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Summary

  • $40MM term loan agreement with Athyrium has yet to be filed by Retrophin with the SEC.
  • Retrophin's CEO stated on the May 30th update call that Retrophin had already received the $40MM from Athyrium, indicating that the term loan had already closed.
  • Despite the CEO's May 30th statement, the Athyrium transaction does not appear to have closed.
  • Retrophin's liquidity situation remains uncertain unless and until transaction documents with Athyrium are filed with the SEC.

In my last article regarding Retrophin (NASDAQ:RTRX) (see here), I analyzed recent announcements by the company regarding its liquidity situation and pipeline developments. I noted in that article that, despite statements made by Retrophin's CEO on the company's May 30th update call (see here for audio file of the call), which indicated that both the convertible note and senior secured term loan transactions had already closed and that the company had already received $80 million in proceeds from these transactions, investors would need to wait for the actual transaction documents to be filed with the SEC in order to fully understand the terms and conditions thereof. (For the sake of completeness, the CEO's exact statement on the call was that Retrophin "raised eighty million dollars, simple as that; we sold $40 million of senior notes to Athyrium and we sold $40 million of convertible notes to a consortium of investors"; furthermore, the CEO stated that Retrophin had "approximately $80 million" in its bank accounts as of May 30th.)

Although the transaction documents for the convertible note issuance were filed with the SEC on June 4th (see here), as of 3 p.m. on June 11th, no transaction documents have been filed with the SEC regarding the $40 million senior secured term loan facility with Athyrium. This indicates that while Retrophin may have executed a "binding commitment" letter "subject to customary closing conditions" with Athyrium regarding the transaction on or about May 29th (the date of the press release announcing the transaction), no actual transaction documents were signed between the parties on that date or on the following business day (May 30th, the date of the update call). Had the term loan transaction documents been executed on or prior to May 30th, per Form 8-K filing instructions, they should have been filed with the SEC by the date Retrophin made the convertible note filing (on June 4th). But this did not occur.

Further evidence that the closing conditions for the term loan facility with Athyrium have not been satisfied lies with what's on (or rather, what's not on) Athyrium's website. Under the "News" heading on the website, there is no mention of the Retrophin loan facility. In addition, under the "Portfolio - Athyrium Opportunities Fund" link, there is likewise no mention of the transaction. Thus, either the deal has not closed, or Athyrium is extremely lax in updating its website in a timely manner.

This begs the following question: If the transaction documents for the $40 million Athyrium term loan facility were not yet executed and the closing conditions for the facility not yet satisfied as of May 30th, how could Retrophin's CEO state on that date that Retrophin had already received the $40 million in loan proceeds from Athyrium? I can think of only two possible answers to this question:

  1. Athyrium decided to advance the $40 million to Retrophin on or prior to May 30th, despite the fact that binding transaction documents had not yet been executed and that the closing conditions for the facility not yet been fully satisfied; or
  2. Athyrium did not send Retrophin the $40 million by May 30th, despite Retrophin's CEO's statement to the contrary on that date

I will leave it up to the reader to determine the most likely answer to this question, however, in judging whether the former possibility or the latter possibility is more likely to be the case, one should consider the fact that if an attorney counseled Athyrium that it was acceptable to advance funds to a borrower on a mere commitment letter (subject to customary closing conditions), this attorney would (and should) be liable for malpractice. This is especially the case since the Athyrium facility is supposed to be a secured facility (i.e., the loan is to be secured by Retrophin's assets). In order to properly secure its $40 million loan, Athyrium would need to file a UCC financing statement against Retrophin in Delaware (see here for an explanation). However, Athyrium would not have authority to make this filing unless and until the transaction documents for the loan facility were signed, since these documents would grant the first-priority security interest in Retrophin's assets to Athyrium. Therefore, if Athyrium advanced the money to Retrophin prior to the execution of the loan documents and filing of the UCC financing statement, its loan would be completely unsecured by the anticipated collateral (a rather unfortunate event for a supposedly "secured" lender). In addition, in considering whether to give credence to statements made by Retrophin's CEO, investors should consider the fact that the CEO sold $4.4 million worth of Retrophin stock at $15.14 per share on the very day that he stated that the several million dollars spent on the Thiola acquisition somehow created $10 of net present value per share for Retrophin shareholders (or $255 million in aggregate).

Obviously, Retrophin's shareholders should care greatly about whether the Athyrium loan facility has closed or not (indeed, a shareholder asked exactly this question on the May 30th update call). Retrophin's liquidity will remain strained unless and until the company receives the loan proceeds from Athyrium. As noted in my first article regarding Retrophin (see here), the anticipated funding gap facing the company for the period from the end of Q1 2014 to the end of Q1 2015 could be as high as $75 million. The company will have to pay off $33 million in debt owed to Manchester Pharmaceuticals, which falls due in the next 7 months (by the end of December); in addition, according to Retrophin's Q1 2014 10-Q filing (pp. 21-22), the company has budgeted approximately $57-62 million in other expenditures during this 12-month period. Thus, although the company announced on the update call that it had raised $40 million from the issuance of the convertible notes (which amount was curiously increased to $46 million, less approximately $3 million in placement agent fees, in the SEC filing made by Retrophin regarding the transaction on June 4th), the company will likely run out of money by the end of the year without access to the Athyrium loan proceeds (or some alternative source of liquidity).

With Retrophin's stock up 8.3% on June 9th and currently sporting a market cap in excess of $285 million, investors seem to have given the "all-clear" signal with respect to the company after last week's ~30% slide. However, the company's shareholders appear to be whistling past the graveyard with respect to its still highly uncertain liquidity situation. Shareholders deserve to know what exactly is the status with respect to the Athyrium term loan facility, yet the company has left its shareholders in the dark ever since the morning of May 30th (please see below regarding my attempt to get the company to provide further information regarding the points raised in this article). Even the company's "Tweeting CEO" has been strangely and uncharacteristically silent since last Tuesday, June 3rd (the day before the convertible note SEC filing - but no term loan SEC filing - was made).

Unless and until the following questions regarding the Athyrium facility are answered by Retrophin, in my opinion, investors should steer clear of the company:

  1. Has the Athyrium transaction closed, and were the conditions precedent referenced in the May 29th press release all satisfied?
  2. If so, why have the transaction documents not been filed with the SEC yet, and why is there no mention of the transaction on Athyrium's website?
  3. If not, how could Retrophin's CEO make the statement on May 30th that the term loan proceeds had already been received from Athyrium?

Investors might also want to know answers to the following questions regarding the issuance of the convertible notes by Retrophin:

  1. Why did the CEO state on the update call on May 30th that only $40 million in convertible note proceeds had been received, whereas the 8-K filing on June 4th stated that $46 million of convertible notes had been issued?
  2. Why did the company only file "forms of" the note purchase agreement, convertible note and indenture, instead of copies of the actual executed agreements?
  3. Why did the company not disclose the names of the note purchasers and the amount of convertible notes purchased by each such purchaser?

Please note that I contacted Retrophin IR to ask for their responses (if any) to the foregoing six questions which cover all of the subject matter discussed in this article, and I stated in my request that I would obviously include their responses in this article; however, they were unfortunately unwilling to provide any responsive information concerning these questions, and merely replied as follows:

We do not respond to anonymous blog requests from the Internet... Your questions demonstrate a lack of understanding of finance and do not merit a response.

Failure by Retrophin to provide answers to the foregoing questions regarding the term loan facility with Athyrium, as well as the convertible note issuance simply reinforce the notion that the company is "treating biotech investors like little kids", as stated by another Seeking Alpha author. My price target of $3 is reiterated, as I believe that Retrophin remains highly overvalued for the reasons discussed herein and in my prior two articles regarding the company.

Source: Retrophin: The Curious Case Of The Missing Term Loan Agreement