EGLT: Egalet Recapitalization

By John Vandermosten, CFA

OTC:EGLT

READ THE LATEST EGLT RESEARCH REPORT

On October 31, 2018 Egalet Corp (OTC:EGLT) announced that it has signed a purchase agreement to acquire several pain products from Iroko Pharmaceuticals, Inc. (private). The announcement was the positive side of the story, as the company also initiated bankruptcy proceedings under Chapter 11. If noteholders agree on proposed terms, all current common stock and equity interests will be cancelled. The declining share price during preceding quarters led to exchange delistings and subsequent violations in debt covenants triggering the required debt tender offers. With insufficient cash to satisfy the outstanding debt, Egalet entered into forbearance with noteholders leading to the Chapter 11 filing.


View Exhibit I – Egalet Logo

If the proposed asset purchase agreement is approved, Egalet will acquire several assets from Iroko, including Vivlodex, Tivorbex, Zorvolex, Indocin and an in-development NSAID. Vivlodex, Tivorbex, Zorvolex and the in-development product are created using the SoluMatrix technology. This approach produces sub-micron size particles that are substantially smaller than those comprising competing products providing beneficial properties. The smaller particles allow for more rapid absorption, improved bioavailability and reduce the amount of drug needed among other advantages. The platform was developed by iCeutica and licensed by Iroko. The products are all non-steroidal anti-inflammatories used in a variety of pain applications. Interest in non-narcotic pain relief has raised the profile of this segment and it is complementary to Egalets own portfolio of pain products. Below we summarize the branded assets that are anticipated to be acquired.


View Exhibit II – Summary of Products Acquired from Iroko

Egalet will owe a 5% royalty on sales of products manufactured using the SoluMatrix platform that are due iCeutica and a royalty on sales above $20 million for Indocin. In 2019, the royalty will be 15% of revenues for sales above $20 million and in 2020 and beyond, the royalty will be 20% of revenues for sales above $20 million.
Egalet management has guided total anticipated annual revenues from Egalet legacy products and Iroko acquired products to be in the range of $80 to $90 million; however, the breakdown of this estimate among products is unclear. Iroko is a private company with no disclosure on revenues so further analysis will be delayed until more detail is provided closer to deal closure.

We see the addition of new pain products providing additional revenue on a fixed cost structure which should improve margins and the pathway to profitability. Sales force call points should be largely the same, leveraging the representatives already in place. While historical cost detail is not available, we anticipate that gross margins are high given what appears to be a straightforward manufacturing process for a small molecule drug.

In consideration for the product assets, Egalet will issue $45 million in debt and 49% of the outstanding equity after recapitalization. A royalty of 5% will be paid on Egalet net sales to Iroko following deal closure. Additionally, royalties will be paid on development asset Indocin on revenues generated in excess of $20 million per annum for a duration of 10 years.

The new debt structure will include $50 million of debt issued to the existing 13.0% senior secured debtholders who will also receive $20 million in cash. 5.5% and 6.5% convertible note holders will be converted to equity, comprising about 32% of the total post-restructuring. Below we summarize anticipated capital structure and royalty detail among the stakeholders.


View Exhibit III – Egalet Post-restructuring Capital Structure

Following the consummation of the transaction, Egalet is required to have a cash balance of $10.2 million with a 15% buffer. Based on our rough math, with $70 million of cash at the end of Q2, and $20 million issued to the senior secured holders, we anticipate approximately $10 – $15 million in transaction costs and an additional $20 – $22 million in cash burn prior to deal closure. Based on this estimate, Egalet will be able to satisfy the $10.2 million cash balance requirement.

Timing for the consummation of the deal is targeted towards the first quarter and we believe it could be completed by late January. We will update our valuation which is currently suspended as more details are provided. Shares are expected to trade on the OTC Pink Open Market as of November 1, 2018.

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