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KV Pharmaceutical Must Face Suit Over Quality Assurances

By Andrew Harris - Jun 4, 2012 5:00 PM ET

KV Pharmaceutical Co. (KV/A) must face an investor lawsuit claiming the company and its executives made misleading statements about its compliance with federal quality- control standards, a U.S. appeals court ruled.

Led by public employee pension plans of Boston and Norfolk County, Massachusetts, investors sued the Bridgeton, Missouri- based drugmaker in 2008, alleging it and top executives made misleading statements about compliance with U.S. quality-control regulations.

A unanimous three-judge appellate panel in St. Louis today reversed U.S. District Judge Carol E. Jackson’s 2010 order dismissing the case and directed her to let investors file a revised complaint. The appeals panel pointed to a guilty plea by a unit of the company after the original lawsuit was filed.

“The district court abused its discretion in denying the motion to amend the complaint,” the appellate panel said. “The new allegations supported the investors’ contention that KV made false and misleading statements during the class period.”

In an amended complaint filed in May 2009, KV and its officers were accused of making misleading statements between June 2004 and January 2009 in reports filed with the U.S. Securities and Exchange Commission, during which time federal Food and Drug Administration inspectors had observed manufacturing, packing and labeling without making express findings of violations, according to today’s ruling.

Suspended Shipments

In December 2008, the company issued a press release stating it was suspending shipments of FDA-approved drugs in tablet form, after which shares fell from $5.39 on Dec. 22 to 51 cents on Jan. 26, 2009.

Former Chief Executive Officer Mark Hermelin in March 2011 pleaded guilty to violating drug labeling laws and was sentenced to 30 days in prison. A year earlier, KV’s Ethex unit pleaded guilty to failing to tell the FDA about pill manufacturing problems.

Brad Edwards, a spokesman for KV with Brainerd Communicators in New York, said in an e-mail that the company “does not comment on legal matters.”

The case is Public Pension Fund Group v. KV Pharmaceutical Co., 10-3402, U.S. Court of Appeals for the Eighth Circuit (St. Louis).
 












2012-06-14 BioPharm Insight






Holders of KV Pharmaceuticals' USD 200m 2.5% convertible notes due 2033 have organized an ad hoc group under financial advisor Duff & Phelps and legal counsel Stroock & Stroock & Lavan, said an advisory source and a source familiar with the matter. The convert holders recently moved to organize in anticipation the drug maker's upcoming USD 45m mandatory payment to Hologic could put the company in a liquidity squeeze, the sources added.

For their part, holders of the company's USD 225m 12% senior secured notes due 2015 have also mobilized in a group led by financial advisor Houlihan Lokey, said the source familiar, a bondholder, and the advisory source.

Last week KV announced that it obtained a USD 20m equity line from Commerce Court, which will be paid out over the next 24-months for general corporate purposes. The extra cash is expected to provide some additional flexibility, but KV is still expected to continue burning around USD 30m of cash from operations on a quarterly basis, said a trading desk analyst and the source familiar.

At 31 December, liquidity stood at USD 85.2m of cash.

On 4 August, KV has to make the USD 45m payment plus a 5% royalty fee to Hologic. The payments stem from an asset purchase agreement related to KV's purchase of the licensing rights for Makena, its preterm labor drug.

Unless KV amends its agreement with Hologic, or Makena sales skyrocket in the near term, an event of default is expected to occur since KV is not expected to have enough cash to make the payment, said the analyst.

Hindering an amendment of the payment schedule with Hologic is the fact that KV cannot alter the designated payment amounts without first getting approval from holders of the 12% senior secured notes, the analyst continued. The 12% note indenture mandates the company adhere to a strict payment schedule, which calls for a total USD 95m in milestone and royalty payments to Hologic.

The converts were bid 20.75 today, while the 12% notes are bid in the 60s, said a trader.

If the company is forced to restructure, the convertible holders would face an uphill valuation battle considering the company has not generated positive EBITDA since acquiring the rights to Makena in 2008, said the desk analyst.

The one bargaining chip that convertible holders have to play is that their notes have a put date in May 2013. In order to get Hologic or the 12% secured bondholders to relax the royalty schedule, management has already approached convertible holders about a potential offering to delay the put date, said the bondholder.

In addition to KV's vulnerable liquidity position, investors are wary of additional competition for a generic competitor to Makena, said the bondholder and the analyst. McGuff Pharmaceuticals is currently in the process of obtaining approval from the US Food & Drug Administration for a generic to Makena. Approval of the generic could further hamper sales for Makena, which has already come under pricing scrutiny, and hamper the company's ability to raise capital, said the bondholder and the analyst.

Prior to the FDA's approval of Makena February 2011, a group of convertible bondholders had engaged legal counsel Paul Weiss, as reported. Back in July 2010, bondholders had similar concerns about the company's liquidity following the settlement of a criminal case against KV's Ethex subsidiary.

KV did not return multiple calls for comment. Messages left for officials at Duff & Phelps, Stroock and Houlihan were not returned.

by Paunie Samreth, Reshmi Basu, and Jon Berke
 












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