Selling Vs. Bankruptcy

Part
01
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Part
01

Selling vs. Bankruptcy - Healthcare

When economic factors conspire against large companies, CEOs are often faced with a tough choice: sell or declare bankruptcy. Recently, the pharmaceutical company Kindred Healthcare found itself in a financial situation that made operation unsustainable, and was forced to sell to a consortium of buyers. In contrast, other pharmaceutical companies in similar financial situations have opted for bankruptcy. Recent examples of this include Enumeral Biomedical, Cantrell Drug Company, and PhaseRx. For these companies, cash-flow issues, regulatory obstacles, and operational costs could not be overcome before bankruptcy remained as the only viable option.

Enumeral Biomedical

Peril for Cambridge's Enumeral Biomedical began in May 2017 with a declaration that the company was running out of cash. It only had $1.4 million in reserve (compared with $3.1 million in 2016). Accompanying this announcement was an addendum stating that, should the company not see positive cash flow soon, it would be forced to cut staff, or "wind down its operations through liquidation, bankruptcy, or a sale of its assets." Fast forward to February 2018, and Enumeral Biomedical has been reduced to 2 employees (from 10 in May), declared bankruptcy, and is negotiating the sale of its assets (i.e. antibody and antiviral research and development) to the XOMA Corporation for $1.6 million.

Had the company been sold before the situation became so dire, there is a chance it could have survived. However, faced with adversity, the CEO, Kevin Sarney, continued operations and ran the company until bankruptcy and asset liquidation remained the only viable options.

Cantrell Drug Company

Cantrell Drug Company is a family-owned pharmaceutical company marketing sterile injectable drugs. It was forced to declare bankruptcy in November 2017. The events leading to the company declaring bankruptcy are related to multiple failures in regulation compliance.

The company failed FDA inspections on two separate occasions in 2017. Each failure resulted in a temporary suspension in production and shipping. On top of this, the company was forced to issue a product recall in July, based on concerns over sterility.

The CEO, James McCarley, assumed responsibility for the failures in quality assurance and filed for bankruptcy, stating that the company lacked the finances to "weather the economic consequences of the shutdowns." The company plans to reorganize and raise capital to continue operations in the future.

In this case, circumstance more than unwillingness to sell led to bankruptcy. Unexpected problems with regulation compliance occurred in rapid succession, imposing a significant financial burden on the company -- one that ultimately proved too much to bear.

Phaserx

PhaseRx is a Seattle-based pharmaceutical company specializing in drug development for rare, heritable liver diseases. The company declared bankruptcy in December 2017. Prior to declaring bankruptcy, the company made significant efforts to cut operating costs, including laying off 10 employees, and delaying the development of a new drug.

The measures were, to some degree, successful. Operating costs in the third quarter of 2017 were reduced to $2.5 million from $3.1 million the previous year. This contributed to a larger $5.3 million reduction in operating costs between 2016 and 2017. Despite this, the company still reported a loss upward of $10 million over the course of the year that left cash reserves dwindling at $5.3 million. Regarding the declaration of bankruptcy, Robert Overell, the company's CEO, made the following statement:

“The board and management believe that the decision to voluntarily file for Chapter 11 bankruptcy protection is in the best interests of PhaseRx and its shareholders...The protection afforded under a Chapter 11 filing enables us to continue to explore strategic alternatives, including a potential merger transaction. During this time we expect to continue to operate normally, and are thankful to our dedicated employees whom we expect to remain focused on the advancement of our programs.”

Conclusion

As discussed, the factors ultimately forcing a company to declare bankruptcy can be diverse. Enumeral Biomedical had cash-flow problems that ultimately left them penniless; Cantrell Drug Company faced financially taxing issues with regulation compliance; PhaseRx were not able to implement successful mitigation against high operational costs. For Enumeral Biomedical and PhaseRx, selling may have represented a viable alternative to bankruptcy. For Cantrell Drug Company, however, the rapid succession of unexpected and costly events left the CEO with no other choice.
Part
02
of two
Part
02

Selling vs. Bankruptcy - Non-Healthcare

We were able to find and detail three companies in the US where a CEO waited too long to sell and the company went bankrupt.

The Weinstein Company had financial challenges following a lawsuit filed against Harvey Weinstein. Initial attempts to sell the company failed which led to their filing for bankruptcy. They eventually succeeded in selling the company for $500 million. Peabody Energy Corp were unable to service their $10.1 billion debt, which led them to file for bankruptcy. Carthage Specialty Paperboard Inc. failed in an attempt to sell the company after the owner ran out of finance to keep investing in the company. Below is a deep dive into our research.

WEINSTEIN CO.

Weinstein Company, founded by Bob and Harvey Weinstein, is an independent film studio based in the US. The company was faced with financial struggles caused by Mr. Schneiderman, New York’s attorney general, lawsuit on the company for an allegation on Harvey Weinstein (co-founder) for sexual misconducts. They failed in a deal to sell the company to a Maria Contreras-Sweet led group. "The group had offered to pay roughly $275 million for the Weinstein Company, plus the assumption of $225 million in debt." The deal collapsed as a result of the Ms. Contreras-Sweet’s team not keeping to their own terms of the deal and a public call to include an assurance that the sale would include certain components, which Ms. Contreras-Sweet led team bulked at.

Meanwhile, to remain in business while they negotiated for a sale, they sought out loan from Colony Capital, private equity firm, which was not successful. After the failed cash drive, they had to sell off North American distribution rights to “Paddington 2”. In a final attempt to save the company, the company's board announced that "while we recognize that this is an extremely unfortunate outcome for our employees, our creditors, and any victims, the board has no choice. Over the coming days, the company will prepare its bankruptcy filing with the goal of achieving maximum value in court." The company eventually avoided bankruptcy after a last-minute takeover from the Maria Contreras-Sweet led group in a $500 million deal. On the takeover, the company board said “the deal provides a clear path for compensation for victims and protects the jobs of our employees. We consider this to be a positive outcome under what have been incredibly difficult circumstances.”

PEABODY ENERGY CORP

Peabody Energy Corp is a global coal production company. A drop in coal prices and their expansion into Australia left them unable to service a $10.1 billion debt. In 2015, their assets were estimated at $11.0 billion, while their liability at $10.1 billion. In an attempt to save the company, they filed for bankruptcy protection in a US federal court, excluding their Australia assets. The company said that their mines would continue operations during their bankruptcy proceedings. Glenn Kellow, Peabody CEO, said in a statement "this process enables us to strengthen liquidity and reduce debt, build upon the significant operational achievements we’ve made in recent years and lay the foundation for long-term stability and success in the future." The statement stated that the company has agreed to "$800 million in debtor-in-possession financing from both secured and unsecured creditors, subject to court approval, including a $500 million term loan, a $200 million bonding accommodation facility for clean-up costs and a letter of credit worth $100 million." The move to save the company proved successful as they emerged from bankruptcy protection after reducing the company's debt by over $5 billion. On exiting bankruptcy protection, the CEO said: "Peabody will focus on reducing debt, targeting high-return investments and returning cash to shareholders over time".

CARTHAGE SPECIALTY PAPERBOARD INC.

Carthage Specialty Paperboard Inc. assets are estimated at $14 million against around $31 million in liabilities. Mr. Lambert, vice president sales/marketing, said the owner's inability to continue investing in the old mill made him put the company up for sale.

They had agreed to sell the company's asset to a genuine buyer before the deal stalled. The potential buyer discovered Pension Benefit Guaranty Corp. claim of being owed "$6.6 million for two pension payment plans" by Carthage Specialty Paperboard Inc.

Mr. Schnackel, vice president of finance, wrote "in the span of approximately a week, the company went from steadily progressing toward a successful sale transaction to finding itself without access to needed liquidity and facing an unexpected and acute cash flow shortage as a result of its debt service obligations, reduced revenue and inability to access additional financing".

Standard of their products dropped which led to the loss of their largest customer. The unnamed customer accounted for 10% of the company's annual revenue. These factors hindered them from meeting their debt service obligations. After several setbacks and failed attempts to sell the company, the owner filed for bankruptcy protection while they continue their search for another buyer. As at the time of this research, the bankruptcy proceedings are still ongoing and as such, no outcome yet.

Conclusion

To wrap up, we chose Weinstein Co., Peabody Energy Corp, and Carthage Specialty Paperboard Inc., as case studies. Of the three, filing for bankruptcy was the final move to save the looming downfall of the companies.
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