Mallinckrodt Files for Chapter 11 Bankruptcy
Mallinckrodt has voluntarily initiated Chapter 11 bankruptcy proceedings in the US as part of a plan to reduce the company’s debt by $1.3 billion and resolve potential liabilities relating to opioid litigation.
The entities that filed Chapter 11 petitions include Mallinckrodt plc and substantially all of its US subsidiaries, including its specialty generics-focused subsidiaries and specialty brands-related subsidiaries.
The company says it intends to use the Chapter 11 process to provide a legally binding mechanism to implement a restructuring support agreement that, among other things, provides for an amended proposed opioid claims settlement and financial restructuring. The financial restructuring would: (1) reduce the company’s total debt by approximately $1.3 billion; (2) resolve opioid-related claims against the company, its subsidiaries, and related entities; and (3) resolve various matters relating to the company’s top-selling drug, Acthar Gel (repository corticotropin injection), a drug to treat multiple conditions, including rheumatoid arthritis, multiple sclerosis, and lupus.
Resolution of opioid claims
Mallinckrodt says that it is proceeding with bankruptcy proceedings in part to “resolve several billion dollars of otherwise unmanageable potential legal liabilities.” Under an amended proposed settlement, which would become effective upon Mallinckrodt’s emergence from the Chapter 11 process, subject to court approval and other conditions, opioid claims would be channeled to one or more trusts, which would receive $1.6 billion in structured payments. Of this total, $450 million would be received upon the company’s emergence from Chapter 11; $200 million would be received on each of the first and second anniversaries of emergence; and $150 million would be received on each of the third through seventh anniversaries of emergence with a one-year prepayment option at a discount for all but the first payment.
Opioid claimants would also receive warrants for approximately 19.99% of the company’s fully diluted outstanding shares, reflecting an aggregate equity value of $1.551 billion. In addition, upon commencing the Chapter 11 filing, the company says it will comply with an agreed-upon operating injunction with respect to the operation of its opioid business. Parties to the company’s restructuring support agreement include a court-appointed plaintiffs’ executive committee representing the interests of thousands of plaintiffs in opioid multidistrict litigation composed of more than 1,000 counties, municipalities, Native American tribes, and other opioid claimants.
Resolution of Acthar Gel-related matters
In addition, Mallinckrodt has reached an agreement in principle with certain governmental parties to resolve certain disputes relating to Acthar Gel, the company’s top-selling drug with fiscal 2019 sales of $952.7 million. The Acthar Gel matters include a dispute with the US Centers for Medicare & Medicaid Services (CMS) relating to Medicaid rebates, an associated False Claims Act (FCA) lawsuit, and a FCA lawsuit relating to Acthar’s previous owner’s interactions with an independent charitable foundation.
The agreement is conditioned upon Mallinckrodt entering the Chapter 11 restructuring process. Under the agreement, the company has agreed to pay $260 million over seven years and reset Acthar Gel’s Medicaid rebate calculation as of July 1, 2020, such that state Medicaid programs will receive 100% rebates on Acthar Gel Medicaid sales, based on current Acthar Gel pricing. Additionally, upon execution of the settlement, the company will dismiss its appeal of the CMS Medicaid rebate ruling currently pending in a US court of appeals. The settlement would resolve the CMS Medicaid rebate dispute, the associated FCA lawsuit in Boston, and an FCA lawsuit in the Eastern District of Pennsylvania relating to Acthar’s previous owner’s interactions with an independent charitable foundation. Mallinckrodt expects to complete the settlement over the next several months, subject to bankruptcy court approval.
Financial position and process going forward
In 2019, Mallinckrodt posted revenues of $3.16 billion and a total operating loss of $1.82 billion, which included $1.64 billion for opioid-related litigation settlement charges. For the first six months of 2020, it posted net sales of $832.3 million and adjusted net sales of $1.37 billion and a net loss of $983.3 million, compared to net income of $161.7 million in the year-ago period. Its current consolidated cash balance of the Chapter 11 filing entities (as reported on October 12, 2020) was more than $650 million. Together with cash generated from ongoing operations, the company says this is expected to provide ample liquidity to support continued operations during the court-supervised process.
Mallinckrodt says it has filed a number of customary motions seeking court authorization to continue to support its business operations during the court-supervised process, including the continued payment of employee wages and benefits without interruption. The company says it intends to pay vendors and suppliers in full under normal terms for goods received and services rendered on or after the filing date. The company expects to receive court approval for all of these routine requests. The company’s foreign non-debtor affiliates will continue to operate their businesses in the ordinary course.
Mallinckrodt says that separating its Specialty Generics and Specialty Brands businesses remains one of its goals. Its Specialty Brands business includes innovative specialty pharmaceutical brands, and its Specialty Generics business includes niche specialty generic drugs and active pharmaceutical ingredients. In December 2018, the company announced plans to spin off its Specialty Generics business as a new independent public company, but in August 2019, the company suspended those plans based on market conditions and developments, including increasing uncertainties created by opioid litigation. Mallinckrodt says it will continue to evaluate strategic options for the Specialty Generics business at an appropriate time and when market conditions are favorable.