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KaloBios Pharmaceuticals Inc. is on the way out of bankruptcy after winning approval of a restructuring that pushed former Chief Executive Martin Shkreli to the sidelines.

Mr. Shkreli was arrested on securities fraud charges unrelated to KaloBios in December, about a month after he bought a controlling stake in the ailing pharmaceutical company. He was fired as CEO, and the company filed for bankruptcy protection.

The chapter 11 exit plan that cleared court Wednesday sets up the company to return to business and possibly to the Nasdaq Stock Market, which delisted the shares because of the bankruptcy and Mr. Shkreli's arrest.

Mr. Shkreli denies the fraud charges, which stem from his activities at Retrophin, a public company he is accused of using to cover losses in hedge funds he ran. Mr. Shkreli remains notorious for his avowed support for high drug prices. While chief executive of Turing Pharmaceuticals, he hiked the price of Daraprim, a potentially lifesaving drug, from $13.50 to $750 per pill overnight.

On Wednesday, Judge Laurie Selber Silverstein confirmed a plan that relaunches KaloBios with $14 million in new investments to pursue a potentially lucrative deal for benznidazole, a treatment for a tropical disease that could qualify for a priority review voucher from the Food and Drug Administration.

Mr. Shkreli won't play an active role in the company's future under a settlement reached in connection with the turnaround plan. At the hearing in the U.S. Bankruptcy Court in Wilmington, Del., Judge Silverstein granted interim approval to the pact, which puts distance between KaloBios and Mr. Shkreli, who still owns 47% of the company's shares.

While KaloBios was in bankruptcy, measures put in place by the company's board barred Mr. Shkreli from flexing his power as a major shareholder. That left open the question of what would happen once KaloBios exited bankruptcy. Transactions that are part of the chapter 11 plan mechanics will dilute his stake to less than 14% of the equity in the reorganized company. That reduction isn't sufficient to calm the concerns of, among others, hospitals that KaloBios would like to enlist as part of clinical trials and potential financing parties, said Peter Ivanick, a lawyer for KaloBios.

Numerous potential parties to business arrangements with KaloBios backed away due to Mr. Shkreli's continued stockholdings, Mr. Ivanick said. The settlement renders him a passive investor, unable to vote in opposition to the majority of shareholders and ineligible to nominate candidates for the board of directors. Within months, KaloBios has the option to buy out Mr. Shkreli's stake at a discount to market price.

A lawyer for Mr. Shkreli said he wouldn't comment on KaloBios's assertion that the former CEO's continued association with the company jeopardizes its prospects. Mr. Shkreli supports KaloBio's chapter 11 plan, the lawyer said.

KaloBios's turnaround is being financed by Black Horse Capital LP and Nomis Bay Ltd., which will have a controlling stake in the reorganized KaloBios. The new funding is part of a bankroll KaloBios needs to wrap up a deal for benznidazole that could generate big profits.

A remedy for Chagas disease, a dangerous parasitic infection, benznidazole has been established as safe and effective during decades of use in Latin America. With an estimated 300,000 Chagas disease sufferers in the U.S. and no easy way to get benznidazole in this country, the drug could be in line for expedited regulatory handling through the issuance of a priority review voucher.

"This will allow people to get back to medicine," said Eric Lopez Schnabel, a lawyer for Savant Neglected Diseases, commenting on KaloBios's reorganization. Savant is the San Francisco Bay Area company that controls the rights to benznidazole.

Write to Peg Brickley at peg.brickley@wsj.com

(END) Dow Jones Newswires

June 15, 2016 13:15 ET (17:15 GMT)

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