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May 2, 2023 – Lannett Company, Inc. and three affiliated debtors (NYSE: LCI*, together “Lannett” or the “Debtors”) filed for Chapter 11 protection (on a "prepackaged basis") with the U.S. Bankruptcy Court in the District of Delaware, lead case No. 23-10559 (Judge TBD). Lannett, which "develops, manufactures, packages, markets, and distributes generic pharmaceutical products for a wide range of medical indications," is represented by Howard A. Cohen of Fox Rothschild LLP. Further Board authorized appointments include: (i) Kirkland & Ellis LLP as general bankruptcy counsel, (ii) FTI Consulting as financial advisors, (iii) Guggenheim Securities LLC as investment bankers and (iv) Omni Agent Solutions, Inc as claims agent.
Additional engagement include Sullivan & Cromwell LLP and Houlihan Lokey Inc. as legal counsel and financial advisor, respectively, for a group of secured creditors.
* On April 19, 2023, Lannett Company, Inc. received a written notice from the New York Stock Exchange (the “NYSE”) notifying LCI that it would commence delisting of the Debtors' common stock which is now trading over-the-counter under the symbol “LCIN.”
The Debtors’ lead petition notes between 5,000 and 10,000 creditors; estimated assets between $100.0mn and $500.0mn; and estimated liabilities between $500.0mn and $1.0bn ($657.17mn of funded debt; NB: SEC filings have assets of $334.6mn and liabilities of $708.9mn as at March 31, 2023). Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Wilmington Trust, NA (as Trustee for $86.25mn of convertible notes), (ii) IBSA Institut Biochimique SA ($1.75mn trade claim) and (iii) Johnson Matthey Pharmaceutical Mate ($1.6mn trade claim).
In a press release announcing the filing, the Debtors noted that: “The restructuring transactions set forth in the [May 1st] RSA will substantially delever the Company's balance sheet, positioning Lannett with sufficient liquidity to implement their business plan, including efforts to launch several pipeline products.
The Company entered into the RSA with the significant support of key stakeholders, including holders of more than 80% of its Senior Secured Notes and 100% of its Second Lien Term Loan, seeking to significantly improve its financial position by eliminating approximately $597 million of funded debt, including $511 of secured debt, through conversion of the secured debt into equity in the newly reorganized Company. Subsequent to executing the RSA, Lannett solicited votes of support of its Prepackaged Plan, which is expected to receive the support of the parties to the RSA. The Company expects the Chapter 11 cases to be expeditious, with emergence occurring within 45 days after the filing of the petitions.
Lannett is expected to operate in the ordinary course of business through the Chapter 11 process. The RSA and the Prepackaged Plan provide for vendors, employees, and other partners to be paid in the ordinary course of business for obligations incurred prior to and after the commencement of the Chapter 11 cases. The Company has sufficient liquidity to operate its businesses, including the payment of all such obligations."
Plan and RSA Summary
On May 1st (see our earlier coverage) the Debtors flagged their imminent filing of a prepackaged Plan in an 8-K filing which attached the RSA and the Prepackaged Plan (the Disclosure Statement was filed with a May 2nd 8-K). The Disclosure Statment provides the following summary of terms agreed in the April 30, 2023 RSA:
"…Lannett has spent significant time over the past several months working together with its existing lenders to explore strategic alternatives to best position the Company for success. The Plan reflects the culmination of those efforts and seeks to implement a comprehensive recapitalization of the Debtors’ balance sheet with overwhelming creditor support. Specifically, after extensive diligence and arms’ length negotiations with an ad hoc group of Holders of First Lien Senior Secured Notes Claims and Second Lien Term Loan Claims (the 'Ad Hoc Group' or 'Consenting Stakeholders'), the Debtors reached an agreement with holders of at least 80 percent of the outstanding First Lien Senior Secured Notes Claims and holders of 100 percent of the Second Lien Term Loan Claims on the terms of the restructuring transactions set forth in that certain restructuring support agreement, dated as of April 30, 2023, a copy of which is attached hereto as Exhibit B (the 'Restructuring Support Agreement' or “RSA,” and the transactions contemplated thereby, the 'Restructuring Transactions').
Pursuant to the Restructuring Support Agreement, implementation of the Restructuring Transactions will occur through prepackaged chapter 11 cases on an expedited timeline. To that end, the Debtors commenced solicitation of votes to accept or reject the Plan on May 2, 2023, prior to the commencement of any Chapter 11 Cases, and set a Voting Deadline of May 16, 2023. The RSA contemplates the Debtors emerging from these Chapter 11 Cases approximately 45 days after commencement.
The Debtors, with the overwhelming support of the Holders of First Lien Senior Secured Notes Claims and Second Lien Term Loan Claims, believe that the deleveraging and liquidity enhancing Restructuring Transactions embodied in the Restructuring Support Agreement represent the most value-maximizing path forward. Among other things, consummation of the Restructuring Transactions will eliminate approximately $597 million of the Debtors’ funded debt obligations and provide the Debtors will access to a New RCF.
The key terms of the Restructuring Transactions, as reflected in the Plan, include the following:
- each Holder of an Allowed First Lien Senior Secured Notes Claim shall receive (i) its Pro Rata share of 97% of the New Common Stock, subject to dilution of the MIP New Common Stock and the New Warrants and (ii) its Pro Rata share of 97% of the Takeback Exit Facility;
- each Holder of an Allowed Second Lien Term Loan Claim shall receive (i) its Pro Rata share of 3% of the New Common Stock, subject to dilution of the MIP New Common Stock and the New Warrants, (ii) its Pro Rata share of 3% of the Takeback Exit Facility and (iii) its Pro Rata share of the New Warrants;
- each Holder of an Allowed General Unsecured Claim shall, at the option of the applicable Debtor, be either (i) Reinstated or (ii) paid in full in Cash on the later of (x) the Effective Date and (y) the date on which such payment would otherwise be due in the ordinary course of business in accordance with the terms and conditions of the particular transaction giving rise to such Allowed General Unsecured Claim;
- on the Effective Date, all Allowed Convertible Notes Claims shall be cancelled, released and extinguished and will be of no further force or effect, without any distribution to Holders of Convertible Notes Claims; and
- existing Interests and Section 510(b) Claims will be cancelled, released and extinguished without any distribution.
For the avoidance of doubt, the Plan provides that all General Unsecured Claims, including trade claims, will be paid in full in the ordinary course of business and otherwise unimpaired by the process. In light of the foregoing, the Debtors expect to continue operating normally throughout the Chapter 11 Cases and remain focused on serving their customers and working with suppliers on normal terms.
Consummation of the Restructuring Transactions will position the Debtors to capitalize on their core strengths — including their diversified product portfolio, mid to longer term pipeline, extensive experience with productive partnerships, and strong internal product development capabilities — to achieve long-term success. Each of the Debtors strongly believes that the Plan is in the best interests of the Debtors’ estates and represents the best available alternative at this time. The Debtors are confident that they can implement the Restructuring Transactions to ensure the Debtors’ long-term viability."
As part of the RSA, the Debtors agreed to the following milestones:
- Solicitation Commencement Date: May 2, 2023
- Petition Date: May 4, 2023
- Plan and Disclosure Statement to be filed with Bankruptcy Court: Two days after the Petition Date
- Entry of a Cash Collateral Order: five days after the Petition Date
- Voting Deadline: May 16, 2023
- Entry of Disclosure Statement and Plan Confirmation Order: 40 days after the Petition Date
- Occurrence of Effective Date: 45 days after the Petition Date, subject to any regulatory and/or third-party approvals that are necessary to consummate the Restructuring Transaction.
The following is a summary of classes, claims, voting rights and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement, see also the Liquidation Analysis below):
- Class 1 (“Other Secured Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan.
- Class 2 (“Other Priority Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan.
- Class 3 (“First Lien Senior Secured Notes Claims”) is impaired and entitled to vote on the Plan. Each Holder shall receive its Pro Rata share of 97% of the Takeback Exit Facility and its Pro Rata share of 97% of the New Common Stock, subject to dilution on account of the MIP New Common Stock and the New Warrants.
- Class 4 (“Second Lien Term Loan Claims”) is impaired and entitled to vote on the Plan. Each Holder shall receive: (1) its Pro Rata Share of 3% of the Takeback Exit Facility; (2) its Pro Rata share of 3% of the New Common Stock, subject to dilution on account of the MIP New Common Stock and the New Warrants; and (3) its Pro Rata share of the New Warrants.
- Class 5 (“General Unsecured Claims”) is unimpaired, presumed to accept and not entitled to vote on the Plan.
- Class 6 (“Convertible Notes Claims”) is impaired, presumed to reject and not entitled to vote on the Plan.
- Class 7 (“Intercompany Claims”) is impaired/unimpaired, presumed to accept/reject and not entitled to vote on the Plan.
- Class 8 (“Intercompany Interests”) is impaired/unimpaired, presumed to accept/reject and not entitled to vote on the Plan.
- Class 9 (“Section 510(b) Claims”) is impaired, presumed to reject and not entitled to vote on the Plan.
- Class 10 (“Existing Interests”) is impaired, presumed to reject and not entitled to vote on the Plan.
The Disclosure Statement [Docket No. 17] attaches the followings exhibits:
- Exhibit A: Plan of Reorganization.
- Exhibit B: Restructuring Support Agreement.
- Exhibit C: Liquidation Analysis.
- Exhibit D: Financial Projections.
- Exhibit E: Valuation Analysis.
Proposed Key Dates
- Voting Deadline: May 16, 2023.
- Plan Supplement Deadline: May 25, 2023.
- Plan Objection Deadline and Opt-Out Deadline: June 1, 2023
- Deadline to File Confirmation Brief and Reply: June 6, 2023.
- Combined Hearing: June 8, 2023.
Liquidation Analysis (see Docket No. 17 for notes)
As at the petition date, the Debtors have approximately $657.17mn in aggregate outstanding principal amount of funded debt obligations, consisting of approximately:
- $350.0mn in first lien secured notes indebtedness;
- $220.92mn in second lien term loan indebtedness; and
- $86.25mn in convertible notes indebtedness.
NB: Prior to the Petition date, the Debtors were party to a $45.0mn revolving credit facility (the “Revolving Credit Facility”) with Wells Fargo Bank, National Association. As of May 1, 2023, there was no principal amount outstanding under the Revolving Credit Facility. On May 1, 2023, the $1.8 million of letters of credit issued thereunder were cash collateralized and the Revolving Credit Facility was terminated.
Events Leading to Expected Chapter 11 Filing
The Disclosure Statement further provides, "In recent years, the generic pharmaceuticals business has faced challenges resulting from significant increasing concentration of the purchasing network for pharmaceutical products and a trend toward managed healthcare, which has increased third-party payor cost-containment pressures, resulting in a decrease in the Company’s sales.
Most drastically, the Company has also faced notably accelerated global competition as new entrants emerged in the generic drug market, including with respect to the key products supplied by the Company, thereby significantly impacting value of the Company’s biggest product lines. The majority of these new market competitors arose largely due to low cost overseas suppliers, primarily from India, that provided new market participants with a lower cost core manufacturing base than the Company’s own core manufacturing base that had been acquired when prevailing market prices were appreciably higher. Today, the significant majority of medicines consumed in the United States are from these overseas competitors. These low-cost international Asian suppliers, combined with customer consolidation, eroded competitive advantages that previously drove Company growth. The impacts were felt across the industry and many of the Company’s peers struggled to keep up with a rapidly changing environment.
In recent years, like many other businesses today, the Company has faced disruption across its supply chain, including shipping delays, higher prices from suppliers and reduced availability of materials, particularly excipients and packaging components. Several key suppliers of active pharmaceutical ingredients or other excipients were either significantly delayed or unable to provide key materials for both online and potential new products in the Company’s portfolio. These disruptions were often related to expanding compliance matters between such suppliers and the FDA. To a lesser extent, some fallout of the COVID-19 pandemic also impacted the costs of supply and the speed and effectiveness of working with the Company’s global supply network….
In mid-March 2023, around the same time as significant market announcements related to the reduction of list prices of Insulin manufacturers, the Ad Hoc Group provided the Company a proposal to engage in a comprehensive restructuring, which included an equitization of the First Lien Senior Secured Noteholders and Second Lien Term Loan Lenders’ debt through chapter 11 proceedings. After analyzing available options in light of their projected business plan (and risks associated therewith) the Company ultimately decided to engage with the Ad Hoc Group to determine a path forward. Ultimately, the Company decided that a comprehensive restructuring solution to deleverage its balance sheet was necessary and began negotiating the terms of a transaction.
In light of those ongoing negotiations, the Company determined to defer a $1.9 million interest payment on the Convertible Notes that was due on April 3, 2023 and enter into the 30-day grace period. The Company also deferred payments due on account of their First Lien Senior Secured Notes ($13.6 million on April 17, 2023) and Second Lien Term Loan ($2.7 million on April 24, 2023). On April 19, 2023, the New York Stock Exchange announced that it was initiating proceedings to delist the Company’s common stock.
After extensive, arm’s-length negotiations, on April 30, 2023, the Debtors and the Consenting Stakeholders entered into the Restructuring Support Agreement."
The Debtors note a single shareholder which tope the 5% reporting threshold, Jeffrey Farber (Chairman of the Debtors' Board of Directors) with 5.1%.
About the Debtors
According to the Debtors: “Founded in the 1940’s, Lannett was one of the oldest generic drug manufacturers operating in the United States. Historically, the Company competed for an increasing share of the generic market, and grew to become a meaningful developer, manufacturer, marketer, and distributor of generic versions of brand pharmaceutical medicines that address a wide range of therapeutic areas. This growth was a result of additions to the Company’s lines of generic products from internal development and partners, new customer awards, driving higher unit sales, and a management emphasis looking to minimize unnecessary overhead and administrative costs. Today, Lannett is headquartered in Trevose, Pennsylvania, and employs approximately 500 employees.
The Company primarily generates revenue through filing and receiving approval and launch of abbreviated new drug applications (“ANDAs”), and launches of manufactured drugs from strategic partnerships, and from business and products acquired as a result of the purchases of Silarx Pharmaceuticals, Inc. and Kremers Urban Pharmaceuticals Inc., respectively, in 2015.
The Company currently maintains three primary facilities: (a) one 432,000 square foot facility in Seymour, Indiana which has a production capacity of approximately four billion doses based on the Company’s current product mix as of the Petition Date and plant configuration; and (b) two research and development facilities in Philadelphia, Pennsylvania—one of which contains the Company’s analytical research and development and quality control laboratories and is scheduled to close in 2023, and the other of which is currently not operating and is scheduled to be sold."
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