đź’ŠPushed Pills Pressure Purdue Pharmađź’Š

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Long time PETITION readers should be, if they’re paying attention, identifying recurring themes confronting the various sectors of distress we cover. In retail bankruptcy, for instance, the stories generally contain the same elements: some combination of too much leverage (especially if PE-backed), too large an uneconomical brick-and-mortar footprint, slow adoption of e-commerce, poor supply chain management, awful off-trend product assortment, and disruptors (i.e., Amazon Inc., resale, DTC, etc.). In oil and gas, too much leverage backing capital intensive exploration and production initiatives, an unfavorable commodity environment, bloated SG&A, and too much money chasing outsized returns. In biopharma, new drugs are expensive and time-intensive to produce and often, despite potentially valuable IP and viable use cases, companies run out of money (and/or bust convertible debt) and are unable to continue paying to push their products through the regulatory framework absent a chapter 11. In healthcare, rollups of behavioral health, CCRC, rehab centers, etc., layer on too much debt on top of questionable business models in the face of an uncertain regulatory atmosphere.

And then there is another category: companies with little to no funded debt, minimal trade debt, an ability to fend off competition, and a viable product. What’s their problem? As we’ve seen in recent cases, i.e., Takata Corporation, Imerys Talc America Inc. (also discussed here), Insys Therapeutics Inc., The Diocese of Rochester, those companies tend to get sued into oblivion on the basis of shady-as-sh*t business practices or other general degenerative scumbaggery.

And so it should come as absolutely no surprise to anyone* that Oxycontin manufacturer, Purdue Pharma, has joined the fray, filing for bankruptcy this past week in the Southern District of New York (before the same judge administering the Sears sh*t show). Hold on to your butts people, this one ought to be interesting.

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Unless you’re a total ignoramus, you know by now that the country has been ravaged by an opioid epidemic. Here is 60 Minutes doing a deep dive into the issue. Here is the White House talking about “[e]nding America’s Opioid Crisis.” And here is John Oliver doing the John Oliver thing while talking about opioids.

We mean, you have to be willfully unaware or just plain stupid if you don’t know that this is a big problem. While numerous companies are implicated in this ever-visible scandal, Purdue Pharma is the biggest fish to fall to date (query how long that lasts). But, as noted above, Purdue Pharma generates a ton of money, has no funded debt, etc. So what it needs — and what it gets from a chapter 11 bankruptcy filing — is a break from the deluge of lawsuits against it. All 2,625 of them.

For the uninitiated, a bankruptcy filing triggers an automatic stay pursuant to section 362 of the bankruptcy code. This is an injunction, of sorts, that draws a line in the sand and prevents creditors from rushing to enforce their claims against a debtor. The idea is that by halting this rush and providing the debtor a “breathing spell,” the debtor will have a better opportunity to configure a go-forward strategy that is not only to its benefit, but also treats similarly situated claimants fairly. As you might imagine in a litigation scenario where there are literally thousands of potential judgement creditors scattered across various state and federal courts across the country, this is a powerful tool. It prevents Mia Wallace, plaintiff #1, from winning a huge judgement and collecting against that judgement to the point of siphoning away all of the debtors’ asset value before Vincent Vega, plaintiff #2, has had his day in court.** It also helps the debtors triage the outrageous expense involved with defending heaps of lawsuits all across the country; indeed, the Purdue Pharma debtors note that they spend $5mm/week — A WEEK! — defending themselves against litigation. They project to spend approximately $263mm on legal and related professional costs in 2019. That’s no typo, folks. Biglaw lawyers charge mint.

Here’s the thing about that “automatic stay” thing, though: there are exceptions to it — including, most relevant here, one that’s commonly referred to as the “police and regulatory power exception” (section 362(b)(4)). To preempt the applicability of this section, the debtors have already filed a “preliminary injunction motion,” seeking to enjoin continued prosecution of active governmental litigation against them (and a long slate of related parties, i.e., the entire Sackler family tree).***

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Real Estate & Retail

Before the holidays, Vornado Realty Trust ($VNO) CEO, Steve Roth, issued his shareholder letter. We recommend you read it (particularly starting with Page 15) but this choice quote about sums it up: "I do not believe we can grow our way out of this mess. I believe the only fix for brick and mortar retailing is rightsizing by the closing and evaporation of, you pick the number, 10%, 20%, 30% of the weakest space. This very painful process will surely take more than five years. It will also create enormous opportunity for those with the capital and management platforms to feed on the carnage."  He also discusses, briefly, WeWork and exposure to Sears and KMart. You can read the letter here: it doesn't read like a sterile SEC document and so we highly recommend it. Meanwhile, this is where all of that retail spending went, apparently.