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September 3, 2019 – Further to the Court's bidding procedures order [Docket No. 210], the Debtors notified the Court that, absent any further qualified bids, BTcP Pharma, LLC ("BTcP" or the "Buyer") had been designated as the successful bidder in respect of the Debtors' sale of their Subsys® business (ie "the business of developing, manufacturing and marketing the Subsys® (fentanyl sublingual spray) product" [Docket No. 546]. Consideration for the sale is largely comprised of future royalties (if any) in respect of the Subsys and the Buyer's own fentanyl product, Lazanda.
The notice also attaches a proposed sale order (Exhibit C) which includes the language one would expect from a buyer of anything from a litigation-besieged producer of a fentanyl product, ie belt and braces language as to "free and clear" transfer of assets and a clear refutation of successor liability (see more below).
BTcP is an affiliate of West Therapeutic Development, LLC ("West") which is the U.S. regulatory agent of record for Eolas Pharma Teoranta and Elefsee Pharmaceuticals International, LTD products. West markets and distributes the Lazanda® (fentanyl) nasal spray. West Therapeutic Development is a member of the group companies owned and operated by MMB Healthcare.
In an 8-K filed with the SEC, the Debtors summarized the Buyer's consideration as "(i) the assumption by Buyer of certain specified liabilities, including responsibility for all cure costs, and (ii) post-closing royalty payments payable by Buyer to the Company based on sales of the Subsys product, the Lazanda® (fentanyl nasal spray) product of Buyer and its affiliates and any branded or generic equivalent fentanyl nasal spray, sublingual fentanyl spray, or any transmucosal immediate release fentanyl product (collectively, the 'Combined Products'), for the period of time commencing on the closing date until the expiration of the last to expire orange book listed patent in respect of the Combined Products. Annual royalty payments to the Company will equal forty-five percent (45%) of the annual amount that equals (a) combined net sales generated from sales of the Combined Products, less (i) the cost of goods sold, (ii) legal defense, litigation, and any litigation settlement expenses that are exclusively related to the Subsys product, solely to the extent in respect of actions or events that occurred prior to the closing date, and (iii) expenses in respect of settlement of certain existing litigation, less (b) an expense allocation amount based on the actual amount of operational overhead expense, to the extent attributable to the Combined Products and subject to certain limitations.
Prior to the second anniversary of the closing date, Buyer will pay to the Company an amount equal to the sum of: (x) the total of the closing date accounts receivable actually collected by Buyer and its affiliates, and (y) the value of all Subsys product inventory transferred to Buyer at closing that is actually sold by or on behalf of Buyer at the Company’s cost of acquisition of such inventory (together, the 'Post-Closing Payments'), subject to negotiated reductions specified in the Purchase Agreement. In addition, from the date of the Purchase Agreement through September 30, 2019, the Company will pay as and when due any and all third-party costs and expenses resulting from an observation in a U.S. Food and Drug Administration ('FDA') Form 483 letter relating to certain of the Company’s Subsys products. Following September 30, 2019 until the second anniversary of the closing date, Buyer will pay such costs and expenses as and when due and will have the ability to offset the aggregate amount of such costs and expenses against any and all Post-Closing Payments due to the Company."
The Debtors' proposed order states: "[As to free and clear transfer] The Buyer would not have entered into the Asset Purchase Agreement and would not consummate the Sale Transaction if the transfer of the Purchased Assets to the Buyer and the assumption and assignment of the Assumed Contracts to the Buyer were not free and clear of all liens, claims, encumbrances and other interests, as provided for herein, or if the Buyer would, or in the future could, be liable for any such claims. Subject to the provisions of this Sale Order and except as may be specifically provided in the Asset Purchase Agreement or this Sale Order, the Debtors may sell the Purchased Assets free and clear of any and all interests, including all liens, claims, and encumbrances, because, in each case, one or more of the standards set forth in sections 363(f)(1) through (5) of the Bankruptcy Code have been satisfied….Except to the extent expressly set forth in the Asset Purchase Agreement, this Sale Order is and shall be effective on the Closing Date as a determination that all liens, claims, and other interests of any kind or nature whatsoever existing as to the Purchased Assets prior to the Closing Date have been unconditionally released, discharged, and terminated, in each case to the fullest extent permitted by law, and that the conveyances described herein have been effected; provided that such liens, claims, encumbrances, and other interests shall attach to the proceeds of the Sale Transaction in the order of their priority, with the same validity, force, and effect which they now have against the Purchased Assets. Except to the extent expressly set forth in the Asset Purchase Agreement, the Buyer shall not be responsible for any liens, claims, encumbrances, and other interests, including any derivative, successor, transferee or vicarious liability as a result of the transactions authorized herein, including liabilities on account of any taxes arising, accruing, or payable under, out of, connection with, or in any way relating to the operation of Debtors’ businesses prior to the Closing or by reason of the transactions contemplated by this Sale Order. Upon the Closing Date, all persons having liens of any kind or nature whatsoever against the Debtors or against the Purchased Assets arising prior to the Closing Date shall be forever barred, estopped, and permanently enjoined from pursuing or asserting such liens against the Buyer or any of their respective assets, property, affiliates, successors, assigns, or the Purchased Assets.
[As to successor liability] The Buyer (i) is not, and shall not be, considered a successor in interest to the Debtors, (ii) has not, de facto or otherwise, merged or consolidated with or into the Debtors, (iii) is not a continuation or substantial continuation of the Debtors or any enterprise of the Debtors, and (iv) is not holding itself out to the public as a continuation of the Debtors. There is no continuity or common identity between the Buyer, any of its affiliates and any of the Debtors. The sale and transfer of the Purchased Assets to the Buyer, including the assumption by the Debtors and assignment, transfer and/or sale to the Buyer and the Buyer’s occupation and use of the Purchased Assets will not subject the Buyer to any liability (including any successor liability) with respect to the operation of any of the Debtors’ businesses before Closing (as defined in the Asset Purchase Agreement) or by reason of such transfer, except that, upon the Closing, the Buyer shall become liable for the applicable Assumed Liabilities. Buyer shall have no obligations with respect to any liabilities of the Debtors or the Debtors’ estates arising out of or related to the Purchased Assets, except as expressly provided in the Asset Purchase Agreement. The Sale Transaction contemplated under the Asset Purchase Agreement does not amount to a consolidation, merger or de facto merger of the Buyer and the Debtors and/or the Debtors’ estates. The Buyer would not have acquired the Purchased Assets if it were liable for claims based upon ‘successor liability’ theories."
Goals of the Chapter 11 Process
In a declaration in support of the Chapter 11 filing (the “Long Declaration”), CEO Long detailed the objectives of the INSYS Chapter 11 filing as three-fold:
- Monetize assets: Including through section 363 assets sales (the Debtors have filed a bidding procedures motion) and pursuit of various affirmative claims (eg, indemnification claims; claims against former directors; and claims against insurance carriers that the Debtors believe have wrongly denied them coverage).
- Stop the bleed on litigation-related legal expenses: The Debtors will seek an injunction against the majority of litigation continuing against them during the Chapter 11 Cases, the Long Declaration arguing: "allowing such litigation to continue would erode the Debtors’ precious liquidity, enhancing the pockets of lawyers instead of creditors and distracting management’s attention away from preserving the business and disposing of their assets for the benefit of all creditors….It might also give certain of the Debtors’ creditors (government units) an unfair advantage over other creditors. The fact that the substantial goal of the litigation is to seek monetary damages from the Debtors, not to stop them from any wrongdoing that is currently harming the public, further supports this relief, as does the fact that the Debtors are likely to sell all of their assets in the near-term, including their opioid assets, rendering any injunctive relief unnecessary." The Debtors do not address the seemingly contradictory goals of chasing attenuated claims in protracted litigation against a "stop the bleeding" strategy, nor for that matter how that dovetails with the "need for speed" in prong three below.
- Implement a mechanism that will facilitate the proposal of a chapter 11 plan quickly: In light of the significant amount of contingent and unliquidated claims they face, the Debtors believe that an open and transparent process that enables them to estimate their liability expeditiously and provides all creditors an opportunity to participate will maximize value while still protecting all parties’ due process rights. Accordingly, the Debtors are filing a motion requesting that the Bankruptcy Court adopt estimation procedures and estimate, pursuant to section 502(c) of the Bankruptcy Code, the Debtors’ aggregate liability with respect to certain categories of claims related to Subsys to avoid undue delay in the administration of these Chapter 11 Cases.
Events Leading to the Chapter 11 Filing
The Long Declaration is (appropriately) long on detail as to the multiple litigation/enforcement fronts on which the Debtors have been forced to fight an ultimately losing battle to stave off bankruptcy. [Interested parties may, however, find it short on genuine strategy or insight, much less pragmatism or contrition]. The Debtors class these fronts as follows:
- U.S. Government investigations and U.S and State Qui Tam litigation
- State Attorneys General investigations and litigation
- Municipality litigation
- Private insurance provider litigation
- Personal injury litigation
- Securities litigation
- Indemnification claims of officers and directors
The Long Declaration states: "As described below in [much] more detail, the Debtors are facing extensive litigation relating to their SUBSYS® product (‘Subsys’), which is a prescription opioid. As of the Petition Date, one or more of the Debtors have been named in approximately one thousand lawsuits, and the Debtors anticipate that additional lawsuits may be commenced in the future. Some of the litigation they are facing is common to all opioid manufacturers, while other claims are based on particular alleged activities of the Debtors’ former executives, many of whom either pleaded guilty to or were convicted after trial of federal criminal activity relating to such activities.
The expenses and settlement costs resulting from such litigation have been substantial, consuming large portions of the Debtors’ revenue and liquidity.
At the same time, over the last few years, the Debtors’ revenues from Subsys have been declining rapidly as a result of the increased national scrutiny of prescription of opioids by healthcare professionals, the resulting high-profile political and legal actions taken against manufacturers and distributors of opioids, and the specific news relating to the former executives’ criminal activity. Moreover, although the Debtors have promising products in the pipeline, those products are not yet approved for production, require significant additional investment to bring to market, and are not expected to generate revenue in the near term. As a smaller company than some other opioid manufacturers, with over 90% of its current revenue coming from the sale of opioids, Insys could not withstand the concurrent negative impact of massive litigation costs and significant opioid revenue deterioration. These factors have caused a substantial cash drain on the company to the point where, despite the Debtors’ best efforts, they risk running out of cash in 2019."
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