Question about DNDN stock. Any Bankruptcy attorneys here? No bashers/pumpers.

Nobody pays full price for garbage. Bid will be $150 million I'm guessing, for the hard assets such as equipment & property & factories. The IP cannot be counted upon as a revenue return, it's just a "nice to have" in the settlement. Maybe a couple of million bucks can be generated here or there by selling pieces of IP, but nothing compared to the overall scrap price of the surgical stainless steel found in the production centers that no potential buyer has use for. It's already been proven that the business of selling this drug for a profit is fantasy. No way drug continues to be manufactured, marketed, or sold past Q1...

 

That won't happen, if only because any bid submitted must be greater than or equal to $275 million. If no bid is submitted, the company will immediately go private, public shares cancelled, and new shares distributed to creditors in proportion to the amount they are owed.

The problem is that the "assets" largely don't belong to the company. Both Atlanta and Seal Beach are leased facilities so those can't be sold. In the case of Atlanta, even the equipment inside the factory belongs to the lessor, not the company, even though that equipment is shown on the balance sheet as an asset through the wonders of accounting fiction for operating leases. More than half of the assets shown on the September balance sheet were, at original cost, leasehold improvements to the factories and those aren't transferrable unless somebody buys the entire business to continue making Provenge, otherwise they are worthless.

So realistically the only hard assets is some office furniture, computers, lab equipment, and manufacturing assets at Seal Beach with an original cost of $90 million. Used lab and manufacturing equipment has a resale value of 10-20 cents on the dollar and the furniture 30-50 cents. The value of computers and software are harder to estimate because the age is unknown the age, but all of those assets depreciate rapidly as the technology changes so anything more than about 24 months old will be hard to sell. In a fire sale scenario, it is hard to see how the hard assets will fetch more than $30-40 million in liquidation. Inventory is $66 million but to the extent that a lot of that is specialized material, like antigens, it has little value to anybody that is not running the Provenge business. Presumably most of the accounts receivable would be collectable and that is about $20 million.

I still see the winning scenario as Deerfield bidding $275 million, which is essentially what they are owed so no new cash is required. Then, they have two options:

1. Resell the assets they just bought with a cashless credit bid and hope to get more than the value of the assets alone. There may be companies willing to pay Deerfield some substantial amount, say $75 million, for the entire Provenge business that would not be willing to pay $275 million or more at auction.

2. If there are no buyers waiting in the wings to pay $75 million or more, immediately sell everything that is not tied down and hope to recoup $50-60 million from the sale of hard asset and accounts receivable.

3. The alternative is for Deerfield to do nothing, let the company liquidate, and accept whatever percentage of the liquidation proceeds they are entitled to as an unsecured creditor. However, as that is likely to be much less than the proceeds from options 1 and 2 above, I don't think they will do that. No matter what, I think Deerfield will make a stalking horse bid because that will buy them some overbid protection. The way that works is if Deerfield makes the stalking horse bid and are then outbid at auction, Deerfield gets to keep a percentage of the sale proceeds, normally up to about 10% of the stalking horse bid. Deerfield would then recoup $27.5 million in overbid protection money plus their fair share of the final proceeds as a creditor, again much better than doing nothing.

 

Perhaps a stupid question, but isn't the proprietary science, R&D, pipeline, etc. worth something to a big pharma giant? Even if they wanted to stop making provenge due to high costs I would think that years of development and research would be a drop in the bucket at 275M and they could use this for future product developments.

 

Just because you can buy the technology for less than what it would cost to recreate it means nothing. You can get fired for pissing away $275 million just as you can for pissing away $3 billion.

Value derives from the profits associated with the products, not from the sunk cost. If the science, pipeline, etc. can produce a valuable drug that can be manufactured at a significant profit, then yes it has value. Provenge does not fit that description so it does not have significant, if any, value.

However, to get a new drug that does have value will require the expenditure of not just $275 million, but that plus another $1-2 billion (minimum) in further R&D and manufacturing optimization so this is not a decision about a few hundred million, but rather a multi-year and multi-billion R&D initiative that will necessarily result in bypassing other R&D initiative because even big pharma has an R&D budget and limitations on manpower that they can throw at development.

Consider if somebody in your neighborhood spent $1.5 million to build a house, but it is only partly finished. The bank foreclosed and will sell it to you as-is for $250 thousand but you will have to put in another $1 million to finish construction. Do you buy it?

If that is the exact house design you want AND you have nothing better to do with $1 million, then maybe. If you want a different style of house or have better things to do with your money then it doesn't matter how cheap the bank is willing to sell, you have no need for a partially finished house. Big pharma is no different.

 

But can you be arrested for creating $7 billion in value by giving sales projections with absolutely no basis in reality, selling your stock at the inflated share price buoyed by those projections and thousands of people losing billions based on those projections that were a figment of your greedy corporate psycho imagination? Apparently not in America.

 

Yes, you can get arrested but proving outright fraud is nearly impossible because the government must show that the person knew it was fraud and not just sloppy estimates. At some point the people that lost billions have to take some shared ownership and admit that they did not look very carefully at their investment and blindly followed what came out of MG's mouth. Rookie error #1.

 

The question was obviously rhetorical and you could not be more wrong. You do not have to know you are committing fraud. If you do not know murder is a crime and you murder someone you can be convicted.

All the CEO had to know is that his public projections of 150 million to 200 million for quarter 4 2011 were not remotely possible a) when he made them and/or b) long before he pulled them. All the CEO had to know is that DNDN's term cost density was known to be a problem long before he told the public the day he pulled his projections. Ask the people who were responsible for projections if he knew his projection was not remotely possible. Look at the Silverberg lawsuit to see if he knew his projections were not remotely possible or if he knew about the cost density problem long before he told the public. Too many people know the truth. Very easy case.

Silverberg lawsuit:

http://courts.state.de.us/opinions/download.aspx?ID=199270

 

Actually, you do have to know that you are committing fraud. Any time you make a material statement that is not correct you commit a misrepresentation, which may be innocent. If an officer made a statement about what they thought sales would be, and they truly believed that, it is a misrepresentation but not a fraud.

A fraud ALWAYS requires the establishment of ALL five of these facts:

1. That a material fact was misrepresented,

2. That the misrepresentation was intentional, AND was INTENDED to deceive,

3. That the misrepresentation fooled the recipient,

4. That the recipient acted in reliance of the misinformation, AND

5. An economic loss was suffered.

The second factor, known by the legal term "scienter", is extremely difficult to prove which is why there are so few fraud cases even when the other four factors are blatantly obvious. If I sell you a 2006 automobile after I told you that it was really a 2009 model, you have the right to rescind the sale or recover the price difference between the two models, but that is because I made a misrepresentation which might have been innocent (I am stupid about cars). All you have to show is that the car was actually a 2006 model and that I said it was something different.

If you want to show fraud, you have to PROVE that I knew it was a 2006 and told you that lie to get more money from you. What I did, or didn't know, is very hard to prove. Does anybody have a memo from MG to the board or hi fellow officers where he admits there is no way sales would ever reach $4 billion, or has some co-conspirator come forward and revealed the scheme hatched at some remote mountain cabin intended to deceive shareholders? If not, there is no way to prove scienter.

Being dumb as a box of rocks pretty much negates scienter, and explains why there are so few fraud convictions, and the Safe Harbor provision of the Securities Litigation Reform Act covers most innocent misrepresentations (and creates a three year statute of repose).

 

The safe harbor provision is for private litigation only, not federal.

A CEO and company counsel have the responsibility of knowing securities laws. That is why companies have executive counsel. They are responsible to know what constitutes fraud. If they have committed fraud, they were supposed to know it was fraud.

There are laws and regulations that state if a company gives projections to the public, those projections must be reasonable. Those laws have to be followed. You have a responsibility to know those laws just as you have a responsibility to know that robbing a store is a crime.

You seem to be implying that any CEO of any company that might max out at $100 in revenues for a year can tell the public he or she thinks their company is going to have $100 billion in revenues and then claim they made a mistake and believed it when they were saying it.

Read the Silverberg lawsuit. The govt would also have the testimony of those who were subpoena'd who would have knowledge of what company insiders knew about the $175M-200M projection for q4 2011 and what company insiders knew about the problems doctors and practices were having with laying out 93,000 per patient before they were getting reimbursed. The public found out about this arrangement and the problems with this arrangement weeks before the 4th quarter of 2011 when billions of dollars were lost. The warnings given in company filings about reimbursement never ended up happening. Doctors and practices always got reimbursed.

The reason for so few convictions is because the govt has a history of not going after CEO's of medium to large companies. They get the small companies all the time.

Good luck with your interpretation of securities law. Hope your specialty is BK.

 

At what point in time in a Chapter 11 bankruptcy does the D&O insurance coverage terminate?

 

D&O is like any other insurance; it is written for a fixed period of time after which it expires. It matters a lot whether it is an "occurrence" based policy or a "claims made" policy. The first covers any event that occurs during the policy period, whenever the claim is made, and the second covers only claims made during the coverage period.

The difference is if something happened in 2014, but no claim was made until 2015, a 2014 "claims made" policy would not cover that loss unless the company also bought a policy to cover the tail period as well. D&O policies are highly customized so you need to read the contract to see who it covers, on what events, on what basis, and for which periods. A lot of bankruptcies will also provide in the plan a "hold harmless" that lets the board off the hook for any disclosed event.

 

Who does the responsiblity shift to? It can not take away the right to sue for things not related to the bankruptcy.

 

The indemnification agreement is between employee and employer and can have a "hold harmless clause" stating that employer and employee can not sue each other. The D&O policy is between employer and insurance company.

A bankruptcy itself can not hold officers or director harmless.

"Under Chapter 11 of the Bankruptcy Code, indemnification claims by directors or officers would generally be treated as unsecured claims payable only to the extent that other unsecured claims are payable as part of an approved plan of reorganization."

Based on that information, with respect to lawsuit rulings and legal fees it would appear that directors and officers make indemnification claims to the company. The company has the responsibility under the indemnification agreement to pay them and then the company recovers from the insurance company. It appears in the case of chapter 11, a director or officer would make a claim, the company would put in a claim to the insurer and money paid by the insurer would go to the company and the directors and officers would stand on line with the rest of the creditors.

 

The court cannot force it to happen, but the reorganized company can assume the liability. Each and every contingent claim against a bankrupt company, if properly disclosed, can be wiped out in bankruptcy but every executory contract (including indemnification agreements) can be assumed by the reorganized debtor if they choose to do so.

As a reorganized company needs officers and directors, a group that is hard enough to recruit as it is, the reorganized company will often provide some protection. Since the overwhelming number of board decisions are legal, this is usually just payment of some legal defense costs.

 

Everyone including the feds will likely go after individuals...

 

Sounds GOLDen!

 

We know that there is no stalking horse bidder, but the company did not say why it declined to name one. Naming a stalking horse bidder is routine procedure is most bankruptcy cases, and Deerfield could have credit bid for the minimum price. Does this mean Deerfield has second thoughts or proposed a purchase agreement that was so unpalatable that the company couldn't, or wouldn't, accept it?

Where does this go next? The creditors cannot possibly WANT to own and operate this company as the situation is messy (to say the least) and a lot more investment will be required to fix the problems if they are even fixable. Creditors might want to own the company briefly, but only if there is a willing buyer waiting to take it off their hands. If there is no buyer, does this become a liquidation of assets for the benefit of creditors?

 

Yes. It's f*cked.

 

Look at Worldcom. States file criminal charges. Sometimes they start with civil.

"Oklahoma will file criminal charges against WorldCom Inc., and several former executives, including Chief Executive Bernard J. Ebbers, the Wall Street Journal reported late Tuesday on its Web site.

Citing people familiar with the matter, the newspaper said state Atty. General Drew Edmondson will file criminal charges alleging WorldCom, Ebbers and five other company leaders violated the Oklahoma Securities Act.

The state will contend that WorldCom and the six executives willfully presented investors false information about the company, according to the newspaper's sources.

WorldCom, which plans to change its name to MCI when it emerges from Chapter 11, is moving its headquarters from Mississippi to Virginia."

 

They sink this Titanic yet?!? WTF is TAKING so long?!