Analysis of MetaMorphix’s Bankruptcy

Since its formation in 1997, MetaMorphix raised over $150 million to fund the development and commercialization of its two technology platforms, growth factors (licensed from Johns Hopkins University) and animal genomics (acquired and licensed from Celera). Nearly $100 million of this amount was raised as straight equity. But during 2002, the biotech bubble burst, which had the impact of lowering biotechnology company valuations by as much as 50% to 75%. As a result, developing biotechnology companies like MetaMorphix had to find alternative means of raising funds or experience dramatic dilution. The solution that most biotechnology companies used was secured convertible notes. These notes delayed conversion into equity until note maturity, when it was expected that the biotechnology industry would have recovered.

From the period of October 2003 through May 2007, MetaMorphix raised just over $38 million using two distinct raises which have been referred to as the senior secured 12.5% notes and the junior secured 10% notes. With both of these notes, MetaMorphix was entitled to convert them into equity at a qualified liquidity event such as an IPO.

Through out this period, MetaMorphix maintained relationships with investment banks and continually monitored the IPO market in the U.S. Unfortunately, the market was largely closed for biotechnology companies, particularly companies with market caps under $250 million, and remains that way even today. By 2008, the Company was adding the equivalent of $750k in interest from the two notes to its balance sheet each month. Additionally, the Company was mindful that the first group of notes would become due in late 2008. The Company aggressively pursued a number of alternatives including reverse merger into a publicly listed company, acquisition by a publicly traded company, acquisition by a major animal health company, and listing on a foreign exchange.

A representative of one of the Company’s largest investors, who had worked in the London financial markets for over 25 years, advised us that a number of U.S. biotechnology companies had successfully listed on the London AIMS (a subsidiary of the London Stock Exchange- LSE) and these same companies achieved favorable valuations. Another attractive feature of an AIMS listing was the cost and time required for going public was substantially less than in the U.S. This same representative introduced the Company to a number of UK financial institutions which culminated in our engaging Noble Financial Group, a London-based financial institution, to facilitate the listing process. He also introduced us to Investec, an investment bank with the second largest number of successful IPOs on AIMS, which was brought on to manage the investment book.

During the AIMS IPO process, our SEC counsel advised us that it was not clear in the language of the 12.5% senior secured notes if an IPO on AIMS would qualify as an event that would allow us to force conversion into equity. Therefore, counsel suggested to avoid a rescission of the offering, the Company should formally seek approval from the 12.5% note holders. The Company received consent from a majority of the 12.5% note holders (57%) to convert their notes at the IPO price. However, we needed a super majority of 66⅔% to undertake an IPO and we failed to complete the IPO.

As many of our secured notes matured in January 2010, the Company engaged the services of Bengur Bryan, a Baltimore-based financial group specializing in corporate restructuring, in May 2009 to assist in developing and implementing a reorganization plan. Among the first activities in the process, Bengur Bryan determined the value of the Company was between $16.7 million to $20.8 million using three different methodologies (discounted cash flow, trailing revenue and comparable valuation models). Bengur Bryan advised the Company and its board of directors that there were 3 possible routes forward: 1) raise sufficient equity capital to satisfy our debt, 2) obtain the consent of secured note holders to extend their notes, and 3) reach consensual agreement with secured note holders for a plan of reorganization. Upon Bengur Bryan’s advice, MetaMorphix retained bankruptcy counsel in October 2009 in the event that creditors pursued involuntary bankruptcy.