NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, dollars in millions, except share data, per share data and where indicated)
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1.
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Background and Basis of Presentation
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Background
Mallinckrodt plc is a global business of multiple wholly owned subsidiaries (collectively, "Mallinckrodt" or "the Company") that develop, manufacture, market and distribute specialty pharmaceutical products and therapies. Areas of focus include autoimmune and rare diseases in specialty areas like neurology, rheumatology, nephrology, pulmonology and ophthalmology; immunotherapy and neonatal respiratory critical care therapies; analgesics and gastrointestinal products.
The Company operates in two reportable segments, which are further described below:
•Specialty Brands includes innovative specialty pharmaceutical brands; and
•Specialty Generics includes niche specialty generic drugs and active pharmaceutical ingredients ("API(s)").
The Company owns or has rights to use the trademarks and trade names that are used in conjunction with the operation of its business. One of the more important trademarks that the Company owns or has rights to use that appears in this Quarterly Report on Form 10-Q is "Mallinckrodt," which is a registered trademark or the subject of pending trademark applications in the United States ("U.S.") and other jurisdictions. Solely for convenience, the Company only uses the ™ or ® symbols the first time any trademark or trade name is mentioned in the following notes. Such references are not intended to indicate in any way that the Company will not assert, to the fullest extent permitted under applicable law, its rights to its trademarks and trade names. Each trademark or trade name of any other company appearing in the following notes is, to the Company's knowledge, owned by such other company.
Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared in U.S. dollars and in accordance with accounting principles generally accepted in the U.S. ("GAAP"). The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results may differ from those estimates. The unaudited condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and entities in which they own or control more than 50.0% of the voting shares, or have the ability to control through similar rights. All intercompany balances and transactions have been eliminated in consolidation and all normal recurring adjustments necessary for a fair presentation have been included in the results reported.
The results of entities disposed of are included in the unaudited condensed consolidated financial statements up to the date of disposal, and where appropriate, these operations have been reported in discontinued operations. Divestitures of product lines and businesses not meeting the criteria for discontinued operations have been reflected in operating income (loss).
The fiscal year end balance sheet data was derived from audited consolidated financial statements, but do not include all of the annual disclosures required by GAAP; accordingly these unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited annual consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended December 27, 2019 filed with the U.S. Securities and Exchange Commission ("SEC") on February 26, 2020.
Going Concern
The accompanying unaudited condensed consolidated financial statements are prepared in accordance with GAAP applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
On October 12, 2020, Mallinckrodt plc and certain of its subsidiaries voluntarily initiated proceedings (the "Chapter 11 Cases") under chapter 11 of title 11 ("Chapter 11") of the United States Code (the "Bankruptcy Code"), to modify its capital structure, including restructuring portions of its debt, and resolve potential legal liabilities, including but not limited to those described in Note 11 as Opioid-Related Matters and Acthar Gel-Related Matters. In connection with the filing of the Chapter 11 Cases, the Company entered into a Restructuring Support Agreement (as defined in Note 14) as part of a prearranged plan of reorganization. See Note 14 for further information on the voluntary petitions for reorganization and the Restructuring Support Agreement.
Substantial doubt about the Company's ability to continue as a going concern exists in light of its Chapter 11 Cases. The Company's ability to continue as a going concern is contingent upon, among other things, its ability to, subject to the approval by the U.S. Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"), implement a plan of reorganization, emerge from the
Chapter 11 proceedings and generate sufficient liquidity following the reorganization to meet its obligations, most notably its opioid and Acthar Gel®-related claims and outstanding debt, and operating needs.
Although management believes that the reorganization of the Company through the Chapter 11 proceedings will appropriately position the Company upon emergence, the commencement of these proceedings constituted an event of default under certain of the Company’s debt agreements, enforcement of any remedies in respect of which is automatically stayed as a result of the Chapter 11 proceedings. There are a number of risks and uncertainties associated with the Company’s bankruptcy, including, among others that: (a) the Company’s prearranged plan of reorganization may never be confirmed or become effective, (b) the Restructuring Support Agreement may be terminated by one or more of the parties thereto, (c) the Bankruptcy Court may grant or deny motions in a manner that is adverse to the Company and its subsidiaries, and (d) the Chapter 11 Cases may be converted into cases under chapter 7 of the Bankruptcy Code.
The transactions contemplated by the Restructuring Support Agreement are subject to approval by the Bankruptcy Court, among other conditions. Accordingly, no assurance can be given that the transactions described therein will be consummated. As a result, the Company has concluded that management’s plans at this stage do not alleviate substantial doubt about the Company’s ability to continue as a going concern.
The unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts and classification of liabilities that might result from the outcome of this uncertainty.
Fiscal Year
The Company reports its results based on a "52-53 week" year ending on the last Friday of December. Unless otherwise indicated, the three and nine months ended September 25, 2020 refers to the thirteen and twenty-six week periods ended September 25, 2020 and the three and nine months ended September 27, 2019 refers to the thirteen and twenty-six week periods ended September 27, 2019.
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2.
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Revenue from Contracts with Customers
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Product Sales Revenue
See Note 13 for presentation of the Company's net sales by product family.
Reserves for variable consideration
The following table reflects activity in the Company's sales reserve accounts:
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Rebates and Chargebacks
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Product Returns
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Other Sales Deductions
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Total
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Balance as of December 28, 2018
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$
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354.3
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$
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34.0
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$
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17.1
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$
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405.4
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Provisions
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1,772.9
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18.8
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50.7
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1,842.4
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Payments or credits
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(1,844.4)
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(22.9)
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(41.2)
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(1,908.5)
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Balance as of September 27, 2019
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$
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282.8
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$
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29.9
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$
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26.6
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$
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339.3
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Balance as of December 27, 2019
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$
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295.8
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$
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28.4
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$
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13.2
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$
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337.4
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Provisions
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1,453.7
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22.3
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44.3
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1,520.3
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Provision for Medicaid lawsuit (Note 11) (1)
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535.1
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—
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—
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535.1
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Payments or credits
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(1,461.3)
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(24.3)
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(45.8)
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(1,531.4)
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Balance as of September 25, 2020 (1)
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$
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823.3
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$
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26.4
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$
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11.7
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$
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861.4
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(1)Excludes the $105.1 million that is reflected as a component of operating expenses as it represents a pre-acquisition contingency related to the portion of the liability that arose from sales of Acthar Gel prior to the Company’s acquisition of Questcor Pharmaceuticals Inc. ("Questcor") in August 2014. See Note 11 for further detail on the status of the Medicaid lawsuit.
Product sales transferred to customers at a point in time and over time were as follows:
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Three Months Ended
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Nine Months Ended
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September 25,
2020
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September 27,
2019
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September 25,
2020
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September 27,
2019
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Product sales transferred at a point in time
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79.5
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%
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81.4
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%
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78.5
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%
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81.7
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%
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Product sales transferred over time
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20.5
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18.6
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21.5
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18.3
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Transaction price allocated to the remaining performance obligations
The following table includes estimated revenue from contracts extending greater than one year for certain of the Company's hospital products that are expected to be recognized in the future related to performance obligations that were unsatisfied or partially unsatisfied as of September 25, 2020:
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Remainder of Fiscal 2020
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$
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49.3
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Fiscal 2021
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106.0
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Fiscal 2022
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41.0
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Fiscal 2023
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9.9
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Thereafter
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0.3
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Costs to fulfill a contract
As of September 25, 2020 and December 27, 2019, the total net book value of the devices used in the Company's portfolio of drug-device combination products, which are used in satisfying future performance obligations, were $26.8 million and $26.5 million, respectively, and were classified in property, plant and equipment, net, on the unaudited condensed consolidated balance sheets. The associated depreciation expense recognized during the nine months ended September 25, 2020 and September 27, 2019 was $4.0 million and $5.1 million, respectively.
Product Royalty Revenues
The Company licenses certain rights to Amitiza® (lubiprostone) ("Amitiza") to a third party in exchange for royalties on net sales of the product. The Company recognizes such royalty revenue as the related sales occur. The royalty rates consist of several tiers ranging from 18.0% to 26.0% with the royalty rate resetting every year. The associated royalty revenue recognized was as follows:
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Three Months Ended
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Nine Months Ended
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September 25,
2020
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September 27,
2019
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September 25,
2020
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September 27,
2019
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Royalty revenue
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$
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20.4
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$
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19.5
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$
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52.3
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$
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56.3
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Contract Liabilities
The following table reflects the balance of the Company's contract liabilities at the end of each period:
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September 25,
2020
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December 27,
2019
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Accrued and other current liabilities
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$
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3.0
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$
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5.6
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Other liabilities
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0.4
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0.6
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Contract liabilities
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$
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3.4
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$
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6.2
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Revenue recognized during the nine months ended September 25, 2020 and September 27, 2019 from amounts included in contract liabilities at the beginning of the period was $4.7 million and $10.3 million, respectively, inclusive of the Company's wholly owned subsidiary BioVectra Inc. ("BioVectra"), prior to the completion of the sale of this business in November 2019.
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3.
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Restructuring and Related Charges
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During fiscal 2018 and 2016, the Company launched restructuring programs designed to improve its cost structure. Charges of $100.0 million to $125.0 million were provided for under each program. Each program generally commenced upon substantial completion of the previous program. In addition to the aforementioned programs, the Company has taken restructuring actions to generate synergies from its acquisitions.
Net restructuring and related charges by segment were as follows:
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Three Months Ended
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Nine Months Ended
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September 25,
2020
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September 27,
2019
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September 25,
2020
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September 27,
2019
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Specialty Brands
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$
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—
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$
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—
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$
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0.1
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$
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0.4
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Specialty Generics
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—
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6.7
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0.1
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9.3
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Corporate
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3.2
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0.5
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15.6
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1.5
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Restructuring charges, net
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$
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3.2
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$
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7.2
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$
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15.8
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$
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11.2
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Net restructuring and related charges by program were comprised of the following:
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Three Months Ended
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Nine Months Ended
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September 25,
2020
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September 27,
2019
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September 25,
2020
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September 27,
2019
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2018 Program
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$
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3.2
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$
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6.7
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$
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17.8
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$
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9.3
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2016 Program
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—
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0.5
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(0.1)
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2.7
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Acquisition Programs
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—
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—
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(1.9)
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(0.8)
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Total charges expected to be settled in cash
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$
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3.2
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$
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7.2
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$
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15.8
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$
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11.2
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The following table summarizes cash activity for restructuring reserves, substantially all of which related to contract termination costs, employee severance and benefits and exiting of certain facilities:
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2018 Program
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2016 Program
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Acquisition Programs
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Total
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Balance as of December 27, 2019
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$
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2.7
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$
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31.3
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$
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0.2
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$
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34.2
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Charges
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18.1
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0.1
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—
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18.2
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Changes in estimate
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(0.3)
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(0.2)
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(1.9)
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(2.4)
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Cash payments
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(19.3)
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(30.7)
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(0.2)
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(50.2)
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Currency translation and other
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—
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—
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1.9
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1.9
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Balance as of September 25, 2020
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$
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1.2
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$
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0.5
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$
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—
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$
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1.7
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As of September 25, 2020, net restructuring and related charges incurred cumulative to date were as follows:
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2018 Program
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2016 Program
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Specialty Brands
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$
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3.0
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$
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68.1
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Specialty Generics
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10.1
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14.6
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Corporate
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19.7
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28.8
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$
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32.8
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$
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111.5
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All of the restructuring reserves were included in accrued and other current liabilities on the Company's unaudited condensed consolidated balance sheets. Amounts paid in the future may differ from the amount currently recorded.
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security ("CARES") Act. The CARES Act was a response to the market volatility and instability resulting from the novel coronavirus ("COVID-19") pandemic. It includes provisions to support individuals and businesses in the form of loans, grants, and tax changes among other types of relief. Estimates of the effects of the changes to the U.S. tax code have been incorporated into the Company’s nine months ended September 25, 2020 provision for income taxes, as applicable.
The CARES Act income tax provisions applicable to the Company include, but are not limited to (1) carrybacks of certain net operating losses ("NOL(s)") generated in tax years beginning after December 31, 2017 and before January 1, 2021 to the preceding five taxable years, (2) suspension of the 80.0% taxable income limitation for NOLs generated in tax years beginning after December 31, 2017 and before January 1, 2021, (3) increase in the limitation of the interest expense deduction under Internal Revenue Code ("IRC") §163(j) from 30.0% to 50.0% of adjusted taxable income for any taxable year beginning in 2019 or 2020, (4) expansion of the charitable contribution deduction limit to 25.0% of taxable income versus the previous 10.0% limitation for contributions made during
2020, and (5) acceleration of alternative minimum tax credits being refunded incrementally in tax years 2018, 2019, 2020 and 2021 to recover the entire remaining balance in either the 2018 or 2019 tax year.
As a result of the CARES Act, the Company is able to carryback a portion of its prior year and estimated current year U.S. Federal NOLs resulting in anticipated cash tax refunds of $201.0 million and $117.4 million, respectively. A tax benefit of $285.3 million has been recognized during the nine months ended September 25, 2020. The carryback of the U.S. Federal NOLs has an ancillary effect on the Company’s unrecognized tax benefits, as disclosed below.
As further discussed in Note 1, the Company concluded that there is substantial doubt about its ability to continue as a going concern within one year from the date of issuance of the unaudited condensed consolidated financial statements. The Company considered this in determining that certain net deferred tax assets were no longer more likely than not realizable. As a result, an increase in valuation allowance of $341.6 million on the Company’s net deferred tax assets was recorded for the three months ended June 26, 2020. Approximately $202.7 million of this increase was a valuation allowance placed on prior year deferred tax assets predominantly related to U.S. Federal NOLs and the Opioid-Related Litigation Settlement charge (as defined in Note 11). The remaining $138.9 million increase was placed on the Company's net deferred tax assets resulting from current year activity predominantly related to the Acthar Gel Medicaid Retrospective Rebate (as defined in Note 11) accrual. As a result, all of the Company's net deferred tax assets as of the nine months ended September 25, 2020 are fully offset by a valuation allowance.
The Company recognized an income tax benefit of $211.6 million on a loss from continuing operations before income taxes of $19.8 million for the three months ended September 25, 2020, and an income tax benefit of $27.6 million on a loss from continuing operations before income taxes of $28.5 million for the three months ended September 27, 2019. This resulted in effective tax rates of 1,068.7% and 96.8% for the three months ended September 25, 2020 and September 27, 2019, respectively. The income tax benefit for the three months ended September 25, 2020 was comprised of $201.4 million of current tax benefit and $10.2 million of deferred tax benefit. The current tax benefit was primarily the result of the CARES Act and unrecognized tax benefits, partially offset by the fiscal 2020 reorganization of the Company's intercompany financing and associated legal entity ownership. The deferred tax benefit was predominantly related to the fiscal 2020 reorganization of the Company's intercompany financing and associated legal entity ownership. The income tax benefit for the three months ended September 27, 2019 was comprised of $3.3 million of current tax expense and $30.9 million of deferred tax benefit. The deferred tax benefit was predominantly related to previously acquired intangibles and the generation of tax loss and credit carryforwards net of valuation allowances.
The Company recognized an income tax benefit of $69.2 million on a loss from continuing operations before income taxes of $884.7 million for the nine months ended September 25, 2020, and an income tax benefit of $256.6 million on a loss from continuing operations before income taxes of $102.8 million for the nine months ended September 27, 2019. This resulted in effective tax rates of 7.8% and 249.6% for the nine months ended September 25, 2020 and September 27, 2019, respectively. The income tax expense for the nine months ended September 25, 2020 was comprised of $370.3 million of current tax benefit and $301.1 million of deferred tax expense. The current tax benefit was primarily the result of the CARES Act and unrecognized tax benefits, partially offset by the fiscal 2020 reorganization of the Company's intercompany financing and associated legal entity ownership. The deferred tax expense was predominantly related to the valuation allowance noted above, recorded against the Company's net deferred tax assets, and unrecognized tax benefits, partially offset by a tax benefit predominantly related to the fiscal 2020 reorganization of the Company's intercompany financing and associated legal entity ownership. The income tax benefit for the nine months ended September 27, 2019 was comprised of $47.4 million of current tax expense and $304.0 million of deferred tax benefit. The deferred tax benefit was predominantly related to previously acquired intangibles, the generation of tax loss and credit carryforwards net of valuation allowances, the non-restructuring impairment charges, as well as the 2019 reorganization of the Company's intercompany financing and associated legal entity ownership, which eliminated the interest bearing deferred tax obligation.
The income tax benefit was $211.6 million for the three months ended September 25, 2020, compared with an income tax benefit of $27.6 million for the three months ended September 27, 2019. The $184.0 million net increase in the tax benefit included an increase of $235.7 million attributed to the CARES Act, and an increase of $1.2 million attributed to the fiscal 2019 gain on debt repurchased partially offset by a decrease of $32.0 million attributed to the fiscal 2020 reorganization of the Company's intercompany financing and associated legal entity ownership, a decrease of $12.3 million attributed to changes in the timing, amount and jurisdictional mix of income, a decrease of $6.5 million attributed to separation costs and a decrease of $2.1 million attributed to net restructuring.
The income tax benefit was $69.2 million for the nine months ended September 25, 2020, compared with an income tax benefit of $256.6 million for the nine months ended September 27, 2019. The $187.4 million net decrease in the tax benefit included a decrease of $229.1 million predominantly attributed to the fiscal 2019 reorganization of the Company's intercompany financing and associated legal entity ownership including related adjustments to elections on the fiscal 2019 U.S. tax return primarily as a result of changes to the NOL carryback provisions in the CARES Act, a decrease of $202.7 million attributed to a valuation allowance recorded against the Company's net deferred tax assets, a decrease of $30.0 million attributed to changes in the timing, amount and jurisdictional mix of income, a decrease of $9.9 million attributed to separation costs, a decrease of $8.5 million attributed to non-restructuring impairment charges, a decrease of $2.6 million attributed to net restructuring, partially offset by an increase of $285.3 million attributed to the CARES Act and an increase of $10.1 million attributed to the fiscal 2019 gain on debt repurchased.
During the nine months ended September 25, 2020, and fiscal 2019, the net cash payments for income taxes were $42.9 million and $30.7 million, respectively.
On July 15, 2020, the activities of the Company's principal executive offices were relocated from the United Kingdom ("U.K.") to Ireland, which resulted in a change in the Company's tax residence to Ireland. Mallinckrodt plc has always been and remains incorporated in Ireland. Relocation of Mallinckrodt plc’s tax residence to Ireland allows the Company to mitigate the potential impacts of the U.K.’s departure from the European Union and align with the Company's commercial activity in Ireland. The Company continues to be subject to taxation in various tax jurisdictions worldwide. Accordingly, in fiscal 2020 the Company will report the Irish tax jurisdiction as the Company's domestic jurisdiction using an Irish statutory tax rate of 12.5% versus the U.K. statutory rate of 19.0%, and the International jurisdiction will represent areas outside the Irish tax jurisdiction. There is no material financial impact to this change.
In August 2020, a settlement was reached with the Internal Revenue Service ("IRS") related to the audit of Mallinckrodt Hospital Products Inc.'s ("MHP") (formerly known as Cadence Pharmaceuticals, Inc. ("Cadence")) tax year ended September 26, 2014. Cadence was acquired as a U.S. subsidiary on March 19, 2014. Following the acquisition of Cadence, the Company transferred certain rights and risks in Ofirmev intellectual property ("Transferred IP") to one of the Company's wholly owned non-U.S. subsidiaries. The transfer occurred at a price determined in conjunction with external advisors, in accordance with applicable Treasury Regulations and with reference to the $1,329.0 million taxable consideration the Company paid to the shareholders of Cadence. The IRS asserted the transfer price of the Transferred IP was understated. The settlement increased the transfer price of the Transferred IP, resulting in an increase to taxable income of $356.5 million and underpayment interest of $11.8 million. The increase to taxable income was satisfied through a noncash offset against the Company's U.S. Federal NOLs and interest expense for the tax year ended September 25, 2020, while the underpayment interest was satisfied through a cash payment of $11.8 million. The Company was adequately reserved for this; therefore there were no impacts to the unaudited condensed consolidated statement of operations for the three months ended September 25, 2020.
During the three months ended September 25, 2020, the Company commenced the fiscal 2020 reorganization of its intercompany financing and associated legal entity ownership to align its Specialty Brands and Specialty Generics businesses in preparation for the Chapter 11 bankruptcy filing, described in Note 14. As a result, for the three months ended September 25, 2020, the Company recognized current income tax expense of $44.2 million and a deferred income tax benefit of $12.2 million with a corresponding reduction to net deferred tax liabilities. In addition, a current tax benefit of $234.7 million was recognized due to the impact of the CARES Act on the fiscal 2020 reorganization, as described above. Finally, the fiscal 2020 reorganization substantially contributed to a deferred tax asset of $312.2 million for the portion of the Company's estimated fiscal 2020 U.S. Federal NOL that is not impacted by the CARES Act, which is fully offset with a valuation allowance.
The Company's unrecognized tax benefits, excluding interest, totaled $336.9 million and $398.6 million as of September 25, 2020 and December 27, 2019, respectively. The net decrease of $61.7 million primarily resulted from settlements of $80.3 million, a lapse of statute of limitations of $35.7 million, and a net decrease of prior period tax positions of $4.3 million, offset by an increase to current period tax positions of $58.6 million. If favorably settled, $77.0 million of unrecognized tax benefits as of September 25, 2020 would benefit the effective tax rate. The total amount of accrued interest and penalties related to these obligations was $15.7 million and $32.9 million as of September 25, 2020 and December 27, 2019, respectively. Due to a lapse of the statute of limitations noted above, $18.1 million of tax and interest on unrecognized tax benefits related to the Nuclear Imaging business were eliminated, and a benefit of $17.3 million was recorded in discontinued operations within the unaudited condensed consolidated statement of operations for the nine months ended September 25, 2020.
It is reasonably possible that within the next twelve months the unrecognized tax benefits could decrease by up to $25.0 million and the amount of related interest and penalties could decrease by up to $6.0 million as a result of payments or releases due to the resolution of examinations, appeals and litigation and the expiration of various statutes of limitation.
|
|
|
|
|
|
|
|
5.
|
Earnings (Loss) per Share
|
Basic earnings (loss) per share is computed by dividing net income (loss) by the number of weighted-average shares outstanding during the period. Diluted earnings (loss) per share is computed using the weighted-average shares outstanding and, if dilutive, potential ordinary shares outstanding during the period. Potential ordinary shares represent the incremental ordinary shares issuable for restricted share units and share option exercises. The Company calculated the dilutive effect of outstanding restricted share units and share options on earnings per share by application of the treasury stock method. Dilutive securities, including participating securities, are not included in the computation of loss per share when the Company reports a net loss from continuing operations as the impact would be anti-dilutive.
The weighted-average number of shares outstanding used in the computations of basic and diluted earnings (loss) per share were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 25,
2020
|
|
September 27,
2019
|
|
September 25,
2020
|
|
September 27,
2019
|
|
Basic
|
84.6
|
|
|
84.0
|
|
|
84.4
|
|
|
83.8
|
|
|
Dilutive impact of restricted share units and share options
|
—
|
|
|
—
|
|
|
—
|
|
|
0.4
|
|
|
Diluted
|
84.6
|
|
|
84.0
|
|
|
84.4
|
|
|
84.2
|
|
The computation of diluted weighted-average shares outstanding for both the three and nine months ended September 25, 2020 excluded approximately 5.8 million shares of equity awards, and for both the three and nine months ended September 27, 2019 excluded approximately 7.1 million shares of equity awards, respectively, because the effect would have been anti-dilutive.
Inventories were comprised of the following at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25,
2020
|
|
December 27,
2019
|
|
Raw materials and supplies
|
$
|
52.6
|
|
|
$
|
62.7
|
|
|
Work in process
|
204.9
|
|
166.5
|
|
Finished goods
|
85.8
|
|
82.9
|
|
|
$
|
343.3
|
|
|
$
|
312.1
|
|
|
|
|
|
|
|
|
|
7.
|
Property, Plant and Equipment
|
The gross carrying amount and accumulated depreciation of property, plant and equipment were comprised of the following at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25,
2020
|
|
December 27, 2019
|
|
Property, plant and equipment, gross
|
$
|
1,901.2
|
|
|
$
|
1,900.1
|
|
|
Less: accumulated depreciation
|
(1,049.8)
|
|
|
(1,003.6)
|
|
|
Property, plant and equipment, net
|
$
|
851.4
|
|
|
$
|
896.5
|
|
Depreciation expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 25,
2020
|
|
September 27,
2019
|
|
September 25,
2020
|
|
September 27,
2019
|
|
Depreciation expense
|
$
|
25.5
|
|
|
$
|
24.5
|
|
|
$
|
75.7
|
|
|
$
|
73.7
|
|
The gross carrying amount and accumulated amortization of intangible assets were comprised of the following at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25, 2020
|
|
December 27, 2019
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Amortizable:
|
|
|
|
|
|
|
|
|
Completed technology
|
$
|
10,394.6
|
|
|
$
|
4,417.0
|
|
|
$
|
10,456.9
|
|
|
$
|
3,822.8
|
|
|
License agreements
|
120.1
|
|
77.1
|
|
|
120.1
|
|
74.1
|
|
Trademarks
|
77.7
|
|
22.7
|
|
|
77.7
|
|
20.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
10,592.4
|
|
|
$
|
4,516.8
|
|
|
$
|
10,654.7
|
|
|
$
|
3,917.0
|
|
|
Non-Amortizable:
|
|
|
|
|
|
|
|
|
Trademarks
|
$
|
35.0
|
|
|
|
|
$
|
35.0
|
|
|
|
|
In-process research and development
|
245.3
|
|
|
|
|
245.3
|
|
|
|
|
Total
|
$
|
280.3
|
|
|
|
|
$
|
280.3
|
|
|
|
Ofirmev®
During the three months ended June 26, 2020, due to decreased demand as a result of the deprioritization of non-critical medical treatment in the face of the COVID-19 pandemic, along with increased generic competition anticipated in the marketplace post the product's loss of exclusivity in December 2020, the Company identified a triggering event with respect to the Ofirmev intangible asset within the Specialty Brands segment and assessed the recoverability of the definite-lived asset. Additionally, the Company evaluated whether these events warranted a revision to the remaining period of amortization that previously extended to March 2022. As a result of this analysis, the Company revised the useful life to end December 25, 2020, commensurate with the final period of market exclusivity. After this change in estimate of the asset's useful life, the Company determined that the undiscounted cash flows related to the Ofirmev intangible asset were less than its net book value, which required the Company to record an impairment charge for the difference between the fair value of the Ofirmev intangible asset and its net book value.
The Company determined the fair value of the Ofirmev intangible asset using the income approach, a level three measurement technique. For purposes of determining fair value, the Company made various assumptions regarding estimated future cash flows, the discount rate and other factors in determining the fair value of the intangible asset. The Company's projections in relation to the Ofirmev intangible asset included long-term net sales and operating income at lower than historical levels. These changes in assumptions resulted in a fair value of the Ofirmev intangible asset that was less than its net book value. Therefore, the Company recorded an impairment charge of $63.5 million during the three months ended June 26, 2020. The remaining intangible asset value of $26.1 million as of September 25, 2020 will be amortized prospectively over the remaining useful life.
Terlipressin
During September 2020, the U.S. Food and Drug Administration ("FDA") issued a Complete Response Letter ("CRL") regarding the Company's New Drug Application ("NDA") seeking approval for the investigational agent terlipressin to treat adults with hepatorenal syndrome type 1 ("HRS-1"). The CRL stated that, based on the available data, the agency cannot approve the terlipressin NDA in its current form and requires more information to support a positive risk-benefit profile for terlipressin for patients with HRS-1.
In response to receipt of the CRL, on October 26, 2020, the Company had an End of Review Meeting with the FDA where both parties engaged in constructive dialogue in an effort to clarify a viable path to approval. As the Company continues to engage with the FDA over the coming months, it will continue to assess the impact of any changes to planned revenue or earnings on the fair value of the associated in-process research and development asset of $81.0 million included within intangible assets, net on the unaudited condensed consolidated balance sheets as of September 25, 2020 and December 27, 2019.
The Company annually tests the indefinite-lived intangible assets for impairment, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable by either a qualitative or income approach. Management relies on a number of qualitative factors when considering a potential impairment such as changes to planned revenue or earnings that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset.
Intangible asset amortization expense
Intangible asset amortization expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 25,
2020
|
|
September 27,
2019
|
|
September 25,
2020
|
|
September 27,
2019
|
|
Amortization expense
|
$
|
210.6
|
|
|
$
|
210.4
|
|
|
$
|
599.8
|
|
|
$
|
649.8
|
|
The estimated aggregate amortization expense on intangible assets owned by the Company is expected to be as follows:
|
|
|
|
|
|
|
|
Remainder of Fiscal 2020
|
$
|
171.4
|
|
Fiscal 2021
|
581.1
|
|
Fiscal 2022
|
581.1
|
|
Fiscal 2023
|
581.1
|
|
Fiscal 2024
|
581.1
|
Debt was comprised of the following at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25, 2020
|
|
December 27, 2019
|
|
|
Principal
|
|
Unamortized Discount and Debt Issuance Costs
|
|
Principal
|
|
Unamortized Discount and Debt Issuance Costs
|
|
Current maturities of long-term debt (1):
|
|
|
|
|
|
|
|
|
4.875% senior notes due April 2020
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
614.8
|
|
|
$
|
0.6
|
|
|
9.50% debentures due May 2022
|
10.4
|
|
|
—
|
|
—
|
|
—
|
|
5.75% senior notes due August 2022
|
610.3
|
|
|
2.5
|
|
—
|
|
—
|
|
8.00% debentures due March 2023
|
4.4
|
|
|
—
|
|
—
|
|
—
|
|
4.75% senior notes due April 2023
|
133.7
|
|
|
0.6
|
|
—
|
|
—
|
|
5.625% senior notes due October 2023
|
514.7
|
|
|
3.6
|
|
—
|
|
—
|
|
Term loan due September 2024
|
1,509.1
|
|
|
13.1
|
|
|
15.6
|
|
|
0.2
|
|
|
Term loan due February 2025
|
400.5
|
|
|
5.3
|
|
|
4.1
|
|
|
0.1
|
|
|
5.50% senior notes due April 2025
|
387.2
|
|
|
3.1
|
|
—
|
|
—
|
|
10.00% first lien senior notes due April 2025
|
495.0
|
|
|
8.2
|
|
—
|
|
—
|
|
10.00% second lien senior notes due April 2025
|
322.9
|
|
|
8.5
|
|
—
|
|
—
|
|
Revolving credit facility
|
900.0
|
|
|
2.0
|
|
—
|
|
—
|
|
Total current debt
|
5,288.2
|
|
|
46.9
|
|
|
634.5
|
|
|
0.9
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
9.50% debentures due May 2022
|
—
|
|
—
|
|
10.4
|
|
|
—
|
|
|
5.75% senior notes due August 2022
|
—
|
|
—
|
|
610.3
|
|
|
3.7
|
|
|
8.00% debentures due March 2023
|
—
|
|
—
|
|
4.4
|
|
|
—
|
|
|
4.75% senior notes due April 2023
|
—
|
|
—
|
|
133.7
|
|
|
0.8
|
|
|
5.625% senior notes due October 2023
|
—
|
|
—
|
|
514.7
|
|
|
4.4
|
|
|
Term loan due September 2024
|
—
|
|
|
—
|
|
1,505.2
|
|
|
15.5
|
|
|
Term loan due February 2025
|
—
|
|
|
—
|
|
399.5
|
|
|
6.1
|
|
|
5.50% senior notes due April 2025
|
—
|
|
|
—
|
|
387.2
|
|
|
3.6
|
|
|
10.00% first lien senior notes due April 2025
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
|
10.00% second lien senior notes due April 2025
|
—
|
|
|
—
|
|
322.9
|
|
|
9.9
|
|
|
Revolving credit facility
|
—
|
|
|
—
|
|
900.0
|
|
|
3.1
|
|
|
Total long-term debt
|
—
|
|
|
—
|
|
|
4,788.3
|
|
|
47.1
|
|
|
Total debt
|
$
|
5,288.2
|
|
|
$
|
46.9
|
|
|
$
|
5,422.8
|
|
|
$
|
48.0
|
|
(1)As of September 25, 2020, the Company was in full compliance with the provisions and covenants associated with its debt agreements. The commencement of the Chapter 11 Cases on October 12, 2020 constituted an event of default under certain of the Company's debt agreements. Accordingly, all long-term debt was classified as current on the unaudited condensed consolidated balance sheet as of September 25, 2020. However, any efforts to enforce payment obligations under the debt instruments are automatically stayed as a result of the Chapter 11 Cases. See Note 14 for further information. The Company's debt instruments are further described within the notes to the financial statements included within the Company's Annual Report filed on Form 10-K for the fiscal year ended December 27, 2019.
As of September 25, 2020, the applicable interest rate and outstanding borrowings on the Company's variable-rate debt instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applicable interest rate
|
|
Outstanding borrowings
|
|
Term loan due September 2024
|
3.50
|
%
|
|
$
|
1,509.1
|
|
|
Term loan due February 2025
|
3.75
|
|
|
400.5
|
|
|
|
|
|
|
|
Revolving credit facility
|
2.52
|
|
|
900.0
|
|
As of September 25, 2020, the Company was fully drawn on its $900.0 million revolving credit facility.
On April 7, 2020, the Company, Mallinckrodt International Finance S.A. and Mallinckrodt CB LLC ("the Issuers") entered into an exchange agreement (the "Exchange Agreement") with certain third parties (collectively, the "Exchanging Holders"). Pursuant to the Exchange Agreement, the Exchanging Holders agreed to exchange with the Issuers, on April 7, 2020, their holdings of 4.875% senior unsecured notes that had a maturity date of April 15, 2020 ("2020 Notes") issued by the Issuers (the "Existing Notes")
(consisting of approximately $495.0 million aggregate principal amount of the Existing Notes) for new 10.00% First Lien Senior Secured Notes due 2025 issued by the Issuers (the "First Lien 2025 Notes"), at a rate of $1,000 of First Lien 2025 Notes for every $1,000 of Existing Notes exchanged (such exchange, the "Exchange"). The Issuers and Exchanging Holders consummated the Exchange on April 7, 2020.
Interest on the First Lien 2025 Notes is payable semi-annually in cash on April 15th and October 15th of each year, commencing on October 15, 2020.
The Issuers may redeem some or all of the First Lien 2025 Notes prior to April 15, 2022 by paying a "make-whole" premium. The Issuers may redeem some or all of the First Lien 2025 Notes on or after April 15, 2022 at specified redemption prices. In addition, prior to April 15, 2022, the Issuers may redeem up to 40% of the aggregate principal amount of the First Lien 2025 Notes with the net proceeds of certain equity offerings. The Issuers may also redeem all, but not less than all, of the First Lien 2025 Notes at any time at a price of 100% of their principal amount, plus accrued and unpaid interest, if any, in the event the Issuers become obligated to pay additional amounts as a result of changes affecting certain withholding tax laws applicable to payments on the First Lien 2025 Notes.
The Issuers are obligated to offer to repurchase (a) all of the First Lien 2025 Notes at a price of 101% of their principal amount plus accrued and unpaid interest, if any, as a result of certain change of control events and (b) First Lien 2025 Notes using asset sale proceeds at a price of 100% of their principal amount plus accrued and unpaid interest, if any, in the event of certain asset sales. These obligations are subject to certain qualifications and exceptions.
The First Lien 2025 Notes are subject to an indenture that contains certain customary covenants and events of default (subject in certain cases to customary grace and cure periods). The occurrence of an event of default under the indenture could result in the acceleration of the First Lien 2025 Notes and could cause a cross-default that could result in the acceleration of other indebtedness of the Company and its subsidiaries.
The First Lien 2025 Notes are jointly and severally guaranteed, subject to certain exceptions, on a secured, unsubordinated basis by the Company and each of its subsidiaries (other than the Issuers) (the "Note Guarantors") that guarantees the obligations under the Issuers’ existing senior secured credit facilities.
The First Lien 2025 Notes and the guarantees thereof are secured by liens on the same assets of the Issuers and the Note Guarantors that are subject to liens securing the existing senior secured credit facilities, subject to certain exceptions.
On April 15, 2020, the Company paid in full the remaining approximately $119.8 million in principal amount of outstanding 2020 Notes at the maturity thereof with cash on hand.
In disposing of assets or businesses, the Company has from time to time provided representations, warranties and indemnities to cover various risks and liabilities, including unknown damage to assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities related to periods prior to disposition. The Company assesses the probability of potential liabilities related to such representations, warranties and indemnities and adjusts potential liabilities as a result of changes in facts and circumstances. The Company believes, given the information currently available, that the ultimate resolutions will not have a material adverse effect on its financial condition, results of operations and cash flows.
In connection with the sale of the Specialty Chemical business (formerly known as Mallinckrodt Baker) in fiscal 2010, the Company agreed to indemnify the purchaser with respect to various matters, including certain environmental, health, safety, tax and other matters. The indemnification obligations relating to certain environmental, health and safety matters have a term of 17 years from the sale, while some of the other indemnification obligations have an indefinite term. The amount of the liability relating to all of these indemnification obligations included in other liabilities on the Company's unaudited condensed consolidated balance sheets as of September 25, 2020 and December 27, 2019 was $15.5 million and $15.0 million, respectively, of which $12.8 million and $12.3 million, respectively, related to environmental, health and safety matters. The value of the environmental, health and safety indemnity was measured based on the probability-weighted present value of the costs expected to be incurred to address environmental, health and safety claims made under the indemnity. The aggregate fair value of these indemnification obligations did not differ significantly from their aggregate carrying value as of September 25, 2020 and December 27, 2019. As of September 25, 2020, the maximum future payments the Company could be required to make under these indemnification obligations were $70.2 million. The Company was required to pay $30.0 million into an escrow account as collateral to the purchaser, of which $19.0 million and $18.9 million remained in restricted cash, included in other long-term assets on the unaudited condensed consolidated balance sheets as of September 25, 2020 and December 27, 2019, respectively.
The Company has recorded liabilities for known indemnification obligations included as part of environmental liabilities, which are discussed in Note 11.
The Company is also liable for product performance; however, the Company believes, given the information currently available, that the ultimate resolution of any such claims will not have a material adverse effect on its financial condition, results of operations and cash flows.
As of September 25, 2020, the Company had various other letters of credit, guarantees and surety bonds totaling $31.2 million and restricted cash of $37.3 million held in segregated accounts primarily to collateralize surety bonds for the Company's environmental liabilities.
|
|
|
|
|
|
|
|
11.
|
Commitments and Contingencies
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The Company is subject to various legal proceedings and claims, including patent infringement claims, product liability matters, personal injury, environmental matters, employment disputes, contractual disputes and other commercial disputes, including those described below. Although it is not feasible to predict the outcome of these matters, the Company believes, unless otherwise indicated below, given the information currently available, that their ultimate resolution will not have a material adverse effect on its financial condition, results of operations and cash flows.
Subsequent to September 25, 2020, the Company announced that Mallinckrodt plc and certain of its subsidiaries voluntarily initiated the Chapter 11 Cases under the Bankruptcy Code in the Bankruptcy Court. As a result of initiating the Chapter 11 Cases, all litigations and proceedings against the Company have been automatically stayed, subject to certain limited exceptions. In addition, the Company has requested an order from the Bankruptcy Court enjoining all litigations against the Company and various individuals named in certain of the litigations described below that might otherwise be subject to such an exception. For further information about the Chapter 11 cases, refer to Note 14.
Governmental Proceedings
Opioid-Related Matters
Since 2017, multiple U.S. states, counties, a territory, other governmental persons or entities and private plaintiffs have filed lawsuits against certain entities of the Company, as well as various other manufacturers, distributors, pharmacies, pharmacy benefit managers, individual doctors and/or others, asserting claims relating to defendants' alleged sales, marketing, distribution, reimbursement, prescribing, dispensing and/or other practices with respect to prescription opioid medications, including certain of the Company's products. As of November 3, 2020, the cases the Company is aware of include, but are not limited to, approximately 2,618 cases filed by counties, cities, Native American tribes and/or other government-related persons or entities; approximately 270 cases filed by hospitals, health systems, unions, health and welfare funds or other third-party payers; approximately 128 cases filed by individuals; approximately six cases filed by schools and school boards; and 17 cases filed by the Attorneys General for New Mexico, Kentucky, Rhode Island, Georgia, Florida, Alaska, New York, Nevada, South Dakota, New Hampshire, Louisiana, Illinois, Mississippi, West Virginia, Puerto Rico, Ohio, and Idaho, with Idaho being the only state Attorney General to file in federal as opposed to state court. As of November 3, 2020, the Mallinckrodt defendants in these cases consist of Mallinckrodt plc and the following subsidiaries of Mallinckrodt plc: Mallinckrodt Enterprises LLC, Mallinckrodt LLC, SpecGx LLC, Mallinckrodt Brand Pharmaceuticals Inc., Mallinckrodt Inc., MNK 2011 Inc., and Mallinckrodt Enterprises Holdings, Inc. On November 22, 2019, the Delaware Attorney General filed a motion in the Superior Court of the State of Delaware to amend its complaint to add certain entities of the Company, which the court granted on December 18, 2019. The Delaware Attorney General has not yet filed its amended complaint. The Hawaii Attorney General filed a complaint against the Company on June 3, 2019. On December 27, 2019, the First Circuit Court entered a written order dismissing the Hawaii Attorney General's claims against all defendants without prejudice, finding that the allegations in the State's complaint failed to give notice of the claims against the defendants. Certain of the lawsuits have been filed as putative class actions. On October 8, 2020, the State of Rhode Island filed a lawsuit against the Company's President and Chief Executive Officer, Mark C. Trudeau, asserting similar claims relating to the marketing and distribution of prescription opioid medications.
Most pending federal lawsuits have been coordinated in a federal multi-district litigation ("MDL") pending in the U.S. District Court for the Northern District of Ohio. The MDL court has issued a series of case management orders permitting motion practice addressing threshold legal issues in certain cases, allowing discovery, setting pre-trial deadlines and setting a trial date on October 21, 2019 for two cases originally filed in the Northern District of Ohio by Summit County and Cuyahoga County against opioid manufacturers, distributors, and pharmacies ("Track 1 Cases"). The counties claimed that opioid manufacturers' marketing activities changed the medical standard of care for treating both chronic and acute pain, which led to increases in the sales of their prescription opioid products. They also alleged that opioid manufacturers' and distributors' failure to maintain effective controls against diversion was a substantial cause of the opioid crisis. On September 30, 2019, the Company announced that Mallinckrodt plc, along with its wholly owned subsidiaries Mallinckrodt LLC and SpecGx LLC, had executed a definitive settlement agreement and release with Cuyahoga and Summit Counties in Ohio. The settlement fully resolves the Track 1 cases against all named Mallinckrodt entities that were scheduled to go to trial in October 2019 in the MDL. Under the agreement, the Company paid $24.0 million in cash on October
1, 2019. In addition, the Company will provide $6.0 million in generic products, including addiction treatment products, and will also provide a $0.5 million payment in two years in recognition of the counties' time and expenses. Further, in the event of a comprehensive resolution of government-related opioid claims, the Company has agreed that the two plaintiff counties will receive the value they would have received under such a resolution, less the payments described above. All named Mallinckrodt entities were dismissed with prejudice from the lawsuit. The value of the settlement should not be extrapolated to any other opioid-related cases or claims. On October 21, 2019, the MDL court issued a Stipulated Dismissal Order dismissing the claims against the remaining manufacturers and distributors pursuant to a settlement agreement, and severing the claims against the remaining pharmacy defendants to be heard in a subsequent trial, currently scheduled for November 9, 2020. Judge Polster issued Suggestions of Remand for City and County of San Francisco, California and City of Chicago, Illinois. Both cases have been remanded, respectively, to the Northern District of California and the Northern District of Illinois. Manufacturer defendants moved to dismiss the City of San Francisco action on April 20, 2020, which the Company joined. The motion was granted in part and denied in part on September 30, 2020. On October 23, 2020, the MDL court set a trial for October 25, 2021. Additionally, all manufacturer defendants, including us, were severed from the "Track Two" MDL cases, City of Huntington and Cabell County Commission, West Virginia. Those cases have subsequently been remanded to the Southern District of West Virginia.
Other lawsuits remain pending in various state courts. In some jurisdictions, such as Arizona, California, Connecticut, Illinois, Massachusetts, New York, Pennsylvania, South Carolina, Texas, Utah and West Virginia, certain of the 247 state lawsuits have been consolidated or coordinated for pre-trial proceedings before a single court within their respective state court systems. State cases are generally at the pleading and/or discovery stage. Trials have been set in certain state cases, including in Arizona (June 1, 2021), Florida (April 4, 2022), Georgia (May 26, 2022), Maryland (December 7, 2021), Missouri (June 2022), 2021), Nevada (April 18, 2022), New Mexico (September 6, 2022), Rhode Island (January 19, 2021), and West Virginia (November 1, 2021). In Texas, the first of two bellwether trials is set to be ready for jury trial on September 27, 2021. The Company is not named as a defendant in the primary bellwether for that first trial, but is named as a defendant in the alternate bellwether for the first trial. The date and candidates for the second bellwether trial have not yet been selected. On March 26, 2020, the Supreme Court of Tennessee granted defendants’ application for permission to appeal the judgment of the Tennessee Court of Appeals in Effler et al. v. Purdue Pharma, LP et al., No. 16596, which reversed the Circuit Court for Campbell County’s grant of defendants’ motion to dismiss plaintiffs’ claims under Tennessee’s Drug Dealer Liability Act (DDLA). Oral argument in the Effler appeal was held on September 2, 2020. A successful ruling from the Tennessee Supreme Court in Effler would also require dismissal of the DDLA claim brought by the district attorney general plaintiffs in Staubus et al. v. Purdue Pharma, LP et al., No. C-41916. The Staubus trial has been continued in the Circuit Court for Sullivan County. There is no trial date set at this time.
The lawsuits assert a variety of claims, including, but not limited to, public nuisance, negligence, civil conspiracy, fraud, violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO") or similar state laws, violations of state Controlled Substances Acts or state False Claims Acts ("FCA"), product liability, consumer fraud, unfair or deceptive trade practices, false advertising, insurance fraud, unjust enrichment, negligence and negligent misrepresentation, and other common law and statutory claims arising from defendants' manufacturing, distribution, marketing and promotion of opioids and seek restitution, damages, injunctive and other relief and attorneys' fees and costs. The claims generally are based on alleged misrepresentations and/or omissions in connection with the sale and marketing of prescription opioid medications and/or an alleged failure to take adequate steps to prevent diversion.
Opioid-Related Litigation Settlement. On February 25, 2020, the Company announced that it had reached an agreement in principle with a court-appointed plaintiffs' executive committee representing the interest of thousands of plaintiffs in the MDL and supported by a broad-based group of 48 state and U.S. Territory Attorneys General on the terms of a global settlement that would resolve all opioid-related claims against the Company and its subsidiaries (the "Opioid-Related Litigation Settlement"). The Opioid-Related Litigation Settlement contemplated the filing of voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code ("Chapter 11") by certain subsidiaries of Mallinckrodt plc operating the Specialty Generics business (the "Specialty Generics Subsidiaries") and the establishment of a trust for the benefit of plaintiffs holding opioid-related claims against the Company (the "Opioid Claimant Trust"). Subject to the Settlement Closing (as defined below), the Opioid-Related Litigation Settlement also provided that the Company would make certain structured payments to the Opioid Claimant Trust. It was contemplated that, pursuant to the terms of a channeling injunction and third-party release, which would be subject to court approval, all persons or entities asserting opioid-related claims against the Company would recover solely from the Opioid Claimant Trust on account of such claims. The Opioid-Related Litigation Settlement provided for:
•the payment of $300.0 million upon Specialty Generics' emergence from the completed Chapter 11 case;
•the payment to the Opioid Claimant Trust of additional cash totaling $1,300.0 million, consisting of $200.0 million on each of the first and second anniversaries of emergence and $150.0 million on each of the third through eighth anniversaries of emergence; and
•the issuance of warrants ("Settlement Warrants") upon emergence from the contemplated Chapter 11 process to the Opioid Claimant Trust to purchase ordinary shares of the Company with an eight year term at a strike price of $3.15 per ordinary share that would represent approximately 19.99% of the Company's fully diluted outstanding shares, including
after giving effect to the exercise of the warrants, provided that such warrants could not be exercised during any calendar quarter in a quantity that would exceed 5.0% of the number of shares outstanding.
The Opioid-Related Litigation Settlement included a number of conditions to its consummation (such consummation, the "Settlement Closing") such as, among other things, bankruptcy court approval of the bankruptcy plan effectuating the Opioid-Related Litigation Settlement, the emergence of the Specialty Generics Subsidiaries from bankruptcy and other conditions.
In connection with New York State’s support of the Opioid-Related Litigation Settlement, on March 9, 2020, the State of New York and Suffolk County, together with Mallinckrodt LLC and SpecGx LLC, jointly filed a motion to sever, or remove, Mallinckrodt LLC and SpecGx LLC from the New York State opioid trial, which, as of March 10, 2020, was postponed due to COVID-19. Nassau County opposed the motion. On May 12, 2020, the Court denied the motion to sever without prejudice to renewal after a new trial date has been set. On October 28, 2020, the presiding judge said the trial may begin in January 2021.
As a result of the Opioid-Related Litigation Settlement, the Company recorded an accrual for this contingency of $1,600.0 million related to the structured cash payments and $43.4 million related to the Settlement Warrants in the consolidated balance sheet as of December 27, 2019. As of September 25, 2020, the Settlement Warrants were valued at $9.3 million. Refer to Note 12 for further information regarding the valuation of the Settlement Warrants.
In conjunction with the Company's Chapter 11 filing on October 12, 2020, the Company entered into a Restructuring Support Agreement (as defined in Note 14) which includes a proposed resolution of all opioid-related claims against the Company and its subsidiaries that supersedes the Opioid-Related Litigation Settlement. For further information on the terms of this proposed resolution, refer to Note 14.
Other Opioid-Related Matters. In addition to the lawsuits described above, certain entities of the Company have received subpoenas and civil investigative demands ("CID(s)") for information concerning the sale, marketing and/or distribution of prescription opioid medications and the Company's suspicious order monitoring programs, including from the U.S. DOJ and the Attorneys General for Missouri, New Hampshire, Kentucky, Washington, Alaska, South Carolina, Puerto Rico, New York, West Virginia, Indiana, the Divisions of Consumer Protection and Occupational and Professional Licensing of the Utah Department of Commerce, and the New York State Department of Financial Services. The Company has been contacted by the coalition of State Attorneys General investigating the role manufacturers and distributors may have had in contributing to the increased use of opioids in the U.S. On January 27, 2018, the Company received a grand jury subpoena from the U.S. Attorneys' Office ("USAO") for the Southern District of Florida for documents related to the distribution, marketing and sale of generic oxymorphone products. On April 17, 2019, the Company received a grand jury subpoena from the USAO for the Eastern District of New York ("EDNY") for documents related to the sales and marketing of controlled substances, the policies and procedures regarding controlled substances, and other related documents. On June 4, 2019, the Company received a rider from the USAO for EDNY requesting additional documents regarding the Company's anti-diversion program. The Company is responding or has responded to these subpoenas, CIDs and any informal requests for documents.
In August 2018, the Company received a letter from the leaders of the Energy and Commerce Committee in the U.S. House of Representatives requesting a range of documents relating to its marketing and distribution of opioids. The Company completed its response to this letter in December 2018. The Company received a follow-up letter in January 2020 and provided the committee a response. The Company is cooperating with the investigation.
The Attorneys General for Kentucky, Alaska, New York, New Hampshire, West Virginia and Puerto Rico have subsequently filed lawsuits against the Company. Similar subpoenas and investigations may be brought by others or the foregoing matters may be expanded or result in litigation. The Company intends to vigorously defend itself in these matters. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with these investigations and/or lawsuits.
On April 21, 2020, New York Governor Andrew Cuomo announced that the New York State Department of Financial Services had filed a Statement of Charges against Mallinckrodt, including allegations that it misrepresented the safety and efficacy of its branded and unbranded opioid products and downplayed the risks of negative outcomes to patients, resulting in claims for payment of medically unnecessary opioid prescriptions to commercial insurance companies. The Statement of Charges claims that Mallinckrodt violated Section 403 of the New York Insurance Law, which prohibits fraudulent insurance acts and includes penalties of up to $5,000 plus the amount of the fraudulent claim for each violation. It further alleges that Mallinckrodt violated Section 408 of the Financial Services Law, which prohibits intentional fraud or intentional misrepresentation of a material fact with respect to a financial product or service and includes penalties of up to $5,000 per violation. The Department claims that each fraudulent prescription constitutes a separate violation of these laws. A hearing on the Statement of Charges was scheduled for January 25, 2021, but the Department of Financial Services agreed to a voluntary stay on October 15, 2020. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
On June 1, 2020, a putative class action lawsuit was filed against Mallinckrodt plc, Mallinckrodt Canada ULC, the Canadian Ministry of Health ("Province") and the College of Pharmacists of British Columbia ("College") in the Supreme Court of British Columbia, captioned Laura Shaver v. Mallinckrodt Canada ULC, et al., No. VLC-S-S-205793. The action purports to be brought on
behalf of any persons (1) prescribed Methadose for opioid agonist treatment in British Columbia after March 1, 2014, (2) covered by Pharmacare Plan C within British Columbia who were prescribed Methadose for opioid agonist treatment after February 1, 2014, (3) who transitioned from compounded methadone to Methadose for opioid agonist treatment in British Columbia after March 1, 2014, or (4) covered by Pharmacare Plan C within British Columbia who were transitioned from compounded methadone to Methadose for opioid agonist treatment after February 1, 2014. The suit generally alleges that the Province’s decision to grant Methadose coverage under Pharmacare Plan C and remove compounded methadone from coverage under Pharmacare Plan C had adversely affected those being treated for opioid use disorder. The suit asserts that the Province, the College and the Mallinckrodt defendants failed to warn patients about, and made false representations concerning, the efficacy of Methadose and the risks of switching from compounded methadone to Methadose. The suit seeks general, special, aggravated, punitive and exemplary damages in an unspecified amount, costs and interest and injunctive relief against the Province, the College and the Mallinckrodt defendants. Pursuant to two orders granted by the Ontario Superior Court of Justice (Commercial List) on October 15, 2020, the Chapter 11 proceedings commenced by Mallinckrodt plc and Mallinckrodt Canada ULC pursuant to the U.S. Bankruptcy Code were recognized and given effect in Canada. Among other things, the Canadian Court has stayed all proceedings against the Mallinckrodt defendants, including the British Columbia class action proceedings. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
New York State Opioid Stewardship Act. On October 24, 2018, the Company filed suit in the U.S. District Court for the Southern District of New York against the State of New York, asking the court to declare New York State's Opioid Stewardship Act ("OSA") unconstitutional and to enjoin its enforcement. On December 19, 2018, the court declared the OSA unconstitutional and granted the Company's motion for preliminary injunctive relief. On January 17, 2019, the State of New York appealed the court's decision. On September 14, 2020, a panel of the U.S. Court of Appeals for the Second Circuit reversed in part the lower court’s judgment, finding that the lower court should have dismissed the Company’s (and other parties’) challenges to the OSA for lack of subject matter jurisdiction. The Company disagrees with the decision and continues to evaluate its options with respect to the decision. In April 2019, the State of New York passed its 2020 budget, which amended the OSA so that if the OSA decision is reversed on appeal, the OSA would apply only to the sale or distribution of certain opioids in New York for 2017 and 2018 and, effective July 1, 2019, imposed an excise tax on certain opioids.
DEA Investigation. In November 2011 and October 2012, the Company received subpoenas from the U.S. Drug Enforcement Administration ("DEA") requesting production of documents relating to its suspicious order monitoring program for controlled substances. The USAO for the Eastern District of Michigan investigated the possibility that the Company failed to report suspicious orders of controlled substances during the period 2006-2011 in violation of the Controlled Substances Act and its related regulations. The USAO for the Northern District of New York and Office of Chief Counsel for the U.S. DEA investigated the possibility that the Company failed to maintain appropriate records and security measures with respect to manufacturing of certain controlled substances at its Hobart facility during the period 2012-2013. In July 2017, the Company entered into a final settlement with the DEA and the USAOs for the Eastern District of Michigan and the Northern District of New York to settle these investigations. As part of the agreement, the Company paid $35.0 million to resolve all potential claims and agreed, as part of a Memorandum of Agreement ("MOA"), to utilize all available transaction information to identify suspicious orders of any Mallinckrodt controlled substance product and to report to the DEA when it concludes that chargeback data or other information indicates that a downstream registrant poses a risk of diversion, among other things. The MOA remained in effect until July 10, 2020, but the Company is continuing to utilize all available transaction information to identify suspicious orders for reporting to the DEA beyond that date.
Acthar Gel-Related Matters
Medicaid Lawsuit. In May 2019, the Company filed a lawsuit under the Administrative Procedure Act ("APA") in the U.S. District Court for the District of Columbia (the "District Court") against the U.S. Department of Health and Human Services ("HHS") and CMS (collectively, the "Agency"). The dispute involves the base date AMP under the Medicaid Drug Rebate Program for Mallinckrodt's Acthar Gel. A drug's "base date AMP" is used to calculate the Medicaid rebate amount payable by the drug's manufacturer to state Medicaid agencies when the drug is prescribed to Medicaid beneficiaries. At issue in the lawsuit is whether the FDA's 2010 approval of a new drug application for use of Acthar Gel in treating infantile spasms rendered Acthar Gel eligible for a new base date AMP, as indicated by CMS' written communications in 2012. In May 2019, CMS indicated that if the Company failed to revert to use of the original base date AMP in its calculation of Acthar Gel Medicaid rebates, CMS would identify the Company as being out of compliance with its Medicaid Drug Rebate Program reporting requirements, among other potential actions, triggering certain negative consequences. As such, the Company filed a lawsuit alleging (i) that CMS has violated the Medicaid drug rebate statute, (ii) that CMS has violated its own regulations defining "single source drug," (iii) that CMS has failed to adequately explain its change in position based on two letters that CMS sent Questcor in 2012 regarding the base date AMP for Acthar Gel, (iv) that CMS failed to give the Company fair notice of its latest position, and (v) that CMS should be prohibited from applying its new position retrospectively. The District Court held a hearing regarding this matter in August 2019.
In March 2020, the Company received an adverse decision from the District Court, which upheld CMS' decision to reverse its previous determination of the base date AMP used to calculate Acthar Gel rebates. On March 16, 2020, the Company filed an Emergency Motion for Reconsideration and Stay of Entry of Judgment Pending Reconsideration Or, Alternatively, Injunction Pending
Appeal with the District Court. In response, the government agreed that CMS would not require the Company to change the Medicaid rebate calculation for Acthar Gel until June 14, 2020, to allow the District Court time to decide the Company’s reconsideration motion. The District Court denied the Company's motion for reconsideration on May 29, 2020. On June 2, 2020, the Company appealed the District Court's decision to the U.S. Court of Appeals for the D.C. Circuit (the "Court of Appeals") and filed an Emergency Motion for Injunction Pending Appeal and to Expedite Briefing and Argument. The Court of Appeals denied the Company's request for an injunction pending appeal on June 15, 2020. The Company appealed the District Court's decision to the Court of Appeals, which heard oral argument on September 24, 2020.
As previously disclosed, the Company recorded an accrual of $640.2 million related to the retrospective liability (the "Acthar Gel Medicaid Retrospective Rebate") in the unaudited condensed consolidated balance sheet as of September 25, 2020, of which $535.1 million and $105.1 million have been reflected as a component of net sales and operating expenses, respectively, in the unaudited condensed consolidated statement of operations for the nine months ended September 25, 2020. The $105.1 million reflected as a component of operating expenses represents a pre-acquisition contingency related to the portion of the Acthar Gel Medicaid Retrospective Rebate that arose from sales of Acthar Gel prior to the Company’s acquisition of Questcor in August 2014.
On October 12, 2020, the Company announced a settlement in principle, which is conditioned upon the Company entering the Chapter 11 restructuring process, to resolve various Acthar Gel-related matters, including the Medicaid lawsuit, an associated FCA lawsuit and an FCA lawsuit relating to Acthar Gel’s previous owner’s interactions with an independent charitable foundation (the "Acthar Gel-Related Settlement"). The Company has agreed to pay $260.0 million over seven years and to reset Acthar Gel’s Medicaid rebate calculation as of July 1, 2020, such that state Medicaid programs will receive 100% rebates on Acthar Gel Medicaid sales, based on current Acthar Gel pricing. Additionally, upon execution of the settlement, the Company will dismiss its appeal, which is currently pending in the Court of Appeals. The Company expects that the Acthar Gel-Related Settlement – which would resolve the Medicaid lawsuit, 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 – will be completed over the next several months, subject to Bankruptcy Court approval.
U.S. House Committee Investigation. In January 2019, the Company along with 11 other pharmaceutical companies, received a letter from the U.S. House Committee on Oversight and Reform requesting information relating to the Company's pricing strategy for Acthar Gel and related matters. The Company cooperated with the Committee's investigation. The Company’s President and Chief Executive Officer Mark C. Trudeau accepted an invitation from the Committee to discuss the Company’s pricing policies and modernization strategy for Acthar Gel at a hearing before the Committee, which took place on October 1, 2020.
Boston Civil Investigative Demand. In January 2019, the Company received a CID from the USAO for the District of Massachusetts for documents related to the Company's participation in the Medicaid Drug Rebate Program. The Company responded to the government's requests and cooperated with the investigation.
In March 2020, the U.S. District Court for the District of Massachusetts unsealed a qui tam complaint under the federal FCA against the Company in which the DOJ and 28 states have intervened alleging that the Company had failed to pay the correct amount of rebates for its Acthar Gel product. Other related legal proceedings involving the Company, including the litigation described as the Medicaid Lawsuit, are discussed above. The Company disagrees with the government's characterization of the facts and applicable law. The Company moved to dismiss the DOJ's Complaint in Intervention in July 2020 and moved to dismiss the complaint of the intervening states in September 2020. As previously disclosed, in the event that the Company does not prevail in its Medicaid lawsuit the potential for damages in this matter could be up to approximately $1,280.0 million, after subtracting out potential restitution, related to the Acthar Gel Medicaid Retrospective Rebate. The Company has not recognized an accrual for this contingency in its financial results for the nine months ended September 25, 2020.
As discussed above, on October 12, 2020, the Company announced a settlement in principle to resolve various Acthar Gel-related matters, including the Medicaid lawsuit and this associated Boston FCA lawsuit as well as an FCA lawsuit relating to Acthar Gel’s previous owner’s interactions with an independent charitable foundation (see "Acthar Gel-Related Settlement" above). On October 14, 2020, the court entered an order acknowledging the automatic stay of this litigation as to the Company pursuant to §362 of the Bankruptcy Code.
Questcor EDPA Qui Tam Litigation. In September 2012, Questcor received a subpoena from the USAO for the Eastern District of Pennsylvania for information relating to its promotional practices related to Acthar Gel. The investigation eventually expanded to include Questcor's provision of financial and other support to patients, including through charitable foundations and related matters. The Company cooperated with the investigation. In March 2019, the U.S. District Court for the Eastern District of Pennsylvania unsealed two qui tam actions involving the allegations under investigation by the USAO for the Eastern District of Pennsylvania. The DOJ intervened in both actions, which were later consolidated. In September 2019, the Company executed a settlement agreement with the DOJ for $15.4 million and finalized settlements with the three qui tam plaintiffs. These settlements were paid during the three months ended September 27, 2019 and resolve the portion of the investigation and litigation involving Questcor's promotional practices related to Acthar Gel. In June 2019, the DOJ filed its Complaint in Intervention in the litigation, alleging claims under the federal False Claim Act based on Questcor's relationship with and donations to an independent charitable patient co-pay
foundation. The Company disagrees with the DOJ's characterization of the facts and applicable law. In January 2020, the court denied the Company's motion to dismiss the Complaint in Intervention.
As discussed above, on October 12, 2020, the Company announced a settlement in principle to resolve various Acthar Gel-related matters, including the Medicaid lawsuit and associated Boston FCA lawsuit as well as this Questcor EDPA Qui Tam lawsuit (see "Acthar Gel-Related Settlement" above). On October 15, 2020, the court entered an order acknowledging the automatic stay of this litigation as to the Company pursuant to §362 of the Bankruptcy Code.
Patent Litigation
Amitiza Patent Litigation: Sun Pharmaceutical Industries, Ltd. and Sun Pharmaceutical Industries, Inc. In October 2018, Sucampo AG, Sucampo Pharmaceuticals, Inc. and Sucampo Pharma LLC, all subsidiaries of the Company, and Takeda Pharmaceutical Company Limited, Takeda Pharmaceuticals USA, Inc., and Takeda Pharmaceuticals America, Inc. (collectively "Takeda," the exclusive licensee under the patents in litigation) filed suit in the U.S. District Court for the District of New Jersey against Sun Pharmaceutical Industries, Ltd. and Sun Pharmaceutical Industries, Inc. (collectively "Sun") alleging that Sun infringed U.S. Patent Nos. 7,795,312, 8,026,393, 8,097,653, 8,338,639, 8,389,542, 8,748,481 and 8,779,187 following receipt of a September 2018 notice from Sun concerning its submission of an abbreviated new drug application ("ANDA") containing a Paragraph IV patent certification with the FDA for a competing generic of Amitiza. On June 4, 2020, the parties entered into a settlement agreement under which Sun was granted the non-exclusive right to market a competing generic version of Amitiza in the U.S. under its ANDA on or after January 1, 2023, or earlier under certain circumstances.
INOmax® Patent Litigation: Praxair Distribution, Inc. and Praxair, Inc. (collectively "Praxair"). In February 2015, INO Therapeutics LLC and Ikaria, Inc., both subsidiaries of the Company, filed suit in the U.S. District Court for the District of Delaware against Praxair following receipt of a January 2015 notice from Praxair concerning its submission of an ANDA containing a Paragraph IV patent certification with the FDA for a nitric oxide drug product delivery system. In July 2016, the Company filed a second suit against Praxair in the U.S. District Court for the District of Delaware following receipt of a Paragraph IV notice concerning three additional patents recently added to the FDA Orange Book that was submitted by Praxair regarding its ANDA for its nitric oxide drug product delivery system. The infringement claims in the second suit were added to the original suit. In September 2016, the Company filed a third suit against Praxair in the U.S. District Court for the District of Delaware following receipt of a Paragraph IV notice concerning a fourth patent added to the FDA Orange Book that was submitted by Praxair regarding its ANDA for its nitric oxide drug product delivery system.
Trial for the suit filed in February 2015 was held in March 2017 and a decision was rendered September 5, 2017 that ruled five patents invalid and six patents not infringed. The Company appealed the decision to the Court of Appeals for the Federal Circuit. The oral arguments in the appeal occurred on February 6, 2019. Praxair received FDA approval of their ANDA for their Noxivent nitric oxide and clearance of their 510(k) for their NOxBOXi device on October 2, 2018. The appeal decision, issued on August 27, 2019, substantively affirmed the U.S. District Court decision with respect to the invalidity of the heart failure (HF) patents and the non-infringement of the delivery system infrared (DSIR) patents. The Company filed a petition for en banc review at the Federal Circuit on September 26, 2019, which the Federal Circuit denied on November 19, 2019. The Company filed a petition for a writ of certiorari with the United States Supreme Court on March 6, 2020 and the petition was denied on April 6, 2020. The adverse final outcome in the appeal of the Praxair litigation decision is expected to result in the broader-scale launch of a competitive nitric oxide product before the expiration of the last of the listed patents on May 3, 2036 (November 3, 2036 including pediatric exclusivity), which could adversely affect the Company's ability to successfully maximize the value of INOmax and have an adverse effect on its financial condition, results of operations and cash flows.
Ofirmev Patent Litigation: Baxter Healthcare Corporation. In March 2020, MHP and Mallinckrodt Hospital Products IP Limited, both subsidiaries of the Company, and New Pharmatop LP, the current owner of the U.S. patents licensed exclusively by the Company, filed suit in the U.S. District Court for the District of Delaware against Baxter Healthcare Corporation ("BHC") alleging that BHC infringed U.S. Patent No. 6,992,218, U.S. Patent No. 9,399,012, U.S. Patent No. 9,610,265, U.S. Patent No. 9,987,238 and U.S. Patent No. 10,383,834 following receipt of a February 2020 notice from Baxter concerning its submission of an ANDA, containing a Paragraph IV patent certification with the FDA for a competing version of Ofirmev. On April 23, 2020, the parties entered into a settlement agreement under which BHC was granted the non-exclusive right to market a competing intravenous acetaminophen product in the U.S. under its ANDA on or after December 6, 2020, or earlier under certain circumstances.
Commercial and Securities Litigation
Shareholder Litigation (HealthCor). In October 2020, four purported shareholders of the Company’s stock filed a complaint in the U.S. District Court for the District of Columbia against the Company, its Chief Executive Officer ("CEO") Mark C. Trudeau and its former Chief Financial Officer ("CFO") Matthew K. Harbaugh. The lawsuit, captioned HealthCor Offshore Master Fund, L.P., et al. v. Mallinckrodt plc, et al., asserts claims for false and misleading statements in violation of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, common law fraud, and negligent misrepresentation arising from substantially
similar allegations as those contained in the Shenk class action lawsuit below. The complaint seeks damages in an unspecified amount. The defendants intend to vigorously defend themselves in this matter. As this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit. As to the Company, this litigation is subject to the automatic stay under §362 of the Bankruptcy Code and the Company has requested an order from the Bankruptcy Court enjoining proceedings against the individual named defendants.
Health Care Service Corporation Litigation. In February 2020, Health Care Service Corporation ("HCSC") filed a non-class complaint against the Company in California state court alleging improper pricing and distribution of Acthar Gel, in violation of the New Jersey RICO statute and various states’ antitrust laws. HCSC also brings claims against the Company for conspiracy to violate the New Jersey RICO statute, fraud, unlawful restraint of trade, unfair and deceptive trade practices, insurance fraud, tortious interference with contract and unjust enrichment. The case, which is proceeding as Health Care Service Corp. v. Mallinckrodt ARD LLC, et al., alleges similar facts as those alleged in the Humana matter below. The Company intends to vigorously defend itself in this matter, and moved to dismiss the complaint in June 2020. As this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
City of Marietta Litigation. In February 2020, the City of Marietta, Georgia filed a putative civil class action complaint against the Company in the U.S. District Court for the Northern District of Georgia relating to the price of Acthar Gel. The complaint, which pleads one claim for unjust enrichment, purports to be brought on behalf of third-party payers and their beneficiaries as well as people without insurance in the U.S. and its Territories who paid for Acthar Gel from four years prior to the filing of the complaint until the date of trial. The case is proceeding as City of Marietta v. Mallinckrodt ARD LLC. Marietta alleges that it has paid $2.0 million to cover the cost of an Acthar Gel prescription of an employee and that the Company has been unjustly enriched as a result. The Company intends to vigorously defend itself in this matter, and has moved to dismiss the complaint. The Company’s motion to dismiss remains pending. On October 16, 2020, the court ordered the case administratively closed in light of the Company's Chapter 11 Cases.
Local 322. In November 2019, the United Association of Plumbers & Pipefitters Local 322 of Southern New Jersey ("Local 322") filed a putative class action complaint against the Company and other defendants in New Jersey state court on behalf of New Jersey and third party payers for alleged deceptive marketing and anti-competitive conduct related to the sale and distribution of Acthar Gel. The complaint asserts claims under the New Jersey Consumer Fraud Act, the New Jersey Antitrust Act, the New Jersey RICO statute, negligent misrepresentation, conspiracy/aiding and abetting and unjust enrichment. The proposed class is defined as "All third-party payors and their beneficiaries (1) who are current citizens and residents of the State of New Jersey, and (2) who, for purposes other than resale, purchased or paid for Acthar Gel from August 27, 2007 through the present." In January 2020, after removing the complaint to federal court in New Jersey, the Company moved to dismiss or stay the case. On August 18, 2020 the court dismissed all claims against the Company other than Local 322's antitrust claim relating to the former owner of Acthar Gel's acquisition of Synacthen. The Company intends to vigorously defend itself in this matter, and moved to dismiss the complaint in June 2020. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit. On October 14, 2020, the court ordered the case administratively closed in light of the Company's Chapter 11 Cases.
Shareholder Derivative Litigation (Brandhorst). In September 2019, a purported shareholder of the Company's stock filed a shareholder derivative complaint in the U.S. District Court for the District of Columbia against the Company, as nominal defendant, as well as its CEO Mark Trudeau, its former CFO Matthew K. Harbaugh, its Executive Vice President Hugh O'Neill, and the following members of the Board of Directors: Angus Russell, David Carlucci, J. Martin Carroll, David Norton, JoAnn Reed and Kneeland Youngblood (collectively with Trudeau, Harbaugh and O'Neill, the "Brandhorst Defendants"). The lawsuit is captioned Lynn Brandhorst, derivatively on behalf of nominal defendant Mallinckrodt PLC v. Mark Trudeau et al. and relies on the allegations from the putative class action securities litigation that was filed against the Company and certain of its officers in January 2017, captioned Patricia A. Shenk v. Mallinckrodt plc, et al. described further below. The complaint asserts claims for contribution, breaches of fiduciary duty, unjust enrichment, abuse of control, and gross mismanagement, and is premised on allegations that the Brandhorst Defendants caused the Company to make the allegedly false or misleading statements at issue in the Shenk class action lawsuit. The complaint seeks damages in an unspecified amount and corporate governance reforms. On November 20, 2019, this matter was stayed by agreement of the parties pending resolution of the Shenk lawsuit below. The Company intends to vigorously defend itself in this matter. As to the Company, this litigation is subject to the automatic stay under §362 of the Bankruptcy Code, and the Company has requested an order from the Bankruptcy Court enjoining proceedings against the individual named defendant.
Humana Litigation. In August 2019, Humana Inc. filed a lawsuit against the Company in the U.S. District Court for the Central District of California alleging violations of federal and state antitrust laws; racketeering violations under 18 U.S.C. § 1962(c); conspiracy to violate RICO under 18 U.S.C. § 1962(d); violations of state unfair competition, consumer fraud and deceptive trade practice laws; state insurance fraud; tortious interference with contract; and unjust enrichment related to the pricing of Acthar Gel. Humana alleges that it paid more than $700.0 million for Acthar Gel and seeks undisclosed damages from 2011 through present. The case alleges similar facts as those alleged in the MSP and Rockford matters below, and includes references to allegations at issue in a pending qui tam action against the Company in the U.S. District Court for the Eastern District of Pennsylvania (see Questcor EDPA Qui Tam Litigation above). The case is proceeding as Humana Inc. v. Mallinckrodt ARD LLC. In March 2020, the court granted-in-part and denied-in-part the Company's motion to dismiss Humana's claims. The court dismissed Humana's antitrust and tortious
interference claims with leave to amend. The court denied the Company's motion to dismiss Humana's RICO and other fraud-based claims. Humana filed an amended complaint in May 2020, which the Company has moved to dismiss. In August 2020, the court granted-in-part and denied-in-part the Company's motion to dismiss the amended complaint. The court dismissed with prejudice Humana's claims under most state antitrust laws dismissed with prejudice Humana's tortious interference claims. The court ruled that Humana's federal antitrust and federal and state-law analog RICO claims may proceed. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit. On October 13, 2020, the court entered an order acknowledging the automatic stay of this litigation as to the Company pursuant to §362 of the Bankruptcy Code.
Putative Class Action Litigation - Steamfitters Local Union No. 420. In July 2019, Steamfitters Local Union No. 420 filed a putative class action lawsuit against the Company and United BioSource Corporation in the U.S. District Court for the Eastern District of Pennsylvania, proceeding as Steamfitters Local Union No. 420 v. Mallinckrodt ARD, LLC, et al. The complaint makes similar allegations as those alleged in related state and federal actions that were filed by the same plaintiff's law firm in Illinois, Pennsylvania, Tennessee and Maryland (now dismissed; see WCBE below), and includes references to allegations at issue in a pending qui tam actions against the Company in the U.S. District Court for the Eastern District of Pennsylvania (see Questcor Subpoena above). The complaint alleges RICO violations under 18 U.S.C. § 1962(c); conspiracy to violate RICO under 18 U.S.C. § 1962(c); violations of the Pennsylvania (and other states) Unfair Trade Practices and Consumer Protection laws; negligent misrepresentation; aiding and abetting/conspiracy; and unjust enrichment. The complaint also seeks declaratory and injunctive relief. In December 2019, the court denied the Company's motion to dismiss the complaint. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
Putative Class Action Securities Litigation (Strougo). In July 2019, a putative class action lawsuit was filed against the Company, its CEO Mark C. Trudeau, its CFO Bryan M. Reasons, its former Interim CFO George A. Kegler and its former CFO Matthew K. Harbaugh, in the U.S. District Court for the Southern District of New York, captioned Barbara Strougo v. Mallinckrodt plc, et al. The complaint purports to be brought on behalf of all persons who purchased or otherwise acquired Mallinckrodt's securities between February 28, 2018 and July 16, 2019. The lawsuit generally alleges that the defendants made false and misleading statements in violation of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder related to the Company's clinical study designed to assess the efficacy and safety of its Acthar Gel in patients with amyotrophic lateral sclerosis. The lawsuit seeks monetary damages in an unspecified amount. A lead plaintiff was designated by the court on June 25, 2020, and on July 30, 2020, the court approved the transfer of the case to the U.S. District Court for the District of New Jersey. On August 10, 2020, an amended complaint was filed by the lead plaintiff alleging an expended putative class period of May 3, 2016 through March 18, 2020 against the Company and Mark C. Trudeau, Bryan M. Reasons, George A. Kegler and Matthew K. Harbaugh, as well as newly named defendants Kathleen A. Schaefer, Angus C. Russell, Melvin D. Booth, JoAnn A. Reed, Paul R. Carter, and Mark J. Casey (collectively with Trudeau, Reasons, Kegler and Harbaugh, the "Strougo Defendants"). The amended complaint claims that the defendants made false and/or misleading statements and/or failed disclose that: (i) the CMS had informed the Company that it was using the wrong base date AMP for calculating the Medicaid rebate the Company owed CMS for Acthar Gel each quarter since 2014; (ii) the Company’s reported net income was improperly inflated in violation of GAAP; (iii) the Company’s contingent liabilities associated with the rebates owed to CMS for Acthar Gel were misrepresented; (iv) the Company’s fiscal year 2019 guidance for Acthar Gel net sales was false; (v) the Company failed to disclose material information regarding the cases captioned Landolt v. Mallinckrodt ARD LLC, No. 1:18-cv-11931-PBS (D. Mass.) (Landolt) and U.S. ex rel. Strunck v. Mallinckrodt ARD LLC, No. 2:12-cv-0175-BMS (E.D. Pa.) (Strunck), or the related investigation by the Department of Justice (DOJ) and (vi) the Company failed to disclose that the clinical trials for Acthar Gel were purportedly initiated in order to make it appear that alternative revenue opportunities for Acthar Gel existed and thus offset the expected 10% decline in net sales as a result of the rebates the Company now had to pay. On October 1, 2020, the defendants filed a motion to dismiss the amended complaint. The defendants intend to vigorously defend themselves in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit. As to the Company, this litigation is subject to the automatic stay under §362 of the Bankruptcy Code, and the Company has requested an order from the Bankruptcy Court enjoining proceedings against the individual named defendants.
Acument Global. In May 2019, Acument Global Technologies, Inc. ("Acument"), filed a non-class complaint against the Company and other defendants in Tennessee state court alleging violations of Tennessee Consumer Protection laws, unjust enrichment, fraud and conspiracy to defraud. The case alleges similar facts as those alleged in the MSP and Rockford matters below, and is captioned Acument Global Technologies, Inc., v. Mallinckrodt ARD Inc., et al. In February 2020, the court granted-in-part and denied-in-part the Company’s motion to dismiss. While the court dismissed Acument’s fraud-based claims and its claim under the Tennessee Consumer Protection Act, the court ruled that the antitrust and unjust enrichment claims may proceed. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
Washington County Board of Education ("WCBE"). In May 2019, WCBE filed a non-class complaint against the Company and other defendants in Maryland state court alleging violations of Maryland Consumer Protection Act, negligent misrepresentation, fraud, unjust enrichment and conspiracy to defraud. The case, which was removed to the U.S. District Court for the District of Maryland in June 2019, alleges similar facts as those alleged in the MSP and Rockford matters above, and is captioned Washington County Board of Education v. Mallinckrodt ARD Inc., et al. On January 4, 2020, the court dismissed the complaint. Thereafter, the plaintiff filed a
notice of voluntary dismissal, which the Company moved to strike. The U.S. District Court granted the motion to strike, and the plaintiff appealed that order to the U.S. Court of Appeals for the Fourth Circuit in June 2020. The Fourth Circuit dismissed plaintiff's appeal in September 2020.
Local 542. In May 2018, the International Union of Operating Engineers Local 542 filed a non-class complaint against the Company and other defendants in Pennsylvania state court alleging improper pricing and distribution of Acthar Gel, in violation of Pennsylvania's Unfair Trade Practices and Consumer Protection law, aiding and abetting, unjust enrichment and negligent misrepresentation. The case alleges similar facts as the MSP and Rockford matters below, and is captioned Int'l Union of Operating Engineers Local 542 v. Mallinckrodt ARD Inc., et al. Plaintiff filed an amended complaint in August 2018, the Company's objections to which were denied by the court. Although the court temporarily stayed proceedings in January 2020, the court lifted the stay in February 2020. The Company intends to continue to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
Putative Class Action Litigation (MSP). In October 2017, a putative class action lawsuit was filed against the Company and United BioSource Corporation in the U.S. District Court for the Central District of California. Pursuant to a motion filed by the defendants, the case was transferred to the U.S. District Court for the Northern District of Illinois in January 2018, and is currently proceeding as MSP Recovery Claims, Series II, LLC, et al. v. Mallinckrodt ARD, Inc., et al. The Company filed a motion to dismiss in February 2018, which was granted in January 2019 with leave to amend. MSP filed the operative First Amended Class Action Complaint on April 10, 2019, in which it asserts claims under federal and state antitrust laws and state consumer protection laws and names additional defendants. The complaint alleged that the Company unlawfully maintained a monopoly in a purported ACTH product market by acquiring the U.S. rights to Synacthen® Depot ("Synacthen") and reaching anti-competitive agreements with the other defendants by selling Acthar Gel through an exclusive distribution network. The complaint purported to be brought on behalf of all third-party payers, or their assignees, in the U.S. and its territories, who have, as indirect purchasers, in whole or in part, paid for, provided reimbursement for, and/or possess the recovery rights to reimbursement for the indirect purchase of Acthar Gel from August 1, 2007 to present. In March 2020, the court granted the Company’s motion to dismiss the complaint with leave to amend. MSP filed an amended complaint on July 3, 2020. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit. On October 13, 2020, the court entered an order acknowledging the automatic stay of this litigation as to the Company pursuant to §362 of the Bankruptcy Code.
Employee Stock Purchase Plan (ESPP) Securities Litigation. In July 2017, a purported purchaser of Mallinckrodt stock through Mallinckrodt's ESPPs, filed a derivative and class action lawsuit in the Federal District Court in the Eastern District of Missouri, captioned Solomon v. Mallinckrodt plc, et al., against the Company, its CEO Mark C. Trudeau, its former CFO Matthew K. Harbaugh, its Controller Kathleen A. Schaefer, and current and former directors of the Company (collectively, the "Solomon Defendants"). On September 6, 2017, plaintiff voluntarily dismissed its complaint in the Federal District Court for the Eastern District of Missouri and refiled virtually the same complaint in the U.S. District Court for the District of Columbia. The complaint purports to be brought on behalf of all persons who purchased or otherwise acquired Mallinckrodt stock between November 25, 2014, and January 18, 2017, through the ESPPs. In the alternative, the plaintiff alleges a class action for those same purchasers/acquirers of stock in the ESPPs during the same period. The complaint asserts claims under Section 11 of the Securities Act, and for breach of fiduciary duty, misrepresentation, non-disclosure, mismanagement of the ESPPs' assets and breach of contract arising from substantially similar allegations as those contained in the Shenk class action lawsuit below. Stipulated co-lead plaintiffs were approved by the court on March 1, 2018. Co-lead Plaintiffs filed an amended complaint on June 4, 2018 having a class period of July 14, 2014 to November 6, 2017. On July 6, 2018, this matter was stayed by agreement of the parties pending resolution of the Shenk class action lawsuit below. The defendants intends to vigorously defend themselves in this matter. On October 13, 2020, the court entered an order acknowledging the automatic stay of this litigation as to the Company pursuant to §362 of the Bankruptcy Code, and the Company has requested an order from the Bankruptcy Court enjoining proceedings against the individual named defendants.
Putative Class Action Litigation (Rockford). In April 2017, a putative class action lawsuit was filed against the Company and United BioSource Corporation in the U.S. District Court for the Northern District of Illinois. The case is captioned City of Rockford v. Mallinckrodt ARD, Inc., et al. The complaint was subsequently amended to, among other things, include an additional named plaintiff and additional defendants. As amended, the complaint purports to be brought on behalf of all self-funded entities in the U.S. and its Territories, excluding any Medicare Advantage Organizations, related entities and certain others, that paid for Acthar Gel from August 2007 to the present. Plaintiff alleges violations of federal antitrust and RICO laws, as well as various state law claims in connection with the distribution and sale of Acthar Gel. In January 2018, the Company filed a motion to dismiss the Second Amended Complaint, which was granted in part in January 2019. The court dismissed one of two named plaintiffs and all claims with the exception of Plaintiff's federal and state antitrust claims. The remaining allegation in the case is that the Company engaged in anti-competitive acts to artificially raise and maintain the price of Acthar Gel. To this end, Plaintiff alleges that the Company unlawfully maintained a monopoly in a purported ACTH product market by acquiring the U.S. rights to Synacthen and conspired with the other named defendants by selling Acthar Gel through an exclusive distributor. The Company intends to continue defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit. On October 13, 2020, the court entered an order acknowledging the automatic stay of this litigation as to the Company pursuant to §362 of the Bankruptcy Code.
Putative Class Action Securities Litigation (Shenk). In January 2017, a putative class action lawsuit was filed against the Company and its CEO in the U.S. District Court for the District of Columbia, captioned Patricia A. Shenk v. Mallinckrodt plc, et al. The complaint purports to be brought on behalf of all persons who purchased Mallinckrodt's publicly traded securities on a domestic exchange between November 25, 2014 and January 18, 2017. The lawsuit generally alleges that the Company made false or misleading statements related to Acthar Gel and Synacthen to artificially inflate the price of the Company's stock. In particular, the complaint alleges a failure by the Company to provide accurate disclosures concerning the long-term sustainability of Acthar Gel revenues, and the exposure of Acthar Gel to Medicare and Medicaid reimbursement rates. On January 26, 2017, a second putative class action lawsuit, captioned Jyotindra Patel v. Mallinckrodt plc, et al. was filed against the same defendants named in the Shenk lawsuit in the U.S. District Court for the District of Columbia. The Patel complaint purports to be brought on behalf of shareholders during the same period of time as that set forth in the Shenk lawsuit and asserts claims similar to those set forth in the Shenk lawsuit. On March 13, 2017, a third putative class action lawsuit, captioned Amy T. Schwartz, et al., v. Mallinckrodt plc, et al., was filed against the same defendants named in the Shenk lawsuit in the U.S. District Court for the District of Columbia. The Schwartz complaint purports to be brought on behalf of shareholders who purchased shares of the Company between July 14, 2014 and January 18, 2017 and asserts claims similar to those set forth in the Shenk lawsuit. On March 23, 2017, a fourth putative class action lawsuit, captioned Fulton County Employees' Retirement System v. Mallinckrodt plc, et al., was filed against the Company, its CEO and former CFO in the U.S. District Court for the District of Columbia. The Fulton County complaint purports to be brought on behalf of shareholders during the same period of time as that set forth in the Schwartz lawsuit and asserts claims similar to those set forth in the Shenk lawsuit. On March 27, 2017, four separate plaintiff groups moved to consolidate the pending cases and to be appointed as lead plaintiffs in the consolidated case. Lead plaintiff was designated by the court on March 9, 2018. Lead plaintiff filed a consolidated complaint on May 18, 2018, alleging a class period from July 14, 2014 to November 6, 2017, the Company, its CEO, its former CFO, and Executive Vice President, Hugh O'Neill, as defendants, and containing similar claims, but further alleging misstatements regarding payer reimbursement restrictions for Acthar Gel. On August 30, 2018, the lead plaintiff voluntarily dismissed the claims against Mr. O'Neill without prejudice. The Company filed a motion to dismiss the complaint which was granted in part, and denied in part by the court on July 30, 2019. On September 1, 2020, the case deadlines were suspended to allow the parties to pursue a mediation. The defendants intends to vigorously defend themselves in this matter. On October 13, 2020, the court entered an order acknowledging the automatic stay of this litigation as to the Company pursuant to §362 of the Bankruptcy Code, and the Company has requested an order from the Bankruptcy Court enjoining proceedings against the individual named defendants.
Generic Price Fixing Litigation
Generic Pharmaceutical Antitrust MDL. In August 2016, a multidistrict litigation was established in the Eastern District of Pennsylvania relating to allegations of antitrust violations with respect to generic pharmaceutical pricing (the "Generic Pricing MDL"). Plaintiffs in the Generic Pricing MDL, captioned In re: Generic Pharmaceuticals Pricing Antitrust Litigation, allege a conspiracy of price-fixing and customer allocation among generic drug manufacturers beginning in or around July 2009. Since its establishment, the Generic Pricing MDL has expanded to encompass dozens of pharmaceutical companies and more than 100 generic pharmaceutical drugs. The Company was recently named in three cases associated with this litigation. There was a status conference on September 10, 2020, at which time the court stated that any new or amended complaints are due by December 15, 2020. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
State Attorneys General Litigation. In June 2020, the Company, along with more than 20 other pharmaceutical manufacturers, was named as a defendant in a lawsuit brought by Attorneys General for 51 States, Territories, and the District of Columbia. The lawsuit, filed in the U.S. District Court for the District of Connecticut, alleges that manufacturers of generic drugs conspired to fix prices for certain generic drugs by communicating in advance of price increases and agreeing to certain market share allocations amongst competitors to thwart competition. The lawsuit alleges that prices for the generic drugs at issue were inflated as a result of the alleged conspiracies, causing harm to the U.S. healthcare system. The complaint seeks monetary damages and injunctive relief for violations of Section 1 of the Sherman Antitrust Act and various state antitrust, consumer protection, and unjust enrichment claims. In July 2020, this lawsuit was consolidated with the Generic Pricing MDL. The Company disagrees with the Attorneys Generals’ characterization of the facts and applicable law. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
Rite Aid Litigation. In July 2020, a direct action complaint filed in the U.S. District Court for the Eastern District of Pennsylvania named the Company and several other pharmaceutical manufacturers as new defendants in an action captioned Rite Aid Corp. et al. v. Actavis Holdco U.S., Inc. et al. The lawsuit purports to be brought by entities that directly purchased generic drugs from defendants or a co-conspirator. The complaint seeks monetary damages and injunctive relief for violations of Section 1 of the Sherman Antitrust Act, and is premised on facts similar to those alleged in the State Attorneys General Litigation. The Company expects this lawsuit to be consolidated with the Generic Pricing MDL. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
Suffolk County, N.Y. Litigation. In August 2020, a direct action complaint filed in the U.S. District Court for the Eastern District of New York named the Company and several other pharmaceutical manufacturers as new defendants in an action captioned County of
Suffolk v. Actavis Holdco U.S., Inc. et al. The lawsuit purports to be brought by Suffolk County, New York, which directly and indirectly purchased generic drugs from defendants or a co-conspirator. The complaint seeks monetary damages and injunctive relief for violations of Sections 1 and 3 of the Sherman Antitrust Act, the Donnelly Act, New York General Business Law § 340, and New York Social Services Law § 145-b, and is premised on facts similar to those alleged in the State Attorneys General Litigation. This lawsuit has been transferred to the U.S. District Court for the Eastern District of Pennsylvania and consolidated with the Generic Pricing MDL. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
J M Smith Litigation. In September 2020, a direct action complaint filed in the U.S. District Court for the Eastern District of Pennsylvania named the Company and several other pharmaceutical manufacturers as new defendants in an action captioned J M Smith Corporation v. Actavis Holdco U.S., Inc. et al. The lawsuit purports to be brought by entities that directly purchased generic drugs from defendants or a co-conspirator. The complaint seeks monetary damages and injunctive relief for violations of Section 1 of the Sherman Antitrust Act, and is premised on facts similar to those alleged in the State Attorneys General Litigation. This lawsuit has been consolidated with the Generic Pricing MDL. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
Xyrem Litigation
Self-Insured Schools Litigation. In August 2020, a complaint filed in the U.S. District Court for the Southern District of New York named the Company and several other pharmaceutical manufacturers as new defendants in an action captioned Self-Insured Schools of California v. Jazz Pharmaceuticals Plc et al. The lawsuit is brought on behalf of a purported class of individuals and entities that indirectly purchased Xyrem (sodium oxybate). The complaint alleges that Jazz Pharmaceuticals delayed generic competition by the Company and others by providing substantial consideration to the Company and others to delay market entry for sodium oxybate, causing consumers to pay supracompetitive prices for Xyrem and its generic bioequivalent products. The complaint seeks monetary damages and declaratory and injunctive relief for violations of Sections 1 and 3 of the Sherman Antitrust Act, Section 16 of the Clayton Antitrust Act, and various state antitrust laws and, state consumer protection statutes, and state laws prohibiting unfair and deceptive practices. The Company intends to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
Hollman Litigation. In September 2020, a complaint filed in the U.S. District Court for the Northern District of California named the Company and several other pharmaceutical manufacturers as new defendants in an action captioned Ruth Hollman v. Jazz Pharmaceuticals Plc et al. The lawsuit is brought on behalf of a purported class of individuals and entities that indirectly purchased Xyrem (sodium oxybate). The complaint alleges that Jazz Pharmaceuticals delayed generic competition by the Company and others by providing substantial consideration to the Company and others to delay market entry for sodium oxybate, causing consumers to pay supracompetitive prices for Xyrem and its generic bioequivalent products. The complaint seeks monetary damages and declaratory and injunctive relief for violations of Sections 1 and 3 of the Sherman Antitrust Act, Section 16 of the Clayton Antitrust Act, and various state antitrust laws, state consumer protection statutes, and state laws prohibiting unfair and deceptive practices. On November 3, 2020, the plaintiff dismissed the case against the Company and certain other defendants without prejudice. The lawsuit remains pending against several other defendants.
Environmental Remediation and Litigation Proceedings
The Company is involved in various stages of investigation and cleanup related to environmental remediation matters at a number of sites, including those described below. The ultimate cost of site cleanup and timing of future cash outlays is difficult to predict, given the uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations and alternative cleanup methods. The Company concluded that, as of September 25, 2020, it was probable that it would incur remediation costs in the range of $37.8 million to $86.9 million. The Company also concluded that, as of September 25, 2020, the best estimate within this range was $61.3 million, of which $1.3 million was included in accrued and other current liabilities and the remainder was included in environmental liabilities on the unaudited condensed consolidated balance sheet as of September 25, 2020. While it is not possible at this time to determine with certainty the ultimate outcome of these matters, the Company believes, given the information currently available, that the final resolution of all known claims, after taking into account amounts already accrued, will not have a material adverse effect on its financial condition, results of operations and cash flows.
Mallinckrodt Veterinary, Inc., Millsboro, Delaware. The Company previously operated a facility in Millsboro, Delaware ("the Millsboro Site") where various animal healthcare products were manufactured. In 2005, the Delaware Department of Natural Resources and Environmental Control found trichloroethylene ("TCE") in the Millsboro public water supply at levels that exceeded the federal drinking water standards. Further investigation to identify the TCE plume in the ground water indicated that the plume has extended to property owned by a third party near the Millsboro Site. The Company, and another former owner, have assumed responsibility for the Millsboro Site cleanup under the Alternative Superfund Program administered by the Environmental Protection Agency ("EPA"). The companies have entered into three Administrative Orders on Consent ("AOC(s)") with the EPA to perform
investigations to abate, mitigate or eliminate the release or threat of release of hazardous substances at the Millsboro Site and to conduct an Engineering Evaluation/Cost Analysis ("EE/CA") to characterize the nature and extent of the contamination. In January 2017, the EPA issued its Action Memorandum regarding the EE/CA. In March 2020, the EPA approved the Final Action Report documenting the remedial construction activities completed in accordance with Paragraph 8.12 of AOC 3 for Removal Response Action. The report recommended decommissioning the Directed Groundwater Recirculation system and commencing Long Term Monitoring. Upon receipt of the EPA approved Final Action Report, the Company believes, given the information currently available, that the ultimate resolution of all known claims, after taking into account amounts already accrued, will not have a material adverse effect on its financial condition, results of operations and cash flows.
Products Liability Litigation
Beginning with lawsuits brought in July 1976, the Company is named as a defendant in personal injury lawsuits based on alleged exposure to asbestos-containing materials. A majority of the cases involve product liability claims based principally on allegations of past distribution of products containing asbestos. A limited number of the cases allege premises liability based on claims that individuals were exposed to asbestos while on the Company's property. Each case typically names dozens of corporate defendants in addition to the Company. The complaints generally seek monetary damages for personal injury or bodily injury resulting from alleged exposure to products containing asbestos. The Company's involvement in asbestos cases has been limited because it did not mine or produce asbestos. Furthermore, in the Company's experience, a large percentage of these claims have never been substantiated and have been dismissed by the courts. The Company has not suffered an adverse verdict in a trial court proceeding related to asbestos claims and intends to continue to defend these lawsuits. When appropriate, the Company settles claims; however, amounts paid to settle and defend all asbestos claims have been immaterial. As of September 25, 2020, there were approximately 11,800 asbestos-related cases pending against the Company.
The Company estimates pending asbestos claims, claims that were incurred but not reported and related insurance recoveries, which are recorded on a gross basis in the unaudited condensed consolidated balance sheets. The Company's estimate of its liability for pending and future claims is based on claims experience over the past five years and covers claims either currently filed or expected to be filed over the next seven years. The Company believes that it has adequate amounts recorded related to these matters. While it is not possible at this time to determine with certainty the ultimate outcome of these asbestos-related proceedings, the Company believes, given the information currently available, that the ultimate resolution of all known and anticipated future claims, after taking into account amounts already accrued, along with recoveries from insurance, will not have a material adverse effect on its financial condition, results of operations and cash flows.
Internal Revenue Code Section 453A Interest
As a result of historical internal installment sales, the Company has reported IRC §453A interest on its tax returns on the basis of its interpretation of the U.S. Internal Revenue Code and Regulations. Alternative interpretations of these provisions could result in additional interest payable. Due to the inherent uncertainty in these interpretations, the Company has deferred the recognition of the benefit associated with the Company's interpretation and maintains a corresponding liability of $28.2 million and $47.4 million as of September 25, 2020 and December 27, 2019, respectively. The decrease of $19.2 million was recognized as a benefit to interest expense during the nine months ended September 25, 2020, due to lapses of certain statute of limitations. Further favorable resolution of this uncertainty would likely result in a material reversal of this liability and a benefit being recorded to interest expense within the unaudited condensed consolidated statements of operations.
Tax Matters
As further discussed in Note 4, in August 2020, a settlement was reached with the IRS related to the audit of MHP's (formerly known as Cadence) tax year ended September 26, 2014. The settlement increased the transfer price of the Transferred IP, resulting in an increase to taxable income of $356.5 million and underpayment interest of $11.8 million. The increase to taxable income was satisfied through a noncash offset against the Company’s U.S. Federal NOLs and interest expense for the tax year ended September 25, 2020, while the underpayment interest was satisfied through a cash payment of $11.8 million. The Company was adequately reserved for this item; therefore there were no impacts to the unaudited condensed consolidated statement of operations for the three months ended September 25, 2020.
Other Matters
The Company's legal proceedings and claims are further described within the notes to the financial statements included within the Company's Annual Report filed on Form 10-K for the fiscal year ended December 27, 2019.
|
|
|
|
|
|
|
|
12.
|
Financial Instruments and Fair Value Measurements
|
Fair value is defined as the exit price that would be received from the sale of an asset or paid to transfer a liability, using assumptions that market participants would use in pricing an asset or liability. The fair value guidance establishes a three-level fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs used in measuring fair value. The levels within the hierarchy are as follows:
Level 1— observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2— significant other observable inputs that are observable either directly or indirectly; and
Level 3— significant unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions.
The following tables provide a summary of the significant assets and liabilities that are measured at fair value on a recurring basis at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25,
2020
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Debt and equity securities held in rabbi trusts
|
$
|
31.8
|
|
|
$
|
22.5
|
|
|
$
|
9.3
|
|
|
$
|
—
|
|
|
Equity securities
|
28.0
|
|
|
28.0
|
|
|
—
|
|
|
—
|
|
|
|
$
|
59.8
|
|
|
$
|
50.5
|
|
|
$
|
9.3
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deferred compensation liabilities
|
$
|
33.2
|
|
|
$
|
—
|
|
|
$
|
33.2
|
|
|
$
|
—
|
|
|
Contingent consideration and acquired contingent liabilities
|
27.2
|
|
|
—
|
|
|
—
|
|
|
27.2
|
|
|
Settlement Warrants
|
9.3
|
|
|
—
|
|
|
—
|
|
|
9.3
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
69.7
|
|
|
$
|
—
|
|
|
$
|
33.2
|
|
|
$
|
36.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 27,
2019
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
|
|
Debt and equity securities held in rabbi trusts
|
$
|
30.6
|
|
|
$
|
21.0
|
|
|
$
|
9.6
|
|
|
$
|
—
|
|
|
Equity securities
|
26.2
|
|
|
26.2
|
|
|
—
|
|
|
—
|
|
|
|
$
|
56.8
|
|
|
$
|
47.2
|
|
|
$
|
9.6
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Deferred compensation liabilities
|
$
|
39.2
|
|
|
$
|
—
|
|
|
$
|
39.2
|
|
|
$
|
—
|
|
|
Contingent consideration and acquired contingent liabilities
|
69.3
|
|
|
—
|
|
|
—
|
|
|
69.3
|
|
|
Settlement Warrants
|
43.4
|
|
|
—
|
|
|
—
|
|
|
43.4
|
|
|
|
$
|
151.9
|
|
|
$
|
—
|
|
|
$
|
39.2
|
|
|
$
|
112.7
|
|
Debt and equity securities held in rabbi trusts. Debt securities held in rabbi trusts primarily consist of U.S. government and agency securities and corporate bonds. When quoted prices are available in an active market, the investments are classified as level 1. When quoted market prices for a security are not available in an active market, they are classified as level 2. Equity securities held in rabbi trusts primarily consist of U.S. common stocks, which are valued using quoted market prices reported on nationally recognized securities exchanges.
Equity securities. Equity securities consist of shares in Silence Therapeutics plc ("Silence"), for which quoted prices are available in an active market; therefore, the investment is classified as level 1 and is valued based on quoted market prices reported on an internationally recognized securities exchange.
Deferred compensation liabilities. The Company maintains a non-qualified deferred compensation plan in the U.S., which permits eligible employees of the Company to defer a portion of their compensation. A recordkeeping account is set up for each participant
and the participant chooses from a variety of funds for the deemed investment of their accounts. The recordkeeping accounts generally correspond to the funds offered in the Company's U.S. tax-qualified defined contribution retirement plan and the account balance fluctuates with the investment returns on those funds.
Contingent consideration and acquired contingent liabilities. As of September 25, 2020, the Company maintains various contingent consideration and acquired contingent liabilities associated with the acquisitions of Questcor, Stratatech Corporation ("Stratatech"), and Ocera Therapeutics, Inc. ("Ocera").
The contingent liability associated with the acquisition of Questcor pertains to the Company's license agreement with Novartis AG and Novartis Pharma AG (collectively "Novartis") related to Synacthen, otherwise known as the Company's development product MNK-1411. Under the terms of this agreement, the Company made a $25.0 million payment during the nine months ended September 25, 2020 and subsequently suspended its rights and obligations to Novartis under such agreement. As of September 25, 2020 there are no further contingent liabilities associated with Synacthen. The Company determined the fair value of the contingent consideration associated with the acquisition of Questcor to be zero and $24.5 million as of September 25, 2020 and December 27, 2019, respectively.
As part of the acquisition of Stratatech, the Company provided contingent consideration to the prior shareholders of Stratatech, primarily in the form of regulatory filing and approval milestones associated with the deep partial thickness and full thickness indications associated with StrataGraft®. For each indication, the Company is responsible for a payment upon acceptance of the Company's submission and another upon approval by the FDA. Accordingly, upon acceptance by the FDA of the Company's deep partial thickness submission during the three months ended September 25, 2020, the Company made a $20.0 million payment to the prior shareholders of Stratatech. The Company assesses the likelihood and timing of making such payments at each balance sheet date. The fair value of the contingent payments was measured based on the net present value of a probability-weighted assessment. The Company determined the fair value of the contingent consideration associated with the acquisition of Stratatech to be $15.8 million and $29.0 million as of September 25, 2020 and December 27, 2019, respectively.
As part of the acquisition of Ocera, the Company provided contingent consideration to the prior shareholders of Ocera in the form of both patient enrollment clinical study milestones and sales-based milestones associated with MNK-6105 and MNK-6106. The Company determined the fair value of the contingent consideration based on an option pricing model to be $11.4 million and $15.8 million as of September 25, 2020 and December 27, 2019, respectively.
Of the total fair value of the contingent consideration of $27.2 million, $13.2 million was classified as current and $14.0 million was classified as non-current in the unaudited condensed consolidated balance sheet as of September 25, 2020. The following table summarizes the activity for contingent consideration:
|
|
|
|
|
|
|
|
Balance as of December 27, 2019
|
$
|
69.3
|
|
|
Payments
|
(45.0)
|
|
|
Accretion expense
|
0.5
|
|
Fair value adjustments
|
2.4
|
|
|
Balance as of September 25, 2020
|
$
|
27.2
|
|
Settlement Warrants. Under the Opioid-Related Litigation Settlement, it was contemplated that the Company would issue Settlement Warrants upon emergence from the contemplated Chapter 11 process to the Opioid Claimant Trust to purchase ordinary shares of the Company with an eight year term at a strike price of $3.15 per ordinary share that would represent approximately 19.99% of the Company's fully diluted outstanding shares, including after giving effect to the exercise of the warrants, provided that such warrants may not be exercised during any calendar quarter in a quantity that would exceed 5.0% of the number of shares outstanding.
The fair value of the Settlement Warrants has been estimated using the Black-Scholes pricing model. Use of a valuation model requires management to make certain assumptions with respect to selected model inputs. The expected volatility assumption is based on the historical and implied volatility of the Company's peer group with similar business models. The expected term assumption is based on the contractual term of the Settlement Warrants, including the maximum exercise restriction of 5.0% per calendar quarter, which resulted in the valuation of four separate tranches. The expected annual dividend per share is based on the Company's current intentions regarding payment of cash dividends. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term assumed. The estimated fair value for the Settlement Warrants will be subject to revaluation at each balance sheet date with any changes in fair value recorded as a non-cash gain or (loss) in the unaudited condensed consolidated statements of operations until the Settlement Warrants are issued, at which point they will be recorded as equity or as a liability based upon the facts and circumstances at the time of issuance.
The key assumptions used to estimate the fair value of the Settlement Warrants were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25,
2020
|
|
December 27, 2019
|
|
Expected share price volatility
|
60.1
|
%
|
|
54.4
|
%
|
|
Weighted-average risk-free rate
|
0.5
|
%
|
|
1.8
|
%
|
|
Expected annual dividend per share
|
—
|
%
|
|
—
|
%
|
|
Weighted-average expected term (in years)
|
7.6
|
|
7.6
|
|
Share price
|
$
|
1.14
|
|
|
$
|
3.45
|
|
Subsequent to September 25, 2020, the Company announced that Mallinckrodt plc and certain of its subsidiaries voluntarily initiated the Chapter 11 Cases under the Bankruptcy Code in the Bankruptcy Court. In conjunction with the Chapter 11 filing, the Company entered into a Restructuring Support Agreement (as defined in Note 14) which includes a proposed resolution of all opioid-related claims against the Company and its subsidiaries that supersedes the Opioid-Related Litigation Settlement. The Restructuring Support Agreement includes new terms whereby the warrants equal to approximately 19.99% of the post-emergence fully diluted outstanding shares. These new terms may have a material impact to the recorded fair value of the warrants as of September 25, 2020, but such impact cannot be reasonably estimated at this time. For further information on the terms of this proposed resolution, refer to Note 14.
Financial Instruments Not Measured at Fair Value
The following methods and assumptions were used by the Company in estimating fair values for financial instruments not measured at fair value as of September 25, 2020 and December 27, 2019:
•The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and the majority of other current assets and liabilities approximate fair value because of their short-term nature. The Company classifies cash on hand and deposits in banks, including commercial paper, money market accounts and other investments it may hold from time to time, with an original maturity of three months or less, as cash and cash equivalents (level 1). The fair value of restricted cash was equivalent to its carrying value of $56.3 million and $31.7 million as of September 25, 2020 and December 27, 2019, (level 1), respectively. As of September 25, 2020, $20.2 million and $36.1 million of the restricted cash balance was included in prepaid and other current assets and other assets, respectively, on the unaudited condensed consolidated balance sheet. As of December 27, 2019, substantially all of the restricted cash was included in other assets on the consolidated balance sheet.
•The Company has received a portion of consideration as part of contingent earn-out payments related to the sale of the Nuclear Imaging business in the form of preferred equity certificates. These securities are classified as held-to-maturity and are carried at amortized cost, which approximates fair value (level 3), of $29.8 million and $18.9 million as of September 25, 2020 and December 27, 2019, respectively. These securities are included in other assets on the unaudited condensed consolidated balance sheets.
•The Company's life insurance contracts are carried at cash surrender value, which is based on the present value of future cash flows under the terms of the contracts (level 3). Significant assumptions used in determining the cash surrender value include the amount and timing of future cash flows, interest rates and mortality charges. The fair value of these contracts approximates the carrying value of $51.3 million and $51.1 million as of September 25, 2020 and December 27, 2019, respectively. These contracts are included in other assets on the unaudited condensed consolidated balance sheets.
•The carrying value of the Company's revolving credit facility approximates the fair value due to the short-term nature of this instrument, and is therefore classified as level 1. The Company's 4.875%, 5.75%, 4.75%, 5.625%, 5.50% and 10.00% first and second lien senior notes are classified as level 1, as quoted prices are available in an active market for these notes. Since the quoted market prices for the Company's term loans and 9.50% and 8.00% debentures are not available in an active market, they are classified as level 2 for purposes of developing an estimate of fair value. The following table presents the carrying values and estimated fair values of the Company's debt as of the end of each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25, 2020
|
|
December 27, 2019
|
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
|
Level 1:
|
|
|
|
|
|
|
|
|
4.875% senior notes due April 2020
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
614.8
|
|
|
$
|
480.0
|
|
|
5.75% senior notes due August 2022
|
610.3
|
|
|
159.8
|
|
|
610.3
|
|
|
251.0
|
|
|
4.75% senior notes due April 2023
|
133.7
|
|
|
19.8
|
|
|
133.7
|
|
|
53.7
|
|
|
5.625% senior notes due October 2023
|
514.7
|
|
|
125.5
|
|
|
514.7
|
|
|
193.2
|
|
|
5.50% senior notes due April 2025
|
387.2
|
|
|
93.1
|
|
|
387.2
|
|
|
135.5
|
|
|
10.00% first lien senior notes due April 2025
|
495.0
|
|
|
516.1
|
|
|
—
|
|
|
—
|
|
|
10.00% second lien senior notes due April 2025
|
322.9
|
|
|
252.6
|
|
|
322.9
|
|
|
253.8
|
|
|
Revolving credit facility
|
900.0
|
|
|
900.0
|
|
|
900.0
|
|
|
900.0
|
|
|
Level 2:
|
|
|
|
|
|
|
|
|
9.50% debentures due May 2022
|
10.4
|
|
|
4.2
|
|
|
10.4
|
|
|
5.4
|
|
|
8.00% debentures due March 2023
|
4.4
|
|
|
1.3
|
|
|
4.4
|
|
|
2.0
|
|
|
Term loan due September 2024
|
1,509.1
|
|
|
1,318.8
|
|
|
1,520.8
|
|
|
1,240.0
|
|
|
Term loan due February 2025
|
400.5
|
|
|
349.1
|
|
|
403.6
|
|
|
326.2
|
|
|
Total Debt
|
$
|
5,288.2
|
|
|
$
|
3,740.3
|
|
|
$
|
5,422.8
|
|
|
$
|
3,840.8
|
|
Concentration of Credit and Other Risks
Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of accounts receivable. The Company generally does not require collateral from customers. A portion of the Company's accounts receivable outside the U.S. includes sales to government-owned or supported healthcare systems in several countries, which are subject to payment delays. Payment is dependent upon the financial stability and creditworthiness of those countries' national economies.
The following table shows net sales attributable to distributors that accounted for 10.0% or more of the Company's total segment net sales, which excludes the one-time charge related to the Medicaid lawsuit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 25,
2020
|
|
September 27,
2019
|
|
September 25,
2020
|
|
September 27,
2019
|
|
CuraScript, Inc.
|
28.1
|
%
|
|
31.1
|
%
|
|
27.7
|
%
|
|
30.2
|
%
|
The following table shows accounts receivable attributable to distributors that accounted for 10.0% or more of the Company's gross accounts receivable at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25,
2020
|
|
December 27,
2019
|
|
AmerisourceBergen Corporation
|
26.5
|
%
|
|
31.3
|
%
|
|
McKesson Corporation
|
18.1
|
|
|
15.3
|
|
|
CuraScript, Inc.
|
13.2
|
|
|
12.1
|
|
The following table shows net sales attributable to products that accounted for 10.0% or more of the Company's total segment net sales, which excludes the one-time charge related to the Medicaid lawsuit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 25,
2020
|
|
September 27,
2019
|
|
September 25,
2020
|
|
September 27,
2019
|
|
Acthar Gel
|
27.9
|
%
|
|
30.9
|
%
|
|
27.9
|
%
|
|
30.5
|
%
|
|
INOmax
|
20.3
|
|
|
18.4
|
|
|
21.2
|
|
|
18.1
|
|
|
Ofirmev
|
12.7
|
|
|
11.6
|
|
|
10.5
|
|
|
11.5
|
|
|
|
|
|
|
|
|
|
|
The Company operates in two reportable segments, which are further described below:
•Specialty Brands includes innovative specialty pharmaceutical brands; and
•Specialty Generics includes niche specialty generic drugs and APIs.
Management measures and evaluates the Company's operating segments based on segment net sales and operating income. Management excludes corporate expenses from segment operating income. In addition, certain amounts that management considers to be non-recurring or non-operational are excluded from segment net sales and operating income because management and the chief operating decision maker evaluate the operating results of the segments excluding such items. These items may include, but are not limited to, depreciation and amortization, share-based compensation, net restructuring and related charges, non-restructuring impairment charges, separation costs, research and development ("R&D") upfront payments, changes related to the Opioid-Related Litigation Settlement and the Acthar Gel Medicaid Retrospective Rebate incurred as a result of the Medicaid lawsuit. During the three months ended September 25, 2020, the Company began excluding depreciation and share-based compensation from its evaluation of the operating results of its segments. As a result, prior period segment operating income has been recast to reflect this change on a comparable basis. Although these amounts are excluded from segment net sales and operating income, as applicable, they are included in reported consolidated net sales and operating income (loss) and are reflected in the reconciliations presented below.
Selected information by reportable segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 25,
2020
|
|
September 27,
2019
|
|
September 25,
2020
|
|
September 27,
2019
|
|
Net sales:
|
|
|
|
|
|
|
|
|
Specialty Brands
|
$
|
539.6
|
|
|
$
|
580.4
|
|
|
$
|
1,553.0
|
|
|
$
|
1,812.4
|
|
|
Specialty Generics
|
159.4
|
|
|
163.3
|
|
|
512.7
|
|
|
545.2
|
|
|
Segment net sales
|
699.0
|
|
|
743.7
|
|
|
2,065.7
|
|
|
2,357.6
|
|
|
Medicaid lawsuit (Note 11)
|
(0.7)
|
|
|
—
|
|
|
(535.1)
|
|
|
—
|
|
|
Net sales
|
$
|
698.3
|
|
|
$
|
743.7
|
|
|
$
|
1,530.6
|
|
|
$
|
2,357.6
|
|
|
Operating income:
|
|
|
|
|
|
|
|
|
Specialty Brands
|
$
|
291.8
|
|
|
$
|
277.0
|
|
|
$
|
765.0
|
|
|
$
|
894.2
|
|
|
Specialty Generics
|
43.1
|
|
|
36.3
|
|
|
155.5
|
|
|
125.4
|
|
|
Segment operating income
|
334.9
|
|
|
313.3
|
|
|
920.5
|
|
|
1,019.6
|
|
|
Unallocated amounts:
|
|
|
|
|
|
|
|
|
Corporate and unallocated expenses (1)
|
(42.1)
|
|
|
(15.3)
|
|
|
(152.3)
|
|
|
(76.6)
|
|
|
Depreciation and amortization
|
(236.1)
|
|
|
(234.9)
|
|
|
(675.5)
|
|
|
(723.5)
|
|
|
Share-based compensation
|
(4.3)
|
|
|
(7.8)
|
|
|
(17.6)
|
|
|
(30.6)
|
|
|
Restructuring and related charges, net
|
(3.2)
|
|
|
(7.2)
|
|
|
(15.8)
|
|
|
(11.2)
|
|
|
Non-restructuring impairment charges
|
—
|
|
|
—
|
|
|
(63.5)
|
|
|
(113.5)
|
|
|
Separation costs (2)
|
(33.0)
|
|
|
(19.8)
|
|
|
(75.0)
|
|
|
(50.4)
|
|
|
R&D upfront payment (3)
|
—
|
|
|
(20.0)
|
|
|
(5.0)
|
|
|
(20.0)
|
|
|
Opioid-related litigation settlement (4)
|
25.8
|
|
|
—
|
|
|
34.1
|
|
|
—
|
|
|
Medicaid lawsuit (Note 11)
|
(0.5)
|
|
|
—
|
|
|
(640.2)
|
|
|
—
|
|
|
Operating income (loss)
|
$
|
41.5
|
|
|
$
|
8.3
|
|
|
$
|
(690.3)
|
|
|
$
|
(6.2)
|
|
(1)Includes administration expenses and certain compensation, legal, environmental and other costs not charged to the Company's reportable segments.
(2)These costs, which are included in SG&A expenses, primarily relate to professional fees, costs incurred in preparation for the Chapter 11 proceedings as the Company works to resolve opioid and other legal uncertainties, incremental costs incurred to build out the corporate infrastructure of the previously planned spin-off of the Company's Specialty Generics segment, as well as rebranding initiatives associated with the Specialty Brands ongoing transformation.
(3)Represents R&D expense incurred related to an upfront payment made to acquire product rights in Japan for terlipressin during the nine months ended September 25, 2020 and an upfront payment made to Silence in connection with the license and collaboration agreement entered into during the three and nine months ended September 27, 2019.
(4)Represents the change in the Settlement Warrants' fair value. Refer to Note 12 for further information regarding the valuations of the Settlement Warrants.
Net sales by product family within the Company's reportable segments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 25,
2020
|
|
September 27,
2019
|
|
September 25,
2020
|
|
September 27,
2019
|
|
Acthar Gel (1)
|
$
|
195.3
|
|
|
$
|
229.8
|
|
|
$
|
576.6
|
|
|
$
|
720.1
|
|
|
INOmax
|
141.9
|
|
|
136.8
|
|
|
438.5
|
|
|
427.6
|
|
|
Ofirmev
|
88.7
|
|
|
86.1
|
|
|
216.0
|
|
|
272.2
|
|
|
Therakos
|
62.6
|
|
|
60.9
|
|
|
174.1
|
|
|
183.6
|
|
|
Amitiza (2)
|
47.7
|
|
|
52.6
|
|
|
138.2
|
|
|
157.6
|
|
|
Other (3)
|
3.4
|
|
|
14.2
|
|
|
9.6
|
|
|
51.3
|
|
|
Specialty Brands
|
539.6
|
|
|
580.4
|
|
|
1,553.0
|
|
|
1,812.4
|
|
|
|
|
|
|
|
|
|
|
|
Hydrocodone (API) and hydrocodone-containing tablets
|
20.0
|
|
|
15.7
|
|
|
71.9
|
|
|
51.2
|
|
|
Oxycodone (API) and oxycodone-containing tablets
|
16.1
|
|
|
17.2
|
|
|
48.0
|
|
|
53.3
|
|
|
Acetaminophen (API)
|
54.9
|
|
|
48.5
|
|
|
154.5
|
|
|
143.1
|
|
|
Other controlled substances
|
62.4
|
|
|
72.9
|
|
|
223.8
|
|
|
265.7
|
|
|
Other
|
6.0
|
|
|
9.0
|
|
|
14.5
|
|
|
31.9
|
|
|
Specialty Generics
|
159.4
|
|
|
163.3
|
|
|
512.7
|
|
|
545.2
|
|
|
Segment net sales
|
699.0
|
|
|
743.7
|
|
|
2,065.7
|
|
|
2,357.6
|
|
|
Medicaid lawsuit (Note 11)
|
(0.7)
|
|
|
—
|
|
|
(535.1)
|
|
|
—
|
|
|
Net sales
|
$
|
698.3
|
|
|
$
|
743.7
|
|
|
$
|
1,530.6
|
|
|
$
|
2,357.6
|
|
(1)The three and nine months ended September 25, 2020 includes the prospective change to the Medicaid rebate calculation beginning in June 2020, which impacted Acthar Gel net sales by $22.2 million and $30.8 million, respectively. See Note 11 for further detail on the status of the Medicaid lawsuit.
(2)Amitiza consists of both product net sales and royalties. Refer to Note 2 for further details on Amitiza's revenues.
(3)The three and nine months ended September 27, 2019 includes $10.5 million and $36.8 million of net sales, respectively, related to BioVectra prior to the completion of the sale of this business in November 2019.
Commitments and Contingencies
Certain litigation matters occurred during the nine months ended September 25, 2020 or prior, but had subsequent updates through the issuance of this report. See further discussion in Note 11.
Chapter 11 Restructuring
Voluntary Petitions for Reorganization
On October 12, 2020 (the "Petition Date"), Mallinckrodt plc and certain of its subsidiaries voluntarily initiated the Chapter 11 Cases under the Bankruptcy Code in the Bankruptcy Court. The entities that filed the Chapter 11 Cases include the Company, substantially all of the Company’s U.S. subsidiaries, including certain subsidiaries of Mallinckrodt plc operating the Specialty Generics business (the "Specialty Generics Subsidiaries") and the Specialty Brands business (the "Specialty Brands Subsidiaries"), and certain of the Company’s international subsidiaries (together with the Company, Specialty Generics Subsidiaries and Specialty Brands Subsidiaries, the "Debtors"). The Debtors have filed a motion with the Bankruptcy Court seeking joint administration of the Chapter 11 Cases under the caption In re Mallinckrodt plc, Case No. 20-12522 (JTD).
On October 14, 2020, the Company received Bankruptcy Court approval of its customary motions filed on the Petition Date seeking court authorization to continue to support its business operations during the Chapter 11 Cases, including the continued payment of employee wages and benefits without interruption, payment of critical and foreign vendors, and continuation of customer programs. Under the interim Court order, the Company will make adequate protection payments of an incremental 200 basis points on the senior secured term loans and senior secured revolving credit facility during the Chapter 11 Cases. These adequate protection payments are expected to be classified as interest expense, beginning during the three months ending December 25, 2020.
Restructuring Support Agreement
On October 11, 2020, the Company and the other Debtors entered into a Restructuring Support Agreement (the "RSA") with creditors holding approximately 84%, by aggregate principal amount, of the Company’s outstanding guaranteed unsecured senior notes and with a group of governmental plaintiffs in the opioid litigation pending against the Company and certain of its subsidiaries,
including 50 state and territory attorneys general and the court-appointed plaintiffs’ executive committee in the opioid multidistrict litigation (collectively, the "Supporting Parties").
The RSA incorporates the terms agreed to by the parties reflected in the term sheets attached to the RSA, including an agreement by the Supporting Parties to support the following:
•A proposed resolution of all opioid-related claims against the Company and its subsidiaries. Under the terms of the amended proposed settlement (the "Amended Proposed Opioid-Related Litigation Settlement"), which would become effective upon Mallinckrodt’s emergence from the Chapter 11 process, subject to court approval and other conditions:
◦Opioid claims would be channeled to one or more trusts, which would receive $1,600.0 million in structured payments consisting of (i) a $450.0 million payment upon the Company’s emergence from Chapter 11; (ii) a $200.0 million payment upon each of the first and second anniversaries of emergence; and (iii) a $150.0 million payment upon each of the third through seventh anniversaries of emergence with a one-year prepayment option at a discount for all but the first payment.
◦Opioid claimants would also receive warrants for approximately 19.99% of the Company’s fully diluted outstanding shares, including after giving effect to the exercise of the warrants, exercisable at a strike price reflecting an aggregate equity value of $1,551.0 million.
◦Upon commencing the Chapter 11 filing, the Company will comply with an agreed-upon operating injunction with respect to the operation of its opioid business.
•A proposed resolution with the U.S. Department of Justice and other governmental parties to settle a range of litigation matters and disputes relating to Acthar Gel.
◦The Company has reached an agreement in principle with the DOJ and other governmental parties to settle a range of litigation matters and disputes relating to Acthar Gel, referred to herein as the Acthar Gel-Related Settlement. Under the settlement in principle, which is conditioned upon the Company entering the Chapter 11 restructuring process, the Company has agreed to pay $260.0 million to the DOJ and other parties over seven years and reset Acthar Gel’s Medicaid rebate calculation as of July 1, 2020, such that state Medicaid programs will receive 100% rebates on Acthar Gel Medicaid sales, based on current Acthar Gel pricing. Additionally, upon execution of the settlement, the Company will dismiss its appeal of the Medicaid lawsuit, currently pending in the Court of Appeals for the D.C. Circuit. In turn, the U.S. Government will drop its demand for approximately $640 million in retrospective Medicaid rebates for Acthar Gel and agree to dismiss a FCA lawsuit in Boston relating to the Medicaid lawsuit and an unrelated FCA suit in the Eastern District of Pennsylvania relating to legacy Questcor interactions with an independent charitable foundation.
Mallinckrodt has entered into the agreement in principle to settle with the DOJ and other governmental parties solely to move past these litigation matters and disputes and will make no admission of liability or wrongdoing. The Company expects to complete the settlement with the DOJ, as well as various states that are party to the Boston FCA litigation, over the next several months, subject to court approval.
•The reinstatement of the agreements associated with the Company’s senior secured term loans, senior secured revolving credit facility, 10.00% first and second lien senior notes. At the end of the court-supervised process, all allowed claims under these agreements are expected to be reinstated at existing rates and maturities.
•A restructuring of the Company’s unsecured notes under the Guaranteed Unsecured Notes Indentures (as defined below). At the end of the court-supervised process, holders of allowed claims under the Guaranteed Unsecured Notes Indentures and the Guaranteed Unsecured Notes (as defined below) are expected to receive their pro rata share of $375.0 million of new secured second lien notes due seven years after emergence and 100% of the ordinary shares of Mallinckrodt, subject to dilution by the warrants described above and certain other equity.
•A proposed resolution of other remaining claims and treatment of equity holders. At the end of the court-supervised process, trade creditors and holders of allowed general unsecured claims are expected to share in $150.0 million in cash, and equity holders and holders of the 9.50% debentures due May 2022, the 8.00% debentures due March 2023 and the 4.75% senior notes due April 2023 are expected to receive no recovery.
The restructuring transactions contemplated by the RSA will be effectuated through a plan of reorganization to be proposed by the Debtors (the "Plan"), which among other things as outlined above, provides for a financial restructuring that would reduce the Company’s total debt by approximately $1,300.0 million. Pursuant to the RSA, each of the Debtors and the Supporting Parties has made certain customary commitments to each other in connection with the pursuit of the transactions contemplated by the term sheets attached thereto. The Debtors have agreed, among other things, to use commercially reasonable efforts to make all requisite filings with the Bankruptcy Court; continue to involve and update the Supporting Parties’ representatives in the bankruptcy process; and satisfy certain other covenants. The Supporting Parties have committed to support and vote for the Plan and have agreed to use commercially reasonable efforts to take, or refrain from taking, certain actions in furtherance of such support.
The RSA contains milestones for the progress of the Chapter 11 Cases (the "Milestones"), which include the dates by which the Debtors are required to, among other things, obtain certain orders of the Court and consummate the Debtors’ emergence from bankruptcy. Among other dates set forth in the RSA, the agreement contemplates that the Court shall have entered an order confirming the Plan no later than eleven months after the Petition Date and that the Debtors shall have emerged from bankruptcy no later than fifteen months after the Petition Date.
Each of the parties to the RSA may terminate the agreement (and thereby their support for the Plan) under certain limited circumstances. Any Debtor may terminate the RSA upon, among other circumstances: (i) its board of directors, after consultation with legal counsel, reasonably determining in good faith that performance under the RSA would be inconsistent with its fiduciary duties; and (ii) certain actions by the Bankruptcy Court, including dismissing the Chapter 11 Cases or converting the Chapter 11 Cases into cases under chapter 7 of the Bankruptcy Code.
The Supporting Parties also have specified termination rights, including, among other circumstances, termination rights that arise if any of the Milestones have not been achieved, extended, or waived. Termination by one of these creditor groups will result in the termination of the RSA as to the terminating group only, with the RSA remaining in effect with respect to the Debtors and the non-terminating group.
The transactions contemplated by the RSA are subject to approval by the Bankruptcy Court, among other conditions. Accordingly, no assurance can be given that the transactions described therein will be consummated.
Event of default
The commencement of the Chapter 11 Cases above constituted an event of default under certain of the Company’s debt agreements. Subject to any applicable provisions of the Bankruptcy Code, the Company’s debt instruments and agreements described within the notes to the financial statements included within the Company’s Annual Report filed on Form 10-K for the fiscal year ended December 27, 2019 (other than the 9.50% debentures due May 2022, the 8.00% debentures due March 2023 and the 4.75% senior notes due April 2023) provide that, as a result of the commencement of the Chapter 11 Cases, the principal amount, together with accrued and unpaid interest thereon, and in the case of the indebtedness outstanding under the senior notes, premium, if any, thereon, shall be immediately due and payable. Accordingly, all long-term debt was classified as current on the unaudited condensed consolidated balance sheet as of September 25, 2020. However, any efforts to enforce payment obligations under the debt instruments are automatically stayed as a result of the Chapter 11 Cases and the creditors’ rights in respect of the debt instruments are subject to the applicable provisions of the Bankruptcy Code.
Adoption of Accounting Standards Codification ("ASC") 852 - Reorganizations
For periods occurring after the Petition Date, the Company will adopt Financial Accounting Standards Board ASC Topic 852 - Reorganizations, which specifies the accounting and financial reporting requirements for entities reorganizing through Chapter 11 bankruptcy proceedings. These requirements include distinguishing transactions associated with the reorganization separate from activities related to the ongoing operations of the business.
The Company is currently assessing whether or not it qualifies for fresh start accounting upon emergence from Chapter 11. If the Company were to meet the requirements to adopt the fresh start accounting rules, its assets and liabilities would be recorded at fair value as of the fresh start reporting date, which may differ materially from the recorded values of assets and liabilities on our unaudited condensed consolidated balance sheets.
While the Chapter 11 Cases are pending, the Debtors do not anticipate making interest payments due under their respective unsecured debt instruments; however, the Debtors expect to pay all interest payments in full as they come due under their respective senior secured debt instruments. The total aggregate amount of interest paid pursuant to the Company's unsecured debt instruments that were outstanding as of September 25, 2020 was $64.2 million and $147.3 million during the nine months ended September 25, 2020 and the fiscal year ended December 27, 2019, respectively. The total aggregate amount of interest payments due under the Company's unsecured debt instruments for the remainder of 2020, which it does not expect to pay is $28.8 million.
Notice of Delisting
On October 12, 2020, the Company was notified by the staff of NYSE Regulation, Inc. ("NYSE Regulation") that it had determined to commence proceedings to delist the ordinary shares of the Company from the NYSE. NYSE Regulation reached its decision that the Company is no longer suitable for listing pursuant to NYSE Listed Company Manual Section 802.01D after the Company announced that it had commenced the Chapter 11 Cases. Trading in the Company’s ordinary shares was also suspended on October 12, 2020. On October 13, 2020, the Company’s ordinary shares began trading on the OTC Pink Marketplace under the symbol "MNKKQ." The Company decided not to appeal NYSE’s determination and, on October 13, 2020, NYSE filed a Form 25 with the U.S. Securities and Exchange Commission to remove the Company's ordinary shares from listing and registration on the NYSE.