it will use proceeds from the deal to fund several clinical trials for drugs it is developing for cancer and autoimmune diseases. It does not specify how much cash will go toward clinical trials.
That said, the IPO plans are tailored to benefit Kadmon’s creditors. The company has roughly $200 million in debt outstanding, according to the prospectus. Kadmon is using the IPO to convert that debt into equity. But instead of converting it all into common shares, some of the debt, $30 million worth, will turn into preferred shares with significant privileges for their owners.
“It’s hard to tell if the deal makes sense for someone purchasing in the IPO,” says a veteran biotech lawyer, unaffiliated with the Kadmon IPO, who asked for anonymity to speak freely. “The debt holders are getting a lot out of this deal.”
Bankers working on the IPO either declined to comment or did not respond to inquiries from Xconomy.
Here’s how Kadmon is slicing up the debt. The $30 million slice will turn into 30,000 preferred shares worth $1,000 each. Their owners would be first in line for a payout if Kadmon is sold, goes bankrupt, or undergoes any other so-called “liquidity event.” They will get their $1,000-per-share paid back, plus potential extra payouts that common shareholders might not get, for a minimum of $30 million before anyone else can touch a dime.
Those preferred shares will also guarantee their owners a five percent dividend, even when common shareholders do not receive one. If Kadmon doesn’t pay the dividends right away, the amount would still accrue to the shareholders.
The $30 million tranche is part of a $75 million “senior” debt chunk. The other $45 million would convert into common shares in two different ways and allow the owners to sell those shares immediately into the public markets. With about two-thirds, the main holder of the $75 million senior debt is GoldenTree Asset Management, a New York debt investor with more than $24 billion in assets under management, according to its website. GoldenTree has been a main backer of Kadmon from the start, with other earlier loans already paid back.
Kadmon also owes $123 million to a group of “second lien” lenders. Their debt will convert to common shares at an 80 percent discount to the IPO price. The largest holder of the second lien debt is ThirdPoint Ventures, part of the hedge fund run by activist investor Daniel Loeb, who has had a hand in the breakup of biotech firms such as PDL BioPharma and Ligand Pharmaceuticals.
(Loeb tried to split up Amgen a couple years ago, to no avail.)
GoldenTree and ThirdPoint did not respond to questions in time for publication.
There are signs that Kadmon has been under pressure to go public. The company had to pay the senior lenders a $1.3 million fee in April when it did not complete an IPO of at least $75 million by March 31, 2016. That seems like small change, but it was 15 percent of the firm’s cash holdings. Kadmon ended March with only $8.6 million in cash and equivalents, according to the prospectus.
The “second-lien” lenders have also imposed penalties. Because Kadmon did not go public by March 31, the interest rate on their debt jumped from 13 percent to 16 percent. If Kadmon’s IPO try is unsuccessful, the interest will rise again in October and next April, each by three percent.
Kadmon’s cash position could grow more precarious without new funding. It earns its revenue “almost entirely,” according to the prospectus, by selling ribavirin, which until recently was a staple of hepatitis C drug regimens. Sales dwindled from $63.5 million in 2014 to $29.3 million last year as most treatment regimens no longer include the drug.
Kadmon’s most advanced experimental drug is called KD025 and is being tested in a mid-stage trial for idiopathic pulmonary fibrosis. Kadmon aims to begin Phase 2 studies of KD-025 this year in other autoimmune diseases such as psoriasis, psoriatic arthritis, lupus, and chronic graft-versus host disease. The drug blocks a target known as rho-associated coiled-coil kinase 2, or ROCK2.
Last year, Kadmon spun out a gene therapy subsidiary, which is now known as MeiraGTx. Kadmon’s IPO prospectus shows that it owns 44 percent of the company, which is run by Alexandria Forbes and is developing gene therapies for amyotrophic lateral sclerosis and inherited forms of blindness, among other diseases.
Ben Fidler contributed to this report.
Photo of Sam Waksal courtesy of Keith Spiro Photography.
