Aradigm Corporation – Specialty Pharma Files Chapter 11 as Regulatory Approvals Languish, Plans Sale as Major Stakeholder Grifols Contemplates Further Life Support

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February 15, 2019 – Aradigm Corporation (OTCQB: ARDM, “Aradigm” or the “Company”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Northern District of California, lead case number 19-40363. The Company, a specialty pharmaceutical company focused on drugs for the prevention and treatment of severe respiratory diseases, is represented by Bennett G. Young of Jeffer Mangels Butler & Mitchell LLP. 

The Company’s petition notes between 1 and 50 creditors, estimated assets of $3.8mn and estimated liabilities of $27.2mn. Documents filed with the Court list the Company’s three largest unsecured creditors as (i) Hayward Point Eden I Ltd Partnership ($3.5mn lease). (ii) Exelead, Inc. ($846k trade debt) and (iii) Nancy Pecota ($559k former CEO).

In a press release announcing the filing, Aradigm advised, “On February 11, 2019, Aradigm determined that without confirmation of funding from their primary investor and partner [Spanish pharma Grifols, see more below], the Company would not have enough funds to meet all of their future financial obligations. Therefore, the Company had no alternative but to consider filing for bankruptcy protection in order to preserve its going concern value….Aradigm intends to commence a process to sell substantially all of its assets to an interested party, subject to Bankruptcy Court approval. The proceeds from the sale would be distributed to satisfy the claims of its creditors, also subject to Court approval. Remaining assets, if any, would then be distributed to the Company’s stockholders.” 

About the Company
Aradigm is an emerging specialty pharmaceutical company focused on the development and commercialization of drugs for the prevention and treatment of severe respiratory diseases. Aradigm is currently in Phase 3 development of Apulmiq (an investigational proprietary formulation of ciprofloxacin for inhalation) for the treatment of patients with NCFBE and chronic lung infection with P. aeruginosa. In Europe, where Apulmiq is labelled Linhaliq, Aradigm is seeking regulatory approval from the European Medicines Agency (“EMA”). According to Aradigm, its inhaled ciprofloxacin formulations are also product candidates for treatment of patients with cystic fibrosis and non-tuberculous mycobacteria, and for the prevention and treatment of high threat and bioterrorism infections, such as inhaled tularemia, pneumonic plague, melioidosis, Q fever and inhaled anthrax. 

Events Leading to the Chapter 11 Filing
Since the beginning of 2018, the Company has had a number of setbacks relating to the approval of its Apulmiq product in both the United States and Europe. Aradigm has spent a considerable amount of time and money, and that of its principal equity holder and creditor, Spanish pharmaceutical Grifols, S.A. (“Grifols”), looking to develop and commercialize respiratory products. Recent events appear to be the last gasp for a company that has long been on life support. A registration statement filed with the SEC in November 2018 (the S-1”) in what appeared to be a rather optimistic attempt at raising equity capital noted, “We have incurred significant recurring operating losses and negative cash flows from its operations and, as of September 30, 2018, had an accumulated deficit of $467.4 million, a total shareholders’ deficit of $23.5 million and working capital of $0.7 million.” Much of this pain has been borne by Grifols which has long held out hope that its investment in Aradigm would eventually bear fruit. Grifols hold’s 48% of the Company’s equity and $20mn of the Company’s $23mn 2021 notes (issued 2016). Grifols has also paid Aradigm $65mn further to a license agreement, with the Company disclosing in the S-1, “We have utilized the full amount of the $65 million of Grifols-funded budget provided under the License Agreement and will not be recognizing any future revenue related to the $65 million Grifols-funded budget.” 

In October 2018, with the Company still holding out hope of a regulatory approval for Aradigm in the U.S. and/or Europe. Grifols signed on for another $2mn of the Company’s notes with the possibility of a further $2mn to be purchased in December 2018. It may be the failure of Grifols to follow through on that commitment, and/or the expiration of headroom under the license agreement, that is referred to in the Company’s press release when it referenced uncertain continued funding. What is certain is that Grifol controls oxygen flow to Aradigm; whether Grifols is looking to cut off oxygen to a terminally ill company or strategically use the Company’s bankruptcy to fully acquire any upside in Aradigm’s drugs and IP, remains to be seen.

Struggles for Regulatory Approval
In January 2018, the Company announced that it has failed to receive FDA approval for Apulmiq, stating in a press release, “The CRL [Complete Response Letter] states that the FDA has determined that it cannot approve the NDA [New Drug Application] in its present form and provides specific reasons for this action along with recommendations needed for resubmission; the areas of concern include clinical data, human factors validation study and product quality.” Further to that rejection, the Company soon reported to the SEC the resignation of key personnel, with a Company 8-K noting, “Effective February 11, 2018, each of Igor Gonda, President and Chief Executive Officer; Juergen Froehlich, Chief Medical Officer; and Nancy Pecota, Vice President, Finance, Chief Financial Officer and Corporate Secretary resigned all offices and positions held by him or her with the Company.”

In December 2018, the Company announced that it had, as required before the FDA would further consider Apulmiq, completed a third-party evaluation (“TPE”) of the Phase 3 clinical trial results for Apulmiq; with the Company further suggesting that the results of the TPE were encouraging. In January 2019, the Company provided additional detail as to the TPE and announced that it had scheduled a meeting with the FDA for January 25, 2019 (the Company, which has not commented on its view of that meeting, is awaiting the FDA’s release of formal minutes at the end of February). On January 30, 2019, the Company updated the market on where its application to the EMA stood for Linhaliq, noting that on the current timetable a final response from the EMA was unlikely prior to the end of July2019.

In its press release announcing the Chapter 11 filing, the Company noted its continued optimism as to ultimately receiving approval for Apulmiq/Linhaliq, stating “Aradigm remains confident in the efficacy, safety and quality of Apulmiq (US)/Linhaliq (EMA). We are committed to continue working toward the approval of Apulmiq (US)/Linhaliq (EMA) for Non-Cystic Fibrosis Bronchiectasis (NCFBE) patients who have chronic infection with P. aeruginosa, resulting in severe disease with frequent exacerbations, high morbidity and mortality, and no available treatment options.”

Aradigm now has two timetables to worry about, however; that of regulators and that of the bankruptcy Court, which will further take matters out of the hands of the Debtor and place them in those of Grifols. 

A big question that remains is as to the intentions of Grifols, which presumably will have the opportunity to credit bid for Aradigm and may very well want to do so while regulatory approvals remain uncertain and competing bidders are held in check by that uncertainty. If and when Aradigm emerges from bankruptcy and breathes on its own, it may very well be in the hands of Grifols.

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