I’m Kevin Kedra, healthcare pharmaceutical analyst with G.research. Earlier this week, generic and specialty drug manufacturer Mallinckrodt surprised the market by announcing a $1.6B settlement in principle to resolve the company’s ongoing opioid lawsuits. Through its generics business, Mallinckrodt has been one of the leading suppliers of both generic drugs and active pharmaceutical ingredients for the opioid market. Under the proposed settlement, Mallinckrodt will place its generics business into Chapter 11 bankruptcy and use a channeling injunction to funnel all opioid liabilities into that entity, thus protecting the company’s branded specialty drugs business. Upon emergence from Chapter 11, the generics business will still be controlled by Mallinckrodt, and the company will pay $1.6 billion in cash over an 8 year period as part of the opioid settlement.
This strategy of effectively putting a fence around opioid liabilities through Chapter 11 and a channeling injunction is something that we hadn’t seen before within opioid litigation, and other companies could seek something similar. What is even more interesting to us than the structure is the fact that 47 US state and territory attorneys general, covering nearly 90% of the US population, have signed on to this settlement in principle. With the next major opioid case scheduled to begin in New York on March 20, we are seeing increasing momentum for global settlements across the industry. Companies like Endo and Teva would likely both benefit from a finalized settlement ahead of the New York case.
Among these names, Teva remains our favorite. The company has actually reached a settlement in principle, though only four state attorneys general have officially signed on. By working alongside the Big 3 drug distributors, Teva has been able to offer $23B of free drug to help treat opioid dependency. This provides a sizeable headline number for the settlement value, but we estimate that the cash impact to Teva could be roughly an order of magnitude lower. If Teva is able to bring a majority of attorneys general on board, we could see shares trading more in-line with our 2020 PMV of $18 per share.
