"Noteholders Agree to Swap Debt for Stake in K-V Pharmaceutical" ($KV)

Looks like it will be a fast reorganization,

"Hedge funds Silver Point Capital and Whitebox Advisors, along with Boston mutual-fund company Pioneer Investment Management, have agreed to swap some $225 million in secured notes for an 82% stake in the reorganized pharmaceutical company, according to the terms of a proposed plan outlined Wednesday in U.S. Bankruptcy Court in New York [which] also includes a $20 million rights offering at an exercise price 'intended to provide the senior note holders with a recovery equal to par plus accrued interest,' [...] Lenders who agree to provide $50 million second-lien term loan will get 15% of the reorganized K-V's shares with convertible note holders splitting 3% of the new company's shares. General unsecured creditors would divvy up a yet-to-be-determined pool of cash."

The saga continues. It sounds like the sub notes are the ones getting 3% of the new equity?

New Low for KV Pharma ($KV)

Wow, closed at 4.3 cents today.

I covered part of my position at ~7 cents. Looks like I will have a chance to cover the rest closer to 0!

K-V Pharma Symbol Change to KVPHA on OTC ($KV)

The stock (OTC: KVPHA) is now 7.5 cents bid.

From KV's Declaration in Support of its Chapter 11 Petition

As of July 19, 2012, KV had 40,000 shares of 7% Cumulative Convertible Preferred Stock (the “Preferred Stock”) outstanding. Each share of Preferred Stock is convertible at the holder’s option into Class A Common Stock (“Class A Common Stock”). KV also has 49,007,569 outstanding shares of Class A Common Stock held by approximately 649 record holders, 11,075,435 outstanding shares of Class B Common Stock (the “Class B Common Stock”) held by approximately 257 record holders, and outstanding warrants to purchase Class A Common Stock. [...]

With the steadfast belief that the value of Makena® would be realized if the FDA enforced the orphan drug exclusivity granted to KV, in May 2012, the Company engaged in preliminary discussions with an ad hoc group of Convertible Noteholders regarding the potential provision of financing to the Company outside of a bankruptcy filing as well as extending a “put” right of the Convertible Noteholders under the terms of the Indenture governing the Convertible Notes, which put right may be exercised in May 2013. Although the ad hoc group of Convertible Noteholders, through its advisors, conducted certain diligence and provided a term sheet to the Company in respect of extending the put right, as a result of, among other things, the Company’s looming payment to Hologic, the parties were unable to come to an agreement.

Thereafter, in July 2012, after the commencement of the FDA Action, the Company and its advisors restarted discussions with the ad hoc group of Convertible Noteholders as well as an ad hoc group of Senior Noteholders regarding a potential restructuring, with a view towards obtaining a favorable result from the FDA Action.

During this time, the Company also attempted to negotiate an amendment to the Hologic Agreement to provide a much needed breathing spell, including, an extension of the looming August 4, 2012 payment. However, the Company was unsuccessful in obtaining a timely extension of the milestone payment owed to Hologic on terms that were acceptable to the Company. As a result, the Company was forced to file these chapter 11 cases.

"K-V Pharmaceutical Company Files Voluntary Petitions for Reorganization to Restructure Financial Obligations" ($KV)

Announced last night!:

K-V Pharmaceutical Company (NYSE: KVa/ KVb) ("K-V" or "the Company") and certain of its domestic subsidiaries today filed voluntary Chapter 11 petitions under the U.S. Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York, seeking the protection of Chapter 11 while it seeks to restructure its financial obligations.

These obligations include a milestone payment under the terms of the Company's agreement with Hologic Inc. pursuant to which the Company purchased all rights to Makena®. The Company was unsuccessful prior to the filing in obtaining a renegotiation of the milestone payments owed to Hologic on terms that were acceptable to the Company. As a result, the Company was forced to file these Chapter 11 cases. The Company has enough cash on hand to operate its business in the near term and intends to seek new financing and use of cash collateral to provide additional time to enable the Company to continue operations, as it takes additional steps to restructure its financial obligations.

I wrote yesterday that "I'm really wondering whether they file a Q this year. With the sub notes now trading ~7, it seems much more likely that they file for bankruptcy." I just didn't think it would happen that day!

Letter from FDA to Wedgewood Pharmacy Regarding Compounded 17P ($KV)

This letter from FDA to Wedgewood Pharmacy is from June 29. The purpose of the letter was to "ensure that Wedgewood Pharmacy is not operating under the misimpression that there is a 'green light' to compound large volumes of copies of Makena."

I hadn't seen it before and the retail bulls have been crowing about it. I don't think there's any great relevance - it seems pretty clear that most of the pharmacies are compounding 17P in accordance with a reasonable interpretation of the law and FDA regs.

As the FDA wrote in support of its motion to dismiss, "[The] exclusivity provision [in the ODA], by its plain language, does not guarantee a drug protection from competition. It applies only to bar FDA from approving certain NDAs, ANDAs, and BLAs. It does not bar FDA from approving another sponsor’s NDA or BLA for the same drug for a different indication, nor does it prevent FDA from approving another sponsor’s NDA or BLA for a different drug for the same indication. This provision makes no mention of compounded drug products."

Last year, KV filed its Q on August 9. I'm really wondering whether they file a Q this year. With the sub notes now trading ~7, it seems much more likely that they file for bankruptcy.

Another Good Point from Alere's Brief in the KV vs FDA Case ($KV)

"Because traditional compounding (within the limits set by Congress and FDA policy) is outside of the NDA requirements, and because the ODA only protects the manufacturer of an orphan drug from the issuance of a further NDA for the same drug and same indication, the ODA's protective scope does not circumscribe pharmacists' ability to engage in such compounding."

This is a great brief. I think Alere absolutely nails it.

New Filings in K-V Pharma vs FDA Case ($KV)

KV's Memorandum in Opposition to FDA's Motion to Dismiss. I thought they did a poor job responding to this argument by the FDA: "This exclusivity provision, by its plain language, does not guarantee a drug protection from competition. It applies only to bar FDA from approving certain NDAs, ANDAs, and BLAs. It does not bar FDA from approving another sponsor’s NDA or BLA for the same drug for a different indication, nor does it prevent FDA from approving another sponsor’s NDA or BLA for a different drug for the same indication. This provision makes no mention of compounded drug products."

Brief of Amici Curiae Alere Women's and Children's Health, LLC and Interested Physicians in Support of Defendants: "Plaintiffs come to the Court with unclean hands in another respect as well. Whereas FDA's designation of Makena under the ODA protects Makena from direct competition from another NDA for the same drug for the same indication, Plaintiffs have attempted to leverage that limited protection into a much broader monopoly. Most obviously, Plaintiffs seek to turn their ODA designation into protection from competition from legitimate pharmaceutical compounding. [...] Plaintiffs' own behavior indicates that they will use any declaratory or injunctive relief from this Court in an effort to dissuade physicians and pharmacies from engaging in even permissible compounding. [...] Although Plaintiffs apparently believe an expanded monopoly is necessary in order for Plaintiffs to recover the inflated purchase price they paid for the NDA, that is not the concern of this Court... [...] The decision of many doctors... to prescribe for a given patient a compounded version of 17P that does not contain benzyl alcohol as a preservative is an appropriate exercise of their professional medical judgment that is permitted under the FDCA." This is very well argued.

Something else interesting. I had thought that the "preservative-free 17P" was just a smokescreen so that people could avoid paying for Makena. However, the Alere brief points out that "it is not known whether, and to what extent, use of benzyl alcohol as a preservative in a drug poses a risk to a fetus when administered to a pregnant woman."

I'm still predicting that there's no way KV gets their injunction and so they file for BK this quarter.

Latest and Greatest ($KV $AONE $GMXR $HOV)

KV said in its lawsuit that unless it is able to "immediately generate significantly higher market share and revenues from Makena than the current levels, the company will not be able to meet its cash obligations, and will run out of cash in less than three months from the date of this Complaint," which would be the first week of October. That even seems optimistic, and anyway they would be likely to file BK sometime before they literally ran out of cash. The FDA lawsuit that KV is banking on is not the clear winner that they need judging by the response by the FDA (e.g. "more time spent on pharmacies compounding 17-HPC means less time spent pursuing enforcement actions in other areas"). I would obviously expect the stock to collapse to ~0 in the event of a BK filing.

The AONE bonds are down to 20 cents (and they have issued new "debt" where the payments are made with stock), and the company had previously said that "as of May 31, 2012, the Company expects to have approximately four to five months of cash to support its ongoing operations." That suggests that sometime around August/September the company will need to do something dramatic, which would be good for the debt/equity trade. I continue to wonder how the $163 million of 2016 notes only be worth $35 million according to the bond market - yet the company has a market cap of over $100 million? Aren't both the notes worth significantly more and the stock worth significantly less? I think they should be looking at a debt/equity swap right now for all their existing unsecured debt. They would be in a much better position to survive with less leverage. Ultimately though, they are probably a goner no matter what as Vinod Khosla has said. The best outcome would be for the company to liquidate and distribute proceeds to bondholders, as ENER did.

The big catalyst for GMXR is the bond maturity in February. That bond is trading at 69 and the 2015 unsecured is trading around 40. The well results in the Bakken have continued to come in poorly. They tend to be pretty opportunistic about debt/equity swaps and I'm sure they would rather spend money on drilling than on principal repayments to bondholders. The market cap is $60 million, which is more than the market value of the debt due in February. I would look for them to try to repay the February maturity in stock (via swaps) rather than cash. That will obviously be good for the long debt/short equity trade. Also, the company announced that they will release 2012 second quarter financial and operational results after the close of trading on the New York Stock Exchange on Wednesday, August 8, 2012.

Last is HOV, which has been trading stock for the bond that we own. It's nice to know that the company agrees that the bonds are a better value than the stock. I'm looking for continued swaps to put a ceiling on the share price while increasing the price/expected recovery of our bond. I've previously mentioned "impediments [which] will affect the home builders going forward (significantly higher-than-average vacancy rates, legacy land positions with subpar gross margins, competitive land market in attractive locations, rising labor/material costs, potential new home-builder entities with stronger balance sheets...)." Today I see a smart observation, that "the market may come to the realization that a sizeable portion of the land left on the balance sheet is: 1) Not in a desirable area despite the uptick in new-home demand; 2) Land that needs major improvement but does not yield an adequate gross margin at today's home prices after the necessary development spend."

"Re: Recent FAX from KV Pharmaceutical concerning [Makena]."

Saw this post about Makena on the Ob Gyn L Forum:

There will be more and more attempts by KV to do other "end around sweeps" to be the sole provider!

I continue to write for the high quality product of the Walgreen's Pharmacy at Texas Womans Hospital. I do not plan to change my behavior brcause of this attempt by KV to manipulate the facts

One More Thing From the Memorandum in Support of FDA's Motion to Dismiss in K-V Pharma Lawsuit ($KV)

Plaintiffs’ requests that this Court supervise FDA’s enforcement activities are extraordinary and improper because, as discussed below (pp 18-21), FDA’s non-enforcement decisions are committed to the agency’s discretion. See Heckler v. Chaney, 470 U.S. 831, 837-38; Judicial Watch, 2012 U.S. Dist. LEXIS 26684 *39 (where court could not order relief plaintiff sought because the “enforcement tools provided to the defendant under [the statute] are committed to the agency’s sole discretion,” plaintiff lacked standing); see Block v. SEC, 50 F.3d 1078, 1084 (D.C. Cir. 1995) (“the agency alone, and neither a private party nor a court, is charged with the allocation of enforcement resources.”); Coker v. Sullivan, 902 F.2d 84, 89 (D.C. Cir. 1990) (“This court should not steer the Department’s resources and shape its priorities when we lack knowledge of the matters competing for the Department’s attention.”); see also Norton v. S. Utah Wilderness Alliance, 542 U.S. 55, 64 (2004) (under 5 U.S.C. § 706(1), court can only compel agency to take “a discrete agency action that it is required to take”).

Plaintiffs are, in effect, asking the Court to assume the role of FDA’s “director of enforcement,” a task for which it is ill-suited. Chaney, 470 U.S. at 831-32 (“The agency is far better equipped than the courts to deal with the many variables involved in the proper ordering of its priorities.”). To meet Plaintiffs’ demands, the Court must order FDA to disregard not only its own risk-based approach for prioritizing inspection and enforcement resources regarding compounding generally but also, consequently, its priorities for other unrelated enforcement activities: more time spent on pharmacies compounding 17-HPC means less time spent pursuing enforcement actions in other areas. Sierra Club v. Whitman, 268 F.3d 898, 903 (9th Cir. 2001) (EPA “must be able to choose which violations are most egregious. It would be unwise for the judiciary . . . to attempt to set the priorities for the EPA’s enforcement decisions.”).

Memorandum in Support of FDA's Motion to Dismiss in K-V Pharma Lawsuit ($KV)

A good summary of FDA's argument from their MEMORANDUM IN SUPPORT OF DEFENDANTS’ MOTION TO DISMISS AND IN OPPOSITION TO PLAINTIFFS’ MOTION FOR INJUNCTIVE RELIEF, in K-V PHARMACEUTICAL COMPANY v. UNITED STATES FOOD AND DRUG ADMINISTRATION (1:12-cv-01105-ABJ):

Plaintiffs’ Complaint should be dismissed. Their claims are not justiciable. To establish standing, Plaintiffs must allege an injury that is likely to be redressed by the relief they seek. Plaintiffs cannot satisfy the redressability requirement because the declaratory and injunctive relief they seek, including an order compelling FDA to take enforcement actions and to refuse import entries of 17-HPC active pharmaceutical ingredient (API), either is unavailable as a matter of law or is not likely to redress their injury.

Even if Plaintiffs can establish standing, FDA’s March 2011 statement is not subject to judicial review under the Administrative Procedure Act (APA) because FDA’s decisions not to take enforcement action are committed to the agency’s discretion under Heckler v. Chaney, 470 U.S. 821 (1985). Moreover, the conduct alleged - a statement expressing an intent to exercise enforcement discretion - does not state a violation of any of the sections of the Federal Food, Drug, and Cosmetic Act (FDCA) cited by Plaintiffs. Finally, this Court should refuse to grant the requested mandatory injunction. FDA’s testing of samples of compounded 17-HPC and the active ingredient failed to reveal any major safety concern. Forcing FDA to reject its enforcement priorities in favor of Plaintiffs’ commercial interests would be both inappropriate and contrary to the public interest."

Very bearish for KV. In order to survive, they needed an injunction forcing the FDA to eliminate competition for Makena. At a minimum, it seems like this case will drag on forever and at the very least not be resolved in KVs favor in the 1-2 month time frame that would be needed for them to avoid running out of cash. Referring to the circuit split on 353a:

"[I]n light of the complexity of taking enforcement action during this circuit split, FDA is generally prioritizing enforcement actions related to compounded drugs using a risk-based approach, giving the highest enforcement priority to compounded products that are causing harm or that amount to health fraud."

Referring to the Orphan Drug Act:

"This exclusivity provision, by its plain language, does not guarantee a drug protection from competition. It applies only to bar FDA from approving certain NDAs, ANDAs, and BLAs. It does not bar FDA from approving another sponsor’s NDA or BLA for the same drug for a different indication, nor does it prevent FDA from approving another sponsor’s NDA or BLA for a different drug for the same indication. This provision makes no mention of compounded drug products."

It also seems like KV has shot themselves in the foot with the lawsuit. How much effort is FDA going to put into "normal enforcement" now that they are defending this lawsuit from KV?

FDA's Motion to Dismiss in K-V Pharma Lawsuit ($KV)

This is from the DEFENDANTS’ MOTION TO DISMISS in K-V PHARMACEUTICAL COMPANY v. UNITED STATES FOOD AND DRUG ADMINISTRATION (1:12-cv-01105-ABJ):

"Defendants hereby move to dismiss this action pursuant to Fed. R. Civ. P. 12(b)(1) for lack of subject matter jurisdiction because plaintiffs have failed to establish that they have standing inasmuch as the relief they seek either is unavailable as a matter of law or is not likely to redress their injury. Defendants further move to dismiss this action pursuant to Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief can be granted inasmuch as the plaintiffs challenge an exercise of enforcement discretion that is not subject to review by the Court."

"K-V Pharmaceutical Company Announces Additional Notification from NYSE Regarding Listing Criteria" ($KV)

Nice Friday press release:

K-V Pharmaceutical Company (NYSE: KVa/ KVb) ("the Company") today announced that on July 16, 2012 it was notified by the New York Stock Exchange Regulation, Inc., ("NYSE") that it is below listing standard criteria due to the Company's average market capitalization being less than $50 million over a 30-day trading period and its stockholder's equity being less than $50 million. Per NYSE regulations, K-V intends to submit a plan to the NYSE within 45 days of receipt of the notification to demonstrate its ability to achieve compliance with these continued listing standards within 18 months of receipt of the notice.

EP: "K-V Pharmaceutical orders a beer in last-chance saloon"

A writeup of KV this morning:

"In the meantime, Imperial Capital believes K-V must try to renegotiate upcoming licensing payments to Hologic, Makena’s originator, which represent a large near-term liability. This might help delay the cash crunch, as might cutting operating costs. [...] Just how much headroom there is for further price reductions, and whether these might do anything to change the FDA’s stance, are two key issues with which the company must now grapple, assuming that it is not already too late. To be sure the grim reaper is now knocking at K-V’s door."

Just took a look at the latest in the FDA lawsuit - the defendants (FDA) are to file the Administrative Record by 8/10/2012. Also, with regard to KV's motion for temporary restraining order and preliminary injunction:

"defendants' dispositive motion and combined memorandum in opposition to plaintiffs' motion and in support of its dispositive motion shall be filed on or before July 20, 2012; plaintiffs' combined reply and opposition to the dispositive motion shall be filed on or before July 27, 2012; defendants' reply in support of its dispositive motion shall be filed on or before August 3, 2012; and a motions hearing is set for August 7, 2012, at 2:00 pm. Since plaintiffs' motion is now consolidated with the merits, the parties need not brief irreparable harm."

So it looks like it will be about a month before there is even the possibility of a positive news catalyst.

More Context on KV Pharma ($KV) - Interesting Nugget From a 2011 Article

This is an old Washington Post article about Makena, but says a lot about what the FDA thinks:

In an interview with The Washington Post on Friday, an FDA official said that, if requested, the agency could approve a lower-priced generic version of the drug for another use that doctors could prescribe 'off label.'

In addition, the official said the agency would not prevent compounding pharmacies from continuing to provide 17P unless patient safety is thought to be at risk.

'We have our hands full pursuing our enforcement priorities,' said the official, who spoke on the condition of anonymity because of the sensitive nature of the issue. 'And it’s not illegal for a physician to write a prescription for a compounded drug or for a patient to take a compounded drug. We certainly are concerned about access of patients to medication.;

Looks Bearish: K-V Pharmaceutical Company v. FDA, U.S. District Court, District of Columbia, No. 12-01105 ($KV)

Just took a look at the complaint filed in K-V Pharmaceutical Company v. FDA, U.S. District Court, District of Columbia, No. 12-01105. Here are some of the highlights:

• Unless FDA publicly signals that it will stop the unlawful competition by non-customized compounded drugs (and thereby give KV's creditors a reason to believe that KV is likely to be able to meet its financial obligations if given more time), KV will not be able to attract new capital at a reasonable cost, and is likely to exhaust its working capital within three to six months and be forced to file bankruptcy before then.
• FDA has issued further public statements on Makena [...] None of these statements has announced an intent to take enforcement action against unlawful compounded 17P that is not customized to meet the special needs of individual patients who have the condition for which Makena, a drug that has statutory market exclusivity, is indicated but for whom Makena is medically inappropriate.
• Unless KV is able to immediately generate significantly higher market share and revenues from Makena than the current levels, the company will not be able to meet its cash obligations, and will run out of cash in less than three months from the date of this Complaint.
• As a result of FDA's Statement, Makena is being, and will continue to be, widely displaced in the market by compounded 17P.

Also interesting, from one of the declarations which was filed:

• [T]oday more than 100 firms compound 17P, the largest of which are doing so in commercial quantities.
• State Medicaid agencies' policies precluding access to Makena persist
• [O]ne of the larger compounders of 17-P appears to have widely distributed to its customers and the public a fax stating 'The FDA found no reason to change its enforcement policies regarding compounded [17P]'
• KV has been informed by certain State Medicaid agencies... that they do not interpret the June 15 [FDA] Statements as requiring any changes to their policies.

Reading the complaint and supporting materials was highly revealing. It looks like the FDA has been very uninterested in blocking competition from compounded 17P, and state Medicaid agencies have been very uninterested in paying for Makena.

KV Pharma ($KV) Sues the FDA

Just reported:

"In its lawsuit, K-V said the FDA was addressing the financial concerns of insurance companies that cover the cost of medications instead of the needs of patients in declining to stop pharmacies from making cheaper versions of the Makena drug. By law, the FDA is only allowed to make decisions based on science, not cost.

K-V said Makena's sales are not enough for the company to satisfy its creditors, and it would go bankrupt within three to six months if the FDA failed to act, according to the lawsuit filed on Thursday in the U.S. District Court for the District of Columbia."

Since it seems unlikely that this lawsuit can be resolved in KV's favor before September, when their next interest payment is due and will be very low on cash, it seems almost certain that the company will need to file BK. At that point, I would expect the share and sub bond prices to collapse to near zero, given the substantial other claims senior to them, and the uncertainty about the enterprise value.

I view it as unlikely that the FDA would settle this lawsuit quickly by changing its behavior, and more likely that they would stonewall and take it all the way. Presumably, this situation has been hashed out behind the scenes ad nauseam between KV and FDA. It doesn't seem like FDA is willing to budge on it.

The tests of compounded product failed to show a serious safety concern, which was the political cover that FDA would need to upset the Medicare and insurance payers, doctors, and White House.

FDA Issues Further Guidance About Makena ($KV)

Mostly, more blah blah about how people should order name brand Makena instead of much cheaper compounded product. This part was interesting though,

"Policies imposed by certain state Medicaid agencies force a pregnant woman at high risk for recurrent preterm birth to 'try and fail' or be 'unable to tolerate' compounded 17P formulations before the state will approve Makena® for her; others require that she and her physician must demonstrate 'medical necessity' for Makena® instead of compounded formulations. These coverage policies disregard guidance issued by FDA and CMS, including the most recent statements. Notably, some states with such policies in place also have prematurity rates above the national average of 12.2 percent - an outcome with heartbreaking results for families and the potential for high life-long medical costs, a significant portion of which will likely be borne by Medicaid."

Very interesting the lengths that health care payers are going to avoid overpaying for this stuff.

"K-V Pharmaceutical Company Announces Notification from NYSE Regarding Listing Criteria"

K-V Pharmaceutical Company (NYSE: KVa/ KVb) ("the Company") today announced

"[O]n June 26, 2012 it was notified by the New York Stock Exchange Regulation, Inc., that its Class A common shares is below criteria for the average closing price of a security of less than $1.00 over a consecutive 30 day trading period[...]

Per NYSE procedures, K-V intends to notify the NYSE within 10 business days from the receipt of the NYSE notification of its intent to cure this deficiency within the six-month cure period. During this six-month cure period, the Company's shares will continue to be listed and traded on the NYSE, subject to its compliance with other NYSE continued listing standards. However, starting on July 3, 2012 the Company's Class A common shares and Class B common shares will trade under the symbols "KVa.BC" and "KVb.BC," respectively."