June 10, 2019 − INSYS Therapeutics, Inc. (f/k/a Neopharm Inc.) and six affiliated Debtors ("INSYS" or the "Debtors") filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 19-11292. The Company, a specialty pharmaceutical development and distribution company with a heavy reliance on opioid products, is represented by Paul N. Heath of Richards, Layton & Finger, P.A. Further board-authorized engagements include (i) FTI Consulting, Inc. as financial advisor, (ii) Lazard Frères & Co. LLC as investment banker, (iii) Weil, Gotshal & Manges LLP as legal counsel and (iv) Epiq Corporate Restructuring as claims agent.
The INSYS’s petition notes between 5,000 and 10,000 creditors, estimated assets of $175.1mn and estimated liabilities $262.5mn. The Debtors' list of top 30 unsecured creditors is unusual, in that it is almost entirely comprised of settlements and amounts owed to law firms. The largest two creditors are the Unites States and the State of Massachussetts, with settlements of $195.0mn and $30.0mn, respectively (discussed further below). What then follows is largely a list of unpaid law firms. Normally something of a source of embarrassment for a law firm to be left clutching a naked claim, here the list comes off as more of a badge of honor, a Who's Who list of litigation specialists: King & Spalding; Nixon Peabody; White & Case; Cravath; Paul Hastings; Ropes & Gray; Paul Weiss; DLA Piper; Holland & Knight; Hogan Lovells; Quinn Emanuel; Skadden; Katten Munchin; Shook Hardy; Covington; K&L Gates each on the hook for more than $100k (the first four listed at over $1.0mn).
In a press release (see also 8-K) announcing the filing, INSYS advised that “INSYS intends to conduct the asset sales in accordance with Section 363 of the U.S. Bankruptcy Code. The Chapter 11 process is intended to facilitate an orderly auction and sale process and maximize value for INSYS’ creditors. INSYS aims to complete the asset sales within 90 days and address creditors’ claims as efficiently and expeditiously as possible.”
Andrew G. Long, the Debtors' Chief Executive Officer, noted: “After conducting a thorough review of available strategic alternatives, we determined that a court-supervised sale process is the best course of action to maximize the value of our assets and address our legacy legal challenges in a fair and transparent manner. INSYS has compelling assets and a highly talented team. We believe this process will provide us with a forum to negotiate an equitable resolution with our creditors and represents the best opportunity for our people and our business.”
On June 6, 2019, the Debtors filed an 8-K detailing (i) a formal $195.0mn settlement agreement entered into with the United States relating to False Claims Act claims, (ii) the execution of a criminal deferred prosecution agreement with the U.S. Attorney for the District of Massachusetts concerning five counts of mail fraud and a related $30.0mn fine and (iii) a Corporate Integrity Agreement and Conditional Exclusion Release entered into with the Office of the Inspector General of the Department of Health and Human Services relating to the previously reported investigations.
Goals of the Chapter 11 Process
In a declaration in support of the Chapter 11 filing (the “Long Declaration”), CEO Long detailed the objectives of the INSYS Chapter 11 filing as three-fold:
- Monetize assets: Including through section 363 assets sales (the Debtors have filed a bidding procedures motion) and pursuit of various affirmative claims (eg, indemnification claims; claims against former directors; and claims against insurance carriers that the Debtors believe have wrongly denied them coverage).
- Stop the bleed on litigation-related legal expenses: The Debtors will seek an injunction against the majority of litigation continuing against them during the Chapter 11 Cases, the Long Declaration arguing: "allowing such litigation to continue would erode the Debtors’ precious liquidity, enhancing the pockets of lawyers instead of creditors and distracting management’s attention away from preserving the business and disposing of their assets for the benefit of all creditors….It might also give certain of the Debtors’ creditors (government units) an unfair advantage over other creditors. The fact that the substantial goal of the litigation is to seek monetary damages from the Debtors, not to stop them from any wrongdoing that is currently harming the public, further supports this relief, as does the fact that the Debtors are likely to sell all of their assets in the near-term, including their opioid assets, rendering any injunctive relief unnecessary." The Debtors do not address the seemingly contradictory goals of chasing attenuated claims in protracted litigation against a "stop the bleeding" strategy, nor for that matter how that dovetails with the "need for speed" in prong three below.
- Implement a mechanism that will facilitate the proposal of a chapter 11 plan quickly: In light of the significant amount of contingent and unliquidated claims they face, the Debtors believe that an open and transparent process that enables them to estimate their liability expeditiously and provides all creditors an opportunity to participate will maximize value while still protecting all parties’ due process rights. Accordingly, the Debtors are filing a motion requesting that the Bankruptcy Court adopt estimation procedures and estimate, pursuant to section 502(c) of the Bankruptcy Code, the Debtors’ aggregate liability with respect to certain categories of claims related to Subsys to avoid undue delay in the administration of these Chapter 11 Cases.
Events Leading to the Chapter 11 Filing
The Long Declaration is (appropriately) long on detail as to the multiple litigation/enforcement fronts on which the Debtors have been forced to fight an ultimately losing battle to stave off bankruptcy. [Interested parties may, however, find it short on genuine strategy or insight, much less pragmatism or contrition]. The Debtors class these fronts as follows:
- U.S. Government investigations and U.S and State Qui Tam litigation
- State Attorneys General investigations and litigation
- Municipality litigation
- Private insurance provider litigation
- Personal injury litigation
- Securities litigation
- Indemnification claims of officers and directors
The Long Declaration states: "As described below in [much] more detail, the Debtors are facing extensive litigation relating to their SUBSYS® product (‘Subsys’), which is a prescription opioid. As of the Petition Date, one or more of the Debtors have been named in approximately one thousand lawsuits, and the Debtors anticipate that additional lawsuits may be commenced in the future. Some of the litigation they are facing is common to all opioid manufacturers, while other claims are based on particular alleged activities of the Debtors’ former executives, many of whom either pleaded guilty to or were convicted after trial of federal criminal activity relating to such activities.
The expenses and settlement costs resulting from such litigation have been substantial, consuming large portions of the Debtors’ revenue and liquidity.
At the same time, over the last few years, the Debtors’ revenues from Subsys have been declining rapidly as a result of the increased national scrutiny of prescription of opioids by healthcare professionals, the resulting high-profile political and legal actions taken against manufacturers and distributors of opioids, and the specific news relating to the former executives’ criminal activity. Moreover, although the Debtors have promising products in the pipeline, those products are not yet approved for production, require significant additional investment to bring to market, and are not expected to generate revenue in the near term. As a smaller company than some other opioid manufacturers, with over 90% of its current revenue coming from the sale of opioids, Insys could not withstand the concurrent negative impact of massive litigation costs and significant opioid revenue deterioration. These factors have caused a substantial cash drain on the company to the point where, despite the Debtors’ best efforts, they risk running out of cash in 2019."
Frankly it is hard not to be impressed by the temerity of a Debtor declaration which:
- refers to the "alleged activities" of individuals who have already been convicted or plead guilty;
- that discusses a drop in sales of an opioid, that only achieved sales through criminal promotion in the first place, as if that drop can rationally be discussed in market/operational terms;
- that argues that its 90% reliance on opioid products makes it more of a "victim" of a market backlash against opioids than more legitimate market players;
- that claims to have "promising products in the pipeline" when by every market criteria (approval, funding, revenue-generating potential) it most demonstrably does not;
- that promotes a strategy "to stem the bleeding" when it comes to litigation aimed at the Debtors as a time-saving boon to creditors, but wants the time necessary to chase potentially recoverable assets at the end of litigation rainbows;
- that unlike other bankrupt estates facing class action law suits (eg USA Gymnastics) makes no real effort to acknowledge the victims or the potential salve that an equitable distribution of even a few cents might make to those victims and their families; and
- that accuses government regulators of being motivated by money as opposed to focusing on the "wrongdoing that is currently harming the public."
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