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Valeritas Holdings, Inc. – Quality Issues as to Chinese-Supplied Insulin, Compunded by Coronavirus Outbreak, Force Chapter 11 and $23mn Sale to Denmark’s Zealand

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February 9, 2020 − Valeritas Holdings, Inc. and three affiliated Debtors (“Valeritas” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20-10290. The Debtors, a commercial-stage medical technology company focused on the development of products for type 2 diabetes patients, are represented by Maris J Kandestin of DLA Piper LLP (US). Further board-authorized engagements include (i) Lincoln International as investment banker, (ii) PricewaterhouseCoopers, LLP as financial advisor and (iii) Kurtzman Carson LLC as claims agent.

The Debtors’ lead petition notes between 100 and 200 creditors; estimated assets between $10.0mn and $50.0mn; and estimated liabilities between $10.0mn and $50.0mn. Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) WCAS Capital Partners IV, L.P. ($1.6mn subordinated note), (ii)
OptumRX ($1.4mn contingent trade debt) and (iii) Aquilo Partners, L.P. ($600k contingent termination fee).

In a press release announcing the filing, the Debtors advised that it had entered into an "agreement to sell substantially all of the business to Zealand Pharma A/S (NASDAQ: ZEAL) ('Zealand'), a Denmark-based biotechnology company. To accomplish the sale in the most efficient manner, Valeritas and its subsidiaries filed voluntary petitions for relief under Chapter 11…Concurrently, the Company filed a motion requesting approval of a stalking horse asset purchase agreement with Zealand and to initiate a competitive bidding process under Section 363 of the Bankruptcy Code designed to achieve the highest or otherwise best offer for the business….The agreement with Zealand, which was reached following a robust and extensive marketing process, provides total cash consideration of $23 million and includes the assumption of certain liabilities related to the ongoing business.”

Events Leading to the Chapter 11 Filing

In a declaration in support of the Chapter 11 filing (the “Declaration”), John E. Timberlake, the Debtors' President, Chief Executive Office, detailed the events leading to Valeritas' Chapter 11 filing. The Declaration's "tale of woe" details the slide into bankruptcy of medical technology company entirely reliant on a single (not yet profit making) insulin product that experienced a major supply interruption when Chinese supplier was unable to maintain product quality in respect of the insulin it was manufacturing for the Debtors. No small matter when that insulin is being used as part of a product (a patch) which is supposed to provide wearers with a stable supply of insulin. This supply issue, identified in December 2019, required the Debtors to discard much of its inventory; it also came at a time when the Chinese New Year…extended by the coronavirus outbreak, meant that inventory-replenishing shipments of a safe insulin product could not be made. Although the coranavirus plays an accelerating role in respect of a company already on a knife-edge; the Declaration does provide some macro-level insight on the potential for coronavirus disruption in respect of other companies doing business with Chinese manufacturers, the Declaration noting: "many Chinese businesses, including the Company’s CMO, employ rural workers and, as a result, may experience production capability issues due to the uncertainty surrounding when these rural employees will return to work." In sum, the Declaration provides something of a warning as to the one-two punch that a dependency on rural Chinese workers meant for these Debtors: Firstly a major quality issue in respect of a quality-dependent product and then the unforeseen impact of a health emergency in respect of a geographically and culturally workforce over which it has little direct control and almost no ability to mitigate its financial distress. The result of depleted inventory, and an indefinite delay in replenishing that stock, ultimately shutting down the Debtors' access to capital.

The Declaration states: "The Company relies on sales of V-Go® to generate all of its revenue. Although the Company has experienced commercial success with V-Go®, as of the Petition Date, the Company was still in the commercial growth stage of its operations and, therefore, had not generated profits or free cash flows. For approximately eleven months prior to the Petition Date, the Company was engaged in an out of court sale and marketing process (the 'Out of Court Process') led by a boutique investment bank. In December 2019, the Company was facing diminishing liquidity, a lack of access to additional capital, and potential near-term defaults under the Prepetition Term Loan when it experienced a temporary supply disruption due to a manufacturing yield issue.

This event led the Company’s two potential buyers in its Out of Court Process to withdraw their bids. 

The Company halted all deliveries of V-Go®, retested all of its existing inventory as well as product it controlled in the United States, opened a corrective-action preventative action (or CAPA) investigation, identified the root cause of the yield issue, modified production specifications to meet yield requirements going forward, and conducted a health hazard evaluation. 

While management quickly identified the root cause of the issue and implemented corrective actions, the Company’s existing liquidity constraints were further exacerbated by the supply disruption and the Company’s one-time write-off of approximately $3.5 million of inventory. Further, under these conditions, the Company’s existing lenders would not extend further credit, nor could the Company secure financing from another source. 

Moreover, the yield issue unfortunately coincided with certain external factors impacting production. The CMO and the Company’s other manufacturers and suppliers in China are closed for the Lunar New Year (Chinese New Year) celebrations, which took place this year between January 27, 2020 through February 3, 2020, which was extended through February 9, 2020 by the Chinese government due to the coronavirus epidemic in China.

The occurrence of the Chinese New Year holiday has not posed a problem in the past, because the Company historically maintained at least 3 months’ worth of finished product inventory to cover periods when its Chinese suppliers were closed. This year, however, inventory levels were substantially reduced as a result of the production disruption in December 2019. Thus, the work stoppage during the Chinese New Year holiday posed a problem for the Company for the first time. This problem was exacerbated due to the rapid onset of the coronavirus epidemic and the Chinese government’s measures to combat the spread of the disease, which included extending the holiday for an additional week."

About the Debtors

Valeritas is a commercial-stage medical technology company focused on improving health and simplifying life for people with diabetes by developing and commercializing innovative technologies. Valeritas' flagship product, V-Go® Wearable Insulin Delivery device, is a simple, affordable, all-in-one basal-bolus insulin delivery option for adult patients requiring insulin that is worn like a patch and can eliminate the need for taking multiple daily shots. V-Go® administers a continuous preset basal rate of insulin over 24 hours, and it provides discreet on-demand bolus dosing at mealtimes. It is the only basal-bolus insulin delivery device on the market today specifically designed keeping in mind the needs of type 2 diabetes patients. Headquartered in Bridgewater, New Jersey, Valeritas operates its R&D functions in Marlborough, Massachusetts.

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The post Valeritas Holdings, Inc. – Quality Issues as to Chinese-Supplied Insulin, Compunded by Coronavirus Outbreak, Force Chapter 11 and $23mn Sale to Denmark’s Zealand appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.


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