in the united states bankruptcy court for the … · for relief under chapter 11 of title 11 of the...

IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE

In re Chapter 11 KALOBIOS PHARMACEUTICALS, INC., Case No. 15-12628 (LSS) Debtor.1

Objection Deadline: May 31, 2016, at 4:00 p.m. (ET) Hearing Date: June 7, 2016, at 2:00 p.m. (ET)

DEBTOR’S MOTION PURSUANT TO 11 U.S.C. § 105(a), 363, 365 AND 502 AND FED. R. BANKR. P. 9019 APPROVING SETTLEMENT STIPULATION BY AND

AMONG DEBTOR, LONZA AND BIOWA RELATING TO LONZA AGREEMENTS, BIOWA AGREEMENTS, CLAIMS AND RELATED MATTERS

KaloBios Pharmaceuticals, Inc., as debtor and debtor in possession (the “Debtor” or

“KaloBios”) in the above-captioned chapter 11 case hereby moves (the “Motion”), pursuant to

sections 105(a), 363, 365 and 502 of title 11 of the United States Code (the “Bankruptcy Code”)

and Rule 9019 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) for entry

of an order, substantially in the form attached hereto as Exhibit A (the “Proposed Order”),

approving the settlement stipulation, substantially in the form annexed to the Proposed Order as

Exhibit 1 (the “Stipulation”), by and between (i) the Debtor, (ii) Lonza Sales AG (“Lonza AG”),

Lonza Sales Ltd (“Lonza Ltd”), and Lonza Biologics, Inc. (collectively, with Lonza AG and

Lonza Ltd, “Lonza” or the “Lonza Entities”), and (iii) BioWa, Inc. (“BioWa” and together with

the Debtor and Lonza, the “Parties”) providing for, among other things, the assumption or

rejection by the Debtor of the Lonza Agreements2 and BioWa Agreements and the resolution of

1 The last four digits of the Debtor’s federal tax identification number are 7236. The Debtor’s

address is 1000 Marina Blvd #250, Brisbane, CA 94005-1878.

2 Capitalized terms used but not defined herein are defined in the Stipulation.

Case 15-12628-LSS Doc 461 Filed 05/16/16 of 21

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Claims (as defined below) and related matters. In support of this Motion, the Debtor respectfully

states as follows:

JURISDICTION

1. The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and

1334. This matter is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2), and the

Court may enter a final order consistent with Article III of the United States Constitution. Venue

is proper pursuant to 28 U.S.C. §§ 1408 and 1409.

2. The bases for the relief requested herein are sections 105(a), 363, 365 and 502 of

the Bankruptcy Code and Bankruptcy Rule 9019.

BACKGROUND

3. On December 29, 2015 (the “Petition Date”), the Debtor filed a voluntary petition

for relief under chapter 11 of title 11 of the United States Code (as amended, the “Bankruptcy

Code”). The Debtor continues to operate its business as debtor in possession pursuant to sections

1107(a) and 1108 of the Bankruptcy Code. No trustee, examiner or committee has been

appointed in this chapter 11 case.

The Parties’ Pre-Bankruptcy Relationships

4. The Debtor and one or more of the Lonza Entities entered into certain agreements

prior to the Petition Date, including the following agreements:

(a) The Services Agreement between Lonza Sales AG and KaloBios Pharmaceuticals, Inc., dated April 1, 2009, as amended from time to time through Amendment No. 39, dated August 26, 2015 (as amended, the “KB004 Agreement”).

(b) The Services Agreement between Lonza Sales AG and KaloBios Pharmaceuticals, Inc., Relating to Product KB001-A, dated December 10, 2014 (as amended, the “KB001-A Agreement”).


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(c) The Development and Manufacturing Agreement, between Lonza Ltd and KaloBios Pharmaceuticals, Inc., Relating to KB001, dated January 24, 2008 (as amended, the “KB001 Agreement”).

(d) The Research Evaluation Agreement, between Lonza Sales AG and KaloBios Pharmaceuticals, Inc., dated May 6, 2008 (as amended, the “Research Agreement”).

5. Prior to the Petition Date, as documented by Amendment No. 35 to the KB004

Agreement, Lonza AG undertook certain Stage 59 and 60 services, including production of one

cGMP Batch of KB004 Product at 1000 L scale for the Debtor (the “KB004 Stage 60 Product”).

Lonza AG maintains that it completed and tendered delivery of the KB004 Stage 60 Product and

related documentation prior to the Petition Date. The Debtor takes no position on whether such

services were completed, and delivery of the KB004 Stage 60 Product occurred, prior to the

Petition Date.

6. Lonza currently has possession, custody and control of the KB004 Stage 60

Product.

7. By an invoice, dated September 25, 2015, Lonza invoiced the Debtor £26,400 for

certain obligations incurred under the KB001-A Agreement (the “KB001-A Invoice”). From

September 2015 to December 2015, Lonza issued several invoices to the Debtor for obligations

incurred under the KB004 Agreement, totaling £814,028.62.

8. Prior to the Petition Date, BioWa and the Debtor entered into that certain Non-

Exclusive License Agreement, effective as of September 2, 2008 (as amended, the “BioWa 2008

License”), whereby BioWa granted to the Debtor a license for the use of certain technology

owned or controlled by BioWa known as the Potelligent® Technology in the development of the

Debtor’s products. The BioWa 2008 License was subsequently terminated by agreement of

BioWa and the Debtor.


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9. Prior to the Petition Date, BioWa, Lonza AG and the Debtor entered into that

certain Non-Exclusive License Agreement, effective as of October 15, 2010 (as amended, and

including, without limitation, that certain Third Party Reviewer Agreement annexed as Exhibit 2

to the Stipulation and that certain Mutual Confidentiality Agreement, dated February 26, 2010,

the “BioWa/Lonza License”) pursuant to which the Debtor was granted a license for the use of

certain Technology (as that term is defined therein), which includes the Potelligent® CHOK1SV

cell line and related know-how.

10. In conducting its operations prior to the Petition Date, the Debtor used the

Technology to produce its KB004 antibody product in those cells.

11. BioWa asserts that the Debtor has failed to pay it the annual BioWa One-Target

Research License Fee in the amount of $100,000.00, which has become due and payable

pursuant to Section 6.2.1 of the BioWa/Lonza License.

12. Lonza asserts that the Debtor has failed to pay it the annual Lonza Research

License Fee in the amount of £35,000, which has become due and payable pursuant to Section

6.2.2 of the BioWa/Lonza License.

The Bar Date and Proofs of Claim

13. On February 16, 2016, the Court entered the Order Granting Debtor’s Motion for

an Order (I) Establishing Bar Dates for Filing Proofs of Claim, (II) Approving the Form and

Manner of Notice Thereof and (III) Granting Related Relief (D.I. 186) (the “Bar Date Order”),

which, among other things, established April 1, 2016,3 as the general bar date (the “General Bar

Date”) by which creditors must file proofs of claim for pre-Petition Date claims.

3 The Bar Date Order set the General Bar Date as thirty days after the Service Date (as defined in

the Bar Date Order). The Service Date occurred on March 1, 2016 and the General Bar Date is therefore April 1, 2016.


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14. After the entry of the Bar Date Order, the Debtor served notice of the General Bar

Date (D.I. 219) and appropriate claim forms pursuant to the Bar Date Order. The Debtor also

published notice of the General Bar Date in the San Francisco Chronicle and the National

Edition of The Wall Street Journal.

15. Lonza timely filed a Proof of Claim against the Debtor, identified by the Claims

Agent as Claim No. 8 (the “Lonza Filed Claim”), which asserts an unsecured claim against the

Debtor in the amount of $1,250,605.00 and purports to reserve Lonza’s right to seek allowance

of some or all of such claim as an administrative expense claim pursuant to section 503(b)(9) of

the Bankruptcy Code.

16. BioWa timely filed a Proof of Claim against the Debtor, identified by the Claims

Agent as Claim No. 30 (the “BioWa Filed Claim,” together with the Lonza Filed Claim, the

“Claims”), which asserts, among other things, an unsecured claim in the amount of $100,000.

The Savant Transaction

17. On February 26, 2016, the Court entered an order (D.I. 211) authorizing the

Debtor to execute and enter into a letter of intent with Savant Neglected Diseases, LLC

(“Savant”), for the acquisition of the worldwide rights to Savant’s benznidazole program for the

treatment of Chagas disease (the “Savant Transaction”), and on February 29, 2016, the Debtor

and Savant executed the Letter of Intent.

18. Closing the Savant Transaction is subject to, among other things, (i) obtaining

financing in an amount adequate to permit the Debtor to exit chapter 11 with at least $10 million

in unencumbered cash and (ii) exiting chapter 11 by June 30, 2016.


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The DIP Financing and Exit Financing

19. On March 23, 2016, the Bankruptcy Court entered an order (D.I. 293) approving,

among other things, the Debtor’s entry into that certain amended letter of intent and annexed

amended term sheet, each dated March 18, 2016 (collectively, the “Stalking Horse LOI”), by and

between the Debtor and Cheval Holdings, Ltd., Black Horse Capital LP, Black Horse Capital

Master Fund Ltd., and Nomis Bay LTD (collectively, the “Stalking Horse Entities”).

20. The Stalking Horse LOI provides for a debtor-in-possession financing facility of

$3 million (the “DIP Facility”) and an exit facility of $11 million (the “Exit Facility”) to

facilitate consummation of the Savant Transaction as well as consummation of the Plan. The

Exit Facility of $11 million is conditioned upon, among other things, closing of the Savant

Transaction and exiting chapter 11 before the end of June 2016.

21. On April 8, 2016, the Debtor filed a motion to approve the DIP Facility (D.I. 324)

(the “DIP Motion”). The Court entered an order approving the DIP Motion on April 29, 2016

(D.I. 388). The Funding Date for the DIP Facility occurred on May 16, 2016, and the Debtor has

now received the proceeds of the DIP Facility.

The Plan and Disclosure Statement

22. On May 9, 2016, the Court entered an order (D.I. 420), approving the Disclosure

Statement with Respect to the Second Amended Plan of Reorganization of KaloBios

Pharmaceuticals, Inc. Under Chapter 11 of the Bankruptcy Code (D.I. 435) (as may be

amended, modified or supplemented, the “Disclosure Statement”) as containing adequate

information under section 1125 of the Bankruptcy Code and authorizing the Debtor to solicit

votes with regard to the acceptance or rejection of the Debtor’s Second Amended Plan of

Reorganization (D.I. 434) (as may be amended, modified or supplemented, the “Plan”).


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23. The Plan provides, among other things, for the Holders4 of Allowed Class 2

Claims to receive in full and final satisfaction and discharge of such Allowed General Unsecured

Claim, value equal to 100% of the Allowed amount of such Claim in the form of: (i) Cash equal

to 50% of the Allowed amount of such Allowed General Unsecured Claim plus (ii) a Company

Note in an original principal amount equal to the 50% of the Allowed amount of such Allowed

General Unsecured Claim (together, the “Class 2 Treatment”).

24. The hearing on the Debtor’s request for confirmation of the Plan is scheduled to

occur on June 14-15, 2016.

The Debtor’s Go Forward Business Plan

25. As discussed more fully in the Disclosure Statement. After emergence from

bankruptcy, KaloBios intends to focus on three compounds that are currently in various stages of

development: (1) benznidazole, the rights to which it is acquiring through the Savant transaction,

(2) KB003 (also known as lenzilumab) and (3) KB004. The development focus of KaloBios is

on neglected diseases with a particular focus on pediatric populations, which will allow for

potential eligibility for “Priority Review Vouchers” (“PRV”) that entitle the holder to a priority

review of a human drug application of the voucher holder’s choice.

26. KB004 is a monoclonal antibody (mAb) that binds specifically to EphA3, which

is an onco-fetal protein that has been shown to be present on the surface of many types of cancer

cells. KB004 targets hematologic malignancies, which are tumors affecting blood, bone marrow

and the lymphatic system, as well as tumors affecting solid organs. It has been tested in a Phase

I/II trial in certain types of blood cancers (Acute Myelogenous Leukemia (“AML”),

Myelofibrosis and Myelodysplastic Syndrome).

4 Capitalized terms used in paragraph 23 but not defined therein are defined in the Plan.


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27. KaloBios was conducting a Phase I/II study of KB004 in hematologic tumors, but

wound down Phase II due to its restructuring efforts and the filing of the Chapter 11 Case. Phase

I of the KB004 study, however, was completed, and the data presented at the 2014 American

Society of Hematology Annual Meeting showed that KB004 is well tolerated and has promising

clinical activity. As a result of the Phase I study, an acute myeloid leukemia patient experienced

a complete response with incomplete platelet recovery with a “complete response” in a clinical

trial being “associated with less infection, bleeding and blood product support.” Two other

patients demonstrated clinical improvements, defined by international guidelines as

“improvement in survival, improvement in a patient’s quality of life, improved physical

functioning, or improved tumor-related symptoms.”

28. As discussed in more detail in the Disclosure Statement, the Debtor is evaluating

a partnership with a prominent research institute in Australia to perform an Investigator-

Sponsored Trial (“IST”) of KB004 in patients with Glioblastoma Multiforme, a very aggressive

brain tumor. The Debtor understands that the researcher has secured a grant of funding from the

Australian government for this IST. For the IST to proceed, the Debtor will need access to the

supply of KB004 Stage 60 Product currently in the possession, custody and control of Lonza.

29. The Assumed Agreements (as defined below) all relate to the KB004

development program. Pursuant to the Assumed Agreements, the Debtor has obtained and may

in the future obtain, among other things, goods services and the use of technology essential to the

continued progression of the KB004 program.


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The Settlement Stipulation

30. The Stipulation helps make it possible for the Debtor to continue its KB004

program. The key terms of the Stipulation include the following:5

Consent to Contract/License Assumptions

Lonza consents to the Debtor’s assumption of the Lonza Assumed Agreements,6 as of the Plan Effective Date, on the terms set forth in the Stipulation.

BioWa consents to the Debtor’s assumption, as of the Plan Effective Date, of the BioWa/Lonza License on the terms set forth in the Stipulation.

Agreed Cure and Allowed Class 2 Claims

Lonza agrees that in lieu of any claim or cure amount that it might have or assert in connection with the Lonza Agreements, whether under section 365 of the Bankruptcy Code or otherwise, it: (i) within ten (10) calendar days after the occurrence of the Plan Effective Date, shall be paid a cure amount of $923,604.93 (the “Lonza Cure Amount”); and (ii) in addition, shall have an Allowed Class 2 (General Unsecured Claim) against the Debtor under the Plan in the amount of $431,401.46 (the “Allowed Lonza GUC”), which Allowed Lonza GUC shall receive the Class 2 Treatment. Payment to Lonza of the Lonza Cure Amount and the Plan distribution of Cash on account of the Allowed Lonza GUC shall be made in accordance with the payment instructions set forth in Schedule 4(a) to the Stipulation. Upon the payment of the Lonza Cure Amount in accordance with Paragraph 4(a) of the Stipulation and the payment instructions set forth in Schedule 4(a) thereto, Lonza acknowledges and agrees that the Debtor will have satisfied all of the requirements of section 365 of the Bankruptcy Code for assumption of the Lonza Assumed Agreements. The terms of the Company Note that will be made payable to Lonza in respect of the Allowed Lonza GUC shall be consistent in all respects with the Stipulation, shall not contain terms inconsistent with the Stipulation, and shall be subject to the Stipulation.

BioWa agrees that in lieu of any claim or cure amount that it might have or assert in connection with any BioWa Agreement, whether under section 365 of the Bankruptcy Code or otherwise, it: (i) within ten (10) calendar days after the occurrence of the Plan Effective Date, shall be paid a cure

5 The summary of the Stipulation described in this Motion is qualified in its entirety by the terms of

the Stipulation. In the event of any inconsistency, the Stipulation controls.

6 “Lonza Assumed Agreements” means the KB004 Agreement, the KB001-A Agreement, the KB001 Agreement, the Research Agreement, the BioWa/Lonza License to the extent of Lonza’s interest therein, and any and all other agreements between the Debtor and any Lonza Entity that relate in any way to the Debtor’s KB004, KB001-A or KB001 products to the extent that any such agreement constitutes an “executory contract” as such term is used in section 365 of the Bankruptcy Code.


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amount of $75,000.00 (the “BioWa Cure Amount,” and together with the Lonza Cure Amount, the “Cure Amounts”); and (ii) in addition, shall have an Allowed Class 2 (General Unsecured Claim) against the Debtor under the Plan in the amount of $25,000.00 (the “Allowed BioWa GUC,” and together with the Allowed Lonza GUC, the “Allowed GUCs”), which Allowed BioWa GUC shall receive the Class 2 Treatment. Payment to BioWa of the BioWa Cure Amount and the Plan distribution of Cash on account of the Allowed BioWa GUC shall be made in accordance with the payment instructions set forth in Schedule 4(b) to the Stipulation. Upon the payment of the BioWa Cure Amount in accordance with Paragraph 4(b) of the Stipulation, BioWa acknowledges and agrees that the Debtor will have satisfied all of the requirements of section 365 of the Bankruptcy Code for assumption of the Lonza/BioWa License. The terms of the Company Note that will be made payable to BioWa in respect of the Allowed BioWa GUC shall be consistent in all respects with the Stipulation, shall not contain terms inconsistent with the Stipulation, and shall be subject to the Stipulation

Claims Administration Actions

The Allowed Lonza GUC and Allowed BioWa GUC shall be deemed to amend and supersede in all respects the Lonza Filed Claim and BioWa Filed Claim, respectively.

KB004 Stage 60 Product

Lonza shall continue to store the KB004 Stage 60 Product in a commercially and scientifically appropriate manner in order it preserve the integrity of the KB004 Stage 60 Product through and including December 31, 2016, without the Debtor incurring additional liability beyond what is provided for in the Stipulation. In the event that the Debtor requires Lonza to store the KB004 Stage 60 Product beyond December 31, 2016, it will notify Lonza in writing at least thirty (30) calendar days prior to such date and the Debtor and Lonza shall confer in good faith on an appropriate storage fee going forward. In the event that the Debtor requests Lonza to release the KB004 Stage 60 Product to the Debtor or its designated recipient, Lonza will comply with the Debtor’s reasonable instructions, subject to any applicable legal requirements and subject to the Debtor reimbursing Lonza for its reasonable costs incurred connection with such compliance. In the event the KB004 Stage 60 Product requires further stability or other testing prior to being released from Lonza’s possession, custody or control, the Debtor and Lonza will confer in good faith with respect to such matters in order that such testing may be completed without undue delay or cost.

Old Agreements The Debtor and each of the Lonza Entities agree that any Lonza Agreements that are not Lonza Assumed Agreements (such Lonza Agreements, “Old Lonza Agreements”), to the extent such Old Lonza Agreements are later adjudicated to be executory contracts subject to assumption or rejection under section 365 of the Bankruptcy Code, (i) such Old Lonza Agreements automatically will be deemed rejected upon the Plan Effective Date without further Order of the Bankruptcy Court or


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further action by any Party, and (ii) the Debtor, the Debtor’s estate and the Reorganized Debtor (as defined in the Plan) shall neither have nor incur any liability to any Lonza Entity as a result of the rejection such Old Lonza Agreements or any breach of such Old Lonza Agreements occurring in connection with such rejection; provided, however, that Paragraph 7(a) of the Stipulation is without prejudice to the respective rights, if any, of Lonza and the Debtor (or Reorganized Debtor, as applicable) to seek the remedies of specific performance or an injunction arising from or relating to any breach by the other party of a confidentiality obligation contained in any Old Lonza Agreement (and the ability of the other party to oppose a request for such a remedy).

The Debtor and BioWa agree that any BioWa Agreements other than the BioWa/Lonza License (such other BioWa Agreements, the “Old BioWa Agreements”), to the extent such Old BioWa Agreements are later adjudicated to be executory contracts subject to assumption or rejection under section 365 of the Bankruptcy Code, (i) such Old BioWa Agreements automatically will be deemed rejected upon the Plan Effective Date without further Order of the Bankruptcy Court or further action by any Party, and (ii) the Debtor, the Debtor’s estate and the Reorganized Debtor (as defined in the Plan) shall neither have nor incur any liability to BioWa as a result of the rejection such Old BioWa Agreements or any breach of such Old BioWa Agreements occurring in connection with such rejection; provided, however, that Paragraph 7(b) of the Stipulation is without prejudice to the respective rights, if any, of BioWa and the Debtor (or Reorganized Debtor, as applicable) to seek the remedies of specific performance or an injunction (and the ability of the other party to oppose a request for such a remedy) arising from or relating to any prospective breach by the other party of a confidentiality obligation contained in any Old BioWa Agreement or restriction on the sale, transfer or distribution of BioWa cells, BioWa transfected cells or BioWa know-how or other intellectual property rights contained in any Old BioWa Agreement

Plan Support & Voting

Unless the Bankruptcy Court has entered an order denying approval of the Stipulation or the Bankruptcy Court has adjudicated the Debtor to be in material breach of its obligations pursuant to the Stipulation, subject to the terms and conditions of the Stipulation, Lonza and BioWa agree they shall:

(a) Vote their respective Allowed GUC in favor of the Plan and timely return a duly executed ballot in connection therewith; and

(b) Support the Plan and not (i) withdraw or revoke their vote with respect to the Plan, (ii) object to the Plan or any related disclosure statement, so long as each of the foregoing is consistent in all material respects with the Stipulation and (iii) support any alternative plan or transaction which the Debtor does not support.

Releases Except for the obligations set forth in the Stipulation and in the Lonza Assumed Agreements, the Debtor, on behalf of itself, its bankruptcy estate,


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and its present, former and future principals, agents, successors, assigns, attorneys, insurers, affiliates and subsidiaries, hereby waives, releases and discharges the Lonza Entities and each of their respective present, former and future principals, agents, successors, assigns, attorneys, insurers, affiliates and subsidiaries, from any and all claims, liabilities, damages, actions, causes of action, costs and fees existing as of the Execution Date, whether now known or unknown, arising from, related to, or in any manner concerning any aspect of the Lonza Agreements and performance thereof, including without limitation royalties or other payments or transfers made to any Lonza Entity under or in connection with any Lonza Agreement prior to the Petition Date or during the Bankruptcy Case, and specifically including any and all claims or causes of action under Chapter 5 of the Bankruptcy Code.

Except for the obligations set forth in the Stipulation and in the BioWa/Lonza License, the Debtor, on behalf of itself, its bankruptcy estate, and its present, former and future principals, agents, successors, assigns, attorneys, insurers, affiliates and subsidiaries, hereby waives, releases and discharges BioWa and its present, former and future principals, agents, successors, assigns, attorneys, insurers, affiliates and subsidiaries, from any and all claims, liabilities, damages, actions, causes of action, costs and fees existing as of the Execution Date, whether now known or unknown, arising from, related to, or in any manner concerning any aspect of the BioWa Agreements and performance thereof, including without limitation royalties or other payments or transfers made to BioWa under or in connection with any BioWa Agreement prior to the Petition Date or during the Bankruptcy Case, and specifically including any and all claims or causes of action under Chapter 5 of the Bankruptcy Code.

Except for the obligations set forth in the Stipulation, in the Plan and in the Lonza Assumed Agreements, the Lonza Entities on behalf of themselves and their respective present, former and future principals, agents, successors, assigns, attorneys, insurers, affiliates and subsidiaries, hereby waives, releases and discharges the Debtor, the Debtor’s bankruptcy estate, and the Debtor’s present, former and future principals, agents, successors, assigns, attorneys, insurers, affiliates and subsidiaries, from any and all claims, liabilities, damages, actions, causes of action, costs and fees existing s of the Execution Date, whether now known or unknown, arising from, related to, or in any manner concerning any aspect of the Lonza Agreements and performance thereof, including without limitation royalties or other payments due to any Lonza Entity under or in connection with any Lonza Agreement prior to the Petition Date or during the Bankruptcy Case, and specifically including any and all liabilities evidenced by the Lonza Invoices and the annual Lonza Research License Fee pursuant to Section 6.2.2 of the BioWa/Lonza License.

Except for the obligations set forth in the Stipulation, in the Plan and in the BioWa/Lonza License, BioWa on behalf of itself and its present, former


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and future principals, agents, successors, assigns, attorneys, insurers, affiliates and subsidiaries, hereby waives, releases and discharges the Debtor, the Debtor’s bankruptcy estate, and the Debtor’s present, former and future principals, agents, successors, assigns, attorneys, insurers, affiliates and subsidiaries, from any and all claims, liabilities, damages, actions, causes of action, costs and fees existing as of the Execution Date, whether now known or unknown, arising from, related to, or in any manner concerning any aspect of the BioWa Agreements and performance thereof, including without limitation royalties or other payments due to BioWa under or in connection with any BioWa Agreement prior to the Petition Date or during the Bankruptcy Case.

For the avoidance of doubt, the releases set forth in Paragraph 10 of the Stipulation are without prejudice to any Party’s ability to seek specific performance or injunctive relief to the extent preserved or reserved as set forth in Paragraphs 7(a) and 7(b) of the Stipulation.

Conditions to Effectiveness

The Stipulation is subject to Court approval and other conditions to its effectiveness as set forth in Paragraph 12 (a) of the Stipulation.

Termination The Stipulation is subject to termination under certain circumstances as set forth in Paragraph 12(b) of the Stipulation.

Miscellaneous. The Stipulation contains other reasonable and customary provisions for an agreement of this nature.

RELIEF REQUESTED

31. By this Motion, the Debtor requests that the Court enter the Proposed Order

approving the Stipulation pursuant to section 105(a), 363 and 502 of the Bankruptcy Code and

Bankruptcy Rule 9019.

BASIS FOR RELIEF

A. The Settlements Contained In The Stipulation Should Be Approved Under 11 U.S.C. §§ 105(a) & 363(b) And Fed. R. Bankr. P. 9019.

32. Bankruptcy Rule 9019 governs approval of settlements by a debtor and provides

that, “on motion by the trustee and after notice and a hearing, the court may approve a

compromise or settlement.” Fed. R. Bankr. P. 9019. In addition, section 105(a) of the


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Bankruptcy Code provides that the “court may issue any order, process or judgment that is

necessary or appropriate to carry out the provisions of this title.” 11 U.S.C. § 105(a).

33. The starting point in analyzing any proposed settlement is the general policy of

encouraging settlements and favoring compromises. See Myers v. Martin (In re Martin), 91 F.3d

389, 393 (3d Cir. 1996) (“Compromises are favored in bankruptcy.”); In re World Health

Alternatives, Inc., 344 B.R. 291, 296 (Bankr. D. Del. 2006) (finding settlements “generally

favored in bankruptcy”). The Third Circuit has recognized that “[i]n administering

reorganization proceedings in an economical and practical manner it will often be wise to

arrange the settlement of claims as to which there are substantial and reasonable doubts.” In re

Penn Cent. Transp. Co., 596 F.2d 1102, 1113 (3d Cir. 1979) (internal quotation marks omitted)

(quoting Protective Comm. for Indep. S’holders of TMT Trailer Ferry, Inc. v. Anderson, 390

U.S. 414, 424 (1968)).

34. To approve a settlement, a bankruptcy court must determine that such settlement

is in the best interest of a debtor’s estate. Law Debenture Trust Co. of New York v. Kaiser

Aluminum Corp. (In re Kaiser Aluminum Corp.), 339 B.R. 91, 95–96 (D. Del. 2006). In

addition, a court must:

assess and balance the value of the claim that is being compromised against the value to the estate of the acceptance of the compromise proposal in light of four factors: (1) the probability of success in the litigation, (2) the likely difficulties in collection, (3) the complexity of the litigation involved, and the expense, inconvenience and delay necessarily attending it, and (4) the paramount interests of the creditors.

Id. at 96 (quoting Martin, 91 F.3d at 393). The court’s ultimate inquiry is whether a settlement is

fair, reasonable, and in the best interest of a debtor’s estate. In re Marvel Entm’t Grp., Inc., 222

B.R. 243, 249 (D. Del. 1998) (quoting In re Louise’s, Inc., 211 B.R. 798, 801 (D. Del. 1997)).


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35. The decision whether to approve a proposed compromise and settlement is

committed to the sound discretion of the bankruptcy court. See, e.g., In re Coram Healthcare

Corp., 315 B.R. 321, 329 (Bankr. D. Del. 2004). A court need not decide the numerous issues of

law and fact raised by the settlement and it need not be convinced that the proposed settlement is

the best possible, rather “[t]he court need only conclude that the settlement falls within the

reasonable range of litigation possibilities somewhere above the lowest point in the range of

reasonableness.” In re Nutritional Sourcing Corp., 398 B.R. 816, 833 (Bankr. D. Del. 2008)

(quoting In re Coram Healthcare Corp., 315 B.R. 321, 330 (Bankr. D. Del. 2004)).

36. In the Debtor’s business judgment, the compromises and transactions embodied in

the Stipulation: (i) are fair and equitable; (ii) represent a settlement of potential disputes and

claims under the Lonza Agreements and the BioWa Agreements that is well within the

reasonable range of potential litigation outcomes; (iii) ensure that the Debtor will have continued

access to the goods, services and technology available under the Assumed Agreements, all of

which is integral to the Debtor’s ability to move forward with its KB004 program; (iv) favorably

resolve potentially sizeable claims that may be incurred by the Debtor’s estate in the event the

Assumed Agreements are not assumed; and (v) obviate the expense, delay, inconvenience and

uncertainty that would attend any litigation of the disputes that likely would arise under the

Lonza Agreements and BioWa Agreements in the absence of this Stipulation. Therefore, the

Stipulation satisfies section 363 of the Bankruptcy Code and Bankruptcy Rule 9019, and should

be approved by the Court.

37. Under sections 105(a) and 363(b) of the Bankruptcy Code the Stipulation should

be approved because it is a reasonable exercise of the Debtor’s business judgment. The

Stipulation has a sound business purpose and represents the exercise of KaloBios’s sound


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business judgment and, accordingly, any actions required to effectuate the terms of the

Stipulation should be authorized and approved pursuant to Section 363(b). See In re Lionel

Corp., 722 F. 2d 1063, 1071 (2d Cir. 1983) (“The rule we adopt requires that a judge

determining a 363(b) application expressly find from the evidence presented before him a good

business reason to grant the application.”); In re Delaware Hudson Ry. Co., 124 B.R. 169, 179

(Bankr. Del. 1991 ).

38. Further, the Martin factors, to the extent applicable in this context, all support

approval of the Stipulation under Bankruptcy Rule 9019. First, it is far from clear that the

Debtor would be able to assume the Assumed Agreements without the consent of Lonza and

BioWa, as applicable. Certain of the Assumed Agreements, including particularly the

BioWa/Lonza License involve the licensing of intellectual property to the Debtor. While the

Debtor believes that, absent this Stipulation, it would have persuasive arguments as to why it

could assume the Assumed Agreements without the consent of Lonza and BioWa, the Debtor

acknowledges that pursuing such a path would entail some litigation risk to it and its estate. . In

re Trump Entm’t Resorts, Inc., 526 B.R. 116, 122 (Bankr D. Del. 2015) (finding that “a debtor in

possession may not assume an executory contract over the nondebtor's objection if applicable

law would bar assignment to a hypothetical third party, even where the debtor in possession has

no intention of assigning the contract in question to any such third party”) (internal quotations

omitted).

39. Moreover, even if without the Stipulation the Debtor could overcome technical

objections of Lonza and BioWa to the assumption of the Assumed Agreements under section 365

of the Bankruptcy Code, it is not clear that cost and delay entailed in assuming such agreements

on a contested basis would be financially or practically feasible for the Debtor to bear. Pursuant


17

to the Stipulation, Lonza and BioWa have agreed to discount by 25-30% the amounts they would

require to be paid as cure claims in connection with the assumption of the Assumed Agreements.

40. The Stipulation ensures that the Debtor is able to assume the Lonza Assumed

Agreements and the BioWa/Lonza License, providing the Debtor with continued access to,

among other things, the Technology and KB004 Stage 60 Product.

41. Second, because Lonza, BioWa and the Debtor have had a lengthy history with

one another dating back until at least 2008, and because the agreements at issue are lengthy and

highly technical, any litigation over them is likely to be time consuming, complex and expensive.

The Stipulation avoids the adverse effects of such a scenario.

42. Third, the paramount interests of the Debtor’s creditors, shareholders and other

stakeholders are well-served by consummating the Stipulation. As discussed above, the KB004

program is an important part of the Debtor’s post-emergence business plan. Given its current

resource constraints, the Debtor’s ability to continue the KB004 program without continuing its

relationship with Lonza and BioWa is, at best, questionable. Moreover, continuing the KB004

program is in the public interest, given the possibility that it might result in a viable treatment for

certain aggressive forms of cancer.

B. The Debtor’s Assumption Of The Assumed Agreements And Deemed Rejection Of Any Old Agreements To The Extent Executory Should Be Approved.

43. The Lonza Assumed Agreements and the BioWa/Lonza License are executory

contracts. It is also possible that certain of the Old Lonza Agreements and Old BioWa

Agreements, in whole or part, may be executory (though the Stipulation contains no

determination of their status in this regard). As set forth in the Stipulation, the Assumed

Agreements will be assumed on the Plan Effective Date subject to the terms and conditions of

the Stipulation. Similarly, the Old Lonza Agreements and Old BioWa Agreements, to the extent


18

executory, on the Plan Effective Date will be deemed rejected without further action of any Party

and without the Debtor, the Debtor’s estate or the Reorganized Debtor incurring any liability as a

result of such deemed rejection.

44. Pursuant to section 365 of the Bankruptcy Code, a debtor in possession's decision

to assume or reject or modify such executory contracts should be approved if it is a reasonable

exercise of business judgment. Section 365(a) of the Bankruptcy Code provides that a debtor,

“subject to the court's approval, may assume or reject an executory contract or an unexpired

lease.” 11 U.S.C. § 365(a); see Univ. Med. Ctr. v. Sullivan (In re Univ. Med. Ctr.), 973 F.2d

1065, 1075 (3d Cir. 1992); see also In re Penn Traffic Co., 524 F.3d 373 (2d Cir. 2008). The

Court may approve a debtor’s assumption or rejection of an executory contract or unexpired

lease if such assumption or rejection is made in the exercise of such debtor’s sound business

judgment, and if such rejection benefits its estate. See, e.g., In re AbitibiBowater Inc., 418 B.R.

815, 831 (Bankr. D. Del. 2009) (A debtor's decision to assume or reject an executory contract

will stand so long as “a reasonable business person would make a similar decision under similar

circumstances.”); In re Philadelphia Newspapers, LLC, 424 B.R. 178, 182 (Bankr. E.D. Pa.

2010) (“The standard applied to determine whether the rejection of an executory contract or

unexpired lease should be authorized is the ‘business judgment’ standard.”); Sharon Steel Corp.

v. Nat'l Fuel Gas Distrib. Corp., 872 F.2d 36, 39 (3d Cir. 1989); see also NLRB v. Bildisco &

Bildisco (In re Bildisco), 682 F.2d 72, 79 (3d Cir. 1982), aff’d, 465 U.S. 513 (1984); Westbury

Real Estate Ventures, Inc. v. Bradlees, Inc. (In re Bradlees, Inc.), 194 B.R. 555, 558 n.1 (Bankr.

S.D.N.Y. 1996) (“[u]nder the business judgment test, ... [a court should approve a debtor’s

proposed rejection] if the debtor can demonstrate that rejection will benefit the estate”). It is

enough if a debtor determines in its business judgment that a benefit will be realized. Sharon


19

Steel Corp., 872 F.2d at 39 (citing Wheeling-Pittsburgh Steel Corp. v. West Penn Power Co. (In

re Wheeling-Pittsburgh Steel Corp.), 72 B.R. 845, 846 (Bankr. W.D. Pa. 1987)); In re Balco

Equities, Inc., 323 B.R. 85, 99 (Bankr. S.D.N.Y. 2005) (“In determining whether the debtor has

employed reasonable business discretion, the court for the most part must only determine that the

rejection will likely benefit the estate.”). The business judgment standard requires that the Court

approve the debtor’s business decision unless that judgment is the product of bad faith, whim or

caprice. See Philadelphia Newspapers, 424 BR at 182-83; In re Trans World Airlines, Inc., 261

B.R 103, 121 (Bankr. D. Del. 2001).

45. As discussed above, the Debtor’s decision to assume the Assumed Agreements on

the terms and conditions set forth in the Stipulation, as well as its decision to reject any Old

Lonza Agreements and any Old BioWa Agreements (to the extent executory), are plainly

supported by sound business judgment and of significant benefit to the Debtor and its estate.

46. Approving the Stipulation will benefit the Debtor’s estate and bolster its efforts to

successfully reorganize on the timeframe required by the Savant Transaction, the DIP Facility

and the Exit Facility. Moreover, the Stipulation falls well within the range of reasonable

litigation outcomes faced by the Parties and is the product of extensive, arm’s-length

negotiations. It provides for a fair and practical resolution of the Lonza Agreements, BioWa

Agreements and Claims between the Debtor, Lonza and BioWa. If approved, the Stipulation

will enable the Debtor to continue its study of KB004 and its potential medical and financial

value and facilitate confirmation of the Debtor’s Plan, which provides that that general unsecured

creditors will be paid in full over time and existing equity will retain their interests.

47. For these reasons, the Court should find that the Stipulation (i) is fair, equitable

and in the best interests of the Debtor, its estate, creditors, stockholders, and other parties in


20

interest; (ii) represents an exercise of the Debtor’s sound business judgment; and (iii) should be

approved pursuant to sections 105(a), 363, 365 and 502 of the Bankruptcy Code and Bankruptcy

Rule 9019.

NOTICE

48. Copies of this Motion have been served first-class mail upon the following: (a)

the Office of the United States Trustee for the District of Delaware; (b) counsel to Lonza; (c)

counsel to BioWa; (d) counsel to the DIP Agent; (e) counsel to the Stalking Horse Entities; (f)

the parties included on the Debtor’s list of twenty (20) largest unsecured creditors; and (g) all

parties who have requested notice under Bankruptcy Rule 2002. The Debtor submits that, under

the circumstances, no other or further notice is required.

WHEREFORE, the Debtor respectfully requests that the Court (i) grant this Motion and

the relief requested herein; (ii) enter the Proposed Order attached as Exhibit A hereto approving

the Stipulation, substantially in the form attached to the Proposed Order as Exhibit 1; and (iii)

grant such other and further relief as it deems just and proper.

Dated: May 16, 2016 MORRIS, NICHOLS, ARSHT & TUNNELL LLP Wilmington, Delaware /s/ Gregory W. Werkheiser

Eric D. Schwartz (No. 3134) Gregory W. Werkheiser (No. 3553) Matthew B. Harvey (No. 5186) Marcy J. McLaughlin (No. 6184) 1201 N. Market St., 16th Floor PO Box 1347 Wilmington, DE 19899-1347 Telephone: (302) 658-9200 Facsimile: (302) 658-3989 E-mail:[email protected] [email protected]

[email protected] [email protected]

- and -


21

Peter Ivanick, Esq. (admitted pro hac vice)

Pieter Van Tol, Esq. (admitted pro hac vice) John D. Beck, Esq. (admitted pro hac vice) HOGAN LOVELLS US LLP 875 Third Avenue New York, NY 10022 Telephone: (212) 918-3000 Facsimile: (212) 918-3100 E-mail:[email protected] [email protected] [email protected] Counsel to the Debtor and Debtor in Possession

10029511.3



In re Chapter 11 KaloBios Pharmaceuticals, Inc., Case No. 15-12628 (LSS) Debtor.1

Objection Deadline: May 31, 2016 at 4:00 p.m. (ET) Hearing Date: June 7, 2016 at 2:00 p.m. (ET)

NOTICE OF DEBTOR’S MOTION PURSUANT TO 11 U.S.C. § 105(a), 363, 365 AND 502 AND FED. R. BANKR. P. 9019 APPROVING SETTLEMENT STIPULATION BY

AND AMONG DEBTOR, LONZA AND BIOWA RELATING TO LONZA AGREEMENTS, BIOWA AGREEMENTS, CLAIMS AND RELATED MATTERS

PLEASE TAKE NOTICE that on May 16, 2016, the above-captioned debtor and

debtor in possession (the “Debtor”) filed the Debtor’s Motion Pursuant To 11 U.S.C. § 105(a), 363, 365 And 502 And Fed. R. Bankr. P. 9019 Approving Settlement Stipulation By And Among Debtor, Lonza And BioWa Relating To Lonza Agreements, BioWa Agreements, Claims And Related Matters (the “Motion”).

PLEASE TAKE FURTHER NOTICE that objections, if any, to the Motion must be (a) in writing; (b) filed with the Clerk of the Bankruptcy Court, 824 N. Market Street, 3rd Floor, Wilmington, Delaware 19801, on or before May 31, 2016 at 4:00 p.m. (ET) (the “Objection Deadline”); and (c) served on the undersigned counsel as to be received on or before the Objection Deadline.

PLEASE TAKE FURTHER NOTICE THAT A HEARING ON THE MOTION

WILL BE HELD ON JUNE 7, 2016 AT 2:00 P.M. (ET) BEFORE THE HONORABLE LAURIE SELBER SILVERSTEIN, AT THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE, 824 N. MARKET STREET, 6TH FLOOR, COURTROOM #2, WILMINGTON, DELAWARE 19801.

IF YOU FAIL TO RESPOND IN ACCORDANCE WITH THIS NOTICE, THE

COURT MAY GRANT THE RELIEF REQUESTED IN THE MOTION WITHOUT FURTHER NOTICE OR HEARING.



Case 15-12628-LSS Doc 461-1 Filed 05/16/16 Page 1 of 2

2

Dated: May 16, 2016 MORRIS, NICHOLS, ARSHT & TUNNELL LLP Wilmington, Delaware

/s/ Gregory W. Werkheiser Eric D. Schwartz (No. 3134) Gregory W. Werkheiser (No. 3553) Matthew B. Harvey (No. 5186) Marcy J. McLaughlin (No. 6184) 1201 N. Market St., 16th Floor PO Box 1347 Wilmington, DE 19899-1347 Telephone: (302) 658-9200 Facsimile: (302) 658-3989 [email protected] [email protected]

[email protected] [email protected] and Peter Ivanick, Esq. Lynn W. Holbert, Esq. John D. Beck, Esq. HOGAN LOVELLS US LLP 875 Third Avenue New York, NY 10022 Telephone: (212) 918-3000 Facsimile: (212) 918-3100 Email: [email protected] [email protected] [email protected]

Counsel for Debtor and Debtor in Possession


Exhibit A

Proposed Order




Re: D.I. ________

ORDER PURSUANT TO 11 U.S.C. § 105(a), 363, 365 AND 502 AND FED. R. BANKR. P. 9019 APPROVING SETTLEMENT STIPULATION BY AND AMONG

DEBTOR, LONZA AND BIOWA RELATING TO LONZA AGREEMENTS, BIOWA AGREEMENTS, CLAIMS AND RELATED MATTERS

Upon the motion (the “Motion”)2 of KaloBios Pharmaceuticals, Inc., as debtor and debtor

in possession (the “Debtor” or “KaloBios”), pursuant to sections 105(a), 363, 365 and 502 of title

11 of the United States Code (the “Bankruptcy Code”) and Rule 9019 of the Federal Rules of

Bankruptcy Procedure (the “Bankruptcy Rules”), for entry of an order approving the settlement

stipulation (the “Stipulation”), by and between (i) the Debtor, (ii) Lonza Sales AG (“Lonza

AG”), Lonza Sales Ltd (“Lonza Ltd”), and Lonza Biologics, Inc. (collectively, with Lonza AG

and Lonza Ltd, “Lonza” or the “Lonza Entities”), and (iii) BioWa, Inc. (“BioWa” and together

with the Debtor and Lonza, the “Parties”) providing for, among other things, the assumption or

rejection by the Debtor of the Lonza Agreements and BioWa Agreements and the resolution of

Claims and related matters; and adequate notice of the Motion having been given as set forth in

the Motion; and it appearing that no other or further notice is necessary; and the Court having

jurisdiction to consider the Motion and the relief requested therein pursuant to 28 U.S.C. §§ 157

and 1334; and the Court having determined that consideration of the Motion is a core proceeding


address is 1000 Marina Blvd #250, Brisbane, CA 94005-1878

2 Capitalized terms used but not defined herein are defined in the Motion.


2

pursuant to 28 U.S.C. § 157(b)(2); and the Court having determined that the Debtor has

demonstrated sound business justifications for entering into the Stipulation and the legal and

factual bases set forth in the Motion establish just cause for the relief requested in the Motion;

and, taking into account the anticipated costs and risks associated with litigating the Lonza

Agreements, BioWa Agreements Claims and related matters, the Stipulation and the related

relief requested by the Motion is fair, reasonable and in the best interests of the Debtor, its

estates, creditors, stockholders, and other parties in interest; and upon the record in this

proceeding; and after due deliberation;

IT IS HEREBY ORDERED THAT:

1. The Motion is GRANTED.

2. The Stipulation annexed to this Order as Exhibit 1 and the Debtor’s entry into the

Stipulation are APPROVED.

3. The Debtor is authorized to take any and all actions necessary or appropriate to

perform its obligations and enforce its rights arising under the Stipulation.

4. The failure specifically to describe or include any particular provision of the

Stipulation in this Order shall not diminish or impair the effectiveness of such a provision, it

being the intent of this Court that the Stipulation be approved in its entirety.

5. The Debtor is authorized to assume the Assumed Agreements in accordance with

the terms and conditions of the Stipulation. No cure or other payments shall be required in

connection with such assumption of the Assumed Agreements, except as provided for in the

Stipulation.

6. Subject to the terms and conditions of the Stipulation, the Old Lonza Agreements

and Old BioWa Agreements, to the extent executory, shall be deemed rejected upon the occurred


3

of the Plan Effective Date. Neither the Debtor, the Debtor’s estate, nor the Reorganized Debtor

shall incur any claims or liability in connection with such deemed rejection of the Old Lonza

Agreements and Old BioWa Agreements.

7. The Stipulation and this Order shall be binding upon the Debtor, Lonza, BioWa

and all parties in interest in this chapter 11 case, and any of their respective successors and

assigns, including without limitation the Reorganized Debtor and any transferees, purchasers or

other acquirers of the claims or interests of Lonza or BioWa in this chapter 11 case.

8. The Debtor, the Debtor’s claims and solicitation agent, Prime Clerk LLC, and the

Clerk of the Court are authorized to take all necessary and appropriate actions to give effect to

the Stipulation.

9. Notwithstanding Bankruptcy Rules 6004(h) and 6006(d), the terms and conditions

of this Order shall be immediately effective and enforceable upon its entry.

10. The Court retains jurisdiction with respect to all matters arising from or related to

the implementation of this Order and the settlement embodied in the Stipulation.

Dated: _______________, 2016 Wilmington, Delaware

______________________________________________ THE HONORABLE LAURIE SELBER SILVERSTEIN UNITED STATES BANKRUPTCY JUDGE


Exhibit 1 to Proposed Order

Stipulation


Execution Version



SETTLEMENT STIPULATION BY AND AMONG DEBTOR, LONZA ENTITIES AND BIOWA RELATING TO LONZA AGREEMENTS AND CLAIMS, BIOWA

AGREEMENTS AND CLAIMS, AND RELATED MATTERS

This settlement stipulation (the “Stipulation”) is made and entered into this 16th

day of May, 2016 (the “Execution Date”), by and between (i) KaloBios Pharmaceuticals, Inc.,

the debtor and debtor in possession (the “Debtor” or “KaloBios”) in the above-captioned chapter

11 case, (ii) Lonza Sales AG (“Lonza AG”), Lonza Sales Ltd (“Lonza Ltd”), and Lonza

Biologics, Inc. (collectively, with Lonza AG and Lonza Ltd, “Lonza” or the “Lonza Entities”),

and (iii) BioWa, Inc. (“BioWa”). The Debtor, Lonza and BioWa are sometimes each referred to

here as a “Party” and together as the “Parties”. The Parties hereby stipulate and agree as follows:

Recitals

A. Prior to the Petition Date (as defined herein), the Debtor and one or more

of the Lonza Entities were party to certain agreements, including the following:

The Services Agreement between Lonza Sales AG and KaloBios Pharmaceuticals, Inc., dated April 1, 2009, as amended from time to time through Amendment No. 39, dated August 26, 2015 (as amended, the “KB004 Agreement”).

The Services Agreement between Lonza Sales AG and KaloBios Pharmaceuticals, Inc., Relating to Product KB001-A, dated December 10, 2014 (as amended, the “KB001-A Agreement”).




2

The Development and Manufacturing Agreement, between Lonza Ltd and KaloBios Pharmaceuticals, Inc., Relating to KB001, dated January 24, 2008 (as amended, the “KB001 Agreement”)

The Research Evaluation Agreement, between Lonza Sales AG and KaloBios Pharmaceuticals, Inc., dated May 6, 2008 (as amended, the “Research Agreement”)

B. Prior to the Petition Date, as documented by Amendment No. 35 to the

KB004 Agreement, Lonza AG undertook certain Stage 59 and 60 services, including production

one cGMP Batch of KB004 Product at 1000 L scale for the Debtor (the “KB004 Stage 60

Product”). Lonza AG maintains that it completed and tendered delivery of the KB004 Stage 60

Product and related documentation prior to the Petition Date. For purposes of this Stipulation,

the Debtor takes no position on whether such services were completed and delivery of the

KB004 Stage 60 Product occurred prior to the Petition Date.

C. Lonza currently has possession, custody and control of the KB004 Stage

60 Product.

D. By Invoice No. 4032028, dated September 25, 2015, Lonza invoiced the

Debtor £26,400 for certain obligations incurred under the KB001-A Agreement (the “KB001-A

Invoice”).

E. From September – December 2015, Lonza issued several invoices to the

Debtor for obligations incurred under the KB004 Agreement as follows:

Date Invoice No. Amount September 28, 2015 4032141 £7,000.00September 29, 2015 4032549 £25,000.00October 29, 2015 4036276 £8,750.00December 14, 2015 4041810 £3,329.00December 14, 2015 4041811 £1,644.00December 29, 2015 4043215 £504,000.00December 29, 2015 4043179 £199,908.37December 29, 2015 4043180 £54,736.25December 29, 2015 4043181 £9,661.00


3

TOTAL £814,028.62 (collectively, with the KB001-A Invoice, the “Lonza Invoices”).

F. Prior to the Petition Date, BioWa and the Debtor entered into that certain

Non-Exclusive License Agreement, effective as of September 2, 2008 (as amended, the “BioWa

2008 License”), whereby BioWa granted to the Debtor a license for the use of certain technology

owned or controlled by BioWa known as the Potelligent® Technology in the development of the

Debtor’s products. The BioWa 2008 License was subsequently terminated by agreement of

BioWa and the Debtor.

G. Prior to the Petition Date, BioWa, Lonza AG and the Debtor entered into

that certain Non-Exclusive License Agreement, effective as of October 15, 2010 (as amended,

and including, without limitation, that certain Third Party Reviewer Agreement annexed as

Exhibit 2 and that certain Mutual Confidentiality Agreement, dated February 26, 2010, the

“BioWa/Lonza License”) pursuant to which the Debtor was granted a license for the use of

certain Technology (as that term is defined therein), which includes the Potelligent® CHOK1SV

cell line and related know-how.

H. In conducting its operations prior to the Petition Date, the Debtor worked

with the Technology to produce its KB004 antibody product in those cells.

I. BioWa asserts that the Debtor has failed to pay it the annual BioWa One-

Target Research License Fee in the amount of $100,000.00, which has become due and payable

pursuant to Section 6.2.1 of the BioWa/Lonza License.

J. Lonza asserts that the Debtor has failed to pay it the annual Lonza

Research License Fee in the amount of £35,000, which has become due and payable pursuant to

Section 6.2.2 of the BioWa/Lonza License.


4

K. On December 29, 2015 (the “Petition Date”), the Debtor filed a voluntary

petition for relief under chapter 11 of title 11 of the United States Code (as amended, the

“Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware (the

“Bankruptcy Court”), thereby commencing its chapter 11 case, Case No. 15-12628 (LSS) (the

“Bankruptcy Case”).

L. By Order, dated February 12, 2016 [D.I. 170], the Bankruptcy Court

appointed Prime Clerk LLC, as the official claims and noticing agent for the Bankruptcy Case

(the “Claims Agent”).

M. Lonza has timely filed a Proof of Claim against the Debtor, identified by

the Claims Agent as Claim No. 8 (the “Lonza Filed Claim”), which asserts an unsecured claim

against the Debtor in the amount of $1,250,605.00 and purports to reserve Lonza’s right to seek

allowance of some or all of such claim as an administrative expense claim pursuant to section

503(b)(9) of the Bankruptcy Code.

N. BioWa has timely filed a Proof of Claim against the Debtor, identified by

the Claims Agent as Claim No. 30 (the “BioWa Filed Claim”), which asserts, among other

things, an unsecured claim in the amount of $100,000.

O. On April 7, 2016, the Debtor filed the Debtor’s Plan of Reorganization

[D.I. 318] and related proposed disclosure statement [D.I. 319]. On April 25, 2016, the Debtor

filed the Debtor’s First Amended Plan of Reorganization [D.I. 366], together with a revised

disclosure statement [D.I. 368]. On May 9, 2016, the Debtor filed the Debtor’s Second Amended

Plan of Reorganization (as amended, together with all schedules, exhibits and supplements, the

“Plan”), and a related disclosure statement [D.I. 435] (the “Disclosure Statement”). Also on May

9, 2016, the Bankruptcy Court entered an Order [D.I. 420] that, inter alia, approved the


5

Disclosure Statement and authorized the Debtor to commence solicitation of acceptances of the

Plan.

P. The Plan provides, among other things, for the Holders of Allowed Class 2

Claims to receive in full and final satisfaction and discharge of such Allowed General Unsecured

Claim, value equal to 100% of the Allowed amount of such Claim in the form of: (i) Cash equal

to 50% of the Allowed amount of such Allowed General Unsecured Claim; plus (ii) a Company

Note in an original principal amount equal to the 50% of the Allowed amount of such Allowed

General Unsecured Claim (together, the “Class 2 Treatment”).

Q. Following its emergence from bankruptcy pursuant to its confirmed and

effective Plan, the Debtor anticipates that it will engage in further research, development, testing

and potentially commercialization activities with respect to its KB004 product. The Debtor,

therefore, believes that it will have further need in connection with its business for Lonza’s

services under the KB004 Agreement and possibly other agreements with Lonza, use of the

KB004 Stage 60 Product, and use of the Technology licensed pursuant to the Lonza/BioWa

License.

NOW, THEREFORE, after arm’s-length negotiations and in consideration of the

foregoing, as well as the terms, conditions and mutual agreements set forth herein, IT IS

HEREBY stipulated and agreed by the Parties as follows:

1. Recitals. The recital clauses set forth above are made an integral part of

this Stipulation and are true and correct.

2. Certain Definitions. To the extent not otherwise defined herein, as used in

this Stipulation, the following terms have the meanings specified below:


6

(a) “Lonza Assumed Agreements” means the KB004 Agreement, the

KB001-A Agreement, the KB001 Agreement, the Research Agreement, the BioWa/Lonza

License to the extent of Lonza’s interest therein, and any and all other agreements between the

Debtor and any Lonza Entity that relate in any way to the Debtor’s KB004, KB001-A or KB001

products to the extent that any such agreement constitutes an “executory contract” as such term

is used in section 365 of the Bankruptcy Code.

(b) “Lonza Agreements” means the KB004 Agreement, the KB001-A

Agreement, the KB001 Agreement, the Research Agreement, the BioWa/Lonza License to the

extent of Lonza’s interest therein, and any and all other agreement between the Debtor and any

Lonza Entity, whether or not previously terminated.

(c) “BioWa Agreements” means the BioWa/Lonza License to the

extent of BioWa’s interest therein and any other agreement between the Debtor and BioWa,

whether or not previously terminated.

(d) “Assumed Agreements” means the Lonza Assumed Agreements

and the BioWa/Lonza License.

(e) “Plan Effective Date” means the Effective Date, as such term is

defined in the Plan.

(f) “Approval Date” means the first day after which the Approval

Order, in form and substance reasonably acceptable to the Parties, has been entered by the

Bankruptcy Court and such Approval Order is not subject to (i) a timely-filed pending appeal,

(ii) a timely filed pending motion for relief under Fed. R. Bankr. P. 9023 or 9024, or (iii) a

pending stay of its enforcement or effectiveness.


7

(g) “Final Order” means an order entered by the Bankruptcy Court, or

any other court exercising jurisdiction over the subject matter hereof and the Parties, that has not

been stayed, reversed, modified, or vacated and as to which the time within which a notice of

appeal, petition for writ of certiorari, or a motion for stay, rehearing, reargument,

reconsideration, or other motion (collectively, a “Tolling Motion”) that tolls the running of the

time period within which a notice of appeal, petition for writ of certiorari, or Tolling Motion

must be filed has expired and: (i) there has not been filed any appeal or petition for writ of

certiorari, or if any such appeal or petition has been filed, it is no longer pending; and (ii) there

has not been filed any Tolling Motion, or if any such Tolling Motion has been filed, it was

denied or the tolling period set forth therein has passed; provided, however, that the possibility

that a motion pursuant to Fed. R. Civ. P. 60 or Fed. R. Bankr. 9024 may be filed with respect to

such order does not prevent such order from being a Final Order.

3. Consent to Contract/License Assumptions.

(a) Lonza Consent. Lonza hereby consents to the Debtor’s assumption

of the Lonza Assumed Agreements, as of the Plan Effective Date, on the terms set forth in this

Stipulation.

(b) BioWa Consent. BioWa hereby consents to the Debtor’s

assumption of the BioWa/Lonza License, as of the Plan Effective Date, on the terms set forth in

this Stipulation.

4. Agreed Cure and Allowed Class 2 Claims.

(a) Lonza Cure Amount and Allowed Lonza Agreement GUC. Lonza

agrees that in lieu of any claim or cure amount that it might have or assert in connection with the

Lonza Agreements, whether under section 365 of the Bankruptcy Code or otherwise, it: (i)


8

within ten (10) calendar days after the occurrence of the Plan Effective Date, shall be paid a cure

amount of $923,604.93 (the “Lonza Cure Amount”); and (ii) in addition, shall have an Allowed

Class 2 (General Unsecured Claim) against the Debtor under the Plan in the amount of

$431,401.46 (the “Allowed Lonza GUC”), which Allowed Lonza GUC shall receive the Class 2

Treatment. Payment to Lonza of the Lonza Cure Amount and the Plan distribution of Cash on

account of the Allowed Lonza GUC shall be made in accordance with the payment instructions

set forth in Schedule 4(a) hereto. Upon the payment of the Lonza Cure Amount in accordance

with this Paragraph 4(a) and the payment instructions set forth in Schedule 4(a) hereto, Lonza

acknowledges and agrees that the Debtor will have satisfied all of the requirements of section

365 of the Bankruptcy Code for assumption of the Lonza Assumed Agreements. The terms of

the Company Note that will be made payable to Lonza in respect of the Allowed Lonza GUC

shall be consistent in all respects with this Agreement, shall not contain terms inconsistent with

this Agreement, and shall be subject to this Agreement

(b) BioWa Agreed Cure and Allowed BioWa GUC. BioWa agrees that

in lieu of any claim or cure amount that it might have or assert in connection with any BioWa

Agreement, whether under section 365 of the Bankruptcy Code or otherwise, it: (i) within ten

(10) calendar days after the occurrence of the Plan Effective Date, shall be paid a cure amount of

$75,000.00 (the “BioWa Cure Amount,” and together with the Lonza Cure Amount, the “Cure

Amounts”); and (ii) in addition, shall have an Allowed Class 2 (General Unsecured Claim)

against the Debtor under the Plan in the amount of $25,000.00 (the “Allowed BioWa GUC,” and

together with the Allowed Lonza GUC, the “Allowed GUCs”), which Allowed BioWa GUC

shall receive the Class 2 Treatment. Payment to BioWa of the BioWa Cure Amount and the Plan

distribution of Cash on account of the Allowed BioWa GUC shall be made in accordance with


9

the payment instructions set forth in Schedule 4(b) hereto. Upon the payment of the BioWa Cure

Amount in accordance with this Paragraph 4(b), BioWa acknowledges and agrees that the Debtor

will have satisfied all of the requirements of section 365 of the Bankruptcy Code for assumption

of the Lonza/BioWa License. The terms of the Company Note that will be made payable to

BioWa in respect of the Allowed BioWa GUC shall be consistent in all respects with this

Agreement, shall not contain terms inconsistent with this Agreement, and shall be subject to this

Agreement.

5. Claims Administration Actions.

(a) The Allowed Lonza GUC shall be deemed to amend and supersede

in all respects the Lonza Filed Claim.

(b) The Allowed BioWa GUC shall be deemed to amend and

supersede in all respects the BioWa Filed Claim.

(c) The Claims Agent shall modify the official claims register for the

Bankruptcy Case consistent with this Stipulation.

6. KB004 Stage 60 Product. Lonza shall continue to store the KB004 Stage

60 Product in a commercially and scientifically appropriate manner in order it preserve the

integrity of the KB004 Stage 60 Product through and including December 31, 2016, without the

Debtor incurring additional liability beyond what is provided for in this Stipulation. In the event

that the Debtor requires Lonza to store the KB004 Stage 60 Product beyond December 31, 2016,

it will notify Lonza in writing at least thirty (30) calendar days prior to such date and the Debtor

and Lonza shall confer in good faith on an appropriate storage fee going forward. In the event

that the Debtor requests Lonza to release the KB004 Stage 60 Product to the Debtor or its

designated recipient, Lonza will comply with the Debtor’s reasonable instructions, subject to any


10

applicable legal requirements and subject to the Debtor reimbursing Lonza for its reasonable

costs incurred connection with such compliance. In the event the KB004 Stage 60 Product

requires further stability or other testing prior to being released from Lonza’s possession, custody

or control, the Debtor and Lonza will confer in good faith with respect to such matters in order

that such testing may be completed without undue delay or cost.

7. Old Agreements.

(a) Old Lonza Agreements. The Debtor and each of the Lonza Entities

agree that any Lonza Agreements that are not Lonza Assumed Agreements (such Lonza

Agreements, “Old Lonza Agreements”), to the extent such Old Lonza Agreements are later

adjudicated to be executory contracts subject to assumption or rejection under section 365 of the

Bankruptcy Code, (i) such Old Lonza Agreements automatically will be deemed rejected upon

the Plan Effective Date without further Order of the Bankruptcy Court or further action by any

Party, and (ii) the Debtor, the Debtor’s estate and the Reorganized Debtor (as defined in the

Plan) shall neither have nor incur any liability to any Lonza Entity as a result of the rejection

such Old Lonza Agreements or any breach of such Old Lonza Agreements occurring in

connection with such rejection; provided, however, that this Paragraph 7(a) is without prejudice

to the respective rights, if any, of Lonza and the Debtor (or Reorganized Debtor, as applicable) to

seek the remedies of specific performance or an injunction arising from or relating to any breach

by the other party of a confidentiality obligation contained in any Old Lonza Agreement (and the

ability of the other party to oppose a request for such a remedy).

(b) Old BioWa Agreements. The Debtor and BioWa agree that any

BioWa Agreements other than the BioWa/Lonza License (such other BioWa Agreements, the

“Old BioWa Agreements”), to the extent such Old BioWa Agreements are later adjudicated to be


11

executory contracts subject to assumption or rejection under section 365 of the Bankruptcy Code,

(i) such Old BioWa Agreements automatically will be deemed rejected upon the Plan Effective

Date without further Order of the Bankruptcy Court or further action by any Party, and (ii) the

Debtor, the Debtor’s estate and the Reorganized Debtor (as defined in the Plan) shall neither

have nor incur any liability to BioWa as a result of the rejection such Old BioWa Agreements or

any breach of such Old BioWa Agreements occurring in connection with such rejection;

provided, however, that this Paragraph 7(b) is without prejudice to the respective rights, if any,

of BioWa and the Debtor (or Reorganized Debtor, as applicable) to seek the remedies of specific

performance or an injunction (and the ability of the other party to oppose a request for such a

remedy) arising from or relating to any prospective breach by the other party of a confidentiality

obligation or restriction on the sale, transfer or distribution of BioWa cells, BioWa transfected

cells or BioWa know-how or other intellectual property rights contained in any Old BioWa

Agreement. For the avoidance of doubt, nothing in this Paragraph 7(b) is intended to or shall (i)

modify any party’s rights or obligations under any Old BioWa Agreement or (ii) revive any

party’s rights or obligations under any Old BioWa Agreement that have already terminated,

ceased or expired by the terms of any Old BioWa Agreement or any agreement that has

superseded, in whole or in part, an Old BioWa Agreement.

8. Motion to Approve Settlement and Assumption of Assumed Agreements.

(a) Within ten (10) calendar days after the Execution Date (the “Filing

Deadline”), the Debtor will file with the Bankruptcy Court a motion (the “Approval Motion”) to

approve this Stipulation pursuant to sections 105(a), 363, 365, 502, 503 and 507 of the

Bankruptcy Code and Rules 6004, 6006 and 9019 of the Federal Rules of Bankruptcy Procedure

(the “Bankruptcy Rules”). The Approval Motion shall include, among other relief requested,


12

authorization for the Debtor to assume the Assumed Agreements as of the Plan Effective Date

with the consent of Lonza and BioWa, subject to the terms and conditions of this Stipulation.

The Debtor will provide counsel to Lonza and BioWa with a draft of the Approval Motion and

related proposed order (the “Approval Order”) for review at least two (2) calendar days prior to

the Filing Deadline. The Approval Motion, including the related Approval Order, shall be in

form and substance reasonably acceptable to the Debtor, Lonza and BioWa.

(b) The Debtor will use its reasonable best efforts to have the Approval

Motion heard at the earliest available hearing date following the Filing Deadline (which may be

the hearing on confirmation of the Plan, tentatively scheduled for June 14-15, 2016) that does not

require the Debtor to obtain relief from the Bankruptcy Court to shorten notice below the

minimum period required by the Bankruptcy Rules and the local rules of the Bankruptcy Court.

Lonza and BioWa will use their respective reasonable best efforts to cooperate with such

scheduling and to be available, if needed, in connection with the hearing on the Approval

Motion.

9. Plan Support. Unless the Bankruptcy Court has entered an order denying

approval of this Stipulation or the Bankruptcy Court has adjudicated the Debtor to be in material

breach of its obligations pursuant to this Stipulation, subject to the terms and conditions of this

Stipulation, Lonza and BioWa agree that each will:

(a) Vote its respective Allowed GUC in favor of the Plan and timely

return a duly executed ballot in connection therewith.

(b) Support the Plan and not (i) withdraw or revoke its vote with

respect to the Plan, (ii) object to the Plan or any related disclosure statement, so long as each of


13

the foregoing is consistent in all material respect with this Stipulation or (iii) support any

alternative plan or transaction which the Debtor does not support.

10. Releases.

(a) Except for the obligations set forth in this Stipulation and in the

Lonza Assumed Agreements, the Debtor, on behalf of itself, its bankruptcy estate, and its

present, former and future principals, agents, successors, assigns, attorneys, insurers, affiliates

and subsidiaries, hereby waives, releases and discharges the Lonza Entities and each of their

respective present, former and future principals, agents, successors, assigns, attorneys, insurers,

affiliates and subsidiaries, from any and all claims, liabilities, damages, actions, causes of action,

costs and fees existing as of the Execution Date, whether now known or unknown, arising from,

related to, or in any manner concerning any aspect of the Lonza Agreements and performance

thereof, including without limitation royalties or other payments or transfers made to any Lonza

Entity under or in connection with any Lonza Agreement prior to the Petition Date or during the

Bankruptcy Case, and specifically including any and all claims or causes of action under Chapter

5 of the Bankruptcy Code.

(b) Except for the obligations set forth in this Stipulation and in the

BioWa/Lonza License, the Debtor, on behalf of itself, its bankruptcy estate, and its present,

former and future principals, agents, successors, assigns, attorneys, insurers, affiliates and

subsidiaries, hereby waives, releases and discharges BioWa and its present, former and future

principals, agents, successors, assigns, attorneys, insurers, affiliates and subsidiaries, from any

and all claims, liabilities, damages, actions, causes of action, costs and fees existing as of the

Execution Date, whether now known or unknown, arising from, related to, or in any manner

concerning any aspect of the BioWa Agreements and performance thereof, including without


14

limitation royalties or other payments or transfers made to BioWa under or in connection with

any BioWa Agreement prior to the Petition Date or during the Bankruptcy Case, and specifically

including any and all claims or causes of action under Chapter 5 of the Bankruptcy Code.

(c) Except for the obligations set forth in this Stipulation, in the Plan

and in the Lonza Assumed Agreements, the Lonza Entities on behalf of themselves and their

respective present, former and future principals, agents, successors, assigns, attorneys, insurers,

affiliates and subsidiaries, hereby waives, releases and discharges the Debtor, the Debtor’s

bankruptcy estate, and the Debtor’s present, former and future principals, agents, successors,

assigns, attorneys, insurers, affiliates and subsidiaries, from any and all claims, liabilities,

damages, actions, causes of action, costs and fees existing s of the Execution Date, whether now

known or unknown, arising from, related to, or in any manner concerning any aspect of the

Lonza Agreements and performance thereof, including without limitation royalties or other

payments due to any Lonza Entity under or in connection with any Lonza Agreement prior to the

Petition Date or during the Bankruptcy Case, and specifically including any and all liabilities

evidenced by the Lonza Invoices and the annual Lonza Research License Fee pursuant to Section

6.2.2 of the BioWa/Lonza License.

(d) Except for the obligations set forth in this Stipulation, in the Plan and in

the BioWa/Lonza License, BioWa on behalf of itself and its present, former and future

principals, agents, successors, assigns, attorneys, insurers, affiliates and subsidiaries, hereby

waives, releases and discharges the Debtor, the Debtor’s bankruptcy estate, and the Debtor’s

present, former and future principals, agents, successors, assigns, attorneys, insurers, affiliates

and subsidiaries, from any and all claims, liabilities, damages, actions, causes of action, costs and

fees existing as of the Execution Date, whether now known or unknown, arising from, related to,


15

or in any manner concerning any aspect of the BioWa Agreements and performance thereof,

including without limitation royalties or other payments due to BioWa under or in connection

with any BioWa Agreement prior to the Petition Date or during the Bankruptcy Case.

(e) Except as otherwise stated herein, the Debtor, Lonza and BioWa

further acknowledge section 1542 of the Civil Code of the State of California and hereby waive

and relinquish all rights and benefits that they may have thereunder with respect to the matters

addressed herein.

(f) For the avoidance of doubt, this Paragraph 10 is without prejudice

to any Party’s ability to seek specific performance or injunctive relief to the extent preserved or

reserved as set forth in Paragraphs 7(a) and 7(b) above.

(g) For the further avoidance of doubt, nothing in this Stipulation is

intended to or shall relieve any Party of its prospective obligations under any Assumed

Agreement from and after the Plan Effective Date.

11. Miscellaneous.

(a) Applicable Law. This Stipulation will be construed in accordance

with the laws of the State of Delaware, without regard to principles of conflicts of law, and will

be binding upon and inure to the benefit of the Parties thereto and their respective successors,

licensees and assigns.

(b) Further Assurances. Each of the Parties shall furnish the other

Party with (and shall execute, acknowledge and deliver and cause to be executed, acknowledged

and delivered to the other Party) any other instruments which such other Party may reasonably

require or deem necessary, from time to time, in its discretion, to evidence, establish, protect,

enforce, defend, or secure to it any or all of its rights, title, or interest hereunder.


16

(c) Notices. Notices hereunder shall be in writing and shall be

addressed to the address below or any successor address of which one Party informs the other in

writing:

If to the Debtor or Reorganized Debtor: Dr. Cameron Durrant Chairman and Chief Executive Officer KaloBios Pharmaceuticals, Inc. 1000 Marina Blvd, Suite 250 Brisbane, CA 94005-1878 Telephone: (650) 243-3100 Facsimile: (650) 243-3260 email: [email protected]; [email protected] with a copy to (which shall not

constitute notice hereunder): Gregory W. Werkheiser Morris Nichols, Arsht & Tunnell LLP 1201 North Market Street, 16th Floor P.O. Box 1347 Wilmington, Delaware 19801 Telephone: (302) 658-9200 Facsimile: (302) 658-3989 email: [email protected]

If to the Lonza Entities: Evan Zisholtz Sr Legal Counsel Legal Lonza Inc. 90 Boroline Rd US - 07401 Allendale Tel. : +1 201 316 9317 Fax : +1 201 378 5200 email: [email protected]

If to BioWa: Shintaro Hasegawa Director, Business Development BioWa, Inc. 212 Carnegie Center, Suite 101 Princeton, NJ 08540, USA Phone: 609-580-7341 Fax: 609-228-5247 E-mail: [email protected]

with a copy to (which shall not constitute notice hereunder):

Victoria A. Guilfoyle


17

Blank Rome LLP 1201 Market Street Suite 800 | Wilmington, DE 19801 Phone: 302-425-6404 Fax: 302-428-5101 Email: [email protected] Any notice hereunder shall be given by personal delivery, express courier service (e.g., Federal

Express) with written receipt confirming delivery, certified mail with written receipt confirming

delivery, or facsimile with written confirmation of transmission. The date of the giving of such

notice shall be the date of such personal delivery or facsimile transmission, one (1) business day

after mailing by express mail courier within the United States, and (3) business days after

mailing by certified mail; provided that in the event of conflict with the date of the written

receipt then the date that the receipt was signed shall control.

(d) Successors Bound; Capacity to Execute. This Stipulation shall be

binding on the Parties hereto and their respective successors and assigns. Nothing in this

Stipulation, express or implied, is intended to confer upon any person or entity other than the

foregoing, any rights, remedies, obligations or liabilities under or by reason of this Stipulation.

Each of the Lonza Entities and BioWa represents and warrants that it is duly authorized and has

full right, title and capacity to execute and deliver this Stipulation, and to bind itself to this

Stipulation. The Debtor represents and warrants that, subject to the approval of this Stipulation

by the Bankruptcy Court, it is duly authorized and has full right, title and capacity to execute and

deliver, and to be bound to, this Stipulation. Each Party represents and warrants that its signatory

below is duly authorized to execute this Stipulation on such Party’s behalf.

(e) Intent. The Parties (a) acknowledge that it is their intent to

consummate this Stipulation and (b) agree to cooperate to the extent reasonably necessary to


18

obtain Bankruptcy Court approval and implement all terms and conditions of the Stipulation and

to exercise their best efforts to accomplish the terms and conditions of the Stipulation.

(f) Complete Defense. This Stipulation may be plead as a full and

complete defense to, and may be used as the basis for an injunction against, any action, suit or

other proceeding that may be instituted, prosecuted or attempted in breach of or contrary to this

Stipulation.

(g) No Admission. Neither the Stipulation, nor any act performed or

document executed pursuant to, or in furtherance of, the Stipulation: (i) is or may be deemed to

be or may be used as an admission of, or evidence of, the validity of the Lonza Filed Claim, the

Lonza Invoices, the BioWa Filed Claim, of any debt or obligation arising under or relating to any

Lonza Agreement or any BioWa Agreement, of any wrongdoing or liability of any person or

entity; or (ii) is or may be deemed to be or may be used as an admission of, or evidence of, any

fault or omission of any person or entity in any civil, criminal or administrative proceeding in

any court, administrative agency or other tribunal.

(h) Entire Agreement. The Stipulation constitutes the entire agreement

among the Parties hereto and supersedes any prior negotiations, agreements or understandings

among them. No representations, warranties or inducements have been made to any party

concerning the Stipulation or its schedules or exhibits other than as set forth herein.

(i) Headings. The headings contained herein are for reference

purposes only and shall not affect in any way the meaning or interpretation of this Stipulation.

(j) Amendment. The Stipulation may be amended or modified only by

a written instrument signed by or on behalf of all Parties or their respective successors in interest.


19

(k) Jointly Drafted. This Stipulation shall be deemed to have been

jointly drafted by the Parties, and in construing and interpreting this Stipulation, no provision

shall be construed and interpreted for or against any of the Parties because such provision or any

other provision of the Stipulation as a whole is purportedly prepared or requested by such Party.

(l) Jurisdiction and Venue. The Bankruptcy Court shall retain

jurisdiction with respect to implementation and enforcement of the terms of the Stipulation, and

all Parties submit to the jurisdiction of the Bankruptcy Court for purposes of implementing and

enforcing the settlement embodied in the Stipulation. To the extent the Bankruptcy Court

declines or lacks jurisdiction, the Parties irrevocably consent to the jurisdiction of the courts of

the State of Delaware and of any federal court located within the State of Delaware for all

purposes in connection with any action or proceeding that arises out of or relates to this

Stipulation.

(m) Acknowledgement. Each of the Parties acknowledges that it has

read all of the terms of this Stipulation, has had an opportunity to consult with counsel of its own

choosing or voluntarily waived such right and enters into these terms voluntarily and without

duress.

(n) Counterparts; Facsimile; Electronic Mail. The Stipulation may be

executed in one or more counterparts and by facsimile or electronic mail, all of which shall be

deemed to be one and the same agreement.

12. Effectiveness Conditions; Termination and Effects Thereof.

(a) Staged Effectiveness of Stipulation.

(i) Paragraphs 1, 2, 4 (solely to the extent of the provisional

allowance of the Allowed GUCs for voting purposes under the Plan), 8, 9, 11 and 12 of this


20

Stipulation shall be effective immediately as of the Execution Date and shall remain effective

subject to the termination of this Stipulation in accordance with Paragraph 12(b) below.

(ii) Paragraphs 3, 4 (except to the extent earlier effective

pursuant to Paragraph 12(a)(i) hereof), 5, 6 and 7 of this Stipulation shall become effective upon

the occurrence of the Approval Date and shall remain effective subject to the termination of this

Stipulation in accordance with Paragraph 12(b) below.

(iii) Except as provided in Paragraphs 12(a)(iv) and 12(a)(v)

below with respect to the releases by Lonza and BioWa of the Debtor, Paragraphs 10 and any

remaining provisions of this Stipulation shall be effective only upon the occurrence of the Plan

Effective Date and shall remain effective subject to the termination of this Stipulation in

accordance with Paragraph 12(b) below.

(iv) The release to be provided by the Lonza Entities as set

forth in Paragraph 10(c) of this Stipulation shall not be effective until Lonza has received the

Lonza Cure Amount in accordance with Paragraph 4(a) of this Stipulation.

(v) The release to be provided by BioWa as set forth in

Paragraph 10(d) of this Stipulation shall not be effective until BioWa has received the BioWa

Cure Amount in accordance with Paragraph 4(b) of this Stipulation.

(b) Termination.

(i) Any Party may terminate this Stipulation by providing

written notice of termination to the other Parties pursuant to Paragraph 11(c) in the event that the

Bankruptcy Court enters an order denying approval of this Stipulation, without leave to amend or

re-file the Approval Motion, and such order has become a Final Order.


21

(ii) Any Party may terminate this Stipulation by providing

written notice of termination to the other Parties pursuant to Paragraph 11(c) in the event the

Bankruptcy Court enters an order denying confirmation of the Plan, without leave for the Debtor

to amend the Plan, and such order has become a Final Order.

(iii) Any Party, not itself in material breach of its obligations

under this Stipulation, may terminate this Stipulation on account of another Party’s material

breach of its obligations under this Stipulation if the breaching Party has failed to cure such

material breaches of its obligations under this Stipulation within fourteen (14) days after having

been provided written notice of such material breach in accordance with Paragraph 11(c) of this

Stipulation.

(iv) Any Party may terminate this Stipulation by providing


Approval Date has not occurred by June 30, 2016.

(v) Any Party may terminate this Stipulation by providing


Approval Order has not become a Final Order by July 31, 2016.

(vi) Any Party may terminate this Stipulation by providing


Plan Effective Date has not occurred by July 31, 2016; provided, however, the Debtor shall not

have the right to terminate this Stipulation on account of the failure of the Plan Effective Date to

occur by July 31, 2016, if the Plan has been confirmed on or before such date and the

Confirmation Order (as defined in the Plan) has not been vacated or deemed vacated in

accordance with Section 9.5 of the Plan.


22

(vii) Either Lonza or BioWa may terminate this Stipulation by

providing written notice of termination to the other Parties pursuant to Paragraph 11(c) in the

event that the Debtor amends the Plan to provide for Plan treatment of its Allowed GUC that is

materially less advantageous to it than the Plan treatment provided for in this Stipulation.

(viii) Either Lonza or BioWa may terminate this Stipulation by

providing written notice of termination to the other Parties pursuant to Paragraph 11(c) in the

event that a chapter 11 trustee is appointed in the Debtor’s Bankruptcy Case, the Bankruptcy

Case is converted to a chapter 7 liquidation case or the Bankruptcy Case is dismissed without the

Plan Effective Date having first occurred.

(c) Effects of Termination.

(i) In the event this Stipulation is terminated pursuant to one or

more of Paragraphs 12(b)(i), 12(b)(ii), 12(b)(iv), 12(b)(v), 12(b)(vi), 12(b)(vii) or 12(viii) above,

no Party hereto shall have or incur any liability to any other Party hereto arising out of or relating

to this Stipulation, and the Parties shall each be restored to the extent possible to their respective

positions prior to the Execution Date.

(ii) In the event this Stipulation is terminated on account of a

Party’s material breach of this Stipulation in accordance with Paragraph 12(b)(iii) above, the

non-breaching Party or Parties shall have and retain any claims or causes of action the possess

against the breaching Party or Parties relating to their breach of this Stipulation.

(iii) Notwithstanding anything to the contrary herein, the

Parties’ respective rights and obligations under Paragraphs 11(a), 11(c), 11(d), 11(g), 11(h),

11(i), 11(j), 11(k), 11(l), 11(m) and 11(n) shall survive any termination of this Stipulation.


Execution Version

(Signature Page to Settlement Stipulation By And Among Debtor, Lonza Entities And BioWa)

IN WITNESS WHEREOF, intending to be legally bound, and intending that this

Stipulation constitute an agreement executed under seal, each of the Parties has caused this

Stipulation to be executed under seal the day and year first above mentioned.

DEBTOR:

KALOBIOS PHARMACEUTICALS, INC. By: Name: Dr. Cameron Durrant Title: Chairman and Chief Executive Officer


Execution Version


LONZA ENTITIES:

LONZA SALES AG By: Name: Title:

LONZA SALES LTD By: Name: Title:

LONZA BIOLOGICS, INC. By: Name: Title:


Execution Version


BIOWA:

BIOWA, INC. By: Name: Title:


Execution Version

Scheduled 4(a)

[Lonza Payment Instructions]


Execution Version

Scheduled 4(b)

[BioWa Payment Instructions]


in the united states bankruptcy court for the … · for relief under chapter 11 of title 11 of the...

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