Aceto Corporation – Files Chapter 11 Following Failure to Counter Generic Headwinds, Announces $338mn (Cash) Stalking Horse Bid of New Mountain Capital and DIP Financing

February 20, 2019 – Aceto Corporation and eight affiliated Debtors (“Aceto” or the “Company”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of New Jersey, lead case number 19-13448. The Company, an international company engaged in the development, marketing, sale and distribution of human health products, pharmaceutical ingredients and performance chemicals, is represented by Kenneth A. Rosen of Lowenstein Sandler LLP. Further board-authorized engagements include (i) Simmons & Simmons as special foreign counsel to represent and assist the Company in carrying out its duties in connection with possible foreign matters, (ii) PJT Partners LP as investment banker and financial advisor, (iii) AlixPartners affiliate AP Services LLC to provide restructuring services, including the secondment of Rebecca Roof as chief financial officer, and (iv) Prime Clerk as claims agent.

The Company’s petition notes between 200 and 1,000 creditors, estimated assets of $753.1mn and estimated liabilities of $702.8mn. Documents filed with the Court list the Company’s three largest unsecured creditors as (i) Citibank, N.A., as Trustee ($143.8mn unsecured convertible notes), (ii) Aurobindo Pharma Ltd. ($41.0mn trade debt) and (iii) Thinq Pharma ($6.7mn trade debt).

Asset Purchase Agreement and DIP Financing

In a press release detailing the Chapter 11 filing (further detail provided in a 10-Q filed with the SEC on February 20, 2019), Aceto also announced that it had entered into a ‘stalking-horse’ asset purchase agreement with NMC Atlas, L.P., an affiliate of New Mountain Capital, pursuant to which NMC Atlas will acquire substantially all of the assets of the Company’s Pharmaceutical Ingredients and Performance Chemicals segments and the Nutritionals portion of the Human Health segment for an aggregate purchase price of $338mn in cash, plus the assumption of certain liabilities and certain adjustments, on a cash-free and debt-free basis.  Aceto’s foreign chemicals business subsidiaries are not included in the filing but will be included in the sale. 

In addition, Aceto intends to separately enter into a stalking horse agreement for its subsidiary, Rising Pharmaceuticals. Aceto expects to complete the dispositions of its chemicals and Rising businesses before its fiscal year end on June 30, 2019.

Aceto further announced that it had received a commitment for debtor-in-possession (“DIP”) financing of $60 million from a syndicate of lenders led by Wells Fargo Bank, N.A. The DIP financing will finance Aceto’s working capital needs through the completion of the sales transactions and support payments to vendors and suppliers for post-petition purchases in the ordinary course. Pursuant to the terms of the DIP credit agreement, interest will accrue on the principal balance of the DIP loans at a rate per annum equal to (a) LIBOR for such interest period plus 7.00% in respect of Eurodollar loans and (b) the alternate base rate plus 6.00% in respect of ABR borrowings.

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Roof Declaration”), Rebecca Roof, Aceto’s Chief Financial Officer detailed the events leading to the Company’s Chapter 11 filing.

The Roof Declaration refers multiple times to “persistent adverse conditions in the generic drug market” as the Company’s prospects rapidly plummeted in the second half of 2018. The “generic headwinds” disclosure is largely lifted, as is most of the Roof Declaration, from the press releases referred to below. To get a more than generic understanding of “generic headwinds” one has to consult the Company’s most recent 10-K where a risk factor notes, “The generic pharmaceutical industry has experienced continued pricing pressure, intense competition and customer consolidation that may continue to materially adversely affect our business, financial condition, operating results, cash flows and liquidity.”  In addition to “generic” headwinds, the Roof declaration notes the impact of “failure to supply” penalties imposed on its Rising Human Health business, repeated issues with financial covenants, several 9-figure impairments of goodwill, the initiation of two civil class action securities law suits and the failure to meet country-of-origin requirements in respect of a number of its generic products. In short, a lot of bad days at the office; so bad, that Edward Borkowski, hired as Aceto’s Chief Financial Officer in February 2018 had resigned by April.

From the Roof Declaration, “The Company entered the final quarter of fiscal 2018 (i.e. April 1, 2018 through June 30, 2018) with $65.1 million of available cash with the Pharmaceutical Ingredients and Performance Chemicals segments continuing to remain as stable, cash-generating businesses. Additionally, for the first nine months of fiscal 2018, the Company generated free cash flow of $50.0 million, $10.6 million in excess of the $39.4 million that was used for debt repayments.

 

However, the Company’s third quarter fiscal 2018 results reflected persistent adverse conditions in the generic drug market impacting the Company’s Human Health business segment.

In addition, the Company has faced certain supply chain challenges in Rising’s Human Health business for the past several quarters. Specifically, certain of Rising’s distribution agreements contain service level failure to supply penalties or similar provisions (‘FTS’) that potentially subject Rising to charges and penalties in the event that Rising fails to meet the supply obligations under such agreements. Such charges and penalties can be substantial and may not be adequately or fully reimbursed by Rising’s suppliers. Rising has incurred approximately $34.3 million in gross FTS penalties and has deducted approximately $13.4 million of such penalties from its suppliers.

On April 18, 2018, the Company issued a press release (the “April 2018 Press Release”) announcing, among other things, that (i) in light of the persistent adverse conditions in the generics market, the Company was negotiating with its Prepetition Lenders a waiver under the A&R Credit Agreement with respect to the non-compliance by the Company with the Total Net Leverage Ratio and Debt Service Coverage Ratio financial covenants, in each case, solely for the fiscal quarter ended March 31, 2018; (ii) the financial guidance issued by the Company on February 1, 2018 should no longer be relied upon; (iii) the Company anticipated recording substantial non-cash intangible asset impairment charges, including goodwill, in the range of $230 million to $260 million on certain currently marketed and pipeline generic products as a result of continued intense competitive and pricing pressures; and (iv) the resignation of Edward Borkowski as Aceto’s Chief Financial Officer.

Subsequently, the market price of Aceto’s common stock declined. Thereafter, in late April 2018, Aceto and certain individuals were named as defendants in two civil securities class action lawsuits…It is my understanding that by virtue of the filing of the Chapter 11 Cases, the Securities Class Action Lawsuits are automatically stayed as against the Company. The Company vigorously denies any allegations of wrongful or actionable conduct.

 

Additionally, during the third quarter of fiscal 2018, the Company reported a decline in actual and forecasted revenue and earnings due to the persistent adverse conditions in the generics market. The Company was also notified by the U.S. government that 11 generic drug products Rising acquired through its Acetris subsidiary in connection with the 2016 Citron/Lucid Acquisition were not in compliance with the federal Trade Agreement Act country- of-origin provisions of a clause contained in the government supply contracts acquired from Lucid.Based on these indicators, the Company announced in a May 3, 2018 press release (the “May 2018 Press Release”) that, as previously indicated in the April 2018 Press Release, it was necessary to perform an interim goodwill impairment analysis at March 31, 2018 for Rising, and the total impairment charges for goodwill and intangibles recorded in the third quarter of fiscal 2018 was $256.3 million, all of which related to Rising.

 

The May 2018 Press Release also disclosed that Aceto and the Guarantors obtained a waiver for non-compliance by Aceto with the Total Net Leverage Ratio and Debt Service Coverage Ratio financial covenants for the fiscal quarter ended March 31, 2018.

 

Following entry into the May 2018 Amendment, the Company continued to work collaboratively with its Prepetition Lenders on developing long-term solutions to strengthen the Company’s balance sheet in the face of a prolonged generics industry down cycle.

 

While the Company took substantial steps to address the challenges confronting its business, the persistent adverse conditions in the generics market continued throughout 2018. In part as a result of these conditions and other factors, as of June 30, 2018, Aceto was not in compliance with the Total Net Leverage Ratio, Senior Secured Net Leverage Ratio and Debt Service Coverage Ratio financial covenants in the A&R Credit Agreement….The Company remained impacted by the Company’s debt load relative to operating results and faced future issues complying with the financial covenants contained in the A&R Credit Agreement. Additionally, the continued FTS charges continued to consume liquidity. 

 

After thoroughly considering all options available to them, the Debtors, in consultation with their professional advisors, ultimately determined that given the challenges described above, one or more sales of the Company’s businesses and assets as a going concern was the best available option to maximize value.”

ACETO Corporation, incorporated in 1947, is focused on the global marketing, sale and distribution of Human Health products (finished dosage form generics and nutraceutical products), Pharmaceutical Ingredients (pharmaceutical intermediates and active pharmaceutical ingredients) and Performance Chemicals (specialty chemicals and agricultural protection products). The Company functions as a “virtual” manufacturing company, distributing more than 1,100 chemical compounds used principally as finished products or raw materials in the pharmaceutical, nutraceutical, agricultural, coatings and industrial chemical industries. The Company’s global reach enables the Company to source and supply quality products on a worldwide basis. Leveraging local connections, the Company sources more than two-thirds of its products from Asia, buying from approximately 500 companies in China and 200 in India.