Akorn Inc.

May 20, 2020

Akorn Inc. ($AKRX), a specialty pharmaceutical company based in Illinois that develops, manufactures and markets generic and branded prescription pharmaceuticals, finally filed for chapter 11 bankruptcy.

Why “finally?” Well, back in January 2019 the company, in conjunction with an announcement of new executive and board appointments, noted that restructuring professionals (Cravath Swaine & Moore LLP, PJT Partners LP and AlixPartners LLP)* were assisting with the formulation of a business plan and discussions with stakeholders. In December 2019, the publicly-traded company acknowledged in an SEC filing that bankruptcy was on the table, sending the stock into a 33% freefall. Subsequently, in February 2020, the company announced in connection with its Q4 and annual earnings that it had reached an agreement with its lenders to execute a sale of the business “potentially using Chapter 11 protection.” A sale, however, could not generate sufficient value to cover the outstanding funded indebtedness under the company’s term loan credit agreement. Shortly thereafter in March, the company defaulted under said agreement and the company and its lenders pivoted to discussions about a credit bid with an ad hoc group of term lenders serving as stalking horse purchaser of the assets in chapter 11. Alas, here we are. The company and 16 affiliates (the “debtors”) “FINALLY” find themselves in court with recently inked asset purchase and restructuring support agreements in tow. The debtors will use the bankruptcy process to further their sale process and market test bids against the term lenders’ proposed $1.05b credit bid; they hope to have an auction in the beginning of August with a mid/late-August sale hearing.

The sale process, however, is not where the excitement is here.

We are now in an age — post COVID-19 — where M&A deals falling apart is becoming commonplace news and debates about force majeure and “material adverse effect” rage on in the news and, eventually, in the courts. In that respect, Akorn was ahead of the curve.

In April 2017, Akorn and Fresenius Kabi AG ($FSNUY), a massive German healthcare company, announced a proposed merger with Akorn shareholders set up to receive $34/share — a sizable premium to the then prevailing stock price in the high-20s. (PETITION Note: for purposes of comparison, the stock was trading at $1.26/share on the aforementioned announcement of annual earnings). Akorn shareholders approved the merger but then the business began to suffer. Per the debtors:

…Akorn began to experience a steep and sustained drop-off in financial performance drive by a variety of factors, including, among other things: consolidation of buyer power leading to price reductions; the FDA’s expedition of its review and approval process for generic drugs, leading to increased competition and resultant additional price and volume erosion; and legislative attempts to reduce drug prices.

Almost exactly a year later — after all kinds of shady-a$$ sh*t including anonymous letters alleging data integrity and regulatory deficiencies at Akron facilities and sustained poor financial performance — Fresenius was like “we out.” Lawsuits ensued with Akorn seeking to enforce the merger and Fresenius parrying with “material adverse effect” defenses. The Delaware Chancery Court agreed with Fresenius.

This is America so lawsuits beget lawsuits and Fresenius’ announcement that the merger was at risk spawned (i) federal class action litigation against Akron and certain of its present and former directors and officers and (ii) federal and state law derivative litigation. Akorn ultimately settled the class action litigation but four groups of hedge funds opted out and continue to pursue claims against Akorn. Meanwhile, Akorn lost its appeal of the Delaware Chancery Court decision and a decision on Fresenius’ claims for damages remain reserved. Fresenius has at least a $74mm claim.

This litigation overhang — coupled with the debtors’ $861.7mm in term loans (emanating out of strategic acquisitions in 2014) — is what drives this bankruptcy. The debtors believe that, upon resolution of these issues, it is well-positioned to thrive. They had $682mm revenue in ‘19 and $124mm of adjusted EBITDA. In Q1 ‘20, the company achieved adjusted EBITDA of $59mm (PETITION Note: “adjusted” being an operative word here). Large wholesale distributors like AmerisourceBergen Corporation ($ABC), Cardinal Health Inc. ($CAH), and McKesson Corporation ($MCK) are large customers. The U.S. healthcare system is shifting towards generics and big brand-name pharmaceuticals are rolling off-patent and “driving generic opportunities.” Pre-petition efforts to find a buyer who shares the debtors’ optimism, however, proved unfruitful.

Armed with a $30mm DIP commitment from certain of the term lenders in the ad hoc group, the debtors will swiftly determine whether the prospect of owning these assets “free and clear” will generate any higher or better offers.

*Kirkland & Ellis LLP, in its quest for 32,892,239% restructuring market share, ultimately displaced Cravath.

• Jurisdiction: D. of Delaware (Judge Owens)

• Capital Structure: $861.7mm ‘21 Term Loans (Wilmington Savings Fund Society FSB)

• Professionals:

  • Legal: Kirkland & Ellis LLP (Patrick Nash, Nicole Greenblatt, Gregory Pesce, Christopher Hayes) & Richards Layton & Finger PA (Paul Heath, Amanda Steele, Zachary Shapiro, Brett Haywood)

  • Financial Advisor: AlixPartners LLP

  • Investment Banker: PJT Partners LP (Mark Buschmann)

  • Claims Agent: KCC (*click on the link above for free docket access)

• Other Parties in Interest:

  • Term Loan & DIP Agent ($30mm): Wilmington Savings Fund Society FSB

    • Legal: Wilmer Cutler Pickering Hale and Dorr LLP

  • Ad Hoc Group of Term Lenders

    • Legal: Gibson Dunn & Crutcher (Scott Greenberg, Steven Domanowski, Jeremy Evans, Michael J. Cohen) & Young Conaway Stargatt & Taylor LLP (Robert Brady)

    • Financial Advisor: Greenhill & Co. LLC (Neil Augustine)

  • Large equityholders: Blackrock Inc., The Vanguard Group, Akorn Holdings LP, Stonehill Capital Management LLC