Novan files for Chapter 11 bankruptcy

October 2023 | DEALFRONT | BANKRUPTCY & CORPORATE RESTRUCTURING

Financier Worldwide Magazine

October 2023 Issue

Novan Inc and its wholly owned subsidiary EPI Health have entered into a stalking horse asset purchase agreement with Ligand Pharmaceuticals prior to filing voluntary petitions for Chapter 11 bankruptcy protection in the US bankruptcy court for the District of Delaware.

Going forward, Novan will continue to operate its business under the jurisdiction of the bankruptcy court and in accordance with the applicable provisions of the bankruptcy code and orders of the bankruptcy court. The company also entered a secured debtor-in-possession (DIP) credit facility and secured an agreement to sell substantially all of its assets under section 363 of the US bankruptcy code, along with a commitment from Ligand Pharmaceuticals to fund $15m in DIP financing.

On 14 July, the company also entered into a bridge loan with Ligand for the principal amount of $3m. This pre-petition loan provided needed working capital to the company for general corporate purposes and is secured by the assets of the company. The pre-petition bridge loan will be rolled into the DIP credit facility after bankruptcy court approval of the DIP credit facility. According to Ligand, the $15m DIP loan will accrue interest at 12 percent annually and will be subject to a 6 percent increase in interest should Novan default on its loan agreement.

Prior to the Chapter 11 filing, Novan, which was spun out from UNC Chapel Hill, had been pursuing financing and strategic alternatives as well as taking measures to conserve cash. The board of directors of the company made the decision to commence the Chapter 11 case with Ligand as a stalking horse bidder after reviewing alternatives and considering factors such as the company’s challenging financial circumstances and the challenging market climate.

As the Chapter 11 filing progresses, Novan will continue to progress toward potential approval of berdazimer gel, 10.3 percent, which has a Prescription Drug User Fee Act (PDUFA) goal date of 5 January 2024. In Q2 2023, Novan received its mid-cycle review communication from the Food and Drug Administration (FDA) in addition to the manufacturing facility’s pre-approval inspection and establishment inspection report.

The asset purchase agreement Novan and Ligand entered into governs the sale of substantially all the assets of Novan for $15m to be paid in cash at closing. The cash payable at closing will be reduced dollar-for-dollar by the outstanding balance of the DIP credit facility which will be repaid at closing. The transaction will be subject to approval by the bankruptcy court and compliance with agreed-upon and bankruptcy court-approved bidding procedures allowing for the submission of higher or otherwise better offers, and other agreed-upon conditions.

In June, Novan warned investors that its market capitalisation had fallen below NASDAQ listing requirements and that it was pursuing financing and strategic options. It had until 27 December to regain compliance with NASDAQ. As of 31 March 2023, Novan had a total cash and cash equivalents balance of $12.5m. The company reported a net loss of $14.1m in the first three months of 2023.

The board of directors of the company made the decision to commence the Chapter 11 case with Ligand as a stalking horse bidder after reviewing alternatives and considering factors such as the company’s challenging financial circumstances and the challenging market climate.

“In the first half of the year we have focused on fortifying our business team, including a sharpening of our capabilities and expertise in credit, reorganization and operations,” said Todd Davis, chief executive of Ligand. “We are well positioned to take advantage of opportunities such as the proposed acquisition of Novan’s assets. Ligand has a proven track record of finding and investing in attractive assets that are in special situations and maximizing value - both for the assets and for shareholders.”

“We remain confident in the potential of berdazimer gel to be approved, and become an important treatment for molluscum contagiosum,” said Matt Korenberg, president and chief operating officer of Ligand. “There are currently no FDA-approved prescription drug treatment options for this commonly acquired, highly contagious viral skin disease, and, if approved by the FDA, berdazimer gel would be the first self-application topical treatment for this indication.”

Richard Summerfield