Filing for Bankruptcy in the Pharmaceutical Industry

Twenty-two biotech and pharmaceutical companies filed for bankruptcy in 2024 compared to 28 in 2023, the highest in 10-years.^1,2,3 Filing for bankruptcy can have many downstream consequences across research and development (R&D) operations, stakeholders, and the healthcare environment. The bankruptcy process typically begins with the company completing one of two filings within the U.S. Bankruptcy Code. The two filings are Chapter 11, reorganization, or Chapter 7, liquidation.

Companies usually file for Chapter 11 because it allows them to continue operating while restructuring debts under court supervision.⁴ The bankruptcy process aims to help companies achieve financial stability while developing a plan to repay creditors over time.

Chapter 11

Chapter 11 allows the company to reorganize its operations, renegotiate contracts, and propose a repayment plan for creditors under the supervision of a bankruptcy court.^5,6 This is particularly important in the pharmaceutical space where companies may need to maintain the production and distribution of critical medications, continue clinical trials, and uphold regulatory obligations despite financial uncertainty. During this filing, companies work with creditors, suppliers, and regulatory agencies to make sure that business functions can continue. The court may approve the sale of assets such as drug licenses, manufacturing facilities, or intellectual property to raise funds and support operations. R&D programs may be halted or sold off, and other R&D programs may continue through restructuring or acquisition. The goal of Chapter 11 is to help the company emerge from bankruptcy by becoming more financially stable and capable of long-term growth. 

Chapter 7

While Chapter 11 filing allows for reorganization, Chapter 7 involves a complete liquidation, or conversion of a company’s assets into cash, to repay debts. Filing for Chapter 7 bankruptcy indicates that a company is no longer viable and must cease operations.^7,8 A court-appointed trustee takes control of the company’s estate and sells off assets such as drug licenses, intellectual property, manufacturing equipment, and inventory. The trustee then distributes the proceeds to creditors based on legal priority. Chapter 7 filing can have significant consequences for patients, healthcare providers, and clinical research. Disruptions in drug availability can occur, which can then affect patient care. The FDA may step in to facilitate a transition of drug rights to another company, or the bankrupt company’s patents and development programs may be purchased by other pharmaceutical firms. It is important to note that once the liquidation process is complete, the original company is dissolved and ceases to exist.

Research and Development (R&D)

R&D programs may face uncertainty during bankruptcy as companies may need to suspend or cancel drug development initiatives. This can delay or permanently halt innovation for drugs in early development stages. In addition, programs may be sold to other companies as part of asset liquidation or restructuring efforts. The benefit here is that pipeline or approved products have continued support as they enter or remain on the market. Bankruptcy commonly affects drug manufacturing and distribution. Ensuring that patients continue to receive critical medications becomes a top priority, especially if the bankrupt company produces life-saving medication. The court may grant special permissions or funding to maintain production and avoid disruptions in supply. In addition, bankruptcy affects licensing and collaboration agreements between companies. Bankruptcy law allows companies to reject burdensome contracts, including R&D partnerships or commercialization agreements. On the other hand, complex legal battles can ensue with disputes over contracts and commercialization agreements. Partners may attempt to acquire full rights to co-developed drugs or technologies and do so at reduced valuations.

Impact of Bankruptcy

Pharmaceutical bankruptcy often results in significant losses for investors and shareholders. Equity holders are typically last in line for repayment and often receive little to no recovery.⁴ Publicly traded companies may be delisted from stock exchanges, and share prices can collapse. To reduce costs, companies often downsize their workforce and close offices or manufacturing plants. While this helps in rebalancing the company’s financial obligations, it can also delay project timelines. During this time of reorganization, employee benefits and severance packages may be renegotiated or impacted.

Other Effects of Bankruptcy

Patients and healthcare providers may experience uncertainty, especially if the bankrupt company marketed essential or specialty drugs. Physicians may need to find alternative therapies, and patients might face disruptions in access. Nonprofit advocacy groups and government agencies may support efforts to mitigate access issues, which can be crucial in cases where public health is at risk. From a regulatory perspective, the company must continue to comply with FDA pharmaceutical requirements. In other words, bankruptcy does not excuse a company from maintaining good manufacturing practices, product labeling, pharmacovigilance, or adverse event reporting. The FDA may work with the company or potential buyers of its assets to make sure that critical public health responsibilities are met despite financial difficulties.

Summary

In conclusion, pharmaceutical bankruptcies, through Chapter 11 reorganization or Chapter 7 liquidation, can have complex and far-reaching implications. These events not only affect the financial and operational stability of the companies involved but also have downstream effects in the broader healthcare ecosystem. Patients, providers, regulators, investors, and research pipelines may be impacted. While some companies may successfully restructure and emerge stronger, others dissolve, potentially resulting in intellectual property and drug assets being absorbed by competitors. How a bankruptcy unfolds determines whether innovation and patient access can be preserved or disrupted, which demonstrates the delicate balance between business viability and public health in the pharmaceutical industry.

Resources:

1. Pecci, A. PharmaVoice. In a Record Year for Biotech Bankruptcy, Here are 3 Companies That Went Under. 2023.
2. Armstrong A, Masson G. FierceBiotech. Biotech Bankruptcies Hit 10-Year Peak in 2023. 2024.
3. Masson G. FierceBiotech. The 2024 Biotech Graveyard. 2024.
4. Bloomberg Law. Practical Guidance: Bankruptcy, Overview - Pharmaceutical & Biotech Company Bankruptcies. 2024.
5. United States Courts. Chapter 11 - Bankruptcy Basics. 2024.
6. Internal Revenue Service. Chapter 11 Bankruptcy - Reorganization. 2024.
7. United States Courts. Chapter 7 - Bankruptcy Basic. 2024.
8. Internal Revenue Service. Chapter 7 Bankruptcy - Liquidation Under the Bankruptcy Code. 2024.

*Information presented on RxTeach does not represent the opinion of any specific company, organization, or team other than the authors themselves. No patient-provider relationship is created.