Law360 (May 21, 2020, 10:25 AM EDT) -- Specialty pharmaceutical business Akorn Inc. predictably limped into Delaware Bankruptcy Court late Wednesday with Chapter 11 plans for a more than $1 billion all-asset sale, trailed by troubles that include a potential $70 million-plus Chancery Court judgment over a botched merger and credit default threats.
Listing more than $1 billion each in assets and liabilities, the Illinois-based global health care company included in its filings a proposed $30 million bankruptcy financing loan and an agreement with lenders that will collectively serve as a stalking horse bidder.
Akorn aims to maintain normal operations throughout the bankruptcy and fulfill commitments to customers, suppliers, associates and other stakeholders, according to a statement on the company's website. President and CEO Doug Boothe said the COVID-19 crisis emphasized that the company's work is vital and that the bankruptcy filing is a "decisive, positive" move.
"We look forward to separating legacy litigation and debt from the company's most valuable assets — our products, our people, our manufacturing facilities and our knowledge — so that we can move forward unencumbered by these liability exposures under new ownership that believes in our future," Boothe stated.
Petitions were filed for Akorn's United States subsidiaries, but not its India and Switzerland entities, according to Boothe. The company aims to have a sale locked down by the third quarter of 2020 and "emerge as a more vibrant company, even better positioned to improve patients' lives through the quality, availability and affordability of its products," Boothe stated.
The Chapter 11 bid follows two no-profit years and a crushing $310 million in negative earnings before interest, taxes, depreciation and amortization in 2018, according to a declaration by Chief Financial Officer Duane A. Portword.
The petition came alongside more than a dozen motions seeking to obtain debtor-in-possession financing, utilize cash collateral, honor payroll and benefits obligation, and pay off claims by vendors and suppliers, the declaration said.
Akorn in April notified the Chancery Court of its impending insolvency in a letter detailing its failed search for a stalking horse buyer and subsequent credit default. The company is also facing more than $100 million in claims by Fresenius Kabi AG over an October 2018 court ruling that Fresenius had a right to walk away from a $4.3 billion deal to acquire Akorn, based on Akorn's alleged deal misrepresentations and regulatory compliance troubles.
Fresenius' announcement about the merger troubles prompted a now-settled securities class action, according to Portwood's declaration However, four hedge funds opted out of the class and "made clear" they continue to litigate their claims, the declaration said.
The declaration traced Akron's financial troubles back to a "steep and sustained" financial performance backslide in 2017 due to a series of market forces, including buyer power consolidation and subsequent price reductions, increased competition resulting from the U.S. Food & Drug Administration's expedition of generic drug review and approval process, and legislative bids to lower drug prices.
While the market developments impacted the pharmaceutical market as a whole, the specialty drug sector took a particularly hard hit, according to the declaration. Akorn's biggest products — ephedrine, lidocaine ointment and clobetasol — suffered as a result of new market entrants at the time and the company's stock value dropped 105% in the third quarter of 2017.
Share prices further dropped in February 2018 upon announcements by both Fresnius and Akorn that an internal investigation was underway of purported data integrity and regulatory deficiencies at Akorn's facilities, the declaration said. Akorn's probe uncovered that "likely false data" had been submitted to the FDA connection with an abbreviated new drug application, which was later pulled.
Akorn has also been working to remedy deficiencies unearthed by the FDA and third-party inspection and certification firm NSF International, and has overhauled its executive team, according to the declaration.
Fresenius notified Akorn in April 2018 that it was terminating the merger, sparking litigation that led to the Delaware Supreme Court's ruling that the termination was valid. In April, the Chancery Court denied Fresenius's bid for $43 million in legal fees and reserved judgment on Fresenius's remaining $74 million in claims.
Despite a business uptick, Akorn is nonetheless vexed by "significant nonoperational headwinds" in the form of the securities claims and the Fresenius litigation, both of which have discouraged investors, the declaration said.
Akorn is represented by Paul Noble Heath, Brett Michael Haywood, J. Zachary Noble, Zachary I. Shapiro, Amanda R. Steele and Sarah Silveira of Richards Layton & Finger PA.
The case is In re: Akron Inc., case no. 20-11177, in Delaware Bankruptcy Court.
---Additional reporting by Jeff Montgomery. Editing by Rebecca Flanagan.
Correction: An earlier version of this article misstated the location of Akorn's headquarters. The error has been corrected.
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