(Bloomberg) — Mallinckrodt Plc became the third major opioid maker to go bankrupt after being swamped by claims it profited by fueling the U.S. opioid epidemic.
The drug company said Monday it filed for Chapter 11 protection in Delaware after getting creditors and claimants to agree on a restructuring plan that hands ownership to bondholders, wipes out shareholders and sets aside $1.6 billion to resolve all opioid litigation. The filing also will help resolve a U.S. government probe into whether the company defrauded Medicaid by overcharging for Acthar Gel, its top-selling multiple sclerosis drug.
The move comes as Mallinckrodt was readying for two trials over accusations it illegally marketed opioids and failed to properly oversee large shipments of the highly addictive pills, which have been tied to an epidemic of abuse that killed thousands of Americans. A judge is likely to halt all litigation while the bankruptcy plan makes its way through the court process.
The agreement includes certain debt holders, state attorneys general and lawyers for municipalities that sued to recoup billions in tax dollars spent on battling opioid addictions. Mallinckrodt will set up a trust to oversee payments from the $1.6 billion fund to claimants, and give them warrants to buy a stake in the reorganized company that could total nearly 20%, according to a statement.
Wiped Out
Current shareholders are likely to get nothing, filings show. The stock, which ended last week at 75 cents a share, has hovered at penny-stock levels for most of this year as the talks progressed, and trading was suspended on Monday after the bankruptcy was filed.
Chief Executive Officer Mark Trudeau, who has been in charge for seven years, said the plan puts Mallinckrodt “on a clear path” to ending litigation and turning the company around.
Quotes on Mallinckrodt’s unsecured bonds due in 2023 and 2024 prices rose the most on record in preliminary pricing after the announcement, to about 38 cents on the dollar from around 23 cents, according to Trace bond trading data.
Read about what bankruptcy may mean for bondholders
“Mallinckrodt has been threatening bankruptcy for over a year, so this comes as no surprise,” Hunter Shkolnik, a lawyer for two New York counties who sued opioid makers and distributors over their mishandling of the pills, said in an emailed statement.
The development mirrors Purdue Pharma LP’s move to short-circuit opioid suits against the maker of OxyContin by filing for bankruptcy protection last year. Purdue is proposing a $10 billion settlement plan that would turn that company over to the states and local governments and require the billionaire Sackler family — which owns the drugmaker — to come up with $3 billion. Some states and municipalities have opposed the offer, saying it’s not enough to deal with the public health crisis.
Insys Therapeutics Inc., maker of the Subsys painkiller, sought bankruptcy protection last year after agreeing to pay hundreds of millions of dollars to settle a probe by U.S. prosecutors over the promotion of its highly addictive opioid-based medicine.
Criminal Case
John Kapoor, Insys’s founder and former CEO, was sentenced to 5 1/2 years in prison after a jury found him guilty of conspiring with other Insys executives to lure doctors into wrongfully broadening use of a drug intended only to manage severe cancer pain through the use of sham speaker’s fees. He is the first CEO of an opioid maker to face criminal charges.
Unlike Purdue and Insys, Mallinckrodt has billions of funded debt obligations to manage. Before its filing, Mallinckrodt crafted a restructuring agreement that’s supported by 84% of the unsecured noteholders as well as 50 states and territories, according to a statement. The plan will allow the company to shed as much as $1.3 billion in debt.
First-lien and second-lien holders would get to keep their stakes, with their existing rates and maturities. Investors who hold guaranteed unsecured notes would get their share of $375 million of new secured second-lien notes due seven years after the company emerges from Chapter 11, according to the statement. Those holders would receive 100% of the reorganized company’s equity, subject to certain dilutions.
Trade creditors and holders of general unsecured claims are slated to share $150 million in cash, while equity holders and non-guaranteed unsecured noteholders are expected not to recover anything.
Acthar Accord
Once it completes the bankruptcy process, Mallinckrodt said it will continue to comply with an injunction regarding how it runs the opioid business.
The filing paves the way for a $260 million settlement of U.S. government claims that Mallinckrodt executives cheated the government through what the government said were “meteoric” price hikes for its multiple-sclerosis fighting Acthar Gel. The money will be paid out over seven years and will go to states as rebates for the drug’s price hikes.
Along with the New York trial, Mallinckrodt faced an upcoming court contest over Tennessee officials’ claims it flooded the eastern part of the state with its opioid painkillers.
Tennessee officials and lawyers for an opioid-addicted baby contend the company acted as the equivalent of a drug dealer when it shipped large orders that wound up supplying some pill mills in the state, according to court filings. Mallinckrodt has said the real culprits in the opioids epidemic are illegal dealers of the painkillers.
Mallinckrodt executives also faced accusations that they failed to properly supervise their opioid salespeople. In a 2009 email, a sales manager compared the addictive painkillers to Doritos and urged customers to “keep eating, we’ll make more.” Mallinckrodt executives said last year that the employee no longer works for them and his email didn’t reflect the firm’s commitment to fighting opioid abuse.
Local Impact
“We are disappointed MNK has run to bankruptcy court to avoid our pending trial,” Gerard Stranch, a Nashville-based lawyer representing Tennessee officials in the case, said in an emailed statement. “We are also concerned MNK has worked with states to help them negotiate an allocation of the paltry settlement funds that will favor the state’s general fund but leave local and rural areas uncompensated.”
In its Chapter 11 filing, Mallinckrodt estimated liabilities of $1 billion to $10 billion and assets in the same range. Mallinckrodt LLC, the company’s generic drug unit, also sought bankruptcy protection, according to court filings. The company said separating its generic and specialty businesses remains one of its goals through its bankruptcy process.
The case is Mallinckrodt Plc, 20-12522, U.S. Bankruptcy Court for the District of Delaware (Wilmington).
(Updates to add bond prices in seventh paragraph and additional information on accusations in 19th paragraph. A previous version of this story corrected a reference to the injunction on opioid business in the 15th paragraph)
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