Delaware Chapter 11: Valeritas Holdings, Inc.V

On February 9, 2020 (the “Petition Date“), Valeritas Holdings, Inc. and its subsidiaries (collectively, the “Debtors”) filed voluntary petitions for relief under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware.

 

The Debtors are represented by DLA Piper LLP. The case has been assigned to the Honorable Laurie Selber Silverstein. A hearing on the Debtors’ first day motions was held on February 12, 2020. A meeting to form the unsecured creditors’ committee was held on February 21, 2020.

 

The Debtors are a commercial-stage medical technology company, focused on improving health and simplifying life for people with diabetes by developing and commercializing innovative technologies. The Debtors’ flagship product is the V-Go® Wearable Insulin Delivery device (“V-Go®”), which is a simple, affordable, all-in-one basal-bolus delivery option for patients with type 2 diabetes that is available in three convenient doses and is worn like a patch and can eliminate the need for multiple daily injections. Using the Debtors’ proprietary h-Patch™ technology, 5 V-Go® is the only basal-bolus insulin delivery device on the market today that was specifically designed keeping in mind the needs of patients with type 2 diabetes.

 

V-Go® is manufactured in Southern China by the Debtors’ primary contract manufacturing organization (the “CMO”) in accordance with current good manufacturing practices, or cGMP. The CMO uses Valeritas-owned custom-designed, semi-automated manufacturing equipment and production lines to meet the Company’s quality requirements. Separate contract manufacturing organization companies in China perform release testing, sterilization, inspection, and packaging functions. The processes utilized in the manufacturing and testing of V-Go® have been verified and validated to the extent required by the FDA and other regulatory bodies.

 

The Debtors do not engage in direct sales to patients, but instead partner with distributors to make V-Go® available to patients for prescription fulfilment or purchase primarily through retail pharmacies. The Debtors have distribution agreements with all of the national (and many regional) wholesalers, as well as with important medical supply companies.

 

For approximately eleven months prior to the Petition Date, the Debtors were 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 Debtors were 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 Debtors’ two potential buyers in its Out of Court Process to withdraw their bids. While management quickly identified the root cause of the issue and implemented corrective actions, the Debtors’ existing liquidity constraints were further exacerbated by the supply disruption and the Debtors’ one-time write-off of approximately $3.5 million of inventory. Further, under these conditions, the Debtors’ existing lenders would not extend further credit, nor could the Debtors secure financing from another source. Notwithstanding the Debtors’ quick response to address the manufacturing yield issue, it could not resurrect the Out of Court Process. Moreover, the yield issue, unfortunately, coincided with certain external factors impacting production. The CMO and the Debtors’ 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 Debtors 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.

 

The Debtors filed for a chapter 11 to accomplish the sale of substantially all of its business to Zealand Pharma A/S (“Zealand”), a Denmark-based biotechnology company. The Debtors have filed a motion requesting approval of a stalking horse asset purchase agreement with Zealand and a competitive bidding process under Section 363 of the Bankruptcy Code designed to achieve the highest or otherwise best offer for the business ( See John Timberlake Declaration in Support ).

 

As of the Petition Date, the Debtors owe approximately $7 million to unsecured creditors. Capital Royalty Partners II L.P. is owed approximately $19 million under a senior secured loan that is secured by all of the Debtors’ assets. WCAS Capital Partners IV L.P. is owed approximately $1,608,497 under a senior subordinate note.

 

The Debtors have commenced these chapter 11 cases to pursue a sale process backstopped by a stalking horse transaction that will maximize the value of the Debtors’ business for the benefit of their estates and creditors. In order to do this, however, the Debtors require additional funding. The Debtors are seeking approval to enter into the DIP facility and use cash collateral. According to the Debtors, absent this relief, the Debtors would be unable to pay their operating expenses and reach the closing date of a sale. The Debtors are seeking authority to obtain senior secured post-petition financing on a super-priority multi-draw term loan facility of up to $5.5 million on an interim basis and up to $12 million on a final basis from HB Fund LLC. The Debtors are seeking cash collateral for eight weeks for a total of $154,000.