UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

 

 

Filed by the Registrant  ☒

Filed by a Party other than the Registrant  ☐

Check the appropriate box:

 

☐	Preliminary Proxy Statement

 

☐	Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

☒	Definitive Proxy Statement

 

☐	Definitive Additional Materials

 

☐	Soliciting Material under § 240.14a-12

PROMETHEUS BIOSCIENCES, INC.

(Name of Registrant as Specified in its Charter)

N/A

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check all boxes that apply):

 

☐	No fee required

 

☒	Fee paid previously with preliminary materials

 

☐	Fee computed on table in exhibit required by Item 25(b) per Exchange Act Rules 14a-6(i)(1) and 0-11

 

 

 

PROMETHEUS BIOSCIENCES, INC.

3050 Science Park Road

San Diego, CA 92121

MERGER PROPOSED—YOUR VOTE IS VERY IMPORTANT

May 16, 2023

Dear Stockholders of Prometheus Biosciences, Inc.:

You are cordially invited to attend a special meeting of the stockholders of Prometheus Biosciences, Inc., a Delaware corporation (“Prometheus,” the “Company,” “we,” “us” or “our”), to be held virtually via live webcast on June 15, 2023, at 9:00 a.m. Eastern Time (the special meeting and any adjournments or postponements thereof, the “Special Meeting”). To attend the Special Meeting, you must pre-register at www.proxydocs.com/RXDX by 5:00 p.m. Eastern Time on June 14, 2023, the day preceding the Special Meeting. For purposes of attendance at the Special Meeting, all references in the enclosed proxy statement to “present” shall mean virtually present at the Special Meeting.

We have entered into an Agreement and Plan of Merger (as it may be amended from time to time, the “Merger Agreement”), dated as of April 15, 2023, with Merck & Co., Inc., a New Jersey corporation (“Merck”), and Splash Merger Sub, Inc., a Delaware corporation and a direct wholly owned subsidiary of Merck (“Merger Sub”). Pursuant to and subject to the terms and conditions of the Merger Agreement, Merger Sub will be merged with and into Prometheus, with Prometheus surviving the merger as a wholly owned subsidiary of Merck (the “Merger”).

At the Special Meeting, you will be asked to consider and vote on a proposal to adopt the Merger Agreement (the “Merger Proposal”). The affirmative vote of the holders of a majority of the outstanding shares of Prometheus common stock, par value $0.0001 per share (the “Company Shares”), issued and outstanding and entitled to vote thereon as of the close of business on May 15, 2023 (the “Record Date”) is required to approve the Merger Proposal. At the Special Meeting, you will also be asked to consider and vote on a proposal to approve, on a non-binding, advisory basis, certain compensation that will or may be paid or become payable to Prometheus’ named executive officers that is based on or otherwise relates to the Merger (the “Merger Compensation Proposal”). The affirmative vote of the holders of a majority in voting power of the votes cast affirmatively or negatively (excluding abstentions) at the Special Meeting by the holders entitled to vote thereon is required to approve the Merger Compensation Proposal. At the Special Meeting, you will also be asked to consider and vote on a proposal to approve the adjournment of the Special Meeting to a later date or dates if necessary to solicit additional proxies if there are insufficient votes in person or by proxy to approve the Merger Proposal at the time of the Special Meeting (the “Adjournment Proposal”). The affirmative vote of the holders of a majority in voting power of the votes cast affirmatively or negatively (excluding abstentions) at the Special Meeting by the holders entitled to vote thereon is required to approve the Adjournment Proposal.

If the Merger is consummated, you will be entitled to receive $200.00 in cash, without interest, for each Company Share that you own (unless you have properly exercised appraisal rights, including by not voting in favor of the Merger Proposal). Such merger consideration represents a premium of approximately 75% over the Company Share closing price of $114.01 on April 14, 2023, the last trading day before the public announcement that Prometheus entered into the Merger Agreement.

The Board of Directors of Prometheus (the “Board”), after considering the factors more fully described in the enclosed proxy statement, has unanimously (i) determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are advisable, fair to and in the best interests of Prometheus and its stockholders and declared it advisable for Prometheus to enter into the Merger Agreement, (ii) approved and declared advisable the execution and delivery by Prometheus of the Merger Agreement, the performance by Prometheus of its covenants and agreements contained therein and the consummation of the Merger and the other transactions contemplated thereby upon the terms and subject to the conditions contained therein, (iii) directed that the adoption of the Merger Agreement be submitted to a vote at a meeting of Prometheus’ stockholders and (iv) resolved, subject to the terms and conditions set forth in the Merger Agreement, to recommend that the Merger Agreement be adopted by Prometheus’ stockholders. The Board unanimously recommends that Prometheus stockholders vote “FOR” the Merger Proposal. In addition, the Board unanimously recommends that Prometheus stockholders vote “FOR” the Merger Compensation Proposal and “FOR” the Adjournment Proposal.

The enclosed proxy statement provides detailed information about the Special Meeting, the Merger Agreement and the Merger. A copy of the Merger Agreement is attached as Annex A to the proxy statement and is incorporated herein by reference. The proxy statement also describes the actions and determinations of the Board in connection with its evaluation of the Merger Agreement and the Merger. We encourage you to read the accompanying proxy statement, including all documents incorporated by reference into the proxy statement, and its annexes, including the Merger Agreement, carefully and in their entirety, as they contain important information. You may also obtain more information about Prometheus from documents we file with the Securities and Exchange Commission from time to time.

Whether or not you plan to attend the Special Meeting in person, please complete, sign, date and return, as promptly as possible, the enclosed proxy card in the accompanying postage prepaid envelope or grant your proxy electronically over the Internet or by telephone. Only your last-dated proxy will be counted, and any proxy may be revoked at any time prior to its exercise at the Special Meeting. If you attend the Special Meeting and vote thereat, your vote will revoke any proxy that you have previously submitted.

Your vote is very important, regardless of the number of Company Shares that you own. We cannot consummate the Merger unless the Merger Proposal is approved by the affirmative vote of the holders of at least a majority of the issued and outstanding Company Shares entitled to vote thereon as of the Record Date.

If you have questions or need assistance voting your shares of Prometheus common stock, please contact:

1407 Broadway, 27^th Floor

New York, New York 10018

proxy@mackenziepartners.com

Call Collect: (212) 929-5500

or

Toll-Free (800) 322-2885

On behalf of the Board, I thank you for your support and appreciate your consideration of this matter.

 

Neither the Securities and Exchange Commission nor any state securities regulatory agency has approved or disapproved of the transactions described in this document, including the Merger, or determined if the information contained in this document is accurate or adequate. Any representation to the contrary is a criminal offense.

PLEASE COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD PROMPTLY. This proxy statement is dated May 16, 2023 and, together with the enclosed form of proxy card, is first being mailed to stockholders on or about May 16, 2023.

PROMETHEUS BIOSCIENCES, INC.

3050 Science Park Road

San Diego, CA 92121

 

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON JUNE 15, 2023

 

 

NOTICE IS HEREBY GIVEN that a special meeting of the stockholders of Prometheus Biosciences, Inc., a Delaware corporation (“Prometheus,” the “Company,” “we,” “us” or “our”), will be held virtually via live webcast on June 15, 2023, at 9:00 a.m. Eastern Time, or at any adjournment or postponement thereof. To attend the Special Meeting, you must pre-register at www.proxydocs.com/RXDX by 5:00 p.m. Eastern Time on June 14, 2023, the day preceding the Special Meeting. For purposes of attendance at the Special Meeting, all references in the enclosed proxy statement to “present” shall mean virtually present at the Special Meeting. The Special Meeting is being held for the following purposes:

 

1.

To consider and vote on a proposal to adopt the Agreement and Plan of Merger (as it may be amended from time to time, the “Merger Agreement”), dated as of April 15, 2023, by and among Merck & Co., Inc., a New Jersey corporation (“Merck”), Splash Merger Sub, Inc., a Delaware corporation and a direct wholly owned subsidiary of Merck (“Merger Sub”), and Prometheus, pursuant to which Merger Sub will be merged with and into Prometheus, with Prometheus surviving as a wholly owned subsidiary of Merck (the “Merger”);

 

2.

To consider and vote on a proposal to approve, on a non-binding, advisory basis, certain compensation that will or may be paid or become payable to Prometheus’ named executive officers that is based on or otherwise relates to the Merger; and

 

3.

To consider and vote on a proposal to approve the adjournment of the special meeting to a later date or dates if necessary to solicit additional proxies if there are insufficient votes in person or by proxy to approve the proposal to adopt the Merger Agreement at the time of the special meeting (the special meeting and any adjournments or postponements thereof, the “Special Meeting”).

Only stockholders of record as of the close of business on May 15, 2023 (the “Record Date”) are entitled to notice of the Special Meeting and to vote at the Special Meeting or at any adjournment or postponement thereof.

The Board unanimously recommends that you vote:

1. “FOR” the proposal to adopt the Merger Agreement (the “Merger Proposal”);

2. “FOR” the proposal to approve, on a non-binding, advisory basis, certain compensation that will or may be paid or become payable to Prometheus’ named executive officers that is based on or otherwise relates to the Merger (the “Merger Compensation Proposal”); and

3. “FOR” the proposal to approve the adjournment of the Special Meeting to a later date or dates if necessary to solicit additional proxies if there are insufficient votes to approve the Merger Proposal at the time of the Special Meeting (the “Adjournment Proposal”).

Your vote is very important, regardless of the number of shares of Prometheus common stock, par value $0.0001 per share (“Company Shares”), that you own. Whether or not you plan to attend the Special Meeting in person, please complete, sign, date and return, as promptly as possible, the enclosed proxy card in the accompanying prepaid reply envelope or grant your proxy electronically over the Internet or by telephone. If you fail to return your proxy card, grant your proxy electronically over the Internet or by telephone or attend the Special Meeting, your Company Shares will not be counted for purposes of determining whether a quorum is present at the Special Meeting and, if a quorum is present, will have the same effect as a vote “AGAINST” the Merger Proposal.

Under Delaware law, stockholders and beneficial owners who do not vote in favor of the Merger Proposal will have the right to seek appraisal of the fair value of their issued and outstanding Company Shares as determined by the Delaware Court of Chancery if the Merger is consummated, but only if they submit a written demand for such an appraisal to Prometheus before the vote on the Merger Proposal and comply with the other Delaware law procedures explained in the accompanying proxy statement.

By Order of the Board of Directors,

 

Mark C. McKenna

Chairman of the Board, President and Chief Executive Officer

San Diego, California

May 16, 2023

YOUR VOTE IS VERY IMPORTANT!

If your Company Shares are registered directly in your name: If you are a stockholder of record, you may grant a proxy to vote your Company Shares through the Internet, by telephone or by mail as described below. Please help us save time and postage costs by granting a proxy through the Internet or by telephone. Each such method is generally available 24 hours a day and will ensure that your proxy to vote your Company Shares is confirmed and posted immediately. To grant a proxy to vote your Company Shares:

 

1.

BY INTERNET

 

a.

Go to the website at www.proxypush.com/RXDX, 24 hours a day, 7 days a week, until the start of the Special Meeting.

 

b.

Please have your proxy card available to verify your identity and create an electronic proxy.

 

c.

Follow the simple instructions provided.

 

2.

BY TELEPHONE

 

a.

On a touch-tone telephone, call toll-free 1-866-447-1752, 24 hours a day, 7 days a week, until 11:59 p.m. Eastern Time on June 14, 2023, the day preceding the Special Meeting.

 

b.

Please have your proxy card available to verify your identity.

 

c.

Follow the simple instructions provided.

 

3.

BY MAIL

 

a.

Mark, sign and date your proxy card.

 

b.

Return it prior to 11:59 p.m. Eastern Time on June 14, 2023, the day preceding the Special Meeting, in the postage-paid envelope provided.

If your Company Shares are held in the name of a bank, broker or other nominee: You will receive instructions on how to vote from the bank, broker or other nominee. You must follow the instructions of such bank, broker or other nominee in order for your Company Shares to be voted. Telephone and Internet voting instructions also may be offered to stockholders owning Company Shares through certain banks and brokers. As a beneficial owner, you have the right to direct your bank, broker or other nominee on how to vote the Company Shares in your account. Your bank, broker or other nominee cannot vote on any of the proposals to be considered at the Special Meeting, including the Merger Proposal, without your instructions.

If you fail to return your proxy card, grant your proxy electronically over the Internet or by telephone or attend the Special Meeting, your Company Shares will not be counted for purposes of determining whether a quorum is present at the Special Meeting. To vote your Company Shares at the Special Meeting, you must pre-register at www.proxydocs.com/RXDX by 5:00 p.m. Eastern Time on June 14, 2023, the day preceding the Special Meeting. Company Shares held directly in your name as a stockholder of record may be voted at the Special Meeting via the Special Meeting website, provided you have pre-registered for the Special Meeting. If you hold your Company Shares through a bank, broker or other nominee, you must obtain from such nominee a valid “legal proxy” issued in your name in order to vote at the Special Meeting.

We encourage you to read the accompanying proxy statement, including all documents incorporated by reference into the accompanying proxy statement, and its annexes, carefully and in their entirety. If you have any questions concerning the Merger, the Special Meeting or the accompanying proxy statement, would like additional copies of the accompanying proxy statement or require assistance in submitting your proxy or voting your Company Shares, please contact our proxy solicitor or us by using the contact information provided below:

1407 Broadway, 27^th Floor

New York, New York 10018

proxy@mackenziepartners.com

Call Collect: (212) 929-5500

or

Toll-Free (800) 322-2885

or

 

Prometheus Biosciences, Inc.

3050 Science Park Road

San Diego, CA 92121

Attn: Corporate Secretary

Call: (858) 422-4300

TABLE OF CONTENTS

 

QUESTIONS AND ANSWERS			1
SUMMARY			13
THE COMPANIES			27
THE SPECIAL MEETING			28
Date, Time and Place of the Special Meeting			28
Purpose of the Special Meeting			28
Pre-Registering for the Special Meeting			28
Record Date; Shares Entitled to Vote; Quorum			29
Vote Required; Abstentions and Broker Non-Votes			29
Company Shares Held by Directors and Executive Officers			30
Voting; Proxies			30
Revocability of Proxies			31
Abstentions			32
Adjournments and Postponements			32
Board Recommendation			33
Solicitation of Proxies			33
Anticipated Date of Consummation of the Merger			33
Appraisal Rights			33
Householding of Special Meeting Materials			34
Questions and Additional Information			35
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS			36
THE MERGER			38
Certain Effects of the Merger on Prometheus			38
Effect on Prometheus if the Merger Is Not Consummated			38
Merger Consideration			39
Background of the Merger			39
Recommendation of the Board and Reasons for the Merger			46
Opinion of Centerview Partners LLC			52
Opinion of Goldman Sachs & Co. LLC			57
Certain Unaudited Prospective Financial Information			61
Interests of the Directors and Executive Officers of Prometheus in the Merger			64
Financing of the Merger			68
Closing and Effective Time of the Merger			68
Appraisal Rights			68
Material U.S. Federal Income Tax Consequences of the Merger to Holders of Company Shares			72
Regulatory Approvals Required for the Merger			75
Litigation Related to the Merger			77
Delisting and Deregistration of Company Shares			77
THE MERGER AGREEMENT			78
Explanatory Note Regarding the Merger Agreement			78
When the Merger Becomes Effective			78
Structure of the Merger; Certificate of Incorporation; Bylaws; Directors and Officers			79
Effect of the Merger on Company Shares			79
Treatment of Equity Awards and the ESPP			79
Dissenting Company Shares			80
Payment for Company Shares			80
Representations and Warranties			82
Conduct of Business Pending the Merger			86
Other Covenants and Agreements			88
Conditions to the Merger			97
Termination			98

 

i

Termination Fee; Certain Expenses			100
Expenses Generally			101
Specific Performance			101
Amendments; Waiver			102
Governing Law and Jurisdiction			102
PROPOSAL NO. 1: APPROVAL OF THE MERGER PROPOSAL			103
The Merger Proposal			103
Vote Required			103
Board Recommendation			103
PROPOSAL NO. 2: ADVISORY VOTE ON THE MERGER COMPENSATION PROPOSAL			104
The Merger Compensation Proposal			104
Vote Required			106
Board Recommendation			107
PROPOSAL NO. 3: ADJOURNMENT OF THE SPECIAL MEETING			108
The Adjournment Proposal			108
Vote Required			108
Board Recommendation			108
MARKET PRICES AND DIVIDEND DATA			109
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT			110
FUTURE STOCKHOLDER PROPOSALS			113
WHERE YOU CAN FIND MORE INFORMATION			114
MISCELLANEOUS			116

ANNEXES

 

ANNEX A—AGREEMENT AND PLAN OF MERGER			A-1
ANNEX B—OPINION OF CENTERVIEW PARTNERS LLC			B-1
ANNEX C—OPINION OF GOLDMAN SACHS & CO. LLC			C-1

 

ii

 

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2

 

3

 

4

 

5

 

6

 

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8

 

9

 

10

 

11

 

12

 

13

 

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THE COMPANIES

Prometheus Biosciences, Inc.

Prometheus is a Delaware corporation with principal executive offices located at 3050 Science Park Road, San Diego, CA 92121, telephone number (858) 422-4300. Prometheus is a clinical-stage biotechnology company pioneering a precision medicine approach to the discovery, development, and commercialization of novel therapeutic products for the treatment of immune-mediated diseases, starting first with inflammatory bowel disease. Prometheus leverages its proprietary precision medicine platform, Prometheus360^™, which includes one of the world’s largest gastrointestinal bioinformatics databases and sample biobanks, to identify novel therapeutic targets, develop therapeutic candidates to engage those targets, and develop genetics-based diagnostic tests designed to identify patients more likely to respond to its therapeutic candidates. The Company Shares are listed on Nasdaq under the symbol “RXDX.” Additional information about Prometheus is contained in certain of its public filings that are incorporated by reference herein. See “Where You Can Find More Information” beginning on page 114 of this proxy statement.

Merck & Co., Inc.

Merck, known as MSD outside the United States and Canada, is a New Jersey corporation with principal executive offices located at 126 East Lincoln Avenue, Rahway, NJ 07065, telephone number (908) 740-4000. Merck is a global health care company that delivers innovative health solutions through its prescription medicines, including biologic therapies, vaccines and animal health products. The common stock of Merck is listed on the New York Stock Exchange under the symbol “MRK.”

Splash Merger Sub, Inc.

Merger Sub is a Delaware corporation and a direct wholly owned subsidiary of Merck, with a registered office located at 1209 Orange Street, Wilmington, DE 19801. Merger Sub was formed solely for the purpose of effecting the Merger and the transactions contemplated by the Merger Agreement. Upon completion of the Merger, Merger Sub will cease to exist.

 

27

THE SPECIAL MEETING

We are furnishing this proxy statement to Prometheus stockholders as part of the solicitation of proxies by the Board for use at the Special Meeting or any adjournment or postponement thereof.

Date, Time and Place of the Special Meeting

This proxy statement is being furnished to our stockholders as part of the solicitation of proxies by the Board for use at the Special Meeting to be held virtually via live webcast on June 15, 2023, at 9:00 a.m. Eastern Time, or at any adjournment or postponement thereof. Prometheus stockholders will be able to virtually attend and vote at the Special Meeting by visiting www.proxydocs.com/RXDX. To attend the Special Meeting, you must pre-register at www.proxydocs.com/RXDX by 5:00 p.m. Eastern Time on June 14, 2023, the day preceding the Special Meeting.

Company Shares held directly in your name as a stockholder of record may be voted at the Special Meeting via the Special Meeting website, provided you have pre-registered for the Special Meeting. Shares held in “street name” may be voted at the Special Meeting via the Special Meeting website only if you obtain a legal proxy from your bank, broker or other nominee and provided you have pre-registered for the Special Meeting.

Purpose of the Special Meeting

At the Special Meeting, we will ask our stockholders of record as of the Record Date to vote on (i) the Merger Proposal, (ii) the Merger Compensation Proposal and (iii) the Adjournment Proposal. If holders of Company Shares fail to adopt the Merger Agreement by approving the Merger Proposal, the Merger will not occur. A copy of the Merger Agreement is attached to this proxy statement as Annex A and incorporated herein by reference, and the material provisions of the Merger Agreement are described under “The Merger Agreement” beginning on page 78 of this proxy statement.

This proxy statement and the enclosed form of proxy are first being mailed to our stockholders on or about May 16, 2023.

Pre-Registering for the Special Meeting

In order to attend the Special Meeting, you must pre-register at www.proxydocs.com/RXDX by 5:00 p.m. Eastern Time on June 14, 2023, the day preceding the Special Meeting.

Prometheus Stockholders of Record

Prometheus stockholders of record as of the Record Date may register to participate in the Special Meeting remotely by visiting www.proxydocs.com/RXDX. Please have your proxy card, or notice, containing your control number available and follow the instructions to complete your registration request. After registering, Prometheus stockholders will receive a confirmation email with a link and instructions for accessing the virtual Special Meeting. Requests to register to participate in the Special Meeting remotely must be received no later than 5:00 p.m. Eastern Time on June 14, 2023, the day preceding the Special Meeting.

Beneficial (Street Name) Stockholders

Prometheus stockholders whose Company Shares are held through a bank, broker or other nominee as of the Record Date may register to participate in the Special Meeting remotely by visiting www.proxydocs.com/RXDX. Please have your voting instruction form, notice, or other communication containing your control number available and follow the instructions to complete your registration request. After registering, Prometheus stockholders will receive a confirmation email with a link and instructions for accessing the virtual Special Meeting. Requests to register to participate in the Special Meeting remotely must be received no later than 5:00 p.m. Eastern Time on June 14, 2023, the day preceding the Special Meeting.

 

28

Questions on How to Pre-Register

If you have any questions or require any assistance with pre-registering, please contact MacKenzie Partners, Inc., Prometheus’ proxy solicitor for the Special Meeting, at (212) 929-5500 (call collect) or (800) 322-2885 (toll-free).

Record Date; Shares Entitled to Vote; Quorum

Only stockholders of record as of the close of business on May 15, 2023, the Record Date for the Special Meeting, are entitled to notice of and to vote at the Special Meeting or at any adjournments or postponements thereof. A list of stockholders entitled to vote at the Special Meeting will be available in our offices located at 3050 Science Park Road, San Diego, CA 92121, during regular business hours for a period of at least 10 days before the Special Meeting.

As of the Record Date, there were 47,813,238 Company Shares issued and outstanding and entitled to be voted at the Special Meeting.

A quorum of stockholders is necessary to transact business at the Special Meeting. Our amended and restated bylaws provide that the presence at the Special Meeting, in person or by proxy, of the holders of a majority of the voting power of our issued and outstanding Company Shares entitled to vote at the Special Meeting will constitute a quorum for Prometheus to transact business at the Special Meeting. In general, Company Shares that were issued and outstanding as of the Record Date and are represented by a properly signed and returned proxy card will be counted as Company Shares present and entitled to vote at the Special Meeting for purposes of determining a quorum. Company Shares represented by proxies received but marked “ABSTAIN” will be included in the calculation of the number of Company Shares considered to be present at the Special Meeting for purposes of determining a quorum. Broker non-votes will not be included in the calculation of the number of Company Shares considered to be present at the Special Meeting for purposes of determining a quorum. However, if a beneficial owner of Company Shares held in street name gives voting instructions to the bank, broker or other nominee with respect to at least one of the proposals, but gives no instruction as to one or more of the other proposals, then those Company Shares will be deemed present at the Special Meeting and for purposes of establishing a quorum at the Special Meeting, will be voted as instructed with respect to any proposal as to which instructions were given, and will not be voted with respect to any other proposal.

In the event that a quorum is not present at the Special Meeting, it is expected that the meeting would be adjourned to a later date to solicit additional proxies, and a quorum will have to be established at such adjourned date.

Vote Required; Abstentions and Broker Non-Votes

Each Company Share issued and outstanding as of the close of business on the Record Date is entitled to one vote at the Special Meeting.

Approval of the Merger Proposal requires the affirmative vote of the holders of a majority of the Company Shares that are issued and outstanding as of the Record Date and entitled to vote thereon. Adoption of the Merger Agreement by our stockholders is a condition to the closing of the Merger.

Approval of the Merger Compensation Proposal requires the affirmative vote of the holders of a majority in voting power of the votes cast affirmatively or negatively (excluding abstentions) at the Special Meeting by the holders entitled to vote thereon.

Approval of the Adjournment Proposal requires the affirmative vote of the holders of a majority in voting power of the votes cast affirmatively or negatively (excluding abstentions) at the Special Meeting by the holders entitled to vote thereon.

 

29

If a Prometheus stockholder fails to vote, it will have the same effect as if the stockholder voted “AGAINST” the Merger Proposal, but it will have no effect on the Merger Compensation Proposal or the Adjournment Proposal.

If a Prometheus stockholder abstains from voting, it will have the same effect as if the stockholder voted “AGAINST” the Merger Proposal, but will not be considered to be a vote cast on, and will have no effect on, the Merger Compensation Proposal or the Adjournment Proposal.

If you hold your Company Shares in “street name,” the failure to instruct your bank, broker or other nominee on how to vote your Company Shares will result in a broker non-vote, and each broker non-vote will have the same effect as a vote “AGAINST” the Merger Proposal, but will have no effect on the Merger Compensation Proposal or the Adjournment Proposal.

Company Shares Held by Directors and Executive Officers

As of the close of business on the Record Date, directors and executive officers of Prometheus and their affiliates beneficially owned and were entitled to vote, in the aggregate, 50,789 Company Shares, which represented approximately 0.1% of the Company Shares issued and outstanding on that date. Our directors and executive officers have informed us that they currently intend to vote all of their Company Shares (i) “FOR” the Merger Proposal, (ii) “FOR” the Merger Compensation Proposal and (iii) “FOR” the Adjournment Proposal, although none of them is obligated to do so.

Voting; Proxies

Voting at the Special Meeting

You can vote at the virtual Special Meeting, which will be held on June 15, 2023, at 9:00 a.m. Eastern Time, at www.proxypush.com/RXDX (unless the Special Meeting is adjourned or postponed).

You may also authorize the persons named as proxies on the proxy card to vote your shares by returning the proxy card in advance by mail, over the Internet or by telephone. Although Prometheus offers four different voting methods, Prometheus encourages you to vote over the Internet or by phone as Prometheus believes they are the most cost-effective methods. We also recommend that you vote as soon as possible, even if you are planning to attend the Special Meeting, so that the vote count will not be delayed.

Providing Voting Instructions by Proxy

To ensure that your Company Shares are voted at the Special Meeting, we recommend that you submit your proxy or provide voting instructions for your Company Shares held in “street name” to your bank, broker or other nominee promptly, even if you plan to attend the Special Meeting.

Company Shares Held by Record Holders

If you are a stockholder of record and your Company Shares are registered in your name with our transfer agent, Computershare, you may submit your proxy using one of the methods described below.

Submit a Proxy by Telephone or via the Internet. This proxy statement is accompanied by a proxy card with instructions for submitting a proxy. You can grant a proxy by telephone by calling the toll-free number 866-447-1752, until 11:59 p.m. Eastern Time on June 14, 2023, the day preceding the Special Meeting, or via the Internet, until the start of the Special Meeting, by accessing the Internet address as specified on the enclosed proxy card. Your Company Shares will be voted as you direct, and in the same manner as if you had completed, signed, dated and returned your proxy card, as described below. You must have the enclosed proxy card available, and follow the instructions on the proxy card, in order to submit a proxy electronically over the Internet or by telephone.

 

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Submit a Proxy Card. If you complete, sign, date and return the enclosed proxy card by mail so that it is received prior to 11:59 p.m. Eastern Time on June 14, 2023, the day preceding the Special Meeting, your Company Shares will be voted in the manner directed by you on your proxy card.

Voting instructions are included on your proxy card. All Company Shares represented by properly executed proxies received in time for the Special Meeting will be voted at the Special Meeting in accordance with the instructions of the stockholder. If you sign, date and return your proxy card without indicating how you wish to vote, such Company Shares represented by your properly signed proxy will be voted “FOR” each of the Merger Proposal, the Merger Compensation Proposal and the Adjournment Proposal. If you fail to return your proxy card and you are a holder of record as of the close of business on the Record Date, unless you attend the Special Meeting, your Company Shares will not be considered present at the Special Meeting for purposes of determining whether a quorum is present, and your failure to vote will have the same effect as a vote “AGAINST” the Merger Proposal and will have no effect on the vote regarding the Merger Compensation Proposal or the Adjournment Proposal.

Company Shares Held in “Street Name”

If your Company Shares are held in “street name” through a bank, broker or other nominee, your bank, broker or other nominee will send you instructions as to how to provide voting instructions for your Company Shares. You may cause your Company Shares to be voted through your bank, broker or other nominee by completing and returning the voting form provided by your bank, broker or other nominee, or by the Internet or telephone through your bank, broker or other nominee by following the instructions provided to you by them if such a service is available, or by attending the Special Meeting and voting using your control number, or, if you did not obtain a control number, by contacting your bank, broker or other nominee to obtain a control number so that you may vote.

Under applicable stock exchange rules, banks, brokers or other nominees have the discretion to vote your Company Shares on “routine” matters if you fail to instruct your bank, broker or other nominee on how to vote your Company Shares with respect to such matters. The Merger Proposal, the Merger Compensation Proposal and the Adjournment Proposal described in this proxy statement are “non-routine” matters, and your bank, broker or other nominee therefore cannot vote on these proposals without your instructions. Accordingly, if you do not return your bank’s, broker’s or other nominee’s voting form, do not provide voting instructions via the Internet or telephone through your bank, broker or other nominee, if applicable, or do not attend the Special Meeting and vote in person with a “legal proxy” from your bank, broker or other nominee, such actions will result in a “broker non-vote.” Broker non-votes, if any, will not be considered present at the Special Meeting for purposes of determining whether a quorum is present at the Special Meeting, will have the same effect as if you voted “AGAINST” the Merger Proposal and will have no effect on the Merger Compensation Proposal or the Adjournment Proposal. However, if a beneficial owner of shares of common stock held in street name gives voting instructions to the bank, broker or other nominee with respect to at least one of the proposals, but gives no instruction as to one or more of the other proposals, then those shares will be deemed present at the Special Meeting and for purposes of establishing a quorum at the Special Meeting, will be voted as instructed with respect to any proposal as to which instructions were given, and will not be voted with respect to any other proposal. For Company Shares held in “street name,” only Company Shares affirmatively voted “FOR” the Merger Proposal, the Merger Compensation Proposal or the Adjournment Proposal will be counted as a vote in favor of such proposal.

Revocability of Proxies

Any person giving a proxy pursuant to this solicitation has the power to revoke and change it any time before it is voted at the Special Meeting. If you are a stockholder of record, you may change your vote or revoke your proxy by:

 

•

delivering a written notice of revocation of your proxy to our Corporate Secretary at Prometheus Biosciences, Inc., Attention: Corporate Secretary, 3050 Science Park Road, San Diego, CA 92121 prior to 11:59 p.m. Eastern Time on June 14, 2023, the day preceding the Special Meeting;

 

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•

signing a new proxy card with a date later than the date of the previously submitted proxy card relating to the same Company Shares and returning it to us by mail prior to 11:59 p.m. Eastern Time on June 14, 2023, the day preceding the Special Meeting;

 

•

submitting a new proxy by telephone prior to 11:59 p.m. Eastern Time on June 14, 2023, the day preceding the Special Meeting;

 

•

submitting a new proxy by Internet prior to the start of the Special Meeting; or

 

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attending the Special Meeting and voting thereat (simply attending the Special Meeting will not cause your proxy to be revoked).

Please note, however, that only your last-dated proxy will count. Attending the Special Meeting without taking one of the actions described above will not in itself revoke your proxy. Please note that if you want to revoke your proxy by mailing a new proxy card to Prometheus or by sending a written notice of revocation to Prometheus, you should ensure that you send your new proxy card or written notice of revocation in sufficient time for it to be received by Prometheus before the Special Meeting. Please note that to be effective, your new proxy card, telephonic voting instructions or written notice of revocation must be received by our Corporate Secretary prior to 11:59 p.m. Eastern Time on June 14, 2023, the day preceding the Special Meeting.

If you hold your Company Shares in “street name,” you should contact your bank, broker or other nominee for instructions regarding how to change your vote or submit new voting instructions. You may also vote in person at the Special Meeting with your control number, or, if you did not obtain a control number, by contacting your bank, broker or other nominee to obtain a control number. Any adjournment or postponement of the Special Meeting for the purpose of soliciting additional proxies will allow Prometheus stockholders who have already sent in their proxies to revoke them at any time prior to their use at the Special Meeting, as adjourned or postponed.

Abstentions

An abstention occurs when a stockholder attends a meeting, either in person or by proxy, but abstains from voting. Abstentions will be included in the calculation of the number of Company Shares represented at the Special Meeting for purposes of determining whether a quorum has been achieved. Abstaining from voting will have the same effect as a vote “AGAINST” the Merger Proposal, but will have no effect on the Merger Compensation Proposal or the Adjournment Proposal.

Adjournments and Postponements

Although it is not currently expected, subject to certain restrictions in the Merger Agreement, the Special Meeting may be adjourned or postponed, among other reasons, for the purpose of soliciting additional proxies. If a quorum is not present, then under our amended and restated bylaws, (i) the chairperson of the Special Meeting or (ii) a majority in voting power of the stockholders entitled to vote thereon, present at the Special Meeting in person or represented by proxy, shall have power to adjourn the Special Meeting until a quorum is present or represented, and notice need not be given of the adjourned meeting if the time, place, if any, thereof, and the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such adjourned meeting are announced at the meeting at which the adjournment is taken. However, our amended and restated bylaws provide that if any such adjournment is for more than thirty (30) days, or if after an adjournment a new record date for determining stockholders entitled to vote is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the adjourned meeting as of the record date for determining the stockholders entitled to notice of the adjourned meeting.

If the Special Meeting is adjourned or postponed to solicit additional proxies, stockholders who have already submitted their proxies will be able to revoke them at any time prior to their use at the Special Meeting as adjourned or postponed.

 

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In the event that there is present at the Special Meeting, in person or by proxy, sufficient favorable voting power to secure the vote of our stockholders necessary to adopt the Merger Agreement by approving the Merger Proposal, we do not currently anticipate that we will adjourn or postpone the Special Meeting.

Board Recommendation

The Board, after considering the various factors more fully described under “The Merger—Recommendation of the Board and Reasons for the Merger” beginning on page 46 of this proxy statement, unanimously (i) determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are advisable, fair to and in the best interests of Prometheus and its stockholders and declared it advisable for Prometheus to enter into the Merger Agreement, (ii) approved and declared advisable the execution and delivery by Prometheus of the Merger Agreement, the performance by Prometheus of its covenants and agreements contained therein and the consummation of the Merger and the other transactions contemplated thereby upon the terms and subject to the conditions contained therein, (iii) directed that the adoption of the Merger Agreement be submitted to a vote at a meeting of Prometheus’ stockholders and (iv) resolved, subject to the terms and conditions set forth in the Merger Agreement, to recommend that the Merger Agreement be adopted by Prometheus’ stockholders (the matters described in clauses (i) through (iv), the “Company Board Recommendation”).

The Board unanimously recommends that you vote (i) “FOR” the Merger Proposal, (ii) “FOR” the Merger Compensation Proposal and (iii) “FOR” the Adjournment Proposal.

Solicitation of Proxies

The Board is soliciting your proxy, and we will bear the cost of the solicitation of proxies.

We have retained MacKenzie Partners, Inc., a proxy solicitation firm, to solicit proxies in connection with the Special Meeting at a cost of approximately $20,000 plus expenses. We will also indemnify the proxy solicitor against losses arising out of its provisions of these services on our behalf. In addition, we may reimburse banks, brokers and other nominees representing beneficial owners of Company Shares for their expenses in forwarding soliciting materials to such beneficial owners. Proxies may also be solicited by our directors, officers and employees, personally or by telephone, email, fax, over the Internet or other means of communication. No additional compensation will be paid for such services.

Anticipated Date of Consummation of the Merger

We currently anticipate that the Merger will be consummated in the third quarter of 2023, assuming satisfaction or waiver of all of the conditions to the Merger. However, the Merger is subject to various conditions, and it is possible, including as a result of factors outside the control of Prometheus and Merck, that the Merger will be consummated at a later time or not at all.

Appraisal Rights

If the Merger is consummated, persons who do not wish to accept the Merger Consideration are entitled to seek appraisal of their Company Shares under Section 262 and, if all procedures described in Section 262 are strictly complied with, to receive payment in cash for the fair value of their Company Shares exclusive of any element of value arising from the accomplishment or expectation of the Merger, as determined by the Delaware Court of Chancery, together with interest, if any, to be paid upon the amount determined to be the fair value. The “fair value” of your Company Shares as determined by the Delaware Court of Chancery may be more or less than, or the same as, the Merger Consideration that you are otherwise entitled to receive under the Merger Agreement. These rights are known as “appraisal rights”. This proxy statement serves as a notice of such appraisal rights pursuant to Section 262.

 

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Persons who exercise appraisal rights under Section 262 will not receive the Merger Consideration they would otherwise be entitled to receive pursuant to the Merger Agreement. They will receive an amount determined to be the “fair value” of their Company Shares following petition to, and an appraisal by, the Delaware Court of Chancery. Persons considering seeking appraisal should recognize that the fair value of their Company Shares determined under Section 262 could be more than, the same as or less than the Merger Consideration they would otherwise be entitled to receive pursuant to the Merger Agreement. Strict compliance with the procedures set forth in Section 262 is required. Failure to comply strictly with all of the procedures set forth in Section 262 may result in the withdrawal, loss or waiver of appraisal rights. Consequently, and in view of the complexity of the provisions of Section 262, persons wishing to exercise appraisal rights are urged to consult their legal and financial advisors before attempting to exercise such rights.

A holder of record of Company Shares and a beneficial owner who (i) continuously holds or beneficially owns, as applicable, such Company Shares through the Effective Time, (ii) has not consented to the Merger in writing or otherwise voted in favor of the Merger or otherwise withdrawn, lost or waived appraisal rights, (iii) strictly complies with the procedures under Section 262, (iv) does not thereafter withdraw his, her or its demand for appraisal of such Company Shares and (v) in the case of a beneficial owner, a person who (A) reasonably identifies in his, her or its demand the holder of record of the Company Shares for which the demand is made, (B) provides documentary evidence of such beneficial owner’s beneficial ownership and a statement that such documentary evidence is a true and correct copy of what it purports to be and (C) provides an address at which such beneficial owner consents to receive notices given by Prometheus and to be set forth on the Chancery List (as defined in the section entitled “The Merger—Appraisal Rights” beginning on page 68 of this proxy statement), will be entitled to receive the fair value of his, her or its Company Shares exclusive of any element of value arising from the accomplishment or expectation of the Merger, as determined by the Delaware Court of Chancery, together with interest, if any, to be paid upon the amount determined to be the fair value.

A copy of Section 262 may be accessed without subscription or cost at the following publicly available website: https://delcode.delaware.gov/title8/c001/sc09/index.html#262. The following summary is not a complete statement of the law relating to appraisal rights and is qualified in its entirety by reference to Section 262 and any amendments thereto after the date of this proxy statement. Any person who desires to exercise his, her or its appraisal rights should review carefully Section 262 and is urged to consult his, her or its legal advisor before electing or attempting to exercise such rights. For more information, please see the section entitled “The Merger—Appraisal Rights” beginning on page 68 of this proxy statement.

Householding of Special Meeting Materials

Unless we have received contrary instructions, we may send a single copy of this proxy statement to any household at which two or more stockholders reside if we believe the stockholders are members of the same family. Each stockholder in the household will continue to receive a separate proxy card. This process, known as “householding,” reduces the volume of duplicate information received at your household and helps to reduce our expenses.

We will promptly deliver a separate copy of our proxy statement to any stockholder without charge upon a written request or verbal request to Prometheus Biosciences, Inc., 3050 Science Park Road, San Diego, CA 92121, Attention: Corporate Secretary, telephone number 858-422-4300. Stockholders sharing an address that are receiving multiple copies of this proxy statement can request delivery of a single copy of the proxy materials by contacting their broker, bank or other intermediary or sending a written request to Prometheus Biosciences, Inc. at the address above.

 

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Questions and Additional Information

If you have more questions about the Merger or how to submit your proxy, or if you need additional copies of this proxy statement or the enclosed proxy card or voting instructions, please contact our proxy solicitor or us:

 

1407 Broadway, 27^th Floor

New York, New York 10018

proxy@mackenziepartners.com

Call Collect: (212) 929-5500

or

Toll-Free (800) 322-2885

or

 

Prometheus Biosciences, Inc.

3050 Science Park Road

San Diego, CA 92121

Attn: Corporate Secretary

Call: (858) 422-4300

If your broker, bank or other nominee holds your Company Shares, you should also call your broker, bank or other nominee for additional information.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement, and the documents to which we refer you in this proxy statement, as well as information included in oral statements or other written statements made or to be made by us or on our behalf, contain “forward-looking statements” that do not directly or exclusively relate to historical facts. Forward-looking statements can usually be identified by the use of terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “evolve,” “expect,” “forecast,” “intend,” “looking ahead,” “project,” “may,” “might,” “opinion,” “plan,” “possible,” “potential,” “should,” “will,” “would” and similar words or expressions. Stockholders are cautioned that any such forward-looking statements are not guarantees of future performance and may involve significant risks and uncertainties, and that actual results may vary materially from those in the forward-looking statements. These risks and uncertainties include, but are not limited to, the risks detailed in our filings with the SEC, including in our most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, factors and matters described or incorporated by reference in this proxy statement, and the following factors:

 

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the inability to consummate the Merger within the anticipated time period, or at all, due to any reason, including the failure to obtain the Prometheus Stockholder Approval or the failure to satisfy the other conditions to the consummation of the Merger, including the termination or expiration of the waiting period applicable to the Merger under the HSR Act;

 

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the occurrence of any event, change or other circumstance or condition that could give rise to the termination of the Merger Agreement, including the risk that the Merger Agreement may be terminated in circumstances requiring us to pay Merck the Prometheus Termination Fee;

 

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risks that the proposed Merger disrupts our current plans and operations or affects our ability to retain or recruit key employees;

 

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the effect of the announcement, pendency or consummation of the Merger on our business relationships (including, without limitation, suppliers and other business partners), operating results and business generally;

 

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potential business uncertainty, including changes to existing business relationships, during the pendency of the Merger that could affect Prometheus’ financial performance;

 

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the amount of the costs, fees, expenses and charges related to the Merger Agreement or the Merger;

 

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risks related to diverting the attention of our management and employees from ongoing business operations;

 

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the inability to obtain the Prometheus Stockholder Approval with respect to the Merger;

 

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the risk that our stock price may decline significantly if the Merger is not consummated;

 

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the effect of the restrictions placed on our business activities and the limitations on our ability to pursue alternatives to the Merger during the pendency of the Merger, pursuant to the Merger Agreement;

 

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the nature, cost and outcome of any litigation and other legal proceedings, including any such proceedings related to the Merger and instituted against us and others;

 

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the fact that under the terms of the Merger Agreement, we are unable to solicit other Acquisition Proposals during the pendency of the Merger;

 

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the fact that receipt of the all-cash Merger Consideration would be taxable to our stockholders that are treated as U.S. Holders for United States federal income tax purposes;

 

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Prometheus’ ability to implement its business strategy, including the fact that our stockholders would forego the opportunity to realize the potential long-term value of the successful execution of our current strategy as an independent public company; and

 

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•

the risks related to the potential impact of general economic, political and market factors on the parties to the proposed Merger.

Consequently, no forward-looking statements may be guaranteed and there can be no assurance that the actual results or developments anticipated by such forward-looking statements will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, Prometheus or its businesses or operations. No assurance can be given that these are all of the factors that could cause actual results to vary materially from the forward-looking statements. The foregoing review of risks and uncertainties that could cause actual events to differ from expectations should not be construed as exhaustive and should be read in conjunction with statements that are included herein and elsewhere, including the risk factors included in Prometheus’ most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q, factors and matters described or incorporated by reference in this proxy statement and other reports filed with the SEC.

Any forward-looking statement made in this proxy statement speaks only as of the date on which it is made. Prometheus can give no assurance that the conditions to the Merger will be satisfied. You should not put undue reliance on any forward-looking statements. Prometheus undertakes no obligation, and expressly disclaims any obligation, to update, alter or otherwise revise any forward-looking statement, whether written or oral, that may be made from time to time, whether as a result of new information, future developments or otherwise, except as may be required by law. If Prometheus does update one or more forward-looking statements, no inference should be drawn that it will make additional updates with respect to those or other forward-looking statements.

 

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THE MERGER

This discussion of the Merger does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, which is attached to this proxy statement as Annex A and incorporated by reference into this proxy statement. You should read the entire Merger Agreement carefully as it is the legal document that governs the Merger.

Certain Effects of the Merger on Prometheus

If the Merger Agreement is adopted by Prometheus stockholders and the other conditions to the closing of the Merger are either satisfied or waived, Merger Sub will be merged with and into Prometheus, with Prometheus continuing as the surviving corporation and a wholly owned subsidiary of Merck.

At the Effective Time, each Company Share issued and outstanding immediately prior to the Effective Time (other than Canceled Company Shares and Dissenting Company Shares) will be canceled and extinguished and automatically converted into the right to receive the Merger Consideration.

The Company Shares are listed and trade on Nasdaq under the symbol “RXDX.” As a result of the Merger, Prometheus will cease to be a publicly traded company and will become a wholly owned subsidiary of Merck. Prior to the Effective Time, we will reasonably cooperate with Merck to delist the Company Shares from Nasdaq and deregister the Company Shares under the Exchange Act, provided that such delisting and termination will not be effective until after the Effective Time. Upon such delisting and deregistration, we will no longer be a publicly traded company and will no longer be required to file periodic reports with the SEC, in each case in accordance with applicable law, rules and regulations. If the Merger is consummated, you will not own any shares of the capital stock of the surviving corporation or Merck.

Effect on Prometheus if the Merger Is Not Consummated

If the Merger Agreement is not adopted by the holders of a majority of the issued and outstanding Company Shares entitled to vote thereon as of the Record Date or if the Merger is not consummated for any other reason, Prometheus stockholders will not receive any payment for their Company Shares pursuant to the Merger Agreement. Instead, Prometheus will remain a public company, the Company Shares will continue to be listed and traded on Nasdaq and registered under the Exchange Act, and we will continue to file periodic reports with the SEC.

Furthermore, if the Merger is not consummated, depending on the circumstances that caused the Merger not to be consummated, the price of the Company Shares may decline significantly. If that were to occur, it is uncertain when, if ever, the price of the Company Shares would return to the price at which it trades as of the date of this proxy statement.

Accordingly, if the Merger is not consummated, there can be no assurance as to the effect of these risks and opportunities on the future value of your Company Shares. If the Merger is not consummated, the Board will continue to evaluate and review our business operations, assets, operating results, financial condition, prospects and business strategy, among other things, and make such changes as are deemed appropriate and continue to seek to enhance stockholder value. If the Merger Agreement is not adopted by the holders of a majority of the issued and outstanding Company Shares entitled to vote thereon as of the Record Date or if the Merger is not consummated for any other reason, there can be no assurance that any other transaction acceptable to Prometheus will be offered or that our business, prospects or results of operations will not be adversely impacted.

In addition, upon termination of the Merger Agreement, under specified circumstances, Prometheus may be required to pay Merck a termination fee, and under other specified circumstances, Merck may be required to pay Prometheus a termination fee, as described under “The Merger Agreement—Termination Fee; Certain Expenses” beginning on page 100 of this proxy statement.

 

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Merger Consideration

In the Merger, each Company Share issued and outstanding immediately prior to the Effective Time (other than as described herein) will be canceled and extinguished and automatically converted into the right to receive the Merger Consideration.

Each Company Share issued and outstanding immediately prior to the Effective Time that is held by Merck, Merger Sub or Prometheus, or by any direct or indirect wholly owned subsidiary of Prometheus, Merck, or Merger Sub shall be canceled and extinguished without any consideration paid therefor at the Effective Time.

“Dissenting Company Shares” refers to each Company Share issued and outstanding and held by a stockholder of Prometheus as of immediately prior to the Effective Time who is entitled to demand and who has properly and validly demanded his, her or its statutory rights of appraisal in respect of such Dissenting Company Share in compliance in all respects with Section 262 of the DGCL. Dissenting Company Shares shall not be converted into, or represent the right to receive the Merger Consideration. Please see “The Merger—Appraisal Rights” beginning on page 68 of this proxy statement for more information.

Each issued and outstanding share of restricted stock of Prometheus as of immediately prior to the Merger will, by virtue of the Merger, automatically and without any action on the part of Prometheus, Merck or the holder thereof, become automatically fully vested and, at the Effective Time, be converted into the right to receive the Merger Consideration.

After the Merger is consummated, under the terms of the Merger Agreement, you will have the right to receive the Merger Consideration, but you will no longer have any rights as a Prometheus stockholder as a result of the Merger (except that any holder of Dissenting Company Shares will have those rights granted under Section 262), nor will you be entitled to receive any shares in Merck or the surviving corporation.

Each of the paying agent, the surviving corporation, Merger Sub, and Merck will be entitled to deduct and withhold from any amounts payable pursuant to the Merger Agreement such amounts as are required to be deducted and withheld therefrom under applicable tax laws. If the paying agent, the surviving corporation, Merger Sub, or Merck, as the case may be, so deducts and withholds amounts and timely and properly remits such amounts to the applicable governmental authority, such amounts shall be treated for all purposes under the Merger Agreement as having been paid to the person to whom such amounts would otherwise have been paid.

Background of the Merger

The terms of the Merger Agreement were the result of extensive negotiations between Prometheus, Merck and their respective affiliates and representatives. The following is a brief description of the background of the Merger and related transactions.

The Board, together with members of senior management of Prometheus, regularly reviews and assesses the performance, future growth prospects, business plans and the overall strategic direction of Prometheus, and considers a variety of strategic alternatives that may be available to Prometheus, including continuing to pursue its strategy as a standalone company or pursuing potential strategic or financing transactions with third parties, in each case, with the goal of maximizing stockholder value.

As part of that review, on May 19, 2022, the Board held a meeting, with members of Prometheus management and representatives of Goldman Sachs, financial advisor to Prometheus, and Latham & Watkins LLP (“Latham”), legal advisor to Prometheus, in attendance, during which representatives of Goldman Sachs presented to the Board regarding the current environment of biopharmaceutical capital markets and M&A transactions and considerations associated therewith, including the current regulatory environment, as well as potential financing windows for Prometheus.

 

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Also in May 2022, members of Prometheus management met with representatives of Centerview to discuss market conditions, industry transactions, and potential strategic opportunities.

On August 11, 2022, the Board held a meeting, with members of Prometheus management and representatives of Goldman Sachs and Latham in attendance, during which representatives of Goldman Sachs discussed current biopharmaceutical capital markets and M&A considerations, including recently announced transactions, and reviewed process and timeline considerations related to strategic partnering and financing opportunities for Prometheus. After the discussion, the Board authorized Prometheus to (i) explore potential strategic partnering and financing opportunities and (ii) taking into account a number of factors, including its familiarity with Prometheus, its reputation as an internationally recognized investment banking firm, and its substantial experience with respect to the pharmaceutical and biotechnology industries, engage Goldman Sachs as its financial advisor in connection with this review of strategic alternatives.

On September 27, 2022, Prometheus entered into an engagement letter with Goldman Sachs to explore potential strategic opportunities.

From October 2022 to early December 2022, Prometheus management, with the assistance of representatives of Goldman Sachs, identified potential parties for a partnership with respect to PRA023, including to co-develop and co-commercialize PRA023 worldwide, and, at the direction of Prometheus management, representatives of Goldman Sachs conducted outreach to seventeen parties, comprised of large and mid-cap pharmaceutical companies, including Merck, Party V, Party W, Party X, Party Y and Party Z, to discuss such opportunities. All but one of the parties contacted expressed interest in exploring a partnership with Prometheus and of those sixteen potential counterparties, each either had an existing non-disclosure agreement in place with Prometheus from a prior business opportunity or entered into a new non-disclosure agreement in connection with this outreach. Of the sixteen non-disclosure agreements, ten included a standstill provision, none of which included a “don’t ask, don’t waive” provision with respect thereto. Each of the sixteen parties was given access to a virtual data room enabling them to conduct due diligence regarding Prometheus and Prometheus management gave management presentations to each of the parties. Members of Prometheus management also responded to due diligence requests from the parties.

On November 10, 2022, the Board held a meeting, with members of Prometheus management and representatives of Goldman Sachs and Latham in attendance, during which Goldman Sachs presented on and discussed with the Board strategic opportunities that might become available to Prometheus following the planned release of results of its ARTEMIS-UC Phase 2 and APOLLO-CD Phase 2a studies and in the context of the broader financial markets.

On November 30, 2022, members of Prometheus management met with representatives of Centerview to discuss market conditions, industry transactions, and potential strategic opportunities.

On December 6, 2022, the Board held a meeting, with members of Prometheus management and representatives of Latham in attendance, to discuss Prometheus’ ARTEMIS-UC Phase 2 and APOLLO-CD Phase 2a study results. Members of Prometheus management presented to the Board regarding the positive trial results and discussed the expected market reaction to the trial results announcement in the context of a potential financing. Taking into account the positive trial results and cash runway considerations, the Board then determined it was in the best interests of Prometheus and its stockholders to prepare for a potential equity financing, and the Board authorized the creation of a pricing committee of the Board, composed of Mark McKenna, Chairman of the Board and Chief Executive Officer at Prometheus, Joseph Papa and Martin Hendrix, both members of the Board, and delegated to the pricing committee the authority to determine and approve the aggregate number of shares to be sold and the price per share for a common stock equity capital raise.

On December 7, 2022, Prometheus publicly announced (i) positive top line results for PRA023 in both its ARTEMIS-UC Phase 2 study and its APOLLO-CD Phase 2a study and its intention to advance PRA023 into

 

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Phase 3 for ulcerative colitis and Crohn’s disease indications and (ii) a proposed $250 million public offering of common stock, with Goldman Sachs, among others, acting as joint bookrunning manager for the offering. The price of a Company Share closed at $36.06 on December 6, 2022 and $95.80 on December 7, 2022 and opened at $103.06 on December 8, 2023.

On December 8, 2022, after approval of the pricing committee of the Board, Prometheus announced the pricing of an upsized common stock offering for gross proceeds, after exercise in full of the underwriters’ over-allotment option, of $550 million at a price of $110.00 per share. The offering closed on December 13, 2022.

Following the announcement of positive trial results and the successful common stock offering, Prometheus management, in consultation with the Board and separately with representatives of Goldman Sachs and Centerview, determined to pause any near-term partnership discussions, and between December 10, 2022 and December 11, 2022, Mr. McKenna contacted each of the previously interested parties to inform them that Prometheus was no longer moving forward with a formal process for potential partnership opportunities and would be shutting down access to the virtual data room.

From December 2022 until late March 2023, members of Prometheus management and representatives of Goldman Sachs and Centerview had regular communications with a number of the previously contacted parties, including Merck, Party V, Party W, Party X, Party Y and Party Z, in order to respond to questions and provide regular updates regarding Prometheus’ business, and members of senior Prometheus management met in person at the J.P. Morgan Annual Healthcare Conference in January 2023 with representatives of Merck, Party V, Party W, Party X and Party Y and subsequently met with Party Z. Throughout these meetings, representatives of Merck, Party V, Party W, Party X, Party Y and Party Z confirmed that they remained interested in a potential strategic transaction with Prometheus but did not make any proposals with respect to a transaction. Over the course of these meetings and upon request, interested parties had their access to the virtual data room restored, with Merck receiving access on January 12, 2023, Party W receiving access on January 23, 2023 and Party X receiving access on March 14, 2023.

As part of the communications described in the immediately preceding paragraph, on January 19, 2023, Sunil Patel, Senior Vice President and Head of Corporate Development & Licensing at Merck, called Mr. McKenna to express continued interest in Prometheus and requested access to certain diligence materials which were subsequently provided by Prometheus to Merck. On February 9, 2023, Mr. Patel again spoke with Mr. McKenna and expressed Merck’s significant interest in a potential strategic transaction between the two companies.

On March 6, 2023, representatives of Goldman Sachs spoke to a representative of Party V who advised that Party V was stopping further evaluation of a potential strategic transaction with Prometheus.

On March 7, 2023, Mr. McKenna met with a representative of Party Z, who indicated that Party Z was unlikely to move forward with a potential acquisition of Prometheus. On the same day, members of the senior management of Prometheus met with representatives of Merck and further discussed Merck’s interest in the transaction.

On March 27, 2023, the Board held a meeting with members of Prometheus management and representatives of Centerview and Latham in attendance. During the meeting, representatives of Centerview gave a presentation on Centerview’s experience with M&A in the pharmaceutical and biotechnology industries and their view with respect to the M&A environment in general, including specific considerations for Prometheus. The Board also discussed with its advisors potential capital raise opportunities in 2023.

On March 31, 2023, Mr. Patel and Rob Davis, Chairman of the Board and Chief Executive Officer at Merck, called Mr. McKenna to inform him that Merck would submit an offer to acquire all of the outstanding Company Shares at $150.00 per share and expressed that Merck wished to move quickly towards executing transaction documents. Later that day, Merck submitted a written non-binding indication of interest to acquire all outstanding Company Shares at $150.00 per share in cash (the “March 31 Offer”), with a targeted signing date of April 21, 2023. During these discussions with Merck and in connection with all other discussions

 

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with Merck and all other potential bidders, there was no discussion between representatives of Prometheus and representatives of any other party with respect to post-closing employment or compensation for members of Prometheus management.

Later on March 31, 2023, the Board met, with members of Prometheus management and representatives of Goldman Sachs, Centerview and Latham in attendance, to review and discuss the March 31 Offer. Representatives from Latham reviewed with the Board certain legal aspects involved in a sale transaction, including the Board’s fiduciary duties in assessing the March 31 Offer and a potential sale process. The Board, together with Prometheus management and its financial and legal advisors discussed, among other things, (i) Prometheus’ standalone prospects, including projected capital needs to advance its Phase 3 trials and its upcoming end-of-Phase 2 meeting with the U.S. Food and Drug Administration (the “FDA”), (ii) the price proposed by Merck in the March 31 Offer, (iii) closing certainty and regulatory considerations with respect to the March 31 Offer, (iv) other potential bidders with the ability to consummate a transaction at or above the value of the March 31 Offer, including the closing certainty and regulatory considerations of potentially transacting with any of Party W, Party X or Party Y, and (v) Prometheus’ response to the March 31 Offer. At the conclusion of the discussion, taking into account the topics discussed and the advice of Prometheus management and representatives of Goldman Sachs and Centerview, the Board authorized Prometheus management to reach out to Party W, Party X and Party Y to inform them that an offer to acquire Prometheus had been received and to gauge their level of interest in submitting an offer to acquire Prometheus on an expedited timeline. The Board selected these parties because of their prior interest in Prometheus, their perceived ability to move quickly to enter into and consummate a potential transaction based on the progress of each of their diligence review of Prometheus, and the Board’s belief that they would be capable of making the most competitive offers due to their size and financial capabilities. In addition, the Board discussed and ultimately determined to formally approve the engagement of Centerview as financial advisor due to its familiarity with Prometheus, its reputation as an internationally recognized investment banking firm and its substantial experience in transactions similar to the Merger.

Also on March 31, 2023, Mr. McKenna, at the direction of the Board, spoke to representatives of Party W, Party X, and Party Y to inform them that an offer to acquire Prometheus had been received.

On April 2, 2023, the Board met again, with members of Prometheus management and representatives of Goldman Sachs, Centerview and Latham in attendance, to further discuss the March 31 Offer. Representatives of Prometheus management, Centerview and Goldman Sachs reviewed and discussed with the Board Prometheus management’s preliminary Unaudited Prospective Financial Information, including the material assumptions included therein, and then representatives of each of Centerview and Goldman Sachs presented to the Board regarding selected precedent transactions, public market perspectives and their preliminary illustrative financial analyses. For a detailed discussion regarding the Unaudited Prospective Financial Information, please see “The Merger—Certain Unaudited Prospective Financial Information” beginning on page 61 of this proxy statement. Following the Board’s consideration of the financial analyses and the preliminary Unaudited Prospective Financial Information, the Board directed management and its advisors to continue to engage with each of Merck, Party W, Party X and Party Y and to communicate to Merck that it would need to improve its offer. Following the meeting, Mr. McKenna reached out to Mr. Patel to inform him that Prometheus was willing to provide Merck access to additional diligence materials, but that Merck would need to significantly increase its offer price before Prometheus would be willing to enter into a potential strategic transaction.

Later in the day on April 2, 2023, at the direction of the Board, Mr. McKenna spoke with representatives of Party X to encourage Party X to submit an offer quickly if it was interested in pursuing a potential transaction with Prometheus.

On April 3, 2023, Prometheus executed an engagement letter with Centerview. Also on April 3, 2023, at the direction of the Board, Mr. McKenna spoke with representatives of Party W to encourage Party W to submit an offer quickly if it was interested in pursuing a potential transaction with Prometheus.

 

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On April 4, 2023, Mr. McKenna spoke with representatives of Party Y regarding various diligence items, including Prometheus’ drug candidates and the overall business potential. At this meeting, Mr. McKenna encouraged Party Y to submit an offer quickly if it was interested in pursuing a potential transaction with Prometheus and, following the meeting, Party Y’s access to the virtual data room was restored.

On April 5, 2023, Mr. McKenna met in person with representatives of Party X who conveyed that they remained very interested in a potential strategic transaction with Prometheus and indicated that an acquisition proposal would be submitted to Prometheus early the week of April 10.

On April 6, 2023, Mr. McKenna had calls with representatives of Party W to further discuss their interest in a potential transaction. During the call, representatives of Party W confirmed that they intended to submit a formal offer.

Also on April 6, 2023, representatives of Prometheus management held a meeting with representatives of Party X. During the meeting, representatives of Party X conveyed to Prometheus management that they had made significant progress on their diligence review and were focused on submitting a formal offer.

On April 7, 2023, Prometheus received in advance of a scheduled meeting with the FDA on April 13, 2023 initial feedback from the FDA regarding conclusions from the Phase 2 clinical trials for PRA023 and its future clinical development.

Also on April 7, 2023, representatives of Goldman Sachs had calls with representatives of Party W and Party X during which Goldman Sachs, at the direction of the Board, expressed to the bidders that they would need to make competitive offers quickly and highlighted that Prometheus was focused on all aspects of an offer, including price and the level of closing certainty, including with respect to required regulatory approvals. Following these conversations, Party X confirmed that they intended to make an offer.

From April 6, 2023 through April 14, 2023, at Merck’s and Party X’s request, members of Prometheus management held numerous diligence calls with representatives of Merck and Party X on topics including intellectual property, tax, clinical results and feedback, human resources, license agreements, finance and accounting, commercial launch and legal due diligence.

On April 8, 2023, Mr. McKenna spoke with representatives of Party W during which they confirmed that they intended to submit an offer on April 12, 2023 and requested in-person meetings on April 13 and April 14, 2023.

On April 10, 2023, Mr. McKenna spoke with representatives of Party W, Party X and Party Y to further discuss their interest in a potential transaction, to respond to certain diligence questions and to encourage each of them to make a bid expeditiously.

Also on April 10, 2023, the Board met, with members of Prometheus management and representatives of Goldman Sachs, Centerview and Latham in attendance, to discuss the status of discussions with Merck, Party W, Party X and Party Y, including the indication from Party X that they would not be able to submit an offer without obtaining approval from their board of directors and the lack of indication that Party Y was likely to make a bid. During the meeting, representatives of Latham again discussed with the Board their fiduciary obligations in connection with considering and approving a sale transaction. Following discussion on these topics, the Board reviewed the financial advisor relationships disclosure of each of Centerview and Goldman Sachs with respect to each of Merck, Party W and Party X. At the conclusion of the meeting, the Board authorized Prometheus management and the financial advisors to continue discussions with each party and directed them to seek the highest potential value for Prometheus stockholders.

On April 12, 2023, Party W submitted a non-binding letter of interest to acquire all of the outstanding Company Shares for $167.50 per share, in cash (the “April 12 Offer”), and requested to meet in person with Prometheus management to discuss the terms of the April 12 Offer and a potential transaction.

 

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On April 13 and 14, 2023, representatives of Prometheus management provided an initial draft of the Merger Agreement for review to each of Merck, Party W and Party X, which initial draft, among other things, (1) included seller-friendly provisions with respect to representations, warranties and covenants, (2) proposed a “hell or high water” standard for regulatory efforts with no reverse termination fee, (3) proposed a termination fee of 2.0% of the enterprise value of the potential transaction and (4) did not propose an outside date for a potential transaction.

On April 13, 2023, members of Prometheus management attended an end-of-Phase 2 meeting with the FDA to discuss the results and conclusions of the Phase 2 clinical trials for PRA023 and its future clinical development, which meeting was productive. Later in the day, Prometheus management met with representatives of Party W in person to discuss their April 12 Offer and Party W’s continued interest in a potential acquisition of Prometheus.

Also on April 13, 2023, at the direction of Prometheus management, representatives of Centerview contacted representatives of Merck and Party X to inform them that Prometheus had received another proposal to acquire Prometheus at a significantly higher value than the March 31 Offer. Later in the day, representatives of Merck informed representatives of Centerview that Merck had substantially completed its diligence review and would only continue to engage with Prometheus regarding a potential acquisition if Prometheus provided specific guidance on the terms at which Prometheus would be willing to enter into exclusivity with Merck and move quickly to enter into definitive transaction documents. Representatives of Merck and Mr. McKenna then discussed a path to negotiate transaction documents by April 15, 2023, a transaction price of $200.00 per Company Share and Merck’s desire for exclusivity. Mr. McKenna agreed to discuss these topics with the Board.

On April 14, 2023, members of Prometheus management and representatives of Goldman Sachs and Centerview held diligence calls with representatives of Party W and its financial advisors.

Also on April 14, 2023, the Board met, with members of Prometheus management and representatives of Latham in attendance, to discuss the April 12 Offer and Mr. McKenna’s conversation with representatives of Merck on April 13, 2023. The Board discussed and considered, among other things, (i) the offer price in the April 12 Offer, (ii) closing certainty and any regulatory approvals that would be required in connection with a potential transaction and, in the Board’s estimation, the significantly increased antitrust risk associated with a transaction involving Party W, (iii) the merits of exclusivity and a $200.00 per Company Share transaction and (iv) whether other parties could provide superior offers to what Merck may agree to on the timeline discussed. The Board also discussed the Unaudited Prospective Financial Information prepared by Prometheus management. Following these discussions, the Board approved the Unaudited Prospective Financial Information and directed Prometheus management to inform Merck that Prometheus would agree to a transaction at $200.00 per Company Share, in cash, and that Prometheus was not willing to enter into an exclusivity agreement, but that Prometheus would be willing to move rapidly to negotiate transaction documents at such a price.

Later in the day on April 14, 2023, Mr. McKenna called Mr. Patel to inform him that the Board was willing to proceed to negotiate definitive transaction agreements with Merck on an expedited but non-exclusive basis with a purchase price of $200.00 per Company Share in cash. Mr. Patel subsequently confirmed that Merck was willing to enter into a transaction at $200.00 per Company Share in cash, however, $200.00 per Company Share represented Merck’s “best and final” time-limited offer.

Later in the day on April 14, 2023, representatives of Paul, Weiss, Rifkind, Wharton & Garrison LLP (“Paul Weiss”), outside legal counsel to Merck, provided representatives of Latham a revised draft of the Merger Agreement. Shortly thereafter, representatives of Latham met with Prometheus management to discuss the key issues in the revised Merger Agreement, including, among other things, (i) the request that specified Prometheus stockholders execute agreements to vote in favor of the transaction at signing, (ii) the efforts required by Merck to obtain required regulatory approvals, (iii) whether to request from Merck a reverse break fee in connection with the potential failure to obtain required regulatory approvals and the size of any such reverse break fee, (iv) the size of the Prometheus termination fee, which Merck had proposed at 4.25% of the equity value of the potential transaction, (v) the structure of the transaction as a one-step merger as proposed by Merck or a tender offer structure as proposed in the initial draft of the Merger Agreement, and (vi) the appropriate Termination Date. Following discussion, Prometheus management, after consulting with members of the Board, authorized

 

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Latham to revise the Merger Agreement and return an updated draft to Paul Weiss that, among other things, (a) rejected Merck’s request to obtain voting agreements from certain Prometheus stockholders, (b) accepted the efforts covenant proposed by Merck, but added a reverse break fee in connection with a failure to obtain regulatory approvals, (c) reduced the size of the Prometheus termination fee from 4.25% to 3.0% of the equity value of the potential transaction, (d) accepted the Merck proposal to structure the transaction as a one-step merger rather than a tender offer, and (e) proposed a Termination Date of 9 months following the execution of the Merger Agreement by the parties.

Later in the evening on April 14, 2023, representatives of Latham and Paul Weiss held a call to discuss the material open issues in the Merger Agreement and early in the morning on April 15, 2023, Latham sent a revised draft of the Merger Agreement to Paul Weiss reflecting the terms approved by Prometheus management, as well as initial drafts of certain related transaction documents.

On April 15, 2023, Mr. McKenna spoke to a senior representative of Party X and informed him that a transaction with another party could be executed later that day. The representative of Party X reiterated Party X’s interest in Prometheus. Party X did not make an offer to acquire Prometheus. Throughout the day on April 15, 2023, Paul Weiss and Latham traded additional drafts of the Merger Agreement and related ancillary materials and negotiated the material open points.

Later on April 15, 2023, the Board convened along with Prometheus management and representatives of Goldman Sachs, Centerview and Latham. Members of Prometheus management reviewed with the Board the negotiations and discussions leading up to the meeting, including the timeline required by Merck to execute definitive transaction documents, the April 12 Offer, the Board’s assessment, after consultation with its advisors, of the closing certainty of a sale transaction with each of Merck and Party W, and the fact that Party X had not made an offer. Latham then reviewed the proposed final terms of the Merger Agreement with the Board as negotiated with Merck and presented to the Board regarding their fiduciary obligations under Delaware law in connection with considering and approving a sale transaction. Representatives of Centerview and Goldman Sachs then reviewed with the Board Centerview’s and Goldman Sachs’ financial analyses of the Merger Consideration, and the Board discussed with its advisors and Prometheus management, among other things, the terms of the Merger Agreement and the Merger Consideration. At the request of the Board, representatives of Centerview and Goldman Sachs then rendered to the Board oral opinions, which were subsequently confirmed by delivery of written opinions dated April 15, 2023, that, as of such date and based upon and subject to various assumptions made, procedures followed, matters considered, and qualifications and limitations upon the review undertaken in preparing their opinions, the Merger Consideration to be paid to the holders of Company Shares (other than as specified in such opinions) pursuant to the Merger Agreement was fair, from a financial point of view, to such holders. For a detailed discussion of Centerview’s opinion, please see below under the caption “—Opinion of Centerview Partners LLC.” For a detailed discussion of Goldman Sachs’ opinion, please see below under the caption “—Opinion of Goldman Sachs & Co. LLC.” Executive management for Prometheus also informed the Board that, based upon, among other things, their views of Prometheus’ prospects on a standalone basis, their consideration of all the alternatives available to Prometheus and the information and advice provided by Goldman Sachs, Centerview and Latham, it was Prometheus executive management’s recommendation that the Board approve the transaction as proposed by Merck upon the terms negotiated by the parties and as set forth in the Merger Agreement. The Board then discussed the various reasons to approve the Merger and certain countervailing factors. For a detailed description of the various reasons considered by the Board, see “The Merger—Recommendation of the Board and Reasons for the Merger” beginning on page 46 of this proxy statement. After further discussion, including on the process that led to the proposed Merger, the alternatives available to Prometheus, including remaining as a public company, and the risks and benefits associated with the proposed transaction, the Board unanimously (i) determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, were advisable, fair to and in the best interests of Prometheus and its stockholders, and declared it advisable for Prometheus to enter into the Merger Agreement, (ii) approved and declared advisable the execution and delivery by Prometheus of the Merger Agreement, the performance by Prometheus of its covenants and agreements contained in the Merger Agreement and the consummation of the Merger and the other transactions contemplated by the Merger Agreement upon the terms and subject to the

 

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conditions contained therein, (iii) directed that the adoption of the Merger Agreement be submitted to a vote at a meeting of the stockholders and (iv) resolved, subject to the terms and conditions set forth in the Merger Agreement, to recommend that the stockholders adopt the Merger Agreement at such meeting of Prometheus’ stockholders.

Immediately following the conclusion of the Board meeting, Latham and Paul Weiss finalized all transaction documents and Prometheus, Merck, and Merger Sub executed the Merger Agreement.

On April 16, 2023, Merck and Prometheus issued a joint press release announcing the entry into the Merger Agreement.

Recommendation of the Board and Reasons for the Merger

Recommendation of the Board

The Board has unanimously: (i) determined that the Merger Agreement and the transactions contemplated thereby, including the Merger, are advisable, fair to and in the best interests of Prometheus and its stockholders, and declared it advisable for Prometheus to enter into the Merger Agreement; (ii) approved and declared advisable the execution and delivery by Prometheus of the Merger Agreement, the performance by Prometheus of its covenants and agreements contained therein and the consummation of the Merger and the other transactions contemplated thereby upon the terms and subject to the conditions contained therein; (iii) directed that the adoption of the Merger Agreement be submitted to a vote at a special meeting of the holders of Company Shares; and (iv) resolved, subject to the terms and conditions set forth in the Merger Agreement, to recommend that the Merger Agreement be adopted by Prometheus stockholders.

The Board unanimously recommends that Prometheus stockholders vote “FOR” the Merger Proposal, “FOR” the Merger Compensation Proposal and “FOR” the Adjournment Proposal.

Reasons for the Merger

In evaluating the Merger Agreement and the transactions contemplated thereby, the Board consulted with members of Prometheus’ senior management, representatives of Prometheus’ legal advisor, Latham & Watkins LLP, and representatives of Prometheus’ financial advisors, Centerview and Goldman Sachs. In the course of reaching its determination and recommendation, the Board reviewed, evaluated and considered a significant amount of information and numerous factors and benefits, including those listed below (which are not listed in any relative order of importance), all of which the Board viewed as supporting its (i) determination that the Merger Agreement and the transactions contemplated thereby, including the Merger, are advisable, fair to and in the best interests of Prometheus and its stockholders and its direction that Prometheus enter into the Merger Agreement; (ii) approval and declaration that it is advisable for Prometheus to execute and deliver the Merger Agreement; (iii) direction that the adoption of the Merger Agreement be submitted to a vote of Prometheus’ stockholders at the Special Meeting; and (iv) resolution, subject to the terms and conditions set forth in the Merger Agreement, to recommend that the Merger Agreement be adopted by Prometheus’ stockholders:

 

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Premium to Market Price. The Board considered the relationship of the Merger Consideration to the price of the Company Shares immediately prior to the execution of the Merger Agreement and the recent historical market price and volatility of the Company Shares, including the fact that the Merger Consideration represents (i) a premium of approximately 75% to the $114.01 closing price per Company Share on Nasdaq on April 14, 2023, the last trading day prior to the date on which the Merger Agreement was executed; (ii) a premium of approximately 75% to the trailing volume-weighted average price per share of $114.33 for the thirty (30) trading day period ended April 14, 2023; (iii) a premium of approximately 58% to the 52-week high closing trading price per share of $126.29 for the 52-week period ended April 14, 2023; (iv) a premium of approximately 82% to the price per share of $110.00 at which Prometheus last raised capital on December 8, 2022; and (v) a premium of approximately 953% to the price per share of $19.00 at which Prometheus issued Company Shares in its initial public offering on March 16, 2021. The Board believed that the Merger

 

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Consideration represents the highest value reasonably available for the Company Shares for the foreseeable future, taking into account the Board’s familiarity with the business strategy, assets and prospects of Prometheus and the recent historical market price of the Company Shares.

 

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Certainty of Value. The Board considered the all-cash nature of the Merger Consideration to be received by Prometheus’ stockholders in the Merger, which would provide liquidity and certainty of value to our stockholders while avoiding exposure to Prometheus’ clinical, regulatory, commercialization and other business risks. Taking into account the business, operations, prospects, strategic and short and long term operating plans, assets, liabilities and financial condition of Prometheus, the Board weighed the certainty of realizing compelling value for Company Shares by virtue of the Merger against the uncertain prospect that the trading value of Company Shares would approach the Merger Consideration in the foreseeable future and the risks and uncertainties associated with our business generally, including those described below and those discussed in Prometheus’ public filings with the SEC. See “Where You Can Find More Information” beginning on page 114 of this proxy statement.

 

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Possible Strategic Alternatives. The Board considered the process conducted by Prometheus, with the assistance of representatives of Centerview and Goldman Sachs, to identify whether other potential parties might be interested in pursuing an acquisition of Prometheus, taking into account the expected interest of such parties generally, their financial capability to consummate a transaction of this size, their ability to provide deal certainty, and their ability to move expeditiously and efficiently to enter into a definitive agreement with respect to an acquisition of Prometheus and consummate such transaction. After a thorough review of strategic alternatives and discussions with management and Prometheus’ financial and legal advisors, the Board determined that the Merger Consideration is more favorable to Prometheus stockholders than the potential value that might result from other strategic options available, including, but not limited to, remaining a standalone public company.

 

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Full and Fair Value. The Board believed that the Merger Consideration of $200.00 per Company Share represents full and fair value for our Company Shares, taking into account the Board’s familiarity with the business strategy, assets and prospects of Prometheus on a standalone basis and the relative certainty of the cash consideration payable in the Merger as compared to the risks and uncertainties of continuing on a standalone basis as an independent public company.

 

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Highest Value Reasonably Obtainable. The Board believed that the Merger Consideration of $200.00 per Company Share represents the highest value reasonably obtainable for our Company Shares for the foreseeable future, taking into account the business, operations, prospects, business strategy, assets, liabilities and general financial condition of Prometheus. The Board also considered the progress and the outcome of Prometheus’ negotiations with Merck, including the increase in the consideration offered by Merck from the time of its initial expression of interest to the end of the negotiations, a number of changes in the terms and conditions of the Merger Agreement from the version initially proposed by Merck that were favorable to Prometheus, Merck’s communications that its offer would be withdrawn if an agreement was not reached expeditiously, and the fact that a number of other strategic parties that had been contacted with respect to a potential acquisition of Prometheus had determined not to engage with Prometheus, had determined that they would not be capable of entering into a strategic transaction with Prometheus at such time, or had otherwise failed to submit a proposal that the Board considered compelling relative to the terms of the Merger and the Merger Consideration of $200.00 per Company Share. Further, the Board believed, based on these negotiations, that the Merger Consideration was the highest price per share that Merck was willing to pay and that the Merger Agreement contained the most favorable terms to Prometheus to which Merck was willing to agree.

 

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Product Commercialization and Development Risks. The Board considered the fact that Prometheus has limited marketing, sales and distribution experience and capabilities, and, if Prometheus’ product candidates receive regulatory approval, Prometheus would need to develop or access such capabilities

 

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within the United States and globally, which it may fail to do successfully or at reasonable cost, along with the risks related to market acceptance and other factors affecting the revenues and profitability of product candidates generally.

 

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Likelihood of Consummation. The Board considered the anticipated timing of the consummation of the transactions contemplated by the Merger Agreement, including the likelihood of consummation, based upon the scope of the conditions to the consummation of the Merger, the relative likelihood of obtaining required regulatory approvals, the remedies available to Prometheus under the Merger Agreement in the event of various breaches by Merck, including specific performance, and Merck’s reputation in the biopharmaceutical industry and its financial capacity to complete an acquisition of this size, which the Board believed supported the conclusion that a transaction with Merck could be completed relatively expeditiously and in an orderly manner.

 

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Centerview’s and Goldman Sachs’ Respective Opinions and Related Analyses. The Board considered the opinions of Centerview and Goldman Sachs rendered to the Board on April 15, 2023, which were subsequently confirmed by delivery of written opinions dated such date that, as of such date and based upon and subject to the assumptions made, procedures followed, matters considered, and qualifications and limitations upon the review undertaken by Centerview and Goldman Sachs in preparing their respective opinions, the Merger Consideration to be paid to the holders of Company Shares (other than as specified in such opinions) pursuant to the Merger Agreement was fair, from a financial point of view, to such holders, as more fully described below under the captions “Opinion of Centerview Partners LLC” and “Opinion of Goldman Sachs & Co. LLC.”

 

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Terms of the Merger Agreement. The Board considered the terms and conditions of the Merger Agreement, which was the product of arm’s-length negotiations with the assistance of Prometheus’ advisors, including the structure of the transaction, the all-cash form of the Merger Consideration, the limited scope of the conditions to the consummation of the Merger, and the customary nature of the representations, warranties, and the covenants and agreements of the parties. For the reasons noted below, the Board believed that the provisions of the Merger Agreement were advisable and fair to, and in the best interests of, Prometheus and our stockholders. In particular:

 

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No Financing Condition. The Board considered the representation of Merck that Merck would have available sufficient funds for the satisfaction of all of its obligations under the Merger Agreement and to pay all related fees and expenses required to be paid by Merck or Merger Sub pursuant to the terms of the Merger Agreement, and that the consummation of the Merger is not subject to a financing condition.

 

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No Solicitation Covenants and Fiduciary Outs. The Board considered the non-solicitation covenants and “fiduciary out” provisions of the Merger Agreement, which, subject to the terms and conditions thereof and limitations set forth therein, permit Prometheus to furnish information to, and to engage in discussions with, third parties that make unsolicited Acquisition Proposals meeting certain criteria, permit the Board to change its recommendation to stockholders regarding the Merger Agreement under certain circumstances and permit Prometheus to terminate the Merger Agreement in order to enter into a definitive agreement relating to a Superior Proposal, subject to, among other things, payment of a termination fee to Merck. The Board further considered its ability to change its recommendation to stockholders regarding the Merger Agreement in response to an Intervening Event if the failure to do so would reasonably be expected to be inconsistent with the fiduciary duties of the Board under applicable law. The Board further considered the fact that the Prometheus Termination Fee, in the opinion of the Board, (i) is reasonable in light of the overall terms of the Merger Agreement and the benefits of the Merger, (ii) is consistent with the amount of such fees payable in comparable transactions on a relative basis, (iii) would not be a substantial impediment or preclude another party from making a competing proposal to acquire Prometheus, and (iv) fair in light of the Merck Termination Fee in the event that the Merger Agreement is terminated due to a failure to effect the Merger prior to the

 

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Termination Date because of an inability to obtain the necessary competition approvals or due to the entry of a final, non-appealable antitrust law or order permanently restraining, enjoining, preventing, or prohibiting or making illegal the Merger.

 

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Termination Date. The Board considered the fact that the Termination Date under the Merger Agreement, on which either party, subject to certain exceptions, can terminate the Merger Agreement, allows for sufficient time to consummate the transactions contemplated by the Merger Agreement, but also prevents the Merger Agreement from being extended for an unreasonable amount of time, which could adversely impact operations.

 

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Enforcement. The Board considered Prometheus’ ability to obtain specific enforcement of the obligations of Merck and Merger Sub under the Merger Agreement, thereby ensuring that Prometheus has an appropriate remedy in the event Merck and Merger Sub were to decline to comply with their obligations under the Merger Agreement.

 

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Stockholder Approval; Appraisal Rights. The Board considered that the adoption of the Merger Agreement would be subject to the approval of our stockholders, that stockholders would be free to vote against the adoption of the Merger Agreement, and that stockholders who do not vote to adopt the Merger Agreement and who properly exercise their appraisal rights under Delaware law will be entitled to such appraisal rights in connection with the Merger.

 

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Conditions to Closing; Interim Operations. The Board considered the fact that the terms and conditions of the Merger Agreement minimize, to the extent reasonably practical, the risk that a condition to consummation of the Merger would not be satisfied and also provide reasonable flexibility to operate Prometheus’ business during the pendency of the Merger.

The Board, in consultation with members of Prometheus’ senior management, also assessed Prometheus’ prospects for substantially increasing stockholder value as a standalone company in excess of the Merger Consideration given the risks and uncertainties in Prometheus’ business, including, but not limited to, the following (which are not listed in any relative order of importance) and those discussed in Prometheus’ public filings with the SEC (see “Where You Can Find More Information” beginning on page 114 of this proxy statement):

 

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Prometheus’ approach to the discovery and development of precision medicines based on Prometheus’ Prometheus360TM platform is unproven, and Prometheus does not know whether it will be able to develop any therapeutics or diagnostic products of commercial value, or if competing technological approaches will limit the commercial value of its product candidates and diagnostic candidates or render Prometheus360 obsolete.

 

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Prometheus’ Enroll360TM platform is also unproven, and Prometheus does not know whether enrolling and profiling patients into Enroll360 will translate into any improvement over traditionally slow enrollment rates or ability to enroll patients into future biomarker-guided clinical trials who are more likely to respond to Prometheus’ therapeutic candidates.

 

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Prometheus is early in its development efforts and all of its development programs are in the clinical, preclinical or discovery stage and if Prometheus is unable to successfully develop, obtain regulatory approval and ultimately commercialize product candidates and related diagnostic candidates, or experience significant delays in doing so, Prometheus’ business will be materially harmed.

 

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Preclinical and clinical development involves a lengthy and expensive process with an uncertain outcome, and the results of preclinical studies and early clinical trials are not necessarily predictive of future results and Prometheus’ product candidates may not have favorable results in clinical trials, if any, or receive regulatory approval on a timely basis, if at all.

 

•

Any difficulties or delays in the commencement or completion, or termination or suspension, of Prometheus’ ongoing or planned clinical trials, including as a result of Prometheus never having

 

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completed a Phase 3 registrational program, could result in increased costs to Prometheus, delay or limit Prometheus’ ability to generate revenue and adversely affect Prometheus’ commercial prospects.

 

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Prometheus’ limited operating history, the fact that Prometheus has incurred significant operating losses since its inception and expects to incur significant losses for the foreseeable future, and the fact that Prometheus may not be able to generate sufficient revenue to achieve and maintain profitability.

 

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In the near term, Prometheus’ ability to generate revenue will depend primarily on collaboration revenue.

 

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Prometheus has entered into, and may in the future seek to enter into, collaborations, licenses and other similar arrangements and may not be successful in doing so, and even if successful, Prometheus may relinquish valuable rights and may not realize the benefits of such relationships.

 

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Prometheus relies on third parties to conduct many of its preclinical studies and clinical trials and to manufacture its product candidates, and these third parties may not perform satisfactorily.

 

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Prometheus faces significant competition, and if Prometheus’ competitors develop technologies or product candidates more rapidly than Prometheus does or their technologies or product candidates are more effective, Prometheus’ ability to develop and successfully commercialize products may be adversely affected.

 

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If Prometheus is unable to obtain and maintain patent protection for its therapeutic and diagnostic programs, products and other proprietary technologies it may develop, or if the scope of the patent protection obtained is not sufficiently broad, Prometheus’ competitors could develop and commercialize products and technology similar or identical to Prometheus’, and Prometheus’ ability to successfully commercialize its therapeutic and diagnostic programs, products and other proprietary technologies it may develop may be adversely affected.

 

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Prometheus may not be able to protect its intellectual property and proprietary rights throughout the world.

 

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Prometheus depends on intellectual property licensed from third parties, and its licensors may not always act in Prometheus’ best interests.

 

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If Prometheus fails to comply with its obligations under its intellectual property licenses, if the licenses are terminated or if disputes regarding these licenses arise, Prometheus could lose significant rights that are important to its business.

 

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Prometheus will require substantial additional financing to achieve its goals, and a failure to obtain this necessary capital when needed on acceptable terms, or at all, could force Prometheus to delay, limit, reduce or terminate its development programs, commercialization efforts or other operations.

 

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The current state of the U.S. and global economies, including the recent downward trend in the biopharmaceutical financial markets, increased volatility resulting from escalating political and global trade tensions, and the current and potential impact in both the near term and long term on the biopharmaceutical industry and the future commercialization efforts required with respect to Prometheus’ therapeutic and diagnostic products or product candidates that may become approved for sale, including the numerous risks, costs and uncertainties associated with research, development and commercialization of Prometheus’ pipeline programs.

In the course of its deliberations, the Board, in consultation with members of Prometheus’ senior management and representatives of Prometheus’ outside financial and legal advisors, also considered a variety of uncertainties, risks and other potentially negative factors concerning the Merger Agreement and the transactions contemplated by the Merger Agreement, including, but not limited to, the following (which are not listed in any relative order of importance):

 

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No Stockholder Participation in Future Earnings or Growth. The Board considered that the nature of the Merger as a cash transaction means that, if the Merger is consummated, our stockholders will not participate in future earnings or growth of Prometheus and will not benefit from any appreciation in the value of Prometheus’ business, the success of any of Prometheus’ product candidates or any appreciation in the shares of the surviving corporation.

 

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•

Risk Associated with Failure to Consummate the Merger. The Board considered the possibility that the transactions contemplated by the Merger Agreement, including the Merger, might not be consummated, and that consummation of the Merger is subject to the satisfaction of certain conditions that may not be within our control, including receipt of the necessary regulatory clearances and approvals and that no Company Material Adverse Effect with respect to Prometheus has occurred that is continuing. The Board considered the fact that there can be no assurance that all conditions to the parties’ obligations to consummate the Merger will be satisfied and, as a result, it is possible that the Merger may not be consummated even if the Merger Agreement is adopted by our stockholders. The Board considered the fact that if the Merger is not consummated (i) Prometheus will have incurred significant transaction and opportunity costs, including the possibility of disruption to our operations, diversion of management and employee attention, employee attrition and a potentially negative effect on our business relationships, (ii) the trading price of the Company Shares may be adversely affected, and (iii) the market’s perceptions of our prospects could be adversely affected.

 

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Interim Operating Covenants. The Board considered the restrictions on the conduct of our business during the pendency of the Merger, which may delay or prevent Prometheus from undertaking potential business opportunities that may arise, may have a material adverse effect on our ability to respond to changing market and business conditions in a timely manner (or at all), or may negatively affect our ability to attract, retain and motivate key personnel. The Board also considered that the focus and resources of Prometheus’ management may become diverted from other important business opportunities and operational matters while working to consummate the Merger, which could adversely affect our business.

 

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No Solicitation Covenants and Termination Fee. The Board considered the fact that, subject to certain exceptions, the Merger Agreement precludes Prometheus and its representatives from soliciting, or entering into or participating in discussions or negotiations relating to, alternative acquisition proposals, and requires Prometheus to pay to Merck the Prometheus Termination Fee if the Merger Agreement is terminated under certain circumstances, including a termination of the Merger Agreement by Prometheus to enter into a definitive agreement for a Superior Proposal, as described in “The Merger Agreement—Termination Fee; Certain Expenses” beginning on page 100 of this proxy statement. The Board also considered, but did not consider preclusive, the fact that the right afforded to Merck under the Merger Agreement to propose amendments or modifications to the terms and conditions of the Merger Agreement in response to a Superior Proposal may discourage other parties that might otherwise have an interest in a business combination with, or an acquisition of, Prometheus. The Board also considered that the amount of the termination fee, as compared to termination fees in transactions of a similar size, in the opinion of the Board, was reasonable and would not likely deter competing bids. The Board also recognized that the provisions in the Merger Agreement relating to non-solicitation and the termination fee were required by Merck as conditions to entering into the Merger Agreement.

 

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Effect of Transaction Announcement. The Board considered the potential effect of the announcement of the Merger Agreement, including effects on our stock price and operations, including our relationships with suppliers, distributors, vendors, collaborators and employees, and our ability to attract and retain key personnel during the pendency of the transactions contemplated by the Merger Agreement, as well as the possibility of a suit, action or proceeding in respect of the Merger Agreement or the transactions contemplated thereby.

 

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Transaction Costs. The Board considered the fact that we have incurred and will continue to incur significant transaction costs and expenses in connection with the Merger, regardless of whether the Merger is consummated.

 

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Taxable Transaction. The Board considered that receipt of the all-cash Merger Consideration would be taxable to our stockholders that are treated as U.S. Holders (as defined in “The Merger—Material U.S. Federal Income Tax Consequences of the Merger to Holders of Company Shares” beginning on page 72 of this proxy statement) for United States federal income tax purposes.

 

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•

Interests of Directors and Executive Officers. The Board considered the possibility that Prometheus’ directors and executive officers may have interests in the transactions contemplated by the Merger Agreement that may be different from, or in addition to, those of Prometheus’ stockholders generally. See “The Merger—Interests of the Directors and Executive Officers of Prometheus in the Merger” beginning on page 64 of this proxy statement.

After considering the foregoing potentially negative factors, the Board concluded that the potential benefits of the Merger substantially outweighed the risks or potential negative consequences.

The foregoing discussion of the information and factors considered by the Board is intended to be illustrative and not exhaustive, but includes the material reasons and factors considered by the Board in reaching its conclusions and recommendation in relation to the Merger, the Merger Agreement and the transactions proposed thereby. In light of the variety of reasons and factors considered and the complexity of these matters, the Board did not find it practicable to, and did not, quantify or otherwise assign relative weights to the specific reasons or factors considered in reaching their determinations and recommendations. The Board based its recommendation on the totality of the information presented, including thorough discussions with, and questioning of, members of our senior management and representatives of our outside financial advisors and legal counsel. Individual directors may have given differing weights to different factors or may have had different reasons for their ultimate determination. In addition, the Board did not reach any specific conclusion with respect to any of the factors or reasons considered. Instead, the Board conducted an overall analysis of the factors and reasons described above and determined in its business judgment that, in the aggregate, the potential benefits of the Merger to the stockholders of Prometheus outweighed the risks or potential negative consequences. It should be noted that this explanation of the reasoning of the Board and certain information presented in this section is forward-looking in nature and should be read in light of the factors set forth in “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 36 of this proxy statement.

Opinion of Centerview Partners LLC

On April 15, 2023, Centerview rendered to the Board its oral opinion, subsequently confirmed in a written opinion dated such date, that, as of such date and based upon and subject to various assumptions made, procedures followed, matters considered, and qualifications and limitations upon the review undertaken by Centerview in preparing its opinion, the Merger Consideration to be paid to the holders of Company Shares (other than Excluded Shares) pursuant to the Merger Agreement was fair, from a financial point of view, to such holders.

The full text of Centerview’s written opinion, dated April 15, 2023, which describes the assumptions made, procedures followed, matters considered, and qualifications and limitations upon the review undertaken by Centerview in preparing its opinion, is attached as Annex B and is incorporated herein by reference. The summary of the written opinion of Centerview set forth below is qualified in its entirety to the full text of Centerview’s written opinion attached as Annex B. Centerview’s financial advisory services and opinion were provided for the information and assistance of the Board (in their capacity as directors and not in any other capacity) in connection with and for purposes of its consideration of the Merger and other transactions contemplated by the Merger Agreement and Centerview’s opinion only addressed the fairness, from a financial point of view, as of the date thereof, to the holders of Company Shares (other than Excluded Shares) of the Merger Consideration to be paid to such holders pursuant to the Merger Agreement. Centerview’s opinion did not address any other term or aspect of the Merger Agreement or the Merger and does not constitute a recommendation to any Prometheus stockholder or any other person as to how such stockholder or other person should vote with respect to the Merger or otherwise act with respect to the Merger or any other matter.

The full text of Centerview’s written opinion should be read carefully in its entirety for a description of the assumptions made, procedures followed, matters considered, and qualifications and limitations upon the review undertaken by Centerview in preparing its opinion.

 

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In connection with rendering the opinion described above and performing its related financial analyses, Centerview reviewed, among other things:

 

•

a draft of the Merger Agreement dated April 15, 2023 (the “Draft Merger Agreement”);

 

•

Annual Reports on Form 10-K of Prometheus for the years ended December 31, 2022 and December 31, 2021;

 

•

certain interim reports to stockholders and Quarterly Reports on Form 10-Q of Prometheus;

 

•

certain publicly available research analyst reports for Prometheus;

 

•

certain other communications from Prometheus to its stockholders; and

 

•

certain internal information relating to the business, operations, earnings, cash flow, assets, liabilities and prospects of Prometheus, including certain financial forecasts, analyses and projections relating to the Company prepared by management of the Company and furnished to Centerview by the Company for purposes of Centerview’s analysis, which are referred to in this summary of Centerview’s opinion as the “Unaudited Prospective Financial Information”, and are described further below under the section entitled “—Certain Unaudited Prospective Financial Information”, and which are collectively referred to in this summary of Centerview’s opinion as the “Internal Data.”

Centerview also participated in discussions with members of the senior management and representatives of Prometheus regarding their assessment of the Internal Data. In addition, Centerview reviewed publicly available financial and stock market data for Prometheus. Centerview also compared certain of the proposed financial terms of the Merger with the financial terms, to the extent publicly available, of certain other transactions that Centerview deemed relevant, and conducted such other financial studies and analyses and took into account such other information as Centerview deemed appropriate.

Centerview assumed, without independent verification or any responsibility therefor, the accuracy and completeness of the financial, legal, regulatory, tax, accounting and other information supplied to, discussed with, or reviewed by Centerview for purposes of its opinion and, with Prometheus’ consent, Centerview relied upon such information as being complete and accurate. In that regard, Centerview assumed, at Prometheus’ direction, that the Internal Data (including, without limitation, the Unaudited Prospective Financial Information) were reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of Prometheus as to the matters covered thereby and Centerview relied, at Prometheus’ direction, on the Internal Data for purposes of Centerview’s analysis and opinion. Centerview expressed no view or opinion as to the Internal Data or the assumptions on which it was based. In addition, at Prometheus’ direction, Centerview did not make any independent evaluation or appraisal of any of the assets or liabilities (contingent, derivative, off-balance-sheet or otherwise) of Prometheus and was not asked to conduct, and did not conduct, a physical inspection of the properties or assets of Prometheus. Centerview assumed, at Prometheus’ direction, that the final executed Merger Agreement would not differ in any respect material to Centerview’s analysis or opinion from the Draft Merger Agreement reviewed by Centerview. Centerview also assumed, at Prometheus’ direction, that the Merger will be consummated on the terms set forth in the Merger Agreement and in accordance with all applicable laws and other relevant documents or requirements, without delay or the waiver, modification or amendment of any term, condition or agreement, the effect of which would be material to Centerview’s analysis or Centerview’s opinion and that, in the course of obtaining the necessary governmental, regulatory and other approvals, consents, releases and waivers for the Merger, no delay, limitation, restriction, condition or other change will be imposed, the effect of which would be material to Centerview’s analysis or Centerview’s opinion. Centerview did not evaluate and did not express any opinion as to the solvency or fair value of Prometheus, or the ability of Prometheus to pay its obligations when they come due, or as to the impact of the Merger on such matters, under any state, federal or other laws relating to bankruptcy, insolvency or similar matters. Centerview is not a legal, regulatory, tax or accounting advisor, and Centerview expressed no opinion as to any legal, regulatory, tax or accounting matters.

 

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Centerview’s opinion expressed no view as to, and did not address, Prometheus’ underlying business decision to proceed with or effect the Merger, or the relative merits of the Merger as compared to any alternative business strategies or transactions that might be available to Prometheus or in which Prometheus might engage. Centerview’s opinion was limited to and addressed only the fairness, from a financial point of view, as of the date of Centerview’s written opinion, to the holders of the Company Shares (other than Excluded Shares) of the Merger Consideration to be paid to such holders pursuant to the Merger Agreement. For purposes of its opinion, Centerview was not asked to, and Centerview did not, express any view on, and its opinion did not address, any other term or aspect of the Merger Agreement or the Merger, including, without limitation, the structure or form of the Merger, or any other agreements or arrangements contemplated by the Merger Agreement or entered into in connection with or otherwise contemplated by the Merger, including, without limitation, the fairness of the Merger or any other term or aspect of the Merger to, or any consideration to be received in connection therewith by, or the impact of the Merger on, the holders of any other class of securities, creditors or other constituencies of Prometheus or any other party. In addition, Centerview expressed no view or opinion as to the fairness (financial or otherwise) of the amount, nature or any other aspect of any compensation to be paid or payable to any of the officers, directors or employees of Prometheus or any party, or class of such persons in connection with the Merger, whether relative to the Merger Consideration to be paid to the holders of the Company Shares (other than Excluded Shares) pursuant to the Merger Agreement or otherwise. Centerview’s opinion was necessarily based on financial, economic, monetary, currency, market and other conditions and circumstances as in effect on, and the information made available to Centerview as of, the date of Centerview’s written opinion, and Centerview does not have any obligation or responsibility to update, revise or reaffirm its opinion based on circumstances, developments or events occurring after the date of Centerview’s written opinion. Centerview’s opinion does not constitute a recommendation to any Prometheus stockholder or any other person as to how such stockholder or other person should vote with respect to the Merger or otherwise act with respect to the Merger or any other matter. Centerview’s financial advisory services and its written opinion were provided for the information and assistance of the Board (in their capacity as directors and not in any other capacity) in connection with and for purposes of its consideration of the Merger and other transactions contemplated by the Merger Agreement. The issuance of Centerview’s opinion was approved by the Centerview Partners LLC Fairness Opinion Committee.

Summary of Centerview Financial Analysis

The following is a summary of the material financial analyses prepared and reviewed with the Board in connection with Centerview’s opinion, dated April 15, 2023. The summary set forth below does not purport to be a complete description of the financial analyses performed or factors considered by, and underlying the opinion of, Centerview, nor does the order of the financial analyses described represent the relative importance or weight given to those financial analyses by Centerview. Centerview may have deemed various assumptions more or less probable than other assumptions, so the reference ranges resulting from any particular portion of the analyses summarized below should not be taken to be Centerview’s view of the actual value of Prometheus. Some of the summaries of the financial analyses set forth below include information presented in tabular format. In order to fully understand the financial analyses, the tables must be read together with the text of each summary, as the tables alone do not constitute a complete description of the financial analyses performed by Centerview. Considering the data in the tables below without considering all financial analyses or factors or the full narrative description of such analyses or factors, including the methodologies and assumptions underlying such analyses or factors, could create a misleading or incomplete view of the processes underlying Centerview’s financial analyses and its opinion. In performing its analyses, Centerview made numerous assumptions with respect to industry performance, general business and economic conditions and other matters, many of which are beyond the control of Prometheus or any other parties to the Merger. None of Prometheus, Merck, Merger Sub or Centerview or any other person assumes responsibility if future results are materially different from those discussed. Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than as set forth below. In addition, analyses relating to the value of Prometheus do not purport to be appraisals or reflect the prices at which Prometheus may actually be

 

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sold. Accordingly, the assumptions and estimates used in, and the results derived from, the financial analyses are inherently subject to substantial uncertainty. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before April 14, 2023 (the last trading day before the public announcement of the Merger) and is not necessarily indicative of current market conditions.

Discounted Cash Flow Analysis

Centerview performed a discounted cash flow analysis of Prometheus based on the Unaudited Prospective Financial Information. A discounted cash flow analysis is a traditional valuation methodology used to derive a valuation of an asset or set of assets by calculating the “present value” of estimated future cash flows of the asset or set of assets. “Present value” refers to the current value of future cash flows or amounts and is obtained by discounting those future cash flows or amounts by a discount rate that takes into account macroeconomic assumptions and estimates of risk, the opportunity cost of capital, expected returns and other appropriate factors.

In performing this analysis, Centerview calculated a range of per Company Share equity values by (a) discounting to present value as of March 31, 2023 using discount rates ranging from 12.0% to 13.5% (reflecting Centerview’s analysis of Prometheus’ weighted average cost of capital) and using a mid-year convention: (i) the forecasted risk-adjusted, after-tax unlevered free cash flows of Prometheus over the period beginning April 1, 2023 and ending on December 31, 2044, utilized by Centerview as set forth in Unaudited Prospective Financial Information, (ii) an implied terminal value of Prometheus, calculated by Centerview by assuming that unlevered free cash flows would decline in perpetuity after December 31, 2044 at a rate of free cash flow decline of 50% year over year (except for platform, overhead general and administrative and unallocated research and development), (iii) tax savings from usage of Prometheus’ estimated federal net operating losses of approximately $164 million as of December 31, 2022 and future losses, as reflected in the Unaudited Prospective Financial Information, (b) adding to the foregoing results Prometheus’ net estimated cash and cash equivalents of $715 million as of March 31, 2023, as provided by Prometheus management, and (c) subtracting from the foregoing results the present value of the impact of assumed equity raises of $500 million in 2025 and $400 million in 2026, as set forth in the Unaudited Prospective Financial Information. Centerview divided the result of the foregoing calculations by the number of fully diluted outstanding Company Shares (determined using the treasury stock method and taking into account the dilutive impact of outstanding in-the-money options and restricted stock units) as of April 13, 2023, based on the Unaudited Prospective Financial Information, resulting in a range of implied equity values per Company Share of $128.60 to $152.35 rounded to the nearest $0.05. Centerview then compared the results of the above analysis to the $200.00 per Company Share value of the Merger Consideration to be paid to the holders of Company Shares (other than Excluded Shares) pursuant to the Merger Agreement.

Other Factors

Centerview noted for the Board certain additional factors solely for informational purposes, including, among other things, the following:

 

•

Historical Stock Price Trading Analysis. Centerview reviewed historical closing trading prices of the Company Shares during the 52-week period ended April 14, 2023 (the last trading day before the public announcement of the Merger), which reflected low and high stock closing prices for Prometheus during such period of approximately $22.39 to $126.29 per Company Share, rounded to the nearest $0.01.

 

•

Analyst Price Target Analysis. Centerview reviewed stock price targets for the Company Shares in recently published, publicly available Wall Street research analyst reports as of April 14, 2023 (the last trading day before the public announcement of the Merger), which indicated low and high stock price targets for Prometheus ranging from $138.00 to $225.00 per Company Share.

 

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•

Premiums Paid Analysis. Centerview performed an analysis of premiums paid in selected transactions involving publicly traded biopharmaceutical companies for which premium data were available. The premiums in this analysis were calculated by comparing the per share acquisition price in each transaction (excluding any contingent consideration) to the closing price of the target company’s common stock for the date one day prior to the date on which the trading price of the target’s common stock was perceived to be affected by a potential transaction. Based on such analysis and other considerations that Centerview deemed relevant in its professional judgment, Centerview applied a range of 50% to 80% to Prometheus’ closing stock price on April 14, 2023 (the last trading day before the public announcement of the Merger) of $114.01, which resulted in an implied price range of approximately $171.00 to $205.20 per Company Share, rounded to the nearest $0.05.

General

The preparation of a financial opinion is a complex analytical process involving various determinations as to the most appropriate and relevant methods of financial analysis and the application of those methods to the particular circumstances and, therefore, a financial opinion is not readily susceptible to summary description. In arriving at its opinion, Centerview did not draw, in isolation, conclusions from or with regard to any factor or analysis that it considered. Rather, Centerview made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of the analyses.

Centerview’s financial analyses and opinion were only one of many factors taken into consideration by the Board in its evaluation of the Merger. Consequently, the analyses described above should not be viewed as determinative of the views of the Board or Prometheus Management with respect to the Merger Consideration or as to whether the Board would have been willing to determine that a different consideration was fair. The consideration for the transaction was determined through arm’s-length negotiations between Prometheus and Merck and was approved by the Board. Centerview provided advice to Prometheus during these negotiations. Centerview did not, however recommend any specific amount of consideration to Prometheus or the Board or that any specific amount of consideration constituted the only appropriate consideration for the transaction.

Centerview is a securities firm engaged directly and through affiliates and related persons in a number of investment banking, financial advisory and merchant banking activities. In the two years prior to the date of its written opinion, except for Centerview’s current engagement, Centerview had not been engaged to provide financial advisory or other services to Prometheus, and Centerview did not receive any compensation from Prometheus during such period. In the two years prior to the date of its written opinion, Centerview provided financial advisory services unrelated to Prometheus, to Merck, including in connection with Merck’s spin-off of Organon & Co. in 2021 and other strategic matters, and Centerview received between $15 million and $25 million in aggregate compensation from Merck during such period. Centerview may provide financial advisory and other services to or with respect to Prometheus or Merck or their respective affiliates in the future, for which Centerview may receive compensation. Certain (i) of Centerview’s and its affiliates’ directors, officers, members and employees, or family members of such persons, (ii) of Centerview’s affiliates or related investment funds and (iii) investment funds or other persons in which any of the foregoing may have financial interests or with which they may co-invest, may at any time acquire, hold, sell or trade, in debt, equity and other securities or financial instruments (including derivatives, bank loans or other obligations) of, or investments in, Prometheus, Merck or any of their respective affiliates, or any other party that may be involved in the Merger.

The Board selected Centerview as its financial advisor in connection with the Merger based on Centerview’s familiarity with Prometheus, their reputation as an internationally recognized investment banking firm and their substantial experience in transactions similar to the Merger. Centerview is an internationally recognized investment banking firm that has substantial experience in transactions similar to the Merger.

In connection with Centerview’s services as the financial advisor to the Board, Prometheus has agreed to pay Centerview an aggregate fee of $70.5 million, $2.0 million of which was payable upon the earlier to occur of

 

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(i) the date on which Centerview advised the Board that it was prepared to render its opinion and (ii) the rendering of the opinion and $68.5 million of which is payable contingent upon consummation of the Merger. In addition, Prometheus has agreed to reimburse certain of Centerview’s expenses arising, and to indemnify Centerview against certain liabilities that may arise, out of Centerview’s engagement.

Opinion of Goldman Sachs & Co. LLC

Goldman Sachs rendered its opinion to the Board that, as of April 15, 2023, and based upon and subject to the factors and assumptions set forth therein, the $200.00 in cash per Company Share to be paid to the holders (other than Merck and its affiliates) of Company Shares pursuant to the Merger Agreement was fair from a financial point of view to such holders of Company Shares.

The full text of the written opinion of Goldman Sachs, dated April 15, 2023, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex C. Goldman Sachs provided advisory services and its opinion for the information and assistance of the Board in connection with its consideration of the Merger and other transactions contemplated by the Merger Agreement. Goldman Sachs’ opinion is not a recommendation as to how any holder of Company Shares should vote with respect to the Merger, or any other matter.

In connection with rendering the opinion described above and performing its related financial analyses, Goldman Sachs reviewed, among other things:

 

•

the Merger Agreement;

 

•

annual reports to stockholders and Annual Reports on Form 10-K of Prometheus for the two fiscal years ended December 31, 2022;

 

•

Prometheus’ Registration Statement on Form S-1, including the prospectus contained therein dated March 11, 2021 relating to Prometheus’ initial public offering, dated February 19, 2021;

 

•

certain interim reports to stockholders and Quarterly Reports on Form 10-Q of Prometheus;

 

•

certain other communications from Prometheus to its stockholders;

 

•

certain publicly available research analyst reports for Prometheus; and

 

•

certain internal financial analyses and forecasts for the Company and certain forecasts related to the expected utilization by the Company of certain net operating loss carryforwards, in each case, as prepared by the management of Prometheus and approved for our use by Prometheus (referred to in this section of the proxy statement as the “Unaudited Prospective Financial Information”, and which are summarized in the section entitled “The Merger—Certain Unaudited Prospective Financial Information” beginning on page 61 of this proxy statement).

Goldman Sachs also held discussions with members of the senior management of Prometheus regarding their assessment of the strategic rationale for, and the potential benefits of, the Merger and the past and current business operations, financial condition and future prospects of Prometheus; reviewed the reported price and trading activity for the Company Shares; compared certain financial and stock market information for Prometheus with similar information for certain other companies the securities of which are publicly traded; reviewed the financial terms of certain recent business combinations in the biopharma industry and in other industries; and performed such other studies and analyses, and considered such other factors, as Goldman Sachs deemed appropriate.

For purposes of rendering this opinion, Goldman Sachs, with Prometheus’ consent, relied upon and assumed the accuracy and completeness of all of the financial, legal, regulatory, tax, accounting and other information

 

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provided to, discussed with or reviewed by, it, without assuming any responsibility for independent verification thereof. In that regard, Goldman Sachs assumed with Prometheus’ consent that the Unaudited Prospective Financial Information were reasonably prepared on a basis reflecting the best then currently available estimates and judgments of the management of Prometheus. Goldman Sachs did not make an independent evaluation or appraisal of the assets and liabilities (including any contingent, derivative or other off-balance-sheet assets and liabilities) of Prometheus and it was not furnished with any such evaluation or appraisal. Goldman Sachs assumed that all governmental, regulatory or other consents and approvals necessary for the consummation of the Merger will be obtained without any adverse effect on the expected benefits of the Merger in any way meaningful to its analysis. Goldman Sachs also assumed that the Merger will be consummated on the terms set forth in the Merger Agreement, without the waiver or modification of any term or condition the effect of which would be in any way meaningful to its analysis.

Goldman Sachs’ opinion does not address the underlying business decision of Prometheus to engage in the Merger, or the relative merits of the Merger as compared to any strategic alternatives that may be available to Prometheus; nor does it address any legal, regulatory, tax or accounting matters. Goldman Sachs’ opinion addresses only the fairness from a financial point of view to the holders (other than Merck and its affiliates) of Company Shares, as of the date of the opinion, of the $200.00 in cash per Company Share to be paid to such holders pursuant to the Merger Agreement. Goldman Sachs’ opinion does not express any view on, and does not address, any other term or aspect of the Merger Agreement or Merger or any term or aspect of any other agreement or instrument contemplated by the Merger Agreement or entered into or amended in connection with the Merger, including, the fairness of the Merger to, or any consideration received in connection therewith by, the holders of any other class of securities, creditors, or other constituencies of Prometheus; nor as to the fairness of the amount or nature of any compensation to be paid or payable to any of the officers, directors or employees of Prometheus, or class of such persons, in connection with the Merger, whether relative to the $200.00 in cash per Company Share to be paid to the holders (other than Merck and its affiliates) of Company Shares pursuant to the Merger Agreement or otherwise. Goldman Sachs is not expressing any opinion as to the prices at which the Company Shares will trade at any time or, as to the potential effects of volatility in the credit, financial and stock markets on Prometheus, Merck or the Merger, or as to the impact of the Merger on the solvency or viability of Prometheus or Merck or the ability of Prometheus or Merck to pay their respective obligations when they come due. Goldman Sachs’ opinion is necessarily based on economic, monetary, market and other conditions as in effect on, and the information made available to Goldman Sachs as of, the date of its opinion and Goldman Sachs assumes no responsibility for updating, revising or reaffirming its opinion based on circumstances, developments or events occurring after the date of its opinion. Goldman Sachs’ advisory services and opinion are provided for the information and assistance of the Board in connection with its consideration of the Merger and other transactions contemplated by the Merger Agreement and such opinion does not constitute a recommendation as to how any holder of Company Shares should vote with respect to such Merger or any other matter. The opinion has been approved by a fairness committee of Goldman Sachs.

The following is a summary of the material financial analyses delivered by Goldman Sachs to the Board in connection with rendering the opinion described above. The following summary, however, does not purport to be a complete description of the financial analyses performed by Goldman Sachs, nor does the order of analyses described represent relative importance or weight given to those analyses by Goldman Sachs. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before April 14, 2023, the last trading day before the public announcement of the Merger, and is not necessarily indicative of current market conditions.

Summary of Financial Analyses

Implied Premia Analysis. Goldman Sachs calculated and compared certain implied premia described below based on the consideration to be paid to holders (other than Merck and its affiliates) of Company Shares pursuant to the Merger Agreement.

 

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Goldman Sachs calculated the implied premia represented by the consideration to be paid to holders (other than Merck and its affiliates) of Company Shares pursuant to the Merger Agreement relative to:

 

•

$114.01, the closing price per Company Share as of April 14, 2023 (which is referred to in this section of the proxy statement as the “Unaffected Share Price”);

 

•

$129.60, the highest intra-day trading price of Company Shares over the 52-week period ended April 14, 2023 (which is referred to in this section of the proxy statement as the “52-week High”); and

 

•

$114.33, the volume weighted average price (which is referred to in this section of the proxy statement as “VWAP”) of Company Shares over the 30-trading-day time period ended April 14, 2023 (which is referred to in this section of the proxy statement as the “30-day VWAP”).

The results of these calculations and comparisons were as follows:

 

Common Stock Reference Price		Implied Premium Represented by $200.00 in Cash per Company Share
Unaffected Share Price of $114.01			75.4	%
52-week High of $129.60			54.3	%
30-day VWAP of $114.33			74.9	%

Illustrative Discounted Cash Flow Analysis. Using the Unaudited Prospective Financial Information, Goldman Sachs performed an illustrative discounted cash flow analysis on Prometheus to derive a range of illustrative present values per Company Share. Using the mid-year convention for discounting cash flows and discount rates ranging from 11.5% to 13.5%, reflecting estimates of Prometheus’ weighted average cost of capital (“WACC”), Goldman Sachs discounted to present value as of March 31, 2023 (i) estimates of unlevered free cash flow for Prometheus for the second, third and fourth quarters of fiscal year 2023 through the fiscal year ending December 31, 2044 as reflected in the Unaudited Prospective Financial Information and (ii) a range of illustrative terminal values for Prometheus, which were calculated by applying perpetuity growth rates ranging from 0.0% to 2.0% to a terminal year estimate of the unlevered free cash flow to be generated by Prometheus, as reflected in the Unaudited Prospective Financial Information. In addition, using a mid-year convention and discount rate of 11.5% to 13.5%, reflecting an estimate of Prometheus’ WACC, Goldman Sachs discounted to present value as of March 31, 2023 the estimated benefits of Prometheus’ net operating losses (“NOLs”) for the second, third and fourth quarters of fiscal year 2023 through fiscal year 2044 as reflected in the Unaudited Prospective Financial Information. The range of perpetuity growth rates was estimated by Goldman Sachs utilizing its professional judgment and experience, taking into account the Unaudited Prospective Financial Information and market expectations regarding long-term real growth of gross domestic product and inflation. Goldman Sachs derived such discount rates by application of the Capital Asset Pricing Model, which requires certain company-specific inputs, including Prometheus’ target capital structure weightings, the cost of long-term debt, after-tax yield on permanent excess cash, if any, future applicable marginal cash tax rate and a beta for Prometheus, as well as certain financial metrics for the United States financial markets generally.

Goldman Sachs derived ranges of illustrative enterprise values for Prometheus by adding the ranges of present values it derived above. Goldman Sachs then added to the range of illustrative enterprise values it derived, the amount of Prometheus’ net cash balance as of March 31, 2023, and the net present value of the $500 million in financing with a 6% gross spread expected in 2025 and $400 million in financing with a 6% gross spread expected in 2026, as set forth in the Unaudited Prospective Financial Information and in each case, as provided by and approved for Goldman Sachs’ use by the management of Prometheus, to derive a range of illustrative equity values for Prometheus. Goldman Sachs then divided the range of illustrative equity values it derived by the number of fully diluted outstanding Company Shares, as provided by and approved for Goldman Sachs’ use by the management of Prometheus, using the treasury stock method, to derive a range of illustrative present values per Company Share ranging from $129.78 to $161.59.

 

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Premia Paid Analysis—Undisturbed Closing Stock Price. Goldman Sachs reviewed and analyzed, using publicly available information, the acquisition premia for select transactions announced in the 10 years preceding April 14, 2023 involving a public company in the biopharmaceutical industry based in the United States as the target where the disclosed enterprise values for the transaction were between $5 billion and $15 billion. For the entire period, using publicly available information, Goldman Sachs calculated the median, 25th percentile and 75th percentile premiums of the price paid in the 23 transactions relative to the target’s last undisturbed closing stock price prior to announcement of the transaction. This analysis indicated a median premium of 62% across the period. This analysis also indicated a 25th percentile premium of 48% and 75th percentile premium of 77% across the period. Using this analysis, Goldman Sachs applied a reference range of illustrative premiums of 48% to 77% to the undisturbed closing price per Company Share of $114.01 as of April 14, 2021 and calculated a range of implied equity values per Company Share of $168.51 to $201.57.

Premia Paid Analysis—52-Week Intraday High Stock Price. Goldman Sachs reviewed and analyzed, using publicly available information, the acquisition premia for select transactions announced in the 10 years preceding April 14, 2023 involving a public company in the biopharmaceutical industry based in the United States as the target where the disclosed enterprise values for the transaction were between $5 billion and $15 billion. For the entire period, using publicly available information, Goldman Sachs calculated the median, 25th percentile and 75th percentile premiums of the price paid in the 23 transactions relative to the target’s 52-week intraday high price prior to announcement of the transaction. This analysis indicated a median premium of 28% across the period. This analysis also indicated a 25th percentile premium of 19% and 75th percentile premium of 56% across the period. Using this analysis, Goldman Sachs applied a reference range of illustrative premiums of 19% to 56% to the 52-week intraday high per Company Share of $129.60 as of April 14, 2021 and calculated a range of implied equity values per Company Share of $154.28 to $202.51.

General

The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary set forth above, without considering the analyses as a whole, could create an incomplete view of the processes underlying Goldman Sachs’ opinion. In arriving at its fairness determination, Goldman Sachs considered the results of all of its analyses and did not attribute any particular weight to any factor or analysis considered by it. Rather, Goldman Sachs made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of its analyses. No company or transaction used in the above analyses as a comparison is directly comparable to Prometheus or Merck or the contemplated transaction.

Goldman Sachs prepared these analyses for purposes of Goldman Sachs’ providing its opinion to the Board as to the fairness from a financial point of view of the $200.00 in cash per Company Share to be paid to the holders (other than Merck and its affiliates) of Company Shares pursuant to the Merger Agreement. These analyses do not purport to be appraisals nor do they necessarily reflect the prices at which businesses or securities actually may be sold. Analyses based upon forecasts of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by these analyses. Because these analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of the parties or their respective advisors, none of Prometheus, Merck, Goldman Sachs or any other person assumes responsibility if future results are materially different from those forecast.

The Merger Consideration was determined through arm’s-length negotiations between Prometheus and Merck and was approved by the Board. Goldman Sachs provided advice to Prometheus during these negotiations. Goldman Sachs did not, however, recommend any specific amount of consideration to Prometheus or the Board or that any specific amount of consideration constituted the only appropriate consideration for the Merger.

As described herein, Goldman Sachs’ opinion to the Board was one of many factors taken into consideration by the Board in making its determination to approve the Merger Agreement. The foregoing summary does not

 

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purport to be a complete description of the analyses performed by Goldman Sachs in connection with the fairness opinion and is qualified in its entirety by reference to the written opinion of Goldman Sachs attached as Annex C.

Goldman Sachs and its affiliates are engaged in advisory, underwriting, lending and financing, principal investing, sales and trading, research, investment management and other financial and non-financial activities and services for various persons and entities. Goldman Sachs and its affiliates and employees, and funds or other entities they manage or in which they invest or have other economic interests or with which they co-invest, may at any time purchase, sell, hold or vote long or short positions and investments in securities, derivatives, loans, commodities, currencies, credit default swaps and other financial instruments of Prometheus, Merck any of their respective affiliates and third parties, or any currency or commodity that may be involved in the transaction contemplated by the Merger Agreement. Goldman Sachs acted as financial advisor to Prometheus in connection with, and participated in certain of the negotiations leading to, the transaction contemplated by the Merger Agreement. Goldman Sachs has provided certain financial advisory and/or underwriting services to Prometheus and its affiliates from time to time for which Goldman Sachs Investment Banking has received, and may receive, compensation, including having acted as acted as bookrunner to Prometheus in connection to a follow-on equity raise in December 2022. During the two-year period ended April 15, 2023, Goldman Sachs has recognized compensation for financial advisory and/or underwriting services provided by Goldman Sachs Investment Banking to Prometheus and/or its affiliates of approximately $13 million. Goldman Sachs also has provided certain financial advisory and/or underwriting services to Merck and its affiliates from time to time for which Goldman Sachs Investment Banking has received, and may receive, compensation, including having acted as financial advisor to Merck in connection to its acquisition of Acceleron Pharma Inc. in November 2021, as joint bookrunner to Merck with respect to its offering of certain notes in December 2021, as joint lead arranger and joint bookrunner to Organon & Co., a subsidiary of Merck, with respect to its offering of certain term loans and other secured and unsecured debt in June 2021, and as letter of credit issuer to Organon & Co. in connection to a revolving credit facility in June 2021. During the two-year period ended April 15, 2023, Goldman Sachs has recognized compensation for financial advisory and/or underwriting services provided by Goldman Sachs Investment Banking to Merck and/or its affiliates of approximately $32 million. Goldman Sachs may also in the future provide financial advisory and/or underwriting services to Prometheus, Merck and their respective affiliates for which Goldman Sachs Investment Banking may receive compensation.

The Board selected Goldman Sachs as its financial advisor because it is an internationally recognized investment banking firm that has substantial experience in transactions similar to the Merger. Pursuant to a letter agreement dated September 27, 2022 (as amended), Prometheus engaged Goldman Sachs to act as its financial advisor in connection with the contemplated transaction. The engagement letter between Prometheus and Goldman Sachs provides for a transaction fee that is estimated, based on the information available as of the date of announcement, at approximately $70.5 million, $1 million of which became payable at announcement of the Merger, and the remainder of which is contingent upon consummation of the Merger. In addition, Prometheus has agreed to reimburse Goldman Sachs for certain of its expenses, including attorneys’ fees and disbursements, and to indemnify Goldman Sachs and related persons against various liabilities that may arise out of its engagement, including certain liabilities under the federal securities laws.

Certain Unaudited Prospective Financial Information

We do not, as a matter of course, make public projections as to our future financial performance, due to, among other reasons, the uncertainty, unpredictability and subjectivity of the underlying assumptions and estimates and the inherent difficulty of predicting financial performance for future periods. However, Prometheus’ management regularly prepares and reviews with the Board estimates regarding the success and timing of the development of, regulatory filings and approvals for and the commercialization of our products and product candidates. In connection with our strategic planning process and the Board’s evaluation of the Merger, as described further in the section captioned “The Merger—Background of the Merger” beginning on page 39 of this proxy statement, Prometheus’ management prepared and reviewed with the Board certain unaudited prospective financial information of Prometheus as an independent company for the fiscal years 2023 through 2044, as prepared and used as described below (referred to as the “Unaudited Prospective Financial Information”).

 

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The Unaudited Prospective Financial Information was prepared for internal use only and not for public disclosure and was provided to the Board for the purposes of considering, analyzing and evaluating the Merger. The Unaudited Prospective Financial Information was also provided to, approved by Prometheus for use by, and relied upon by, Centerview and Goldman Sachs, Prometheus’ financial advisors, for the purposes of Centerview’s and Goldman Sachs’s financial analyses and fairness opinions in connection with the Merger (as described in more detail in the sections captioned “The Merger—Opinion of Centerview Partners LLC” and “The Merger—Opinion of Goldman Sachs & Co. LLC” beginning on pages 52 and 57 of this proxy statement, respectively), and were the only financial projections with respect to the Company used by Centerview and Goldman Sachs in performing such financial analyses. The Unaudited Prospective Financial Information was not provided to Merck or any other prospective bidder. The Unaudited Prospective Financial Information includes estimates of Prometheus’ financial performance on a risk-adjusted basis. With Prometheus’ consent, Centerview and Goldman Sachs each assumed that the Unaudited Prospective Financial Information was reasonably prepared on bases reflecting the best then available estimates and judgments of our management as to our future financial performance, and relied on Prometheus’ assessments as to the validity of, and risks associated with, our products and product candidates.

The Unaudited Prospective Financial Information was developed based on Prometheus’ management’s knowledge of and assumptions with respect to Prometheus’ business, including with respect to the commercialization of Prometheus’ PRA023 pipeline drug candidate for the treatment of immune-mediated diseases including ulcerative colitis (“UC”), Crohn’s Disease, and systemic sclerosis-associated interstitial lung disease and Prometheus’ PRA052 pipeline drug candidate for the treatment of UC. The Unaudited Prospective Financial Information was developed without giving effect to the Merger, including any impact of the negotiation or execution of the Merger Agreement or the Merger, the expenses that have already or may be incurred in connection with completing the Merger or any changes to Prometheus’ operations or strategy that may be implemented during the pendency of or following the consummation of the Merger. The Unaudited Prospective Financial Information also does not consider the effect of any failure of the Merger to be completed and it should not be viewed as accurate or continuing in that context.

The Unaudited Prospective Financial Information was not prepared with a view toward public disclosure or complying with accounting principles generally accepted in the United States (which we refer to as “GAAP”). In addition, the Unaudited Prospective Financial Information was not prepared with a view toward complying with the guidelines established by the SEC or the American Institute of Certified Public Accountants with respect to prospective financial information. Neither our independent registered public accounting firm nor any other independent accountants have (1) compiled, reviewed, audited, examined or performed any procedures with respect to the Unaudited Prospective Financial Information, (2) expressed any opinion or any other form of assurance on such information or the achievability of the Unaudited Prospective Financial Information or (3) assumed any responsibility for the Unaudited Prospective Financial Information.

Because the Unaudited Prospective Financial Information reflects estimates and judgments, it is susceptible to sensitivities and assumptions, as well as multiple interpretations based on actual experience and business developments. The Unaudited Prospective Financial Information also covers multiple years, and such information by its nature becomes less predictive with each succeeding year. The Unaudited Prospective Financial Information is not, and should not be considered to be, a guarantee of future operating results. Further, the Unaudited Prospective Financial Information is not fact and should not be relied upon as being necessarily indicative of our future results.

Although the Unaudited Prospective Financial Information is presented with numerical specificity, it reflects numerous assumptions and estimates as to future events. The Unaudited Prospective Financial Information will be affected by, among other factors, our ability to achieve our goals for the development, regulatory approval and commercialization of our products and product candidates, including on the timeline assumed for purposes of the Unaudited Prospective Financial Information. The Unaudited Prospective Financial Information reflects assumptions and uncertainties that are subject to change. Important factors that may affect actual results and cause the Unaudited Prospective Financial Information not to be achieved are described in

 

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various risk factors described in the section captioned “Cautionary Statement Regarding Forward-Looking Statements” beginning on page 36 of this proxy statement, and in our other filings with the SEC, including those listed under the section captioned “Where You Can Find More Information” beginning on page 114 of this proxy statement. All of these factors are difficult to predict, and many of them are outside of our control. As a result, there can be no assurance that the Unaudited Prospective Financial Information will be realized, and actual results may be materially better or worse than those contained in the Unaudited Prospective Financial Information, whether or not the Merger is consummated. The Unaudited Prospective Financial Information also reflects assumptions as to certain business decisions that are subject to change. The Unaudited Prospective Financial Information may differ from publicized analyst estimates and forecasts and does not consider any events or circumstances after the date that it was prepared, including the announcement of the entry into the Merger Agreement. The Unaudited Prospective Financial Information has not been updated or revised to reflect information or results after the date it was prepared or as of the date of this proxy statement. Except to the extent required by applicable federal securities laws, we do not intend to update or otherwise revise the Unaudited Prospective Financial Information to reflect circumstances existing after the date that such information was prepared or to reflect the occurrence of future events. Prometheus has or may report results of operations for periods included in the Unaudited Prospective Financial Information that were or will be completed following the preparation of the Unaudited Prospective Financial Information. Stockholders and investors are urged to refer to Prometheus’ periodic filings with the SEC for information on Prometheus’ actual historical results.

Certain of the financial measures included in the Unaudited Prospective Financial Information are “non-GAAP financial measures.” These are financial performance measures that are not calculated in accordance with GAAP. These non-GAAP financial measures should not be viewed as a substitute for GAAP financial measures, and may be different from non-GAAP financial measures used by other companies. Furthermore, there are limitations inherent in non-GAAP financial measures because they exclude charges and credits that are required to be included in a GAAP presentation. In certain circumstances, including those applicable to the Unaudited Prospective Financial Information, financial measures included in forecasts provided to a financial advisor and a board of directors in connection with a business combination transaction are excluded from the definition of “non-GAAP financial measures” under applicable SEC rules and regulations. As a result, the Unaudited Prospective Financial Information is not subject to SEC rules regarding disclosures of non-GAAP financial measures, which would otherwise require a reconciliation of a non-GAAP financial measure to a GAAP financial measure. Reconciliations of non-GAAP financial measures were not provided to or relied upon by the Board, Centerview or Goldman Sachs. Accordingly, no reconciliation of the financial measures included in the Unaudited Prospective Financial Information is provided in this proxy statement.

The Unaudited Prospective Financial Information constitutes forward-looking statements. By including the Unaudited Prospective Financial Information in this proxy statement, neither we nor any of our representatives has made or makes any representation to any person regarding our ultimate performance as compared to the information contained in the Unaudited Prospective Financial Information. The inclusion of the Unaudited Prospective Financial Information should not be regarded as an indication that the Board, Prometheus or any other person considered, or now considers, the Unaudited Prospective Financial Information to be predictive of actual future results. Further, the inclusion of the Unaudited Prospective Financial Information in this proxy statement does not constitute an admission or representation by Prometheus that the information presented is material. The Unaudited Prospective Financial Information is included in this proxy statement solely to give our stockholders access to the information that was provided to the Board, Centerview, and Goldman Sachs. The Unaudited Prospective Financial Information is not included in this proxy statement in order to influence any Prometheus stockholder to make any investment decision with respect to the Merger, including whether or not to seek appraisal rights with respect to their shares.

Unaudited Prospective Financial Information

Various judgments and assumptions were made when preparing the Unaudited Prospective Financial Information, including, among others (1) revenue estimates based on various assumptions, including with respect

 

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to addressable patient population, United States and EU commercial launch years, market penetration, time to peak sales, peak sales, inflationary factors and pricing and exclusivity, and potential outcomes with respect thereto for the commercialization of the PRA023, PRA052 and other potential pipeline drug candidates, (2) the probability of success in obtaining regulatory approval of Prometheus’ drug candidates, (3) the entry into partnerships for the development and commercialization of certain product candidates outside of the United States and EU with various upfront, milestone and royalty payments assumptions, (4) assumptions with respect to cost of goods sold and estimated sales, marketing and distribution expenses, with certain of such assumptions estimated on a product-by-product basis, (5) estimated royalty and milestone expenses payable by and to Prometheus based on the terms of Prometheus’ existing and future potential partner relationships, (6) variable research and development expenses estimated based on the phase of each product’s development and launch, (7) estimated benefits of Prometheus’ net operating losses of approximately $164 million as of December 31, 2022 and estimated future losses, (8) the impact of $500 million in financing expected in 2025 and $400 million in financing expected in 2026, and (9) corporate general and administrative expenses generally.

The following table presents estimates of Prometheus’ net revenue, gross profit, EBIT, net income and unlevered free cash flow, in each case, for the fiscal years 2023 through 2044, as reflected in the Unaudited Prospective Financial Information, as approved by Prometheus management.

Projected Non-GAAP

($ in millions, Unaudited)

 

		Fiscal Year Ending December 31,
		2023				2024				2025				2026				2027				2028				2029				2030				2031				2032				2033
Net Revenue		$	4				—			$	100			$	158			$	403			$	848			$	1,770			$	2,948			$	4,233			$	5,640			$	6,300
Gross Profit		$	4				—			$	100			$	145			$	367			$	772			$	1,609			$	2,676			$	3,836			$	5,105			$	5,691
EBIT(1)		$	(209	)		$	(301	)		$	(142	)		$	(506	)		$	(197	)		$	128			$	918			$	1,545			$	2,242			$	3,060			$	3,424
Net Income		$	(190	)		$	(293	)		$	(137	)		$	(483	)		$	(177	)		$	142			$	913			$	1,392			$	1,863			$	2,562			$	2,916
Unlevered Free Cash Flow(2)		$	(209	)		$	(301	)		$	(142	)		$	(529	)		$	(232	)		$	36			$	590			$	1,050			$	1,585			$	2,214			$	2,614
		Fiscal Year Ending December 31,
		2034				2035				2036				2037				2038				2039				2040				2041				2042				2043				2044
Net Revenue		$	6,547			$	6,788			$	7,025			$	7,254			$	7,486			$	7,706			$	7,932			$	8,162			$	4,238			$	2,406			$	1,492
Gross Profit		$	5,906			$	6,116			$	6,321			$	6,518			$	6,718			$	6,907			$	7,099			$	7,296			$	3,924			$	2,221			$	1,372
EBIT(1)		$	3,587			$	3,757			$	3,904			$	4,062			$	4,189			$	4,308			$	4,428			$	4,551			$	2,471			$	1,399			$	867
Net Income		$	3,121			$	3,337			$	3,540			$	3,757			$	3,955			$	4,150			$	4,352			$	4,561			$	3,019			$	2,247			$	1,882
Unlevered Free Cash Flow(2)		$	2,798			$	2,933			$	3,050			$	3,176			$	3,276			$	3,371			$	3,465			$	3,562			$	2,496			$	1,380			$	822

 

(1)	“EBIT” refers to Prometheus’ gross profit less total operating expenses.

(2)	“Unlevered Free Cash Flow” refers to EBIT, less tax expenses, less capital expenditures, plus depreciation and amortization, less changes in net working capital.

Interests of the Directors and Executive Officers of Prometheus in the Merger

Members of the Board and Prometheus’ executive officers may have various interests in the Merger that may be in addition to, or different from, the interests of Prometheus stockholders generally. The members of the Board were aware of these potential interests and considered them at the time they approved the Merger Agreement and in making their recommendation that Prometheus stockholders adopt the Merger Agreement. These potential interests are described below.

Treatment of Equity Awards

Each of our directors and executive officers hold outstanding Prometheus equity awards. The Prometheus equity awards held by our directors and executive officers immediately prior to the Effective Time will be treated

 

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in the Merger in the same manner as Prometheus equity awards held by employees generally. At the Effective Time, outstanding Prometheus equity awards held by our directors and executive officers will be treated as follows:

 

•

Each Prometheus stock option that is outstanding and unexercised immediately prior to the Effective Time, whether vested or unvested, will be cancelled and converted into the right to receive an amount in cash equal to the product obtained by multiplying (i) the aggregate number of Company Shares underlying such Prometheus stock option by (ii) an amount equal to the Merger Consideration less the applicable per share exercise price of such Prometheus stock option; and

 

•

Each Prometheus RSU award that is outstanding immediately prior to the Effective Time will be cancelled and converted into the right to receive an amount in cash equal to the product obtained by multiplying (i) the aggregate number of Company Shares underlying such Prometheus RSU award by (ii) the Merger Consideration.

The following table sets forth, for each of Prometheus’ directors and executive officers, (i) the number and value of Company Shares subject to vested Prometheus stock options, (ii) the number and value of Company Shares subject to unvested Prometheus stock options, (iii) the number and value of unvested Prometheus RSUs (which, in the case of each of Prometheus’ non-employee directors, reflects the Prometheus RSUs to be granted to such director as his or her annual award on May 19, 2023) and (iv) the total value of Company Shares subject to Prometheus stock options and unvested RSUs, in each case, held by such director or executive officer as of May 9, 2023. All such amounts actually payable to each of Prometheus’ directors and executive officers will be less any required withholding taxes and without interest. No director or executive officer held any Prometheus Restricted Shares as of May 9, 2023. Except as noted above, these amounts do not attempt to forecast any additional equity award grants, issuances or forfeitures that may occur prior to the Effective Time following the date of this proxy statement. As a result of the foregoing assumptions, which may or may not actually occur or be accurate on the relevant date, the actual amounts to be received by Prometheus’ directors and executive officers may materially differ from the amounts set forth below. This table also does not include any outstanding rights to purchase shares under the ESPP held by our executive officers. For additional information regarding the ESPP, see “The Merger Agreement—Treatment of Equity Awards and the ESPP” beginning on page 79 of this proxy statement.

 

Name		Vested Stock Options (#)				Value of Vested Stock Options ($)(1)				Unvested Stock Options (#)				Value of Unvested Stock Options ($)(1)				Unvested RSUs (#)(2)				Value of Unvested RSUs ($)(3)				Total Value of Outstanding Stock Options and Unvested RSUs ($)(4)
Non-Employee  Directors
Helen C. Adams			17,958				3,439,203				34,651				6,217,578				2,162				432,400				10,089,181
Fred Hassan			26,096				4,769,716				35,458				6,238,838				2,111				422,200				11,430,754
Martin Hendrix, Ph.D.			27,777				4,930,973				32,723				5,674,917				2,059				411,800				11,017,690
James D. Laur			27,777				4,930,973				32,723				5,674,917				2,059				411,800				11,017,690
Joseph C. Papa			41,993				8,140,381				47,715				8,768,730				2,265				453,000				17,362,111
Judith L. Swain, M.D.			16,875				3,261,938				33,625				6,042,153				2,059				411,800				9,715,891
Mary Szela			28,888				5,228,728				31,612				5,516,362				2,059				411,800				11,156,890
Executive Officers
Mark C. McKenna			1,072,535				206,647,761				1,077,443				184,629,465				37,113				7,422,600				398,699,826
Keith W. Marshall, Ph.D.			249,593				47,639,599				346,102				58,407,457				9,811				1,962,200				108,009,256
Mark Stenhouse			199,923				38,154,897				271,115				45,553,298				9,811				1,962,200				85,670,395

 

(1)

For purposes of this table, the value of each Prometheus stock option is equal to the product obtained by multiplying (A) the number of Company Shares underlying the vested or unvested portion, as applicable, of such Prometheus stock option by (B) the excess of (i) $200.00 over (ii) the exercise price of such Prometheus stock option.

(2)

The actual number of Prometheus RSUs to be granted to each director on May 19, 2023 will be determined by dividing the aggregate total dollar value of each director’s annual cash retainer and, if applicable, additional committee retainers ($420,000 for Ms. Adams, $410,000 for Mr. Hassan, $400,000 for Dr. Hendrix, $400,000 for Mr. Laur, $440,000 for Mr. Papa, $400,000 for Dr. Swain, and $400,000 for

 

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Ms. Szela) by the closing price of the Company Shares on May 18, 2023. The amounts in the table represent an estimated number of Prometheus RSUs to be granted pursuant to such awards, determined by dividing the aggregate total dollar value of each director’s annual cash retainer and, if applicable, additional committee retainers (as set forth above) by the closing price of the Company Shares on May 8, 2023 ($194.22).

(3)	For purposes of this table, the value of each Company Share underlying the Prometheus RSU awards is equal to $200.00.

(4)	See page 110 of this proxy statement for additional information regarding shares beneficially owned by directors and executive officers of Prometheus and their affiliates.

Stock Ownership

Certain non-employee directors and executive officers hold Company Shares. For additional information, see the section entitled “Security Ownership of Certain Beneficial Owners and Management” beginning on page 110 of this proxy statement.

Change in Control Severance Benefits in Executive Officer Employment Arrangements

Each of Prometheus’ executive officers has entered into an employment letter agreement with Prometheus, pursuant to which the executive officer is entitled to severance benefits upon a qualifying termination of employment, including after a change in control (which will include the Merger).

Employment Letter Agreement with Mr. McKenna

Prometheus previously entered into an employment letter agreement with Mr. McKenna, which governs the terms of his employment with us as our President and Chief Executive Officer. In the event Prometheus terminates Mr. McKenna without “cause” or he resigns for “good reason” within 24 months following a change in control, subject to his execution and non-revocation of a release of claims and his continued compliance with post-termination obligations, Mr. McKenna will be entitled to (i) continuation of his base salary for 18 months, (ii) his target bonus, payable in a lump sum, (iii) payment of the COBRA premiums for him and his eligible dependents for the 18 months following his termination of service, and (iv) accelerated vesting of any unvested time-based vesting equity awards. In addition, pursuant to his employment letter agreement, Mr. McKenna is also eligible to receive a gross-up payment for any excise taxes payable under Section 280G and 4999 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”) as a result of a change in control transaction (plus an additional amount necessary to put him in the same after-tax position as if no excise tax had been imposed).

For purposes of Mr. McKenna’s employment letter agreement, “cause” means his (i) conviction of a felony, plea of guilty or no contest to a felony, or confession of guilt to a felony; (ii) act or omission which constitutes willful misconduct or gross negligence that results in loss, damage or injury to us or our prospects, including, but not limited to (a) dishonesty or a breach of fiduciary duty to us or our stockholders, or (b) theft, fraud, embezzlement or other illegal conduct; (iii) continued failure, refusal or unwillingness to perform, to the reasonable satisfaction of the Board determined in good faith, any material duty or responsibility assigned to him, which failure of performance continues for a period of more than 30 days after written notice thereof has been provided by our board of directors, setting forth in reasonable detail the nature of such failure of performance; or (iv) the material breach of any of the provisions of his employment letter agreement or any other written agreement between him and us.

For purposes of Mr. McKenna’s employment letter agreement, “good reason” means a resignation that occurs following the occurrence of any of the following without his written consent: (i) a material change in the geographic location at which he must perform his duties (with a relocation outside a 35-mile radius of his principal place of employment prior to such relocation considered material for this purpose); (ii) a material reduction of his base compensation, target bonus and/or benefits; (iii) any action or inaction that constitutes a

material breach of his employment letter agreement by us; or (iv) a material reduction in his authority, duties or responsibilities (including a requirement to report to any person or entity other than the Board, or following a change in control, the board of directors (or similar governing body) of the ultimate parent company of the surviving entity in such change in control that has at least one class of publicly traded securities listed on a national stock exchange).

 

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Employment Letter Agreements with Dr. Marshall and Mr. Stenhouse

Prometheus previously entered into employment letter agreements with each of Dr. Marshall and Mr. Stenhouse, which govern the terms of their employment with us as our Chief Financial Officer and Chief Operating Officer, respectively. In the event Prometheus terminates Dr. Marshall or Mr. Stenhouse without “cause” or they resign for “good reason,” Dr. Marshall and Mr. Stenhouse will be entitled to (i) continuation of their base salary for 12 months, (ii) their target bonus, payable in a lump sum, (iii) payment of the COBRA premiums for them and their eligible dependents for the 12 months following their termination of service, and (iv) accelerated vesting of any unvested time-based vesting equity awards. For purposes of Dr. Marshall and Mr. Stenhouse’s employment letter agreements, the terms “cause” and, for Dr. Marshall, “good reason” generally have the same meanings as given to such terms in Mr. McKenna’s employment letter agreement described above, except that for Dr. Marshall, the parenthetical in clause (iv) of the definition instead reads “(including a requirement to report to any person or entity other than the president and chief executive officer of [Prometheus], or following a change in control, the chief executive officer of the ultimate parent company of the surviving entity in such change in control that has at least one class of publicly traded securities listed on a national stock exchange).” For purposes of Mr. Stenhouse’s employment letter agreement “good reason” means a resignation that occurs following the occurrence of any of the following without his written consent: (i) a material reduction of his base compensation, target bonus and/or benefits; (ii) any action or inaction that constitutes a material breach of his employment letter agreement by us; or (iii) a material reduction in his authority, duties or responsibilities. Dr. Marshall and Mr. Stenhouse’s entitlement to these severance benefits are subject to their execution and non-revocation of a release of claims and their continued compliance with post-termination obligations.

2023 Bonus Awards

Those employees of Prometheus (including executive officers) who are eligible to receive an annual cash bonus under an employment letter agreement or under the Annual Incentive Plan will receive such bonus for the year ending December 31, 2023 at two hundred percent (200%) of the target level of performance as set forth in the applicable employment letter agreements or the Annual Incentive Plan, as applicable; provided, however, that if an employee’s employment is terminated prior to the payment of the 2023 bonus awards under circumstances that would give rise to severance under Prometheus’ Severance Plan, such employee (including executive officers) will be entitled to receive his or her 2023 bonus, prorated for the portion of 2023 that elapsed prior to the date of termination if such termination occurs prior to December 31, 2023. For fiscal year 2023, Mr. McKenna has a target bonus of 80% of his base salary ($650,000) and each of Dr. Marshall and Mr. Stenhouse has a target bonus of 40% of their base salaries ($480,000).

Transaction and Retention Bonus Pool

The Board has approved a cash transaction and retention bonus pool (the “Retention Pool”) in an aggregate amount not to exceed $10.0 million, pursuant to which certain employees of Prometheus (including executive officers) may be allocated awards to recognize and reward extraordinary efforts related to the consummation of the Merger, which will be payable no earlier than the closing of the Merger. As of the date of this proxy statement, no awards under the Retention Pool have been allocated to any Prometheus employees (including any executive officers).

New Merck Arrangements

Certain of Prometheus’ executive officers may continue to provide employment or other services to Merck after the Effective Time and may enter into new agreements, arrangements or understandings with Merck to set forth the terms and compensation of such post-Effective Time service. As of the date of this proxy statement, no such agreements, arrangements or understandings with Merck exist.

280G Mitigation Actions

If the Effective Time is not reasonably anticipated to occur by December 31, 2023, under the Merger Agreement, Prometheus may, in consultation with Merck, implement strategies before the Effective Time to

 

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mitigate the possible impact of Sections 280G and 4999 of the Code. Pursuant to his employment letter agreement, Mr. McKenna is entitled to receive a gross-up payment equal to any excise taxes imposed under Sections 280G and 4999 of the Code (plus any taxes resulting from such additional payment) as a result of any compensatory payments made to him in connection with a change in control transaction (including the Merger).

Indemnification of Directors and Officers; Insurance

Directors and officers of Prometheus are also entitled to indemnification and covered by insurance in certain circumstances. For a detailed description of these requirements, please see “The Merger Agreement—Other Covenants and Agreements—Indemnification of Directors and Officers; Insurance” beginning on page 95 of this proxy statement.

Financing of the Merger

The Merger Agreement is not conditioned upon receipt of financing by Merck. We anticipate that the total amount of funds necessary to consummate the Merger and the related transactions, not including fees and expenses, will be approximately $10.8 billion, including the estimated funds needed to (i) pay our stockholders the Merger Consideration due to them under the Merger Agreement and (ii) make payments in respect of outstanding equity awards of Prometheus pursuant to the Merger Agreement.

We understand that Merck expects to fund amounts needed for the acquisition of Prometheus under the Merger Agreement through the use of cash on hand, commercial paper or existing or new credit facilities. Merck and Merger Sub have represented in the Merger Agreement that they have available or, with respect to Merger Sub, will have available as of the Effective Time, sufficient funds for the satisfaction of all of their obligations under the Merger Agreement and to pay all related fees and expenses required to be paid by Merck or Merger Sub pursuant to the terms of the Merger Agreement.

Closing and Effective Time of the Merger

The closing of the Merger will take place by electronic exchange of signatures and documents at 9:00 a.m., New York time, on a date to be specified by the parties, which shall be not later than the second business day after the satisfaction (or waiver, if permitted by applicable law) of the last to be satisfied of the conditions set forth in the Merger Agreement (other than those conditions that, by their nature, are to be satisfied at the closing of the Merger, but subject to the satisfaction (or waiver, if permitted by applicable law) of those conditions), and in any event no later than one business day thereafter, or at such other location, date and time as Prometheus and Merck shall mutually agree upon in writing.

On the Closing Date, Merck, Prometheus and Merger Sub will cause the Merger to be consummated under the DGCL by filing a certificate of merger in such form as required by, and executed in accordance with, the DGCL with the Secretary of State of the State of Delaware and will take such further actions as may be required to make the Merger effective on the Closing Date. The Merger will become effective at the time and day of the filing of such certificate of merger with the Secretary of State of the State of Delaware, or such later time and day as may be agreed in writing by Prometheus and Merck and specified in the certificate of merger).

Appraisal Rights

If the Merger is consummated, persons who do not wish to accept the Merger Consideration are entitled to seek appraisal of their Company Shares under Section 262 and, if all procedures described in Section 262 are strictly complied with, to receive payment in cash for the fair value of their Company Shares exclusive of any element of value arising from the accomplishment or expectation of the Merger, as determined by the Delaware Court of Chancery, together with interest, if any, to be paid upon the amount determined to be the fair value. The “fair value” of your Company Shares as determined by the Delaware Court of Chancery may be more or less

 

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than, or the same as, the Merger Consideration that you are otherwise entitled to receive under the Merger Agreement. These rights are known as “appraisal rights”. This proxy statement serves as a notice of such appraisal rights pursuant to Section 262.

Persons who exercise appraisal rights under Section 262 will not receive the Merger Consideration they would otherwise be entitled to receive pursuant to the Merger Agreement. They will receive an amount determined to be the “fair value” of their Company Shares following petition to, and an appraisal by, the Delaware Court of Chancery. Persons considering seeking appraisal should recognize that the fair value of their Company Shares determined under Section 262 could be more than, the same as or less than the Merger Consideration they would otherwise be entitled to receive pursuant to the Merger Agreement. Strict compliance with the procedures set forth in Section 262 is required. Failure to comply strictly with all of the procedures set forth in Section 262 may result in the withdrawal, loss or waiver of appraisal rights. Consequently, and in view of the complexity of the provisions of Section 262, persons wishing to exercise appraisal rights are urged to consult their legal and financial advisors before attempting to exercise such rights.

A copy of Section 262 may be accessed without subscription or cost at the following publicly available website: https://delcode.delaware.gov/title8/c001/sc09/index.html#262. The following summary is not a complete statement of the law relating to appraisal rights and is qualified in its entirety by reference to Section 262 and any amendments thereto after the date of this proxy statement. Any person who desires to exercise his, her or its appraisal rights should review carefully Section 262 and is urged to consult his, her or its legal advisor before electing or attempting to exercise such rights. The following summary does not constitute legal or other advice, nor does it constitute a recommendation that persons seek to exercise their appraisal rights under Section 262. A person who loses his, her or its appraisal rights will be entitled to receive the Merger Consideration under the Merger Agreement.

A holder of record of Company Shares and a beneficial owner who (i) continuously holds or beneficially owns, as applicable, such Company Shares through the Effective Time, (ii) has not consented to the Merger in writing or otherwise voted in favor of the Merger or otherwise withdrawn, lost or waived appraisal rights, (iii) strictly complies with the procedures under Section 262, (iv) does not thereafter withdraw his, her or its demand for appraisal of such Company Shares and (v) in the case of a beneficial owner, a person who (A) reasonably identifies in his, her or its demand the holder of record of the Company Shares for which the demand is made, (B) provides documentary evidence of such beneficial owner’s beneficial ownership and a statement that such documentary evidence is a true and correct copy of what it purports to be and (C) provides an address at which such beneficial owner consents to receive notices given by Prometheus and to be set forth on the Chancery List (as defined below), will be entitled to receive the fair value of his, her or its Company Shares exclusive of any element of value arising from the accomplishment or expectation of the Merger, as determined by the Delaware Court of Chancery, together with interest, if any, to be paid upon the amount determined to be the fair value.

Section 262 requires that where a proposed merger is to be submitted for approval at a meeting of stockholders, the corporation must notify stockholders that appraisal rights will be available not less than twenty (20) days before the meeting to vote on the merger. Such notice must include either a copy of Section 262 or information directing the stockholders to a publicly available electronic resource at which Section 262 may be accessed without subscription or cost. This proxy statement constitutes Prometheus’ notice to our stockholders that appraisal rights are available in connection with the Merger, in compliance with the requirements of Section 262. If you wish to consider exercising your appraisal rights, you should carefully review the text of Section 262, which may be accessed without subscription or cost at the following publicly available website: https://delcode.delaware.gov/title8/c001/sc09/index.html#262. Failure to comply timely and properly with the requirements of Section 262 will result in the loss of your appraisal rights under the DGCL.

If you elect to demand appraisal of your Company Shares, you must satisfy each of the following conditions: you must deliver to Prometheus a written demand for appraisal of your Company Shares prior to the

 

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Special Meeting, which must (i) reasonably inform us of the identity of the holder of record of Company Shares who intends to demand appraisal of his, her or its Company Shares (and, for beneficial owners only, such demand is accompanied by documentary evidence of such beneficial owner’s beneficial ownership and a statement that such documentary evidence is a true and correct copy of what it purports to be, and provides an address at which such beneficial owner consents to receive notices given by Prometheus and to be set forth on the Chancery List) and (ii) that you intend to demand the appraisal of your shares. In addition, as described above, you must not vote or submit a proxy in favor of the proposal to adopt the Merger Agreement; you must hold or beneficially own, as applicable, your Company Shares continuously through the effective date; and you must comply with the other applicable requirements of Section 262.

A Prometheus stockholder who elects to exercise appraisal rights must mail or deliver his, her or its written demand for appraisal to the following address:

Prometheus Biosciences, Inc.

3050 Science Park Road

San Diego, CA 92121

Attention: Corporate Secretary

Within ten (10) days after the Effective Time, the surviving corporation must give written notice that the Merger has become effective to each stockholder of any class or series of stock of Prometheus who is entitled to appraisal rights that the Merger was approved and that appraisal rights are available for any or all shares of such class or series of stock.

Within one hundred twenty (120) days after the Effective Time, but not thereafter, the surviving corporation and any person who has properly and timely demanded appraisal and otherwise complied with Section 262 may commence an appraisal proceeding by filing a petition in the Delaware Court of Chancery, with a copy served on the surviving corporation in the case of a petition filed by a person, demanding a determination of the fair value of the Company Shares held by all persons that have demanded appraisal. There is no present intent on the part of Prometheus or the surviving corporation to file an appraisal petition and persons seeking to exercise appraisal rights should assume that Prometheus and the surviving corporation will not file such a petition or initiate any negotiations with respect to the fair value of Company Shares. Accordingly, persons who desire to have their Company Shares appraised should initiate any petitions necessary for the perfection of their appraisal rights within the time periods and in the manner prescribed in Section 262. If, within one hundred twenty (120) days after the Effective Time, no petition has been filed as provided above, all rights to appraisal will cease and any person that previously demanded appraisal will become entitled only to the Merger Consideration under the Merger Agreement.

At any time within sixty (60) days after the Effective Time, any person who has not commenced an appraisal proceeding or joined a proceeding as a named party may withdraw the demand and accept the Merger Consideration specified by the Merger Agreement for that person’s Company Shares by delivering to the surviving corporation a written withdrawal of the demand for appraisal. However, any such attempt to withdraw the demand made more than sixty (60) days after the Effective Time will require written approval of the surviving corporation. Unless the demand is properly withdrawn by the person within sixty (60) days after the effective date, no appraisal proceeding in the Delaware Court of Chancery will be dismissed as to any person without the approval of the Delaware Court of Chancery, with such approval conditioned upon such terms as the Delaware Court of Chancery deems just. If the surviving corporation does not approve a request to withdraw a demand for appraisal when that approval is required, or if the Delaware Court of Chancery does not approve the dismissal of an appraisal proceeding, the person will be entitled to receive only the fair value of such person’s Company Shares determined by the Delaware Court of Chancery in any such appraisal proceeding, which value could be less than, equal to or more than the Merger Consideration offered pursuant to the Merger Agreement.

In addition, within one hundred twenty (120) days after the Effective Time, any person who has theretofore complied with the applicable provisions of Section 262 will be entitled, upon written request, to receive from the

 

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surviving corporation a statement setting forth the aggregate number of Company Shares not consented in writing or otherwise voted in favor of the Merger and with respect to which demands for appraisal were received by the surviving corporation and the aggregate number of holders of such Company Shares. Such statement must be given within ten (10) days after the written request therefor has been received by the surviving corporation or within ten (10) days after the expiration of the period for the delivery of demands as described above, whichever is later.

Upon the filing of a petition by a person, service of a copy of such petition shall be made upon the surviving corporation. The surviving corporation shall be required to, within twenty (20) days after such service, file in the office of the Register in Chancery in which the petition was filed a duly verified list containing the names and addresses of all persons who have demanded appraisal of their Company Shares and with whom the surviving corporation has not reached agreements as to the value of such Company Shares (the “Chancery List”). The Register in Chancery, if so ordered by the Delaware Court of Chancery, shall give notice of the time and place fixed for the hearing of such petition by registered or certified mail to the surviving corporation and to all such persons set forth on the Chancery List.

If a petition for an appraisal is timely filed by a person, at the hearing on such petition, the Delaware Court of Chancery will determine which persons have complied with Section 262 and have become entitled to appraisal rights provided thereby. The Delaware Court of Chancery may require the persons who have demanded an appraisal of their Company Shares and who hold Company Shares represented by certificates to submit their certificates of Company Shares to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any person fails to comply with such direction, the Delaware Court of Chancery may dismiss the proceedings as to such person.

Upon application by the surviving corporation or any person entitled to participate in the appraisal proceedings, the Delaware Court of Chancery may, in its discretion, proceed to trial upon the appraisal prior to the final determination of the persons entitled to appraisal. Any person whose name appears on the Chancery List and may participate fully in all proceedings until it is finally determined that such person is not entitled to appraisal rights under Section 262.

Where proceedings are not dismissed, the appraisal proceeding shall be conducted in accordance with the rules of the Delaware Court of Chancery, including any rules specifically governing appraisal proceedings. Through such proceedings the Delaware Court of Chancery shall determine the fair value of Company Shares taking into account all relevant factors, exclusive of any element of value arising from the accomplishment or expectation of the Merger, together with interest, if any, to be paid upon the amount determined to be the fair value. Unless the Delaware Court of Chancery, in its discretion, determines otherwise for good cause shown, interest on an appraisal award will accrue and compound quarterly from the Effective Time through the date the judgment is paid at five percent (5%) over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period between the Effective Time and the date of payment of the judgment. At any time before the entry of judgment in the proceedings, the surviving corporation may pay to each person entitled to appraisal an amount in cash, in which case interest shall accrue after such payment only on the sum of (x) the difference, if any, between the amount so paid and the fair value of the Company Shares as determined by the Delaware Court of Chancery, and (y) interest theretofore accrued, unless paid at that time.

When the fair value of the Company Shares is determined, the Delaware Court of Chancery will direct the payment of such value, with interest thereon, if any, to the persons entitled to receive the same.

Although Prometheus believes that the Merger Consideration is fair, no representation is made as to the outcome of the appraisal of fair value as determined by the Delaware Court of Chancery and persons should recognize that such an appraisal could result in a determination of a value higher or lower than, or the same as, the Merger Consideration. Moreover, the surviving corporation does not anticipate offering more than the Merger Consideration to any person exercising appraisal rights and reserves the right to assert, in any appraisal

 

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proceeding, that, for purposes of Section 262, the “fair value” of the relevant Company Shares is less than the Merger Consideration.

In determining “fair value”, the Delaware Court of Chancery is required to take into account all relevant factors. In Weinberger v. UOP, Inc., the Delaware Supreme Court discussed the factors that could be considered in determining fair value in an appraisal proceeding, stating that “proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court” should be considered and that “[f]air price obviously requires consideration of all relevant factors involving the value of a company.” The Delaware Supreme Court has stated that in making this determination of fair value, the court must consider market value, asset value, dividends, earnings prospects, the nature of the enterprise and any other facts which were known or could be ascertained as of the date of the Merger which throw any light on future prospects of the merged corporation. The Delaware Supreme Court has indicated that transaction price is one of the relevant factors the Delaware Court of Chancery may consider in determining “fair value” and that absent deficiencies in the sale process the transaction price should be given “considerable weight.” Section 262 provides that fair value is to be “exclusive of any element of value arising from the accomplishment or expectation of the Merger.” In Cede & Co. v. Technicolor, Inc., the Delaware Supreme Court stated that such exclusion is a “narrow exclusion [that] does not encompass known elements of value,” but which rather applies only to the speculative elements of value arising from such accomplishment or expectation. In Weinberger, the Delaware Supreme Court construed Section 262 to mean that “elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the Merger and not the product of speculation, may be considered.”

The cost of the appraisal proceeding may be determined by the Delaware Court of Chancery and taxed upon the parties as the Delaware Court of Chancery deems equitable in the circumstances. However, costs do not include attorneys’ and expert witness fees. Each person is responsible for his, her or its attorneys’ and expert witness fees, although, upon application of a person whose name appears on the Chancery List who participated in the proceeding and incurred expenses in connection therewith, the Delaware Court of Chancery may order that all or a portion of such expenses, including, without limitation, reasonable attorneys’ and expert witness fees, be charged pro rata against the value of all Company Shares entitled to appraisal not dismissed pursuant to Section 262(k) of the DGCL or subject to such an award pursuant to a reservation of jurisdiction under Section 262(k) of the DGCL. Determinations by the Delaware Court of Chancery are subject to appellate review by the Delaware Supreme Court.

Any person who has duly demanded appraisal in compliance with Section 262 will not be entitled to vote for any purpose any Company Shares subject to such demand or to receive payment of dividends or other distributions on such Company Shares, except for dividends or distributions payable to Prometheus stockholders of record at a date prior to the Effective Time.

To the extent there are any inconsistencies between the foregoing summary, on the one hand, and Section 262, on the other hand, Section 262 will govern.

Failure to comply strictly with all of the procedures set forth in Section 262 will result in the loss of a stockholder’s statutory appraisal rights.

Material U.S. Federal Income Tax Consequences of the Merger to Holders of Company Shares

The following discussion is a summary of certain material U.S. federal income tax consequences of the Merger that may be relevant to holders of Company Shares whose Company Shares are converted into the right to receive cash pursuant to the Merger. This discussion is based upon the Code, Treasury Regulations promulgated under the Code, court decisions, published positions of the Internal Revenue Service (the “IRS”), and other applicable authorities, all as in effect on the date of this proxy statement and all of which are subject to change or differing interpretations at any time, possibly with retroactive effect. This discussion is limited to

 

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holders that hold their Company Shares as “capital assets” within the meaning of Section 1221 of the Code (generally, property held for investment purposes). This summary of material U.S. federal income tax consequences is not a complete description of all potential U.S. federal income tax consequences of the Merger. This summary does not describe any of the tax consequences arising under the laws of any state, local or non-U.S. tax jurisdiction and does not consider any aspects of U.S. federal tax law other than income taxation (e.g., state, gift or alternative minimum tax, the Medicare net investment income surtax, or any withholding considerations under the Foreign Account Tax Compliance Act of 2010 (including regulations issued thereunder and intergovernmental agreements entered into pursuant thereto or in connection therewith)). In addition, this summary does not address the U.S. federal income tax consequences to holders of Company Shares that exercise appraisal rights under the DGCL. For purposes of this discussion, a “holder” means either a U.S. Holder or a Non-U.S. Holder or both, as the context may require.

This discussion is for general information only and does not address all of the U.S. federal income tax considerations that may be relevant to holders in light of their particular facts and circumstances, including, but not limited to:

 

•

holders that may be subject to special treatment under U.S. federal income tax laws, such as: financial institutions, tax-exempt organizations, governmental organizations, S corporations, partnerships or any other entities or arrangements treated as pass-through entities or partnerships for U.S. federal income tax purposes or any investor therein, insurance companies, mutual funds, brokers or dealers in stocks, securities, commodities or currencies, traders in securities that elect to use the mark-to-market method of accounting for their securities, regulated investment companies, real estate investment trusts, “controlled foreign corporations,” “passive foreign investment companies” or certain former citizens or long-term residents of the United States;

 

•

holders holding their Company Shares as part of a hedging, straddle or other risk reducing transaction or as part of a conversion transaction or other integrated investment;

 

•

holders deemed to sell their Company Shares under the constructive sale provisions of the Code;

 

•

holders that received their Company Shares in compensatory transactions;

 

•

holders that hold their Company Shares through individual retirement or other tax-deferred accounts;

 

•

holders that own an equity interest, actually or constructively, in Merck or the surviving corporation;

 

•

U.S. Holders whose “functional currency” is not the U.S. dollar;

 

•

holders that are required to report income no later than when such income is reported in an “applicable financial statement”; or

 

•

holders that own or have owned (directly, indirectly or constructively) 5% or more of the Company Shares (by vote or value).

If a partnership (including an entity or arrangement classified as a partnership for U.S. federal income tax purposes) is a beneficial owner of Company Shares, the U.S. federal income tax treatment of a partner in such partnership will generally depend upon the status of the partner and the activities of the partnership. Partnerships holding Company Shares and partners therein should consult their tax advisors regarding the particular tax consequences to them of the Merger.

We have not sought, and do not intend to seek, any ruling from the IRS with respect to the statements made and the conclusions reached in the following summary. No assurance can be given that the IRS will agree with the views expressed in this summary, or that a court will not sustain any challenge by the IRS in the event of litigation.

THIS DISCUSSION OF MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES IS PROVIDED FOR GENERAL INFORMATION ONLY AND DOES NOT CONSTITUTE LEGAL OR

 

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TAX ADVICE TO ANY HOLDER. A HOLDER SHOULD CONSULT ITS TAX ADVISORS CONCERNING THE U.S. FEDERAL INCOME TAX CONSEQUENCES RELATING TO THE MERGER IN LIGHT OF ITS PARTICULAR CIRCUMSTANCES AND ANY CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR NON-U.S. TAXING JURISDICTION OR OTHER TAX LAWS.

U.S. Holders

For purposes of this proxy statement, a “U.S. Holder” is a beneficial owner of Company Shares who or that is for U.S. federal income tax purposes:

 

•

An individual who is a citizen or resident of the United States;

 

•

A corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States or any state thereof or the District of Columbia;

 

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An estate, the income of which is subject to U.S. federal income taxation regardless of its source; or

 

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A trust (i) that is subject to the primary supervision of a court within the United States and the control of one or more United States persons as defined in Section 7701(a)(30) of the Code or (ii) that has a valid election in effect under applicable Treasury regulations to be treated as a United States person for U.S. federal income tax purposes.

The receipt of cash by a U.S. Holder in exchange for Company Shares pursuant to the Merger will be a taxable transaction for U.S. federal income tax purposes. In general, such U.S. Holder will recognize gain or loss equal to the difference, if any, between the amount of cash received and the U.S. Holder’s adjusted tax basis in the Company Shares surrendered pursuant to the Merger. A U.S. Holder’s adjusted tax basis generally will equal the amount that such U.S. Holder paid for the Company Shares. Any such gain or loss generally will be capital gain or loss and will be long-term capital gain or loss if such U.S. Holder’s holding period in such Company Shares is more than one year at the time of the consummation of the Merger. A reduced tax rate on capital gains generally will apply to long-term capital gains of non-corporate U.S. Holders, including individuals. There are limitations on the deductibility of capital losses. If a U.S. Holder acquired different blocks of Company Shares at different times or different prices, such U.S. Holder must determine its adjusted tax basis and holding period separately with respect to each block of Company Shares.

Payments made to a U.S. Holder in exchange for Company Shares pursuant to the Merger may be subject to information reporting to the IRS and backup withholding at a rate of 24%. To avoid backup withholding on such payments, U.S. Holders that do not otherwise establish an exemption should complete and return to the exchange agent a properly executed IRS Form W-9 included in the letter of transmittal certifying that such holder is a United States person for U.S. federal income tax purposes, that the taxpayer identification number provided is correct and that such holder is not subject to backup withholding. Certain types of U.S. Holders (including, with respect to certain types of payments, corporations) generally are not subject to backup withholding or information reporting rules.

Backup withholding is not an additional tax. Any amounts withheld from cash payments to a U.S. Holder pursuant to the Merger under the backup withholding rules generally will be allowed as a refund or a credit against such U.S. Holder’s U.S. federal income tax liability, if any, provided the required information is timely furnished to the IRS. U.S. Holders should consult their tax advisors regarding their qualification for an exemption from backup withholding and the procedures for obtaining such an exemption.

Non-U.S. Holders

For purposes of this proxy statement, the term “Non-U.S. Holder” means a beneficial owner of Company Shares that is neither a U.S. Holder nor an entity or arrangement treated as a partnership for U.S. federal income tax purposes.

 

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Non-U.S. Holders should consult their tax advisors to determine the U.S. federal, state, local, non-U.S. and other tax consequences that may be relevant to them in light of their particular circumstances.

Any gain realized by a Non-U.S. Holder pursuant to the Merger generally will not be subject to U.S. federal income tax unless:

 

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the gain is effectively connected with a trade or business of such Non-U.S. Holder in the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment maintained by such Non-U.S. Holder in the United States), in which case such gain generally will be subject to U.S. federal income tax at rates generally applicable to U.S. persons, and, if the Non-U.S. Holder is a corporation, such gain may also be subject to an additional branch profits tax at a rate of 30% (or a lower rate specified under an applicable tax treaty);

 

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such Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of the disposition, and certain other specified conditions are met, in which case such gain will be subject to U.S. federal income tax at a rate of 30% (or a lower rate specified under an applicable tax treaty), which may be offset by U.S.-source capital losses of such Non-U.S. Holder recognized in the same taxable year (if any) provided the Non-U.S. Holder timely files U.S. federal income tax returns with respect to such losses; or

 

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Company Shares held by such Non-U.S. Holder constitute a United States real property interest (a “USRPI”) by reason of Prometheus’ status as a “United States real property holding corporation” within the meaning of Section 897(c)(2) of the Code (a “USRPHC”), at any time during the shorter of the five-year period ending on the date of the Effective Time or the period that the Non-U.S. Holder held the applicable Company Shares.

With respect to the third bullet point above, Prometheus believes it is not a USRPHC. Because the determination of whether Prometheus is a USRPHC depends, however, on the fair market value of its USRPIs relative to the fair market value of its non-U.S. real property interests and other business assets, there can be no assurance Prometheus is not a USRPHC. Even if Prometheus is a USRPHC, gain arising from the sale or other taxable disposition of Prometheus common stock by a Non-U.S. Holder will not be subject to U.S. federal income tax if Prometheus common stock is “regularly traded,” as defined by applicable Treasury Regulations, on an established securities market and such Non-U.S. Holder owned, actually and constructively, 5% or less of Prometheus common stock throughout the shorter of the five-year period ending on the date of the sale or other taxable disposition or the Non-U.S. Holder’s holding period.

Non-U.S. Holders should consult their tax advisors regarding potentially applicable income tax treaties that may provide for different rules.

Payments made to Non-U.S. Holders in exchange for Company Shares pursuant to the Merger may be subject to information reporting to the IRS and backup withholding at a rate of 24%. Non-U.S. Holders generally can avoid information reporting and backup withholding by providing the exchange agent with the applicable and properly completed and executed IRS Form W-8 certifying the holder’s non-U.S. status or by otherwise establishing an exemption. Copies of information returns that are filed with the IRS may be made available under an applicable tax treaty or information exchange agreement to the tax authorities of the country in which the Non-U.S. Holder resides or is established. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules generally will be allowed as a refund or a credit against a Non-U.S. Holder’s U.S. federal income tax liability, if any, provided the required information is timely furnished to the IRS.

Regulatory Approvals Required for the Merger

HSR Act and U.S. Antitrust Matters

Under the HSR Act, and the rules promulgated thereunder by the Federal Trade Commission (the “FTC”), the Merger cannot be consummated until Prometheus and Merck each file a notification and report form with the

 

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FTC and the Antitrust Division of the U.S. Department of Justice (the “DOJ”) under the HSR Act and the applicable waiting period thereunder has expired or been terminated. A transaction notifiable under the HSR Act may not be completed until the expiration of a 30-calendar-day waiting period following the parties’ filing of their respective HSR Act notification forms or the early termination of that waiting period. Prometheus and Merck filed their respective HSR Act notifications on April 21, 2023. The waiting period under the HSR Act is set to expire at 11:59 p.m., Eastern Time, on May 22, 2023. The DOJ or the FTC may extend the 30 day waiting period by issuing a Request for Additional Information and documentary materials (a “Second Request”). If either agency issues a Second Request, the waiting period will be extended until 30 days after the parties substantially comply with the request.

At any time before or after consummation of the Merger, notwithstanding the expiration or termination of the waiting period under the HSR Act, the Antitrust Division of the DOJ or the FTC could take such action under applicable antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the consummation of the Merger, seeking divestiture of substantial assets of the parties or requiring the parties to license, or hold separate, assets or terminate existing relationships and contractual rights. At any time before or after the consummation of the Merger, and notwithstanding the expiration or termination of the waiting period under the HSR Act, any state could take such action under its applicable antitrust laws as it deems necessary or desirable in the public interest. Such action could include seeking to enjoin the consummation of the Merger or seeking divestiture of substantial assets of the parties. Private parties may also seek to take legal action under applicable antitrust laws under certain circumstances.

General

Subject to the terms of the Merger Agreement, Prometheus, Merck and Merger Sub have agreed to take any and all actions reasonably necessary to cause the expiration or termination of the applicable waiting periods under the HSR Act and any foreign antitrust laws as soon as practicable (and in any event by the date that is at least five (5) business days before the Effective Time), and to avoid any impediment to the consummation of the Merger under any antitrust laws, including (1) proposing, negotiating, committing to and effecting, by consent decree, hold separate order or otherwise, conduct of business restrictions, a sale or disposition of such assets or businesses as are required to be divested or a license or grant of commercialization rights to businesses, product lines, fields of use, divisions, business arrangements, contracts, assets or interests therein of Prometheus, (2) amending any venture or other arrangement of Prometheus and (3) cooperating with each other and using their respective reasonable best efforts to oppose, contest and resist fully and vigorously any legal proceeding, including by defending through litigation, pursing vigorously all available avenues of administrative and judicial appeal and seeking to have vacated, lifted, reversed or overturned any order that may result from such legal proceedings, whether temporary, preliminary or permanent, that is in effect and that prohibits, prevents or restricts consummation of the transactions contemplated by the Merger Agreement, in each case, as may be required in order to enable the consummation of the transactions contemplated hereby, including the Merger, to occur as soon as reasonably practicable (and in any event no later than the Termination Date) and to otherwise avoid the entry of, or to effect the dissolution of, any preliminary or permanent injunction which would otherwise have the effect of preventing the consummation of the transactions contemplated hereby, including the Merger; provided, however, that (x) Merck and its affiliates shall not be obligated to take the foregoing actions contemplated by this sentence (A) with respect to Merck, its affiliates or their respective assets, categories of assets, businesses, relationships, contractual rights, obligations or arrangements, and any intellectual property rights thereto or embodied therein or any venture or other arrangement; nor (B) with respect to Prometheus, to the extent such actions would have any more than an immaterial effect on the business, operations or financial condition of Prometheus and (y) Prometheus may not take any of the foregoing actions without Merck’s prior written consent. Further, and for the avoidance of doubt, without the written consent of Prometheus, Merck will not extend any waiting period under the HSR Act (by pull and refile, or otherwise) or enter into any agreement with the FTC, the Antitrust Division of the DOJ or any other governmental authority not to consummate the transactions contemplated by the Merger Agreement without the written consent of Prometheus, which shall not be unreasonably withheld.

 

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Other than the filings required under the HSR Act as described above, we currently do not expect that any clearance, approval or consent would be required under any other applicable antitrust law in connection with the Merger.

Litigation Related to the Merger

On May 9, 2023, two lawsuits were filed in the United States District Court for the Southern District of New York against Prometheus and the members of the Board: O’Dell v. Prometheus Biosciences, Inc., Case No. 23-cv-3862, and Wang v. Prometheus Biosciences, Inc., Case No. 23-cv-03875. The lawsuits allege that the preliminary proxy statement filed by Prometheus on April 28, 2023 with the SEC in connection with the Merger omits material information with respect to the transactions contemplated by the Merger Agreement, rendering it false and misleading in violation of Sections 14(a) and 20(a) of the Exchange Act. The plaintiffs seek, among other things, injunctive relief, rescission, declaratory relief and unspecified monetary damages. Prometheus believes these lawsuits are wholly without merit. Additional lawsuits regarding the Merger may be filed.

Delisting and Deregistration of Company Shares

If the Merger is consummated, following the Effective Time, the Company Shares will cease trading on Nasdaq and will be deregistered under the Exchange Act. As such, we would no longer file periodic reports with the SEC.

 

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