The opinion of the court was delivered by: Anita B. Brody, J.
On August 7, 2008, Plaintiff EUSA Pharma (US), Inc., ("EUSA") brought an action against Defendants Innocoll Pharmaceuticals Limited and Innocoll Technologies Limited (collectively "Innocoll") for declaratory and injunctive relief. EUSA requested a preliminary injunction to prevent Innocoll from beginning a clinical trial that might trigger EUSA's option to purchase the exclusive license to commercialize a product being developed by Innocoll. On August 11, 2008, I entered a temporary restraining order preventing the option's expiration that remains in effect (Doc. #11). On October 2 and 3, 2008, I conducted an evidentiary hearing, and on December 19, 2008, I heard oral argument. Considering the record and pleadings, I will issue the preliminary injunction requested by EUSA.
EUSA and Innocoll are pharmaceutical companies. (Hr'g Tr. 5, 149, Oct. 2, 2008 [hereinafter "10/2 Hr'g Tr."].) EUSA specializes in pain control and cancer management drugs. (10/2 Hr'g Tr. 5.) Innocoll specializes in pharmaceutical products that utilize collagen. (10/2 Hr'g Tr. 149.) This case concerns the CollaRx(r) Bupivacaine Implant ("B-Implant") being developed by Innocoll. EUSA currently has an option to buy the exclusive license to commercialize the B-Implant in the United States. (Pl.'s Ex. 8.) Before it can be commercially profitable, however, the U.S. Food and Drug Administration ("FDA") must approve the B-Implant for use in the U.S. (10/2 Hr'g Tr. 9.)
A. The FDA Approval Process
For a drug to receive FDA approval, the company requesting approval (called a "sponsor") must conduct clinical trials to establish safety and efficacy. (see 10/2 Hr'g Tr. 81-84.) Once clinical trials are complete, the sponsor submits to the FDA a New Drug Application ("NDA") with supporting clinical data. (10/2 Hr'g Tr. 83.) The FDA decides whether to grant approval based on this NDA. (10/2 Hr'g Tr. 83-84.) Thus, the process of developing a drug for the U.S. focuses on putting together a strong NDA with compelling clinical data.
Federal regulations govern how a sponsor may conduct clinical trials. See 21 C.F.R. §§ 312.1 et seq. Before a sponsor may begin a clinical trial on human subjects, two requirements must be satisfied. (10/2 Hr'g Tr. 81.) First, the sponsor must submit to the FDA an Investigational New Drug Application ("IND"). 21 C.F.R. § 312.20(a). Second, an Investigational Review Board must approve the trial after reviewing its protocol and past clinical trials on animals. (10/2 Hr'g Tr. 81.)
With regard to the clinical trial process, "[t]he clinical investigation of a previously untested drug is generally divided into three phases. Although in general the phases are conducted sequentially, they may overlap." 21 C.F.R. § 312.21. A Phase I clinical trial involves few patients (usually from 10 to 20) and primarily measures safety. (10/2 Hr'g Tr. 81-82.) A Phase II clinical trial involves more patients (usually from 100 to 200) and primarily measures efficacy.*fn1 (10/2 Hr'g Tr. 82.) Specifically, a Phase II trial measures how patients respond to a drug at various doses for a given indication (i.e., circumstance in which the drug may be used for treatment). (10/2 Hr'g Tr. 36-37.) In this way, the sponsor tries to determine as closely as possible the optimal dose*fn2 or range of doses for that indication.*fn3 Id. A Phase III clinical trial involves many more patients (usually up to several thousand) and aims to produce compelling clinical data for the NDA. (10/2 Hr'g Tr. 36-37, 83.) In Phase III, the sponsor gives enough patients the optimal dose or range of doses determined from Phase II data to establish a high likelihood that the drug will be safe and effective when prescribed by doctors.*fn4 (10/2 Hr'g Tr. 37, 83.)
During this process, a sponsor may request three types of meetings with the FDA. (10/2 Hr'g Tr. 83.) A "Type A" meeting may be requested when a dispute arises between the sponsor and the FDA. (10/2 Hr'g Tr. 85.) A "Type B" meeting may be requested after Phase II to seek guidance from the FDA on how best to proceed with Phase III. Id. Sponsors normally request Type B meetings before designing a Phase III trial. Id. A "Type C" meeting is neither Type A nor B and can be requested at any time. (10/2 Hr'g Tr. 85-86.)
No drug being developed has a 100 percent chance of getting FDA approval and becoming commercially available. (10/2 Hr'g Tr. 27.) According to accepted wisdom in the pharmaceutical industry, however, drugs have an increasingly higher chance of success after each phase of clinical trials. (10/2 Hr'g Tr. 24, 26-27.) During the hearing in this case, a credible witness testified as follows: "[O]bviously in Phase I, the chance of making it are very low, five to ten percent. . In Phase II, then it's tens of percent. And at the end of Phase III . you might get up into the 50 to 70 percent." (10/2 Hr'g Tr. 26.)
The B-Implant is a novel innovation in post-surgical pain relief. (10/2 Hr'g Tr. 50-53, 152.) It is a collagen*fn5 sponge impregnated with bupivacaine hydrochloride, a known anesthetic, that a doctor implants inside a patient to provide local anesthesia after surgery. (10/2 Hr'g Tr. 13-14, 150-151.) Once the sponge delivers the medicine, the collagen degrades and becomes indistinguishable from human collagen already inside the body. (10/2 Hr'g Tr. 150.) If the B-Implant becomes commercially available, it could reduce the need for doctors to prescribe opiates such as morphine and OxyContin for post-surgical pain relief. (10/2 Hr'g Tr. 152.)
In a Phase I trial, Innocoll administered the B-Implant to 12 patients who had each undergone a hysterectomy. (10/2 Hr'g Tr. 82.) On February 28, 2007, Innocoll submitted to the FDA an IND for Phase II clinical trials on post-hysterectomy and other post-surgery patients. (Pl.'s Ex. 14.) The document indicates that Phase III trials would occur only after Phase II was completed.*fn6 (Pl.'s Ex. 14 §§ 4.1.3, 18.104.22.168, 4.1.5.) Currently, Phase II trials for the B-Implant are ongoing. (10/2 Hr'g Tr. 95.)
C. The Parties' Negotiations
In Spring 2007, Bryan Morton ("Morton"), the chief executive officer of EUSA and of EUSA Pharma (Europe) Limited ("EUSA/Europe"), had a meeting with Dr. Michael Myers ("Myers"), the chief executive officer of Innocoll. (10/2 Hr'g Tr. 12.) Based on this meeting and on subsequent discussions, EUSA/Europe became interested in purchasing the B-Implant and other products owned by Innocoll. (10/2 Hr'g Tr. 12-13.) Innocoll and EUSA/Europe exchanged proposals that contemplated EUSA/Europe buying, among other things, an option to purchase the exclusive license to commercialize the B-Implant in the U.S. ("Option"). (10/2 Hr'g Tr. 17-18.)
In June 2007, Morton and Myers had several communications in which they negotiated the terms of the Option. (Pl.'s Exs. 1-6.) On June 12, 2007, Morton sent Myers a term sheet that proposed a $10 million payment upon exercising the Option plus milestone payments upon FDA approval and commercial sales. (Pl.'s Ex. 2.) On June 13, 2007, Myers responded with an email that requested a $20 million exercise payment and different milestone payments. (Pl.'s Ex. 1.) Myers added: "We will need to put an expiration date on the call option otherwise Innocoll could be hampered in it's [sic] effort to achieve a major funding event." Id. Later that day, Morton and Myers had a telephone conversation in which Morton stressed EUSA/Europe's need for clinical data on the B-Implant such that before exercising the Option EUSA/Europe could evaluate the B-Implant and calculate the risks involved. (10/2 Hr'g Tr. 23.) Thus, Morton proposed having the Option expire thirty days after EUSA/Europe received Phase III data. Id. After this conversation, Morton sent an email that proposed a $15 million exercise payment, accepted the milestone payments that Myers had requested, and stated: "Exercise term expires once PIII data [Phase III data] analysis has been reviewed by the JSC [Joint Steering Committee] plus one month from that date."*fn7 (Pl.'s Ex. 3.)
At this point, the only outstanding issue was the Option's expiration date. (Pl.'s Ex. 4.) On June 14, 2007, Myers sent an email to Morton, stating:
There is no support for giving you a free call option on bupivicaine [sic] for the US until the end of Phase 3. I can offer it to you free of charge until the end of the first Phase 2 study. Alternatively, it can be extended to the end of Phase 3 as requested for a payment of $7.5 million . on signing this deal.
Id. The same day, Morton replied by email: "I cannot live with what you propose. I propose [that] a $5m total payment at end of Phase 2 keeps the option alive until Phase 3 data are analyzed (plus the month)." (Pl.'s Ex. 5.) On June 16, 2007, Myers responded with the following counteroffer:
If EUSA will support Phase 2 program to the amount of $1.5 million and, once the option is exercised, contribute 50% of the costs, upto [sic] a maximum of $5 million, to an agreed Phase 3 program, we will agree to your proposal to the [sic] extend the option until the first patient is dosed in the Phase 3 study. (Pl.'s Ex. 6.) Later that day, Morton accepted Myers's counteroffer by email, thereby concluding negotiations. Id. Throughout this process, both EUSA/Europe and Innocoll expected that clinical studies for the ...