Lucira Health, Inc. – Back-Up Bidder Pearsanta Objects to Choice of Pfizer as Successful Bidder; Accuses Debtor of Bad Faith Preference for Pfizer and Leaving Money on the Table

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April 10, 2023 – Back-up bidder Pearsanta, Inc. ("Pearsanta") has filed an objection to the results of the Debtors' April 6th auction, arguing that the Debtors' choice of Pfizer, Inc. ("Pfizer") as the successful bidder, notwithstanding what Pearsant argues was a lower Pfizer bid, is indicative of a bias for Pfizer that has been clear throughout the auction/sale process and "belies a valid exercise of either business judgment or good faith."

Pearsanta rejects the Debtors' justification of the Pfizer choice based on a superior "ability to close" (Pfizer's willingness to serve as back-up bidder, should Pearsanta stumble, mooting that argument) and argues that the Pfizer choice "has left money on the table without any justification for doing so…. Pfizer got preferential treatment. At best, Pearsanta was used for leverage without any good faith intention to accept their bid."

The auction transcript below provides detail as to the final bids of each of Pfizer and Pearsanta [Docket No. 237].

UPDATE: Pfizer's APA was filed on April 12 as Exhibit A to Docket No. 245. The APA lists a purchase price comprised of: (i) the assumption of Assumed Liabilities; (ii) the sum of: (A) a cash payment (the “Cash Payment”) equal to $5,000,000, plus (B) the payment of Cure Costs in respect of the Assigned Contracts set forth on Schedule 1.1(e) (other than Cure Costs for the Jabil Contracts which shall be paid by Buyer pursuant to Section 4.1(a)(ii)(C)); plus (C) an additional cash payment of $7,000,000 less the aggregate amount of paid Cure Costs associated with (x) the Jabil Contracts and (y) any Transition Contracts, if any (the “Additional Amount”); provided that Buyer must provide Seller with a detailed written accounting of the Cure Costs paid by Buyer under subclauses (x) and (y) within sixty-five (65) days following Closing. 

From the transcript: 

Pfizer's counsel: "Pfizer bids $5 million cash, assumption of $5,417,080.93 for a total of $10,417,080.93….And then they have added two additional contracts. The cure amounts totalled $3,785,359.22….The two contracts, AMA is $2,192,476.16, and BioSphere is $1,592,883.06, for a total of $3,785,359.22….They've also indicated an additional $7 million. That brings their total to $21,202,440.15."

Pearsanta's counsel: "Okay. So Pearsanta is prepared to, um, bid a higher amount based upon its APA and the differences would be the cash portion of the offer would be 13,407,117.· So again, 13,407,177 in cash. And they want to add the BioSurg, Pegatron, iPACK APA, and Bluebird contracts as assumed contracts which totals 10,443,432 [for a total of $23,850,609]."

The Pearsanta Objection

The Pearsanta objection provides: "The justification for the selection of the Pfizer bid – its ability to close – belies a valid exercise of either business judgment or good faith. By accepting Pfizer’s bid, the Debtor has left money on the table without any justification for doing so.

That Pfizer has a greater ability to close should be factored out of the analysis because, by participating, Pfizer agreed to accept a back-up bidder position if its bid proved unsuccessful….This means that the Debtor could have inked a deal with Pearsanta on better terms, and then, if the deal hadn’t worked out due to an inability to close, it could have gotten the exact same deal it has now. By choosing Pearsanta, the Debtor would have been out nothing, but would have gained something. 

There was no risk to the Debtor in taking Pearsanta’s higher offer. Yet it declined. There was no principled reason for the Debtor’s decision not to structure the deal that way – it had qualified Pearsanta, and Pearsanta remains today the back-up bidder. Indeed, rather than accept the bid, Pearsanta was subject to additional capital demands, which on information and belief, were not made to Pfizer. The same was true for the handling of certain creditors. Pfizer got preferential treatment. At best, Pearsanta was used for leverage without any good faith intention to accept their bid.

By taking this approach from the outset (not reviewing the term sheet, imposing conditions unlike those imposed on Pfizer, and twice choosing the lower-priced alternative), the auction process was tainted and unfair to the creditors."

Case Status

On February 22, 2023, Lucira Health, Inc. (Nasdaq: LHDX; “Lucira” or the “Debtor”) filed for Chapter 11 protection noting estimated assets between $100.0mn and $500.0mn (no funded debt); and estimated liabilities between $50.0mn and $100.0mn (the Debtor further notes assets of $145.9mn and liabilities of $84.8mn as at December 31, 2022). At filing, the Debtor, a developer of infectious disease testing kits, cited a decline in COVID test kit sales and the failure of the FDA to approve its 2022-2023 flu testing kit as precipitating its need to seek bankruptcy shelter. In a case of unpropitious timing and/or a disastrous lack of communication, the FDA announced approval of the testing kit on February 24, 2023.

The unsurprisingly aggrieved Debtors and the FDA have have since engaged in a spirited blame game.

The Bidding Procedure Motion

The Debtor's bidding procedures/sale motion [Docket No. 16] states “Following an extensive prepetition marketing process, the Debtor determined, in consultation with Armanino LLP (‘Armanino’) and the Debtor’s other advisors, that an expedited sale process under chapter 11 of the Bankruptcy Code is the best path forward to consummate a value-maximizing Sale of its Assets. For the reasons set forth herein, a marketing and Sale process under section 363 of the Bankruptcy Code provides the Debtor with certain advantages that were not available to the Debtor during the prepetition marketing process.”

Marketing Efforts

In a declaration in support of the bidding procedures motion [Docket No. 18], Alexander Brandtneris of Armanino states, “Beginning in the Fall 2022, following an unanticipated delay in the FDA’s approval of the Debtor’s combination test kit for COVID-19 and influenza A and B and a decline in COVID19 testing, the Debtor determined that it was necessary to explore strategic alternatives aimed at maximizing optionality while containing costs wherever possible to best preserve available liquidity and maximize the value of the Assets for all its stakeholders.

On November 13, 2022, the Debtor retained Armanino to assist in these efforts. Commencing shortly thereafter, the Debtor, with the assistance of its professional advisors, pursued multiple work streams to evaluate a range of strategic alternatives with the goal of maximizing the value of the Debtor and its Assets. The Debtor, in consultation with Armanino, launched a marketing process for the Assets on December 13, 2022. Armanino contacted or received inbound interest from approximately 177 strategic and financial parties regarding a potential transaction for the Debtor or the Assets. These parties were provided non-confidential presentation materials prepared by the Debtor, including a sale memorandum with the detailed background of the Debtor and the Assets. Certain confidential information (including access to a virtual data room) was provided to approximately 35 parties who executed a non-disclosure agreement. All interested parties who executed a non-disclosure agreement were also invited to attend a post-NDA webinar ('Webinar') with the Debtor’s management on January 5, 2023. 

Despite the best efforts of the Debtor and its advisors, the strategic alternative exploration and evaluation process—including the marketing process—did not produce a satisfactory stalking horse offer to purchase the company as a going concern or to purchase the Assets outside of the protections afforded by a chapter 11 process. Without a clear out-of-court solution to maximize value, the Debtor pivoted to preparing for a chapter 11 filing and Sale process under section 363 of the Bankruptcy Code."

About the Debtors

According to the Debtor: “Lucira is a medical technology company focused on the development and commercialization of innovative infectious disease tests to make lab-quality diagnostics more accessible. Lucira designed its test platform to provide accurate, reliable, PCR-quality test results anywhere and at any time. Beyond its already commercialized COVID-19 and Point of Care COVID-19 & Flu Tests, Lucira is working on new diagnostic tests for respiratory infections and other categories including women’s health and sexually transmitted infections (STIs).”

The Nadiro Declaration adds: "The Debtor is a corporation organized under the laws of the State of Delaware, with its principal office located in Emeryville, California. Founded in 2013, Lucira is a medical technology company focused on the development and commercialization of transformative and innovative infectious disease test kits.

Lucira has developed a proprietary testing platform that produces molecular testing for infectious diseases in a single-use and consumer-friendly test kit. That platform enables Lucira to develop a pipeline of infectious disease test kits, which, to date, has focused on respiratory diseases, including COVID-19 and influenza A and B virus indications. Lucira’s test kits are powered by two AA batteries and fit in the palm of a hand. The kits are designed to securely deliver a clinically relevant test result to users at home, to healthcare providers, and to required public health authorities, anywhere and at any time. In addition, the kits are coupled with a digital platform, Lucira Connect, which is able to connect users with virtual care providers that can prescribe treatment plans, including antiviral medications if necessary.

Lucira’s business model has been to pursue the commercialization of a broad menu of test kits for use within point-of-care ('POC') and prescription or over-the-counter ('OTC') athome settings through partnerships with customers, such as hospital networks, payors, corporate senior living facilities and large employers. All of Lucira’s net sales have been derived from sales of its test kits through its healthcare, business-to-business, international and direct-to-consumer channels."  

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