Mallinckrodt to Pay Executive Bonuses as Opioid Cases Loom

(Bloomberg) -- Mallinckrodt Plc plans to pay more than $4.2 million in bonuses to retain top executives, as the drugmaker looks to avoid bankruptcy and settle more than 2,500 state and local government lawsuits over its handling of opioid painkillers.

The St. Louis-based drug distributor said in a Nov. 5 securities filing that it, or one of its units, may have to restructure the company’s “obligations in a bankruptcy proceeding” if a global deal can’t be reached to wipe out all opioid liability.

In a separate filing the same day, Mallinckrodt said it agreed to pay retention bonuses to its top executives, including Chief Executive Officer Mark Trudeau, who stands to get more than $1.5 million. The company’s chief financial, legal and scientific officers will also get extra compensation to remain in their jobs.

Mallinckrodt shares fell 8.8% to $2.76 at 10:13 a.m. in New York, falling sharply for the third consecutive trading session. The company’s bonds were among the top decliners in the U.S. high-yield market on Thursday, according to Trace bond-trading data. Mallinckrodt’s notes due 2023 and 2025 both fell more than 4 and 5 cents on the dollar to trade around 24 cents.

Mallinckrodt, along with fellow drug distributors McKesson Corp. and Cardinal Health Inc., and opioid makers Johnson & Johnson and Teva Pharmaceutical Industries Ltd., are talking with state attorneys generals and the municipalities’ lawyers about a global settlement. Some of those companies have floated a deal valued at almost $50 billion.

“It’s unusual for a company to pay those bonuses prior to a Chapter 11 filing,” said Chuck Tatelbaum, a Florida-based bankruptcy attorney who has worked on dozens of reorganizations. “I see this as some real message-sending to the local governments that they better get a deal done or the thing will land in bankruptcy court.”

The retention payments were determined to be appropriate by a committee of the board of directors, Mallinckrodt said in a statement. The company declined to comment on whether the bonuses were meant to keep the executives around to help navigate a potential bankruptcy.

“We are navigating a challenging market environment and working to achieve a number of key objectives, including addressing near-term debt maturities, resolving opioid claims and pursuing a separation of the specialty generics business,” the company said in a statement.

Teva is offering $23 billion in donated opioid-treatment drugs plus $250 million in cash while J&J has said it’s willing to kick in $4 billion in cash. Another $18 billion in cash would come from McKesson, Cardinal Health and AmerisourceBergen Corp. Mallinckrodt hasn’t made public what it’s offering to resolve the cases.

Many cities and counties -- along with some states -- have turned their noses up at the current offer, saying it isn’t enough to address the fallout from opioid addictions and overdoses across the U.S.

Local governments in hard-hit states including Ohio, West Virginia and Kentucky have accused opioid makers, distributors and pharmacy chains of understating the risks of prescription opioids, overstating their benefits, failing to halt suspiciously large shipments, and ignoring red flags about repeated retail sales.

“We are aware of Mallinckrodt’s risk of bankruptcy and we are willing to discuss a reasonable resolution with them,” Joe Rice, one of the lawyers leading the cities’ and counties’ cases, said Wednesday. He’s also one of the leaders in the settlement talks.

What Bloomberg Intelligence Says

Distributors could be closing in on a global deal in light of news they offered $18 billion to resolve opioid lawsuits. States’ reported $45 billion original counteroffer could mean plaintiffs are aiming for $27 billion, or a few billion less. Liability should be shared about equally, yet McKesson may pay the most.

--Holly Froum, Consumer Litigation Analyst

To read the report click here

Mallinckrodt has made no secret that its looming opioid liability has the distributor feeling the financial heat. The company faces a $5 billion debt load and said in securities filings that it may be forced to pay “material amounts” as part of any opioid settlement.

Some analysts have estimated it could take as much as $150 billion in total to wipe out all liability for companies that made, sold or distributed opioids.

In September, Mallinckrodt hired restructuring experts from AlixPartners LLP. Earlier this week, it sought to refinance some debt by exchanging bonds for new securities at a discount. If creditors sign on, the company could chop its debt by more than $800 million.

To safeguard the company’s top management, Mallinckrodt directors agreed last month to pay bonuses to keep executives around for at least 18 months, according to the securities filings.

Besides Trudeau, the board agreed to give a $900,000 bonus to Mark Casey, Mallinckrodt’s chief legal officer, $930,000 to Steven Romano, the firm’s chief scientific officer and $825,000 to Chief Financial Officer Bryan Reasons. The bonuses would have to be repaid if any of the executives leaves or is fired over the next year and a half.

The case is In Re National Prescription Opioid Litigation, 17-md-2804, U.S. District Court, Northern District of Ohio (Cleveland).

--With assistance from Katherine Doherty.

To contact the reporters on this story: Jef Feeley in Wilmington, Delaware at jfeeley@bloomberg.net;Riley Griffin in New York at rgriffin42@bloomberg.net

To contact the editors responsible for this story: David Glovin at dglovin@bloomberg.net, ;Drew Armstrong at darmstrong17@bloomberg.net, Timothy Annett

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