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April 20, 2020 – The Debtors notified the Court that their Modified Amended Joint Chapter 11 Plan of Reorganization became effective as of April 20, 2020 [Docket No. 542]. The Court had previously approved the Debtors’ Plan on April 11, 2020 [Docket No. 520].
On December 29, 2019, Melinta Therapeutics, Inc. and five affiliated debtors (formerly NASDAQ: MLNT, “Melinta” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-12748. In their lead Petition, the Debtors, a company focused on the development and commercialization of novel antibiotics to treat serious bacterial infections, noted between 200 and 1,000 creditors, estimated assets of $228.5mn and estimated liabilities of $289.0mn.
In a joint press release announcing Melinta's emergence, the former Debtors and new owners Deerfield Management Company, L.P. ("Deerfield") stated: "In accordance with the pre-negotiated Chapter 11 plan of reorganization, Melinta is now privately owned by affiliates of Deerfield and has eliminated its debt obligations, resulting in a well-financed and strongly positioned anti-infectives company with plans for future growth."
Deerfield Partner Jonathan Leff added: “The Melinta team has demonstrated an ability to successfully deliver important antibiotics to treat serious infections and has shown resilience and dedication during the most challenging of times…Covid-19 is a wake-up call regarding the dangers of infectious diseases and the need for innovative anti-infective products to serve the public health. We are delighted to join Melinta in this journey.”
In an 8-K, Melinta adds: "As of the Effective Date, and in accordance with the Plan, all existing equity interests in the Company (including the Company’s existing common stock and awards granted under the Company’s equity plans) have been canceled and holders of our common stock and other equity interests will not receive or retain any property on account thereof. Holders of Allowed Class 3 Secured Prepetition Credit Agreement Claims (which are secured claims held by the Supporting Lenders) have received 100% of the equity in the Reorganized Company. As of the Effective Date and in accordance with the Plan and the Confirmation Order, the common stock of the Reorganized Company will not be registered under the Securities Act of 1933, as amended or the Securities Exchange Act of 1934, as amended, listed on a national securities exchange, or quoted in the over-the-counter marketplace, and the Reorganized Company and the other Reorganized Debtors will no longer be required to, and will not, file reports or other information with the Securities and Exchange Commission."
In an earlier March 4th press release, the Debtors confirmed that Deerfield, the lenders under their senior prepetition credit facility, had been designated as the successful bidder for the Debtors' assets, credit bidding $140.0mn of prepetition debt for 100 percent of the emerged Debtors' equity.
The Debtors' memorandum in support of Plan confirmation provides:
"Specifically, the Plan, and the Global Settlement embodied therein, provide, among other things, that upon the Effective Date, and in each case subject to the terms and conditions of the Plan:
- (a) the Debtors shall establish the GUC Trust, which will be funded with the Initial GUC Trust Funding Amount and the Vatera GUC Trust Contribution Amount (totaling $4.0 million combined) and shall receive certain Avoidance Actions and commercial tort claims;
- (b) Holders of Allowed General Unsecured Claims will receive their Pro Rata Share of any cash distributions from the GUC Trust;
- (c) The Supporting Lenders will waive all their General Unsecured Claims against the Debtors;
- (d) Vatera’s $77,842,985 Allowed General Unsecured Claim will be subordinated to the extent of the Initial GUC Trust Funding Amount and the Vatera GUC Trust Contribution Amount;
- (e) MedCo’s $90 million Allowed General Unsecured Claim will be subordinated to the extent of the Initial GUC Trust Funding Amount and the Vatera GUC Trust Contribution Amount; (f) the Supporting Lenders will receive 100% of the equity interests in reorganized Melinta Therapeutics in full satisfaction of the Secured Prepetition Credit Agreement Claims; and
- (g) Holders of Allowed Administrative, Priority Tax, Other Priority Claims, and Other Secured Claims will be paid in full or otherwise left unimpaired."
The Disclosure Statement notes, “The Plan sets forth the proposed treatment of Claims against, and Interests in, the Debtors. It provides for payment in full or other treatment that would result in the unimpairment of Allowed Administrative, Priority Tax, Other Priority Claims, and Other Secured Claims. The treatment of the remaining Claims against and Interests in the Debtors depends on the outcome Debtors’ sales and marketing process. In the event that the Supporting Lenders are the Successful Bidder, then the Supporting Lenders shall receive 100% of the equity interests in reorganized Melinta Therapeutics (the “Reorganized Melinta Common Stock”) in full satisfaction of the Secured Prepetition Credit Agreement Claims, Holders of Allowed General Unsecured Claims will receive their Pro Rata Share of any cash distributions from a general unsecured claims trust to be established under the Plan (the “GUC Trust”), and all Interests in Melinta Therapeutics shall be cancelled, extinguished, and discharged. In the event that a third party is the Successful Bidder, Holders of Allowed Secured Prepetition Credit Agreement Claims shall receive their Pro Rata Share of the Distributable Cash, until such claims are paid in full in cash, Holders of Allowed General Unsecured Claims shall receive their Pro Rata Share of Distributable Cash, if any, remaining after all Secured Prepetition Credit Agreement Claims have been paid in full in cash and all Interests in Melinta Therapeutics shall be cancelled, extinguished, and discharged."
The Debtors' Liquidation Analysis (see below) indicates "Total Distributable Value" as between $69.5mn and $88.4mn (cash and cash equivalents at $54.0mn).
Global Settlement and GUC Trust
On February 7, 2020, the Debtors, the Committee, Vatera, the Supporting Lenders, and MedCo (collectively, the “Settlement Parties”) accepted and agreed to a settlement (the “Settlement”) memorialized in a Global Settlement Term Sheet filed at Docket No. 275.
Pursuant to the Plan and the Global Settlement Term Sheet, in the event that the Supporting Lenders are the Successful Bidder at the Auction, on the effective date of the Supporting Lender Transaction (the “Supporting Lender Transaction Effective Date”), if applicable, the Debtors shall establish the GUC Trust, which will be funded with $3.5 million (the “Initial GUC Trust Funding Amount”) and shall receive certain Avoidance Actions and commercial tort claims. The GUC Trust will be administered by a trustee (the “GUC Trustee”) and overseen by a committee comprised of three members of the Committee (as defined below) (the “GUC Trust Oversight Committee”). In the event that the Supporting Lenders are the Successful Bidder at the Auction, Holders of Allowed Class 4 General Unsecured Claims shall receive their Pro Rata Share of any distributions or recoveries from the GUC Trust, except that Vatera and MedCo have agreed to subordinate their Claims to those of other Holders of General Unsecured Claims with respect to the first $3.5 million distributed by the GUC Trust.
On March 2, 2020, the Debtors notified the Court that, absent any further qualified bids beyond that of their credit-bidding prepetition lenders (the "Supporting Lenders" or “Stalking Horse”), they had cancelled the auction scheduled for March 6th and designated the Stalking Horse as the successful bidder [Docket No. 372].
With this notice, the Debtors are now placed firmly on a path which has been largely anticipated from the Petition date, namely (as cited from their filing press release) that the "Supporting Lenders would acquire the Company as a going concern by exchanging $140 million of secured claims arising under its senior credit facility for 100 percent of the equity to be issued by the reorganized Company pursuant to a pre-negotiated chapter 11 plan of reorganization."
The following is an updated summary of classes, claims, voting rights, and expected recoveries (defined terms are as defined in the Plan and/or Disclosure Statement; recoveries assume the Supporting Lenders are the Successful Bidder; significant changes are in bold):
- Class 1 (“Other Priority Claims”) is unimpaired, presumed to accept, and not entitled to vote on the Plan. The aggregate amount of claims is $750k and expected recovery is 100%.
- Class 2 (“Other Secured Claims”) is unimpaired, presumed to accept, and not entitled to vote on the Plan. The aggregate amount of claims is $0-$100k and expected recovery is 100%.
- Class 3 (“Secured Prepetition Credit Agreement Claims”) is impaired and entitled to vote on the Plan. The aggregate amount of claims is $142.4mn and expected recovery is 98%. Each Holder of an Allowed Secured Prepetition Credit Agreement Claim shall receive: (1) If the Supporting Lenders are the Successful Bidder, the Holder’s Pro Rata Share of 100% of the Reorganized Melinta Common Stock; or (2) If a third-party bidder is the Successful Bidder, the Holder’s Pro Rata Share of the Distributable Cash, until all Secured Prepetition Credit Agreement Claims are paid in full.
- Class 4 (“General Unsecured Claims”) is impaired and entitled to vote on the Plan. In “Scenario 1” estimated total claims are $14.0mn and estimated recovery is 21%. In “Scenario 2” estimated total claims are $187.0mn and estimated recovery is 0.8%. Scenario 1 assumes that the amount of GUC Trust Distributable Cash is equal to the Initial GUC Trust Funding Amount less $500k in fees and expenses to fund the administration of the GUC Trust. In that scenario, an estimated $14.0mn in Allowed General Unsecured Claims would share on a Pro Rata basis in $3.0mn in GUC Trust Distributable Cash. As described in Section V.H below, Vatera and MedCo are entitled, pursuant to the Global Settlement Term Sheet, to their respective Pro Rata shares of all GUC Trust Distributable Cash in excess of $3.5mn. Thus, all GUC Trust Distributable Cash in excess of $3.5mn would be shared Pro Rata among an estimated $187.0mn in Class 4 General Unsecured Claims. Each Holder of an Allowed General Unsecured Claim shall receive: (A) If the Supporting Lenders are the Successful Bidders, the Holder’s Pro Rata Share of the GUC Trust Distributable Cash, if any, subject to the claim subordination provisions set forth in Section 5.04(f) and (g) of the Plan; or (B) if a bidder other than the Supporting Lenders is the Successful Bidder the Holder’s Pro Rata Share of any Distributable Cash remaining after all Allowed Secured Prepetition Credit Agreement Claims have been paid in full in cash.
- Class 5 (“Intercompany Claims”) is unimpaired, presumed to accept, and not entitled to vote on the Plan. On the Effective Date, all Intercompany Claims shall, at the election of the Debtors, with the approval of the Requisite Supporting Lenders (in the event the Supporting Lenders are the Successful Bidder), be either (A) Reinstated or (B) deemed automatically cancelled, released, and extinguished for no consideration; provided, however, that any Reinstatement of Intercompany Claims pursuant to the immediately preceding clause (A) shall not affect the deemed substantive consolidation of the Estate and Chapter 11 Case of each Debtor for distribution purposes only, pursuant to Section 5.01 of the Plan.
- Class 6 (“Intercompany Interests”) is unimpaired, presumed to accept, and not entitled to vote on the Plan. On the Effective Date, all Intercompany Interests shall, at the election of the Debtors, with the approval of the Requisite Supporting Lenders (in the event the Supporting Lenders are the Successful Bidder), be either (A) Reinstated or (B) deemed automatically cancelled, released, and extinguished for no consideration; provided, however, that any Reinstatement of Intercompany Claims pursuant to the immediately preceding clause (A) shall not affect the deemed substantive consolidation of the Estate and Chapter 11 Case of each Debtor for distribution purposes only, pursuant to Section 5.01 of the Plan
- Class 7 (“Section 510(b) Claims and Recharacterized Claims”) is impaired, deemed to reject, and not entitled to vote on the Plan.
- Class 8 (“Interests in Melinta Therapeutics”) is impaired, deemed to reject, and not entitled to vote on the Plan.
Events Leading to the Chapter 11 Filing
In a declaration in support of the Chapter 11 filing (the “Milligan Declaration”) [Docket No. 17], Peter Milligan, the Debtors' Chief Financial Officer, detailed the events leading to Melinta’s Chapter 11 filing; including macro-level difficulties related to bringing novel antibiotics to a market heavily impacted by competing generic products and the underperformance of three (of the Debtors' total of four) medications acquired in the Debtors' January 2018 purchase of the Infectious Disease Business (“IDB”) from The Medicines Company (“MedCo”). This transaction has generated significant litigation which has now been adjourned pending advancement of the Debtors' restructuring efforts. Ultimately, difficult market conditions as compounded by underperforming products led to breaches in respect of the Debtors' credit agreements.
The Milligan Declaration states, "The market for antibiotics has faced significant financial-related challenges in recent years. The costs associated with bringing an antibiotic medicine to market can total hundreds of millions of dollars, and physicians are often reluctant to prescribe novel antibiotics for fear that over-prescription of such medicines will cause the targeted pathogens to develop antibiotic resistance. As such, prescribers will often use potentially less effective, and often more toxic, generic antibiotics to preserve the effectiveness of the novel agent. And, when new antibiotic medicines are prescribed, they generally do not command high prices or high reimbursement rates, in part due the pricing expectations set by lower-cost generic antibiotics. Given the high cost of bringing antibiotic medications to the market and the limited returns, many large drug manufacturers have left the antibiotics industry over the last several years.
Other smaller, antibiotic-specific firms have dissolved or sought chapter 11 protection. This industry-wide strain has caused a contraction in antibiotics producers’ access to the capital markets.
The Company’s efforts to develop and commercialize its approved Medications have been costly, and the Company has borrowed substantial debt to continue to fund these efforts. For this reason, and in light of the financial covenants contained in the documents governing the Company’s funded indebtedness, slow revenue growth in the antibiotic sector placed the Company in financial difficulty.
The Company’s Medications have failed to generate levels of revenue necessary to cover its costs. As a result, the Company has incurred substantial losses from operations each year since its inception. This combination of slow sales growth, high up-front development costs, substantial distribution costs, and significant debt has strained the Company’s balance sheet, leaving the Company with insufficient liquidity and access to capital to successfully execute its go-forward business plan, absent a financial restructuring.
These challenges have been amplified by significant ongoing litigation comprising two related lawsuits in the Delaware Court of Chancery stemming from the MedCo Transaction (the ‘MedCo/Rempex Litigation’). In the MedCo/Rempex Litigation, certain plaintiffs assert that the Company wrongly withheld payment of $80 million deferred purchase price obligations and assumed liabilities due in connection with the MedCo Transaction. This asserted liability comprises two components. First, MedCo asserts that Melinta unjustifiably refused to pay $25 million in deferred purchase price on each of the 12- and 18-month anniversaries of the closing date of the MedCo Transaction (i.e., January 7, 2019, and July 7, 2019, respectively).
Second, MedCo asserts that Melinta wrongly failed to satisfy an assumed liability under the purchase and sale agreement governing the MedCo Transaction (the 'MedCo PSA')—namely, MedCo’s obligation to make a $30 million 'milestone' payment to the shareholders of Rempex Pharmaceuticals, Inc. ('Rempex') (a company MedCo acquired in 2013 and subsequently sold to Melinta in the MedCo Transaction) upon the European Medicines Agency’s approval of Vabomere.
Melinta does not deny that it withheld these payments. It contends, however, that it is entitled to set off against these obligations significant affirmative claims it has asserted against MedCo for breach of contract and fraud relating to the MedCo Transaction. In particular, Melinta asserts that certain of MedCo’s representations and warranties in the MedCo PSA—including that MedCo operated its IDB business in the ordinary course prior to closing, that financial statements provided to Melinta were prepared in accordance with GAAP, and that MedCo was not in default under any material contracts—were knowingly false. Melinta claims at least $80 million in damages on account of these misrepresentations and asserts that it is entitled to set off these damages against the $50 million in deferred purchase price and the $30 million milestone payment otherwise due under the MedCo PSA.
The Delaware Chancery Court scheduled a hearing in September 2019 to consider various pleadings-stage motions in the MedCo/Rempex Litigation, including, most significantly, MedCo’s motion for judgment on the pleadings in respect of its claim against Melinta for failing to pay the $30 million milestone payment under the MedCo PSA. Given Melinta’s financial circumstances, Melinta requested that MedCo agree to adjourn the September 2019 hearing to permit the parties time to discuss the potential for a consensual restructuring. MedCo agreed and, as a result, all matters between Melinta and MedCo that were previously scheduled for hearing in September 2019 were adjourned to a date to be determined.
Irrespective of the legal merits of the parties’ competing positions in the MedCo/Rempex Litigation, the fact remains that the MedCo Transaction has proven far less valuable than projected at the time of the transaction, and the IDB assets Melinta acquired from MedCo have significantly underperformed projections furnished by MedCo. Melinta believes that the projections furnished by MedCo in connection with the acquisition of the IDB Business—which constitutes three of the four Medications in Melinta’s portfolio—were unduly optimistic and were predicated on materially incorrect assumptions.
The underperformance of the IDB assets relative to MedCo’s projections and the Company’s borrowing associated with the MedCo Transaction, are critical drivers of the Debtors’ current financial predicament.
In light of the foregoing challenges and despite its substantial and significant efforts to increase revenue and net sales, the Company has struggled to comply with its financial covenants. Following slow 2018 results, the Company determined in late 2018 that it would likely require covenant relief from Deerfield, particularly in respect of the ‘going-concern’ covenant."
Liquidation Analysis (see Exhibit B of the Disclosure Statement for further notes)
Fifth Plan Supplement
On April 20th, the Debtors also filed a fifth Plan Supplement [Docket No. 540] which attached the following documents:
- Modified Exhibit B: Revised GUC Trust Agreement (Execution Version)
- Modified Exhibit F: Revised Schedule of Assumed Executory Contracts and Unexpired Leases
- Modified Exhibit G: Revised Schedule of Rejected Executory Contracts and Unexpired Leases
About the Debtors
According to the Debtors. “Melinta Therapeutics, Inc. is the largest pure-play antibiotics company, dedicated to saving lives threatened by the global public health crisis of bacterial infections through the development and commercialization of novel antibiotics that provide new therapeutic solutions. Its four marketed products include Baxdela® (delafloxacin), Vabomere® (meropenem and vaborbactam), Orbactiv® (oritavancin), and Minocin® (minocycline) for Injection. This portfolio provides Melinta with the unique ability to provide providers and patients with a range of solutions that can meet the tremendous need for novel antibiotics treating serious infections."
Melinta was formed as a private company in October 2000. In November 2017, the Company completed a reverse merger with Cempra Inc. (“Cempra”), a publicly traded clinical-stage pharmaceutical company focused on developing anti-infectives. In connection with the merger transaction, Cempra was renamed Melinta Therapeutics, Inc., and Melinta Therapeutics’ common equity became publicly listed on the Nasdaq. As a result of the merger, Melinta acquired a portfolio of development-stage drug medications from Cempra, including solithromycin and fusidic acid. Melinta has since divested fusidic acid and solithromycin, in light of difficulties developing and commercializing these medications.
Prepetition Corporate Structure
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