New Chapter 11 Bankruptcy Filing - Novum Pharma LLC

Novum Pharma LLC

February 3, 2019

Another day, another pharma company that has filed for bankruptcy. Curious, too: we don’t recall seeing any restructuring professionals predicting that pharma would be the hot restructuring industry of choice. But we digress.

Here, Chicago-based Novum Pharma LLC, a special pharmaceutical company which owns and manufactures a portfolio of topical dermatology products, filed for bankruptcy in the District of Delaware. The company’s bankruptcy papers are interesting in that they provide a solid overview of the distribution channel for pharma products from the manufacturer to the end user. Disgruntled with all of the players taking a piece of revenues along the way, Novum Pharma attempted to disrupt the status quo by deployment of an alternative business model. Clearly it didn’t achieve the result it had hoped for.

Per the company, here’s how the “traditional” distribution channel typically works:

Source: PETITION LLC

Source: PETITION LLC

As you can see, the PBMs have a significant amount of leverage on account of their ability to determine which pharmaceuticals will be covered by insurance and which won’t. As a result, the company attempted its alternative. This model was predicated upon the concepts of “enhanced patient access” and “hassle free” access. It doesn’t appear that the company achieved that. Here’s how it would work:

Once the healthcare professional writes a script, the patient could get their prescription through one of three ways:

  1. Via a nationwide network of specialty pharmacies like Cardinal Health 105 Inc., a specialty pharmacy division of Cardinal Health Inc., that the company sells its products to and that have agreed to comply with the company’s guidelines;

  2. If 105 Inc. or the other specialty pharmacies cannot fill the prescription because a PBM denied coverage or otherwise, the pharmacy could transfer the prescription to a “consignment hub,” which is a specialty pharmacy that stocks the Debtor’s products on a consignment or bailment basis and will fill a prescription for a nominal fee (paid by the Debtor); or

  3. If a patient seeks to fill the prescription at a pharmacy that doesn’t participate in the company’s network and the PBM denies coverage, the patient will receive the drug for free.

As you might imagine, prescribing physicians are encouraged to provide patients with a hotline number where, no doubt, patients, are encouraged to go route #1. Why? Because the company earns revenue from the specialty pharmacies (read: from Cardinal Health). But, per the company:

In contrast, when a prescription is filled by a pharmacy, the Debtor expends funds to facilitate the transaction. In particular, when a healthcare plan covers some or all of the cost of a Dermatology Product prescription, the Debtor, through its Co-Pay Vendors, pays the amount that is not covered by the healthcare plan. Alternatively, when a healthcare plan rejects a Dermatology Product prescription, the Debtor facilitates the transfer of that prescription to one of its consignment hubs so that the prescription can be filled and mailed to the patient, at no cost to the patient.

Anyone else see the problem with all of this?!? Don’t know about you, but the added friction of calling a hotline and finding some random specialty pharmacy rather than going to the neighborhood CVS is far from “hassle free.”

All of these gymnastics created a company with $19.4mm in assets, the lion’s share of which is its intellectual property. In addition, there are some consulting and sales support contracts and A/R. On the liability side of the balance sheet, the company has $15.2mm due and owing on a secured basis to lender RGP Pharmacap LLC (at a prime plus 9.75% or 14% interest rate, payable in monthly principal installments), and $2.8mm in lease obligations that are secured, in part, by a $500k letter of credit issued by The Huntington National Bank.

Per the company, among the factors that precipitated the company’s bankruptcy were…

…among other things, (i) manufacturing hurdles leading to production delays and product “stock-outs”; (ii) a dispute with Cardinal and CVS regarding the price at which the Dermatology Products can be returned to the Debtor; (iii) managed care actions leading to increased prescription rejection rates for the Dermatology Products; and (iv) market dilution and decreased total prescriptions due to unauthorized generic alternatives being introduced into the market.

In response, the company implemented cost-cutting measures like outsourcing its “back office” function, downsizing its sales force and entering into a more cost-effective lease. But these measures didn’t address the fundamental business challenges confronting the company. The company continued:

The Debtor’s historically low prescription approval rates, compounded by (i) the Debtor’s persistent manufacturing issues which directly damaged the Debtor’s business because the Debtor’s sales force was unable to distribute sample products during a critical product growth period and HCPs were forced to prescribe alternative medications, (ii) the Debtor’s working capital shortages stemming in part from the Cardinal/CVS product return dispute and (iii) generic drug competition (which the Debtor believes is unlawful), led the Debtor to the inevitable conclusion that its business was no longer sustainable and that a restructuring and refinancing of the business would be necessary.

The chapter 11 filing is meant to preserve the company’s assets and provide it with a forum through which to conduct a bankruptcy sale process of the dermatology products to maximize value for the company’s creditors. Based on the various disputes the company has with Cardinal/CVS, there may be some litigation here for an as-of-yet-unformed Creditors’ Committee to pursue as well.

  • Jurisdiction: D. of Delaware (Judge Carey)

  • Capital Structure: $15.2mm of secured debt, $2.8mm in lease obligations

  • Company Professionals:

    • Legal: Cole Schotz PA (David Hurst, Patrick Reilley, Jacob Frumkin)

    • Independent Director: Thomas J. Allison

    • Financial Advisor: CR3 Partners LLC (Thomas O’Donoghue, Layne Deutscher, Cynthia Chan)

    • Investment Banker: Teneo Capital (Chris Boguslaski)

    • Claims Agent: KCC (*click on company name above for free docket access)

  • Other Parties in Interest:

    • Official Committee of Unsecured Creditors

      • Legal: Sills Cummis & Gross P.C. (Andrew Sherman, Boris Mankovetskiy) & (local) Klehr Harrison Harvey Branzburg LLP (Morton Branzburg, Richard Beck, Sally Veghte)

      • Financial Advisors: Goldin Associates LLC (Gary Polkowitz)

Updated 3/9/19

New Chapter 11 Bankruptcy Filing - PGHC Holdings Inc.

PGHC Holdings Inc.

November 5, 2018

On Sunday night, the New England Patriots took down the Green Bay Packers but the official pizza of the team took an “L.” Indeed, New England local news reported that dozens of area Papa Gino’s locations had abruptly shut down. Now we know why. And, it turns out, the dozens were really 95 stores all in. Which, we’d be remiss not to note, affects 1,100 employees who are now out of jobs.

On Monday morning, PGHC Holdings Inc., the parent company of 141 company-owned and 37 franchisee-and-licensee-owned New England restaurant chains Papa Gino’s Pizzeria and D’Angelo Grilled Sandwiches, filed for bankruptcy to effectuate a sale to WC Purchaser LLC, an affiliate of Wynnchurch Capital. Wynnchurch will provide a DIP credit facility to fund the case.

We, here, at PETITION have highlighted disruption in the casual dining space ad nauseum. The debtors, in their filings, confirmed a lot of what we’ve been saying. They noted:

Consumer preferences have shifted from in-restaurant dining to delivery and carryout ordering, which require fewer overall restaurants and smaller restaurant size to service the same geographic area. As a result of these shifting consumer preferences, the Debtors’ existing footprint is too large — in terms of both number and size of restaurants. In addition, minimum wage increases across many of the Debtors’ markets combined with higher employee benefit costs associated with health plans have also pressured the Debtors’ cash flows. The Debtors also have faced increased competition and associated price pressure from national chains that have increased their footprint in the Debtors’ core New England markets. In addition to these and other operational factors, the Debtors have a substantial debt load that, as noted above, they have been unable to service and are in default under.

Consequently, the debtors have let leases expire, engaged in (mostly unsuccessful) negotiations with landlords on lease forgiveness, changed internal IT systems, emphasized digital media marketing and formulated a smaller more efficient restaurant concept. Nevertheless, these efforts didn’t generate enough revenue and profitability to enable the debtors to handle their debt burden.

Wynnchurch will provide the company with a $13.8mm DIP facility, permit the use of cash collateral, and credit bid the debt it took over to the tune of $20mm. In other words, this is effectively a “loan-to-own” play. Bravo!

  • Jurisdiction: D. of Delaware

  • Capital Structure: $6.9mm Revolver A, $1.5mm Revolver B, $18.4mm Term Loan A (WC Financeco A LLC, as assignee), $34.2mm second lien debt (WC Financeco B LLC, as assignee), $27.9mm unsecured mezz debt (Hartford Life Insurance Company), $11.9mm unsecured mezz debt (Brookside Mezzanine Fund)

  • Company Professionals:

    • Legal: Morris Nichols Arsht & Tunnell LLP (Derek Abbott, Matthew Harvey, Eric Moats)

    • Financial Advisor: CR3 Partners LLC

    • Investment Banker: North Point Advisors LLC

    • Real Estate Advisor: Hilco Real Estate LLC

    • Claims Agent: Epiq Corporate Restructuring LLC (*click on company name above for free docket access)

  • Other Parties in Interest:

    • Mezz Debt Lenders

      • Legal: Choate Hall & Stewart LLP (Douglas Gooding)

New Chapter 11 Filing - Hobbico Inc.

Hobbico Inc.

1/10/18

Chicago-based designer, manufacturer and distributor of hobby products like radio-control toys filed for bankruptcy after struggling from (i) too much debt, (ii) lack of investment in product innovation and in its core ecommerce platform, (iii) a systemic shift in the drone market (wherein Asian suppliers started competing by selling direct-to-consumer), (iv) the bankruptcy of a key supplier of racing products, and (v) disruption to its Asian supply chain. The company defaulted on its secured debt and is using the chapter 11 process in order to attempt to sell its business as a going-concern. 

  • Jurisdiction: D. of Delaware
  • Capital Structure: $74.5mm revolver and term loan (Wells Fargo Bank NA), $41.2mm subordinated secured note (Cyprium Investors IV AIV I LP)     
  • Company Professionals:
    • Legal: Neal Gerber & Eisenberg LLP (Mark Berkoff, Nicholas Miller, Thomas Wolford) & (local) Morris Nichols Arsht & Tunnell LLP (Robert Dehney, Curtis Miller, Matthew Talmo, Andrew Golden)
    • Financial Advisor: CR3 Partners LLC (Tom O'Donoghue, Douglas Flannery, Chris Creger, Layne Deutscher) & Keystone Consulting Group LLC (Louis Brownstone)
    • Investment Banker: Lincoln International LLC (Alexander Stevenson)
    • Claims Agent: JND Corporate Restructuring (*click on company name above for free docket access)
  • Other Parties in Interest:
    • DIP Agent: Wells Fargo Bank NA
      • Legal: Goldberg Kohn Ltd. (Randall Klein, Zachary Garrett, Prisca Kim, Jacob Marshall) & (local) Burr & Forman LLP (J. Cory Falgowski)
    • Lender: Cyprium Investors IV AIV I LP
      • Legal: Cahill Gordon & Reindel LLP (Joel Levitin, Richard Stieglitz Jr.)
    • Official Committee of Unsecured Creditors
      • Legal: Cullen and Dykman LLP (S. Jason Teele, Nicole Stefanelli, Michelle McMahon, Bonnie Pollack) & (local) Whiteford Taylor & Preston LLC (Christopher Samis, L. Katherine Good, Stephen Gerald, Kevin Shaw)
      • Financial Advisor: Emerald Capital Advisors (John Madden)