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.
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 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.”
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.