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Mallinckrodt Mulls Restructuring as a Major Opioid Trial Nears

Eliza Ronalds-Hannon, Jef Feeley and Katherine Doherty

(Bloomberg) -- Facing more than 2,000 states, cities and counties that blame drug makers and distributors for an epidemic of addiction and tens of thousands of overdose deaths, Mallinckrodt Plc has hired restructuring advisers to help limit its potential legal liabilities.

Drugmakers such as Mallinckrodt, Purdue Pharma LP and others are facing claims that they downplayed the addictive risks of their opioid pills and failed to monitor patterns of misuse. With their potential liability running into the tens of billions of dollars, some have raised the possibility of bankruptcy as a way to contain a likely legal payout.

Ahead of the first federal opioid trial next month, Mallinckrodt is exploring options that could include a bankruptcy filing if its costs become unmanageable, according to people with knowledge of the matter. The drugmaker has hired the law firm Latham & Watkins LLP and turnaround firm AlixPartners LLP to advise it, said the people, who asked not to be identified discussing confidential talks.

Mallinckrodt is burdened with $5 billion in debt, adding to the risk of a large legal judgment or settlement. The news sent the value of the drug maker’s bonds plunging into deeply distressed levels on Thursday and wiped out more of the company’s stock-market value, with shares losing as much as 45% to a record low of $1.43.

Its bonds with the nearest maturity -- $700 million of notes due in April -- slid as much as 28 cents on the dollar to about 46 cents, according to the Trace bond-price system. Shares and bonds of other drugmakers facing similar accusations dropped as well, with Teva Pharmaceutical Industries Ltd.’s U.S. shares losing as much as 10% and Endo International Plc dropping as much as 19%.

“People are confusing uncertainty with some of the actions that we’re taking,” Mallinckrodt Chief Executive Officer Mark Trudeau said at a Wells Fargo & Co. healthcare conference on Thursday when asked about the report. The company hires advisers for “all types of things all the time.”

Trudeau downplayed the company’s contribution to the opioid epidemic and noted that the drugs comprise just 10% of what the company does. He said Mallinckrodt continues to look at all alternatives to move away from its generics business, which includes its opioid products.

Representatives for AlixPartners declined to comment, while a representative for Latham didn’t respond to a request for comment.

Opioid Settlements

Local governments in hard-hit states including Ohio, West Virginia and Kentucky have accused opioid makers, distributors and pharmacy chains of understating the risks of prescription opioids, overstating their benefits, failing to halt suspiciously large shipments, and ignoring red flags about repeated retail sales.

Some opioid makers, including Endo and Allergan Plc, already have settled claims they faced. Endo agreed to pay $10 million and donate $1 million worth of drugs while Allergan agreed to pay $5 million.

Purdue Pharma is preparing to file for bankruptcy as part of a plan that may include an $11.5 billion settlement to resolve all lawsuits against it, Bloomberg previously reported.

Mallinckrodt is negotiating with lawyers for the plaintiff cities and counties in hopes of working out a deal to avoid the Oct. 21 trial in Cleveland, people familiar with the talks said. In lawsuits, cities and states contend that executives at the company, which makes generic versions of opioid painkillers, provided lax oversight of orders for its products and took a cavalier attitude toward sales of the addictive medicines.

In 2008, a compliance officer at the drug maker warned her bosses that the company’s system for red-flagging suspicious orders -- required under U.S. rules intended to prevent shipments from being diverted to illegal uses -- was flawed and needed an upgrade, according to unsealed U.S. Drug Enforcement Administration records. But company executives declined to hire an outside vendor to beef up reviews, the records show.

Mallinckrodt has denied its compliance was lax, but it agreed to a $35 million settlement in 2011 to end a government probe of the matter.

Credit Drawdown

Mallinckrodt on Aug. 29 disclosed it had tapped the last $95 million on its revolving credit line, leaving it with no remaining borrowing capacity as liabilities loom, analysts said. When it drew down the revolver, company representatives said the move provided “increased liquidity” for it to “address cash needs that may arise in the future.”

Such needs could include a cash payment in the event that Mallinckrodt can reach a settlement in Cleveland, the people familiar with those talks said.

The pharmaceutical company has about $550 million of cash on hand and more than $5 billion of net debt. After drawing down the remainder of its $900 million revolving credit line and terminating its securitization facility, Mallinckrodt has no borrowing capacity, analysts say.

Mallinckrodt, which produces specialty and generic drugs, has lost about three-quarters of its market value this year as investors assessed the potential liability posed by opioid-related lawsuits.

It also faces pressure from new competitors and regulatory changes.

On Aug. 27, the company lost a patent-infringement case appeal over a generic version of its INOmax infant-respiratory treatment being marketed by Linde Plc’s Praxair. And it has been embroiled in a lawsuit against the U.S. government over a regulatory move that would change Medicaid rebates for its best-selling Acthar Gel.

The case is In Re National Prescription Opioid Litigation, 17-md-2804, U.S. District Court, Northern District of Ohio (Cleveland).

(Adds detail from lawsuits starting in 11th paragraph)

--With assistance from Jeremy Hill.

To contact the reporters on this story: Eliza Ronalds-Hannon in New York at eronaldshann@bloomberg.net;Jef Feeley in Wilmington, Delaware at jfeeley@bloomberg.net;Katherine Doherty in New York at kdoherty23@bloomberg.net

To contact the editors responsible for this story: Rick Green at rgreen18@bloomberg.net, Drew Armstrong, Shannon D. Harrington

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