Akorn Seeks Bankruptcy After Failed Takeover, FDA Warnings
(Bloomberg) -- Akorn Inc. sought bankruptcy protection from creditors after a series of deficiencies uncovered about its quality-control methods resulted in the collapse of rival Fresenius SA’s buyout of the generic drugmaker and subsequent warning letters from the U.S. Food and Drug Administration.
The Lake Forest, Illinois-based company listed as much as $10 billion of debt and $10 billion of assets in its Chapter 11 petition, filed on Wednesday in the Delaware bankruptcy court.
In December of 2018, Fresenius SE backed out of its $4.3 billion offer for the company after it discovered issues with Akorn’s pharmaceutical production, quality control and drug testing. A Delaware judge later blessed that decision and is still considering whether Akorn owes Fresenius more than $70 million in damages over the collapsed deal. In the wake of the court ruling, the FDA fired off warning letters to Akorn relating to two of its plants -- one in New Jersey and the other in Illinois -- after finding manufacturing violations.
“The overhang of the Fresenius litigation, related shareholder litigation with the remaining opt-outs, and ongoing debt service obligations have obstructed out-of-court solutions” to the company’s problems, Duane Portwood, its chief financial officer, said in court filings.
Akorn said in a statement it has reached an agreement with lenders representing more than 75% of its secured debt who will collectively serve as a “stalking horse” bidder in the sale of its business. The lenders will provide additional liquidity to fund business operations during this process, the company said.
Akorn said it obtained consent to use cash collateral from all of its existing lenders and received commitments from certain of its lenders for $30 million in debtor-in-possession financing.
From more than $4 billion in 2017, the market capitalization of the generic drugmaker has fallen to about $28 million in the wake of the failed Fresenius deal and other business problems. Portwood said that Akorn has “not made an annual profit in two years and generated $310 million in negative Ebitda in 2018.”
After a 10-day trial, Delaware Chancery Court Judge Travis Laster concluded in 2018 Fresenius had valid reasons for canceling the buyout because Akorn hid a litany of miscues that cast doubt on the validity of its data and the profitability of its operations. The deal’s blow up prompted Akorn CEO Raj Rai to step down.
During the trial, Fresenius’s lawyers produced evidence showing Akorn’s computer system security was so poor that anyone on the premises could alter test data. That raised questions about the validity of the company’s testing regime. The German company contends four Akorn executives, including its former head of quality control, either altered data or provided phony test data to the FDA as part of new-drug applications. The Delaware Supreme Court upheld Laster’s ruling.
FDA inspectors also found an anesthetic produced at Akorn’s plant in Somerset, New Jersey, was tainted with metal shavings. In addition, sterile eye drops had to be recalled after failing quality testing. Regulators found the manufacturing miscues “pose a risk to the public.”
In response to the FDA’s findings, Akorn officials said in their bankruptcy filings they’ve made improvements in manufacturing operations, such as equipment upgrades and barriers on aseptic manufacturing lines to cut contamination.
“Plans have been developed to implement enhanced electronic quality management systems at all facilities,” he added.
Akorn’s new management shopped the company around, but never got any bids that would cover its debt, Portwood said. Executives hope the bankruptcy process will provide a “value-maximizing, in-court sale process that will publicly ‘market test’ the value of their business—to address the debtors’ capital-structure needs and litigation liabilities in a single forum.”
The drugmaker is asking U.S. Bankruptcy Judge Karen Owens to schedule an Aug. 7 auction. Akorn officials said in a court filing they “remain optimistic that sufficient interest exists to maximize the value of their business and expect to move expeditiously to select a winning bidder and consummate the contemplated sale of their assets.”
The case is Akorn Inc., 20-11177, U.S. Bankruptcy Court, District of Delaware (Wilmington).
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