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Mallinckrodt braces for legal settlements amid pursuit of new medicines

Mallinckrodt PLC, the 150-year-old drug company whose stock has fallen more than 90% in the last year, is bracing for the worst as it faces two legal threats involving its products.

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The company is among those named in lawsuits for allegedly playing a role in fueling the U.S. opioid crisis, which kills about 200 Americans each day. With opioids comprising just 10% of what Mallinckrodt does — hydrocodone and oxycodone generated $19.6 million and $22.8 million in revenues last year, respectively — the company's management insists the drugmaker did not have much to do with the opioid epidemic. Still, the opioid lawsuits raise Mallinckrodt's risk profile as the magnitude of a potential payout remains a wildcard, SVB Leerink said in a September note.

So far, Mallinckrodt has agreed to pay $30 million to two Ohio counties to settle opioid lawsuits, which, according to Stifel, buys it time to address similar litigation in New York state or consider a global settlement. The amount is a fraction of the $572 million an Oklahoma court ordered Johnson & Johnson to pay for its marketing practices related to opioids, and it is also lower than what Purdue Pharma LP and Teva Pharmaceutical Industries Ltd. agreed to pay to settle their respective suits with the state.

Purdue Pharma has also filed for bankruptcy protection and is working to reach a global settlement worth up to $12 billion with 24 state attorneys general.

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The other litigation Mallinckrodt faces is focused on Acthar Gel, a blockbuster medicine primarily used to treat infantile spasms, multiple sclerosis and certain other conditions. Mallinckrodt acquired the gel through its purchase of Questcor Pharmaceuticals Inc. in August 2014, and last year Acthar brought in $1.11 billion in sales.

But Mallinckrodt also inherited litigation with the Questcor deal, which alleges the company bribed doctors to prescribe the gel and defrauded the U.S. Medicare program by illegally marketing the product.

Mallinckrodt has already agreed to pay $15.4 million to settle a U.S. Department of Justice probe related to Acthar Gel but may still have to shell out up to $600 million if it loses another lawsuit from the U.S. Department of Health and Human Services and the Centers for Medicare and Medicaid Services over the product's rebate and pricing, according to SVB Leerink.

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Lawsuits are not the only thing ailing Mallinckrodt; its drug pipeline has also been facing challenges in the past year. S&P Global Ratings said in a July report that the company's business is less stable and predictable considering potential competition to four of its products: Acthar Gel, INOmax, Ofirmev and Amitiza.

At the time it announced its second-quarter results, Mallinckrodt said it did not expect Acthar Gel's net sales to exceed $1 billion in 2019 due to "current significant market uncertainties." The drug was no longer being studied as a treatment for amyotrophic lateral sclerosis because patients receiving the therapy experienced adverse events.

Another of Mallinckrodt's medicines, CPP-1X, also failed to benefit colon cancer patients in a late-stage trial.

But Mallinckrodt notched a win earlier this year when its medicine terlipressin helped improve kidney function in certain patients with a rare liver disease called hepatorenal syndrome type-1. More recently, the company reported positive clinical trial results for its burn therapy StrataGraft.

SVB Leerink said in a Sept. 23 note that pipeline wins increase confidence in Mallinckrodt's management to bring products closer to revenue generation. Mallinckrodt believes revenues from terlipressin and StrataGraft could help offset the loss-of-exclusivity impact from pain drug Ofirmev, though gains would only be realized in the medium to long term. For now, investor focus will stay dominated on near-term developments, SVB Leerink said.

Meanwhile, Mallinckrodt suspended plans in August to spin off its specialty generics and active pharmaceuticals ingredients business and followed it up with an announcement that it was selling its unit BioVectra Inc. — a contract development and manufacturing organization — to private equity firm H.I.G. Capital LLC for up to $250 million.

Stifel said in a Sept. 10 analyst note that the divestiture was a positive step to manage and bolster cash and maintain capital allocation priorities as the Acthar Gel lawsuit decision, opioid trials and a $700 million debt due in April 2020 loom. However, S&P Global Ratings further pushed Mallinckrodt's credit ratings into junk territory following the news: from B+ to CCC.

The rating agency said it does not view the BioVectra sale as material to credit metrics given the quantum of debt and potential litigation liabilities, noting there was a heightened risk of distressed debt exchange over the next year. In an earlier note, S&P Global Ratings said companies like Mallinckrodt and Endo have a limited capacity at the ratings level for large fines or settlements.

Endo International PLC — which also finalized a $10 million settlement with two Ohio counties — is another opioid-maker that has lost most of its stock value this past year. Both Endo and Mallinckrodt now have a market cap below $1 billion, according to data from S&P Global Market Intelligence.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.