Biotech and life sciences companies have historically outperformed the market and operated with relatively low debt levels, especially in the prerevenue stage. A healthy venture capital and public company market has allowed significant growth, even for high-risk ventures, as investors looked for the next “miracle” drug or product that would deliver outsized returns. However, life sciences companies have increasingly taken on debt at earlier stages, and these companies have higher levels of debt overall than in prior years. Credit markets have tightened, and lenders are now also seeking stricter protections and are less willing to facilitate additional investment. This change in the lending environment can negatively affect growth and development strategies. Even companies with an otherwise healthy balance sheet must grapple with the rising wave of “sink the company” personal injury and product liability litigation, which can run into billions of dollars. These factors have led to distress in the life sciences sector, which is likely to increase in 2023.
Restructuring strategies, whether out of court or in court, can create significant value through tools that allow for the separation of valuable products and businesses from bad balance sheets. For example, to deal with potential tort liability, corporate entity structuring can realign a corporate group along business lines or other segments to “ring fence” liabilities. With thoughtful planning, companies can isolate entities and assets subject to current and potential future claims to enable such claims to be addressed without jeopardizing the broader business. These strategies can prevent liabilities related to a particular product or business from inhibiting a company’s growth and affecting other assets and can better position the company for acquisitions and divestitures.
In-court solutions can also create significant value when it comes to products and businesses that have potential but still require additional investment before commercialization. In particular, Chapter 11 of the U.S. Bankruptcy Code provides a suite of powerful tools that allows for the reorganization of companies through a conversion of debt to equity, extension of debt maturities, a reduction in liabilities, or the sale of assets free and clear of claims. The sale option can be particularly useful for life sciences companies looking to preserve or acquire products or businesses that have yet to be produced but have significant potential. Buyers are often more comfortable purchasing assets from a distressed company with the blessing of a federal court, which can make findings that the purchase price was fair and reasonable and provide that the sale is “free and clear” of claims. In addition, an in-court restructuring process, or even the possibility of one, can facilitate and increase leverage with both lenders and regulators during negotiations about requisite consents or other issues for proposed restructuring transactions.