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February 18, 2019 – Pernix Therapeutics Holdings and 12 affiliated Debtors (NASDAQ: PTX, “Pernix” or the “Company”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-10329 [Docket No. 1]. The Company, a holding company that owns several subsidiaries, including specialty pharmaceutical companies, is represented by Adam Landis of Landis Rath & Cobb. Further board-authorized engagements include (i) Davis Polk & Wardwell LLP as bankruptcy counsel, (ii) Guggenheim Partners, LLC as investment banker, (iii) Ernst & Young LLP as financial advisor and (iv) Prime Clerk LLC as claims agent.
The Company’s petition notes between 200 and 1,000 creditors; estimated assets between $100mn and $500mn; and estimated liabilities between $100mn and $500mn. Documents filed with the Court list the Company’s three largest unsecured creditors as (i) Wilmington Trust National Association, as Indenture Trustee to the 4.25% Convertible Notes due 2021 ($78.2mn notes claim), (ii) Wilmington Trust National Association, as Indenture Trustee to the 4.25%/5.25% Exchangeable Notes due 2021 ($35.7mn notes claim) and (iii) Caremark ($3.4mn MCO (PartD) claim).
In a press release announcing the filing, the Company advised that “It has entered into an Asset Purchase Agreement with certain funds managed by Highbridge Capital Management, LLC (collectively ‘Highbridge’). The Agreement serves as an initial ‘stalking-horse bid’ to acquire substantially all of the assets of the Company and its subsidiaries, including the rights to all branded and generic products (the ‘Products’), for approximately $75.6 million in the form of cash and credit bid consideration….The Company and its subsidiaries fully intend to continue operations while the Company works to complete its sale and restructuring process. Pernix has obtained a commitment from Highbridge for debtor-in-possession (‘DIP’) financing of approximately $29.1 million, with an additional accordion facility of $5 million. Proceeds from the DIP financing, in addition to cash flow from operations, will be used to ensure that the Products remain available to patients and will otherwise fortify the Company’s balance sheet.
John Sedor, Chief Executive Officer of Pernix, commented “We believe that pursuing this restructuring and sale process is in the best interest of the Company and our stakeholders….It allows us to ensure that patients continue to have uninterrupted access to our life-changing medications and patient support services while also allowing Pernix to address its financial position.”
Asset Purchase Agreement
On February 18, 2019, Phoenix Top Holdings LLC, an entity formed by affiliates of Highbridge Capital Management (the “Purchaser”), and the Company and certain of its subsidiaries (together, the “Sellers”) entered into an Asset Purchase Agreement (the “Purchase Agreement”) pursuant to which the Purchaser agreed to purchase substantially all of the assets of the Company ( the “Assets” and “Asset Sale,” respectively). The consideration for the Asset Sale provided for in the Purchase Agreement is comprised of (i) $5 million in cash, (ii) subject to Court approval, a credit bid pursuant to section 363(k) of the Bankruptcy Code of (a) all of the outstanding amounts (approximately $40.5 million) under Pernix’s wholly-owned subsidiary Pernix Ireland Pain Designated Activity Company’s (“PIP DAC”) senior secured first lien term loan due 2022 (the “Existing Delayed Draw Term Loan”), (b) an amount equal to the greater of (1) $15 million and (2) all of the outstanding amounts under the DIP Facility less (x) 80% of the cash proceeds generated by the sale of any collateral for the DIP Facility and (y) the amount by which all other cash held by the Debtors and their estates, less the amount of any unpaid claims owing to Nalpropion Pharmaceuticals, Inc. and all cure claims to be paid by the Sellers, in each case at the time of the Auction (as defined below), exceeds the amount provided for in the Debtors’ approved budget under the DIP Facility as of such date, and, (c) $5 million of Pernix’s 12% Senior Secured Notes due 2020 (the “Treximet Secured Notes”), (iii) an amount (payable either in cash or via a credit bid pursuant to section 363(k) of the Bankruptcy Code) equal to the Sellers’ positive working capital (if any) as of the Closing and (iv) the assumption of certain liabilities of the Debtors, all as set forth in the Purchase Agreement. Under the Purchase Agreement, the Purchaser would still be obligated to effect the Asset Sale if the Court approves the sale of certain Treximet-related assets to another bidder, however in such event the consideration would not include the credit bid for $5 million of obligations under the Treximet Secured Notes.
The Debtors also announced their intention to enter into a debtor-in-possession (“DIP”) financing facility on the terms set forth in a Senior Secured Super-priority Debtor-in-Possession Credit Agreement (the “DIP Credit Agreement”), by and among the Company, as borrower (the “Borrower”), the Lenders (as defined therein) party thereto, and Cantor Fitzgerald Securities, as administrative agent, a form of which DIP Credit Agreement was filed with the Court on the Petition Date. The DIP Credit Agreement provides for a senior secured super-priority debtor-in-possession multi-draw term loan financing facility (the “DIP Facility”) in an aggregate amount of up to $34.1 million, $15.0 million of which (the “New Money General Purpose Term Loans”) will be in the form of committed new money loans, with a $5.0 million accordion facility, and $14.1 million of which (the “New Money ABL Refinancing Loans”) will be used to refinance all outstanding obligations under Pernix’s asset-based revolving credit facility due 2022. Up to $3.5 million of the New Money General Purpose Term Loans will be available to the Company on an interim basis.
Events Leading to the Chapter 11 Filing
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Sedor Declaration”) [Docket No. 3], John Sedor, the Company’s Chairman and CEO, detailed the events leading to Pernix’s Chapter 11 filing.
The Sedor Declaration States, “The Company has been actively seeking a long-term solution for its capital structure for some time. In order to consummate the acquisitions of Treximet and Zohydro in 2014 and 2015, respectively, the Company incurred significant indebtedness, including the Prepetition Treximet Notes and the Prepetition Convertible Notes. Due to a number of factors, including, but not limited to, net pricing and market dynamics in their respective therapeutic areas, these products have underperformed relative to expectations, rendering the Company overleveraged.
In late 2017 and into early 2018, the Company was confronted with the loss of two of the largest products in its generics portfolio. First, the Company, through Macoven, distributed a combination product called isometheptene mucate, dichlorphenazone, and acetaminophen, (‘IDA’), which was originally approved in 1948 by the FDA, for safety only….The Company received a letter from the FDA dated October 19, 2017, asserting that any drug products identified in DESI 3265, including IDA, require an approved new drug application (‘NDA’) or an abbreviated new drug application (‘ANDA’) in order for them to continue to be distributed. Since the Company had not obtained an NDA or ANDA for IDA, the FDA directed that it should cease distribution of IDA. While IDA has a long history of safe use, the Company complied with the FDA’s request.
Second, in December 2017, Pemix was notified by Osmotica Pharmaceutical Corp. (‘Osmotica’’) that the manufacturer that it had contracted with to manufacture KHEDEZLA™ (desvenlafaxine) tablets destroyed all of Pemix’s desvenlafaxine Active Pharmaceutical Ingredient (‘API’) without consent. Pemix then learned that its API supplier no longer manufactured this material and did not intend to resume production. Neither Pemix or Osmotica were able to identify an alternative source of suitable API, and as a result Pemix proceeded to discontinue the product. For the year ended December 31, 2017, the Company’s net sales from the sale of these two products were approximately $18 million in the aggregate, or approximately 12% of total net sales. Losing this revenue stream had a significant impact on the Company’s business and operating cash flow in 2018.
In addition, 2018 proved to be more challenging than expected due to issues relating to Treximet and Zohydro. With respect to Treximet, four patents covering Treximet expired in February 2018, enabling up to three generic competitors to enter the market….The launch of generic versions of Treximet by third parties did not proceed as expected in certain key respects. The Company anticipated three generic entrants shortly after the expiration of the Treximet patents in February 2018. In fact, only one competitor promptly entered the market in February 2018, while the two others did not launch until August 2018. However, the first entrant came to market with a much lower price than anticipated, which dramatically impacted Pemix’s ability to profitably market its own generic version of Treximet. The effects of the lower than expected generic price were compounded by the fact that, because there were only two generics for Treximet (the third-party product and Pemix’s authorized generic), managed care organizations did not adjust the maximum allowable cost of the branded Treximet product in April as expected, forcing the Company to pay higher rebates until late 2018. These rebates on the branded product, plus the lower than expected generic price, resulted in significantly lower than anticipated profitability for the Treximet franchise in 2018.
Regarding Zohydro, a key threat arose during 2018 that compromised the integrity of the intellectual property supporting market exclusivity of the product. On August 27, 2018, the United States District Court for the District of Delaware determined, in Pemix’s litigation against Alvogen Malta Operations, Ltd. (‘Alvogen’), that two patents relating to Zohydro are invalid. As a result, absent a reversal of the decision on appeal, pursuant to a previous settlement agreement dated September 29, 2016, between Alvogen and Recro Gainsville LLC, Alvogen will be able to launch a generic version of Zohydro, subject to final approval of an Abbreviated New Drug Application by the Food and Drug Administration, as early as October 1, 2019.
Due to the culmination of the events in late 2017 and 2018, the Company’s ability to enter into strategic transactions (notwithstanding the Nalpropion transaction), such as marketing and sales partnerships, and to access additional liquidity and the capital markets were significantly constrained. Without the ability to expand its business inorganically or enter into partnerships, the Company initiated a strategic operational review, including a potential reduction in the size of its sales force. In addition, the Company recognized that, given its current product mix and scale, it would be difficult to continue to support its funded debt obligations going forward and generate the cash flow needed to be a going concern.”
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