PE-owned Japanese drug maker seeks bankruptcy protection
Kyowa Pharmaceutical Industry, a Japanese generic drug manufacturer owned by Unison Capital, has applied for alternative dispute resolution, an out-of-court process that allows companies to continue operations while negotiating with creditors on a restructuring.
An application was made on June 2 to the Japanese Association of Turnaround Professionals, a government-certified coordination body, sources familiar with the situation told Mergermarket, AVCJ’s sister title. Law firm Mori Hamada & Matsumoto is running the process, one source said, adding that Kyowa is estimated to have about JPY 40bn (USD 281m) in outstanding debt with over 10 lenders.
Unison acquired the company for an enterprise value of JPY 57.4bn in 2019 through a carve-out from India-headquartered drug maker Lupin. MUFG Bank was the arranger for the leveraged loan that supported the deal and is regarded as the largest creditor, the first source and two others said.
Kyowa posted sales of JPY 28.7bn for the 12 months ended March 2022, down from JPY 29.6bn the previous year, according to Tokyo Shoko Research. Over the same period, its net loss widened from JPY 947m to JPY 3.4bn. A Creditsafe report put total outstanding debt at JPY 51.3bn as of March 2022.
Kyowa, Union Capital, Deloitte, MUFG Bank, Mori Hamada & Matsumoto, and the Japanese Association of Turnaround Professionals declined to comment.
ADRs are designed to give companies time to agree on a restructuring, which usually involves creditors taking a haircut and may include the appointment of a new sponsor. They can only proceed with support from all creditors. If this is not forthcoming, a court-led rehabilitation ensues, where sponsors can apply to manage the asset.
Sponsor selection is currently underway with both private equity and strategic investors expressing interest, the second source said.
One healthcare-focused banker added that it might be challenging for Kyowa to secure a new sponsor because its product offering – which focuses on treating conditions related to the central nervous system (CNS) – is small compared to those of major generics manufacturers. Moreover, the company, like several industry peers, has attracted scrutiny about quality control.
In March 2022, Kyowa was ordered by the prefectural governments of Osaka and Hyogo to suspend business operations for up to 33 days. This followed allegations involving the use of unauthorized materials to produce medical products and the creation of fictitious production records, according to local media.
About 12 months earlier, Kyodo News reported that Fukui-based generic drug maker Kobayashi Kako was found to have systematically created fictitious production records, resulting in a 116-day suspension of operations. The company was acquired by Sawai Group Holdings later in 2021.
Other generic drug makers that have gone through ADR processes include Nichi-Iko Pharmaceutical. Local private equity firm J Will Partners was appointed the sponsor in December 2022, heading a consortium that also featured Tokyo-listed Medipal Holdings.
The consortium committed JPY 20bn while creditors agreed to dispose of debt of up to JPY 98.5bn. This accounted for 60% of Nichi-Iko’s total debt load, Nikkei reported.
Kyowa is not the only private equity-backed company to seek bankruptcy protection amid difficult business conditions during and after the pandemic.
Restaurant operator Dinamix, another Unison portfolio company, filed for bankruptcy at Tokyo District Court in February, according to a Teikoku Databank report. It had JPY 10.6bn in outstanding debt. Meanwhile, Polaris Capital Group-controlled mobile phone maker FCNT, plus two subsidiaries, filed for civil rehabilitation in May. Total liabilities stood at JPY 143.1bn, local media reported.
Last year, auto parts supplier Marelli filed for an ADR and then went through a court-led rehabilitation that resulted in lenders forgiving JPY 450bn out of a JPY 1.1trn debt pile. KKR, which had already written off the equity from its 2017 acquisition and put in more money, was reappointed as the sponsor.
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