Replies to post #118647 on Biotech Values

[rkrw]

More like a savvy bastard.

It's always instructive reading the "background to the merger" section.....

Background of Offer and Merger
Clinical Data retained J.P. Morgan Securities LLC (“J.P. Morgan”) to assist Clinical Data in exploring
potential strategic opportunities for Viibryd while Clinical Data was completing the second Phase 3 trial and long-term safety study of Viibryd pursuant to an engagement letter with J.P. Morgan dated April 16, 2009. Clinical Data retained J.P. Morgan because of its prior history of working with Clinical Data and its knowledge of the industry. In March and April 2009, J.P. Morgan contacted approximately 50 pharmaceutical companies on a global basis about potential interest in Viibryd, including Forest. Nine of the parties who were contacted signed confidentiality agreements and six received management presentations. Forest declined to enter into partnering discussions at this time and did not receive a management presentation. No partnering acquisition proposals resulted from these discussions.
Following receipt of positive data in June 2009 from the second Phase 3 trial and long-term safety study
of Viibryd, J.P. Morgan contacted 21 of the pharmaceutical companies it had contacted earlier in 2009,
including Forest, about potential interest in strategic partnering opportunities for Viibryd. The second process
resulted in a large pharmaceutical company (“Company A”) submitting a licensing proposal. Clinical Data
determined that the licensing proposal was unattractive from a financial point of view. In early 2010, Clinical
Data resumed discussions with Company A about a possible licensing transaction or acquisition of Clinical
Data. Company A conducted preliminary due diligence and submitted an offer to acquire Clinical Data for
$24.00 per share. After a period of negotiation between the parties, Company A increased its offer to acquire
Clinical Data to $27.00 per share, subject to completion of confirmatory due diligence and the negotiation of
a definitive transaction agreement. At this time, Clinical Data entered into an amended and restated
engagement letter with J.P. Morgan dated March 11, 2010. Following late-stage negotiations between
Company A and Clinical Data, Company A determined not to pursue the acquisition and terminated all
discussions with Clinical Data.
In March 2010, Clinical Data filed its New Drug Application (“NDA”) for Viibryd with the FDA and in
May 2010, the FDA approved the Viibryd NDA for standard review. During this time, Clinical Data
continued discussions with several parties potentially interested in a transaction with Clinical Data.
In early May 2010, the Chairman of the Board of Directors of Clinical Data contacted Forest about a
potential transaction that could take the form of an acquisition of the Viibryd program or an acquisition of
Clinical Data. On May 6, 2010, Forest and Clinical Data amended a confidentiality agreement, dated
December 11, 2007, to extend the term of the standstill provision and to provide for termination of the
standstill provision in certain specified circumstances including if Clinical Data solicited proposals for a
business combination. In June 2010, Clinical Data, with the assistance of J.P. Morgan, contacted 17
pharmaceutical companies, including Forest, to determine interest in pursuing a strategic transaction with
Clinical Data. Three pharmaceutical companies, including Forest, conducted due diligence. On June 22, 2010,
members of Clinical Data’s senior management made a presentation to representatives of Forest at Forest’s
office in New York City.
In the Fall of 2010, all three pharmaceutical companies engaged in the due diligence process, including
Forest, informed Clinical Data that they would not pursue a transaction prior to learning the outcome of the
FDA’s review of the NDA for Viibryd on its Prescription Drug User Fee Act (“PDUFA”) date of January 22,
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2011. Subsequently, in November 2010, Clinical Data sent to two of the pharmaceutical companies, including
Forest, a term sheet that contemplated the sale of the Clinical Data subsidiary holding Viibryd in exchange for
upfront cash payments, milestones and profit sharing. The term sheet also provided that if certain milestones
were not achieved by the acquiror, then the acquiror would grant Clinical Data an exclusive sublicense to
commercialize Viibryd outside of the United States. Neither party pursued any substantive discussions
regarding the term sheet or any potential transaction.
On December 8, 2010, a representative of Forest contacted Clinical Data to arrange a follow up call on
Forest’s open diligence questions from the Fall process. The parties held a diligence call on December 17,
2010. On December 30, 2010, a representative of Clinical Data sent Forest an e-mail informing Forest that
Clinical Data was negotiating the product label for Viibryd with the FDA and discussing post-marketing
requirements and that Clinical Data continued to be encouraged that it was on track to obtain a decision from
the FDA on the Viibryd NDA by the PDUFA date. The e-mail did not disclose any specific information about
the label negotiations. The e-mail further stated that Clinical Data had decided not to provide potentially
interested parties any further updates on the FDA process until Clinical Data completed the process with the
FDA. On January 6, 2011, a representative of Clinical Data gave Forest a brief update on the outcome of one
of the Forest’s open diligence questions.
On January 21, 2011, the FDA notified Clinical Data and issued a press release that it had approved the
marketing of Viibryd in the United States for the treatment of adult patients with major depressive disorder.
Following the FDA’s press release, Forest and several other companies contacted Clinical Data.
On January 24, 2011, Clinical Data issued its own press release regarding the FDA’s approval of Viibryd.
After Clinical Data’s press release, several companies contacted Clinical Data and expressed interest in a
potential transaction. Clinical Data also held a conference call for investors on January 24, 2011. During the
conference call, Clinical Data’s chief executive officer stated that Clinical Data would “continue to explore
the possibility of obtaining a change of control transaction” that was acceptable to Clinical Data’s board of
directors and its stockholders. On February 2, 2011, Reuters published an interview with Clinical Data’s
Chairman of the board of directors, Randal J. Kirk, in which Mr. Kirk stated that “[w]hile we work on our
final commercial launch plans, we’ll have this brief period in which we investigate whether there’s a change
of control transaction that would satisfy our shareholders, and then otherwise move on and continue to
develop the company.”
On January 28, 2011, Clinical Data’s board of directors held a special meeting with management and
representatives of J.P. Morgan. During the meeting, Mr. Kirk reviewed the preliminary inquiries concerning a
potential strategic transaction received by Clinical Data following the announcement of the approval of
Viibryd. Representatives of J.P. Morgan then reviewed the proposed process for reviewing potential
proposals, including updated information to be sent to the eight pharmaceutical companies already committed
to confidentiality agreements who had requested updated information from Clinical Data, the proposed
process letters to be sent to interested parties and the proposed bid deadline. Clinical Data’s board of directors
discussed strategic alternatives and approved proceeding with the proposed process. To facilitate an efficient
process, Clinical Data’s board of directors also established a transaction committee, comprised of Larry D.
Horner, Randal J. Kirk and Scott L. Tarriff. Clinical Data’s board of directors delegated to the transaction
committee authority to identify, consider and evaluate proposals involving a change of control of Clinical
Data, engage in negotiations of proposals, take action with respect to proposals and determine whether such
proposals are in the best interest of Clinical Data and its stockholders. Clinical Data’s board of directors
reserved for itself the authority to approve any specific transaction.
Following the FDA’s January 21, 2011 announcement, and Clinical Data’s January 24, 2011
announcement, J.P. Morgan had contact with 23 pharmaceutical companies, including Forest, about a
potential sale of Clinical Data. Clinical Data and J.P. Morgan contacted parties based on prior discussions
concerning strategic partnering opportunities and, in some cases, in-bound expressions of interest. No
potential financial buyers were contacted because the pre-revenue profile of Clinical Data was inconsistent
with targets pursued by financial buyers. A total of 11 of the contacted companies received updated
information under confidentiality
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agreements. Several other companies indicated they did not need additional diligence and were evaluating
whether or not they would submit a proposal to acquire Clinical Data.
On January 28, 2011, J.P. Morgan distributed a process letter with a form of merger agreement prepared
by Cooley LLP (“Cooley”), outside counsel to Clinical Data, to the eight parties that expressed interest,
including Forest. The process letter set a deadline of February 17, 2011 for submitting bids consistent with the
terms outlined in J.P. Morgan’s letter. The draft merger agreement contemplated an all-cash transaction
effected through a cash tender offer for all of the outstanding shares of Clinical Data common stock, all
outstanding warrants to purchases shares of Clinical Data common stock and all outstanding convertible notes
of Clinical Data issued on February 25, 2009. The draft merger agreement also contemplated that certain
unspecified officers and directors of Clinical Data would enter into support agreements and commit to tender
their shares of common stock, warrants and convertible notes of Clinical Data and vote outstanding shares of
common stock of Clinical Data in favor of the merger and provided that the support agreements would
terminate upon termination of the merger agreement or a change in the board recommendation. The draft
merger agreement also specified a termination fee of two percent of the merger consideration.
Three companies, including Forest and Company B and Company C conducted substantial due diligence
in the electronic data room and through meetings with Clinical Data management.
On January 31, 2011, Clinical Data’s transaction committee met with representatives of management and
J.P. Morgan and received an update on the interactions J.P. Morgan had to date with the eight parties that
received the bid letter. On February 4, 2011, the transaction committee again met with representatives of
management and J.P. Morgan and received an update on interactions with the interested parties.
On February 7, 2011, Clinical Data’s board of directors held a regular meeting. During the meeting, the
transaction committee gave the board a report on the status of the strategic review process, including a
summary of interactions with potential parties. During the meeting, the board of directors also reviewed the
results of operations for the fiscal quarter ended December 31, 2010, Clinical Data’s cash position and
Clinical Data’s cash requirements for the commercial launch of Viibryd, its research and development and
ongoing operations.
On February 11, 2011, a representative of Clinical Data, representatives of J.P. Morgan, representatives
of Cooley and representatives of Hunton & Williams LLP (“Hunton”), outside counsel to Third Security, an
entity affiliated with Mr. Kirk and a large stockholder of Clinical Data, had a call with representatives of
Forest, representatives of Morgan Stanley, the financial advisor to Forest, and representatives of Covington &
Burling LLP (“Covington”), outside counsel to Forest, to discuss Forest’s proposal that the potential tender
offer include a minimum tender condition that would permit Forest to complete the acquisition of Clinical
Data through a short-form merger immediately following completion of the tender offer in order to address
Forest structuring considerations. Forest also proposed that the parties pursue holding a special meeting of
stockholders of Clinical Data to approve a one-step merger while pursuing the tender offer and that the parties
would close either the two-step cash tender followed by the short-form merger or the one-step merger
depending upon which transaction could be consummated first. Forest and its counsel also asked certain
diligence questions during the call.
Later in the day on February 11, 2011, the transaction committee met with representatives of
management and J.P. Morgan. J.P. Morgan informed the committee that three parties, Forest and Company B
and Company C remained active in the process and were expected to submit bids. In addition, J.P. Morgan
advised the transaction committee that several other parties were still considering submitting bids, though
they had not been in active discussions with Clinical Data or J.P. Morgan.
During the week of February 14, 2011, Clinical Data’s closing stock price increased from $28.44 per
share to as high as $33.90 per share. Clinical Data believes the stock price increased as a result of speculation
that Clinical Data was pursuing merger discussions because, following Clinical Data’s chief executive
officer’s withdrawal from presenting at an upcoming BIO CEO conference, two analysts speculated that the
cancellation was likely due to change of control discussions and several reports were published in the
financial press about the cancellation and possible change of control discussions. At this time, several parties
indicated to
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J.P. Morgan that they were not in a position to submit a proposal for an acquisition in the high $20’s per share
range and cited the significant run-up in Clinical Data’s stock price as their reason for declining to pursue an
acquisition.
On February 16, 2011, representatives of Forest participated in a telephone conference with
representatives of Clinical Data to review the status of Clinical Data’s supply chain arrangements for Viibryd.
On February 16, 2011, Company B informed J.P. Morgan that Company B would not be submitting an
offer on the bid date, but would consider submitting a proposal for a structured transaction, involving an
acquisition of Clinical Data in parallel with Clinical Data spinning off all of its assets and operations other
than any assets related to Viibryd. On February 17, 2011, Company C informed J.P. Morgan that Company C
would not be submitting a proposal.
On February 17, 2011, Forest submitted a proposed mark-up of the merger agreement. Later on
February 17, 2011, Forest submitted a written bid to acquire all of the outstanding common stock of Clinical
Data for $30.00 per share, all of the outstanding warrants for $30.00 per share less the applicable exercise
price of the warrants, all of the outstanding convertible notes for $30.00 for each share of common stock into
which the notes are convertible and all options for $30.00 per share less the applicable exercise price. Forest’s
bid also included a termination fee of four percent of the merger consideration and indebtedness assumed. In
the mark-up of the merger agreement, Forest proposed pursuing the dual track, two-step cash tender offer
with a minimum condition that enabled closing a short-form merger immediately following the tender offer
and a one-step cash merger. Forest also proposed a termination fee of four percent of all merger consideration
and indebtedness assumed.
On February 17, 2011, Clinical Data’s transaction committee held a meeting with representatives of
J.P. Morgan, Cooley and management present, to discuss the status of the process and bid received.
J.P. Morgan updated the transaction committee on the feedback received from Company B and Company C
and described the bid received from Forest and the discussions with Forest’s financial advisor.
Representatives of Cooley summarized the general approach reflected in Forest’s proposed revisions to the
merger agreement and the primary issues in the draft merger agreement. J.P. Morgan indicated that it had not
yet gone to its fairness committee to determine whether it could provide a fairness opinion with respect to the
proposal made by Forest. The transaction committee discussed the Forest proposal, the possibility of a
structured transaction with Company B, Clinical Data’s strategic alternatives and Clinical Data’s closing
stock price, and agreed that Clinical Data should continue to seek a higher price from Forest and continue to
discuss a possible transaction with Company B.
On February 17 and 18, 2011, representatives of Clinical Data discussed the proposed terms of the Forest
proposal and Clinical Data sought a higher cash price per share. Forest indicated that it was unwilling to
increase the upfront cash price from $30.00 per share but that Forest would consider using a contingent value
right based on Forest achieving results for Viibryd that exceeded expectations underlying the $30.00 per share
price. Representatives of Clinical Data proposed a potential structure for a contingent value right.
On February 18, 2011, Clinical Data’s board of directors held a special meeting to discuss the status of
the process and the proposal received from Forest. Clinical Data management and representatives of
J.P. Morgan and Cooley attended the meeting. Mr. Kirk gave an overview of the process, including the fact
that Forest indicated it was unwilling to increase the upfront cash purchase price of $30.00 per share but that
Forest was willing to consider using a contingent value right. Mr. Kirk also outlined the potential terms of a
contingent value right that he had proposed through the parties’ financial advisors. Representatives of
J.P. Morgan then gave an in-depth review of the process conducted since 2009 to obtain a partnering
arrangement for Viibryd or a sale of Clinical Data. The representatives of J.P. Morgan then left the meeting.
Representatives of Cooley reviewed the fiduciary duties of Clinical Data’s board of directors and other legal
considerations in the context of considering the proposal from Forest and other strategic alternatives. Cooley
next described the general approach taken by Forest in the draft merger agreement and the primary issues in
the draft agreement. Representatives of J.P. Morgan (excluding a representative of J.P. Morgan whom
J.P. Morgan excluded from its fairness review process because of his ownership of less than 0.5% of Clinical
Data securities) then rejoined the meeting and reviewed its financial analysis of the merger consideration, and
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J.P. Morgan had determined that it would be able to render a fairness opinion at the $30.00 per share offer
price. The board of directors then discussed valuation and strategic alternatives and agreed that Clinical Data
should continue to pursue a contingent value right as a means of providing more than $30.00 per share in
value to the Clinical Data stockholders.
On February 19, 2011, Forest proposed to Clinical Data a contingent value right with a maximum
payment of $6.00 per share with milestones based on achieving certain U.S. sales of Viibryd following the
closing of the proposed transaction. The Chairman of the Board, with assistance of J.P. Morgan, evaluated the
proposed terms of the contingent value right and engaged in negotiations regarding the terms through the
financial advisors of Clinical Data and Forest.
On February 19, 2011, Clinical Data’s transaction committee held a meeting with representatives of
management and J.P. Morgan to discuss the proposed contingent value right agreement being negotiated with
Forest. J.P. Morgan also updated the committee on discussions with Company B about a potential structured
transaction. Following a discussion, the transaction committee instructed J.P. Morgan to seek to have the
contingent value right offered by Forest structured as a tradable security.
Later on February 19, 2011, J.P. Morgan informed Morgan Stanley that Clinical Data would seek to
finalize negotiations based on the terms of Forest’s revised proposal.
On February 19, 2011, Cooley and Covington had an initial telephone call to discuss the drafting process
and key outstanding issues, including Clinical Data’s counter proposal of a three percent termination fee, the
circumstances under which the tender and support agreement would terminate, the purchase price of the
warrants and convertible notes, covenants to be included in the contingent value right agreement and the
structure and tradability of the contingent value rights. Cooley and Covington had a subsequent telephone call
later that day in which Covington conveyed Forest’s positions on the key issues discussed earlier in the day,
including the fact that the contingent value rights could not be tradable under Forest’s structure for the
proposed transaction and that Forest was willing to accept a termination fee of 3.5% of the merger
consideration and indebtedness assumed. Cooley subsequently delivered a revised draft of the merger
agreement, together with a draft of the contingent value right agreement to Covington. Thereafter, the parties
engaged in negotiations of the merger agreement and contingent value right agreement until early morning on
February 22, 2011.
On February 20, 2011, Company B contacted J.P. Morgan and indicated that after further review it did
not see sufficient value in Stedivaze and Viibryd alone to support a proposal.
On February 20, 2011, Covington delivered a draft of the tender and support agreement, which was
reviewed and negotiated by Hunton as counsel to Third Security and by Cooley.
On February 21, 2011, Clinical Data’s board of directors held a meeting with financial and legal advisors
and management of Clinical Data. During the meeting, representatives of Cooley updated the board of
directors on negotiations that occurred since the last meeting. Representatives of Cooley then reviewed the
key provisions of the merger agreement, including structure and timing considerations given the dual track,
two-step cash tender followed by a merger and one-step merger being pursued, offer conditions, regulatory
approvals, non-solicitation clause and fiduciary exceptions that would permit Clinical Data to negotiate and
accept an unsolicited superior proposal, subject to compliance with the merger agreement and Forest’s
matching rights, the change in board recommendation section, termination provisions, termination fee and
circumstances under which the termination fee would be payable. Representatives of Cooley also reviewed
the contingent value right agreement, including structure, milestones and milestone periods, including the
provision for extension of the milestone periods in specified circumstances if the commercial launch of
Viibryd does not occur within six months of closing of the transaction. Finally, representatives of Cooley
reviewed the tender and support agreement, including the termination provisions and number of subject
securities. Clinical Data’s board of directors asked questions and discussed at length the merger agreement,
contingent value right agreement and related documentation. J.P. Morgan next presented its analysis of the
per share consideration to be paid to the holders of Clinical Data common stock, including the net present
value
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based upon and subject to the factors, assumptions, qualifications and limitations set forth in the opinion, as
of the date of the opinion, that, the per share consideration to be paid to the holders of the Clinical Data
common stock in the Transaction (other than Mr. Kirk and entities affiliated with Mr. Kirk) was fair, from a
financial point of view to such holders. After further discussion, Clinical Data’s board of directors
unanimously approved the merger agreement, the contingent value right agreement and the tender and support
agreement and determined that the merger agreement, contingent value right agreement, the tender and
support agreement and the transactions contemplated therein are advisable, fair to and in the best interests of
the holders of Clinical Data common stock and resolved to recommend that Clinical Data’s stockholders,
warrant holders and note holders tender their common stock, in-the-money warrants and convertible notes
pursuant to the Offer, and that holders of Shares adopt the Merger Agreement.
Early in the morning on February 22, 2011, the Merger Agreement and Support Agreement were signed
and later that day, Forest and Clinical Data issued a joint press release announcing the execution of the
Merger Agreement