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May 9, 2023 – Vyera Pharmaceuticals, LLC and five affiliated debtors (together, "Vyera*" or the “Debtors”) filed for Chapter 11 protection (subchapter V) with the U.S. Bankruptcy Court in the District of Delaware, lead case No. 23-10605 (Judge TBD). The Debtors, "a biopharmaceutical company committed to developing and commercializing treatments that address serious and rare diseases with high unmet medical needs," are represented by R. Craig Martin of DLA Piper LLC (US). Further Board authorized appointments include: (i) Sierra Constellation Partners LLC ("Sierra") as financial advisors (with Sierra's Lawrence Perkins to serve as CRO), (ii) Alvarez & Marsal Securities, LLC as investment bankers and (iii) Epiq Corporate Restructuring, LLC as claims agent.
*The Debtors are owned by Swiss-based Phoenixus AG ("Phoenixus"), formerly known as Turing Pharmaceuticals AG and then Vyera Pharmaceuticals AG. The lead Debtor Vyera Pharmaceuticals, LLC was formerly known as Turing Pharmaceuticals, LLC. In August 2022, the shareholders of Phoenixus elected a new independent Board of Directors, consisting of Derek Pitts, Ivona Smith, and Thomas Allison. Pitts, Allison, and Smith have no prior connection to any interested party to existing derivative litigation and no material past or present business or economic relations with the Debtors (ie with Martin Shkreli). See "Events…" below on the incremental, painful removal of Martin Shkreli from control/ownership of the Debtors.
The Debtors’ lead petition notes between 100 and 200 creditors; estimated assets between $10.0mn and $50.0mn; and estimated liabilities between $1.0mn and $10.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Duane Morris LLP ($2.2mn disputed, contingent litigation cliam), (ii) Cardinal Helath, Inc. ($453k trade payable) and (iii) Ani Pharmaceuticals Inc.($440k trade payable).
Petition Date Highlights
- Biopharmaceutical specializing in treatments for otherwise "unmet medical needs" formerly controlled by Martin Shkreli files for Chapter 11 protection (subchapter V)
- Debtors cite generic competition (revenues declining from $74.0mn to $10.1mn in recent years) and multiple Shkreli-centered litigations as preceipitating need to seek bankruptcy shelter
- Debtors intend to pursue sale transactions with parallel going-concern transaction with respect to "a promising orphan drug" ORL-101 (NB: the already filed Plan is a "Subchapter V Plan of Reorganization and Liquidation")
- Bulk of potential recovery for unsecured creditors to come from earnouts related to sale of ORL-101 business
- Prepetition, five-month asset marketing effort led by Alvarez & Marsal Securities, LLC has not yet yielded a binding offer
Goals of the Chapter 11 Filing
The Debtors provide: "The Plan is structured to support one or more sale transactions with respect to certain of the Debtors’ assets and a parallel going-concern restructuring transaction with respect to Debtor Orpha Labs AG with respect to the development of ORL-101, a promising orphan drug.
The decision to seek protection under subchapter V was taken only after careful consideration of all available alternatives. The subchapter V alternative best preserves liquidity, funds the process to develop the Debtors’ most promising drug (ORL-101) without additional investment or dilution to shareholders, and thus enhances potential recoveries to all stakeholders while implementing a global court-supervised process to administer and pay claims of creditors and other parties holding unliquidated claims….Along with the petitions, the Debtors filed their Joint Subchapter V Plan of Reorganization and Liquidation (the 'Plan'), which seeks to consolidate the Debtors and estates for distribution purposes, establish a liquidation trust to consolidate estate funds, hold additional recoveries from the sale of assets and prosecution of estate causes of action, and fund the business plan to monetize ORL-101 which, if successful, could result in full payment of creditor claims and provide a substantial distribution to shareholders of Phoenixus AG. The Debtors are pursuing an expedited Plan confirmation process to minimize administrative costs and vigorously pursue the monetization of ORL-101."
The subchapter V Plan [Docket No. 11] provides: "This Plan comprises a sale or liquidation of the Liquidating Debtors, the preservation of Phoenixus, and the reorganization of the Reorganized Debtor to maximize the value of the Debtors’ Estates for the benefit of Holders of Allowed Claims and Equity Interests. First, through this Plan, the Debtors will establish a Liquidating Trust, administered by a Liquidating Trustee, into which will flow: (i) the Liquidating Trust Cash; (ii) the right to receive PRV Sale Proceeds, if any, upon the monetization of a PRV [ie a FDA issued priority review voucher]; (iii) the Retained Causes of Action; and (iv) the Liquidating Debtor Sale Proceeds, if any. In parallel, the Debtors will reorganize the Reorganized Debtor to move forward with the ORL Business and their efforts to obtain a PRV from the FDA. On the Effective Date, Holders of Allowed Claims will receive a Liquidating Trust Certificate (along with Pro Rata Distributions from Excess Liquidating Trust Cash, if available), entitling such Holder to a Pro Rata Distribution in Cash from the Liquidating Trust out of the PRV Sale Proceeds, if any, subject to the conditions set forth below.
The Plan is structured to support one or more sale transactions with respect to the assets of the certain of the Debtors and a parallel going-concern restructuring transaction with respect to Orpha Labs (referred to therein as the Reorganized Debtor). The cornerstone of this Plan lies in providing creditors with Liquidating Trust Certificates on the Effective Date (along with Pro Rata Distributions from Excess Liquidating Trust Cash, if available), entitling applicable creditors to Pro Rata Distributions in Cash from the Liquidating Trust out of the PRV Sale Proceeds, if any, in lieu of immediate Cash Distributions from the Liquidating Trust Assets. Cash Distributions from the Liquidating Trust Assets is likely to pay out general unsecured creditors a fraction of what is claimed. By contrast, assuming down-the-line success of the ORL Business, providing Liquidating Trust Certificates could make creditors whole, paying them 100 cents on the dollar. Further, to the extent any PRV Sale Proceeds are sufficient to satisfy creditors in full, any remainder will flow up to Phoenixus and from there to its shareholders."
The following is summary of classes, claims, voting rights and expected recoveries (Defined terms, not otherwise defined below, are as defined in the Plan, see also the Liquidation Analysis below):
- Class 1 (“Priority Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 2 (“Convenience Class Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 3(a) (“General Unsecured Claims – Trade and Litigation Claims”) is impaired and entitled to vote on the Plan. each holders will receive a Liquidating Trust Certificate (along with Pro Rata Distributions from Excess Liquidating Trust Cash, if available), entitling such Holder to a Pro Rata Distribution in Cash from the Liquidating Trust out of the PRV Sale Proceeds, if applicable.
- Class 3(b) (“General Unsecured Claims – FTC Claims”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 4 (“Equity Interests”) is unimpaired, deemed to accept and not entitled to vote on the Plan.
- Class 5 (“Intercompany Claims”) is impaired, deemed to accept and not entitled to vote on the Plan.
- “Excess Liquidating Trust Cash” means Liquidating Trust Cash in excess of the budgeted amount necessary to fund the ORL Business, which budgeted amount may be modified from time to time in the Debtors’ or the Liquidating Trustee’s, as applicable, business judgment.
- “Liquidating Trust Cash” means all Cash on Hand on the Effective Date.
- “PRV Sale Proceeds” means the proceeds, if any, from the sale by the Reorganized Debtor or the Liquidating Trustee, as applicable, of a PRV [ie a priority review voucher] issued to the Reorganized Debtor by the FDA.
On December 1, 2022, the Company engaged Alvarez & Marsal Securities, LLC, as investment banker, to evaluate and pursue potential financing, sale, or restructuring opportunities. As part of these efforts, A&M contacted 151 parties, of which eight (8) executed non-disclosure agreements, and four (4) submitted non-binding proposals, each varying significantly as to the sought-after Company assets. As of the filing of this Plan, the Debtors have not entered into any binding or otherwise definitive documentation with respect to any Sale Transaction. Notwithstanding, the Debtors are continuing to engage with and seek out potential purchasers of the Debtors’ assets."
Events Leading to the Chapter 11 Filing
All paths ultimately lead to Shkreli, so a brief history of his ownership/control of the Debtors is important: "In 2015, Vyera acquired the U.S. licensing rights to Daraprim from the then-owner, Impax Laboratories, for $55 million. At the time of Vyera’s acquisition, Daraprim had a list price of $17.60 per tablet. After purchasing the rights to Daraprim, Martin Shkreli, then-CEO, raised the price of the drug from $17.60 to $750 per tablet effective August 11, 2015….Furthermore, Shkreli was found to have initiated a scheme to block the entry of generic drug competition into the market in order to maintain the sales of Daraprim (detailed further in the FTC Litigation). Through exclusive supply agreements, Shkreli had blocked access to the two most important manufacturers of the API for Daraprim to other manufacturers. Shkreli refused to apologize or change course and stated that he wished he had raised the price even higher.
On December 18, 2015, Shkreli was arrested and charged with securities fraud in connection with prior dealings unrelated to the Debtors. In August 2017, following a six-week trial, a federal jury convicted Shkreli of two counts of securities fraud and one count of securities fraud conspiracy. Shkreli served as the chairman of the Board of Directors of Phoenixus until January 20, 2016, resigning on February 10, 2016. Although Shkreli’s incarceration began in September 2017, he remained Phoenixus’s largest shareholder, and allegedly continued to attempt to direct the Debtors’ businesses from prison. Shkreli obtained a contraband cell phone and was found to have used it to communicate with certain directors of the Debtors….These directors are no longer part of the current Board of Directors.
On August 16, 2021, following an arbitration between Shkreli and a former business partner, the United States District Court for the Southern District of New York appointed Derek Abbott as a receiver to collect and sell the Shkreli’s Phoenixus stock. The Court instructed the receiver to use the proceeds of the sale of Shkreli’s shares to pay the judgment. In June 2022, the Court further authorized the receiver to act in Shkreli’s place with respect to all of Shkreli’s shares of Phoenixus…"
The Debtors group the circumstances leading to their Subchapter V Cases into four categories: (i) introduction of general alternatives and declining sales; (ii) the impact of Martin Shkreli’s actions, and the resulting litigation, on the Debtors; (iii) the impact of the related FTC Litigation stemming therefrom; and (iv) the impact of litigation brought, or threatened, against the Debtors.
- Introduction of Generic Drugs. The success of the Debtors’ businesses and operations is predicated upon its ability to generate sales from the marketed Products and commercialize new products. From 2016 through 2019, the Debtors grossed between $55 million and $74 million from sales of Daraprim. Since 2019, revenues have declined to $21.2 million in 2021 and $10.1 million in 2022, primarily caused by the entrance of several generic alternatives in 2021 and 2022 into the marketplace….As of the Petition Date, on a consolidated basis, the Debtors incurred a net income loss of $1,936,787. In an effort to reduce the Debtors’ liquidity constraints, prior to the Petition Date, the Debtors terminated a number of officers and field-based employees in Vyera and Oakrum, cutting the budget by approximately $1 million. Additionally, the Debtors terminated relationships with certain suppliers and service providers to further reduce expenses.
In May 2022, the Debtors engaged Bourne Partners to explore a sale of the Oakrum product portfolio. The initial bids received were promising, but following further due diligence by the third-party bidders and due to challenging market conditions, the bidders either lowered their proposals or walked away entirely, leaving a single bidder. In June 2022, ANI Pharmaceuticals acquired four of Oakrum’s twelve products for approximately $8 million.
- FTC Litigation. On January 27, 2020, the Federal Trade Commission (“FTC”) and the state of New York brought an antitrust action against Vyera, Phoenixus, Shkreli, and Mulleady (the “Antitrust Defendants”) in the United States District Court for the Southern District of New York (the “FTC Litigation”). On April 14, 2020, six more states joined the FTC Litigation. The plaintiffs alleged that the Antitrust Defendants had violated the antitrust laws by pursuing an elaborate, anticompetitive scheme to illegally preserve a monopoly for Daraprim by blocking lower-cost generic competition. Specifically, the plaintiffs alleged that the Antitrust Defendants knew the exorbitant revenue stream from Daraprim would be short-lived, and proactively engaged in anticompetitive conduct to block generic entry into the market, including prohibiting the resale of Daraprim to generic companies, making it nearly impossible for those companies to conduct requisite testing to introduce generic alternatives to Daraprim.
According to the plaintiffs, the Antitrust Defendants allegedly cut off the U.S. supply of pyrimethamine (the active pharmaceutical ingredient necessary to manufacture Daraprim) through exclusive supply agreements with the manufacturers of the ingredient, and that there was no legitimate, pro-competitive justification for those agreements. Finally, the plaintiffs alleged that the Antitrust Defendants signed 'data-blocking' agreements with Vyera’s distributors to prevent them from selling Daraprim sales data to third parties. The data-blocking agreements allegedly obscured Daraprim sales and prevented generic companies from accurately assessing the market opportunity for a generic Daraprim product.
On December 7, 2021, Vyera, Phoenixus, and Mulleady entered into a Consent Order with the FTC and the States. The Consent Order (i) required Mulleady to pay a fine of $250,000 and largely banned Mulleady from the pharmaceutical industry for several years, subject to certain exceptions; (ii) required Vyera to pay $10 million into a settlement fund in January 2022; and (iii) requires contingent payments of up to $30 million to be paid upon the monetization of any assets of Phoenixus and Vyera within 5 to 10 years following the date of the Consent Order.
As Shkreli did not reach a settlement with respect to the FTC Litigation, the claims against Shkreli proceeded to a bench trial in December 2021. On January 14, 2022, the Court found Shkreli liable on all counts, enjoined him from the pharmaceutical industry for life, and ordered him to pay $64.6 million in disgorgement. Shkreli’s appeal is currently pending before the United States Court of Appeals for the Second Circuit.
- Derivative Litigation. On November 23, 2020, while the FTC Litigation was ongoing, Wormwood Capital LLC ('Wormwood'), SPQR Capital (Cayman) Limited, Sabine Gritti, Andrew Pizzo, and Antoine Verglas (collectively, the 'Derivative Plaintiffs') filed a derivative action (the “Derivative Litigation”) against four of Phoenixus’s then officers and directors—Mulleady, Akeel Mithani, Jordan Walker, and Averill Powers (the “Derivative Defendants”) in New York state court. The Derivative Plaintiffs alleged derivative claims on behalf of Phoenixus and named Phoenixus as a nominal defendant. The lead plaintiff, Wormwood, is a Delaware LLC that has invested approximately $5.5 million in Phoenixus since 2015. The majority of membership interests in Wormwood are held indirectly for the beneficial interest of Ron Tilles, who served as CEO of Phoenixus and Vyera from approximately January 2016 through April 2017.
At base, the Derivative Plaintiffs alleged that the Derivative Defendants conspired with each other and Shkreli to engage in self-dealing and took actions to enrich themselves at the expense of Phoenixus via SevenScore and Dermelix. In connection therewith, the Derivative Plaintiffs allege that Phoenixus’s 2018 and 2019 financial statements are false and misleading, and consequently made it difficult for Phoenixus’s shareholders to assess its performance or otherwise evaluate the value of their shares.
In February 2021, the Derivative Defendants moved to dismiss the Derivative Litigation. While initially successful, the dismissal was reversed on appeal, and the case was remanded to the trial court on March 10, 2022. The Derivative Plaintiffs have not taken any further steps in these proceedings.
- Cerovene and Dr. Reddy Litigation. On September 16, 2022, Vyera and Phoenixus received a draft complaint from Cerovene, Inc. ('Cerovene') and Dr. Reddy’s Laboratories, Inc. ('DRL'), who partnered in 2017 to develop a generic form of the drug Daraprim. The complaint is premised largely on the same conduct that was the subject of the FTC Litigation. Specifically, Cerovene and DRL alleged that Vyera and Phoenixus’s restricted distribution system inhibited their ability to obtain Daraprim DRL and that Vyera and Phoenixus’s exclusive supply agreements delayed their ability to find a supplier. Cerovene and DRL allege that, consistent with the District Court’s finding in the FTC Litigation, this conduct delayed their ability to bring their generic Daraprim to market. While Cerovene and DRL have yet to bring this action formally, the threatened claim, albeit contingent, unliquidated, and disputed, could dwarf the other liabilities and cash balances of the Debtors."
The Perkins Declaration [Docket No. 10] provides: "As of the Petition Date, the Debtors believe that they have no secured debt. Rather, the Debtors’ capital structure is made up solely of unsecured debt and equity interests….As of the Petition Date, the Debtors have less than $7.5 million outstanding in noncontingent liquidated unsecured claims.
About the Debtors
According to the Debtors: “Vyera is a United States based biopharmaceutical company committed to developing and commercializing treatments that address serious and rare diseases with high unmet medical needs. Vyera supports programs that offer financial assistance to patients in need and gives discounts to organizations that provide care to underserved populations. Vyera's research and development efforts focus on novel treatment options for toxoplasmosis and other rare or serious health conditions. “
Liquidation Analysis (see Docket No. 11)
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