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Charting the course of Inyx' downfall

By Kirsty Barnes

- Last updated on GMT

Related tags Debt

With a knife-edge financial history of spiralling debts,
exacerbated by continued borrowing, Inyx' recent insolvency
problems are hardly surprising.

Despite company predictions that it would achieve profitability by the end of 2004, Inyx Inc. has continued to experience substantial recurring operating losses since its inception in 2003, while accumulating a huge amount of debt. In the last public financial results to be reported by the firm in September 2006, before it became delisted, the operating loss was $7m and pre-tax loss was $9.7m on revenues of $18m, and yet it continued to pursue acquisitions and expansion plans, despite having no interest cover or cash flow. The firm first borrowed money from Puerto Rico's Westernbank in March 2005 to fund a $20.8m acquisition of the assets of Aventis PR, part of Sanofi-Aventis, that was conductibg the contract manufacturing of dermatological, respiratory and allergy products in Puerto Rico. It was around this time that Inyx Inc. also borrowed money off Westernbank to pay back money still owed to its former primary lender, Laurus Master Funds. In August, the firm then borrowed more from Westernbank, when Inyx Europe purchased Celltech Manufacturing Services Ltd (CMSL) from UCB for $40.7m, which was later renamed to Ashton Pharmaceuticals Limited. In January 2006, the firm's new subsidiary, Exaeris, also commenced formal operations. By March, 2006 Inyx Inc's long term debt included four loans totalling $30.2m for the Aventis PR purchase; and four loans totalling $23.2m for the Ashton Pharma purchase, plus another $5.5m borrowed for inventory purchases. In September that year the company was already in trouble. According to a Securities & Exchange Commission (SEC) filing, it was "in violation of certain financial covenants pursuant to our Westernbank loan and security agreements." These violations were not new, and the company was only not in default of the bank loan due to waivers continually granted by Westernbank. "There can be no assurances the company will meet such covenants in the future or that Westernbank will continue to grant such waivers,"​ chairman and CEO Dr Jack Kachkar said at the time. Despite this, the following month Inyx Inc. obtained a $10m aggregate increase in the available limit of its credit facilities with Westernbank, allowing it to borrow up to an aggregate of $64.2m, which it did. "In consideration of such increase in loan limits and for continuing to make and provide financial accommodations to Inyx,"​ Dr Kachkar, along with his wife, provided Westernbank with a personal guarantee of up to $10m of the loan. Westernbank however, requested a further personal guarantee from the duo. In November, Inyx Inc. informed Westernbank that it intended to pay off the payments it owed the bank by December 31. At this point the amount borrowed by Inyx Inc. totalled $120m. In order to pay the debt, the company said it was "currently working to secure new financing,"​ although how it intended to do so remains a mystery. All the company's debt was already collateralised by all the existing and future assets of the company and its subsidiaries. In addition, deferred financing costs, such as bank fees and legal costs were also mounting up, as were interest payments on the borrowings, which were due in cash. Meanwhile, Westernbank was not the only organisation owed money by Inyx Inc. As of September 2006, the company still owed UCB $11.1m following the purchase of Ashton Pharma, which it was also promising to settle by December 31. Financial details beyond December are hazy, because the company then announced that it would need to restate previously issued financial statements for the quarters ended March, June and September 2006, and it subsequently delayed indefinitely filing its annual report on Form 10-K with the SEC for the fiscal year ended December 2006. As a result, it became delisted and to this date, has not filed the annual report. It is known though that the Westernbank loan repayments were not paid. More borrowing ​ Throughout all this knife-edge financing, the company continued to forge ahead with new business plans and attempted acquisitions. On September 28, 2006, it announced it had executed a definitive agreement to acquire contract manufacturing and packaging firm Pharmapac UK Ltd, for $20m. At the time the company also had a pending acquisition of a German pharmaceutical production business and was also in the process of a $4.3m acquisition of a building in Miami, Florida, to be used for office space, meeting and training facilities. During the that same quarter, Inyx Inc. also made a $5.6m investment through Consultants LLC to set up a new UK entity, LINX Investments, which became the holding company for a new company called Inyx UAE, which was headquartered in Dubai, and also in the process of establishing operations in Qatar. The company was working on a number of partnership and distribution agreements with both private and governmental entities to develop, manufacture and distribute Inyx products in the Gulf region. But the firm didn't have the money in place to pay for the investments it had already made, let alone all these new ambitious plans. Dr Kachkar said at the time that Inxy Inc. intended to obtain financing for its acquisition opportunities, such as Pharmapac, along with other business development activities, "through a combination of loans and equity investments from commercial sources, seller debt financing, issuance of our equity securities as part of the purchase price, and other sources." ​ By this time, the firm was also solely reliant on financing from Westernbank, along with revenues from its contract manufacturing and purchase orders; as well as the sale of equity securities including proceeds from option and warrant exercises; and stockholder advances, loans and financial guarantees. It was not making any sales of its own products. From time to time, Dr Kachkar and his family were making stockholder loans to the company for working capital purposes, which were subsequently paid back with interest. Dr Kachkar said: "Until such time that the company is refinanced, management intends to fund its operations through cash generated from operations, existing Westernbank credit facilities, and when necessary the use of shareholder loans and advances." ​ But remember, the company was only making quarterly revenues of $18m, $9.7m of which it was losing, and it was already missing its payments to Westernbank from the existing $120m loan and already owed $14m in accounts payable - a staggering amount considering its revenue - of which it was taking an average of 70 days to pay. Meanwhile, the company was already billing some customers in advance for products and services to be provided, which at the end of September 2006 amounted to $5.9m. In addition, it had purchase obligations of $3.3m for manufacturer's components and inventory items. However, at the time the company still insisted that it "continues to be in a position to issue new equity or debt securities to assist funding its operations and growth plans." ​ Although it admitted that "there is currently no formal financing plan in place to repay the [already existing] Westernbank debt or provide additional funding to the company, and there can be no assurances that either senior management or the company will be successful in achieving its financing plans or that additional financing will be obtained on acceptable terms or at all.""If funding requirements are not available, the company may have to delay, reduce in scope, or terminate business development activities, capital expenditure plans, proprietary product development, marketing and commercialisation initiatives." ​ Indeed, as it turns out the funding for Pharmapac was not obtained and the deal, which was expected to be completed on January 4, 2007, fell through, as did the German firm acquisition. The fate of Inyx UAE could not be determined by Outsourcing-Pharma.com by the time of publishing. Borrowed time ​ By April the amount owed by Inxy Inc. to Westernbank had risen to $130m. Westernbank's final crackdown on Inyx' non-payment finally came at the end of June after its holding company, W Holding, hired an independent firm to review its $1.4bn portfolio of asset-based loans in March. At the end of June, W Holding then announced in an SEC filing that it faces a collateral shortfall of at least $80m in one of its larger asset-based loans, which is believed to be that of Inyx Inc. In a report note at the time, Anthony Polini, an analyst with Soleil Securities said of W Holding: "Loan growth has remained at very high levels throughout the recent economic downturn in Puerto Rico, even as problem assets continue to rise.""The company's growth appears to be unbridled and the company's risk management capabilities are suspect in our opinion." ​ It is possible this 'asset over-valuation' was related to Inyx's purchases of Aventis PR and Ashton Pharma. Although Inyx Inc. paid approximately $20.7m for Aventis PR based on the estimated fair market values at the date of acquisition (as determined by the Valuations Services Practice of BearingPoint) Inxy Inc. later based the value of its acquisition as $62.9m after "independent third-party appraisals and valuations,"​ - $42.1m more than the original valuation. It did the same thing when it bought Ashton Pharma, which it paid $40.7m for, but later valued it at $55.6m, again "based on independent third-party appraisals and valuations,"​ which resulted in a value increase of $14.1m. As reported in Outsourcing-Pharma.com yesterday, on 6 July Westernbank launched a lawsuit in the Puerto Rico District Court in San Juan, against a raft of senior Inyx Inc. management. The nature of the lawsuit is for "Racketeer Influenced and Corrupt Organizations,"​ under section 18 of the 1964 Racketeering (RICO) Act, according to the court filing. $240,000.00 in damages are also being sought. It is unclear why the Inyx Inc. management took the financial risks and actions it did, and it is unclear exactly what prompted the Westernbank lawsuit. No-one from Inyx Inc. or its subsidiaries responded to Outsourcing-Pharma.com's requests for interview. More insight into the circumstances surrounding Inyx' management, and possible signposts to the future, will be published in the next edition of Outsourcing-Pharma.com.

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