A partial release of data by the Small Business Administration (SBA) shows at least 99 publicly owned pharma companies and CMOs were approved for federal government paycheck protection program (PPP) loans intended to help small businesses to pay workers during the COVID-19 pandemic.

A GlobalData PharmSource analysis shows a further 50 publicly owned pharma companies and CMOs took PPP loans, in addition to the 49 companies we reported in May (B/POR, May 2020) based on our investigation of their SEC filings. It is possible that some of these companies declined to take the funds after they were approved, or repaid all or part of the loans. We contacted the pharma companies and CMOs named in this article for comment.

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Billion-Dollar Market Caps

Among the 50 public pharma companies approved for PPP loans according to the government data, the largest has a $2B market cap (on August 27): the pharma company and excess capacity contract manufacturer Sorrento Therapeutics (San Diego, CA, US). Another 12 pharma companies have market caps over $200M.

Figure 1: Public Pharma Companies and CMOs and Subsidiaries Approved for PPP Loans.

Credit: GlobalData.

Table 1: Publicly owned dedicated and excess capacity CMOs approved for PPP loans.

Credit: GlobalData, Contract Service Provider Database (accessed August 18, 2020); SBA.gov.

Notes: Dyadic International applied and received approval for a $150,000–350,000 PPP loan before the US government published final loan terms; the company decided not to take the funds, its CEO told us. Recro returned $1.1M of its $4.4M loan, the company told us. It is possible that other companies have since returned the funds. Other companies in this table declined or did not respond to requests for comment.

‘Fraud’ Suspicions

The federal government’s Office of Inspector General warned of “serious concerns of potential fraud” in the loan program in July, noting that applicants did not have to be approved for a loan to receive an advance grant. There is “potentially rampant fraud in the program,” it said.

Treasury Secretary Steven Mnuchin stated in April that companies taking loans over $2M will be audited before the loan will be forgiven. Nine of the 50 public pharma companies we discovered took loans this size. Companies must also show that they used the loan to maintain employee numbers.

“It is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification,” according to Treasury guidance.

Companies that wrongly took money “may be subject to criminal liability,” Mnuchin said. Despite this statement, the question of whether a company qualified for the loan is really a regulatory, not a criminal issue, a senior securities fraud and corporate governance litigator told us. If found to be unqualified, “they’ll have to repay the money and there will be financial penalties, but no one is going to jail for this,” said the lawyer, who asked not to be named. The largest risks are reputational and the consequences of any shareholder action, he said.

Companies could argue in their defense that they had a duty to shareholders to take the loan in the face of financial pressures from the pandemic, the lawyer said. Indeed, Recro Pharma (Malvern, PA, US), a micro cap ($74M on August 18) pharma company and excess manufacturer, told us that it took the PPP loan out of necessity.

“While we understand the sentiments that could lead to concerns about PPP loans to large companies, we are not a large company, and we are a company that has been materially harmed by the COVID-19 crisis,” CEO Gerri Henwood told us.

“We are a small company that was deemed an essential business that did not really have feasible access to the equity capital markets because of this [pandemic] situation and our existing debt.” The loan allowed Recro to keep more employees than it otherwise would have been able to retain, Henwood said, and the company returned $1.1M of the $4.4M loan during the safe harbor period.

For larger companies, some loans were likely the result of a “breakdown in communication” within public companies, the aforementioned lawyer said. Finance departments viewed PPP as “cheap potentially free money: ‘let’s jump on it,’” before the C-level executives realized it could be a “PR disaster,” he said. Some of the large companies immediately returned the money.

The lawyer also claimed that the large companies taking these loans did so because they recognized that the Trump administration is unlikely to take significant enforcement action: “There is this climate of lawlessness, and lack of any sort of restraint from the government. That’s why it’s increasingly important for the private sector and shareholders to take steps,” he said.

“Given what current administration is doing or not doing, there is a risk-benefit analysis that at some level—I can’t tell you it’s deliberate, it’s atmospheric—they just don’t care.”

Of the 49 companies listed on US stock exchanges, 14 companies had not declared their PPP loans in their SEC filings by August 12. While there is no legal requirement for companies to disclose PPP loans, the lawyer told us: “It comes down to materiality: is it information that a reasonable investor would want to know? A good argument could be made that it certainly is, because of…regulatory scrutiny and reputational harm.”

Lender Lawsuits

Meanwhile, lenders have also been accused of wrongdoing. According to separate lawsuits, Wells Fargo and Bank of America prioritized PPP loans to existing business customers over smaller companies despite SBA rules that loans should be awarded on a first-come, first-served basis. Favoring companies seeking the largest loans meant “that the bank would receive millions more dollars in processing fees,” according to one Wells Fargo lawsuit.

“Making matters worse, Wells Fargo concealed from the public that it was reshuffling the PPP applications it received and prioritizing the applications that would make the bank the most money,” the lawsuit states.

Wells Fargo awarded the loans to four of the 50 pharma companies and CMOs: NovaBay Pharmaceuticals (Emeryville, CA, US), International Stem Cell Corporation (Carlsbad, CA, US), India Globalization Capital (Bethesda, MD, US), and Celcuity (Minneapolis, MN, US). Bank of America lent to Sorrento Therapeutics, Agenus Inc (Lexington, MA, US), Abeona Therapeutics (Cleveland, OH, US), Nature’s Sunshine Products (Lehi, UT, US), and Phio Pharmaceuticals (Marlborough, MA, US).

Sorrento is being sued by investors for exaggerating claims about its COVID-19 pipeline. It announced on August 12 it had uncovered fraudulent attempts to manipulate the company’s stock. Sorrento announced the firing of its CFO on August 18, without commenting on the reason.

Correction: a previous version of this article mistakenly identified NOF America Corporation, the subsidiary of NOF Corporation, a diversified chemical producer headquartered in Japan, as the recipient of a PPP loan in place of a North Carolina grocery business.

This article was corrected on September 14, 2020.