Mallinckrodt Files For Bankruptcy To Cut Debt, Settle Opioid Legal Claims

Mallinckrodt announced on Monday that it has voluntarily filed for Chapter 11 proceedings in a move to restructure its debt and resolve “several billions dollars” in potential legal liabilities.

Mallinckrodt (MNK) said that under its financial restructuring plan it seeks to reduce total debt by approximately $1.3 billion and resolve the opioid-related legal claims against the company, its subsidiaries and related entities. In addition, the speciality biopharma company is hoping to resolve various matters related to its multiple-sclerosis treatment Acthar Gel, including the CMS Medicaid rebate dispute, an associated False Claims Act (FCA) lawsuit and an FCA lawsuit relating to Acthar’s previous owner’s interactions with an independent charitable foundation.

Mallinckrodt said it has now reached an agreement in principle on the terms of an amended proposed settlement that would resolve the opioid-related claims and is supported by a broad array of opioid plaintiffs. Under the terms of the settlement, which would become effective upon Mallinckrodt’s emergence from Chapter 11, opioid claims would be channeled to one or more trusts, which would receive $1.6 billion in structured payments.

Opioid claimants would also receive warrants for about 19.99% of the company’s fully diluted outstanding shares, exercisable at a strike price reflecting an aggregate equity value of $1.551 billion.

As part of an agreement reached with certain governmental parties to resolve certain disputes related to Acthar Gel, Mallinckrodt has agreed to pay $260 million over 7 years. Following the execution of the settlement, the company will dismiss its appeal of the CMS Medicaid rebate ruling currently pending in the U.S. Court of Appeals for the D.C. Circuit. 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, during which the company and all of its subsidiaries are continuing to operate and supply customers and patients with products as normal.

MNK shares dived 31% on Friday taking this year’s plunge to 79%. Looking ahead, the $1.63 average analyst price target implies 117% upside potential lies ahead.

Raymond James analyst Elliot Wilbur last month reiterated a Hold rating on stock after the US Food and Drug Administration announced that it could not approve the company’s terlipressin as a treatment for Hepatorenal Syndrome (HRS-1) based on the available data from the Phase 3 clinical trial. HRS-1 is a life-threatening syndrome involving acute kidney failure.

“Terlipressin was supposed to provide MNK with a much needed boost as a growth asset with exclusivity in order to offset headwinds faced by the company, but with terlipressin approval taking a large step back, in tandem with the continued balance sheet and Acthar pressures,” Wilbur remains sidelined on the stock.

The rest of the Street is in line with Wilbur’s stock outlook. The Hold analyst consensus shows 7 Holds versus 2 Sells. (See MNK stock analysis on TipRanks)