October 31, 2018 – Egalet Corporation and two affiliated Debtors (together, “Egalet” or the “Company”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 18-12439 [Docket No. 1]. Egalet, a specialty pharmaceutical company focused on developing, manufacturing and commercializing “abuse-deterrent” treatments for pain, is represented by Robert S. Brady of Young Conaway Stargatt & Taylor. Further board-authorized engagements include Dechert as counsel, Berkeley Research Group as restructuring advisor and Piper Jaffray & Co. as investment banker. The Egalet petition notes between 200 and 1,000 creditors; estimated assets of $119,858,000 and estimated liabilities of $159,233,000.
Egalet’s restructuring is a complicated one that depends on a number of pieces falling into place together. In addition to a restructuring support agreement (the “RSA”) with its creditors, it has announced an asset purchase agreement whereby it is buying certain assets and rights of Iroko Pharmaceuticals Inc. (“Iroko”) whose pharmaceutical products are expected to provide a revenue stream that, when combined with the debt reductions anticipated by the RSA, will result in a sustainable future for Egalet.
Asset Purchase Agreement
On October 30, 2018, Egalet entered into the APA with Iroko pursuant to which Egalet will acquire certain assets and rights of Iroko, including assets related to Iroko’s marketed products VIVLODEX®, TIVORBEX®, ZORVOLEX® and INDOCIN® (indomethacin) oral suspension and suppositories (“INDOCIN”).
The Iroko acquisition is conditioned upon the Debtors’ entry into, and emergence from, Chapter 11. Pursuant to the APA, Egalet will assume certain Iroko liabilities and issue to Iroko (i) $45 million in notes and (ii) 49.0% of Egalet’s post-emergence equity. In addition, at the closing of the transactions contemplated by the APA, Egalet will issue to Iroko an unsecured promissory note in the aggregate principal amount of $4,500,000 and enter into a royalty rights agreement pursuant to which Egalet will pay a 1.5% royalty on net sales of the combined Company’s products following the closing. Egalet expects the Iroko acquisition to close in the first quarter of 2019.
Restructuring Support Agreement and Plan
On October 30, 2018, Egalet also entered into the RSA with creditors holding approximately 94% in aggregate principal amount outstanding and in excess of a majority in number of the Company’s existing 13% Senior Secured Notes (the “First Lien Secured Notes”) and approximately 67% in aggregate principal amount outstanding of the Company’s existing 5.50% Convertible Senior Notes due 2020 (the “5.50% Notes”) and 6.50% Convertible Senior Notes due 2024 (the “6.50% Notes,” and together with the 5.50% Notes, the “Convertible Notes”), taken together as a single class.
The RSA contemplates the financial restructuring of the Company’s existing indebtedness on terms consistent with the RSA and the Debtors’ Plan. According to a Form 8-K (this 8-K also attaching the press release of the Company announcing the Iroko acquisition) filed by the Company, “The Plan provides for the following:
- Payment in full, in cash, of all allowed administrative claims, priority tax claims, statutory fees, professional fee claims and certain other priority and secured claims;
- The cancellation of all of the Company’s common stock and all other equity interests in the Company;
- The conversion of approximately $80 million of claims related to the Existing Senior Secured Notes (the ‘First Lien Secured Notes Claims’) into (i) $50 million in aggregate principal amount of Series A-1 Notes (as defined below), (ii) a number of shares of common stock of reorganized Egalet (‘New Egalet Common Stock’) representing, in the aggregate, 19.38% of the New Egalet Common Stock outstanding as of the Effective Date (subject to dilution only on account of the Management Incentive Plan) (the ‘First Lien Equity Distribution’), (iii) $20 million in cash less certain amounts related to adequate protection payments, and (iv) cash in an amount equal to certain unpaid fees and expenses of the trustee under the indenture governing the Existing Senior Secured Notes provided, however, that if the Debtors elect to consummate an offering (the ‘Rights Offering’) of subscription rights (the ‘Subscription Rights’) to eligible holders of the 5.50% Notes and 6.50% Notes to purchase up to $10 million of shares of New Egalet Common Stock, the shares of New Egalet Common Stock otherwise allocable to the First Lien Note Equity Distribution shall be distributed pursuant to the Rights Offering, and the holders of First Lien Secured Notes Claims shall receive up to $10 million in cash instead of the First Lien Note Equity Distribution;
- The conversion of $48.6 million of claims related to the 5.50% Notes and 6.50% Notes into (i) a number of shares of New Egalet Common Stock representing, in the aggregate, 31.62% of the New Egalet Common Stock as of the Effective Date (subject to dilution only on account of the Management Incentive Plan), and (ii) if the Debtors elect to consummate the Rights Offering and such holder is eligible to participate, the Subscription Rights;
- The implementation of a customary incentive plan for Egalet management pursuant to which 10.0% of the New Egalet Common Stock outstanding as of the Effective Date shall be reserved for participants on terms to be determined by Egalet’s board of directors after the Effective Date (the ‘Management Incentive Plan’); and
- The consummation of the Iroko Acquisition pursuant to the Purchase Agreement.”
Asset Purchase Agreement
On October 30, 2018, Egalet also entered into the APA with Iroko pursuant to which Egalet will acquire certain assets and rights of Iroko, including assets related to Iroko’s marketed products VIVLODEX®, TIVORBEX®, ZORVOLEX® and INDOCIN® (indomethacin) oral suspension and suppositories (‘INDOCIN”).
The Iroko acquisition is to be effectuated pursuant to, and is conditioned upon, the Debtors’ entry into, and emergence from, Chapter 11. Pursuant to the APA, Egalet will assume certain Iroko liabilities and issue to Iroko (i) $45 million in notes and (ii) 49.0% of Egalet’s post-emergence equity. In addition, at the closing of the transactions contemplated by the APA, Egalet will issue to Iroko an unsecured promissory note in the aggregate principal amount of $4,500,000 and enter into a royalty rights agreement pursuant to which Egalet will pay a 1.5% royalty on net sales of the combined Company’s products following the closing. Egalet expects the Iroko acquisition to close in the first quarter of 2019.
Events Leading up to the Chapter 11 Filing
In a declaration filed in support of the Chapter 11 filing (the “Radie Declaration”) [Docket No. 3], Robert Radie, the Company’s President and Chief Executive Officer, detailed the Company’s slide into Chapter 11, beginning with its inability to reach sustaining levels of revenue and rising levels of indebtedness; followed by a nosedive in the trading price of its Nasdaq-listed equity; the resulting delisting of that equity by Nasdaq; and the ignition, by that delisting, of a chain reaction of defaults in the Egalet’s borrowing agreements that ultimately led to the complete collapse of the Company’s capital structure.
The Radie Declaration notes, “For the years ended December 31, 2017, 2016 and 2015, the Debtors reported net losses of approximately $69.4 million, $90.6 million and $57.9 million, respectively. These losses were a result of the Debtors’ continued investments in their commercialization capabilities, the Debtors’ research and development activities, the Debtors’ increasing debt service obligations and general difficulties in increasing the revenue generated from the Debtors’ marketed products, including challenges specific to the abuse-deterrent market such as shifting legislative and social responses to the opioid epidemic.”
Between March 13, 2015 and October 26, 2018, the Company’s shared price declined from $15.92 to $0.10, plunging through Nasdaq’s $1.00 minimum bid price requirement in late 2017. In July 2018, the Company was ultimately demoted to the Nasdaq Capital Market from the Nasdaq Global Market and this delisting constituted a “Fundamental Change” under the indentures governing the Convertible Notes and required Egalet to make an offer to purchase all of the $24.7 million of the 5.50% Notes and all of the $23.9 million of 6.50% Notes then outstanding.
Negative covenants in the indenture governing the Debtors’ First Lien Secured Notes, however, did not provide the Company with the requisite restricted payment capacity to repurchase the Convertible Notes without defaulting those secured notes. As Robert Radie succinctly summed up the unavoidable collapse of the Debtors’ house of cards, “Given these circumstances and constraints, the Debtors’ existing capital structure was no longer sustainable.”
Prepetition Capital Structure
The Radie Declaration provides the following detail as to the Company’s prepetion capital structure:
13% First Lien Secured Notes
- Principal Governing Document(s): (i) Indenture, dated as of August 31, 2016, among Egalet Corporation, the other Debtors (as guarantors) and U.S. Bank National Association, as trustee and collateral agent (in such capacity, the “First Lien Notes Trustee”) and (ii) Collateral Agreement (as amended, supplemented, or otherwise modified from time to time, the “First Lien Secured Notes Collateral Agreement”), dated as of August 31, 2016, among Egalet Corporation, the other Debtors and the First Lien Notes Trustee
- Approximate Principal Amount Outstanding as of the Petition Date: $80.0 million
- Maturity Date: September 20, 2033
- Security Status: Secured
5.50% Convertible Senior Notes
- Principal Governing Document(s): Indenture, dated as of April 7, 2015, among Egalet Corporation, the other Debtors (as guarantors) and The Bank of New York Mellon, as trustee
- Approximate Principal Amount Outstanding as of the Petition Date: $24.7 million
- Maturity Date: April 1, 2020
- Security Status: Unsecured
6.50% Convertible Senior Notes
- Principal Governing Document(s): Indenture, dated as of December 27, 2017, among Egalet Corporation, the other Debtors (as guarantors) and The Bank of New York Mellon, as trustee
- Approximate Principal Amount Outstanding as of the Petition Date: $23.9 million
- Maturity Date: December 31, 2024
- Security Status: Unsecured
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