Struggling with debt, San Diego’s Orexigen Therapeutics is up for sale after filing for Chapter 11 bankruptcy.
Orexigen’s weight-loss prescription drug, Contrave, didn’t meet sales expectations, running afoul of an agreement with creditors, according to court documents. On a related note, cash flow was also an issue.
Orexigen shares, already far below peaks in 2015, dropped 76 percent the morning of March 12, when the bankruptcy was announced.
"The board and management team have thoroughly assessed all of our strategic options and believe that this process represents the best possible solution for Orexigen, taking into account our financial needs," said Michael Narachi, president and CEO of Orexigen, in a statement.
"While we have been working closely with our noteholders and have the support of a controlling number of senior secured noteholders, our debt covenant requirements and near-term cash flow needs have necessitated the protection afforded by a court-driven process."
To pay creditors over time, Orexigen will auction off all of its assets no later than May 24, and by July 2 the company will be sold. The company stated debtholders support this route and put up $35 million in financing so that normal business operations continue uninterrupted. Contrave will be available in the interim, the company noted.
The company forecasted it would be profitable by 2019, according to court papers, but inadequate cash flow plagued Orexigen. As of September, the company reported an accumulated deficit of $765.5 million, largely due to clinical development costs.
“Although Orexigen remained positive about its longer-term prospects and its ability to ultimately maximize value, it continued to be concerned with its highly levered capital structure and inability to generate positive free cash flow in the near term,” the bankruptcy documents state.
In addition, Contrave sales narrowly missed a $100 million net sales target in fiscal 2017, which violated noteholders terms in a $165 million debt deal.
Maxim Jacobs, a biotech analyst at Edison Investment Research, said high levels of debt left the company with few options.
"When you have a lot of debt your balance sheet and not a lot of cash, it's really hard when you have to pay that debt back in the near term. It's really hard to do an equity offering, because the equity investors know their money isn't even going to your operations. It's simply going to the debtholders,” he said.
Jacobs said Contrave users had to pay out-of-pocket, and it was up against a generic drug called phentermine that’s been around for years.
After setbacks, Contrave won U.S. Federal Drug Administration approval in 2014. Orexigen partnered with Takeda Pharmaceuticals on the commercial rollout, eventually becoming the No. 1 prescribed weight loss drug nationally, but initially sales lagged below estimates.
Envisioning differing strategies, Orexigen and Takeda went their separate ways in 2016, and Orexigen invested heavily in building out commercial operations.
In court documents, the company took note of momentum. Sales have been rising, and it prevailed in a patent case against Actavis Laboratories, confirming Contrave market exclusivity until 2030.
Jacobs said it would make sense for a company with multiple drugs and an existing sales force to buy Orexigen.
"I think it could be at or near profitability with this same strategy," he said.
Orexigen has 109 employees, compared to 132 employees in December 2016 and 69 in December 2015.