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EAST BRUNSWICK, NJ (
Savient Pharmaceuticals(SVNT) is insolvent and its directors are greedy pigs more interested in emptying the company's dwindling cash pile into their own pockets than repaying creditors, alleges a West Coast hedge fund and Savient's largest creditor in a lawsuit filed Tuesday.
Alright, I'm taking some sensationalist liberties with the exact language used by Tang Capital Partners in its legal battle against Savient management, but only just slightly. Tang Capital is asking the Delaware Court to declare Savient insolvent, stop the company from moving ahead with a planned financing, and appoint a receiver to liquidate and distribute the company's remaining assets to creditors.
Oh, and Tang Capital also wants Savient to fork over at least $100 million in compensatory damages.
Tang Capital owns Savient debt totaling $38.95 million, or 17% of the company's outstanding convertible notes.
Savient shares tumbled 25% to $1.77 Tuesday after the company issued an 8-k disclosing the Tang Capital suit. In response, Savient said it "believes that the claims alleged by Tang Capital Partners are without merit, and intends to defend this lawsuit vigorously. Additionally, the Company expects to continue to consider financing transactions that would improve its balance sheet."
Savient has struggled mightily to sell its gout drug Krystexxa and its stock price has suffered as a result. How bad a job has Savient done in marketing Krystexxa? I'll let Tang Capital describe the company's effort. The firm's lawsuit makes for a fun read:
"On a relative basis, Krystexxa's sales performance for its first five quarters on the market ranks among the worst of any new drug launch in the history of the pharmaceutical industry. For example, in an analysis of 35 prescription drugs launched in the United States in the past three years, Krystexxa ranks
dead last, with fifth-quarter sales of $3.0 million compared to a range of $3.5 million-$183.4 million for fifth-quarter sales of the other 34 drugs."
There's more on Krystexxa's performance:
"How remarkably low Savient’s revenues are is rivaled only by how remarkably high its expenses are. For the quarter ending December 31, 2011, Krystexxa's fifth quarter on the market, operating expenses were $35,612,000, which was
nearly ten times its revenue of $3,710,000, resulting in an operating loss of $35,207,000.
"This remarkable revenue/expense imbalance can be seen by looking at other metrics as well. Based on reported sales levels and the price of Krystexxa, Tang Capital is informed and believes that, after more than four quarters of active promotion, there are only 250-300 patients nationwide currently receiving the drug. According to the Annual Report, Savient had 173 full-time employees as of February 22, 2012. As such, there are less than two patients on Krystexxa treatment nationwide for every one full-time employee at Savient."
Tang Capital alleges that Savient is insolvent, with total assets of $193 million and liabilities of $259.7 million, as of December 31, 2011. The lawsuit states:
"Savient is insolvent under the balance sheet test because its liabilities far exceed its assets and it has no reasonable prospect for continuing its business successfully. This insolvency is critical because, as described previously, Savient has little, if any, going concern value and there is no reasonable likelihood that it will have such value in the future."
And Savient's financial condition is getting worse, Tang Capital alleges:
"Upon information and belief, the amount by which Savient’s liabilities exceed its assets continues to increase at an alarming rate. Savient experienced a cash burn of approximately $32,920,000 in the fourth quarter of 2011. Based on Savient’s historic performance and the belief that Krystexxa sales grew only modestly in the first quarter of 2012 (as reported by Wolters Kluwer, monthly sales of Krystexxa for the three months ending March 31, 2012 were up only 5% compared to the monthly sales for the three months ending December 31, 2011), Tang Capital estimates that Savient’s excess of liabilities over assets swelled to some $90 million-$95 million as of March 31, 2012 and, left unabated, would, at this rate, approach $200 million at year-end 2012."
Here's the part of the lawsuit where Tang Capital rips into Savient's management and its directors:
"Management of the Company and Director Defendants do not have any incentive to preserve the Company’s most valuable asset -- its cash -- for the benefit of creditors. On the contrary, with salaries and other cash compensation that are above the industry norm for companies of Savient’s market value, and stock options that are far out of the money (weighted average exercise prices of $7.40, which represents more than a 200% premium to Savient’s closing stock price on April 27, 2012), the Company’s officers and Director Defendants are incentivized to maintain the status quo and continue to pursue a hopeless drug launch while ignoring the fact that it has already failed. While recognizing failure and drastically cutting head count and expenses would preserve value for creditors, it would also mean an end to officers’ and Director Defendants’ lucrative cash compensation and would extinguish any chance, however remote, of recognizing any value from their out-of-the-money stock options."
Savient has $230 million in convertible debt that requires the company to pay $10.93 million annually in interest payments. Tang Capital points out that these interest payment "approximates the current annualized sales level of Krystexxa of $12 million based on results for the fourth quarter of 2011…"
Tang Capital further alleges that Savient is negotiating a proposed financial transaction that is expected to close on or before May 9.
"The terms of the Proposed Transaction as disclosed to Tang Capital are not in the best interest of the creditors and, as such, would constitute a breach of fiduciary duties by Director Defendants and a fraudulent transfer if consummated, the lawsuit states.
Like I said, a fun read.
--Written by Adam Feuerstein in Boston.
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