Mallinckrodt Mulls Bankruptcy Ahead Of Major Opioid Litigation

Shares of Mallinckrodt plc (NYSE:MNK) declined 38.6% on Sep 5, following a Bloomberg report stating that the company is considering restructuring and may file for bankruptcy to limit its liabilities related to pending opioid litigations.

Per the report, Mallinckrodt hired restructuring advisers to explore options to avoid the multi-district litigation scheduled in October. The company is mulling for bankruptcy if costs become too high to manage. Moreover, its high debt levels make the situation worse as it may become a hurdle in case a settlement is reached or a penalty is levied by the court. The company may also divest its generic business, which includes opioid drugs.

In fact, Mallinckrodt’s shares have declined 89.9% so far this year compared with the industry’s fall of 7.9% on pricing pressure in the generic segment and rising risk of penalties related to litigations.

Mallinckrodt is one of the defendants in more than 2,000 litigations filed by several states, counties and other political subdivisions in the United States related to the abuse of opioid-based drugs. Several pharma companies are blamed for their marketing practices, which downplayed the risk of addiction from these drugs and boosted their use.

Per the National Institute of Drug Abuse, opioid overdose claimed lives of 47,000 Americans in 2017. Moreover, prescription opioid misuse alone creates a total economic burden of $78.5 billion every year. In the past two decades, 400,000 deaths occurred due to opioid-based drug abuse, per the estimate of Centers for Disease Control and Prevention.

Several analysts expect penalties to run into several billions of dollars for the accused pharma companies in opioid litigations. However, penalties of $527 million levied on J&J (NYSE:JNJ) in the recently concluded opioid litigation with the state of Oklahoma were at the lower end of the market expectation. But we note that the amount is manageable for J&J as it has good balance sheet, with significant cash in hand.

Other companies, especially in the generic segment, with high debt levels as well as low cash resource will likely face unfavorable impact. Shares of Teva Pharma (NYSE:TEVA) and Endo International (NASDAQ:ENDP) also fell on Sep 5, following the Bloomberg report on Mallinckrodt as these companies also face opioid litigations and may seek similar alternatives.

Notably, Endo settled for almost $10 million, resolving all claims against itself related to the upcoming federal multidistrict litigation. Allergan (NYSE:AGN), another defendant in the case, also settled in similar litigation. Meanwhile, Purdue Pharma is planning to file for bankruptcy, which may include a settlement of $10-$12 billion to resolve all pending claims against its opioid-based drugs.

Zacks Rank

Mallinckrodt currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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