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October 23, 2022 – PhaseBio Pharmaceuticals, Inc. (Nasdaq: PHAS, “PhaseBio ” or the “Debtor”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case No. 22-10995 (Judge TBA). The Debtor, "engaged in the research and development of specialized, highly innovative therapies for patients with serious cardiovascular disease," is represented by Daniel J. DeFranceschi of Richards, Layton & Finger, P.A. Further board-authorized engagements include: (i) Cooley LLP as general bankruptcy counsel, (ii) SierraConstellation Partners LLC ("SCP") as financial advisors (and contributing a CRO), (iii) Miller Buckfire & Co. as investment bankers (in respect of DIP financing, Cowen Investment Banking (“Cowen”) having already been engaged as to asset sale efforts) and (iv) Omni Agent Solutions as claims agent.
The Debtor's lead petition notes between 100 and 200 creditors; estimated assets of $18.0mn; and estimated liabilities of $21.3mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) BioVectra ($22.2mn trade claim), (ii) Pharmaron, Inc. ($1.5mn trade claim) and (iii) MLM Medical Labs, LLC ($929k trade claim).
The Debtor is "a pre-revenue, emerging growth company. The Debtor currently has no product sales and does not anticipate having product sales unless and until it receives regulatory approval for bentracimab….The Debtor has incurred significant operating losses since its inception. Its net loss was $27.8 million for the six months ended June 30, 2022, and as of June 30, 2022, the Debtor had an accumulated deficit of $419.6 million."
Petition Date Highlights
- "Pre-Revenue" ($419.6mn of Accumulated Deficit) Developer of Therapies for Heart Patients Files for Chapter 11 with Estimated Liabilities of $21.3mn
- Debtor Looks to Protect Promising "Reversal Agent" Bentracima from Efforts by Investor SFJ Pharmaceuticals to Force Transfer of Bentracima Assets
- Debtor Expects to Evolve Existing "Proposal" from Un-Named "Large, Well-Capitalized Pharmaceutical Company" [AstraZeneca?] Offering $100.0mn in Cash to Stalking Horse "APA" in Near Term
- Lines Up $15.0mn in DIP Financing ($6.0mn New Money, $9.0mn Roll-Up) from Recent Purchaser of Prepetition First Lien Debt: JMB Capital Partners
in a press release announcing the filing (8-K here), te Debtor provides: "As part of the case, PhaseBio also intends to file a motion seeking authorization to pursue an auction and sale process under Section 363 of the U.S. Bankruptcy Code. The proposed bidding procedures, if approved by the court, would require interested parties to submit binding offers to acquire PhaseBio’s bentracimab program assets, which would be purchased free and clear of liens and interests. In anticipation of this sales process, PhaseBio has entered into a confidential non-binding agreement with a large pharmaceutical company with decades of experience in the areas of research, development, production, and commercialization of novel and advanced therapies and other medicines, including in the hospital and critical care space in the United States and the rest of the world."
The Debtor's CEO Jonathan Mow commented: "The Board and management team have thoroughly assessed all of our strategic options and believe that this structured process represents the best possible solution for PhaseBio, taking into account our financial needs and the challenges we have encountered while trying to negotiate a path forward with SFJ Pharmaceuticals. Since early 2022, we have been engaged in a strategic process to help identify potential third parties interested in advancing the bentracimab program, through which we received several compelling offers for the licensing and/or acquisition of certain commercial rights to bentracimab. Each offer, however, would have required SFJ to waive or revisit certain terms of their co-development agreement, which they were unwilling to do….Faced with few other alternatives, we proceeded in good faith with SFJ to negotiate a program transfer to SFJ that we would present to stockholders for their review and approval. We progressed to the point where we believed that the signing of a transaction in late September 2022 was imminent and were certainly disappointed by SFJ’s decision to abruptly walk away from a deal that they had proposed. We now believe that the sales process envisioned by the Chapter 11 restructuring process is the best way to maximize value for all of our stakeholders and give us the best opportunity to get bentracimab to market to benefit patients in need.”
Goals of the Chapter 11 Filing
The Perkins Declaration (defined below) provides: "Through this case, the Debtor intends to seek an expedited ruling from the Court resolving its ongoing dispute with SFJ. In particular, the Debtor anticipates* seeking a determination by the Court that: (a) SFJ’s investment with the Debtor under the CDA [Co-Development Agreement] constitutes equity contributions; (b) the security interest purporting to secure the Debtor’s Contingent Return-On-Investment Payments on SFJ’s equity contributions is invalid; (c) the TDP [Trial Data Package] is property of the Debtor’s estate; and (d) certain other provisions of the CDA are unenforceable. The Debtor further intends to pursue a sale of the Bentracimab Development Program to the Counterparty (or to winning bidder submitting a higher or otherwise better offer) in a value-maximizing transaction for the benefit of creditors and other stakeholders."
* The Debtor has yet to share its arguments as to characterization of the SFJ investment as equity or the invalidity of claimed security interests.
Bentracima and SFJ Pharmaceuticals, X, Ltd
The Debtor's stated catalyst for seeking bankruptcy shelter relates to a fight over the future of its lead product candidate bentracimab (or PB2452), a novel reversal agent for the antiplatelet drug ticagrelor. The "widely prescribed" ticagrelor is marketed and sold by AstraZeneca** (as “Brilinta”) to treat patients with acute coronary syndrome, or who have previously experienced a heart attack. Due to ticagrelor’s antiplatelet activity, however, patients on ticagrelor have an elevated risk of spontaneous bleeding (as well as increased risk of major bleeding during and after surgery) which explains why a "reversal agent" has potentially enormous value as a product to bolster the safety/efficacy of Brilinta. As the Perkins Declaration (defined below) puts it: "The availability of bentracimab as a specific reversal agent could expand ticagrelor’s use by mitigating concerns regarding bleeding risk and uniquely position ticagrelor as the only oral antiplatelet drug with a reversal agent."
** The Debtor acquired worldwide rights to develop and commercialize bentracimab pursuant to a license agreement the Debtor entered into with MedImmune Limited (a subsidiary of AstraZeneca) on November 21, 2017.
So how close is bentracimab to being FDA approved and available to heart patients (and monetizable)? Recent trials and an intense struggle with investor SFJ Pharmaceuticals, X, Ltd. (“SFJ,” which only stands to see a return on its $103.1mn investment if bentracimab receives regulatory approvals) suggest probably pretty close.
In November 2021, the Debtor published the results of a 200-patient trial (150 patients included in results with a further 50 subsequently enrolled) which "demonstrated that bentracimab immediately and sustainably reversed the antiplatelet effects of ticagrelor and was generally well tolerated by patients, with only five drug-related non-serious adverse events reported in three individuals….Based on feedback from the FDA, the Debtor intends to seek approval of bentracimab in the United States through an accelerated approval process to treat patients who present with uncontrolled bleeding or require surgery. The Debtor is currently targeting submission of a BLA [biologics license application] to the FDA for bentracimab in mid-2023."
In January 2020, the Debtor entered into a Co-Development Agreement (the “CDA”) with SFJ to obtain the investment funds needed to support the global development of bentracimab. Pursuant to the CDA, SFJ agreed to provide up to a $120.0mn investment, comprised of (a) $90.0mn in initial funding, and (b) up to $30.0mn in additional funding (with conditions for that additional tranche subsequently met). As of the Petition date, SFJ has invested a total of approximately $101.3 million with the Debtor pursuant to the CDA. NB: The Debtor estimates, apart from the SFJ investment, it has invested approximately $192.9mn in pursuing the development and intended commercialization of bentracimab.
As the Perkins Declaration notes as to SFJ's potential 500% return: "The CDA provides that SFJ will receive highly lucrative, return-on-investment payments only if the Debtor receives future regulatory approvals (collectively, the 'Contingent Return-On-Investment Payments')….
The Debtor’s obligation to make the following Contingent Return-On-Investment Payments is entirely contingent on bentracimab actually receiving approval by the FDA, EMA, and either of the applicable regulatory bodies for Japan or China, as follows:
- upon FDA approval of a BLA for bentracimab, the CDA obligates the Debtor to pay SFJ up to $330 million, comprised of (a) an initial payment of $5.0 million and (b) an additional $325.0 million payable in seven annual installments;
- if the EMA, or the national regulatory authority in certain European countries, authorizes a marketing approval for bentracimab, the CDA obligates the Debtor to pay SFJ up to $210 million, comprised of (a) an initial payment of $5.0 million and (b) an additional $205.0 million payable in seven annual installments; and
- if either the applicable regulatory bodies for Japan or China approves a marketing application for bentracimab, the CDA obligates the Debtor to pay SFJ up to $60 million, comprised of (a) an initial payment of $1.0 million and (b) an additional $59.0 million payable in eight annual installments
In summary, if bentracimab receives broad regulatory approval, SFJ stands to receive up to $600 million, representing over a 500% return on its total committed investment of $120 million (although the Debtor estimates only $101.3 million of that commitment has been actually invested by SFJ to date), but nothing at all if regulatory approval is not obtained. To date, none of these regulatory approvals has been received."
The "Going Concern Condition"
The CDA "contains an unusual, and highly punitive, remedy." If PhaseBio determines in accordance with GAAP that it is probable that PhaseBio will be unable to meet its obligations as they become due within a year, or (b) a “Going Concern” footnote is included in any of PhaseBio’s financial statements (a “Going Concern Condition”) and it fails to remedy the Going Concern Condition within 180 days, SFJ may elect to have PhaseBio’s business related to bentracimab transferred to SFJ for no additional consideration. Upon such a transfer, the CDA further provides that PhaseBio will not share in any revenues from the commercialization of bentracimab until (a) SFJ has received a 300% return on its investment in bentracimab, after which PhaseBio will be entitled to a mid-single-digit royalty on net sales of bentracimab in the United States and certain European countries, and (b) after SFJ has received an aggregate 500% return on its investment in bentracimab, PhaseBio will be entitled to a mid-single-digit royalty on net sales of bentracimab in the rest of the world.
On March 24, 2022, a "180-day Going Concern Cure Period" was triggered when a going concern qualifier was included in the Debtor’s audited financial statements from the period ending December 31, 2021 (10-K here).
On September 21, 2022, the day after the Going Concern Cure Period expired, SFJ notified the Debtor that, pursuant to CDA, it was electing to cause the Bentracimab Development Program to be transferred to SFJ as a result of the Debtor’s failure to remedy its Going Concern Condition within the Going Concern Cure Period….On October 1st, citing the Debtor's failure to effect a transfer of the bentracimab assets, SFJ commenced suit against the Debtor in the United States District Court for the Eastern District of Pennsylvania, asserting claims for breach of contract, declaratory relief with respect to the validity and enforceability of the CDA and Program Transfer Notice, and injunctive relief.
JMB Capital Partners Lending, LLC (“JMB”), which as described further below bought the Debtor's first lien debt at the beginning of October, has agreed to provide the Debtor up to $15.0mn in debtor-in-possession ("DIP") financing, with $12.0mn (minus amounts outstanding in respect of prepetition borrowings, ie $9.1mn, which are to be rolled up) of that amount to be made available upon issuance of an interim DIP order.
Asset Sale Efforts
On October 17th, the Debtor executed a confidential Non-Binding Proposal (the “Proposal”) with a large, well-capitalized pharmaceutical company (the “Counterparty”) with "decades of experience in the areas of research, development, production, and commercialization of novel and advanced therapies and other medicines, including in the hospital and critical care space in the United States and the rest of the world." The Debtor anticipates that the Proposal will evolve shortly into a definitive asset purchase agreement (the “APA”) further to which the Counterparty will be designated as the stalking horse bidder for the Debtor’s bentracimab program assets. Under the Proposal, to be reflected in the APA, the Counterparty will (a) pay the Debtor cash in the amount of $40.0mn (the “Upfront Payment”); (b) pay the Debtor cash in the total amount of $60.0mn upon the achievement of certain regulatory milestones with respect to bentracimab; (c) satisfy the cure amounts in connection with the assumption and assignment of designated executory contracts and leases; (d) assume any agreed upon liabilities; and (e) provide cash consideration to be paid upon the Debtor’s entry into and due performance under a transition services agreement (collectively, the “Purchase Price”) for the purchase of the Debtor’s bentracimab program assets. The Counterparty will provide a $4.0mn deposit into escrow and, if approved as the stalking horse bidder, would be entitled to a break-up fee of $2.0mn and reimbursement of expenses of up to $750,000, to be paid from the proceeds of a sale to an alternative purchaser.
As of the Petition date, the Debtor has approximately $9.1mn in total funded debt obligations with the entirety of that amount arising under a March 2019 loan and security agreement (the "Prepetition First Lien Loan and Security Agreement") with Silicon Valley Bank (“SVB”) as administrative agent, collateral agent and lender. Pursuant to the Prepetition First Lien Loan and Security Agreement, the Debtor could borrow up to $15.0mn issuable in three separate tranches (a) of $7.5mn, which was issued upon execution of the Prepetition Term Loan, (b) $2.5mn, which was issued in May 2019, and (c) $5.0mn, which was issued in October 2019.
The maturity date of the Prepetition Term Loan is March 1, 2023. The Debtor’s obligations under the Prepetition First Lien Loan and Security Agreement are secured by a first-priority security interest in substantially all of the Debtor’s assets pursuant to that certain Intellectual Property Security Agreement, dated as of March 19, 2020, by and among the Debtor and the Prepetition First Lien Lender (the “IP Security Agreement”). The Debtor is also obligated to comply with various other customary covenants, including restrictions on the Debtor’s ability to encumber its intellectual property assets.
On October 3, 2022, the Prepetition First Lien Lender and JMB entered into a Non-Recourse Loan Document Sale and Assignment Agreement (the “Assignment Agreement”), pursuant to which SVB sold and assigned to JMB all of the Prepetition First Lien Lender’s right, title, interest and obligations under the Prepetition First Lien Loan and Security Agreement. Pursuant to the Assignment Agreement, SVB resigned as Prepetition First Lien Agent and JMB became the successor Prepetition First Lien Agent. As of the Petition Date, the aggregate principal amount, plus accrued interest, owing by the Debtor under the Prepetition Term Loan (including the Tranche A Growth Capital Advances) is approximately $9.1mn. Notably, this debt is senior to any amounts owed to SFJ.
The Debtor also has outstanding trade debt totaling approximately $36.0mn.
Events Leading to the Chapter 11 Filings
In a declaration in support of first day filings (the “Perkins Declaration), Lawrence Perkins of SCP, now serving as the debtor's Chief Restructuring Officer commented: "[The] onerous Going Concern Condition provisions, and the unreasonable positions that SFJ has taken in connection therewith, have led to the Debtor’s need for relief under chapter 11.
Developing and commercializing biopharmaceutical products, including launching new products into the marketplace and conducting preclinical studies and clinical trials, is a capital-intensive and uncertain process that takes years to complete. Prepetition, the Debtor was unable to raise additional funding needed to support that process, due principally to the significant overhang of the Contingent Return-On-Investment Payments required under the CDA and the significant spending commitments required to develop and commercialize bentracimab. The Debtor’s distressed financial condition, resulting from this inability to obtain the funding needed to meet its obligations, led to the inclusion of a going concern qualifier in the Debtor’s audited financial statements from the period ending December 31, 2021….this going concern qualifier constituted a Going Concern Condition under the CDA and initiated a 180-day Going Concern Cure Period beginning on March 24, 2022, when the Debtor provided notice of the qualifier to SFJ. The Debtor was already actively seeking to address its need for additional capital, but those efforts were accelerated upon the commencement of the Going Concern Cure Period.
About the Debtor
According to the Debtor: "PhaseBio Pharmaceuticals, Inc. is a clinical-stage biopharmaceutical company focused on the development and commercialization of novel therapies for cardiovascular diseases. The Company’s pipeline includes: bentracimab (PB2452), a novel reversal agent for the antiplatelet therapy ticagrelor; and PB6440, an oral agent for the treatment of resistant hypertension. PhaseBio’s proprietary elastin-like polypeptide technology platform enables the development of therapies with potential for less-frequent dosing and improved pharmacokinetics, and drives both internal and partnership drug-development opportunities."
PhaseBio is located in Malvern, PA, and San Diego, CA.
The Perkins Declaration adds: "Founded in 2002, PhaseBio is a clinical-stage biopharmaceutical company focused on the development and commercialization of novel therapies for cardiovascular diseases.
PhaseBio’s business strategy is to identify, develop and commercialize novel therapies for cardiovascular diseases. Its portfolio of products includes a number of clinical and pre-clinical candidates that are currently in varying stages of development, none of which has received regulatory approval to date."
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