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Cantrell Drug Looks For a Buyer, Again

5 min read

Cantrell Drug Co. hopes its next potential buyer can close the deal to purchase the Little Rock drug compounding company out of Chapter 11 bankruptcy reorganization.

Cantrell Drug and its related real estate holding company, Pharmasite LLC of Little Rock, had two potential buyers in recent months, but neither one could raise the $3.3 million to purchase nearly all of the companies’ assets, said Gary Murphey of Resurgence Financial Services LLC of Atlanta, Cantrell Drug’s financial adviser.

“We’re kind of back to square one right now, looking for a stalking horse bidder that can actually close the deal,” he said. “And so we’ve got a couple of private equity groups kicking the tires.”

Murphey declined to say who the potential buyers are, but Cantrell Drug could be operational in 90 days or less after the purchase. A stalking horse bidder is common when assets are being bought out of bankruptcy. It usually provides a level of assurance for other bidders that somebody has come in and done due diligence.

Kevin Keech of Little Rock, the bankruptcy attorney for Cantrell Drug and Pharmasite, also said it’s possible that an investor would put money into the company and Cantrell Drug’s owner, James “Dell” McCarley Jr., could continue operating it.

McCarley “would love to continue to be involved in the company,” Keech said. “The problem is he hasn’t had the funding to continue the operations.”

An announcement last month by the Food & Drug Administration might make selling Cantrell Drug easier. In response to the COVID-19 pandemic and drug shortages reported by hospitals, the FDA said it would temporarily ease its guidelines for 503B outsourcing facilities, one of which is Cantrell Drug.

“I would say the FDA has taken a more relaxed approach during the COVID situation to ensure the outsourcing facilities could meet the needs of everything going on,” said Lee Rosebush, chairman and general counsel of the Outsourcing Facilities Association of Washington, D.C.

He said the market for compounded drugs “has been growing quite well” because of drug shortages.

But that always hasn’t been the case.

Conditions Cause Concern

McCarley closed Cantrell Drug’s doors at 7524 Cantrell Road in November 2018, a shutdown that resulted in 50 people losing their jobs.

McCarley and his wife, Lynn McCarley, had bought the company from his father-in-law in 1992. Around 2000, McCarley said in 2018, he became interested in compounding, the process of mixing medications into a final dosage form required to administer to a patient.

But federal regulators in recent years had raised concerns over the conditions at Cantrell Drug. In 2018, the FDA alleged Cantrell’s facility and products weren’t sterile and fought to stop Cantrell’s production and distribution of compounded drugs.

Cantrell Drug denied the allegations but signed a consent decree with the FDA in April 2018, promising to stop making and selling drugs until it met federal regulators’ requests for changes.

In September 2018, it received final approval from the FDA to resume operations. By then, the damage was done.

“We did not have enough resources to stabilize the company after the long onslaught,” McCarley said in February 2019. Its revenue plummeted to $1 million in 2018, compared with $10 million in 2017, according to bankruptcy records.

It first filed for Chapter 11 bankruptcy in November 2017. That case was dismissed and closed in March 2019.

In better days, Cantrell Drug had revenue of $18.5 million in 2015, a sum that grew to $23 million in 2016. It also employed about 150 people at its high point.

Filing for Bankruptcy

McCarley, who didn’t reply to a message left with his son last week, told Arkansas Business in February 2019 that the fight with the federal government had drained the company’s resources. McCarley was searching for a buyer for his company in early 2019 after its largest creditor, Regions Bank, filed suit in Pulaski County Circuit Court to foreclose and repossess Cantrell Drug’s assets. As of Oct. 11, Cantrell Drug and Pharmasite owed Regions $3.7 million in principal and interest for several loans, according to a bankruptcy filing. Cantrell returned to U.S. Bankruptcy Court in October and filed for Chapter 11 reorganization.

On March 31, Cantrell Drug had $9 million in debts and $1.9 million in assets, according to its bankruptcy filing. Pharmasite, which also filed for Chapter 11 bankruptcy in October, listed $1.8 million in debts and $2.4 million in assets as of March 31.

The companies had hoped to sell nearly all of their assets to Dr. David Brown of Mena. He was named the stalking horse bidder and had an opening bid of $3.3 million, according to Cantrell Drug’s bankruptcy filing. But he couldn’t come up with the money when it was time to close in January, said Murphey, the financial adviser. Brown didn’t return a call for comment. A second bidder, Diolomics LLC of Little Rock, which was formed in August, also submitted a bid. But it, too, couldn’t come up with the financing, Murphey said.

Last month, the trustee in the bankruptcies filed a motion to convert the cases to a Chapter 7 liquidation.

“Based on the circumstances in this case, it does not appear that the Debtor’s operations can produce sufficient income to reorganize the business and fund a plan,” according to a filing last month from the U.S. trustee by attorney Joseph DiPietro of Little Rock.

Keech said he thinks the issue will be resolved and a conversion to Chapter 7 will be unlikely.

Industrywide Problems

Cantrell Drug is not alone in its struggles with the FDA. Several 503B facilities have closed in recent years. In 2018, there were about 70; 53 now remain.

Rosebush, of the Outsourcing Facilities Association, said he thought most of the closures in recent years were associated with regulatory concerns.

“I think the FDA is actually a little bit heavy-handed in certain circumstances, but it was needed” after the problems at New England Compounding Center in Framingham, Massachusetts. That company was associated with a nationwide fungal meningitis outbreak in 2012 that killed 64 and caused infections in 793 patients, according to the FDA.

Earlier this year, Pharmedium Services LLC of Lake Forest, Illinois, one of the largest compounding companies in the nation, closed, Jillanne Schulte Wall, senior director of regulatory and health policy at the American Society of Health-System Pharmacists, said in an email to Arkansas Business.

Last year, Pharmedium entered into a consent decree with the FDA that blocked it from manufacturing or distributing drugs from its Tennessee facility until it improved conditions and received authorization from the FDA.

Wall said the recent FDA announcement on its guidance doesn’t lift all the regulations for 503B companies.

“503Bs can only compound certain drugs and the hospitals they supply have to attest that they were unable to get the drug through other channels,” she said. “Further, 503Bs are incentivized to produce quality drugs — if they sell something subpar, aside from potential liability, they’re not going to have a business.”

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