KV Pharmaceuticals' financial troubles escalated sharply Jan. 26, after the firm stopped selling nearly all of its products, except for the few it doesn't manufacture and also said that FDA will not approve its pregnancy drug Gestiva until the firm "meets further conditions."

The firm had expected an agency decision by Jan. 25, 2009, on Gestiva (alpha hydroxyprogesterone caproate), which is intended to prevent preterm birth in at-risk women, and can't afford any delay.

KV has been under FDA surveillance for more than a year and acknowledged last month that, as of Dec. 31, 2008, it would likely be in default on one or more covenants on its five-year credit agreement with 10 lenders. At that time the outstanding balance under this line of credit was about $30 million. The agreement provides for a revolving line of credit of up to $320 million.

"Unless a waiver is provided by the lenders in accordance with the terms of the credit agreement, failure by the company to comply with one or more of the covenants constitutes an event of default pursuant to the credit agreement," the firm's 8-K filing states. "As a result of any such default, the company's outstanding obligations under the credit agreement would accelerate and immediately become due and payable."

KV intends to discuss a potential waiver of any breach with its lenders or renegotiate terms of the agreement.

KV has a purchase agreement with Bedford, Mass.-based Hologic for worldwide rights to Gestiva, but the agreement is contingent upon the drug getting FDA approval (¹ Also see "KV Purchases Hologic Premature Birth Prevention Candidate; Sale Contingent On FDA Approval" - Pink Sheet, 22 January, 2008.).

As a result of the FDA delay, KV said that it would not likely see revenues from Gestiva for the fiscal year ending March 31, 2009. KV executives could not be reached for comment, but in a press release issued Jan. 26, the company said it had agreed to revisions FDA is seeking of a protocol for a post-market approval study of the drug.

The firm is also confronting a series of putative class action shareholder lawsuits alleging violations of the SEC laws and receipt of an informal inquiry from the SEC. KV's board of directors has appointed a special committee to respond, chaired by Terry Hatfield, who also is chairman of the board. Other members of the special committee include Jean Bellin, Kevin Carlie, Jonathon Killmer and Norman Schellenger. Additionally, the firm is responding to information requests from the Office of the U.S. Attorney for the Eastern District of Missouri and FDA reps in that office.

Road to collapse

KV announced a voluntary suspension of sales and shipping of all products it manufactures, beginning Jan. 22. It will continue to ship only Evamist (estradiol transdermal spray), ketorolac tromethamine tablets and its enteric coated naproxen sodium tablets, three products it does not manufacture, but these generate little revenue for the company, KV said in an SEC filing.

KV also began a nationwide recall of most products. KV is in discussions with FDA over the terms of the recall, from which it expects to incur significant costs. KV maintains that it is working with Lachman Consultant Services, to get shipments off the ground again as soon as possible.

Saving the company, however, seems a steep challenge for a firm with unstable leadership. On Jan. 16, KV terminated SVP and general counsel, Gregory Bentley, according to SEC filings. In December, the firm fired CEO Marc Hermelin, who remains on the board of directors, and named David Van Vliet interim CEO. Hermelin, though, is not a member of the Special Committee. (² Also see "Former Ways And Means Ranking Member McCrery Joins Capitol Counsel" - Pink Sheet, 5 January, 2009., p. 20).

Early last year, FDA inspectors found KV was not in compliance with good manufacturing practices and later seized unapproved drugs valued at $24.2 million after the firm failed to comply with FDA's deadline to stop manufacturing time-release guaifenesin-containing products (³ Also see "FDA Adds To Unapproved Drug Initiative Scorecard With Action Against KV" - Pink Sheet, 4 August, 2008. p. 28).

KV Class A stock dropped 77 percent to 51 cents on the New York Stock Exchange by close of business Jan. 26.

-- Carlene Olsen (c.olsen@elsevier.com)

Gestiva Approval Unlikely In FY 09; KV Pharmaceutical Admits Credit Fumbles

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