St. Louis Business Journal -- Just a day before KV Pharmaceutical director and majority shareholder Marc Hermelin will be banned from participating in federal health-care programs, the Bridgeton drug maker said Wednesday that Hermelin has resigned.
Hermelin is the first pharmaceutical company official who hasn’t been convicted of a crime to be banned by the Office of Inspector General at the Department of Health and Human Services from participating in federal health-care programs. The exclusion goes into effect Thursday.
Under federal law, if a director or a shareholder with an ownership interest of five percent or more is excluded from participation in federal or state health-care programs, the Department of Health and Human Services’ Office of Inspector General can also exclude the company from such participation. In other words, if Hermelin would have remained on the board as a majority shareholder, KV could have lost the federal government as a customer and, as a result, millions of dollars in federal reimbursement from Medicare and Medicaid programs.
“In an effort to avoid adverse consequences to the company, including a discretionary exclusion of the company, and to enable the company to secure its expanded financial agreement with (its) lenders, Mr. Hermelin has voluntarily resigned his position on the company’s board of directors, effective Nov. 10,” KV said Wednesday.
The name Hermelin and KV have always been synonymous. Marc Hermelin’s late father, Victor Hermelin, founded KV in 1942 and invented the time-release capsule. In December 2008, KV said it fired Hermelin as CEO for cause amid a probe into alleged mismanagement. Hermelin put out a separate news release the same day saying he chose to retire after 35 years with the company.
Hermelin has resigned as trustee of all family trusts that hold KV stock and has agreed to divest his personal ownership interests in the company’s Class A Common and Class B Common stock — approximately 1.8 million shares.
Together, Marc and his son, David Hermelin, control about 62 percent of the voting power of KV’s two classes of common stock. As a result, the Hermelins are able to control all company moves requiring shareholder approval, which includes mergers and other significant transactions. The Hermelin family trust will still hold the majority of KV’s shares but will no longer have majority voting control, said Cathy Biffignani, KV’s director of investor relations.
“As a result of Mr. Hermelin’s resignation and the two agreements with HHS OIG, the company believes it has resolved its remaining issues with respect to HHS OIG and is positioned to continue to participate in federal health-care programs now and in the future,” KV said.
KV also said Wednesday it entered into an agreement with US Healthcare I L.L.C. and US Healthcare II, affiliates of New York-based Centerbridge Partners, for a senior secured debt financing package of up to $120 million, including a $60 million loan that will retire the $20 million loan provided by the same lenders in September and a commitment to provide a multi-draw term loan up to an aggregate principal amount of $120 million. KV said it would use the loans for general corporate and working capital purposes.
Under the terms of loan agreement, KV will pay interest at an annual rate of 16.5 percent, including 5 percent payable in kind, with a maturity date of March 2013. KV said it furnished as collateral substantially all of its assets.
KV issued a stock warrant to the lenders that grants them rights to buy up to 9.9 million shares of the company’s Class A Common Stock, par value 1 cent per share. Upon the completion of a 10-day notice period to stockholders, KV said it would issue a second stock warrant that grants the right to purchase up to 2,687,511 shares of its Class A Common Stock, par value 1 cent per share. All warrants issued will have an exercise price of $1.62 per share. If the Centerbridge affiliates execute their warrants, which KV executives expect they will, the lenders will become company shareholders, said KV Chief Financial Officer Thomas McHugh.
KV also said Wednesday that interim Chief Executive Greg Divis would become the permanent CEO and continue to serve as president of Ther-Rx Corp., KV’s branded pharmaceutical subsidiary.
“Greg is guiding this organization through an important time in its recovery,” said Joseph Lehrer, lead director of KV’s board.
KV said Wednesday it has decided to focus on the development and commercialization of branded specialty pharmaceuticals. The company is working with third-party consultants and the U.S. Food & Drug Administration to obtain approval to resume shipping of key women’s health-care branded products, including vaginal creams Clindesse and Gynazole-1 and is also preparing for the potential approval of Gestiva, a drug used to prevent preterm births, later this fiscal year.
The FDA is scheduled to decide Jan. 13 whether to give Gestiva the green light. It will ultimately be up to regulators to decide whether KV relaunches its internal products or starts selling Gestiva in partnership with Hologic, Biffignani said.
“This additional funding will provide a critical bridge for KV executing its strategic direction,” Divis said. “This includes our commitment to compliance and quality in all that we do, solidifying the improved processes already in place and investing our resources behind our greatest opportunities. Our employees have put KV back on a clear path to successful commercialization of quality branded prescription pharmaceutical products, with a near-term focus that leverages our historical strengths in specialty therapeutic areas such as women’s health.”
KV said it hired New York-based Jefferies & Co. Inc. to explore strategic alternatives for its newly reformed generic drug business, now called Nesher Pharmaceuticals Inc, including a possible sale, Divis said.
“We need to make sure the investments we make generate maximum shareholder return and help rebuild the company,” Divis said. “We believe the branded business, as we look out over the horizon, is the best place to leverage investments. The generic business has strong value for the future but we want to make sure we fully evaluate what is best for company long-term.”
In the meantime, KV will move forward in working toward the approval of additional generic products for re-launch and has to lead a process to evaluate Nesher is currently in the midst of launching its potassium chloride extended release capsules.
It was Jefferies who introduced KV to lender Centerbridge, McHugh said.
As the company introduces more products and resumes making more drugs, KV could rehire more employees, Divis said. That’s a far cry from months of speculation by analysts that KV wouldn’t survive its management turmoil, drug recalls and production stoppage.
Earlier this year, KV agreed to pay $27.6 million in fines and restitution and closed its Ethex Corp. generic drugs business after pleading guilty to criminal charges for allegedly misbranding and adulterating drugs and for not disclosing that its painkiller tablets were oversized.
KV reported a loss of more than $313 million in fiscal 2009, a year after turning an $86.4 million profit. Revenue fell 46 percent to $312.3 million.
“We always knew that when others were speculating, we believed in where we were heading,” Divis said. “We are a company that has wonderful people with a base of assets and we will be successful and bring KV back as a responsible company.”
But Marc Hermelin won’t be around for it, ending a six-decade chapter in the family’s history with KV. When asked about Hermelin’s resignation, Biffignani said: “Marc voluntarily resigned to ensure the success of the organization. Now we have got financing in place and are ready to move on.”
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