MBRKQ Case Summary Updated 07.03.10
Here are some excerpts from the updated summary. The link to the full report can be found at the bottom of the post.
SYNOPSIS
Purchasing the equity of bankrupt MiddleBrook Pharmaceuticals, (MBRKQ) at the current market price of $0.11 is a compelling investment that could return over 60% to the investor in a relatively short timeframe (3 to 4 months). MBRKQ investors have their own statutory Equity Committee that was appointed on June 23, 2010. The Company has proposed and the Equity Committee has agreed to support a Management Incentive Plan (MIP) that does not begin to pay out pre-petition amounts owed or post-petition bonuses to management or employees until all creditors have been paid in-full and a minimum distribution to equity of $7.5 million occurs. The terms of the MIP could conceivably place a floor of value and limit the downside to about $0.08 (which happens to be the lowest price at which the stock has traded on a post-petition basis). I estimate that the funds available for distribution to equity after the §363 sale of substantially all of the company’s assets will be near $17 million or $0.18 on a per share basis.
EXECUTIVE SUMMARY
MiddleBrook Pharmaceuticals, Inc. is pharmaceutical company that sought protection from creditors under Chapter 11 of the Bankruptcy Code on April 30, 2010. On the filing date, the Company had no secured creditors and owed as much as approximately $16.8 million to its unsecured creditors. However, a large portion of the unsecured claims belong to Par Pharmaceutical, Inc. which has asserted a claim of approximately $11.6 million stemming from an unfulfilled development agreement. The official equity committee has indicated in court filings that it expects the claims of Par Pharmaceuticals to be disallowed in their entirety. When backing out Par's claim, the total unsecured claims are reduced to $5.2 million.
On May 11, 2010, the office of the United States Trustee (the "UST") appointed the Creditors Committee.
On June 9, 2010, the Court entered an order approving the sale of substantially all of the assets of the Company in a §363 sale to Victory Pharma who will serve as the stalking horse bidder. The stalking horse bid includes cash of $17.1 million, plus the assumption of about $750,000 in liabilities, according to court records. Competing bids are due on July 15, 2010. According to court filings, the Company is still in discussions with other interested purchasers.
On June 23, 2010 the Trustee appointed the Official Equity Committee.
Explanation of Value Revision
In my original summary I had estimated the distribution to equity would be about $0.09 per share. Admittedly, there is a wide variance between my current estimated recovery of $0.18 and the previous estimate. Originally, I based my valuation on the account balances reflected in the Monthly Operating Report (MOR) from May 2010. Upon further review of the court docket, the Debtors released their Schedule of Assets and Liabilities on June 1, 2010. This schedule excludes many accrued liability accounts that are reported on the MOR.
Given that the §363 sale appears to be moving forward and that end result appears imminent, the estate’s valuation is most appropriately viewed as a liquidating Chapter 11. As such, many of the accrued liabilities from the MOR are not truly items that have to be paid in cash or at all because the company will no longer be a going concern. My best estimate of what remains of the estate after the §363 sale will be a shell company with about $17 million in distributable cash & equivalents after satisfying all unsecured and administrative claims. The shell will also have an NOL carry-forward of $236 million. Given the uncertainty surrounding whether the estate could ever make use of or otherwise monetize the remaining NOLs, the $0.18 estimated recovery does not include any NOL value.
CATALYSTS AND RISKS
The biggest catalysts for recovery in this case include (1) higher bids emerging to compete with the stalking horse bidder, Victory Pharma; (2) an equity infusion to refinance the company as a standalone enterprise or (3) some other form of M&A transaction that seeks to preserve the enormous remaining net operating losses (NOLs). With the current market price for a share of stock of MiddleBrook Pharmaceuticals trading at $0.112 and a projected distribution of $0.183, it would appear that there may be more than 60% upside from current trading levels. In measuring the downside, I look to several issues that are discussed in more detail later in the report. Just briefly, with the proposed Management Incentive Plan (MIP) structured to begin paying out only upon payment in full to creditors and a residual value to equity of $7.5 million, it would appear that the downside could conceivably be measured at a per share distribution of $0.086.
The risks inherent in this case include the uncertainty surrounding liabilities that may potentially be owed to certain holders of MiddleBrook common stock who entered into Registration Rights Agreements in connection with a private placement of MiddleBrook stock during 2005 through 2008. Although the risk remains that the unsecured claims of PAR Pharmaceuticals totaling in excess of $11 million may be allowed, based on statements made in court filings it is expected that these claims that are currently reflected on the company’s books, will be disallowed in whole. If some or all of these claims are allowed, it could have a materially adverse impact on the distribution to holders of MiddleBrook common stock.
DISCLAIMER
The content provided herein is for informational and educational purposes only. In formulating this summary, the author had to make a number of assumptions and estimations. Because of the many uncertainties of the case, including the amount of claims that will survive the claims vetting process and the actual value of the final Asset Purchase Agreement, approximating the final distribution to equity holders is difficult if not altogether premature. None of the contents of this document should be construed as an offer or recommendation to buy or sell any security. The readers of this document should perform their own due diligence before taking any action and are encouraged to contact a financial advisor before making any investment decisions. This summary does not purport, and should not be construed, to advocate, solicit, encourage or discourage votes for any potential plan of reorganization for the Company. In full disclosure, the author is long MBRKQ common stock.
http://www.scribd.com/doc/33888674
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