Trustee sought for bankrupt biotech tied to investor Shkreli

SAN FRANCISCO (Reuters) - The outlook is so bleak for a bankrupt biotechnology company briefly led by controversial investor Martin Shkreli that its management should be replaced by an independent trustee, a government bankruptcy watchdog argued on Monday.

Martin Shkreli (C), chief executive officer of Turing Pharmaceuticals and KaloBios Pharmaceuticals Inc, departs U.S. Federal Court after an arraignment in New York in this December 17, 2015, file photo. REUTERS/Lucas Jackson/Files

KaloBios Pharmaceuticals Inc, based in South San Francisco, California, filed for Chapter 11 bankruptcy in December just weeks after Shkreli was arrested for engaging in what U.S. prosecutors said was a Ponzi-like scheme at his former hedge fund.

The U.S. Trustee, an arm of the Justice Department that oversees bankruptcy administration, on Monday asked the U.S. Bankruptcy Court in Delaware to consider putting KaloBios under a trustee or having the company’s case converted to a Chapter 7 bankruptcy.

In a Chapter 7 case, a company is liquidated rather than reorganized as a going concern as in a Chapter 11 case.

KaloBios is down to nine employees, has no ongoing trials and has no significant ongoing operations, interim U.S. Trustee Andrew Vara said in court papers.

Additionally, a potentially pivotal deal to acquire a drug made by privately held Savant Neglected Diseases LLC is now off the table and KaloBios has only $2.9 million in unencumbered cash, Vara said.

“Investors, creditors, and parties in interest are now left to wonder whether KaloBios is the latest in Mr. Shkreli’s series of allegedly fraudulent moves, and whether any of his actions ‘taint’ the company and its current prospects,” Vara said.

KaloBios was not immediately available for comment.

Shkreli took control of KaloBios in November, saving the company from closing, and became its chief executive on Nov. 20.

He was arrested on Dec. 17 for an allegedly fraudulent scheme at his former hedge fund and at Retrophin Inc, a pharmaceutical company he previously headed.

On Dec. 29 KaloBios filed for bankruptcy, putting itself in the hands of a chief restructuring officer with the aim of developing a restructuring plan.

Shkreli had gained notoriety before his arrest when as chief executive of Turing Pharmaceuticals he raised the price of a drug used to treat a dangerous parasitic infection to $750 a tablet from $13.50.

He resigned as Turing’s CEO on Dec 18.

The case is In re KaloBios Pharmaceuticals Inc., Case No. 15-12628 in U.S. Bankruptcy Court in Delaware.

Reporting by Jim Christie; Editing by Leslie Adler