Valeritas Holdings, Inc. (Valeritas) is largely considered the first bankruptcy filing to cite COVID-19 as a contributing cause of the bankruptcy. At the time of its bankruptcy filing in February 2020, the term “COVID-19” had not been coined, U.S. bankruptcy courts were still open and blissfully unaware of the tumult ahead, and the novel coronavirus seemed to many to be a distant, Chinese problem. As the final bankruptcy decree is entered, we look back at what we can learn from the Valeritas transaction.

Background

Valeritas is a medical technology company that produces the V-Go^Ⓡ, a insulin delivery patch for diabetes patients. Although commercially successful, the V-Go^Ⓡ has not been profitable for Valeritas. In early 2019, Valeritas accountants issued a going concern notification and the company was courting potential suitors. By late 2019, it was holding two purchase offers.

However, more factors were at play. In the final stages of due diligence, one of the potential purchasers discovered a discrepancy in the release testing specifications of the V-Go^Ⓡ. This led both purchasers to withdraw their offers and caused a significant inventory crunch for Valeritas. In December 2019, the company announced that it would have to write off up to $8 million in inventory, was revising its revenue expectations, and engaging advisors to investigate options for the survival of the company, including a Chapter 11 bankruptcy sale. 

Simultaneously, COVID was hitting the Chinese manufacturing industry and affecting production and inventory at the  V-Go^Ⓡ manufacturing facilities. By February 2020, the company had found a purchaser for the company in Zealand Pharma A/S (Zealand.) It filed for Chapter 11 bankruptcy with a stalking horse agreement with Zealand for a $23 million purchase. 

COVID-19 was a huge disruptor across industries and jurisdictions

Although COVID-19 was not the sole reason for Valeritas’ financial struggles, it was a significant factor and caused far-reaching disruption in industries worldwide. Many businesses were forced to look to bankruptcy laws for survival or a graceful exit.

Valeritas entered 2020 in a weak position. It struggled financially and lost two purchase offers that could have saved the company. Additionally, it was going into Lunar New Year and widespread COVID closures and disruption without its usual inventory buffer due to its recent inventory write-off. As the CEO stated in initial filings, their problems were “exacerbated due to the rapid onset of the coronavirus epidemic and the Chinese government’s measures to combat the spread of the disease, which included extending the [Lunar New Year] holiday for an additional week.”

Other companies felt the same pressures. Many U.S. companies rely on the Chinese manufacturing industry, the first to feel the pinch of COVID closures. As the virus spread and public health restrictions shuttered businesses, courts, and schools, other industries were quickly affected. Retail, hospitality, real estate, gas and oil, and many other industries have all suffered financial pressure and increased bankruptcies caused by the coronavirus pandemic.

The pandemic escalated the number and pace of bankruptcies

COVID-19 catalyzed the bankruptcy of many already struggling companies, like Valeritas. Companies that may have weathered their financial storm a little longer or even staved off bankruptcy altogether in better circumstances were tipped into bankruptcy by the challenges of COVID. Manufacturing delays, shipping disruption, forced closures, and continuing debt obligations pushed many businesses over the edge.

Statistics issued by the U.S. Bankruptcy courts show that, although total bankruptcies filed in 2020 decreased, Chapter 11 business petitions increased 20% from the previous year. Much of the fallout from COVID-19 has been seen more recently with the expiration of pandemic-related governmental programs and protections. Bankruptcy filings increased overall and business bankruptcies increased almost 30% in the 12-month period ending September 30, 2023.

The economic environment initiated by the COVID-19 pandemic is still tough, and we continue to see COVID-19 cited as a reason for bankruptcy filings. 

The bankruptcy system works, and continued to work despite the challenges of COVID

The bankruptcy system exists to protect the stakeholders in a business - the employees, creditors, and even the business itself. The Valeritas bankruptcy is a superb example of how bankruptcy can be used strategically and proactively to protect the business, assets, and workforce. When Valeritas filed for bankruptcy, it was emphatic that it wanted to reassure employees by filing promptly and with a viable purchase offer in hand. The company was wary of losing highly trained employees to competitors, which could further devalue the company and destroy its chances of survival. By filing for Chapter 11 bankruptcy, Valeritas was able to continue operating as a going concern, which not only maintained the value of the business but also ensured the continued production of life-saving technology for diabetes patients. 

The Delaware bankruptcy courts were also extraordinary in how quickly and seamlessly they pivoted to virtual operations when the coronavirus pandemic spread to the U.S. Technology already in place for e-filing and videoconferencing was immediately utilized to maintain a functional bankruptcy court system. Attorneys and court staff worked together to keep cases moving, rather than exploiting pandemic restrictions to their advantage. 

Director & Officer breaches and liabilities can be handled through the bankruptcy system

Financial pressures can often cause, or be caused by, other issues. The bankruptcy process can be an efficient means of uncovering and dealing with such problems. In the case of Valeritas, serious breaches of fiduciary duties were alleged against the directors and settled during the bankruptcy.

The breaches were related to changes to the release testing specifications for the V-GoⓇ, which the FDA did not authorize. Arguably, the most critical event in Valeritas’ downfall was the discovery in 2019 of a discrepancy in V-GoⓇ production that caused a huge inventory write-off and led both potential purchasers to withdraw their offers. The directors approved, were aware of, or should have been aware of the changes to the specifications, which began in July 2018 and were flagged during a subsequent FDA site visit. Even when discovered, the directors did not fully disclose the matter to investors and the public, issuing a press release in December 2019 that merely referred to the problem as a “manufacturing yield issue.” 

This was hugely relevant to the bankruptcy filing because Zealand’s offer of $23 million, approved in the Chapter 11 bankruptcy, was substantially lower than both previous offers for the company. As such, any distributions to unsecured creditors were affected. The Liquidating Trustee negotiated a substantial settlement for unsecured creditors approved as part of the bankruptcy process and paid entirely from D&O insurance. 

The bankruptcy process results in efficient and improved creditor recoveries

Bankruptcy gives creditors a vehicle through which they can come together to have a voice in the allocation of funds and the continued operation of the company. In the Valeritas case, unsecured creditors received an additional $3 million through their settlement agreement with the directors and officers. In addition, prepetition lenders agreed to subordinate their unsecured claim so that unsecured creditors were in line for a distribution they otherwise might not have received.

By guiding the Valeritas transaction through the bankruptcy courts, creditors gained information, protections, and, ultimately, recoveries, that they would not have had access to in a standard sale or purchase transaction.

The Valeritas transaction was an award-winning example of how Chapter 11 bankruptcy can be used to save a struggling business. Valeritas was a viable business operation with a popular product and a highly trained workforce. Without the protections of Chapter 11 bankruptcy, the company may have folded in early 2020, leaving a workforce unemployed and diabetes patients without access to good medical technology. In 2023, it may be a crucial factor in the survival of many businesses with a home in the U.S.