Mallinckrodt’s Machinations in Bankruptcy: Lessons for the Opioid Crisis
Written by Michael Scott Daley Jr.
Edited by Aden Levenson, Rachel Liesegnag, and Jack Siegel
In 2019, Mallinckrodt Pharmaceuticals faced a lawsuit from state and federal actors, alleging that the company played a knowing and negligent role in the opioid crisis—a nationwide epidemic of addiction and overdose stemming primarily from prescription opiates. Although the case, New York v. Purdue Pharma et al., originally settled for a sizeable $1.275 billion, Mallinckrodt would eventually reduce its obligation to $250 million for the victims of the opioid crisis, a mere fraction of the original cost. How did Mallinckrodt accomplish this vanishing act? Can other opioid companies use the same techniques? How are companies able to delay payments for such long periods of time? Through an analysis of the relevant law, and some chicanery, this article will demonstrate that Mallinckrodt has abused the current bankruptcy system to delay and reduce settlement payments through a calculated scheme involving strategic business plans and legally appointed accomplices.
The case which generated Mallinckrodt’s massive obligation, New York v. Purdue Pharma et al., accused multiple parties, including Purdue Pharma, Johnson & Johnson, and Mallinckrodt—all major pharmaceutical manufacturers—of knowingly participating in the American opioid use epidemic. The complaint alleges that the companies marketed and sold their opioid drugs in a manner that “deliberately betrayed [common law duties of care] through a persistent course of fraudulent and illegal misconduct, in order to profiteer from the plague that they knew would be unleashed.” The results of this “plague” contributed to a public health crisis which saw almost 645,000 people die in the United States from an overdose” between 1999 and 2021. Mallinckrodt, among others, allegedly told their sales team “ to target susceptible doctors” through in-office visits, advertisements and rebate cards for medications. In addition, the respondents were accused to have colluded to promote the overall expansion of the market for opioid drugs by misleading organizations. Although there was no official finding of wrongdoing, Mallinckrodt nevertheless agreed to pay a settlement from the case of $1.275 billion, totaling to about $4 per person in the U.S., reflecting their self-assessed exposure to culpability.
Whether Mallinckrodt had $1.275 billion to pay, on the other hand, was another question—its settlement obligation was quite above the valuation of its assets performed in 2019. According to the Securities and Exchange Commission, Mallinckrodt was only valued at $764.7 million based on its closing share price at the end of that year, indicating that state prosecutors knew that Mallinckrodt would be unable to sufficiently pay their settlement with the assets that they had. This led Jason Goodson, the company’s Executive Vice President and Chief Strategy and Restructuring Officer (CRO), to issue a new petition to the United States Bankruptcy Court for the District of Delaware. In it, the Bankruptcy Court was asked to “reduce [Mallinckrodt’s] opioid settlement obligations from $1.275 billion to $250 million.” This reduction would cut the payment to about one-fifth of its original amount, a stark difference from the original settlement and significantly below the value of the company. Despite the significant size of the reduction, the Bankruptcy Court approved the petition. To accomplish this, Mallinckrodt cleverly utilized Chapter 11’s component; titled “Modification of plan after confirmation.” According to 11 U.S.C. § 1329, “At any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified.” Within this modification, there are different options, including the ability to “increase or reduce the number of payments on claims of a particular class provided by the plan,” as well as the ability to “extend or reduce the time for such payments.” However, this should not be used to benefit the company’s cash flows in the cash of a settlement payment, but should instead in aiding the ability to provide funds in the future. By granting a longer amount of time through the separation or minimization of payments, the company should be able to generate the necessary payments. However, to meet this goal, new strategies need to be put in place through the role of the chief-restructuring officer (CRO).
What role would Mallinckrodt’s CRO, Jason Goodson, have in the bankruptcy? Industry experts note that “Effective CROs…strike a balance between challenging teams and offering support.” Goodson is responsible both for improving the company’s operations and navigating the challenges of a hefty debt obligation, including through filing petitions for lower payments. Goodson began working as a Senior Director at Mallinckrodt in January 2018, before the lawsuits began, and has changed roles multiple times over his nearly six-year span at the company. It is important to note that Goodson has been present at the company during its years of legal battles—not only in auxiliary roles, but in leadership. In the case of the company that “spent millions of dollars” to push their products in an aggressive manner, the ability for Goodson to continue operations during multiple periods of bankruptcy is not indicative of a company facing the significant financial duress it petitioned it was under. This can be seen through the continued failure of Mallinckrodt’s financial predictions, indicating that Goodson and the financial team are continuing to use falsifications to benefit their company.
Examining Mallinckrodt’s efforts to solve their self-induced financial troubles, certain statements in the First Day Motions request a reduction in the value of the settlement payments illustrating that the company is continuing to prioritize its security over the payment schedule. Mallinckrodt‘s petition stated that “despite achieving positive results and eliminating the overhang of burdensome litigation, Mallinckrodt’s ability to meet its debt and settlement obligations has been threatened by significant unanticipated business developments.” Their business projections indicated that their earnings before interest, taxes, depreciation and amortization (EBITDA) saw a “15% decrease from the projected amount of $791 million” and was “35% lower than the projections for 2022 at the time of the original opioid settlement.” The petition claims that, over time, the company will be able to generate enough revenue to produce settlement payments. However, in Mallinckrodt’s current state, the Bankruptcy Court agreed to reduce its opioid settlement obligation from $1.275 billion. In the petition, Mallinckrodt states that it has “made an illustrative proposal to address the entire capital structure and opioid settlement liabilities.” Of course, the company often failed to meet expectations which should not have been a surprise to the court. Knowing this, perhaps payments should not have been delayed any further on account of unmet and unrealistic goals. If the courts intended to extract $1.275 billion or a large portion of the sum from Mallinckrodt, they should have required payments at an earlier date, without delay, and at the penalty of a liquidated damages clause. This chaos, orchestrated by the company’s executives for the purpose of dodging their obligation to the public, is deeply problematic.
Looking at this case, it is clear that companies have the benefit of the doubt when it comes to appealing settlement payments in a bankruptcy court, leading to delays and minimization of payments. Companies that have taken part in activities that damage society, and which violate the nation’s laws should not be able to evade already-minimized settlement payments for such a prolonged period. Noted economist Edward Altman, in Evaluating the Chapter 11 Bankruptcy-Reorganization Process, focuses specifically on the problem of large time extensions for companies within the Chapter 11 restructuring process. His recommendation is “to establish a reasonable exclusivity period and to adhere to it unless the debtor makes a convincing case that the firm is worth more as going concern than it is in liquidation.” In the case of Mallinckrodt’s shrinking earnings and consistently unmet expectations, the company did not provide convincing evidence of being worth more than liquidation. There must be stricter codes put in place that require proof of success in restructuring strategies. Otherwise, Chapter 11 will continue to prove unsuccessful in arbitrating justice in situations that involve settlement payments from large companies with the resources to play games. If this is not addressed, firms will continue to fail in providing agreed-upon and legally required payments to victims. Certainly, Mallinckrodt’s opiate drugs are potentially beneficial when administered properly to patients, but their continued malpractice should not be incentivized by accommodating to their self-induced financial instability.
It is also not out of the question to liquidate Mallinckrodt—they have many competitors in the industry who are able to make payments on time. Comparatively, Johnson & Johnson, who has also reached settlements in opiate-related lawsuits, successfully paid $230 million to the state of New York in 2022 and continues to make payments on their nine-year settlement deal, where they will provide “up to $5 billion.” Although opiate drugs currently have a role in America’s health system that make Mallinckrodt’s operations beneficial to the medical industry, Johnson & Johnson is one of many companies charged for mislabeling opiates that are meeting their legal settlements, while also continuing to supply the market as Mallinckrodt does. Thus, Mallinckrodt’s survival is not vital and does not justify a lack of accountability.
Within the Preamble of the Constitution, it states that the U.S. and its governmental institutions must “promote the general Welfare.” The government, including the legal system, is required to support the general health and wellness of its citizens from exploitation of companies trying to sell mislabeled opiates proving deleterious to the overall health of citizens. Victims affected by the lies and manipulation of Mallinckrodt regarding their product marketing deserve to be compensated with a fair value and in a timely manner. Directing a fair value to those receiving damages will begin to provide American citizens with the justice they are entitled in receiving instead of pushing a system helping companies benefit in a maliciously dishonest manner.
