Sienna Biopharmaceuticals, Inc. – With No Revenue and Unsustainable Cash Burn, Biopharmaceutical Start-Up Seeks Refuge in Chapter 11

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September 16, 2019− Sienna Biopharmaceuticals, Inc. (NASDAQ Global Select Market: “SNNA," “Sienna” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-12051. The Debtor, a clinical-stage biopharmaceutical and medical device company focused on skin therapies, is represented by Michael R Nestor of Young Conaway Stargatt & Taylor LLP. Further board-authorized engagements include (i) Latham & Watkins as general bankruptcy counsel, (ii) Cowen and Company, LLC as investment banker, (iii) Force 10 Partners as financial advisor and (iv) Epiq Corporate Restructuring, LLC as claims agent. 

The Debtor's petition notes between 200 and 1,000 creditors; estimated assets of $107.6mn and estimated liabilities of $80.6mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Charles River Laboratories ($1.1mn trade debt), (ii) California Employment Development Department ($440k taxes and employment insurance claim) and (iii) Therapeutics, Inc. ($267k trade debt).

Chapter 11 Objectives

The Debtor's objectives are not entirely clear. What is clear is that the capital markets are closed to the Debtor which has never generated any revenue or managed to bring a product to market. The Debtor seems to maintain its belief that there is some intellectual property of value in the business, so ultimately there must be some hope of selling that; for now, however, the Debtor wants to "maintain a business-as-usual atmosphere."

The Beddingfield Declaration (defined below) states: "The Debtor’s ultimate goal in this chapter 11 case is to maximize value for the benefit of all stakeholders. In the near term, however, the Debtor’s immediate objective is to maintain a business-as-usual atmosphere during the early stage of this chapter 11 case, with as little interruption or disruption to the Debtor’s operations as possible;" this notwithstanding the $40.0mn (plus) annual costs of operations and an accumulated deficit approaching $200.0mn.

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Beddingfield Declaration”), Frederick C. Beddingfield III, the Debtor's President and CEO detailed the events leading to Sienna's Chapter 11 filing. A good portion of the Beddingfield Declaration's "tale of woe" is couched in language pulled directly from the Debtor's 10-K (this is, in turn, incorporated by reference into the Debtor's shelf registration statement, the latter probably never seen by what is, judging by the lengthy list of day trading platforms included in a list of shareholders appended to the Chapter 11, a rather unsophisticated shareholder base who have now lost everything [Note to SEC: Why do you allow incorporation by reference of risk factors into a 33 Act selling document from a 34 Act filing?]). In any event, the Beddingfield Declaration tells a simple story: High risk biopharmaceutical and medical device company borrows $100's of millions to fund R&D without ever having a single product approved for market or ever generating any revenue…eventually capital markets evaporate, cash evaporates and Debtor trips minimum cash covenant threshold in senior credit facility and senior lenders pulls the life support plug.

The Beddingfield Declaration states: "Biopharmaceutical and medical device development are highly speculative undertakings and involve a substantial degree of risk. The biopharmaceutical and medical device industries generally, and the dermatology and aesthetics markets specifically, are acutely competitive, subject to rapid change, and significantly affected by new product introductions, results of clinical research, corporate combinations, actions by regulatory bodies, changes by public and private payers, and other factors. While the Debtor is presently advancing several promising product candidates…these have not yet been approved for sale, and the Debtor has not generated any revenue to date.

Since its inception, the Debtor has incurred significant operating losses and has an accumulated deficit as a result of ongoing efforts to develop its product candidates, including conducting nonclinical and clinical trials and providing general and administrative support for these operations. The Debtor had an accumulated deficit of approximately $184.1 million and approximately $159.4 million as of June 30, 2019 and December 31, 2018, respectively. The Debtor had net losses of approximately $8.3 million and approximately $24.6 million for the three and six months ended June 30, 2019… The Debtor had net cash used in operating activities of approximately $21.2 million and approximately $30.2 million for the six months ended June 30, 2019 and 2018, respectively.

The Debtor’s significant cash burn and lack of available revenue has necessitated multiple rounds of debt and equity financings…More recently, the Debtor’s liquidity position has become increasingly strained due to a lack of fresh capital sources and certain other factors, such that the Debtor does not have sufficient available capital to support its ongoing operations and, in particular, fund the initiation of its planned Phase 3 pivotal clinical trials for SNA-120o or further advance the development of SNA-125.

The Minimum Cash Covenant in the Prepetition Credit Agreement requires that, among other things, the Debtor maintain unrestricted cash on deposit with the Prepetition Lender in the total amount of the greater of (a) $30.0 million, or (b) the sum of (i) $15.0 million plus (ii) the Debtor’s six month cash burn, as described in greater detail above, and the Debtor’s cash balance fell below the Minimum Cash Covenant threshold in the days prior to the Petition Date. In addition, the Debtor has certain contingent payments coming due to the former Creabilis shareholders pursuant to the SPA. Specifically, under the SPA, the Debtor will become obligated to issue $18.0 million in shares of its common stock to the former Creabilis shareholders upon the commencement of the first clinical trial of SNA-120. This amount could rise to as much as $53.0 million, consisting of an aggregate of $25.0 million in cash and $28.0 million in shares of common stock, upon achieving certain additional milestones.

These factors have left the Debtor needing significant additional liquidity to continue its research and development operations.

Faced with a lack of viable financing options, dwindling liquidity and the requirements of the Minimum Cash Covenant, and the overhang of significant future milestone payments under the Creabilis SPA, after extensive discussions with its advisors, the Debtor determined that commencing this chapter 11 case was the best available option to preserve and maximize value for stakeholders."

About the Debtor

The Debtor is a clinical-stage biopharmaceutical and medical device company focused on bringing unconventional scientific innovations to patients whose lives are burdened by disease. The Debtor, through its accomplished management team and skilled employees, leverages deep knowledge and experience in drug and medical device development across multiple therapeutic areas with a view towards building a unique, diversified, multi-asset portfolio of therapies in inflammation and immunology that target select pathways in specific tissues, with an initial focus on one of the most important “immune” tissues, the skin.

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