CASE SUMMARY: Zosano Pharma Corp. to Run Sale Process In Wake of FDA Approval Delays for Migraine Drug-Device

Relevant Documents:
Voluntary Petition
Press Release
First Day Declaration

A prepetition marketing process run by SierraConstellation did not yield any going concern offers, but only expressions of interest for discrete assets that would have net no return for the debtor’s estate. As a result, the debtor seeks to run a dual-track liquidation and sale process that would keep the door open for a going concern offer. The debtor says it intends to retain a liquidator to sell any remaining assets it does not sell through its main sale process. The company also says that it intends to propose a plan of liquidation at an “early stage” of the case and cease operations.

The first day hearing has yet to be scheduled.

The company reports $26.4 million in assets and $12.4 million in liabilities. The company’s prepetition capital structure includes:

• Secured debt: None


• Unsecured debt: $10.5 million (primarily owed to trade creditors, contract manufacturing organizations, utility providers and a landlord)


• Equity: The debtor has no subsidiaries and its common stock is publicly traded on the Nasdaq Capital market under the “ZSAN” ticker. Five Narrow Lane L holds 5% or more of the debtor’s equity.

The debtor made a public offering of approximately 50 million shares of its common stock, generating net cash of $14.1 million, short of what it needed to continue development of M207, which development has been suspended. After the FDA denied the debtor’s resubmitted application for M2017 shortly after the public offering, the debtor says its access to the capital markets was “materially diminished.”

The company’s most recent 10-K also notes secured build-to-suit financing from Trinity Funding 1, LLC.

The debtor is represented by Greenberg Traurig as counsel, SierraConstellation Partners as financial advisors. Kurtzman Carson Consultants is the claims agent. The case has been assigned to Judge J. Kate Stickles (case number 22-10506).

Events Leading to the Bankruptcy Filing

The debtor has been pursuing approval from the U.S. Food and Drug Administration of its migraine drug-device called M207, without which it has no sales. The FDA denied the application in 2020, after which Zosano resubmitted its application in January 2022. In February, the FDA denied the resubmitted application because of new clinical data failing to address alleged deficiencies that the FDA previously identified. According to the debtor, addressing the FDA’s concerns would require further clinical trials at “great expense,” and could take at least eight months. The FDA granted the debtor a 12-month extension to April 2023 to resubmit another application.

Apart from potential future sales of M207, the debtor’s only revenue source is feasibility studies, which only provide “limited revenues” ($224,000 in 2020 and $785,000 in 2021) insufficient to support ongoing operations and the continued development of M207.

Facing these regulatory roadblocks and “marginal” cash flow, Zosano retained SierraConstellation Partners as financial advisor in January. Prepetition marketing efforts, spanning more than 150 parties, yielded “multiple” expressions of interest for discrete assets, the debtor explains, but these expressions of interest would net no recovery to the estate. As noted above, in the absence of earlier going concern offers, the company now plans to run a dual-track liquidation and sale process.

Background

Zosano is a clinical-stage biopharmaceutical company focused on providing rapid systemic administration of therapeutics and other bioactive molecules using a proprietary transdermal microneedle system. According to the debtor, this system is designed to “facilitate rapid drug absorption into the bloodstream and to provide an improved pharmacokinetic (‘PK’) profile (compared to original dosage forms) without dependence on the gastrointestinal tract.”

In 2006, the debtor’s business was spun out of a Johnson & Johnson subsidiary, ALZA Corp.

The debtor’s business is focused on development of M207, and its proprietary formulation of zolmitriptan (a serotonin receptor agonist known as a triptan and used as an acute treatment for migraine) that is delivered using its microneedle system. The debtor says that initial feasibility studies suggest that the system may have potential for “further evaluation with large molecules, small molecules and vaccines.”

As of January, the debtor had exclusive licenses to or owns 18 U.S. patent families (including 26 granted patents) and had six pending U.S. patent applications, covering the microneedle system. According to the first day declaration, the debtor licenses most of its patent and patent applications from ALZA on an exclusive basis for all countries, but the debtor is responsible for all development and related costs.

The debtor had net losses of $30 million in 2021 and $33 million in 2020.

The debtor’s largest unsecured creditors are listed below:

10 Largest Unsecured Creditors
Creditor	Location	Claim Type	Amount
Patheon Manufacturing Services LLC	Greenville, N.C.	Contract	$   2,436,788
Aptar CSP Technologies	Grand Est, France	Contract	483,368
BMR	San Diego	Lease Liability	384,115
Worldwide Clinical Trials	Austin, Texas	Professional Services	382,170
CSP Technologies Inc.	Auburn, Ala.	Contract	341,935
Harro Hofliger Packaging Systems Inc	Doylestown, Pa.	Equipment Manufacturing	230,266
Therma LLC	San Jose, Calif.	Engineering Services	151,016
Pitt County Tax Collector	Greenville, N.C.	Tax Liability	136,454
D F King	New York	Professional Services	114,746
J.M. O'Neill, Inc	Livermore, Calif.	Construction Services	107,105

The case representatives are as follows:

Representatives
Role	Name	Firm	Location
Debtor's Counsel	Dennis A. Meloro	Greenberg Traurig	Wilmington, Del.
	John D. Elrod		Atlanta
	Ari Newman		Miami
Debtor's Financial Advisor	NA	SierraConstellation Partners	NA
Debtor's Claims Agent	Drake D. Foster	Kurtzman Carson Consultants	El Segundo, Calif.

First Day Motions

The debtor also filed various standard first day motions, including the following:

• Motion to establish trading procedures
  
  
  
  • The company seeks to establish trading procedures for its equity securities, to be able to object to and prevent transfers if necessary to preserve net operating losses. The debtors report having a “significant amount” of tax attributes.
  
  
  
  


• Motion to pay employee wages and benefits
  
  
  
  • The debtor has 15 full time employees.
  
  
  • The debtor estimates approximately $5,000 in reimbursable expenses and $3,400 in noninsider severance benefits are outstanding as of the petition date.
  
  
  
  


• Motion to use cash management system
  
  
  
  • The company has bank accounts with Silicon Valley Bank and UBS Financial Services.
  
  
  
  


• Motion to maintain insurance programs


• Motion to pay taxes and fees
  
  
  
  • The debtor estimates that it owes approximately $250,000 in taxes and fees.
  
  
  
  


• Motion to provide utilities with adequate assurance


• Motion to waive requirement to file list of equity security holders


• Application to appoint Kurtzman Carson Consultants as claims agent