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AtheroGenics Defaults on Notes, but Seeks to Avoid Bankruptcy
(BioWorld Today Via Acquire Media NewsEdge) Shares of AtheroGenics Inc. shed 41.5 percent on Tuesday after the company defaulted on $30.5 million worth of convertible notes, a move that may trigger a request for immediate repayment of another $271.9 million worth of outstanding notes.
Russell Medford, president and CEO of Atlanta-based AtheroGenics, said in an email interview that the company has hired Morgan Stanley & Co. Inc. to "help us reduce the large amount of debt in our capital structure."
He added that the company's "intention is to try to do so outside of bankruptcy."
Yet AtheroGenics is not broke: The company reported $66.2 million in cash, equivalents and short-term investments as of June 30 after spending $11.4 million on operating expenses during the quarter and posting a second-quarter net loss of $14.3 million, or 36 cents per share.
In its quarterly filing, AtheroGenics acknowledged that although it had the cash to pay off the $30.5 million balance on its 2008 notes, "any such repayment would leave substantially less cash to fund our ongoing operations."
Those operations center on AGI-1067, a small molecule with antioxidant and anti-inflammatory properties. The drug failed a Phase III atherosclerosis trial last spring, leading to the loss of a partnership with AstraZeneca plc. (See BioWorld Today, March 20, 2007, and April 24, 2007.)
AtheroGenics repurposed AGI-1067 for diabetes, and the drug met its endpoints in a Phase III diabetes trial. Medford said the company plans to complete discussions with the FDA by the end of this year and initiate a confirmatory Phase III diabetes trial "shortly thereafter." (See BioWorld Today, Aug. 1, 2008.)
AtheroGenics also continues to seek a new partner for the drug.
Despite the progress of AGI-1067, AtheroGenics shareholders punished the company for defaulting on its notes, pushing the stock (NASDAQ:AGIX) down 27 cents, to close at 38 cents on Tuesday. That's almost on par with the stock's 52-week low of 35 cents, and it's a far cry from the $10 range in which the shares traded before AGI-1067's failure.
AtheroGenics originally issued $100 million worth of 4.5 percent convertible notes due in 2008, but since has restructured or redeemed $69.5 million worth, leaving an unpaid principal balance of $30.5 million. The restructuring created $71.9 million worth of 4.5 percent convertible notes due in 2011. Separately, the company issued $200 million worth of 1.5 percent convertible notes due in 2012, bringing its outstanding note total to $302 million.
In addition to failing to pay off the 2008 notes, which were due on Tuesday, AtheroGenics said it will not make its scheduled interest payment on the 2008 or 2011 notes. The default on the 2008 notes creates a cross-default on the 2011 and 2012 notes, which could become due immediately if the note holders request payment.
In its press release, AtheroGenics said it had attempted to restructure the 2008 notes but was unable to reach an agreement with the note holders regarding terms.
About 96 percent of the 2008 notes are held by CNH Partners LLC, Tamalpais Asset Management LP, Tang Capital Partners LP and Zazove Associates LLC. The note holders issued their own press release on Tuesday in which they asserted that the AtheroGenics board of directors had "lost sight of its fiduciary duty" to maximize value for all stakeholders and had instead become "focused on using a Chapter 11 bankruptcy case as means to distribute whatever remains of the company."
The note holders urged the board to avoid bankruptcy, an "expensive, time-consuming and disruptive process" in which "no one benefits."
Instead, they recommended that AtheroGenics issue $39.4 million of 4.5 percent senior secured convertible debentures due in 2013, replacing the cash that would be utilized to pay off the 2008 notes and allowing operations to continue.
AtheroGenics declined the financing offer. n
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