KaloBios Bankruptcy Loans Could Dilute Shkreli's Holdings
March 21 2016 - 7:10PM
Dow Jones News
KaloBios Pharmaceuticals Inc. has lined up $14 million in loans
to see it through and out of bankruptcy, financing that could be
paid off in the form of bargain-priced stock that would water down
the holdings of former chief executive Martin Shkreli.
Nomis Bay Ltd. has joined Black Horse Capital LP in offering
loans designed to fund a deal to get KaloBios back on its feet and
soothe a sore spot—the company's association with Mr. Shkreli, who
attained notoriety for hiking the price of a vital drug by 5,000%
last year.
KaloBios was on the point of being liquidated last November when
Mr. Shkreli took control of it, after which the stock price rose.
About a month later, he was pushed out of KaloBios after his arrest
on fraud charges unrelated to the company. He remains one of the
company's largest shareholders.
Mr. Shkreli denies the fraud charges, which date back to his
days as a hedge-fund manager. His KaloBios shares are pledged to
secure his bail.
Meanwhile, KaloBios is operating under chapter 11 bankruptcy
protection, raising money to revive a deal Mr. Shkreli was working
on at the time of his arrest. KaloBios's new leaders have told the
company's bankruptcy judge that he has no say in what is going on
at the company.
If the financing works out, Mr. Shkreli's influence will be even
more muted, KaloBios lawyer Gregory Werkheiser told Judge Laurie
Selber Silverstein at a hearing Monday in the U.S. Bankruptcy Court
in Wilmington, Del.
To "claw its way back from near-oblivion," as Mr. Werkheiser put
it, KaloBios is trying to buy benznidazole, a tropical disease
treatment that could earn the owner a ticket for a fast ride
through the regulatory process.
Benznidazole is an established treatment for Chagas Disease in
Latin America, but it isn't yet approved in the U.S., where 300,000
people are afflicted.
The proposed loans are to pull off a $3 million deal with Savant
Neglected Diseases LLC, which owns the drug. Savant says it will
sell to KaloBios, but only if the company exits bankruptcy swiftly
and has $10 million to put it on solid financial ground.
Nomis Bay and Black Horse are the only new investors, so far,
that are willing to take a chance on the troubled biotech
company.
The proposed loans are tied to assurances that Mr. Shkreli will
have voting control of no more than 20% of KaloBios's shares once
the company emerges from chapter 11, Mr. Werkheiser said. If the
loans are paid off in KaloBios stock, he said, Mr. Shkreli's
holdings will be diluted to an estimated 16% of the equity in the
company.
Judge Silverstein Monday said she'd likely allow KaloBios to
move ahead on the loans, subject to resolving some disputed terms
related to compensating the proposed lenders should a better
financing package be found.
At Monday's hearing, Mr. Werkheiser said investors are "scared
to death of the Shkreli effect."
"Investors are wary of KaloBios because Mr. Shkreli was
associated with the company, even though that involvement was only
for one month and Mr. Shkreli is no longer involved in management,"
Judge Silverstein observed.
The man who replaced Mr. Shkreli as chief executive, Cameron
Durrant, said in court papers that investors have been reluctant to
plunge more money into KaloBios due in part to the company's
"brief, but disastrous association with Martin Shkreli and the
negative press coverage, legal troubles, and ill-will surrounding
Mr. Shkreli, as well as broader concerns about the state of the
biotechnology and pharmaceutical industry that Mr. Shkreli's
comments have fueled."
Mr. Shkreli's lawyer, Ben Brafman, disputed linking investors'
reticence to Mr. Shkreli's involvement.
"To suggest that a sophisticated investor may be cautious about
the current state of play in the biotech sector may have some
merit. To suggest however, that any sophisticated investor's
hesitation is linked to Mr. Shkreli's 'brief' association with the
company is just absurd speculation that borders on recklessness,"
Mr. Brafman said in an email.
Write to Peg Brickley at peg.brickley@wsj.com
(END) Dow Jones Newswires
March 21, 2016 18:55 ET (22:55 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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