UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 202130, 2022
or
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _____ to _____
Commission File Number : 001-35803
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Mallinckrodt plc
(Exact name of registrant as specified in its charter)
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| Ireland | | 98-1088325 |
| (State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
College Business & Technology Park, Cruiserath,
Blanchardstown, Dublin 15, Ireland
(Address of principal executive offices) (Zip Code)
Telephone: +353 1 696 0000
(Registrant's telephone number, including area code)
Securities registered pursuant to sectionSection 12(b) of the Act: None
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| (Title of each class) | (Trading Symbol(s)) | (Name of each exchange on which registered) |
| Ordinary shares, par value $0.01 per share | MNK | NYSE American LLC |
Securities registered pursuant to Section 12(g) of the Act:
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Title of each class |
Ordinary shares, par value $0.20 per share |
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒☐ No ☐☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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| Large Accelerated Filer | | ☐ | Accelerated Filer | | ☐☒ | Non-accelerated Filer | | ☒☐ | Smaller Reporting Company | | ☒☐ | Emerging Growth Company | | ☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. Yes ☒ No ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant (assuming solely for the purposes of this calculation that all directors and executive officers of the Registrant are "affiliates") as of June 25, 2021,July 1, 2022, the last business day of the Registrant's most recently completed second fiscal quarter, was approximately $38.9$317.4 million (based upon the closing price of $0.46$24.40 per share as reported by the Pink Open Market on that date).
The number of shares of the registrant's common stock outstanding as of March 11, 2022February 24, 2023 was 84,734,080.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive proxy statement for its annual meeting of shareholders, to be filed with the Securities and Exchange Commission within 120 days after December 31, 2021,30, 2022, are incorporated by reference into Part III of this report.Annual Report on Form 10-K.
MALLINCKRODT PLC
INDEX TO FORM 10-K
Presentation of Information
Unless the context requires otherwise, references to "Mallinckrodt plc," "Mallinckrodt," "we," "us," "our" and "the Company" refer to Mallinckrodt plc, (in examination under Part 10 of the Irish Companies Act 2014), an Irish public limited company, and its consolidated subsidiaries. References to "dollars" or "$" refer to United States dollars.
Trademarks and Trade Names
Mallinckrodt owns or has rights to use trademarks and trade names that it uses in conjunction with the operation of its business. One of the more important trademarks that it owns or has rights to use that appears in this Annual Report on Form 10-K (this "Annual Report") is "Mallinckrodt," which is a registered trademark or the subject of pending trademark applications in the United States and other jurisdictions. Solely for convenience, the Company only uses the ™ or ® symbols the first time any trademark or trade name is mentioned. 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 this Annual Report on Form 10-K is, to the Company's knowledge, owned by such other company.
Forward-Looking Statements
The Company has made forward-looking statements in this Annual Report on Form 10-K that are based on management's beliefs and assumptions and on information currently available to management. Forward-looking statements include, but are not limited to, information concerning the Company's possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities, potential operating performance improvements, the effects of competition and the effects of future legislation or regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words "believe," "expect," "plan," "intend," "project," "anticipate," "estimate," "predict," "potential," "continue," "may," "will," "should" or the negative of these terms or similar expressions.
Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. You should not place undue reliance on any forward-looking statements.
The risk factors included in Item 1A. Risk Factors of this Annual Report on Form 10-K could cause the Company's results to differ materially from those expressed in forward-looking statements. There may be other risks and uncertainties that the Company is unable to predict at this time or that the Company currently does not expect to have a material adverse effect on its business.
These forward-looking statements are made as of the filing date of this Annual Report on Form 10-K.Report. The Company expressly disclaims any obligation to update these forward-looking statements other than as required by law.
Summary of Selected Risk Factors
Our business is subject to numerous material and other risks and uncertainties that you should be aware of. These risks and
uncertainties are described more fully in "Item 1A. Risk Factors" in this Annual Report, and include, but are not limited to, the
following:
Risks Related to Our Emergence from Bankruptcy
•We recently emerged from bankruptcy, which could adversely affect our business and relationships.
•Our actual financial results after emergence from bankruptcy may not be comparable to our projections filed with the Bankruptcy Court or otherwise made public in the course of the Chapter 11 Cases (as defined below).
•Our historical financial statements are not comparable to those produced after the application of fresh-start accounting.
•Upon our emergence from bankruptcy, our Board of Directors was changed and may implement changes in our business strategy that could affect the scope and results of our operations.
•We have contractual and court-ordered compliance obligations that if violated could result in exclusion from participation in federal healthcare programs and monetary, injunctive and/or other sanctions.
Risks Related to Our Business
•Governmental investigations, inquiries, and regulatory actions and lawsuits brought against us with respect to our historical commercialization of opioids could adversely affect, among other things, our business and results of operations.
•The healthcare industry has been under increasing scrutiny and changes to, or non-compliance with, relevant policies, laws, regulations or government guidance may result in actions that could adversely affect our business.
•We face significant competition and may not be able to compete effectively.
•We may experience pricing pressure on certain of our products, which could reduce our future revenue and profitability.
•Sales of our products are affected by the reimbursement practices of governmental health administration authorities, private health coverage insurers and other third-party payers. Reimbursement criteria and the use of tender systems outside the United States could reduce prices for our products.
•Any determination of failure to comply with the reporting and payment obligations under the Medicare and Medicaid rebate programs, and other governmental purchasing and rebate programs, could have a material adverse effect on our business.
•Cost-containment efforts of our customers and other parties could materially adversely affect our business.
•Any failure to comply with the extensive laws and regulations governing our industry may materially adversely affect us.
•Our approved products and investigational products may cause undesirable side effects.
•We may be unable to successfully commercialize or launch new products or expand opportunities for existing products.
•We may not be successful in our efforts to identify or discover additional products or product candidates beyond our existing products and product candidates at the rate we expect.
•We may not achieve the anticipated benefits of price increases enacted on our pharmaceutical products.
•Our customer and product concentration may materially adversely affect our business.
•We may be unable to protect our intellectual property rights or subject to intellectual property rights infringement claims.
•Clinical trials demonstrating the efficacy of Acthar® Gel are limited, which could cause physicians not to prescribe Acthar Gel, or payers not to reimburse the drug, which could negatively impact our business.
•Clinical studies required for our product candidates and new indications of our marketed products are expensive and time-consuming, and their outcome is highly uncertain and regulatory approval may be delayed or become unobtainable.
•We may incur litigation liability, including product liability losses.
•Our operations expose us to the risk of liability of violations of health, safety and environmental laws and regulations.
•If our business development activities are unsuccessful, it may adversely affect us.
•If we are unable to attract and retain key scientific, technical, regulatory and commercial personnel, we may be unable to maintain or expand our business.
•Without continued effectiveness and availability of information technology infrastructure, our operations could be harmed.
•Some of our products are regulated as controlled substances, the making, use, sale, importation, exportation, and distribution of which are subject to significant regulation by the United States Drug Enforcement Administration and other regulatory agencies.
•The United States Drug Enforcement Agency regulates the availability of controlled substances, including active pharmaceutical ingredients. At times, the procurement and manufacturing quotas granted by the United States Drug Enforcement Agency may be insufficient to meet our needs.
•The manufacture of our products is complex, and our business could suffer due to manufacturing or supply problems.
•Our global operations expose us to risks and challenges associated with conducting business internationally.
•We have significant levels of intangible assets which utilize our future projections of cash flows in impairment testing. If we experience unfavorable variances from these projections these assets may have an increased risk of future impairment.
•We are subject to labor and employment laws and regulations, which could increase our costs and restrict our operations.
Risks Related to Our Indebtedness and Settlement Obligations
•Our substantial indebtedness and settlement obligations could adversely affect our financial condition and prevent us from fulfilling our obligations and could further adversely affect our ability to make ongoing payments in respect of the Plan (as defined below).
•We may not be able to generate sufficient cash to service all of our indebtedness and other commitments.
•The terms of the agreements that govern our indebtedness and settlement obligations restrict our current and future operations.
•Our debt and settlement obligation levels may materially adversely affect our ability to issue debt on acceptable terms and future access to capital.
•Borrowing capacity under our receivables-based financing facility may decrease, may not be extended upon maturity, or the maturity date may be accelerated.
•Our variable-rate indebtedness exposes us to interest rate risk, which could cause our debt service obligations to increase significantly.
•Despite current and anticipated indebtedness and settlement obligation levels, we may still be able to incur more debt.
•Future financing may not be available on favorable terms when needed and may be dilutive to existing shareholders.
•The phase out of London Interbank Offered Rate, or the replacement of London Interbank Offered Rate with a different reference rate, may adversely affect interest rates associated with our debt.
Risks Related to Tax Matters
•The United States could treat Mallinckrodt plc (parent corporation) as a United States taxpayer under Internal Revenue Code Section 7874.
•The Internal Revenue Service may interpret Internal Revenue Code Section 382 limitation and cancellation of debt income attribution rules differently.
•Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
•A loss of a major tax dispute or a challenge to our operating structure or intercompany pricing policies could result in a higher tax rate on our worldwide earnings.
•Our status as a foreign corporation for United States federal tax purposes could be affected by a change in law.
•Future changes to United States and foreign tax laws could adversely affect us.
•We may not be able to maintain a competitive worldwide effective corporate tax rate.
•A change in our tax residency could have a negative effect on our future profitability and taxes on dividends.
Risks Related to Our Jurisdiction of Incorporation
•Irish law differs from the laws in effect in the United States and may afford less protection to holders of our securities.
•Irish law imposes restrictions on certain aspects of capital management.
Risks Related to Our Ordinary Shares
•An active trading market of our ordinary shares may not develop and the price and trading volume may fluctuate significantly.
PART I
Overview
We areMallinckrodt plc is a global business consisting 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, hepatology, nephrology, pulmonology, ophthalmology and oncology; immunotherapy and neonatal respiratory critical care therapies; analgesics; cultured skin substitutes and gastrointestinal products.
We operate our business 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)").
We continue to pursue our ongoing transformation to become an innovation-driven biopharmaceutical company focused on improving outcomes for underserved patients with severe and critical conditions. For further information on our products, refer to "Our Businesses and Products" within this Item 1. Business.
Our principal executive offices are located at College Business & Technology Park, Cruiserath, Blanchardstown, Dublin 15, Ireland, where our Specialty Brands global external manufacturing operations are also located. In addition, we have other locations in the United States ("U.S."), most notably our corporate shared services office in Hazelwood, Missouri, our Specialty Brands commercial headquarters in Bridgewater, New Jersey (formerly Hampton, New Jersey,Jersey), and our Specialty Generics headquarters and technical development center in Webster Groves, Missouri.
Emergence from Voluntary Filing Under Chapter 11 and Going ConcernReorganization
On October 12, 2020 Mallinckrodt plc and certain of its subsidiaries("Petition Date"), we voluntarily initiated Chapter 11 proceedings (the "Chapter("Chapter 11 Cases") under chapter 11 of title 11 ("Chapter 11") of the United States Code (the "Bankruptcy("Bankruptcy Code") to modify our capital structure, including restructuring portions of our debt, and to resolve potential legal liabilities, including but not limited to a proposed resolution of all opioid-related claims against us (the "Amended Proposed Opioid-Related Litigation Settlement") and a proposed resolution of various Acthar® Gel (repository corticotropin injection) ("Acthar Gel")-related matters (the "Proposed Acthar Gel-Related Settlement"), includingin the Medicaid lawsuit withU.S. Bankruptcy Court for the Centers for Medicare and Medicaid Services ("CMS"), an associated False Claims Act ("FCA") lawsuit in Boston and an Eastern District of PennsylvaniaDelaware ("EDPA") FCA lawsuit relating to Acthar Gel's previous owner's interactions with an independent charitable foundation. The entities that filed the Chapter 11 Cases include Mallinckrodt plc, substantially all of our 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 our international subsidiaries (together with Mallinckrodt plc, Specialty Generics Subsidiaries and Specialty Brands Subsidiaries, the "Debtors"Bankruptcy Court"). In connection withOn March 2, 2022, the filingU.S. Bankruptcy Court for the District of Delaware ("Bankruptcy Court") entered an order confirming the Chapter 11 Cases, we entered into a restructuring support agreement (asfourth amended supplemented or otherwise modified, "Restructuring Support Agreement" or "RSA") as part of a prearranged plan of reorganization.reorganization (with technical modifications ("Plan"). Subsequent to the filing of the Chapter 11 Cases, Chapter 11 proceedings commenced by a limited subset of the Debtors have beendebtors were recognized and given effect in Canada, and separately Mallinckrodt plc has commenced an examinership process with the High Court of Ireland.Ireland made an order confirming a scheme of arrangement on April 27, 2022, which is based on and consistent in all respects with the Plan ("Scheme of Arrangement"). The references toPlan and Scheme of Arrangement became effective on June 16, 2022, ("Effective Date"), and on such date we emerged from the Chapter 11 Cases included within this Annual Report on Form 10-K shall include, where applicable, such proceedings in Canada and Ireland.Irish examinership proceedings. Refer to Note 2 of the Notes to the Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for further information on the voluntary petitions for reorganization, the RSA and agreements in principle subsequently memorialized in our Chapter 11 plan of reorganization.
Substantial doubt about our ability to continue as a going concern exists in light of our Chapter 11 Cases. Our ability to continue as a going concern is contingent upon, among other things, our 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 our obligations, most notably our opioid and Acthar Gel-related settlements and restructured debt obligations, and operating needs.
Although management believes that our reorganization through the Chapter 11 proceedings will appropriately position us upon emergence, the commencement of these proceedings constituted an event of default under certain of our 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 our bankruptcy, including, among others that: (a) our prearranged plan of reorganization may never become effective, (b) the RSA 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 Mallinckrodt plc and its subsidiaries, and (d) the Chapter 11 Cases may be converted into cases under Chapter 7 of the Bankruptcy Code.
Although the Bankruptcy Court entered an order (the "Confirmation Order") confirming the fourth amended plan of reorganization (with technical modifications) proposed by the Debtors (the "Plan"), consummation of such plan of reorganization and the transactions contemplated therebyPlan and emergence from theChapter 11.
Upon emergence from Chapter 11, proceedings remains subjectwe adopted fresh-start accounting in accordance with the provisions of Financial Accounting Standards Board Accounting Standards Codification Topic 852 - Reorganizations ("ASC 852"), and became a new entity for financial reporting purposes as of the Effective Date. References to "Successor" relate to the satisfactionfinancial position as of various conditions, including completionJune 16, 2022 and results of operations of the Canadianreorganized Company subsequent to June 16, 2022, while references to "Predecessor" relate to the financial position prior to June 16, 2022 and Irish proceedings noted above.results of operations of the Company prior to, and including, June 16, 2022. All emergence-related transactions of the Predecessor were recorded as of June 16, 2022. Accordingly, no assurance can be given that the Plan or transactions contemplated thereby will be consummated. As a result, we have concluded that management's plans atconsolidated financial statements for the Successor are not comparable to the consolidated financial statements for the Predecessor. Refer to Note 3 of the Notes to the Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this stage do not alleviate substantial doubt about our ability to continue as a going concern.
Information about the Chapter 11 Cases, including the case docket, is publicly available at https://restructuring.primeclerk.com/Mallinckrodt/.Annual Report for further information.
Fiscal Year
We report ourThe Company reports its results based on a "52-53 week" year ending on the last Friday of December. The period June 17, 2022 through December 30, 2022 reflects the Successor period, while the period January 1, 2022 through, and including, June 16, 2022 reflects the Predecessor period. Fiscal year ended December 31, 2021 (Predecessor) ("fiscal 2021") consisted of 53 weeks, while the combined periods of January 1, 2022 through June 16, 2022 and June 17, 2022 through December 30, 2022 ("fiscal 2022") and fiscal year ended December 25, 2020 and 2019 each(Predecessor) ("fiscal 2020") consisted of 52 weeks.
Our Businesses and Products
We manage our business in two reportable segments: Specialty Brands and Specialty Generics. Management measures and evaluates our operating segments based on segment net sales and operating income. Information regarding the product portfolios and business strategies of these segments is included in the following discussion.
Specialty Brands
Our business markets branded pharmaceutical products for autoimmune and rare diseases in the specialty areas of neurology, rheumatology, hepatology, nephrology, pulmonology, ophthalmology and oncology; immunotherapy and neonatal respiratory critical care therapies; analgesics; cultured skin substitutes and gastrointestinal products. Our diversified, in-line portfolio of both marketed and development products is focused on patients with significant unmet medical needs.
Our long-term strategy is to to:
•increase patient access and appropriate utilization of our existing products;
•develop innovative new therapies and next-generation devices for our products; advance pipeline products and bring them to market; and
•selectively acquire or license products that are strategically aligned with our product portfolio to expand the size and profitability of our Specialty Brands segment.
We promote our branded products directly to physicians in their offices, hospitals and ambulatory surgical centers (including neurologists, rheumatologists, hepatologists, nephrologists, pulmonologists, ophthalmologists, oncologists, neonatologists, surgeons and pharmacy directors) with our own direct sales force of almost 350300 sales representatives as of December 31, 2021.30, 2022 (Successor). These products are purchased by independent wholesale drug distributors, specialty pharmaceutical distributors, retail pharmacy chains and hospital procurement departments, among others, and are eventually dispensed by prescription to patients. We also contract directly with payer organizations to ensure reimbursement for our products to patients that are prescribed our products by their physicians.
The following is a description of select products in our product portfolio:
•Acthar® Gel (repository corticotropin injection) ("Acthar Gel") is a complex mixture of peptides approved by the U.S. Food and Drug Administration ("FDA") for use in 19 indications. The product currently generates substantially all of its net sales from 11 of the on-label indications, including adjunctive therapy for short-term administration for an acute episode or exacerbation in rheumatoid arthritis ("RA"), including juvenile RA; monotherapy for the treatment of infantile spasms in infants and children under two years of age; treatment during an exacerbation or as maintenance therapy in selected cases of systemic lupus erythematosus; treatment of acute exacerbations of multiple sclerosis ("MS") in adults; including a diuresis or a remission of proteinuria in nephrotic syndrome ("NS") without uremia of the idiopathic type or that due to lupus; treatment during an exacerbation or as maintenance therapy in selected cases of systemic dermatomyositis (polymyositis); treatment of symptomatic sarcoidosis; and treatment of severe acute and chronic allergic and inflammatory processes involving the eye and its adnexa including keratitis and uveitis. We may initiate commercial efforts for other approved indications where there is high unmet medical need. The currently approved indications of Acthar Gel are not subject to patent or other exclusivity.
There is significant clinical evidencedata generated to support the effectiveness of Acthar Gel. This evidencedata is the result of company-sponsored controlled clinical trials, as well as previously completed and largely independent clinical case series and smaller trials that have expanded the product's evidence base and strengthened its clinical profile. We continue our data generation efforts through pre-clinical studies and additional independent research, as well as our efforts to extend the value of the product through product enhancements including the ongoing
development of the Acthar Gel self-injection device, which we believe will create an easier and more patient-friendly application for single unit dosage indications, as well as through additional studies.indications.
•INOmax® (nitric oxide) gas, for inhalation ("INOmax") is a vasodilator that, in conjunction with ventilatory support and other appropriate agents, is indicated to improve oxygenation and reduce the need for extracorporeal membrane oxygenation in term and near-term (>34 weeks) neonates with hypoxic respiratory failure ("HRF") associated with clinical or echocardiographic evidence of pulmonary hypertension. INOmax is also approved in Australia for the treatment of perioperative pulmonary hypertension in adults in conjunction with cardiovascular surgery. Additionally, our Phase 4 registry assessing INOmax for treatment of pulmonary hypertension in premature (27 to 34 weeks) and term and near-term neonates was completed early in February 2020 due to achievement of the pre-specified primary outcome measure of non-inferiority. The decision to end the study early was made following the second planned interim analysis at 75% enrollment. The interim analysis assessed 54 premature and 84 term and near-term neonates and demonstratedreflected that the trial achieved the significance level for non-inferiority. Evaluation of significant improvement for each neonate is based on at least a 25% decrease in oxygenation index or surrogate oxygenation index during the INOmax treatment period.
INOmax is marketed as part of the INOmax Total Care package, which includes the drug product, proprietary drug-delivery systems, technical and clinical assistance, 24/7/365 customer service, emergency supply and delivery and on-site training. Development continuesThe development and subsequent FDA submission of a 510(k) premarket notification application was completed in September 2022 for the next-generationan investigational inhaled nitric oxide delivery system for INOmax device, which is designed togas, for inhalation. If cleared, this next generation inhaled nitric oxide delivery system will offer a compact, portable design that we believe will further enhance the safety of the product, as well as the simplicity and flexibility of use in a number of settings.
•Therakos® photopheresis ("Therakos") is focused on providing innovative immunotherapy treatment platforms that enhance the ability of a patient's immune system to fight disease. We believe Therakos is thea global leader in autologous immunotherapy delivered through extracorporeal photopheresis ("ECP") and provides the only integrated ECP system in the world. ECP involves drawing blood from the patient, separating white blood cells from plasma and red blood cells that are returned to the patient, and treating the white blood cells with an Ultraviolet-A ("UVA") light activated drug. The treated white blood cells are immediately re-administered back into the patient. ECP is approved by the FDA for use in the palliative treatment of the skin manifestations of cutaneous T-cell lymphoma (“CTCL”("CTCL") that is unresponsive to other forms of treatment. Outside the U.S., ECP is approved to treat several other serious diseases that arise from immune system imbalances. Therakos' product suite, which is sold to hospitals, clinics, academic centers and blood banks, includes an installed system, a disposable procedural kit used for each treatment and a drug, UVADEX® (methoxsalen) Sterile Solution (“UVADEX”("UVADEX"), as well as instrument accessories and instrument maintenance and repair services.
•Amitiza® (lubiprostone) ("Amitiza") is a leading global product in the branded constipation market. Amitiza is approved by the FDA for treatment of chronic idiopathic constipation in adults, irritable bowel syndrome with constipation in women 18 years of age and older, and opioid-induced constipation in adult patients with chronic, non-cancer pain, including patients with chronic pain related to prior cancer or its treatment who do not require frequent opioid dosage escalation. Amitiza is a chloride channel type-two activator that increases fluid secretion and motility of the intestine, facilitating passage of stool. Of the branded products currently marketed, only Amitiza is approved for three constipation indications in the U.S.
•StrataGraft® (allogenic cultured keratinocytes and dermal fibroblasts in murine collagen - dsat) ("StrataGraft") regenerative skin tissue is an allogeneic cellularized scaffold product derived from keratinocytes grown on gelled collagen containing dermal fibroblasts indicated for the treatment of adults with thermal burns containing intact dermal elements for which surgical intervention is clinically indicated (deep partial-thickness burns). StrataGraft is designed to deliver viable cells to support the body's own ability to heal. StrataGraft contains metabolically active cells that produce and secrete a variety of growth factors and cytokines. Growth factors and cytokines are known to be involved in wound repair and regeneration. The product is designed with both dermal and epidermal layers composed of well-characterized human cells. StrataGraft is intended to be applied in appropriate aseptic conditions, such as the operating room, and can be sutured, stapled or secured with a tissue adhesive.
During the first quarter of fiscal 2022, we released our first commercial shipment of StrataGraft. The FDA granted StrataGraft orphan drug designation, and it was among the first products designated by the FDA as a Regenerative Medicine Advanced Therapy (RMAT) under the provisions of the 21st Century Cures Act. At the time of approval, the FDA awarded us a Priority Review Voucher (PRV).("PRV"), which has been sold pursuant to an asset purchase agreement dated June 30, 2022. In June 2021, the FDA had approved the StrataGraft biologics license application ("BLA") for deep partial-thickness. We are currently conducting a StrataGraft continued access clinical trial under an expanded access program. The trial sites involved in the pivotal Phase 3 trial have the opportunity to participate in this multicenter, open-label study. Overall, 52 patients were enrolled. There were no unexpected wound or StrataGraft-related events. The safety results were consistent with prescribing information and patients treated achieved durable wound closure without autografting and thus showed expected clinical benefit in this population. We also are currently conducting a Phase 2 trial to evaluate StrataGraft for the treatment of adults with full-thickness burns (also referred to as third-degree burns) and a pediatric study evaluating StrataGraft in the treatment of pediatric populations.
The Biomedical Advanced Research and Development Authority ("BARDA") expressed interest in StrataGraft as a medical countermeasure in response to large-scale burn incidents, and provided funding and technical support for the continued development of StrataGraft. These efforts are part of BARDA's strategy to build emergency preparedness in response to mass casualty events involving trauma and thermal burns by developing novel medical countermeasures for adult and at-risk populations. In the case of a mass casualty thermal burn event, the Government Accountability Office estimates that more than 10,000 patients might require thermal burn care. The limited number of specialized burn centers and related medical infrastructure in the U.S. creates a public health need for therapies that could be deployed quickly for use in these and other care sites.
•Terlivaz® (terlipressin) ("Terlivaz") is the first and only FDA-approved product indicated to improve kidney function in adults with hepatorenal syndrome ("HRS") type 1 (collectively "HRS-1") with rapid reduction in kidney function, an acute and life-threatening condition requiring hospitalization. The FDA granted Terlivaz orphan drug designation. Terlivaz is one of the most studied pharmacological agents in HRS-1 with more than 70 published manuscripts and presented abstracts on clinical data to date. The FDA approval was based, in part, on results from the Phase 3 CONFIRM trial, the largest-ever prospective study (n=300) conducted to assess the safety and efficacy of Terlivaz in patients with HRS-1 in the U.S. and Canada. The CONFIRM trial met its primary endpoint of Verified HRS Reversal, defined as renal function improvement, avoidance of dialysis and short-term survival. It has been approved outside the U.S. for more than 30 years and is available on five continents for its indications in the countries where it is approved. Terlivaz is
recommended for line use by both the American Association for the Study of Liver Diseases and the American College of Gastroenterology guidelines. On September 14, 2022, we announced the FDA had approved Terlivaz for injection and during the fourth quarter of fiscal 2022, we released our first commercial shipment of the product.
•Amitiza® (lubiprostone) ("Amitiza") is approved by the FDA for treatment of chronic idiopathic constipation in adults, irritable bowel syndrome with constipation in women 18 years of age and older, and opioid-induced constipation in adult patients with chronic, non-cancer pain, including patients with chronic pain related to prior cancer or its treatment who do not require frequent opioid dosage escalation. Amitiza is a chloride channel type-two activator that increases fluid secretion and motility of the intestine, facilitating passage of stool. We believe Amitiza is a leading global product in the branded constipation market. Of the branded products currently marketed, only Amitiza is approved for three constipation indications in the U.S.
Specialty Generics
Our Specialty Generics segment is focused on providing our customers high-quality specialty generic drugs and APIs. Specialty Generics include a variety of product formulations containing hydrocodone-containing tablets, oxycodone-containing tablets and several other controlled substances all of which are significant products for the treatment of pain. Other controlled substances products include medicines used to treat attention-deficit/hyperactivity disorder ("ADHD") and addiction treatment medications. Our near-term pipeline in this segment includes the expected launch of several new products in the next few years, with additional products in development long-term. Within this segment, we provide bulk API products, including acetaminophen, mixed amphetamine salts, opioids and acetaminophen,stearates, to a wide variety of pharmaceutical companies, many of which are direct competitors of our Specialty Generics finished dosage business. In addition, we use our APIAPIs for internal manufacturing of our finished dosage products.
We are among the world's largest manufacturers of bulk acetaminophen and the only producer of acetaminophen in the North American and European regions with manufacturing facilities exclusively in the U.S. We manufacture controlled substances under the U.S. Drug Enforcement Administration ("DEA") quota restrictions, and in calendar 2021,2022, we estimated that we received approximately 36.0%36.4% of the total DEA quota provided to the U.S. market for the controlled substances we manufacture. We believe that our market position in the API business and allocation of opioid rawquota-governed controlled substance materials from the DEA is a competitive advantage for our API business and, in turn, for our Specialty Generics segment. The strategy for our API business is based on manufacturing large volumes of high-quality product and customized product offerings, responsive technical services and timely delivery to our customers.
We market these products principally through independent channels, including drug distributors, specialty pharmaceutical distributors, retail pharmacy chains, food store chains with pharmacies, pharmaceutical benefit managers that have mail order pharmacies and hospital buying groups.
Research and Development
Specialty Brands. Our research and development ("R&D") resources are primarily devoted to our branded products, both inline and pipeline.products. Our R&D investments center on building a diverse, durable portfoliosupporting our current late-stage product development, maximizing new product launches and accelerating additional lifecycle management opportunities, inclusive of innovative therapiesnew product enhancements, line extensions and geo-expansions that provide value to patients, physicians and payers. Our strategy focuses on growth, including pipeline opportunities related to early- and late-stage development products to meet the needs of underserved patient populations, where we execute on the development process and perform clinical trials to support regulatory approval of new products.
Data generation is an important strategic driver for our key products, both inline and pipeline, as they extend evidence in approved uses, label enhancements and new indications. Our data strategy is realized through investments in both clinical and health economic activities. We are committed to supporting research that helps advance the understanding and treatment of a variety of different disease states that will further the understanding and development of our currently marketed products, including Acthar Gel, INOmax, Therakos, StrataGraft and Therakos.
The most significant development products in our pipeline are the following:
•Terlipressin is being investigated for the treatment of hepatorenal syndrome ("HRS") type 1 (collectively "HRS-1"), an acute, rare and life-threatening condition requiring hospitalization, with no currently approved therapy in the U.S. or Canada. During fiscal 2019 we completed enrollment for the Phase 3 clinical study (i.e. CONFIRM) to evaluate the efficacy and safety of terlipressin, together with albumin, in adult patients with HRS-1, and announced positive top line results. The study met its prespecified primary endpoint of verified HRS reversal. It also met three of the four prespecified secondary endpoints with the fourth endpoint trending more positive for terlipressin but not achieving statistical significance. This Phase 3 clinical study was conducted under an FDA Special Protocol Assessment (SPA). In March 2020, we initiated and completed a rolling submission of a new drug application ("NDA") filing to the U.S. FDA for terlipressin, and in April 2020 the FDA accepted the NDA for review. In July 2020, the Cardiovascular and Renal Drugs Advisory Committee of the FDA voted to recommend approval of the investigational agent terlipressin to treat adults with HRS-1. During September 2020, the FDA issued a Complete Response Letter ("CRL") regarding the Company's NDA seeking approval for terlipressin. The CRL stated that, based on the available data, the agency could not approve the terlipressin NDA in its current form and required more information to support a positive risk-benefit profile for terlipressin for patients with HRS-1. In response to receipt of the CRL, the Company had an End of Review Meeting on October 26, 2020 and a Type A Meeting on January 29, 2021 with the FDA where both parties engaged in constructive dialogue in an effort to clarify a viable path to U.S. approval. On August 18,
2021, we resubmitted our NDA to the FDA and on February 18, 2022 (the Prescription Drug User Fee Act, or "PDUFA", date), the FDA issued a CRL. In the weeks leading up to the PDUFA date, it became necessary for us to identify a new packaging and labeling manufacturing facility, which meant that an inspection of the FDA could not be completed by the PDUFA date. A satisfactory inspection is required before the NDA can be approved. This is the only outstanding issue noted in the CRL, and it is important to note that there were no safety or efficacy issues cited. We are working with the new facility to have it ready for inspection by the FDA. We remain committed to this critically ill patient population, who currently have no approved treatment option in the U.S for HRS-1 and we believe that there is a path to approval in 2022.
•SLN 501 is a ribonucleic acid ("RNA") silencing therapy currently in preclinical development designed to inhibit the complement cascade, a group of proteins that are involved in the immune system and play a role in the development of inflammation. These proteins are known to contribute to the pathogenesis of many diseases, including autoimmune diseases. In July 2019, we announced a collaboration with Silence Therapeutics plc ("Silence") to develop and commercialize SLN501, and in September 2020, we exercised an option for two additional complement protein targets under the collaboration. In 2022, we plan to initiate a Phase 1 clinical trial for SLN501 and will continue to advance the additional complement protein targets.Terlivaz.
Specialty Generics. The R&D efforts in this segment are focused on hard-to-manufacture pharmaceuticals with difficult-to-replicate pharmacokinetic profiles.profiles and products that would benefit from our vertically integrated manufacturing capabilities. Our Specialty Generics pipeline consists of a number of products in various stages of development. We currently perform most of our development work at our Specialty Generics headquarters and technical development center in Webster Groves, Missouri.
We are developing a number of complex generic pharmaceutical products that take advantage of our API and drug product manufacturing capabilities as well as our experience in working with API and contract manufacturing organizations. We currently have five Abbreviated New Drug Applications ("ANDAs"ANDA(s)") at various stages of review with the FDA and a diverse portfolio of oral, solid and parenteral formulations under development. Our pipeline is focused on applying our capabilities to develop difficult formulations, utilizing our expertise in working with controlled substances to develop potent products, and expanding both our
therapeutic and technology platforms into areas with less competitive pressure. We utilize our proven abilities to design around competitor patents to advance both our API and drug product development opportunities and to create our own intellectual property.
To facilitate our development efforts, we have a multipurpose commercial production facility and pilot plant in St. Louis, Missouri, where we test and scale our manufacturing processes for new products. This also allows us to more rapidly and economically develop certain drug product submissions, all under one roof at our pilot plant, with a limited amount of API or drug product. This facility was converted to dual purpose for both pilot and commercial manufacturing in 2018, and the first product from this facility was approved and launched in 2020.
Competition
Specialty Brands. Certain of our Specialty Brands products do not face direct competition from similar products, but instead compete against alternative forms of treatment that a prescriber may utilize. To successfully compete for business with managed care and pharmacy benefits management organizations, we must often demonstrate that our branded products offer not only superior health outcomes but also cost and service advantages, as compared with other forms of care. For example, while there is no therapeutically substitutable generic alternative for Acthar Gel, it faces significant competition from alternative forms ofearlier-line treatment alternatives including high-dose steroids, and is generally prescribed when earlier-line treatments have failed to provide positive outcomes or are not well tolerated by the patient. We anticipate that competition will likely intensify following ANI Pharmaceuticals Inc.'s ("ANI")Competition intensified with the commercial launch of theira purified cortrophin gel product duringin 2022, which is a distinct product from Acthar Gel; however, it is in a similar drug class. We experienced pressure from their launch in 2022 and we anticipate that this pressure will continue. We continue to differentiate Acthar Gel through pre-clinical studies and through product enhancements including the first quarterongoing development of 2022.the Acthar Gel self-injection device, which is designed to create an easier and more patient-friendly application for single unit dosage indications.
However, certainCertain of our Specialty Brands products now do have direct competition in the U.S. market. For example, there is now direct competition in the U.S. market for INOmax. However, we believe INOmax's highly differentiated service offering and the next generation delivery system, if approved, will help to differentiate the product and mitigate the impact of competition longer-term.
The highly competitive environment of our Specialty Brands segment requires us to continually seek out new products to treat diseases and conditions in areas of high unmet medical need, to create technological innovations and to market our products effectively. Most new products that we introduce must compete with other products already on the market, as well as other products that are subsequently developed by competitors. For our branded products, we may be granted market exclusivity either through the FDA, the U.S. Patent Office or similar agencies internationally. Regulatory exclusivity is granted by the FDA for new innovations, such as new clinical data, a new chemical entity or orphan drugs, and patents are issued for inventions, such as composition of matter or method of use. While patents offer a longer period of exclusivity, there are more bases to challenge patent-conferred exclusivity than with regulatory exclusivity. Generally, once market exclusivity expires on our branded products, competition will likely intensify as generic forms of the product are launched. Products that do not benefit from regulatory or patent exclusivity must rely on other competitive advantages, such as confidentiality agreements or product formulation trade secrets for difficult to replicate products.
Manufacturers of generic pharmaceuticals typically invest far less in R&D than research-based pharmaceutical companies, allowing generic versions to typically be significantly less expensive than the related branded products. The generic form of a drug
may also enjoy a preferred position relative to the branded version under third-party reimbursement programs, or be routinely dispensed in substitution for the branded form by pharmacies. If competitors introduce new products, delivery systems or processes with therapeutic or cost advantages, our products can be subject to progressive price reductions, decreased sales volume or both. To successfully compete for business with managed care and pharmacy benefits management organizations, we must often demonstrate that our branded products offer not only superior health outcomes but also cost advantages, as compared with other forms of care. Certain of our Specialty Brands products are targeted for niche patient populations with unmet medical needs, for example Acthar Gel, that may not be prescribed unless a clear benefit in efficacy or safety is demonstrated or until alternatives have failed to provide positive patient outcomes or are not well tolerated by the patient.
As it relates to our Amitiza product, many patients are currently treated for chronic idiopathic constipation ("CIC"), irritable bowel syndrome with constipation ("IBS-C") or opioid-induced constipation ("OIC") with a variety of medications. Over-the-counter medications are available and are generally intended to provide relief for occasional constipation. Prescription products are also available and are generally intended to provide relief for chronic constipation. As such, the U.S. constipation market is expansive and diverse with a multitude of products intended to treat a large heterogeneous patient population. The prescription chronic constipation market can generally be bifurcated into two categories: 1) generic laxatives and 2) branded products. Generic laxatives make up roughly 80%-90% of the total prescription volume while branded prescriptions have grown to represent 10%-20% of the prescription market. Linzess is the leading branded competitor in this market, marketed by Allergan plc and Ironwood Pharmaceuticals. At this time, Amitiza is the only branded product with chloride channel type-two activator mechanism of action. Amitiza is also the only branded product on the market today in three separate indications for CIC, IBS-C and OIC.
Prior to our acquisition of Amitiza in February 2018, the previous owner had entered into agreements to license certain rights to Amitiza to third parties in exchange for royalties on net sales of the product. We receiveHistorically, we received a double-digit royalty based on a percentage of the gross profits of the licensed products sold during the term of the agreement, which continues until each of our related patents has expired; provided that the percentage of gross profits shall bewas reduced to
zero for the agreement with Par Pharmaceuticals, Inc. et al. (collectively "Par") ifupon the entrance of two or more generics or authorized generics are commercially marketing a generic product in addition to Par. Refer to Note 19 of the Notes to the Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for further information regarding patent litigationPar in relation to Amitiza.fiscal 2023.
Specialty Generics. Our Specialty Generics products compete with products manufactured by many other companies in highly competitive markets, primarily throughout the U.S. Our competitors vary depending upon therapeutic and product categories. Major competitors of our Specialty Generics products include Rhodes Pharmaceuticals LP, Teva Pharmaceutical Industries Ltd., Aurobindo Pharma Ltd., Amneal Pharmaceutical Ltd., Noramco, Inc. and Johnson Matthey plc, among others. We believe our secure sources of opioid raw materials, vertically integrated manufacturing capabilities, broad offerings of API controlled substances and acetaminophen, comprehensive generic controlled substances product line and established relationships with national and regional distributors of generic drugs in the U.S. enable us to compete with larger generic manufacturers. In addition, we believe that our experience with the FDA, DEA and Risk Evaluation and Mitigation Strategies ("REMS") provides us the knowledge to operate efficiently and effectively in this highly regulated, competitive environment.
The Specialty Generics segment faces intense competition from other generic drug manufacturers, brand-name pharmaceutical companies marketing authorized generics, existing branded equivalents and manufacturers of therapeutically similar drugs. The competition varies depending upon the specific product category and dosage strength. Among the large generic controlled substance providers, we are one of the only generic manufacturers that has its own controlled substance API manufacturing capability, and we believe that we offer more vertically integrated generic controlled substance products than any other U.S. manufacturer. New drugs and future developments in improved or advanced drug delivery technologies or other therapeutic techniques may provide therapeutic or cost advantages when compared to the products we sell. The maintenance of profitable operations in generic pharmaceuticals depends, in part, on our ability to select, develop and timely launch new generic products, as well as our ability to manufacture such new products in a cost efficient, high-quality manner and implement and drive market volume.
As a result of consolidation among wholesale distributors and rapid growth of large retail drug store chains, a small number of large wholesale distributors and retail drug store chains control a significant share of the market, and the number of independent drug stores and small drug store chains has decreased. This has resulted in customers gaining more purchasing power. Consequently, there is heightened competition among generic drug producers for the business of this smaller and more selective customer base.
In our API business, we believe that our competitive advantages include our manufacturing capabilities in controlled substances that enable high-speed, high-volume tableting, packaging and distribution. Additionally, we believe we offer customers reliability of supply and broad-based technical customer service.
The competitive landscape in the acquisition and in-licensing of pharmaceutical products has intensified in recent years, reflecting both a reduction in the number of compounds available and an increase in the number of companies and the collective resources bidding on available assets. The ability to effectively compete in product development, acquisitions and in-licensing is important to our long-term growth strategy. In addition to product development and acquisitions, other competitive factors in the pharmaceutical
industry include product efficacy, safety, ease of use, price, demonstrated cost-effectiveness, third-party reimbursement, marketing effectiveness, customer service, reliability of supply, reputation and technical capabilities.
Intellectual Property
We own or license a number of patents in the U.S. and other countries covering certain products and have also developed brand names and trademarks for those and other products. Generally, our Specialty Brands business relies upon patent protection to ensure market exclusivity for the life of the patent. We consider the overall protection ofprotect our products, related inventions, and product innovations that are important to our business.
In a broad sense, patents trademarks and license rights to be of material value and act to protect these rights from infringement. However, our business is not materially dependent upon any single patent, trademark or license or any group of patents, trademarks or licenses.
The majority of an innovative product's commercial value is usually realized during the period in which the product has market exclusivity. In the branded pharmaceutical industry, an innovator product's market exclusivity is generally determined by two forms of intellectual property: patent rights held byprovide the innovator company and any regulatory forms of exclusivity to which the innovator is entitled. In addition, commercial durability may also partially depend upon product-related trade secrets, confidentiality agreements and trademark and copyright laws. These additional items may not prevent competitors from independently developing similar technology or a bioequivalent product.
Patents are a key determinant of market exclusivity for most branded pharmaceuticals. Patents provide the innovatorcompanies with the right to exclude others from practicing an invention related to thea product. Protection for individual products extends for varying periods in accordance with the expiration dates of patents in the various countries. The protection afforded, which may also vary from country to country, depends upon the type of patent, its scope of coverage and the availability of meaningful legal remedies in the country.
In the U.S. branded pharmaceutical industry, an innovator product’s market exclusivity is generally determined by two forms of intellectual property: (i) patent rights held by the innovator company and listed in the FDA’s Orange Book: Approved Drug Products with Therapeutic Equivalence Evaluations ("the Orange Book") and (ii) any regulatory forms of exclusivity to which the innovator is entitled. In addition, commercial durability may also partially depend upon product-related trade secrets, confidentiality agreements and trademark and copyright laws. These additional items may not prevent competitors from independently developing similar technology or a bioequivalent product.
Many developed countries provide certain non-patent incentives for the development of pharmaceuticals. Regulatory exclusivity is independent of any patent rights and can be particularly important when a drug lacks broad patent protection. However, most regulatory forms of exclusivity do not prevent a competitor from gaining regulatory approval prior to the expiration of regulatory exclusivity on the basis of the competitor's own safety and efficacy data on its drug, even when that drug is identical to that marketed by the innovator.
The patents and patent applications that relate to our major marketed products include:
•Acthar Gel. We have four U.S. patents that relate to Acthar Gel. These patents expire from 2031 to 2034. The Acthar Gel is protected primarily by trade secrets. In addition, we continue our efforts to pursue product enhancements, including the ongoing development of the Acthar Gel self-injection device, for which we have additional pending patent applications in the U.S.
•INOmax. We have a portfolio of U.S. and non-U.S. patents and patent applications for INOmax and related technologies. These include over 100 issued patents, expiring between 2023 to 2039, and numerous pending patent applications in the U.S., and over 700 issued patents, expiring between 2026 to 2037, and numerous pending patent applications in other countries.
•Therakos. We currently have 23 issued patents and two pending patent applications relating to Therakos in the U.S. These issued patents expire from 2023 to 2037. We also have 235 issued patents, expiring from 2023 to 2036, relating to Therakos in other countries. We have filed additional patent applications for this product.
•StrataGraft. Our patent portfolio relating to StrataGraft includes 30 issued patents, expiring from 2022 to 2034, and numerous pending patent applications in the U.S. StrataGraft is protected by a mix of patents and trade secrets.
•Terlivaz. We currently have one issued patent, expiring in 2037, and a number of pending patent applications in the U.S. that relate to Terlivaz.
•Amitiza. We have four patents listed in the Orange Book that will expire from 2025 to 2027. We also obtained patent protection in Japan that will expire from 2023 to 2027.
In addition, we have rights to a number of trademarks and service marks, and pending trademark and service mark applications, in the U.S. and elsewhere in the world to further protect the proprietary position of our products.
We estimate the likely market exclusivity period for each of our branded products on a case-by-case basis. It is not possible to predict with certainty the length of market exclusivity for any of our branded products because of the complex interaction between patent and regulatory forms of exclusivity, the relative success or lack thereof by potential competitors' experience in product development and inherent uncertainties concerning patent litigation. There can be no assurance that a particular product will enjoy market exclusivity for the full period of time that we currently estimate or that the exclusivity will be limited to the estimate.
We consider the overall protection of our patents, trademarks and license rights to be of material value and act to protect these rights from infringement. For a discussion of the challenges we face in obtaining or maintaining patent and/or trade secret protection, see the risk factor captioned "We may be unable to protect our intellectual property rights, intellectual property rights may be limited or we may be subject to claims that we infringe on the intellectual property rights of others" included within Item 1A. Risk Factors of this Annual Report.
Regulatory Matters
Quality Assurance and Current Good Manufacturing Practice Requirements
The FDA enforces regulations to ensure that the methods used in, and the facilities and controls used for, the manufacture, processing, packaging and holding of drugs, biologics, and medical devices conform to current good manufacturing practice ("cGMP"). The cGMP regulations that the FDA enforces are comprehensive and cover all aspects of manufacturing operations, from receipt of raw materials to finished product distribution, and are designed to ensure that the finished products meet all the required identity, strength, quality and purity characteristics. Compliance with cGMP includes adhering to requirements relating to organization and training of personnel, buildings and facilities, equipment, control of components and drug product containers and closures, production and process controls, quality control and quality assurance, packaging and labeling controls, holding and distribution, laboratory controls, and records and reports. The cGMP regulations for devices, called the Quality System Regulations, are also comprehensive and cover all aspects of device manufacture, from pre-production design validation to installation and servicing, insofar as they bear upon the safe and effective use of the device and whether the device otherwise meets the requirements of the U.S. Federal Food, Drug and Cosmetic Act (the "FFDCA"("FFDCA"). Other regulatory authorities have their own cGMP rules. Ensuring compliance requires a continuous commitment of time, money and effort in all operational areas.
United States
In general, drug and device manufacturers operate in a highly regulated environment. In the U.S., we must comply with laws, regulations, guidance documents and standards promulgated by the FDA, the Department of Health and Human Services ("HHS"), the DEA, the Environmental Protection Agency ("EPA"), the Customs Service and state boards of pharmacy.
The FDA approves pharmaceuticals through threeFFDCA provides several distinct pathways. First, in order to market and sell apathways for the approval of new prescription non-biologicdrugs. A new drug product in the U.S., a drug manufacturer must file a NDA with the FDA that shows the safety and effectiveness of (a) a new dosage form, new combination, new formulation, new indication or a new chemical entity that serves as the API, known as aapplication ("NDA") under Section 505(b)(1) NDA; or (b)of the FFDCA is a comprehensive application to support approval of a product candidate that has significant differences fromincludes, among other things, data and information to demonstrate that the proposed drug is safe and effective for its proposed uses, that production methods are adequate to ensure the identity, strength, quality, and purity of the drug, and that proposed labeling is appropriate and contains all necessary information. A 505(b)(1) NDA generally contains results of the full set of pre-clinical studies and clinical trials conducted by or on behalf of the applicant to characterize and evaluate the product candidate. Section 505(b)(2) of the FFDCA provides an already approved one, butalternate regulatory pathway to obtain FDA approval; it permits the filing of an NDA where at least some of the information required for approval comes from studies not conducted by or for the applicant knownand for which the applicant has not obtained a right of reference. The applicant may rely to some extent upon the FDA’s findings of safety and effectiveness for an approved product that acts as a 505(b)(2) NDA. Second, in orderthe reference drug, and submit its own product-specific data - which may include data from pre-clinical studies or clinical trials conducted by or on behalf of the applicant - to marketaddress differences between the product candidate and sellthe reference drug. Drug manufacturers may also submit an ANDA under section 505(j) of the FFDCA to market a generic version of an already approved branded drug product, a drug manufacturerproduct. The ANDA must file an ANDA that showsshow that the
generic version is "therapeutically equivalent," or expected to have the same clinical effect and safety profile as the branded drug product when administered to patients under the conditions specified in the labeling. Third,
The FFDCA and Public Health Service Act ("PHSA") also provide pathways for the approvals of biological products. A company can submit a BLA is filed withto the FDA so that the agency can assess, among other things, whether the biological product is safe, pure and potent and the facility in which it is manufactured, processed, packed or held meets standards designed to assure the product's continued safety, purity and potency. The PHSA also permits an abbreviated approval pathway to encourage the development of biosimilars, which are defined as biologics that are "highly similar" to an already approved biologic ("reference product"), notwithstanding minor differences in clinically inactive components and that have no clinically meaningful differences from the reference product in terms of safety, purity and potency.
The FDA typically uses different approval pathways for medical devices. To market and sell a new medical device in the U.S., the manufacturer generally must follow one of two paths. First, a manufacturer could follow what is known as pre-market notification or the 510(k) process. This process requires the manufacturer to demonstrate that the medical device is substantially equivalent to a legally marketed medical device. The second process, pre-market approval, is a more stringent time-consuming process. This requires that the medical device is independently proven to be safe and effective for its intended use.
For all pharmaceuticals (including both drugs and biologics) sold in the U.S., the FDA and other federal regulatory agencies also regulates salesclosely regulate the marketing and marketingpromotion of pharmaceutical products through, among other things, standards and regulations for direct-to-consumer advertising, communications regarding unapproved uses, industry-sponsored scientific and educational activities, and promotional activities involving the Internet. A pharmaceutical product cannot be commercially promoted before it is approved. After approval, product promotion can include only those claims relating to ensuresafety and effectiveness that drug product claims made by manufacturers are neither false nor misleading. Manufacturers are required to file copies of all product-specific promotional materialsconsistent with the FDA's Officelabeling approved by the FDA. Healthcare providers are permitted to prescribe drugs for "off-label" uses—that is, uses not approved by the FDA and therefore not described in the drug’s labeling—because the FDA does not regulate the practice of Prescription Drug Promotion prior to their first use.medicine. However, FDA regulations impose stringent restrictions on manufacturers’ communications regarding off-label uses. In general, such advertising doesa manufacturer may not require FDA prior approval.promote a drug for off-label use, but may engage in non-promotional, balanced communication regarding off-label use under specified conditions. Failure to implement a robust internal company review process and comply with applicable FDA regulations regarding advertisingrequirements and promotion increases the risk ofrestrictions in this area may subject a company to adverse publicity and enforcement action by either the FDA, or the U.S.United States Department of Justice ("DOJ"). or the Office of the Inspector General ("OIG") of the HHS, as well as state authorities. Enforcement action could subject a company to a range of penalties that could have a significant commercial impact, including civil and criminal penalties and agreements that materially restrict the manner in which a company promotes or distributes drug products.
In addition, the manufacture, marketing and selling of certain drug products that are controlled substances may be limited by quota grants for controlled substancesand other requirements or restrictions enforced by the DEA. Refer to "Drug Enforcement Administration" within this Item 1. Business for further information.
NDA Process.The path leading to FDA approval of a NDAmarketing application (NDA for a drug, BLA for a biological product) for a new drugpharmaceutical product begins when the drug product is merely a chemical formulation in the laboratory. In general, the process involves the following steps:
•Completion of formulation and laboratory testing in accordance with good laboratory practice ("GLP") that fully characterizes the drug product from a pre-clinical perspective and provides preliminary evidence that the drug product is safe to test in human beings;
•Filing an investigational new drug ("IND") application with the FDA, will permitwhich must become effective before the conduct of clinical trials (testing in human beings under adequate and well-controlled conditions);
•Approval by an independent institutional review board ("IRB") or ethics committee representing each clinical trial site before each trial may be initiated;
•Designing and conducting adequate and well-controlled human clinical trials to show the safety and efficacy of the drug product candidate for the proposed indication in accordance with the applicable IND and other clinical trial-related regulations, sometimes collectively referred to as good clinical practice ("GCP");
•Submitting the NDAmarketing application for FDA review, which provides a complete characterization of the drug product;
•Determination by the FDA within 60 days of its receipt of a marketing application to accept and file the application for review;
•Satisfactory completion of potential FDA pre-approval inspections regarding the conduct of the clinical trials and the manufacturing processes at the designated facility or facilities where the product is produced to assess compliance with cGMP requirements;
•Potential FDA audit of the non-clinical and/or clinical trial sites that generated the data in accordance with cGMP;support of the marketing application;
•Payment of applicable user fees;
•If applicable, satisfactory completion of an FDA Advisory Committee meeting in which the FDA requests helpviews from outside experts in evaluating the NDA;application;
•Final FDA approval of the fullapplication, including prescribing information, labeling and packaging of the drug product; and
•Ongoing monitoring and reporting of adverse events related to the drug product, implementationImplementation of a REMS program, if applicable, and conduct of any required Phase 4 studies.studies, and compliance with post-approval requirements, including ongoing monitoring and reporting of adverse events related to the product.
Clinical Trials. Clinical trials are typically conducted in four sequential phases, although they may overlap. The four phases are as follows:
•Phase 1 trials are typically small (less than 100 healthy volunteers) and are designed to determine the toxicity and maximum safe dose of the drug product.
•Phase 21. Phase 1 includes the initial introduction of an investigational product candidate into humans. Phase 1 trials usually involve 100 to 300 participants andgenerally are designed to determine whether the drug product produces any clinically significant effectsconducted in healthy volunteers but in some cases are conducted in patients with the intendedtarget disease or condition. IfThese trials are designed to evaluate the resultssafety, metabolism, pharmacokinetic properties and pharmacologic actions of thesethe investigational product candidate in humans, the side effects associated with increasing doses, and if possible, to gain early evidence on effectiveness. During Phase 1 trials, show promise, then a larger Phase 3 trialsufficient information about the investigational product candidate’s pharmacokinetic properties and pharmacological effects may be conducted.obtained to permit the design of Phase 2 trials. The total number of participants included in Phase 1 trials varies, but is generally in the range of 20 to 80.
•Phase 2. Phase 2 includes the controlled clinical trials conducted in patients with the target disease or condition, to determine dosage tolerance and optimal dosage, to identify possible adverse side effects and safety risks associated with the product candidate, and to obtain initial evidence of the effectiveness of the investigational product candidate for a particular indication. Phase 2 trials are typically well-controlled, closely monitored, and conducted in a limited subject population, usually involving no more than several hundred participants.
•Phase 3. Phase 3 trials are often multi-institution studies that involve a large numbercontrolled clinical trials conducted in an expanded subject population at geographically dispersed clinical trial sites. They are performed after preliminary evidence suggesting effectiveness of participantsthe investigational product candidate has been obtained, and are designedintended to show efficacy. Phase 3 (and some Phase 2) trials are designed to be pivotal, or confirmatory trials. The goal of a pivotal trial isfurther evaluate dosage, clinical effectiveness and safety, to establish the overall benefit-risk relationship of the product candidate, and to provide an adequate basis for drug approval. Phase 3 trials usually involve several hundred to several thousand participants. In most cases, the FDA requires two adequate and well controlled Phase 3 trials to demonstrate the efficacy and safety of the drug; however, the FDA may find a single Phase 2 or Phase 3 trial with other confirmatory evidence to be sufficient in rare instances, particularly in an area of significant unmet medical need and efficacyif the trial design provides a well-controlled and reliable assessment of a drug product by eliminating biases and increasing statistical power.clinical benefit.
•Phase 4. In some cases, the FDA requires Phase 4may condition approval of an NDA for a product candidate on the sponsor’s agreement to conduct additional clinical trials which are usually performed after the NDA has been approved. Such post-marketing surveillance is intendedapproval. In other cases, a sponsor may voluntarily conduct additional clinical trials after approval to obtaingain more information about the risksproduct. Such post-approval trials are typically referred to as Phase 4 clinical trials.
Clinical trials may not be completed successfully within a specified period of harm, benefits and optimal usetime, if at all. The decision to terminate development of an investigational product candidate may be made by a health authority (such as the drug productFDA), an IRB/ethics committee, or by observinga company for various reasons. At any time, the results ofFDA may order the drug product in a large number of patients.
The path leading to FDA approvaltemporary or permanent discontinuation of a NDAclinical trial, which is referred to as a clinical hold, or impose other sanctions, if the agency believes the clinical trial is not being conducted in accordance with FDA requirements or presents an unacceptable risk to the clinical trial patients. The suspension or termination of development can occur during any phase of clinical trials if it is determined that the participants or subjects are being exposed to an unacceptable health risk. In addition, there are requirements for a drugthe registration of ongoing clinical trials of product that has significant differences from an already approved NDA is somewhat shorter. The FDA requires a drug manufacturer to submit data from either already published reports or newly conducted studies that showcandidates on public registries and the safetydisclosure of certain clinical trial results and efficacy of those differences. Significant differences include different dosage strengths or route of administration.other trial information after completion.
Assuming successful completion of all required testing in accordance with all applicable regulatory requirements, detailed investigational product candidate information is submitted to the FDA in the form of a marketing application to request market approval for the product in specified indications.
New Drug Applications and Biologics License Applications. In order to obtain approval to market a drug in the United States, a marketing application (NDA for drug product candidates and BLA for biological product candidates) must be submitted to the FDA that provides data establishing the safety and effectiveness of the product candidate for the proposed indication. The application includes all relevant data available from pertinent preclinical studies and clinical trials, including negative or ambiguous results as well as positive findings, together with detailed information relating to the product’s chemistry, manufacturing, controls and proposed labeling, among other things. Data can come from company-sponsored clinical trials intended to test the safety and effectiveness of a product, or from a number of alternative sources, including studies initiated by investigators. To support marketing approval, the data submitted must be sufficient in quality and quantity to establish the safety and effectiveness of the investigational product candidate to the satisfaction of the FDA.
Under the PDUFA,Prescription Drug User Fee Act ("PDUFA"), the FDA has the authority to collect fees from drug manufacturers who submit NDAspharmaceutical marketing applications for review and approval.approval, although there may be some instances in which the user fee is waived. These user fees help the FDA fund the drug approval process. For fiscal 2022,calendar 2023, the user fee rate has been set at $3,117,220$3,242,030 for a marketing application requiring clinical data (which could be a 505(b)(1) NDAor 505(b)(2) NDA), and $1,558,610$1,621,010 for a NDAan application not requiring a complete clinical data package, generallydata. No user fees are assessed on NDAs for products designated as orphan drugs, unless the product also includes a 505(b)(2) NDA.non-orphan-designated indication. We expense these fees as they are incurred.
The averageFDA will initially review timethe pharmaceutical marketing application (NDA or BLA) for completeness before it accepts the application for filing. The FDA has 60 days from its receipt of an application to determine whether the application will be accepted for filing based on the agency’s threshold determination that it is sufficiently complete to permit substantive review. After the application submission is accepted for filing, the FDA begins an in-depth review. The FDA has agreed to certain performance goals in the review of applications. Applications for standard review product candidates are reviewed within ten months of FDA’s acceptance for filing. An accelerated six-month review can be given to applications that meet certain criteria. The FDA can extend the review period by three months, or potentially longer, to consider certain late-submitted information or information intended to clarify information provided in the initial submission. The FDA reviews the application to determine, among other things, whether the proposed product is safe and effective for its intended use, and whether the product is being manufactured in accordance with cGMP. FDA Advisory Committee meetings are often held for New Chemical Entities, novel indications, or for applications that otherwise present scientific, technical, or policy questions on which the agency believes it would benefit from the perspectives of outside experts. An advisory committee meeting includes a panel of independent experts, including clinicians and other scientific experts, who review, evaluate and make a recommendation as to whether the application should be approved and under what conditions. The FDA is not bound by the recommendations of an advisory committee, but it considers such recommendations carefully when making decisions.
Before approving an application, the FDA often will inspect the facilities at which the product is manufactured for cGMP compliance, and may inspect one or more clinical sites to assure compliance with GCP. After it evaluates the application and the results of inspections, the FDA issues either an approval letter or a complete response letter. A complete response letter generally outlines the deficiencies in the submission and may require substantial additional testing or information in order for the FDA to reconsider the application. If those deficiencies are addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA will issue an approval letter. The FDA has committed to reviewing such resubmissions in two or six months depending on the type of information included. Notwithstanding the submission of any requested additional information, the FDA ultimately may decide that the application does not satisfy the regulatory criteria for approval.
An approval letter authorizes commercial marketing of the drug with specific prescribing information for specific indications. As a condition of NDA approval, the FDA may require a REMS to help ensure that the benefits of the drug outweigh the potential risks. REMS can include medication guides, communication plans for healthcare professionals, and elements to assure safe use ("ETASU"). ETASU can include, but are not limited to, special training or certification for prescribing or dispensing, dispensing only under certain circumstances, special monitoring, and the use of patient registries. The requirement for a NDAREMS can materially affect the potential market and profitability of the drug. Moreover, product approval may require substantial post-approval testing and surveillance to monitor the drug’s safety or efficacy. Once granted, product approvals may be withdrawn if compliance with regulatory requirements is approximatelynot maintained or problems are identified following initial marketing.
Changes to some of the conditions established in an approved application, including changes in indications, labeling, or manufacturing processes or facilities, may require submission and prior FDA approval of a supplemental application (or in some cases a new application) before the change can be implemented. A supplemental application for a new indication typically requires clinical data similar to that in the original application, and the FDA uses the same procedures and actions in reviewing supplements as it does in reviewing original marketing applications.
Expedited Programs. The FDA maintains certain expedited programs to facilitate the development and review processes for certain qualifying pharmaceutical product candidates, including fast track designation, breakthrough therapy designation, priority review, accelerated approval, and regenerative medicine advanced therapy ("RMAT") designation. A pharmaceutical product
candidate may be granted fast track designation if it is intended for the treatment of a serious or life-threatening condition and demonstrates the potential to address unmet medical needs for such condition. With fast track designation, the sponsor may be eligible for more frequent opportunities to obtain the FDA’s feedback, and the FDA may initiate review of sections of an application before the application is complete. This rolling review is available if the applicant provides and the FDA approves a schedule for the remaining information. Even if a product receives fast track designation, the designation can be rescinded and provides no assurance that a product will be reviewed or approved more expeditiously than would otherwise have been the case, or that the product will be approved at all.
The FDA may designate a product candidate as a breakthrough therapy if it finds that the product candidate is intended, alone or in combination with one or more other product candidates or approved products, to treat a serious or life-threatening disease or condition, and preliminary clinical evidence indicates that the product candidate may demonstrate substantial improvement over existing therapies on one or more clinically significant endpoints. For product candidates designated as breakthrough therapies, more frequent interaction and communication between the FDA and the sponsor can help to identify the most efficient path for clinical development. Product candidates designated as breakthrough therapies by the FDA may also be eligible for priority review. Even if a product receives Breakthrough Therapy designation, the designation can be rescinded and provides no assurance that a product will be reviewed or approved more expeditiously than would otherwise have been the case, or that the product will be approved at all.
Accelerated approval under FDA regulations allows a product designed to treat a serious or life-threatening disease or condition that provides a meaningful therapeutic advantage over available therapies to be approved on the basis of either an intermediate clinical endpoint or a surrogate endpoint that is reasonably likely to predict clinical benefit. Approvals of this kind typically include requirements for confirmatory clinical trials to be conducted with due diligence to validate the surrogate endpoint or otherwise confirm clinical benefit and for all promotional materials to be submitted to the FDA for review prior to dissemination.
The FDA may also grant priority review designation to a product candidate, which sets the target date for FDA action on the application at six months from FDA filing, or eight months from the sponsor’s submission. Priority review may be granted where a product is intended to treat a serious or life-threatening disease or condition and, if approved, has the potential to provide a safe and effective therapy where no satisfactory alternative therapy exists or a significant improvement in safety or efficacy compared to available therapy. If criteria are not met for priority review, andthe standard FDA review period is ten months from FDA filing or 12 months from sponsor submission. Priority review designation does not change the scientific/medical standard for standard review.approval or the quality of evidence necessary to support approval.
RMAT designation may be granted to regenerative medicine therapies, defined as cell therapies, therapeutic tissue engineering products, human cell and tissue products, and combination products using any such therapies or products, that are intended to treat, modify, reverse, or cure a serious condition, and preliminary clinical evidence indicates that the regenerative medicine therapy has the potential to address unmet medical needs for such condition. Advantages of the RMAT designation include all the benefits of the fast track and breakthrough therapy designation programs, including early interactions with FDA. The FDA granted StrataGraft RMAT designation in July 2017.
BLA Process.Orphan Drug Designation. In many ways,Under the processOrphan Drug Act, the FDA may grant orphan designation to a drug product intended to treat a "rare disease or condition," which is generally a disease or condition that affects fewer than 200,000 individuals in the U.S., or more than 200,000 individuals in the U.S., but for which there is no reasonable expectation that the cost of developing and making a drug product available in the U.S. for this type of disease or condition will be recovered from sales of the product. If orphan product designation is sought, it must be requested before submitting an NDA for the drug for the proposed rare disease or condition. If the FDA grants orphan drug designation, the common name of the therapeutic agent and its designated orphan use are disclosed publicly by the FDA. Orphan product designation does not, by itself, convey any advantage in or shorten the duration of the regulatory review and approval process.
If a product that has orphan designation subsequently receives the first FDA approval for the disease or condition for which it has such designation, the product is entitled to orphan product exclusivity, which the FDA has interpreted to preclude approving for seven years any other sponsor’s application to market the same drug for the same use for which the drug has been granted orphan drug designation, except in limited circumstances, such as a showing of clinical superiority to the product with orphan exclusivity. Orphan exclusivity operates independently from other regulatory exclusivities and other protection against generic competition, including patents that we hold for our products. A sponsor of a product application that has received an orphan drug designation may also be granted tax incentives for clinical research undertaken to getsupport the application.
Generally, orphan drug exclusivity does not block approval of competing products intended for the orphan-protected indication but containing a different active moiety, or containing the same moiety but intended for a different use. Orphan product exclusivity that could block a competitor to one of our products also could block the approval of one of our products for seven years if a competitor obtains approval of a product containing the same moiety for the same orphan disease or condition.
Marketing Exclusivity. Upon NDA approval of a new biologic productchemical entity, which is a drug substance that contains no active moiety that has previously been approved by the FDA is very similar to the approval process for an NDA. However, biological products are typically derived from living systems, meaningin any other NDA, that their large, complex structures are often difficult to characterize, as opposed to traditional drug molecules that are chemically synthesized and structurally both simpler and smaller in size. This underlying distinction drives key differences in the regulatory process, particularly with regard to how competitive versionsreceives five years of a biological product, known as biosimilars, can be brought to market.
Like a NDA, a BLA is submitted tomarketing exclusivity during which the FDA in order to marketcannot accept for review any ANDA or 505(b)(2) NDA for which a new drug in the U.S., and as such, both must contain enough informationchemical entity is a reference product (an application that contains a challenge to demonstrate the efficacy and safety of the drug, as well as demonstrate a proper risk-to-benefit ratio, in order to be successful. Additionally, many of the same regulations apply to NDAs and BLAs, including clinical trial requirements, labeling and advertising rules, pre-marketing regulations, accelerated approval pathways, pediatric study requirements, and PDUFA fees. However, because biological products are processed from living material, BLA content must also demonstrate purity. In addition, the manufacturing process for biological products is more complicated, due to genetic variability in the source material. Therefore, it is critical that BLAs contain a thorough description of product development and relevant manufacturing procedures, as well as all steps taken to ensure that the final biological product performs consistently across batches.
Further, in March 2020 the Biologics Price Competition and Innovation (“BPCI”) Act went into effect, which created an abbreviated approval pathway (codified in Section 351(k) of the Public Health Service Act) to encourage the development of biosimilars, which are defined as a biologic that is "highly similar" topatent associated with the reference product notwithstanding minor differences in clinically inactive components and has no clinically meaningful differences frommay be submitted at four years after reference
product approval). There are provisions that operate to preclude approval of the reference product in termsapplication for an additional period of safety, purity and potency. time. Certain changes to a drug, such as the approval of a new indication, may qualify for a three-year period of exclusivity during which the FDA cannot approve an ANDA or 505(b)(2) NDA for a drug that includes the change.
Under Section 351(k),the PHSA, the FDA must wait four years after approval of a biological product under a BLA before accepting a filing for a biosimilar version of the reference product, and the FDA cannot approve a biosimilar version of the reference product until 12 years after the reference product was approved under a BLA. The BPCI ActPHSA also provides for limited regulatory exclusivity for the first FDA-approved interchangeable biologic with respect to each reference product. This means that the FDA will defer approval of additional interchangeable biologics to the same reference product for defined periods of one year or more.
Patent Term Restoration. A portion of the patent term lost during product development and FDA review of an application is restored if approval of the application is the first permitted commercial marketing of a drug containing the active ingredient. The patent term restoration period is generally one-half the time between the effective date of the IND or the date of patent grant (whichever is later) and the date of submission of the application, plus the time between the date of submission of the application and the date of FDA approval of the product. The maximum period of restoration is five years, and the patent cannot be extended to more than 14 years from the date of FDA approval of the product. Only one patent claiming each approved product is eligible for restoration and the patent holder must apply for restoration within 60 days of approval. The U.S. Patent and Trademark Office, in consultation with the FDA, reviews and approves the application for patent term restoration.
Post-Approval Regulation. After regulatory approval of a drug is obtained, a sponsor is required to comply with a number of post-approval requirements. For example, as a condition of approval of an application, the FDA may require post-marketing testing, including Phase 4 clinical trials, and surveillance to further assess and monitor the product’s safety and effectiveness after commercialization. In addition, as a holder of an approved NDA, a sponsor is required to report adverse reactions and production problems to the FDA, provide updated safety and efficacy information, submit annual reports and comply with advertising and promotional labeling requirements. Manufacturing must continue to conform to cGMP after approval, and the FDA periodically inspects manufacturing facilities to assess compliance with cGMP, as discussed in Quality Assurance and Current Good Manufacturing Practice Requirementsabove.
Newly discovered or developed safety or effectiveness data may require changes to a product’s approved labeling, including the addition of new warnings, contraindications, or limitations of use, and also may require the implementation of other risk management measures. Also, new government requirements, including those resulting from new legislation, may be established, or the FDA’s policies may change, which could delay or prevent regulatory approval of our products under development.
ANDA Process. The path leading to FDA approval of generic drug product under an ANDA is quite different from that of aan NDA, a BLA or even a biosimilar. By statute,Generally, a generic drug product is one that is the FDA waives the requirement for asame as an approved "brand" or "innovator" drug manufacturer to complete certain pre-clinical studies and clinical safety and efficacy trials and instead focuses on data establishing bioequivalence between the brandedproduct (the reference listed drug or Referenced Listed Drug ("RLD""RLD") and the ANDA product. In the event that thein active ingredient, indosage form, strength, and route of administration, bioequivalent to the generic drug behaves inRLD, and labeled the same manner in the human body as the RLD, Generic drug applications are termed "abbreviated" because they are not required to include data to establish safety and effectiveness, instead relying on demonstrating the two drug products are considered bioequivalent. sameness to the RLD, which FDA has already found to be safe and effective.
The FDA considers a generic drug therapeutically equivalent, and therefore substitutable, if it is alsohas the same dosage form, route of administration and strength as the RLD.
In 2010, the U.S. Congress passed into law the Generic Drug User Fee Act to address the FDA's backlog, which at the time was over 2,000 ANDAs. This legislation granted the FDA authority to collect, user fees from generic drug manufacturers who submit ANDAs for review and approval, and the fees collected help the FDA fund the drug approval process. Under the Generic Drug User Fee Amendments of 2017, theThe fiscal 20222023 user fee rate is set at $225,710$240,580 for an ANDA and the prior approval supplement to an ANDA fee was removed.ANDA. These fees are expensed as incurred. The FDA has set goal dates by fiscal year for ANDA submissions to improve the average review time. The FDA has set a target of approving 90% of standard ANDA submissions within 10ten months of submission for submissions made in 2022.2023, and 90% of priority ANDA submissions within eight months of submission.
Medical Devices. There are two primary pathways to receive authorization to distribute a new device in the U.S. The first pathway is premarket notification (theor the 510(k) process).process. Under this pathway, the applicant must demonstrate to the FDA that the new device is as safe and effective or substantially equivalent to a legally marketed device. The applicant can demonstrate this by submitting data. This data may be from human clinical trials. The FDA will make a determination as to whether the new device is substantially equivalent before commercial distribution occurs. Changes that do not significantly affect the safety or efficacy of a legally marketed device may generally be made without additional 510(k) premarket notifications.
The second primary pathway is a premarket approval application ("PMA"). This pathway is generally more complex, time-consuming and expensive than the 510(k) process. Under the PMA pathway, the applicant must demonstrate that the device is safe and effective for its intended use. This generally requires data from clinical trials to show the safety and efficacy of the device. These trials must be performed in accordance with the applicable Investigational Device Exemption (IDE) regulations. The FDA will approve the application if it finds that the evidence is scientifically valid to demonstrate that the device is safe and effective for its intended use.
Patent and Non-Patent Exclusivity Periods. A sponsor of aan NDA is required to identify in its application any patent that claims the drug or a use of the drug subject to the application. Upon NDA approval, the FDA lists these patents in the Orange Book. Any person that files a Section 505(b)(2) NDA, the type of NDA that relies upon the data in the application for which the patents are listed, or an ANDA to secure approval of a generic version of a previous drug, must make a certification in respect to listed patents. The FDA may not approve such an application for the drug until expiration of the listed patents unless the generic applicant certifies that the
listed patents are invalid, unenforceable or not infringed by the proposed generic drug and gives notice to the holder of the NDA for
the RLD of the bases upon which the patents are challenged, and the holder of the RLD does not sue the later applicant for patent infringement within 45 days of receipt of notice. If an infringement suit is filed, the FDA may not approve the later application until the earliest of: (a) 30 months after receipt of the notice by the holder of the NDA for the RLD; (b) entry of an appellate court judgment holding the patent invalid, unenforceable or not infringed; (c) such time as the court may order; or (d) the expiration of the patent.
One of the key motivators for challenging patents is the 180-day market exclusivity period ("generic exclusivity") granted to the developer of a generic version of a product that is the first to file an ANDA containing a Paragraph IV certification and that prevails in litigation with the manufacturer of the branded product over the applicable patent(s) or is not sued or enters into a settlement agreement with the manufacturer of the branded product. For a variety of reasons, there are situations in which a company may not be able to take advantage of an award of generic exclusivity. The determination of when generic exclusivity begins and ends is very complicated as it depends on several different factors.
The holder of the NDA for the RLD may also be entitled to certain non-patent exclusivity during which the FDA cannot approve an application for a competing generic product or 505(b)(2) NDA product. Generally, if the RLD is a new chemical entity, the FDA may not accept for filing any application that references the innovator's NDA for five years from the approval of the innovator's NDA. However, this five-year period is shortened to four years where a filer's ANDA includes a Paragraph IV certification. In other cases, where the innovator has provided certain clinical study information, the FDA may accept for filing, but may not approve, an application that references the innovator's NDA for a period of three years from the approval of the innovator's NDA.
Certain additional periods of exclusivity may be available if the RLD is indicated for use in a rare disease or condition or is studied for pediatric indications.
Risk Evaluation and Mitigation Strategies. The FDA has the authority to require thea pharmaceutical manufacturer to provide a REMS that is intended to ensure that the benefits of a drug or biological product or class of drug products outweigh the risks of harm. The goal of these programs is to mitigate the risk of abuse, misuse, overdose and accidental exposure as well as educating prescribers, pharmacists, healthcare providers and patients about the safe use of the drug product or class of drug products and the treatment and monitoring of patients. The FDA has the authority to impose civil penalties on or take other enforcement action against any drug manufacturer who fails to properly implement an approved REMS program. We participate in the Transmucosal Immediate Release Fentanyl (TIRF) REMS Program, Opioid Analgesic REMS, Buprenorphine Transmucosal Products for Opioid Dependence REMS, (BTOD REMS), Vigabatrin REMS and other such REMS programs.
Drug Enforcement Administration. The DEA is the U.S. federal agency responsible for domestic enforcement of the federal Controlled Substances Act of 1970 ("CSA"). Compounds that have a potential for dependence and abuse are scheduled as controlled substances under the CSA and similar state and foreign laws. Drugs that are scheduled as controlled substances are subject to stringent regulatory requirements, including requirements for registering manufacturing and distribution facilities, security controls and employee screening, recordkeeping, reporting, product labeling and packaging, import and export. There are five federal schedules for controlled substances, known as Schedule I, II, III, IV and V. The CSA classifies drugs and other substances based on identified potential for abuse. The regulatory requirements that apply to a drug vary depending on the particular controlled substance schedule into which a drug is placed, based on consideration of a number of factors, including its potential for dependence and abuse. Schedules I and II contain the most stringent restrictions and requirements, and Schedule V the least. Schedule I controlled substances, such as heroin and LSD, have a high abuse potential and have no currently accepted medical use; thus, they cannot be lawfully marketed or sold. Opioids, such as oxycodone, oxymorphone, morphine, fentanyl and hydrocodone, are Schedule II controlled substances. Consequently, the manufacture, storage, distribution and sale of these substances are highly regulated. For all controlled substances, there are potential criminal and civil penalties that apply for the failure to meet applicable legal requirements, and healthcare professionals must have a DEA license in order to handle, prescribe, or dispense controlled substances.
The DEA regulates the availability of API, products under development and marketed drug productssubstances that are classified as Schedule I or II or IIIcontrolled substances by setting annual quotas. Every year, we must apply to the DEA for manufacturing quota to manufacture API and procurement quota to manufacture finished dosage products.products for our products that are classified as Schedule II controlled substances. Given that the DEA has discretion to grant or deny our manufacturing and procurement quota requests, the quota the DEA grants may be insufficient to meet our commercial and R&D needs. In calendar 2021,year 2022, manufacturing and procurement quotas granted by the DEA were sufficient to meet our sales and inventory requirements on most products.requirements. In December 2021,2022, the DEA continued to further reduce, as it has done over the past several years, the manufacturing quota for the top misused Schedule II opioids that may be manufactured in the U.S. in calendar year 2022.2023. This includes oxycodone, hydrocodone, oxymorphone, hydromorphone and fentanyl. The DEA has complete discretion to adjust or leave unchanged these quotas from time to time during the calendar year and to allocate manufacturing and procurement quota to manufacturers.
DEA regulations make it extremely difficultinclude certain restrictions for a manufacturer in the U.S. to import finished dosage forms of controlled substances manufactured outside the U.S. These rules reflect a broader enforcement approach by the DEA to regulate the manufacture, distribution and dispensing of legally produced controlled substances. Accordingly, drug manufacturers who market and sell finished dosage forms of controlled substances in the U.S. typically manufacture or have them manufactured in the U.S.
The DEA also requires drug manufacturers to design and implement a system that identifies suspicious orders of controlled substances, such as those of unusual size, those that deviate substantially from a normal pattern and those of unusual frequency, prior
to completiondistribution of the sale.controlled substance order. A compliant suspicious order monitoring ("SOM") system includes well-defined due diligence, "know your customer" efforts and order monitoring. One of our Specialty Generics subsidiaries utilizes all available transaction information to identify suspicious orders of any Mallinckrodt controlled substance product and reports such suspicious orders to the DEA when it concludes that chargeback data or other information indicates that a downstream registrant poses a risk of diversion.
To meet its responsibilities, the DEA conducts periodic inspections of registered establishments that handle controlled substances. Annual registration is required for any facility that manufactures, tests, distributes, dispenses, imports or exports any controlled substance. The facilities must have the security, control and accounting mechanisms required by the DEA to prevent loss and diversion.
Individual states also regulate controlled substances, and we, as well as our third-party API suppliers and manufacturers, are subject to such regulation by several states with respect to the manufacture and distribution of these products.
We and, to our knowledge, our third-party API suppliers, dosage form manufacturers, distributors and researchers have all necessary registrations, and we believe all registrants operate in conformity with applicable registration requirements, under controlled substance laws.
Government Benefit Programs. Statutory and regulatory requirements for Medicaid, Medicare, Tricare and other government healthcare programs govern provider reimbursement levels, including requiringas well as require that alleach pharmaceutical companiesmanufacturer that participates in the Medicaid Drug Rebate Program pay rebates to individual states based on a percentage of their net sales arising from Medicaid program-reimbursed products. The federal and state governments may continue to enact measures in the future aimed at containing or reducing payment levels for, or increasing rebates on, prescription pharmaceuticals paid for in whole or in part with government funds. We cannot predict the nature of such measures, which could have material adverse consequences for the pharmaceutical industry as a whole and, consequently, also for us. However, we believe we have provided for our best estimate of potential refunds based on current information available.
From time to time, legislative changes are made to government healthcare programs that impact our business. For example, the Medicare Prescription Drug Improvement and Modernization Act of 2003 created a prescription drug coverage program for people with Medicare through a system of government-regulated private market drug benefit plans. This law provides a prescription drug benefit to seniors and individuals with disabilities in the Medicare program ("Medicare Part D"). Congress continues to examine various Medicare policy proposals that may result in pressure on the prices of prescription drugs in the Medicare program.
The Centers for Medicare & Medicaid Services ("CMS"), the agency that administers the Medicare and Medicaid programs, may implement or revise reimbursement or coverage restrictions under those programs, and a state may do likewise under the Medicaid program. Any reduction in reimbursement or restriction of coverage under Medicare, Medicaid or other government programs may result in a similar reduction in payments or restriction of coverage by private payors. The implementation of cost containment measures or other healthcare reforms may prevent us from being able to generate revenue, attain profitability, or commercialize our products.
In addition, the Patient Protection and Affordable Care Act of 2010, as amended by the Health("Affordable Care and Education Affordability Reconciliation Act of 2010 (collectively, "the Healthcare Reform Act") provided for major changes to the U.S. healthcare system, which impacted the delivery and payment for healthcare services in the U.S. Our business has been most notably impacted by, among other things, changes to the rebates fromunder the Medicaid Fee-For-Service Program and new rebates on Medicaid Managed Care plansutilization and the imposition of an annual fee on branded prescription pharmaceutical manufacturers. Medicaid provisions reduced net sales by $70.7 million, $65.2 million, $106.5 million and $665.3 million and $75.9 million infor the period June 17, 2022 through December 30, 2022 (Successor), the period January 1, 2022 through June 16, 2022 (Predecessor), fiscal 2021 (Predecessor) and fiscal 2020 and 2019,(Predecessor), respectively. The fiscal 2021 (Predecessor) decrease in provision for Medicaid payments was due to the $536.0 million retrospective one-time charge related to the Medicaid lawsuit in fiscal 2020 that is further discussed within Note 19 of the Notes to the Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K. The remaining $22.8 million decrease in the fiscal 2021 provision for Medicaid payments was primarily due to a $21.7 million decrease in Specialty Brands associated with Acthar Gel. The fiscal 2020 provision was impacted by the aforementioned retrospective one-time charge related to the Medicaid lawsuit. The remaining $53.4 million increase in the fiscal 2020 provision for Medicaid payments, as compared to fiscal 2019, was driven by a $47.8 million increase due to Specialty Brands, which includes the $40.4 million prospective impact of the Medicaid lawsuit on Acthar Gel, coupled with a $5.6 million decrease associated with Specialty Generics.(Predecessor). Our business was also impacted by the annual fee on branded prescription pharmaceutical manufacturers, which is reflected within selling, general and administrative expenses ("SG&A"). During the period June 17, 2022 through December 30, 2022 (Successor), the period January 1, 2022 through June 16, 2022 (Predecessor), and fiscal 2020 (Predecessor), we recorded an expense of $2.0 million, $3.8 million and $11.6 million, respectively. Comparatively, in fiscal 2021 (Predecessor), we recorded a gain of $1.0 million driven primarily by favorable adjustments by the Internal Revenue Service ("IRS") for prior periods primarily related to the Medicaid lawsuit ruling. Comparatively,
The Affordable Care Act also established a Medicare Part D coverage gap discount program, under which manufacturers must agree to offer point-of-sale discounts off negotiated prices of applicable brand drugs to eligible beneficiaries during fiscal 2020the coverage gap period, as a condition for the manufacturer’s outpatient drugs to be covered under Medicare Part D. These discounts were increased to 70% of negotiated costs pursuant to the Bipartisan Budget Act of 2018, which as effective beginning in 2019.
On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022 ("Inflation Reduction Act") which, among other things, establishes Medicare Part B and 2019, we recordedPart D inflation rebate scheme, under which, generally speaking, manufacturers will owe rebates if the average sales price of a Part B drug or the average manufacture price of a Part D drug increases faster than the pace of inflation. Failure to timely pay an expenseinflation rebate is subject to a civil monetary penalty. The Inflation Reduction Act also creates a drug price negotiation program under which the prices for Medicare units of $11.6 millioncertain high Medicare spend drugs and $20.1 million, respectively.biologics
without generic or biosimilar competition will be capped by reference to, among other things, a specified non-federal average manufacturer price, starting in 2026. Failure to comply with requirements under the drug price negotiation program is subject to an excise tax and/or a civil monetary penalty. The Inflation Reduction Act further makes changes to the Medicare Part D benefit, including sunsetting the existing coverage gap discount program and replacing it with a new manufacturer discount program in 2025. Failure to offer discounts under this program could be subject to civil monetary penalties. Under the Inflation Reduction Act, certain drug products may be eligible for a small biotech exemption based on specified thresholds around Medicare program spending. Products with this designation are exempt from the drug price negotiation program in 2026, 2027, and 2028; and will be phased into the manufacturer liability for Medicare Part D benefit redesign over a number of years. Congress continues to examine various policy proposals that may result in pressure on the prices of prescription drugs in the government health benefit programs. The Inflation Reduction Act or other legislative changes could impact the market conditions for our product candidates.
Pharmaceutical Pricing and Reimbursement. Certain of our affiliates that are manufacturers participate in the Medicaid Drug Rebate Program and other governmental programs. Each manufacturer that participates in the Medicaid Drug Rebate Program is required to pay a rebate to each state Medicaid program for its covered outpatient drugs that are dispensed to Medicaid beneficiaries and paid for by a state Medicaid program, as a condition of having federal funds available for that manufacturer’s drugs under Medicaid and Medicare Part B. Those rebates are based on pricing data the manufacturer reports on a monthly and quarterly basis to CMS, the federal agency that administers the Medicare and Medicaid programs. These data include the average manufacturer price and, in the case of innovator products, the best price for each drug, which best price, in general, represents the lowest price available from the manufacturer to any wholesaler, retailer, provider, health maintenance organization, nonprofit entity, or governmental entity in the U.S. in any pricing structure, calculated to include all sales and associated rebates, discounts, and other price concessions. Where the average manufacturer price of a drug increases faster than the pace of inflation, the drug may be subject to an additional rebate paid by its manufacturer in the amount that the average manufacturer price has exceeded the pace of inflation. Currently, the Medicaid rebate is capped at 100 percent of the average manufacturer price, but, effective January 1, 2024, this cap on the rebate will be removed, the rebate liability could increase significantly for certain products. On December 31, 2020, CMS issued a final regulation that modified prior Medicaid Drug Rebate Program regulations to permit reporting multiple best price figures with regard to value‑based purchasing arrangements (beginning in 2022); and provide definitions for "line extension," "new formulation," and related terms, with the practical effect of expanding the scope of drugs considered to be line extensions that are subject to an alternative rebate formula (beginning in 2022). A manufacturer’s failure to comply with these price reporting and rebate payment requirements, as well as forthcoming statutory changes to such requirements, could negatively impact its financial results.
Federal law requires that each manufacturer that participates in the Medicaid Drug Rebate Program also participate in the 340B drug pricing program in order for federal funds to be available for the manufacturer’s drugs under Medicaid and Medicare Part B. The 340B program, which is administered by the Health Resources and Services Administration ("HRSA"), requires participating manufacturers to agree to charge statutorily defined covered entities no more than the 340B "ceiling price" for the manufacturer’s covered outpatient drugs. These 340B covered entities include a variety of community health clinics and other entities that receive health services grants from the Public Health Service, as well as hospitals that serve a disproportionate share of low-income patients, certain free-standing cancer hospitals, critical access hospitals, rural referral centers and sole community hospitals. The Affordable Care Act exempts "orphan drugs" from the ceiling price requirements for certain hospital covered entities. The 340B ceiling price is calculated using a statutory formula, which is based on the average manufacturer price and rebate amount for the covered outpatient drug as calculated under the Medicaid Drug Rebate Program, and, in general, products subject to Medicaid price reporting and rebate liability are also subject to the 340B ceiling price calculation and discount requirement. Where a drug is subject to an additional rebate, as noted previously, or a low best price, the 340B ceiling price may calculate as low as, but not lower than, $0.01 per unit. Changes to the Medicaid Drug Rebate amount also could affect a manufacturer’s 340B ceiling price calculations and negatively impact results of operations.
HRSA issued a final regulation regarding the calculation of the 340B ceiling price and the imposition of civil monetary penalties on manufacturers that are found to have knowingly and intentionally overcharged covered entities, which became effective on January 1, 2019. It is unclear how the government will apply its enforcement authority under the regulation. Manufacturers also are required to report 340B ceiling prices to HRSA on a quarterly basis, and HRSA then publishes them to covered entities. Moreover, under a final regulation effective January 13, 2021, HRSA newly established an administrative dispute resolution ("ADR"), process for claims by covered entities that a manufacturer has engaged in overcharging, and by manufacturers that a covered entity violated the prohibitions against diversion or duplicate discounts. Such claims are to be resolved through an ADR panel of government officials rendering a decision that could be appealed only in federal court. An ADR proceeding could subject a manufacturer to onerous procedural requirements and result in additional liability.
For calendar quarters beginning January 1, 2022, manufacturers are required to report the average sales price for certain Medicare Part B-covered products under the Medicare program, whereas they previously were only required to do so if they participated in the Medicaid Drug Rebate Program. Manufacturers calculate the average sales price based on a statutorily defined formula as well as regulations and interpretations of the statute by CMS. CMS uses these submissions to determine payment rates for drugs under Medicare Part B. Starting in 2023, manufacturers must pay refunds to Medicare for single source drugs or biologics, or biosimilar biological products, reimbursed under Medicare Part B and packaged in single-dose containers or single-use packages, for units of discarded drug reimbursed by Medicare Part B in excess of ten percent of total allowed charges under Medicare Part B for that drug.
Manufacturers that fail to pay refunds could be subject to civil monetary penalties of 125 percent of the refund amount. In addition, as noted previously, a manufacturer may be liable for Part B inflation rebates for utilization in quarters starting with the first quarter of 2023. Manufacturers may be liable for civil monetary penalties for violations of this program.
Statutory or regulatory changes or CMS guidance could affect the average sales price calculations for approved products and the resulting Medicare payment rate, and could negatively impact results of operations. Also, the Medicare Part B drug payment methodology is subject to change based on legislation enacted by Congress.
Congress also could enact additional changes that affect overall rebate liability and the information manufacturers report to the government as part of price reporting calculations, which could impact the market conditions for our products. We further expect continued scrutiny on government price reporting and pricing more generally from Congress, agencies, and other bodies, and are seeing an increase in state interest in price reporting, transparency, and other policies to address drug pricing concerns. For additional information about the risk associated with these programs, please see "Our reporting and payment obligations under the Medicare and Medicaid rebate programs, and other governmental purchasing and rebate programs, are complex. Any determination of failure to comply with these obligations or those relating to healthcare fraud and abuse laws could have a material adverse effect on our business" included within Item 1A. Risk Factors of this Annual Report.
In order to be eligible to have our products paid for with federal funds under the Medicaid and Medicare Part B programs and purchased by the Department of Veterans Affairs ("VA"), Department of Defense ("DoD"), Public Health Service, and Coast Guard (collectively, the Big Four agencies) and certain federal grantees, we are required to participate in the VA Federal Supply Schedule ("FSS") pricing program, established under Section 603 of the Veterans Health Care Act of 1992. Under this program, we are obligated to make our "covered" drugs (i.e., innovator drugs and biologics) available for procurement on an FSS contract and charge a price to the Big Four agencies that is no higher than the Federal Ceiling Price ("FCP"), which is a price calculated pursuant to a statutory formula. The FSS program also allows us (but does not require us) to list certain non-covered drugs on an FSS contract at negotiated pricing, not capped at the FCP. The FCP is derived from a calculated price point called the "non-federal average manufacturer price" ("non-FAMP"), which we are required to calculate and report to the VA on a quarterly and annual basis. Pursuant to applicable law, knowing provision of false information in connection with a non-FAMP filing can subject a manufacturer to significant civil monetary penalties for each item of false information. The FSS contract also contains extensive disclosure and certification requirements. In addition, Section 703 of the National Defense Authorization Act for FY 2008, requires us to pay quarterly rebates to DoD on utilization of covered drugs that are dispensed through DoD’s Tricare network pharmacies to Tricare beneficiaries. The rebates are calculated as the difference between the annual non-FAMP and FCP for the calendar year that the product was dispensed. If we overcharge the government in connection with the FSS contract or Tricare Retail Pharmacy Rebate Program, whether due to a misstated FCP or otherwise, we will be required to refund the difference to the government. Failure to make necessary disclosures and/or to identify contract overcharges can result in allegations against us under the False Claims Act ("FCA") and other laws and regulations. Unexpected refunds to the government, and any response to government investigation or enforcement action, would be expensive and time-consuming, and could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Healthcare Fraud and Abuse Laws
We are subject to various federal, state and local laws targeting fraud and abuse in the healthcare industry. For example, in the U.S., there are federal and state anti-kickback, false claims, and other related laws that prohibit the payment or receipt of kickbacks, bribes or other remuneration intendedapply to induce the purchase or recommendation of healthcare products and services or reward past purchases or recommendations, includingthat are ultimately paid for by government health care programs. These laws include the following:
•The U.S. Anti-Kickback Statute prohibits, among other things, knowingly and similar state statutes,willfully offering, paying, soliciting or receiving anything of value to induce (or in return for) the referral of business, including the purchase, recommendation or prescription of a particular drug reimbursable under Medicare, Medicaid or other federally financed healthcare programs. The statute has been interpreted to apply to arrangements between pharmaceutical companies on one hand and patients, prescribers, purchasers and formulary managers on the other. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common manufacturer business arrangements and activities from prosecution and administrative sanction, the exemptions and safe harbors are drawn narrowly and are subject to regulatory revision or changes in interpretation by the DOJ and OIG. Practices or arrangements that involve remuneration may be subject to scrutiny if they do not qualify for an exemption or safe harbor. Violations of the federal Anti-Kickback Statute may be established without providing specific intent to violate the statute.
•The federal civil FCA prohibits, among other things, any person from knowingly presenting, or causing to be presented, a false or fraudulent claim for payment of federal funds, or knowingly making, or causing to be made, a false statement material to a false claim. A claim resulting from a violation of the federal Anti-Kickback Statute constitutes a false or fraudulent claim. The FCA also permits a private individual acting as a “whistleblower” to bring actions on behalf of themselves and federal government alleging violations of the statute and to share in any monetary recovery.
•The healthcare fraud provisions under the Health Insurance Portability and Accountability Act of 1996 (HIPPA). ("HIPAA"), which extend to non-government health benefit programs and which impose criminal liability for, among other things, knowingly and willfully executing, or attempting to execute, a scheme to defraud any health care benefit program, including private third party payors, or falsifying or covering up a material fact or making any materially false or fraudulent statement in connection with the delivery of or payment for health care benefits, items or services.
Violations of these laws can lead to civil and criminal penalties, including fines (including mandatory penalties on a per claim or statement basis for violations of the FCA), damages, imprisonment and exclusion from participation in federal healthcare programs. These laws apply to hospitals, physicians and other potential purchasers of our products and are potentially applicable to us as both a manufacturer and a supplier of products reimbursed by federal healthcare programs. In addition, some states in the U.S. have enacted compliance and reporting requirements aimed at drug manufacturers. Many states also have statutes or regulations similar to the federal anti-kickback law and the FCA and which apply to items and services reimbursed under Medicaid and other state programs, or, in several states, apply regardless of the payor. Other states restrict whether and when pharmaceutical companies may provide meals to health care professionals or engage in other marketing-related activities, and certain states and cities require identification or licensing of sales representatives.
We are also subject to the Foreign Corrupt Practices Act of 1977 ("FCPA") and similar worldwide anti-bribery laws in non-U.S. jurisdictions, such as the United Kingdom ("U.K.") Bribery Act of 2010, which generally prohibit companies and their intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Because of the predominance of government-sponsored healthcare systems around the world, most of our customer relationships outside of the U.S. are with governmental entities and are therefore subject to such anti-bribery laws. Our policies mandate compliance with these anti-bribery laws; however, we operate in many parts of the world that have experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. Despite our training and compliance programs, our internal control policies and procedures may not protect us from reckless or criminal acts committed by our employees or agents.
Sunshine Act and Transparency Laws
The U.S. Physician Payment Sunshine Act ("Sunshine Act") requires tracking of payments and transfers of value to physicians and teaching hospitals and ownership interests held by physicians and their families, and reporting to the federal government and public disclosure of these data. As of last year, manufacturers must also report transfers of value made to physician assistants, nurse practitioners, clinical nurse specialists, certified nurse anesthetists, and certified nurse-midwives. Certain states also require pharmaceutical companies to report expenses relating to the marketing and promotion of pharmaceutical products and to report transfers of value made to healthcare providers in the applicable state.
Data Protection and Privacy
We are also subject to laws and regulations governing the privacy and security of health related and other personal data we collect and maintain (e.g., European Union’s ("E.U.") General Data Protection Regulation ("GDPR"), Section 5 of the Federal Trade Commission Act ("FTC Act"), HIPAA, and the California Consumer Privacy Act ("CCPA"), as amended by the California Privacy Rights Act ("CPRA").
In Europe, the GDPR governs the collection, use, disclosure, transfer or other processing of personal data of individuals within the European Economic Area. Among other things, the GDPR imposes requirements regarding the security of personal data and notification of data breaches to the competent national data processing authorities, requires having lawful bases on which personal data can be processed. The GDPR imposes substantial fines for breaches and violations (up to the greater of €20 million or 4% of our annual global turnover) and confers the right for data subjects to lodge complaints with supervisory authorities, seek judicial remedies and obtain compensation for damages resulting from violations of the GDPR.
The Federal Trade Commission ("FTC") sets expectations for failing to take appropriate steps to keep consumers’ personal information secure, or failing to provide a level of security commensurate to promises made to individual about the security of their personal information (such as in a privacy notice) may constitute unfair or deceptive acts or practices in violation of Section 5(a) of the FTC Act. The FTC expects a company’s data security measures to be reasonable and appropriate in light of the sensitivity and volume of consumer information it holds, the size and complexity of its business, and the cost of available tools to improve security and reduce vulnerabilities. Individually identifiable health information is considered sensitive data that merits stronger safeguards. With respect to privacy, the FTC also sets expectations that companies honor the privacy promises made to individuals about how the company handles consumers’ personal information; any failure to honor promises, such as the statements made in a privacy policy or on a website, may also constitute unfair or deceptive acts or practices in violation of the FTC Act. While we do not intend to engage in unfair or deceptive acts or practices, the FTC has the power to enforce promises as it interprets them, and events that we cannot fully control, such as data breaches, may be result in FTC enforcement. Enforcement by the FTC under the FTC Act can result in civil penalties or enforcement actions.
HIPAA imposes privacy and security obligations on covered entity health care providers, health plans, and health care clearinghouses, as well as their "business associates" – certain persons or covered entities that create, receive, maintain, or transmit protected health information in connection with providing a specified service or performing a function on behalf of a covered entity. Although we are not directly subject to HIPAA, we could potentially be subject to criminal penalties if we, our affiliates, or our agents knowingly receive individually identifiable health information maintained by a HIPAA-covered entity in a manner that is not authorized or permitted by HIPAA.
In California, the CCPA establishes certain requirements for data use and sharing transparency and creates new data privacy rights for California residents. The CCPA and its implementing regulations have already been amended multiple times since their enactment, including by the CPRA. The CPRA introduced significant amendments to the CCPA and established and funded a dedicated California privacy regulator, the California Privacy Protection Agency ("CPPA"). The amendments introduced by the CPRA went into effect on January 1, 2023, and new implementing regulations are expected to be introduced by the CPPA. Failure to comply with the CCPA may result in, among other things, significant civil penalties and injunctive relief, or statutory or actual damages. In addition, California residents have the right to bring a private right of action in connection with certain types of incidents. These claims may result in significant liability and damages. Other states, including Virginia, Colorado, Utah, and Connecticut have enacted similar privacy laws that impose new obligations or limitations in areas affecting our business and we continue to assess the impact of these state legislation, on our business as additional information and guidance becomes available. These laws and regulations are evolving and subject to interpretation, and may impose limitations on our activities or otherwise adversely affect our business.
Compliance with these laws and regulations may require significant additional cost expenditures or changes in products or our business that increase competition or reduce revenue. Noncompliance could result in the imposition of fines, penalties, or orders to stop noncompliant activities, or withdrawal of non-compliant products from a market.
Compliance Programs
In order to systematically and comprehensively mitigate the risks of non-compliance with legal and regulatory requirements described within this Item 1. Business, we have developed what we believe to be robust compliance programs based on the April 2003 Office of the Inspector General ("OIG")OIG Compliance Program Guidance for Pharmaceutical Manufacturers, the U.S. Department of JusticeDOJ Guidance on the Evaluation of Corporate Compliance Programs, the U.S. Federal Sentencing Guidelines, the Pharmaceutical Research and Manufacturers of America Code on Interactions with Healthcare Professionals, the Code of Ethics of the Advanced Medical Technology Association, the U.K. Anti-Bribery guidance, and other relevant guidance from government and national or regional industry codes of behavior. As further described below, we also operate under a corporate integrity agreement ("CIA") and an Operating Injunction (as defined below). We conduct ongoing compliance training programs for all employees and maintain a 24-hour integrity and compliance reporting hotline with a strict policy of non-retaliation. Our compliance programs are implemented and facilitated by our Chief Compliance Officer ("CCO"), who reports to the Chief Executive Officer ("CEO") and the Governance and Compliance Committee of our Board of Directors. The Compliance function is independent of the manufacturing and commercial operations functions.
As part of our compliance programs,program, we have implemented internal cross-functional processes to review and approve product-specific promotional materials, presentations and external communications to address the risk of misbranding, mislabeling or making false or misleading claims about our products through our promotional efforts. In addition, we monitor business activities through our compliance monitoring program including: sales representativesrepresentative expenses, promotional speaker activities and a "ride along" program for compliance to observe field sales and medical representatives interacting with healthcare professionals similar to those included in recent Corporate Integrity Agreements from the OIG.and organizations. We have also implemented a comprehensive controlled substances compliance program, including SOM and anti-diversion efforts and we regularly assist federal, state and local law enforcement and prosecutors in the U.S. by providing information and testimony on our products and placebos for use by the DEA and other law enforcement agencies in investigations and at trial. As part of this program, we also work with some of our customers to help develop and implement what we believe are best practices for SOM and other anti-diversion activities.
Additionally,We believe our compliance program's design addresses our FDA, healthcare anti-kickback, anti-fraud, and anti-bribery-related risks. We believe we have complied with reporting obligations of the Sunshine Act and relevant state disclosure laws and have implemented an Opioid Product Operating Injunctiona program across the Company to track and report data per CMS guidance and state disclosure requirements.
Corporate Integrity Agreement
In concert with the Plan, the Company entered into a CIA with the OIG within the HHS in March 2022. The CIA has a five-year term and requires, among other things, enhancements to our compliance program, as a resultfulfillment of self-reporting, monitoring and training obligations, management certifications and resolutions from the Mallinckrodt Board of Directors. In addition, we are required to retain an independent review organization to conduct annual reviews of certain Mallinckrodt entities agreeingCompany systems and transactions related to Specialty Brands government pricing and patient assistance activities. We continue to comply with our CIA obligations.
Operating Injunction
In connection with the Plan, we agreed to be bound by an Operating Injunctioninjunction enjoining those entities from engaging in certain conduct related to the manner in which they operate their opioid business.business ("Operating Injunction"). The Operating Injunction prohibits, among other things, certain promotional activities related to opioid products and pain treatment, financial and in-kind support for third parties involved with opioids or pain treatment, and certain lobbying activities and communications related to opioids and pain treatment. The Operating Injunction also contains requirements for controlled substances SOM and reporting. The Operating Injunction further requires Mallinckrodt to make available certain clinical data through a third-party data archive and publicly disclose certain produced documents related to the opioid litigation. We implemented an Opioid Product Operating Injunction compliance program as a result of the Operating Injunction. The Operating Injunction provides that Mallinckrodt must retain an independent monitor to evaluate and audit compliance with the Operating Injunction for a term of five to seven years. On February 8, 2021, the Bankruptcy Court entered an order appointing R. Gil Kerlikowske to serve as monitor.
The monitor has since filed fourissued seven compliance reports with the Bankruptcy Court describing his work and making certain recommendations regarding potential enhancements to the Company's processes that the Company has worked to implement. The Company has, among other actions, retained a consulting firm with expertise in data analytics to consult regarding the Company's SOM program; enhanced the Company's internal system for customer inquiries and concerns to encourage further collaboration across business units; and implemented a plan to audit state and federal lobbying activity to monitor compliance with the Operating Injunction.
In connection with the Proposed Acthar Gel-Related Settlement, the Company entered into a corporate integrity agreement ("CIA") with the OIG of the HHS in March 2022.
We believe our compliance program's design also addresses our FDA, healthcare anti-kickback, anti-fraud, and anti-bribery-related risks. We believe we have complied with reporting obligations of the U.S. Federal Physician Payment Sunshine Act and relevant state disclosure laws and have implemented a program across the Company to track and report data per CMS guidance and state disclosure requirements.
Outside the United States
Outside the U.S., we must comply with laws, guidelines and standards promulgated by other regulatory authorities that regulate the development, testing, manufacturing, distribution, marketing and selling of pharmaceuticals,medicinal products and medical devices, including, but not limited to, Health Canada, the Medicines and Healthcare Products Regulatory Agency ("MHRA") in the U.K., the Irish Medicines Board, the European Medicines Agency ("EMA"), the European Commission and member states of the European Union ("E.U."), and their competent authorities such as the Irish Medicines Board, the Therapeutic Goods Administration in Australia, the Ministry of Health and Welfare in Japan, the European Pharmacopoeia of the Council of Europe and the International Conference on Harmonization. Although international harmonization efforts continue, many laws, guidelines and standards differ by region or country.
We currently market our products in Canada, in various countries in the E.U., and in the Latin American, Middle Eastern, African and Asia-Pacific regions. The approval requirements and process vary by country, and the time required to obtain a marketing
authorization may vary from that required for FDA approval. Certain drug products and variations in drug product lines also must meet country-specific and other local regulatory requirements. The following discussion highlights some of the differences in the approval process in other regions or countries outside the U.S.
European Union. Marketing authorizations for medicinal products are obtained pursuant to either a centralized, decentralized or decentralizedmutual recognition procedure. Irrespective of the procedure, an authorization may only be granted to an applicant established in the E.U.
The centralized procedure, which provides for a single marketing authorization valid for all E.U. member states as well as three of the four European Free Trade Association countries (Iceland, Liechtenstein and Norway), is mandatory for the approval of certain drugmedicinal products including orphan medicinal products and biotechnology-derived medicinal products and is optional for others such as novel drug products that are in the interest of patient health. Under the centralized procedure, a single marketing authorization application is submitted for review to the Committee for Medicinal Products for Human Use established at the EMA, which makes a recommendation on the application to the European Commission, who determines whether or not to approve the application. The decentralized procedure providesallows companies to file identical applications to several E.U. member states simultaneously for concurrentproduct candidates that have not yet been authorized in any E.U. member state. The maximum timeframe for completion of the procedure is in principle 210 days.
A mutual recognition procedure allows companies that have a product already authorized in one E.U. member state to apply for that authorization to be recognized by the competent authorities in other E.U. member states..
Biosimilars can only be authorized once the period of nationaldata exclusivity on our candidate, as 'reference' biological medicinal product, has expired. In general, this means that the biological reference medicine must have been authorized for at least eight years before another company can apply for approval decisions,of a similar biological product and further two years until the biosimilar can be marketed.
Medical Devices. In the E.U., medical devices must currently comply with the General Safety and Performance Requirements laid down in Annex I to the E.U. Medical Devices Regulation ("MDR"). Compliance with these requirements is available fora prerequisite to be able to affix the CE mark on products, thatwithout which they cannot be marketed or sold in the E.U. To demonstrate compliance with the General Safety and Performance Requirements of the E.U. MDR and obtain the right to affix the CE mark, medical devices manufacturers must undergo a conformity assessment procedure, which varies according to the type of medical device and its classification. Apart from low risk medical devices (Class I with no measuring function and which are not subjectsterile and not reusable), in relation to which the manufacturer may issue an EC Declaration of Conformity based on a self-assessment of the conformity of its products with the General Safety and Performance Requirements, a conformity assessment procedure requires the intervention of a notified body, which is an organization designated by a Competent Authority of an E.U. member state to conduct conformity
assessments. Depending on the relevant conformity assessment procedure, the notified body would audit and examine the technical documentation and the quality system for the manufacture, design and final inspection of the medical devices. The notified body issues a CE Certificate of Conformity following successful completion of a conformity assessment procedure conducted in relation to the centralized procedure.medical device and its manufacturer and their conformity with the General Safety and Performance Requirements. This Certificate and the related conformity assessment process entitles the manufacturer to affix the CE mark to its medical devices after having prepared and signed a related EC Declaration of Conformity. Notified bodies must be accredited by the E.U. member states’ accreditation bodies to conduct assessment procedures for medical devices in accordance with the E.U. MDR. There are currently a relatively small number of notified bodies that have been accredited to conduct these assessments. This may delay conformity assessment procedures in the future in the E.U.
The E.U. has also adopted directives and other laws that govern the labeling, marketing, advertising, supply, distribution of medicinal products and drug safety monitoring and reporting of drug products.medical devices. Such directives set regulatory standards throughout the E.U. and permit member states to supplement such standards with additional requirements.
Country-specific regulation of the E.U. member states remains essential also regarding pricing and reimbursement. European governments also regulate drugmedicinal products prices through the control of national healthcare systems that fund a large part of such costs to patients. Many regulate the pricing of a new drugmedicinal product at launch through direct price controls or reference pricing and, recently, some have also imposed additional cost-containment measures on drug products. Such differences in national pricing regimes may create price differentials between E.U. member states. Many European governments also advocate generic substitution by requiring or permitting prescribers or pharmacists to substitute a different company's generic version of a branded drugmedicinal product that was prescribed, and patients are unlikely to take a drug product that is not reimbursed by their government.
The regulatory regime for the U.K. is different which may cause additional administrative burdens. The U.K., comprising Great Britain and Northern Ireland, left the E.U. on January 31, 2020, following which existing E.U. medicinal product legislation continued to apply in the U.K. during the transition period until December 31, 2020 under the terms of the E.U.-U.K. Withdrawal Agreement. During this period, the U.K. and the E.U. negotiated a Trade and Cooperation Agreement ("TCA"), for their future relationship that became effective on January 1, 2021.
Great Britain (England, Scotland and Wales) is now treated as a "third country," a country that is not a member of the E.U. whereas, as a result of the Northern Ireland Protocol, Northern Ireland continues to follow the E.U. regulatory regime. The MHRA is responsible for both Great Britain and Northern Ireland. Following the effectiveness of the Human Medicines (Amendment etc.) (EU Exit) Regulations 2019 on January 31, 2020, the U.K. regulatory regime for clinical trials, marketing authorizations, importing, exporting and pharmacovigilance largely mirrors that of the E.U. As part of the TCA, the E.U. and the U.K. will recognize Good manufacturing practice ("GMP") inspections carried out by the other party and accept official GMP documents issued by the other party. The TCA also encourages, although it does not oblige, the parties to consult one another on proposals to introduce significant changes to technical regulations or inspection procedures. Among the areas of absence of mutual recognition are batch testing and batch release. The U.K. has unilaterally agreed to accept E.U. batch testing and batch release for a period of at least 2 years which terminated on January 1, 2023. However, the E.U. continues to apply E.U. laws that require batch testing and batch release to take place in the E.U. territory. This means that medicinal products that are tested and released in the U.K. must be retested and re-released when entering the E.U. market for commercial use. As it relates to marketing authorizations, Great Britain has introduced a separate regulatory submission process, approval process and a separate national marketing authorization. Northern Ireland, however, continues to be covered by the marketing authorizations granted by the European Commission. The U.K. regulatory regime for medical devices is largely aligned with previous E.U. directives and will soon be subject to changes that will probably bring it closer to the current E.U. regulations.
Emerging Markets. Many emerging markets continue to evolve their regulatory review and oversight processes. At present, such countries typically require prior regulatory approval or marketing authorization from large, developed markets (such as the U.S.) before they will initiate or complete their review. Some countries also require the applicant to conduct local clinical trials as a condition of marketing authorization. Many emerging markets continue to implement measures to control drug product prices, such as implementing direct price controls or advocating the prescribing and use of generic drugs.
Environmental
Our operations, like those of other pharmaceutical companies, involve the use of substances regulated under environmental laws, primarily in manufacturing processes and, as such, we are subject to numerous federal, state, local and non-U.S. environmental protection and health and safety laws and regulations. We cannot provide assurance that we have been or will be in full compliance with environmental, health and safety laws and regulations at all times. Certain environmental laws assess strict, (i.e., can be imposed regardless of fault) joint and several liability on current or previous owners of real property and current or previous owners or operators of facilities for the costs of investigation, removal or remediation of hazardous substances or materials at such properties or at properties at which parties have disposed of hazardous substances. We have, from time to time, received notification from the EPA and from state environmental agencies in the U.S. that conditions at a number of sites where the disposal of hazardous substances has taken place requires investigation, cleanup and other possible remedial actions. These agencies may require that we reimburse the
government for costs incurred at these sites or otherwise pay for the cost of investigation and cleanup of these sites including compensation for damage to natural resources. Primarily due to past operations, operations of predecessor companies or past disposal practices, we have projects underway at a number of current and former manufacturing facilities as well as former disposal sites to investigate and remediate environmental contamination resulting from past operations, as further described in Note 19 to the Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.Report.
We continue to be dedicated to environmental sustainability programs to minimize the use of natural resources and reduce the utilization and generation of hazardous materials from our manufacturing process and to remediate identified environmental concerns. Environmental laws are complex and generally have become more stringent over time. We believe that our operations currently comply in all material respects with applicable environmental laws and regulations, and have planned for future capital and operating expenditures to comply with these laws and to address liabilities arising from past or future releases of, or exposures to, hazardous substances.
Raw Materials
We contract with various third-party manufacturers and suppliers, most notably related to our Specialty Brands products, to provide us with raw materials used in our products, finished goods and certain services. If, for any reason, we are unable to obtain sufficient quantities of any of the raw materials, finished goods, services or components required for our products, it could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.
The active ingredients in the majority of our current Specialty Generics products and certain products in development, including oxycodone, oxymorphone, morphine, fentanyl and hydrocodone, are listed by the DEA as Schedule II substances under the CSA. Consequently, their manufacture, shipment, storage, sale and use are subject to a high degree of regulation and the DEA limits the availability of narcotic raw materials and the production of APIs and generic Schedule II substances through manufacturing and procurement quotas that we must apply for annually in order to obtain and produce these substances.
Sales, Marketing and Customers
Sales and Marketing
We market our branded products to physicians (including neurologists, rheumatologists, hepatologists, nephrologists, pulmonologists, ophthalmologists, oncologists, neonatologists and surgeons), other health care providers including respiratory therapists, pharmacists, pharmacy buyers, hospital procurement departments, ambulatory surgical centers and specialty pharmacies. We distribute our branded and generic products through independent channels, including wholesale drug distributors, specialty pharmaceutical distributors, retail pharmacy chains, hospital networks, ambulatory surgical centers and governmental agencies. In addition, we contract with group purchasing organizations ("GPO(s)") and managed care organizations to improve access to our products. We sell and distribute API directly or through distributors to other pharmaceutical companies.
For further information on our sales and marketing strategies, refer to "Our Businesses and Product Strategies" included within this Item 1. Business.above.
Customers
Net sales to distributors that accounted for more than 10.0% of our total net sales in the period from June 17, 2022 through December 30, 2022 (Successor), the period from January 1, 2022 through June 16, 2022 (Predecessor), fiscal 2021 (Predecessor) and fiscal 2020 and 2019(Predecessor) were as follows:
| | | Fiscal Year | | Successor | | | Predecessor |
| | 2021 | | 2020 | | 2019 | | Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
| FFF Enterprise, Inc. | | FFF Enterprise, Inc. | 26.1 | % | | | 11.8 | % | | *% | | *% |
| CuraScript, Inc. | CuraScript, Inc. | 26.1 | % | | 27.4 | % | | 29.7 | % | CuraScript, Inc. | * | | | 15.6 | % | | 26.1 | % | | 27.4 | % |
| AmerisourceBergen Corporation | * | | * | | 10.2 | | |
* Net sales to this distributor were less than 10.0% of total net sales during the respective periods presented above.
No other customer accounted for 10.0% or more of our net sales in the above periods presented.
Manufacturing and Distribution
As of December 31, 2021,30, 2022 (Successor), we had 11 manufacturing sites, including eight located in the U.S., as well as sites in Ireland and Japan, which handle production, assembly, quality assurance testing, packaging and sterilization of our products.
Approximately 93.5%93.9%, 4.2%4.0% and 2.3%2.1% of our manufacturing production (as measured by cost of production) was performed within the U.S., Ireland and Japan, respectively, in fiscal 2021.2022.
As of December 31, 2021,30, 2022 (Successor), we maintained distribution centers in ten countries. In addition, in certain countries outside the U.S. we utilize third-party distribution centers. Products generally are delivered to these distribution centers from our manufacturing facilities and then subsequently delivered to the customer. In some instances, product is delivered directly from our manufacturing facility to the customer. We contract with a wide range of transport providers to deliver our products by road, rail, sea and air.
We utilize contract manufacturing organizations ("CMOs") to manufacture certain of our finished goods that are available for resale. We most frequently utilize CMOs in the manufacture of certain of our Specialty Brands products, including Acthar Gel (for finish and filling of the product) and Therakos products.
Seasonality
We have historically experienced fluctuations in our business resulting from seasonality. For example, Acthar Gel has typically experienced lower net sales during the first calendar quarter compared to other calendar quarters, which we believe is partially attributable to effects of annual insurance deductibles and the lack of warm temperatures that may exacerbate certain medical conditions. DEA quotas for raw materials and final dosage products are allocated in each calendar year to companies and may impact our sales until the DEA grants additional quotas, if any. Impacts from quota limitations are most commonly experienced during the third and fourth calendar quarters, and we have typically experienced lower net sales in DEA controlled products during the fourth calendar quarter. While we have experienced these fluctuations in the past, they may not be indicative of what we will experience in the future.
Human Capital
At Mallinckrodt, we value our employees as our most important asset. We aim to create a culture and a work environment that is inclusive and that welcomes diverse experiences and perspectives. We work hard to identify, retain and attract a diverse workforce that shares our corporate vision to improve the lives of underserved patients with severe and critical conditions. We believe that in doing this, it will make us stronger and more innovative. We invest in human resources programs designed to develop capabilities to deliver on our critical business priorities. We do this by offering competitive pay and benefit programs, investing in our employees' growth and development and creating a safe and healthy work environment. We embrace diversity and empower each individual employee to bring their whole, authentic self to work. Further, we encourage and support our employees to be active members of their communities.
We employAs of December 30, 2022 (Successor), we employed a multi-national workforce of approximately 2,800 people as of December 31, 2021. As an innovative biopharmaceutical company, 21.7% of our employees are field-based and work across multiple countries engaging with healthcare professionals and facilities.2,700 people. Our products are developed by a workforce with specialized degrees in science, engineering and technology. Our manufacturing and distribution locationssites located across the U.S., Ireland and Japan makemade up 52.8%60% of our workforce; 25.5%workforce and 18% were field-based working across multiple countries engaging with healthcare professionals and facilities. The remaining 22% of our employees workworked within our science and technology and corporate services locations of Hampton, New Jersey; Hazelwood, Missouri; Webster Groves, Missouri; Washington, District of Columbia ("D.C."), Staines, U.K. and Dublin, Ireland. Of our total workforce, 99.2% are99% were full time.
Employee Benefits and Well-being
We believe in providing comprehensive and competitive benefits our employees value, designed to be equitable and meet their diverse and unique needs. We are intentional about building inclusivity into our benefits strategy.
In the U.S., Mallinckrodt provides:
•Up to four weeks of paid caregiver leave to help eligible employees deal with family responsibilities;
•Medications at zero employee cost to promote medication adherence for certain chronic medical conditions; and
•Fertility benefits that provide equitable benefits to same-sex couples.
Mallinckrodt also offers a variety of advocacy support resources for employees and their families, including:
•Clinical support for infertility, maternity, oncology, inpatient care, musculoskeletal conditions, congenital heart disease and transplant situation;
•Second opinion services for new or existing medical issues by board-certified, elite specialists at zero cost to employees; and
•Behavioral Health Advocacy to assist employees and their families with complex behavioral health concerns.
Additionally we leverage our well-being platform by collaborating with our diversity focused Business Resource Groups ("BRGs") to provide resources and activities to support their specific goals.
During the pandemic, we have continued to listen to the needs of employees and their families and have responded by implementing new resources and enhanced benefits.
Talent Development and Employee Engagement
We are committed to a culture of continuous learning, aimed at advancing our workforce through personal and professional development. Our talent strategies are aligned to business priorities creating opportunities for our employees to grow and develop. We offer a wide range of leadership and individual development offerings, inclusive of but not limited to, tuition reimbursement, mentoring programs,leadership development training, individual development planning, a robust library of on-demand e-learning content, workshops and seminars, networking and professional coaching that is in-person and/or remote.coaching. We partner with external organizations and invest in programs specifically aimed at advancing diverse talent. We have established processes to identify and align individual employee aspirations with business needs so that development and succession planning can occur. These processes have yielded positive results in the advancement of high potential and diverse talent. We create opportunities to advance our talent through development assignments, on-the-job training and career advancement. Our learning platforms are designed to provide flexibility to meet the needs, interests and aspirations of all employees.
At Mallinckrodt, we value employee feedback. We are intentional about creating a culture where employees can speak freely and are empowered to ask questions. We create opportunities to solicit feedback from employees through one-on-one sessions, focus groups and employee surveys. These forums have and will continue to provide us the opportunity to ensure our employees are engaged and supported both personally and professionally. The introduction of hybrid working in 2021 is just one example of a program that was derived as a result of employee feedback.
InclusionDiversity, Equity and Diversity ("I&D")Inclusion
We strive to foster an inclusive and equitable work environment and a diverse workforce that reflects the customers and patients we serve. We believe the unique and diverse perspectives of our employees enable us to better understand and respond to our patients' needs.
Our workforce is built on the foundation of equal opportunity and fair treatment. As a multi-national company, we celebrate the diversity of our workforce. Our employee-led I&DDiversity, Equity and Inclusion ("DEI") Council and BRGs play key roles in cultivating and inspiring a more inclusive culture. These groups are open to anyone and are typically centered on shared interests, identities and affiliations. Our BRGs provide resources for professional development, personal growth, community engagement, well-being and networking, all while fostering connectivity and enhancing our unique culture.
Our BRGs frequently host company-wide educational events to help foster a culture of diversity, equity and inclusion. Examples from 2022 include:
•African American BRG hosted its third annual Summit, titled Beyond Equity: A Call to Action that included leadership and guest speakers discussing how Mallinckrodt can play a role in bringing equity to underrepresented groups.
•Women in Business BRG hosted quarterly "Climb the Ladder" skill-building workshops, as well as a roundtable discussion with members of our Executive Committee on the topics of gender diversity and allyship.
•Namaste Asia BRG hosted an educational webinar that explored the misconceptions about Asian Americans that create impediments to leadership and collaboration, and what they can do achieve equality.
•LGBTQ+ BRG hosted a roundtable discussion around transgender and nonbinary inclusion and ally-ship.
Our approach to I&DDEI continues to receive national recognition, most recently beingrecognition. Mallinckrodt has been recognized as a "Best Places to Work for LGBTQ Equality" for six consecutive years from the Human Rights Campaign Foundation's Corporate Equity Index.
Social and Community ResponsibilityImpact
Giving backMallinckrodt is committed to local communities has beenbeing a long-standing tradition of oursforce for more than 150 years. Our culture of philanthropy stretches beyond simply doing good for others; it's about driving meaningful changes in our communities to make a positive impact on the world.good. Our social impact strategy focuses on improving the health and well-being of patients, building stronger communities, and empowering our employees to dedicate their time and resources to the causes they care about most. We provide grants to nonprofits worldwide and support employees with their own philanthropy through volunteerism and giving programs.
Corporate Charitable Giving Program
Mallinckrodt provides patient-related and philanthropic support to nonprofit organizations that are aligned with our mission to address unmet needs with innovative solutions. Our patient-centric charitable contributions support initiatives and programs that have broad public benefit and advance medical care and/or patient care within the Company's therapeutic areas of focus. Our community-basedcommunity-
based investments are centered in three strategic areas –areas: (i) improving health and wellness; (ii) advancing science, technology, engineering and mathematics ("STEM") education; and (iii) stimulating jobs and economic growth in life sciences.
Throughout the pandemic we have contributedMallinckrodt continues to focus efforts to advanceon advancing health equity in research, treatment, patient experience and healthimproving outcomes for Black, Indigenous and people of color.underrepresented communities. We are collaboratingcollaborate with patient advocacy organizations to improve engagement with these communities and promote greater awareness of health disparities in our key therapeutic areas of focus. For example, Mallinckrodt has supported:
•NephCure Kidney InternationalInternational's to launch a new Health Equity and Diversity Initiative aimed at creating more equitable access to research and care for underrepresented individuals living with, or are at high risk of developing, chronic kidney diseases.
•The Arthritis FoundationMyositis Association’s Affinity Groups program to improve health outcomesamplify patient voices, equity and access, and create safe spaces for populationscommunities that have traditionally been inadequately representedshare more in research, treatment and policy.common than their myositis.
In 2021, we•The American Liver Foundation’s Think Liver Think Life national public health campaign that focuses on awareness and screening of liver disease.
We supported STEM education andhelping to expanded educational opportunities for female and minority students, to help combatfurther closing the lingering disparitiesgap in education.access for these underrepresented groups. Examples of 20212022 grant support include:
•Students 2 Science, a New Jersey-based nonprofit that inspires and educates students in underserved communities to pursue STEM careers.
•The St. Louis Black Authors of Children's Literature, a nonprofit in St. Louis, Missouri that spearheads the Believe Project – which builds literacy labs in schools and community centers that provide kids consistent access to black children's literature as a strategy for improving reading proficiency.
•Maydm, Inc., a nonprofit in Madison, Wisconsin that provides girls and youth of color in grades 6-12 with skill-based training in STEM fields.
•Millbrook Robotics "GearCats" Booster Club that provides invaluable hands-on STEM education and experience for the students at Millbrook High School, one of North Carolina’s largest and most diverse public high schools.
Employee Giving and Volunteerism
We believe that our employees are the cornerstone of our corporate citizenship efforts, and we provide opportunities for them to embrace their passions and amplify their philanthropic impact. Our volunteerism program provides eight hours of extra paid time off to eligible employees annually for qualified volunteer activities, in addition to time off to participate in our global month of service that's held every October. To encourage charitable giving, we matchMallinckrodt matches U.S. employee donations to eligible nonprofit organizations.organizations - up to $2,500 per employee, per calendar year. We also activate special matching opportunities during times of disaster or crisis.
Information About Our Executive Officers
Set forth below are the names, ages as of February 2, 2023, and current positions of our executive officers.
| | | | | | | | |
| Name | Age | Title |
| Sigurdur O. Olafsson | 54 | President, Chief Executive Officer and Director |
| Bryan M. Reasons | 55 | Executive Vice President and Chief Financial Officer |
| Henriette Nielsen | 57 | Executive Vice President and Chief Transformation Officer |
| Mark Tyndall | 47 | Executive Vice President and Chief Legal Officer and Company Secretary |
| Kassie Harrold | 43 | Executive Vice President and Chief Compliance Officer |
| Lisa French | 54 | Executive Vice President and Chief Commercial Officer |
| Peter Richardson | 63 | Executive Vice President and Chief Scientific Officer |
| Stephen Welch | 45 | Executive Vice President and Head of Specialty Generics |
| Jason Goodson | 42 | Executive Vice President and Head of Corporate Development |
Set forth below is a brief description of the position and business experience of each of our executive officers.
Sigurdur O. Olafsson has been President, CEO and a board director since June 2022. Mr. Olafsson has almost 30 years of diverse pharmaceutical experience across branded and generic drugs. Before joining Mallinckrodt, Mr. Olafsson served as CEO of Hikma Pharmaceuticals plc ("Hikma") from February 2018 to June 2022. Prior to Hikma, Mr. Olafsson served as president and CEO of the Global Generic Medicines Group of Teva Pharmaceuticals ("Teva"), from July 2014 to January 2017. Before that, he served in various senior executive roles at Actavis plc (Watson) from September 2010 to June 2014 and the Actavis Group from October 2003 to August 2010, which develop, manufacture and distribute branded, generic and biosimilar products. Mr. Olafsson has also held a number of leadership positions in Pfizer’s Global R&D organization in the U.K. and U.S., focused on branded drug development, and served as head of drug development for Omega Farma in Iceland. Mr. Olafsson has previously served as a director on the boards of Hikma from 2018 to 2022 and Pfenex Inc. from 2017 to 2019. Mr. Olafsson holds a Master of Science in Pharmacy (Cand Pharm) from the University of Iceland, Reykjavik.
Bryan M. Reasons is our Executive Vice President ("EVP") and Chief Financial Officer ("CFO"). He has executive responsibility for the global finance function. Prior to joining Mallinckrodt in March 2019, Mr. Reasons served as Senior Vice President ("SVP") and CFO of Amneal Pharmaceuticals, Inc. from May 2018 until January 2019 and as SVP, Finance and CFO of Impax Laboratories, Inc. from December 2012 until Amneal and Impax completed their business combination to form Amneal in May 2018. Mr. Reasons previously served as Impax’s Acting CFO from June 2012 to December 2012 and as Impax’s Vice President ("VP"), Finance from January 2012 to June 2012. Prior to joining Impax in January 2012, he held various finance management positions at Cephalon, Inc. from 2005 to 2012 and at E. I. Du Pont De Nemours and Company from 2003 to 2005 and was at PricewaterhouseCoopers LLP ("PwC") from 1993 to 2003, last serving as senior manager. Mr. Reasons also serves as an independent board director and audit committee chair for both Aclaris Therapeutics, Inc. and Recro Pharma, Inc.
Henriette Nielsen is our EVP and Chief Transformation Officer ("CTO"), a role she assumed in August 2022. Ms. Nielsen has executive responsibility for all human resources, communications and people-related matters, as well as a focus on further building out our Environment, Social and Governance program. Ms. Nielsen brings significant experience from a range of corporate functions and an impressive track record of enhancing operations at pharmaceutical companies. Previously, Ms. Nielsen served at Hikma as EVP, Business Operations, a role she held from 2018 to 2022. Before that, Ms. Nielsen served at Teva as SVP, CTO, Global Marketing and Portfolio from 2015 to 2018, and SVP, CTO, Global Generics Medicine from 2014 to 2015. Before that, she was the founder of System Matters APS, a healthcare and impact investing consultancy from 2011 to 2014 and the general counsel and an executive vice president at Actavis Group from 2006 to 2011. Ms. Nielsen began her career as a commercial lawyer in Denmark at Kromann Reumert. She presently serves as Vice Chair of Think Equal USA, a not-for-profit providing and advocating for early-age social emotional learning, and an advisor to EIR, which promotes women’s sports in Denmark. From 2017 to 2018 she served as a board member and observer at PGT Healthcare, a joint venture between Teva and Procter & Gamble Company. Ms. Nielsen was a candidate of law at the University of Copenhagen, received her Master of Laws at the University of Edinburgh, and completed the Leading Sustainable Corporation Program at the University of Oxford.
Mark Tyndall is our EVP, Chief Legal Officer, and Corporate Secretary, roles he assumed in August 2022. Mr. Tyndall has executive responsibility for all legal functions and serves as the primary liaison to the Board of Directors. He also has responsibility for Mallinckrodt’s Government Affairs and Patient Advocacy functions. Previously, from February 2021 to August 2022, Mr. Tyndall served as Mallinckrodt’s SVP and U.S. General Counsel, where he had responsibility for the U.S. and international commercial legal teams, corporate litigation and investigations, legal operations, and the corporate privacy function, and oversaw the Government Affairs team. Before that, Mr. Tyndall held the roles of SVP of Government Affairs and Chief Counsel of Litigation from February 2019 to February 2021, and VP of Government Affairs, Policy and Patient Advocacy from June 2014 to February 2019. Prior to Mallinckrodt, Mr. Tyndall served as Head of Global Policy and Public Affairs at Bayer Healthcare’s consumer health division, a role he served in from January 2013 to June 2014. Prior to joining Bayer, Mr. Tyndall practiced healthcare and political law in the Washington, D.C. office of Sidley Austin LLP, where he focused on healthcare regulatory issues, fraud and abuse matters and legislative and policy issues. He is also a former professional staff member of the U.S. Senate Committee on Agriculture, Nutrition and Forestry. Mr. Tyndall holds a Juris Doctor ("J.D.") from George Washington University Law School, a Master of Public Policy from the College of William and Mary, and a Bachelor of Arts ("B.A.") degree in Economics from Christopher Newport University. He also completed the International Human Rights Law Summer Program at the University of Oxford, New College.
Kassie Harrold is our EVP and CCO, a role she assumed in August 2022. Ms. Harrold has executive responsibility for overseeing Mallinckrodt’s global integrity and compliance program. Previously, Ms. Harrold served as our SVP and CCO, with responsibility for global ethics and the compliance program, including risk assessment and mitigation, hotline reporting and investigations, program monitoring and governance. Ms. Harrold has more than 15 years of compliance experience in the pharmaceutical and specialty chemical industries, and has assessed, implemented and managed compliance programs in a broad range of subject matter areas. Ms. Harrold has held roles of increasing responsibility since joining Mallinckrodt in 2013, including leading the trade compliance and business support functions and advising senior management on a broad range of business matters as the Senior Staff Liaison to the President and CEO. Previously, Ms. Harrold held several positions, including global compliance, litigation and employment counsel and government affairs, with Solutia Inc., the specialty chemicals spin-off of Monsanto. Ms. Harrold is a member of the Healthcare Businesswomen’s Association ("HBA"), previously serving on the St. Louis chapter board. She also participates in the Pharmaceutical Compliance Forum as a member of the CCO Roundtable. She earned her Bachelor of Science ("B.S.") and J.D. degrees from Duquesne University in Pittsburgh, Pennsylvania.
Lisa French is our EVP and Chief Commercial Officer, a role she assumed in October 2022. She has executive responsibility for all commercial and market-access activities for the Company's Specialty Brands products, as well as new product launch execution for assets in Mallinckrodt's near-term development portfolio. Ms. French has more than 30 years of experience in U.S. go-to-market commercialization strategy development and operating experience across the therapeutics lifecycle. Prior to joining the Company, she served as U.S. Business Unit Lead of Organon & Co.’s, a global healthcare company, Women’s Health Franchise, where she led the commercial team. Prior to that, she held various positions of increasing responsibility at Merck, where she ultimately led all aspects of a multi-billion dollar brand, executed commercial innovation initiatives and oversaw multiple sales teams. Her roles included:
Associate Vice President, U.S. Marketing Lead – HPV Franchise; Vice President of U.S. Strategy and Commercial Model Innovation; Executive Director of U.S. Federal Policy; National Executive Director of Commercial Operations – Women's Health; National
Director of Commercial Operations – HIV; Regional Director of Commercial Operations – Chronic Care; and Regional Director of Commercial Operations – Cardiovascular Care, among other roles. Ms. French earned her B.S. in Biology from West Chester University and completed Harvard Business School’s Emerging Leaders and Leadership & Strategy executive programs.
Dr. Peter Richardson, MRCP, is our EVP and Chief Scientific Officer, a role he assumed in January 2023. He has executive responsibility for Mallinckrodt's branded research and development, medical affairs, safety, portfolio and project management, and regulatory affairs functions. Dr. Richardson is a pharmaceutical executive with more than 30 years of experience in research and development leadership, including building and supporting product development pipelines and clinical program management. Prior to joining the Company, Dr. Richardson served as EVP and Chief Medical Officer at Antares Pharmaceuticals, Inc. leading the organization's research and development activities. Prior to Antares Pharmaceuticals, Inc. he held senior leadership positions in research and development at several pharmaceutical companies, including Novartis, MannKind Corporation and Adare Pharmaceuticals. Dr. Richardson earned his Bachelor of Medical Sciences from the University of Nottingham and his Bachelor of Medicine and Bachelor of Surgery from the University of Nottingham Medical School. He completed Stanford University Graduate School of Business' executive program and is a member of the Royal College of Physicians in the United Kingdom.
Stephen Welch is our EVP and Head of Specialty Generics, a role he assumed in August 2022. He has executive responsibility for the Company’s Specialty Generics segment, directly managing all aspects of the segment’s business. Before that, from January 2022 to August 2022, Mr. Welch served as our SVP and General Manager, Specialty Generics. He previously served as the segment’s CFO from December 2020 to January 2022 and CTO for Mallinckrodt from August 2019 to June 2022, including during the Company’s Chapter 11 process, and regularly represented the Company in those proceedings. He joined Mallinckrodt in 2012 and during his time with the Company has held a number of increasingly strategic roles, including Chief of Staff to the President and CEO and Vice President of Corporate Strategy. He began his time at Mallinckrodt in the tax department, focused primarily on mergers and acquisitions transactions and business integrations. Prior to joining Mallinckrodt, Mr. Welch led the tax functions at Human Genome Sciences and PharMerica. He began his career at PwC. Mr. Welch holds a J.D. from the Georgetown University Law Center and a Bachelor’s degree in Political Science from California State University, Bakersfield.
Jason Goodson is our EVP and Head of Corporate Development, a role he assumed in August 2022. Mr. Goodson has executive responsibility for overseeing corporate strategy, business development and business intelligence. He is a seasoned executive leader with a track record of navigating complex business issues and delivering results against corporate strategy. Mr. Goodson previously served as our VP of Business Operations, where he had responsibility for corporate strategy, business development and business intelligence and analytics. Mr. Goodson has also served as Chief of Staff to the President and CEO supporting various strategic initiatives including key workstreams within the Chapter 11 process. Mr. Goodson has over 18 years of experience in various finance leadership, strategy and mergers and acquisitions transaction focused roles. He began his career at Mallinckrodt as Assistant Controller, within the finance organization focused on mergers and acquisitions transactions, integration and transformation projects. Prior to joining Mallinckrodt, Mr. Goodson was with SunEdison Inc, in various finance leadership roles including responsibility for finance transformation initiatives and various business development transactions. Prior to his time at SunEdison, Inc, he was with PricewaterhouseCoopers as a manager in the audit practice. Mr. Goodson holds Masters and Bachelor's degrees from the University of Missouri – Columbia in Accounting. He is a Certified Public Accountant in the state of Missouri.
Available Information
Our website address is mallinckrodt.com. We are not including the information contained on our website as part of, or incorporating it by reference into, this filing. We make available to the public on our website, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 ("Exchange Act") as soon as reasonably practicable after such material is electronically filed with, or furnished to, the U.S. Securities and Exchange Commission ("SEC"). Our reports filed with, or furnished to, the SEC are available on the SEC's website at sec.gov.
We use our website at mallinckrodt.com as a channel of distribution of important company information, such as press releases, investor presentations and other financial information. We also use our website to expedite public access to time-critical information regarding our company in advance of or in lieu of distributing a press release or a filing with the SEC disclosing the same information. Therefore, investors should look to the Investor Relations page of our website for important and time-critical information. Visitors to our website can also register to receive automatic e-mail and other notifications alerting them when new information is made available on the Investor Relations page of our website.
You should carefully consider the risks described below in addition to all other information provided to you in this Annual Report on Form 10-K.Report. Our competitive position, business, financial condition, results of operations and cash flows could be affected by the factors set forth below, any one of which could cause our actual results to vary materially from recent results or from our anticipated future results. The risks and uncertainties described below are those that we currently believe may materially affect our company.
We operate in a rapidly changing environment that involves a number of risks, some of which are beyond our control. The following discussion highlights some of these risks and others are discussed elsewhere in this Annual Report on Form 10-K.Report. These and other risks could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.
Summary of Risk Factors
Risks Related to Our Chapter 11 CasesEmergence from Bankruptcy
We recently emerged from bankruptcy, which could adversely affect our business and relationships.
Our having filed for bankruptcy, notwithstanding our recent emergence from the resulting bankruptcy proceedings, could adversely affect our business and relationships with customers, vendors, contractors, employees or suppliers. Due to uncertainties, many risks associated with the bankruptcy exist, including the following:
•We are subjectthe ability to risksattract, motivate, and/or retain key executives and uncertainties associated with our Chapter 11 Cases (and related proceedings in Canada and Ireland).employees may be adversely affected;
•Delaysemployees may be more easily attracted to other employment opportunities;
•competitors may take business away from us, and our ability to retain customers may be negatively impacted;
•suppliers may not be willing to do business with us at all or on acceptable terms; and
•appeals from orders of the bankruptcy court increase our liabilities.
The occurrence of one or more of these events could have a material and adverse effect on our operations, financial condition and reputation and we cannot assure you that having been subject to bankruptcy proceedings will not adversely affect our operations in the future.
Our actual financial results after emergence from bankruptcy may not be comparable to our projections filed with the Bankruptcy Court or otherwise made public in the course of the Chapter 11 Cases may increaseCases.
In connection with the risksdisclosure statement we filed with the Bankruptcy Court and the hearing to consider confirmation of our being unablePlan (as well as in certain other filings), we prepared projected financial information for various reasons, including to consummate a plandemonstrate to the Bankruptcy Court the feasibility of reorganization and increase our costs associated with the Chapter 11 Cases.
•The Plan and the RSA are subject to significant conditions and milestones that may be difficult for us to satisfy. We must also raise financing to fund certain distributions under the Plan, which may not be available on favorable terms or at all.
•If the RSA is terminated, our ability to consummate the Plan could be materially and adversely affected.
•The Amended Proposed Opioid-Related Litigation Settlement and the Proposed Acthar Gel-Related Settlement (together the "Proposed Settlements") are subject to certain contingencies and may not go into effect in their current form or at all, which may have an adverse impact on our ability to consummate the Plan and our business, financial condition, results ofability to continue operations upon our emergence from Chapter 11. Those projections were prepared solely for the purposes stated therein and cash flows.
•Even ifhave not been, and will not be, updated on an ongoing basis and should not be relied upon by investors. At the Plan is consummated, wetime they were prepared, the projections reflected numerous assumptions concerning our anticipated future performance with respect to then prevailing and anticipated market and economic conditions that were and remain beyond our control and that may not be ablematerialize. Projections are inherently subject to achieve our stated goals or continue as a going concern.
•In certain instances, a Chapter 11 case may be convertedsubstantial and numerous uncertainties and to a case under Chapter 7wide variety of the Bankruptcy Code.
•If the confirmed Plan is not consummated, termination of our exclusive right to file a Chapter 11 plansignificant business, economic and competitive risks and the exclusive rightassumptions underlying the projections or valuation estimates may prove to solicit acceptances could resultbe wrong in competing plans of reorganization, which could have less favorable terms or result in significant litigation and expenses.
•material respects. Actual results may vary significantly from those contemplated by the projections. As a result, of the Chapter 11 Cases, our historical financial information mayinvestors should not be indicative of our future performance, which may be volatile.
•We may be subject to claims that will not be discharged in the Chapter 11 Cases, which could have a material adverse effectrely on our business, financial condition, results of operations and cash flows.
•The pursuit of the Chapter 11 Cases has consumed, and will continue to consume, a substantial portion of the time and attention of our management, which may have an adverse effect on our business, financial condition, results of operations and cash flows, and we may experience increased levels of employee attrition.
•Aspects of the Chapter 11 Cases limit the flexibility of our management team in running our business.
•Certain key aspects of the plan of reorganization must be implemented through an examinership process in Ireland. The examinership process is overseen by the High Court of Ireland and the outcome of those proceedings is a matter within the discretion of the High Court of Ireland. While we believe that the examinership will result in the implementation of those Irish law aspects of the plan of reorganization, there is no guarantee that such implementation will occur.projections.
Risks Related to Our Business
•Governmental investigations, inquiries, and regulatory actions and lawsuits brought against us by government agencies and private parties with respect to our historical commercialization of opioids could adversely affect our reputation, business, financial condition, results of operations and cash flows.
•Our business may be adversely affected by public health crises and epidemics/pandemics, including the on-going coronavirus pandemic.
•The healthcare industry has been under increasing scrutiny from governments, legislative bodies and enforcement agencies related to sales, marketing and pricing practices, and changes to, or non-compliance with, relevant policies, laws, regulations or government guidance may result in actions that could adversely affect our business.
•We face significant competition and maystatements are not be able to compete effectively.
•We may experience pricing pressure on certain of our products due to competitor's product entries, legal changes or changes in insurers' reimbursement practices resulting from increased public scrutiny of healthcare and pharmaceutical costs, which could reduce our future revenue and profitability.
•Sales of our products are affected by, and we may be negatively impacted by any changescomparable to the reimbursement practicesinformation contained in our financial statements after the application of governmental health administration authorities, private health coverage insurersfresh-start accounting.
Upon emergence from bankruptcy, we qualified for and other third-party payers. In addition, reimbursement criteriaadopted fresh-start accounting in accordance with Financial Accounting Standards Board ASC 852, Reorganizations, which on the Effective Date resulted in a new entity, the Successor, for financial reporting purposes, with no beginning retained earnings or policies anddeficit as of the use of tender systems outside the U.S. could reduce pricesfresh-start reporting date. Fresh-start accounting requires that new fair values be established for our products or reduce our market opportunities.
•Our reportingassets, liabilities, and payment obligations underequity as of the MedicareEffective Date. The Effective Date fair values of the Successor's assets and Medicaid rebate programs, and other governmental purchasing and rebate programs, are complex. Any determination of failure to comply with these obligations or those relating to healthcare fraud and abuse laws could have a material adverse effect on our business.
•Cost-containment efforts of our customers, purchasing groups, third-party payers and governmental organizations couldliabilities differ materially adversely affect our business.
•Extensive laws and regulations govern the industry in which we operate and any failure to comply with such laws and regulations, including any changes to those laws and regulations may materially adversely affect us.
•We may be unable to successfully develop, commercialize or launch new products or expand commercial opportunities for existing products or adapt to a changing technology and,from their recorded values as a result, our business may suffer.
•We may not achieve the anticipated benefits of price increases enacted on our pharmaceutical products, which may adversely affect our business.
•Our customer concentration may materially adversely affect our business.
•Our product concentration may materially adversely affect our business.
•We may be unable to protect our intellectual property rights, intellectual property rights may be limited or we may be subject to claims that we infringereflected on the intellectual property rights of others.
•Clinical trials demonstrating the efficacy of Acthar Gel are limited. The absence of such clinical trial data could cause physicians not to prescribe Acthar Gel, or payers not to reimburse the drug, which could negatively impact our business.
•Clinical studies required for our product candidates and new indications of our marketed products are expensive and time-consuming, and their outcome is highly uncertain. If any such studies are delayed or yield unfavorable results, regulatory approval for our product candidates or new indications of our marketed products may be delayed or become unobtainable.
•We may incur product liability losses and other litigation liability.
•Our operations expose us to the risk of violations of applicable health, safety and environmental laws and regulations and related liabilities and litigation.
•Potential indemnification liabilities to Covidien pursuant to the separation and distribution agreement could materially adversely affect us.
•If our business development activities are unsuccessful, it may adversely affect us.
•If we are unable to attract and retain key scientific, technical, regulatory and commercial personnel, we may be unable to maintain or expand our business.
•Our business depends on the continued effectiveness and availability of our information technology infrastructure, and failures of this infrastructure could harm our operations.
•The DEA regulates the availability of controlled substances, including API, drug products under development and marketed drug products. At times, the procurement and manufacturing quotas granted by the DEA may be insufficient to meet our needs.
•The manufacture of our products is highly exacting and complex, and our business could suffer if we, or our suppliers, encounter manufacturing or supply problems.
•Our global operations expose us to risks and challenges associated with conducting business internationally.
•We may not achieve some or allhistorical balance sheets of the expected benefits of any restructuring activities we may undertake and such restructuring activities may adversely affect our business.
•We have significant levels of intangible assets which utilize our future projections of cash flows in impairment testing. Should we experience unfavorable variances from these projections these assets may have an increased risk of future impairment.
•We are subject to labor and employment laws and regulations, which could increase our costs and restrict our operations in the future.
•Our operations may be interrupted by the occurrence of a natural disaster or other catastrophic event at our facilities.
Risks Related to Our Indebtedness
•Our substantial indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations and could further adversely affect our ability to make ongoing payments in respect of the Proposed Settlements.
•Even if our existing indebtedness is restructured, we may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful.
•The terms of the agreements that govern our indebtedness restrict our current and future operations, particularly our ability to respond to changes or to pursue our business strategies.
•Even if our existing indebtedness is restructured, our debt levels and challenges in the commercial and credit environment may materially adversely affect our ability to issue debt on acceptable terms and our future access to capital.
•Our variable-rate indebtedness exposes us to interest rate risk, which could cause our debt service obligations to increase significantly.
•Despite current and anticipated indebtedness levels, we may still be able to incur more debt. This could further exacerbate the risks described above.
•We may need additional financing in the future to meet our capital needs or to make acquisitions, and such financing may not be available on favorable or acceptable terms, and may be dilutive to existing shareholders.
•The phase out of London Inter-Bank Offered Rate ("LIBOR"), or the replacement of LIBOR with a different reference rate, may adversely affect interest rates.
Risks Related to Tax Matters
•The Company's tax attributes and future tax deductions may be reduced or significantly limitedPredecessor. In addition, as a result of the Chapter 11 filing.
•A lossapplication of a major tax dispute or a challenge to our operating structure or intercompany pricing policies could result in a higher tax rate on our worldwide earnings, which could result in a material adverse effect on our financial condition, resultsfresh-start accounting and the effects of operations and cash flow.
•Our status as a foreign corporation for U.S. federal tax purposes could be affected by a change in law.
•Future changes to U.S. and foreign tax laws could adversely affect us.
•We may not be able to maintain a competitive worldwide effective corporate tax rate.
•A change in our tax residency could have a negative effect on our future profitability and taxes on dividends.
Risks Related to Our Jurisdiction of Incorporation
•Irish law differs from the laws in effect in the U.S. and may afford less protection to holders of our securities.
•Irish law imposes restrictions on certain aspects of capital management.
Risks Related to Our Ordinary Shares
•Our ordinary shares are quoted on the Pink Open Market, and thus may have a limited market and lack of liquidity.
•The Plan contemplates the cancellation of our ordinary shares without any value being delivered to shareholders. Any trading in our ordinary shares during the pendency of our Chapter 11 Cases is highly speculative and poses substantial risks to purchasers of our ordinary shares.
Risks Related to Our Chapter 11 Cases
We are subject to risks and uncertainties associated with our Chapter 11 Cases (and related proceedings in Canada and Ireland).
The Chapter 11 Cases could have a material adverse effect on our business, financial condition, results of operations and cash flows. Although the Bankruptcy Court has entered the Confirmation Order confirming the Plan, consummationimplementation of the Plan, the financial statements for the period after June 16, 2022 are not comparable with the financial statements prior to and emergence fromincluding June 16, 2022. Our consolidated financial statements after the Chapter 11 Cases remains subject toEffective Date are not comparable with the satisfaction of certain conditions. So long as the Chapter 11 Cases continue, our senior managementconsolidated financial statements on or before that date and may be required to spend a significant amount of time and effort dealing with the reorganization instead of focusing on our business operations. Bankruptcy Court protection also maydifferent from historical trends. This will make it more difficult for shareholders to retain management and the key personnel necessaryassess our performance in relation to the success and growth of our business. In addition, during the period of time we are involved in the Chapter 11 Cases, our customers and suppliers may lose confidence in our abilityprior periods. See Note 3 to reorganize our business successfully and may seek to establish alternative commercial relationships. As described above, subsequent to the filing of Chapter 11 Cases, the Chapter 11 proceedings commenced by a limited subset of the Debtors have been recognized and given effect in Canada, and separately Mallinckrodt plc has commenced an examinership process with the High Court of Ireland. The references to the Chapter 11 Cases included herein shall include, where applicable, such proceedings in Canada and Ireland.
Other significant risks associated with the Chapter 11 Cases that could result in material adverse effects on our business, financial condition, results of operations, and cash flows include or relate to the following:
•court rulings in the Chapter 11 Cases or any appeals therefrom, including rulings on appeals of the Bankruptcy Court's orders confirming the Plan, determining that no premium is payable in connection with the reinstatement of certain of our debt and denying the motion of certain Acthar Insurance Claimants, as defined in Note 19 of the Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K, for allowanceReport.
Upon our emergence from bankruptcy, our Board of an administrative claimDirectors was changed and may implement changes in our business strategy that could affect the outcomescope and results of any motion seeking a stay in respectour operations.
Our corporate business strategy is subject to continued development, evaluation and implementation by our management and Board of the Bankruptcy Court's order confirmingDirectors. Pursuant to the Plan, or any other motions or requests made to the Bankruptcy Court or any other court relating to the Chapter 11 Cases;
•any court determination that the consummation of the Plan does not render moot challenges thereto (including any appeals of the Bankruptcy Court's orders confirming the Plan, determining that no premium is payable in connection with the reinstatement of certaincomposition of our debt and denying the motionBoard of certain Acthar Insurance Claimants for allowance of an administrative claim);
•Directors changed significantly following our ability to obtain approvals from certain governmental bodies in foreign jurisdictions, including Ireland and Canada, that are required to consummate the Plan;
•our ability to negotiate and enter into definitive documentation regarding the transactions contemplated by the Plan;
•our ability to satisfy the conditions to consummation of the Plan and ultimately consummate the Plan;
•our ability to raise financing, on favorable terms or at all, sufficient to fund the distributions provided for in the Plan, including the repayment of the revolving credit facility;emergence
•the effectsfrom bankruptcy. Our Board of Directors is now made up of nine directors, with a new non-executive Chairman of the filingBoard, all of whom have not previously served on our Board of Directors prior to our emergence from bankruptcy. The new directors have different backgrounds, experiences and perspectives from those individuals who previously served on the Board of Directors of the Chapter 11 CasesCompany prior to our emergence from bankruptcy and, thus, may have different views on the issues that will determine our business and the interests of various constituents,future, including our shareholders;
•the high costsstrategic plans and priorities. The Board of the Chapter 11 Cases;
•our abilityDirectors may determine, from time to maintain relationships with suppliers, customers, employees and other third parties as a result of the Chapter 11 Cases;
•the outcome of pending litigation;
•the possibility that we will not be abletime, to maintain control of our assets as debtors-in-possession;
•the length of time that we will operate with Chapter 11 protection and any resulting risk that we will not satisfy the milestones specified in the RSA and in our agreement with our secured lenders with respect to our use of their cash collateral, that such milestones will not be extended and that the RSA or such cash collateral arrangement will be terminated;
•the availability of operating capital during the pendency of the Chapter 11 Cases, including any event that could terminate our right to continued access to the cash collateral of our lenders to use as operating capital;
•third-party motions in the Chapter 11 Cases, including motions which may be filed by creditors or the creditors' committees that have been appointed in the Chapter 11 Cases, which may interfere with our ability to consummate the Plan;
•the potential adverse effects of the Chapter 11 Cases on our liquidity and results of operations;
•the feasibility of the Plan, including in light of possibleimplement changes in our business strategy which may affect our operations and its prospects;
•the possibility that creditor claims could be asserted against debtors other than those we believe are liable on those claims;
•the adequacy of our cash balances at the time of our projected exit from the Chapter 11 Cases;future strategy and
•our ability to continue as a going concern.
Because plans of the risksCompany and uncertainties associated with the Chapter 11 Cases, we may not be able to accurately predict or quantify the ultimate impact the Chapter 11 Cases may have on our business, financial condition, results of operations and cash flows, nor can we accurately predict the ultimate impact the Chapter 11 Cases may have on our corporate or capital structure.
Delays in the Chapter 11 Cases may increase the risks of our being unable to consummate a plan of reorganization and increase our costs associated with the Chapter 11 Cases.
The RSA contemplates the consummationdiffer materially from those of the Planpast. There is, however, no guarantee that the strategic initiatives and plans, whether current or future, of the Bankruptcy Court has entered the Confirmation Order, but there can be no assurance that weBoard of Directors will be able to satisfy the conditions to consummate the Plan or ultimately consummate the Plan. A prolonged Chapter 11 proceeding could adversely affect our relationships with customers, suppliers and employees, among other parties, whichimplemented in turn could adversely affect our business, financial condition, results of operations and cash flows and our ability to continue as a going concern. A weakening of our financial condition, results of operations and cash flows could adversely affect our ability to implement the Plan (or any other plan of reorganization). If we are unable to consummate the Plan, we may be forced to liquidate our assets.
The Plan and the RSA are subject to significant conditions and milestones that may be difficult for us to satisfy. We must also raise financing to fund certain distributions under the Plan, which may not be available on favorable termstimely manner or at all.
Althoughall and, consequently, there is no guarantee that the Bankruptcy Court has entered the Confirmation Order, there are certain material conditions we must satisfy under the Planoperational and the RSA, including the timely satisfaction of milestones in the Chapter 11 Cases, which include the consummationfinancial objectives of the Plan. Our ability toBoard of Directors will be achieved in a timely satisfy such conditions and complete such milestones is subject to risks and uncertainties, many of which are beyond our control. In addition, we must raise additional financing to fund certain distributions under the Plan, including the repayment of our revolving credit facility. Such financing may not be available on favorable termsmanner or at all.
We have contractual and court-ordered compliance obligations that if violated could result in exclusion from participation in federal healthcare programs and monetary, injunctive or other sanctions.
In March 2022, we entered into a CIA with the OIG-HHS. The CIA has a five-year term and requires, among other things, enhancements to our compliance program, fulfillment of self-reporting, monitoring and training obligations, management certifications and resolutions from the Mallinckrodt Board of Directors. In addition, we are required to retain an independent review organization to conduct annual reviews of certain Company systems and transactions related to Specialty Brands government pricing and patient assistance activities. Complying with the CIA requires the expenditure of significant resources and management time. If the RSA is terminated, our abilitywe fail to consummate the Plan could be materially and adversely affected.
The RSA contains a number of termination events, upon the occurrence of which certain parties to the RSA may terminate the agreement. If the RSA is terminated as to all parties thereto, each of the parties thereto will be released from its obligations in accordancecomply with the terms of the RSA. Such terminationCIA, we may result in the loss of support for the Plan by the parties to the RSA, which could adversely affect our ability to consummate the Plan. If the Plan is not consummated, there can be no assurance that the Chapter 11 Cases would not be converted to Chapter 7 liquidation cases or that any new plan would be as favorable to holders of claims against the Debtors as contemplated by the RSA.
The Amended Proposed Opioid-Related Litigation Settlement and the Proposed Acthar Gel-Related Settlementare subject to certain contingencies and may not go into effect in their current form or at all, which may have an adverse impact on our ability to consummate the Plan and our business, financial condition, results of operations and cash flows.
Until consummation of the Plan, the Proposed Settlements are neither final nor binding and there is no assurance that the necessary parties will agree to definitive documentation, that the contingencies to any agreement will be fulfilled or that any potential settlement agreement entered into by us will be on terms as favorable as the Proposed Settlements. In particular, each of the Proposed Settlements is subject to a number of conditions, many of which may not be satisfied. Among other things, the Proposed Settlements are intended to be implemented through the Plan, the timing and consummation of which is subject to various risks and uncertainties as described elsewhere in this Annual Report on Form 10-K.
Furthermore, subject to the satisfaction of the conditions to the Proposed Settlements, the consummation of the Proposed Settlements would become effective upon our emergence from the Chapter 11 bankruptcy process, the timing of which emergence is uncertain. The settlement process may use a significant portion of our resources and divert management's attention from our day-to-day operations, all of which could harm our business. Furthermore, one or both of the Proposed Settlements may not be implemented or consummated in its or their current form, or at all, as a result of which we would be subject to continued litigation, which,significant stipulated monetary penalties and/or exclusion from participation in turn, could adversely impact our abilityfederal health care programs, including Medicare.
Additionally, a failure to consummatemeet the Plan and result in us and/requirements or our subsidiaries becoming subject to some or allterms of the liabilities that would have otherwise been settled. In such circumstances, our business, financial condition, results of operations and cash flows could be materially and adversely affected.
Even if the Plan is consummated, we may not be able to achieve our stated goals or continue as a going concern.
Even if the Plan or any other Chapter 11 plan of reorganization is consummated, we may continue to face a number of risks, such as changes in economic conditions, changes in our industry, changes in demand for our services and increasing expenses. Some of these risks become more acute when a case under the Bankruptcy Code continues for a protracted period without indication of how or when the case may be completed. As a result of these risks and others, we cannot guarantee that the Plan will achieve our stated goals or that we will be able to continue as a going concern.
Furthermore, even if our debts and other liabilities are reduced or discharged through the Plan, we may need to raise additional funds through public or private debt or equity financing or other various means to fund our business after the completion of the Chapter 11 Cases. Our access to additional financing may be limited, if it is available at all. Therefore, adequate funds may not be available when needed or may not be available on favorable terms, or at all.
In certain instances, a Chapter 11 case may be converted to a case under Chapter 7 of the Bankruptcy Code.
Upon a showing of cause, the Bankruptcy Court may convert our Chapter 11 Cases to a case under Chapter 7 of the Bankruptcy Code. In such event, a Chapter 7 trustee would be appointed or elected to liquidate our assets for distribution in accordance with the priorities established by the Bankruptcy Code. If we are unable to satisfy the conditions to consummate the Plan and ultimately consummate the Plan, we believe that conversion of the Chapter 11 Cases to a case under Chapter 7 of the Bankruptcy Code may become likely. We believe that liquidation under Chapter 7 would result in significantly smaller distributions being made to our creditors than those provided for in the Plan because of (i) the likelihood that the assets would have to be sold or otherwise disposed of in a distressed fashion over a short period of time rather than in a controlled manner and as a going concern, (ii) additional administrative expenses involved in the appointment of a Chapter 7 trustee, and (iii) additional expenses and claims, some of which would be entitled to priority, that would be generated during the liquidation and from the rejection of leases and other executory contracts in connection with a cessation of operations.
If the confirmed plan is not consummated, termination of our exclusive right to file a Chapter 11 plan and the exclusive right to solicit acceptances could result in competing plans of reorganization, which could have less favorable terms or result in significant litigation and expenses.
We currently have the exclusive right to file a Chapter 11 plan through and including March 8, 2022, and the exclusive right to solicit acceptances of any such plan through May 10, 2022. Such deadlines may be extended from time to timeOperating Injunction entered by the Bankruptcy Court "for cause" (as permitted by §1121(d) of the Bankruptcy Code) until the dates 18 months and 20 months after the date we filed the Chapter 11 Cases, respectively. We filed a motionwhich places obligations on us with the Bankruptcy Court to extend such deadlinesrespect to the statutory maximum and such motion is pending. However, it is also possible that (a) parties in interest could seek to shorten or terminate such exclusive plan filing and solicitation periods "for cause" (as permitted by section 1121(d) of the Bankruptcy Code)) or (b) that such periods could expire without extension. If we are unable to satisfy the conditions to consummate the Plan and ultimately consummate the Plan, we believe that such termination or expiration may become more likely.
If our exclusive plan filing and solicitation periods expire or are terminated, other parties in interest will be permitted to file alternative plans of reorganization. There can be no assurances that recoveries under any such alternative plan would be as favorable to creditors as the Plan. In addition, the proposal of competing plans of reorganization may entail significant litigation and significantly increase the expenses of administration of the Debtors' cases, which could deplete creditor recoveries under any plan.
As a result of the Chapter 11 Cases, our historical financial information may not be indicativeoperation of our future performance, which may be volatile.
During the Chapter 11 Cases, we expect our financial resultsopioid business could lead to continue to be volatile as restructuring activities and expenses, contract terminations and rejections, and claims assessments significantly impact our consolidated financial statements. As a result, our historical financial performance is likely not indicative of our financial performance after the date of the filing of the Chapter 11 Cases. In addition, if we emerge from Chapter 11, the amounts reported in subsequent consolidated financial statements may materially change relative to our historical consolidated financial statements, including as a result of revisions to our operating plans pursuant to the Plan. We also may be required to adopt fresh start accounting, in which case our assets and liabilities will 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 consolidated balance sheets. Our financial results after the application of fresh start accounting may be different from historical trends.
We may be subject to claims that will not be discharged in the Chapter 11 Cases, which could have a material adverse effect on our business, financial condition, results of operations and cash flows.
The Bankruptcy Code provides that the consummation of a plan of reorganization discharges a debtor from substantially all debts arising prior to consummation of such plan of reorganization. Subject to certain exceptions, all claims that arose prior to consummation of such plan of reorganization (i) would be subject to compromise and/or treatment under the plan of reorganization and/or (ii) would be discharged in accordance with the Bankruptcy Code and the terms of the plan of reorganization. Any claims not ultimately discharged pursuant to such plan of reorganization (such as claims falling within the exceptions noted above) could be asserted against the reorganized entities and may have an adverse effect on our business, financial condition, results of operations and cash flows on a post-reorganization basis.
The pursuit of the Chapter 11 Cases has consumed, and will continue to consume, a substantial portion of the time and attention of our management, which may have an adverse effect on our business, financial condition, results of operations and cash flows, and we may experience increased levels of employee attrition.
While the Chapter 11 Cases continue, our management will be required to spend a significant amount of time and effort focusing on the Chapter 11 Cases instead of focusing exclusively on our business operations. This diversion of attention may materially adversely affect the conduct of our business, and, as a result, our financial condition, results of operations and cash flows, particularly if the Chapter 11 Cases are protracted.
Furthermore, during the pendency of the Chapter 11 Cases, we have experienced and may continue to experience increased levels of employee attrition, and our employees may face considerable distraction and uncertainty. A loss of key personnel or material erosion of employee morale could adversely affect our business and results of operations. Our ability to engage, motivate and retain key employees or take other measures intended to motivate and incentivize key employees to remain with us through the pendency of the Chapter 11 Cases is limited by restrictions on implementation of incentive programs under the Bankruptcy Code. The loss of services of members of our senior management team could impair our ability to execute our strategy and implement operational initiatives, which would be likely to have a material adverse effect on our business, financial condition, results of operations and cash flows. Furthermore, the new owners of the Company will have the authority to appoint the board of directors upon emergence from bankruptcy, and that new board will also have the authority to appoint a Chief Executive Officer, which could have an impact on the current composition of the senior management team, which could have a material impact on our business. In addition, the longer the Chapter 11 Cases continue, the more likely it is that vendors and employees will lose confidence in our ability to reorganize our business successfully.
Aspects of the Chapter 11 Cases limit the flexibility of our management team in running our business.
Until the Plan is consummated, we will continue to operate our business under supervisionaction by the Bankruptcy Court, and in the case of Mallinckrodt plc, the supervision of the examiner appointed by the High Court of Ireland (the "Examiner"). While we do so, we are required to obtain approval of the Bankruptcy Court, and in some cases certain other parties (including the Examiner), prior to engaging in activities or transactions outside the ordinary course of business. Bankruptcy Court approval of non-ordinary course activities entails preparation and filing of appropriate motions with the Bankruptcy Court, negotiation with various parties-in-interest, and one or more hearings. Parties-in-intereststate Attorneys General, or other enforcement authorities. Such actions may be heard at any Bankruptcy Court hearing and may raise objections with respect to
these motions. This process may delay major transactions and limit our ability to respond quickly to opportunities and events in the marketplace. Furthermore, in the event the Bankruptcy Court (or in the case of Mallinckrodt plc, the Examiner) does not approve a proposed activity or transaction, we would be prevented from engaging in activities, transactions and internal restructurings that we believe are beneficial to us, which may have an adverse effect on our business, financial condition, results of operations and cash flows.
Certain key aspects of the plan of reorganization must be implemented through an examinership process in Ireland. The examinership process is overseen by the High Court of Ireland and the outcome of those proceedings is a matter within the discretion of the High Court of Ireland. While we believe that the examinership will result in monetary, injunctive or other sanctions, as well as increased legal fees and costs associated with such actions. Such actions and associated violations may also increase the implementation of those Irish law aspects of the plan of reorganization, there is no guarantee that such implementation will occur.
The implementation of the plan of reorganization confirmedCompany’s risk for future lawsuits or other actions by the Bankruptcy Court (and consequently the emergence from Chapter 11) is dependent on a number of conditions precedent. Since we are incorporated in Ireland, one of the conditions precedent is the implementation of certain key aspects of the plan through an examinership process under the laws of Ireland. Under this process, the High Court of Ireland has appointed an independent bankruptcy official, known as the Examiner, to review our business, including the plan, and, if considered appropriate by the Examiner, propose a scheme of arrangementthird parties related to the creditors and members of the Company that will implement certain key Irish law aspects of the plan. If accepted by the majority in number and value of at least one class of impaired creditor, the Examiner will apply to the High Court of Ireland for an order confirming the scheme of arrangement. We also believe that the Examiner will consider it appropriate to propose a scheme of arrangement that is complementary to the plan of reorganization, and that such a scheme of arrangement should be confirmed by the High Court of Ireland. However, any decision to confirm any such scheme of arrangement is subject to the discretion of the High Court of Ireland, and the decision as to whether or not to propose a scheme of arrangement as outlined above is subject to the discretion of the Examiner, and there is no guarantee that such approval will be forthcoming. In the event that such approval is not forthcoming, it may be necessary to amend the plan of reorganization, propose an amended scheme of arrangement and/or consider other restructuring or strategic options, including the liquidation of the Company.opioid business.
Risks Related to Our Business
Governmental investigations, inquiries, and regulatory actions and lawsuits brought against us by government agencies and private parties with respect to our historical commercialization of opioids could adversely affect our reputation, business, financial condition, results of operations and cash flows.
As a result of greater public awareness of the public health issue of opioid abuse, there has been increased scrutiny of, and investigation into, the commercial practices of opioid manufacturers by state and federal agencies. As a company that first began processing opioids in the 1890s, we understand the utility of these products and that they are safe and effective when taken as appropriately prescribed. We are deeply committed to diversion control efforts, have sophisticated systems in place to identify suspicious orders and engage in significant due diligence and ongoing monitoring of customers. However, we, along with other opioid manufacturers, have been the subject of federal and state government investigations and enforcement actions, focused on the misuse and abuse of opioid medications in the U.S. Similar investigations may be initiated in the future.
In addition, a significant number of lawsuits have been filed against us, other opioid manufacturers, distributors and others in the supply chain by cities, counties, state Attorneys General and private persons seeking to hold us and others accountable for opioid misuse and abuse. As a result of March 14, 2022, the cases we are aware of include, but are not limited to, approximately 2,619 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 124 cases filed by individuals; approximately eight 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 March 14, 2022, 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. However, there can be no assurance that plaintiffs will not assertCompany's emergence from bankruptcy, all opioid claims against additional Mallinckrodt plc subsidiariesus were deemed to have been settled, discharged, waived, released and extinguished in full on the Effective Date. We may face new opioid claims in the future. The lawsuits assertfuture, which could have a varietymaterial adverse effect on our competitive position, business, financial condition and results 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 CSA or state 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/oroperations.
omissions inIn connection with the sale and marketing of prescription opioid medications and/or an alleged failure to take adequate steps to prevent diversion. Other parties may file similar lawsuits against us in the future.
Webankruptcy, we have implemented steps to comply with an Operating Injunction enjoining certain Mallinckrodt entities from engaging in certain conduct related to the manner in which they operate their opioid business. The Operating Injunction prohibits, among other things, certain promotional activities related to opioid products and pain treatment, financial and in-kind support for third parties involved with opioids or pain treatment, and certain lobbying activities and communications related to opioids and pain treatment. The Operating Injunction also contains requirements for controlled substances suspicious order monitoring and reporting. The Operating Injunction further requires Mallinckrodt to make available certain clinical data through a third-party data archive and publicly disclose certain produced documents related to the opioid litigation. The Operating Injunction provides that Mallinckrodt must retain a monitor to evaluate and monitor compliance with the Operating Injunction for a term of five to seven years. On February 8, 2021, the Bankruptcy Court entered an order appointing R. Gil Kerlikowske to serve as monitor. The obligations imposed by the Operating Injunction apply both while Mallinckrodt is in bankruptcy and after Mallinckrodt emerges from bankruptcy and would apply to the operation of Mallinckrodt's opioid business by any subsequent purchaser. The Operating Injunction imposes material limitations on Mallinckrodt's business in addition to those imposed by otherwise applicable law. Those limitations may have an adverse financial impact on Mallinckrodt's opioid business, including but
not limited to by increasing overhead costs or reducing product sales. A violation of the Operating Injunction may also subject the company to adverse action by the Bankruptcy Court, state and territory Attorneys General, or other enforcement authorities, as well as increased legal fees and costs associated with such actions.
While we are vigorously defending ourselves in these matters, and intend to use the Chapter 11 process to provide a fair, orderly, efficient and legally binding mechanism to implement a RSA pursuant to which, among other things, the parties thereto have agreed to support the Amended Proposed Opioid-Related Litigation Settlement, the nature and scope of these matters is unique and current public perceptions of the public health issue of opioid abuse, together with the manner in which other defendants in those cases resolve opioid-related lawsuits and other actions, may present challenges to favorable resolution of these claims. Accordingly, it is not feasible to predict the ultimate outcome of these investigations, enforcement actions and lawsuits if the Amended Proposed Opioid-Related Litigation Settlement is not consummated. The allegations against us may negatively affect our business in various ways, including through harm to our reputation. We will continue to incur significant legal costs in defending these matters and, if the Amended Proposed Opioid-Related Litigation Settlement is not fully implemented or consummated, we could in the future be required to pay significant amounts as a result of fines, penalties, settlements or judgments, potentially in excess of established accruals. We may be unable to obtain or maintain insurance in the future on acceptable terms or with adequate coverage against potential liabilities or other losses. Any such potential liabilities or losses could also require us to seek financing, which may not be available on terms acceptable to us, or at all, when required. Such matters or the resolution thereof, or increase in accruals thereof, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
In addition, legislative, regulatory or industry measures to address the misuse of prescription opioid medications may also affect our business in ways that we are not able to predict. For example, the State of New York enacted the Opioid Stewardship Act (the "OSA"("OSA"), which went into effect on July 1, 2018 and established an aggregate $100.0 million annual assessment on sales of certain opioid medications in New York. The OSA was challenged, and on December 19, 2018, the U.S. District Court for the Southern District of New York ruled that the OSA was unconstitutional and enjoined its enforcement. On January 17, 2019, the State of New York appealed this ruling. 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 our (and other parties') challenges to the OSA for lack of subject matter jurisdiction. Together with the other plaintiffs, we filed a petition for rehearing en banc to challenge the panel's decision, which was denied on December 18, 2020. On February 12, 2021, the Second Circuit granted the parties' request to stay the mandate. The parties filed a petition for certiorari with the Supreme Court, which was denied. On October 21, 2021, the District Court vacated its December 19, 2018 order, except for its invalidation of the "pass through prohibition" on the basis it violates the Commerce Clause. In April 2019, the State of New York passed its 2020 budget, which amended the OSA so that 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. Furthermore, additionalSome states have enacted opioid taxes or enacted increased licensure and registration fees. For example, New York, effective July 1, 2019, imposed an excise tax on certain opioids. Other states may consider similar legislation that could require entities to pay an assessment or tax on the sale or distribution of opioid medications in those states and may vary in the assessment or tax amounts and the means of calculation from the OSA. If additional state or local jurisdictions successfully enact such legislation and we are not able to mitigate the impact on our business through price increases, operational changes or commercial arrangements, such legislation in the aggregate may have a material adverse effect on our business, financial condition, results of operations and cash flows. See the risk factor captioned "Extensive laws and regulations govern the industry in which we operate, and any failure to comply with such laws and regulations, including any changes to those laws and regulations may materially adversely affect us." for more information.
Furthermore, in the current climate, stories regarding prescription drug abuse and the diversion of opioids and other controlled substances are frequently in the media. Unfavorable publicity regarding the use or misuse of opioid drugs, the limitations of abuse-deterrent formulations, the ability of drug abusers to discover previously unknown ways to abuse our products, public inquiries and investigations into prescription drug abuse, litigation, or regulatory activity regarding sales, marketing, distribution or storage of
opioids could have a material adverse effect on our reputation, leading to parties being unwilling to engage with us from a business perspective, and could have a material impact on the results of litigation.
Finally, various government entities, including Congress, state legislatures or other policy-making bodies have in the past and may in the future hold hearings, conduct investigations and/or issue reports calling attention to the opioid crisis, and may mention or criticize the perceived role of manufacturers, including us, in the opioid crisis. Similarly, press organizations have and likely will continue to report on these issues, and such reporting may result in adverse publicity for us, resulting in reputational harm.
Our business may be adversely affected by public health crises and epidemics/pandemics, including the on-going coronavirus pandemic.
A pandemic, epidemic or outbreak of an infectious disease occurring in the U.S., or elsewhere, could result in our business being adversely affected. Since December 2019, the novel coronavirus ("COVID-19"), has spread to countries throughout the world and has resulted in the World Health Organization declaring the outbreak as a pandemic. Our business performance was significantly impacted by COVID-19, and we continue to expect to see challenges while the pandemic persists and potentially thereafter.
We may experience significant and unpredictable increases or decreases in demand for certain of our products as the needs of health care providers and patients evolve during this pandemic. For example, as we are among the world's largest manufacturers of bulk acetaminophen and the only producer of acetaminophen in the North American and European regions, we could experience an increase in demand which we may not be able to meet in accordance with the needs of the market. Additionally, our INOmax product is a potential treatment for acute respiratory distress syndrome (ARDS), which is a known clinical manifestation of infection with many respiratory viruses including coronaviruses, which could be subject to similar dynamics including with respect to the demands on our upstream supply chain. Alternatively, due to diverse factors ranging from the deprioritization of non-critical medical treatment, to directives that immunosuppressed patients stay-at-home, to the impact of home schooling on the market for attention-deficit/hyperactivity disorder (ADHD) treatments, demand for our products have been and may continue to be negatively impacted.
Furthermore, emergency powers could be invoked under the Defense Production Act, which allows the U.S. government to direct private companies to meet the needs of the nation in the time of an emergency. Given the critical nature of some of the products we manufacture, as well as our pharmaceutical and medical device manufacturing capabilities, we may be impacted by governmental action taken under this or similar legislation.
Many countries around the world have imposed quarantines and restrictions on travel and mass gatherings to slow the spread of the virus. Such disruptions could materially delay potential FDA approval with respect to our clinical trials and product candidates. Other factors caused by the COVID-19 virus have already impacted and could materially delay or otherwise impact clinical trials we are conducting related to our products, including our ability to recruit and retain patients and principal investigators and site staff who, as healthcare providers, may have heightened exposure to the COVID-19 virus. Furthermore, business pressures driven by the ongoing COVID-19 pandemic have led us to prioritize certain investments over others, and such pressures could result in future similar decisions across our product portfolio. Any delays in our clinical trials or regulatory review resulting from such disruptions could materially affect the development or approval of our product candidates or our lifecycle management efforts.
In addition, the economic impact of the spread of the COVID-19 virus, which has caused a broad impact globally, has adversely impacted our business and may continue to adversely affect us. In particular, the COVID-19 virus has negatively affected demand for our products due to limitations on the ability of our sales representatives to meet with physicians, and a reduction in patient visits to their doctors and pharmacists in order to receive prescriptions for our products, all of which may continue even though the pandemic may have abated. There is also an increased risk of supply interruption at our third-party suppliers, impacting their ability to deliver components, which would then impede the ability of our manufacturing facilities to produce finished products on a timely basis, all of which could result in business or operational disruption. Additionally, while the potential long-term economic impact of the COVID-19 virus may be difficult to assess or predict, COVID-19 pandemic has resulted in significant disruption of global financial markets, which could reduce our ability to access capital, thereby negatively affecting our liquidity. The extent to which the COVID-19 pandemic impacts our results will depend on future developments that are highly uncertain and cannot be predicted.
Given the rapid and evolving nature of the COVID-19 virus, the full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be predicted.
The healthcare industry has been under increasing scrutiny from governments, legislative bodies and enforcement agencies related to sales, marketing and pricing practices, and changes to, or non-compliance with, relevant policies, laws, regulations or government guidance may result in actions that could adversely affect our business.
In the U.S. over the past several years, a significant number of pharmaceutical and biotechnology companies have been subject to inquiries and investigations by various federal and state regulatory, investigative, prosecutorial and administrative entities in connection with the promotion of products for unapproved uses and other sales, marketing and pricing practices, including the DOJ
and various other agencies including the OIG within the HHS, the FDA, the Federal Trade Commission (the "FTC")FTC and various state Attorneys General offices. These investigations have alleged violations of various federal and state laws and regulations, including claims asserting antitrust violations, violations of the FFDCA, the FCA, the Prescription Drug Marketing Act, anti-kickback laws, data and patient privacy laws, export and import laws, consumer protection laws and other alleged violations in connection with the promotion of products for unapproved uses, pricing and Medicare and/or Medicaid reimbursement. These laws are described in greater detail in Item 1. Business. The DOJ and the SEC have also increased their focus on the enforcement of the FCPA, particularly as it relates to the conduct of pharmaceutical companies. In addition, over
Many companies have faced government investigations or lawsuits by whistleblowers who bring a “qui tam” action under the past few years, there has been enhancedFCA on behalf of themselves and the government scrutinyfor a variety of industry-sponsored patientalleged improper promotional and marketing activities, including providing free product to customers expecting that the customers would bill the federal programs for the product; providing consulting fees, grants, free travel and other benefits to physicians to induce them to prescribe the company’s products; providing assistance programs, includingto patients with their insurance premiumco-insurance obligations and co-pay assistance programs andproviding donations to third-party charities that provide patients with such assistance.assistance; and inflating prices reported to private price publication services, which are used to set drug reimbursement rates under government healthcare programs. In addition, the government and private whistleblowers have pursued FCA cases against pharmaceutical companies for causing false claims to be submitted as a result of the promotion and marketing of their products for unapproved uses or violations of the federal Anti-Kickback Statute. If we become the subject of a FCA or other government
investigation or whistleblower suit, we could incur substantial legal costs (including settlement costs) and business disruption responding to such investigation or suit, regardless of the outcome.
If we are deemed to have failed to comply with relevant laws, regulations or government guidance in any of these areas, we could be subject to criminal and/or civil sanctions, including significant fines, damages, civil monetary penalties and exclusion from participation in government healthcare programs, including Medicare and Medicaid, actions against executives overseeing our business, and/or burdensome remediation measures.
Many of these government investigations originate as "qui tam" actions under the FCA. Under the FCA, any individual can bring a claim on behalf of the government alleging that a person or entity has presented a false claim, or caused a false claim to be submitted, to the government for payment. The person bringing a “qui tam” suit is often entitled to a share of any recovery or settlement. Qui tam suits, also commonly referred to as “whistleblower suits,” are often brought by current or former employees. In a qui tam suit, the government must decide whether to intervene and prosecute the case. If the government declines to intervene and prosecute the case, the individual may pursue the case alone. If the FDA or any other governmental agency initiates an enforcement action against us or if we are the subject of a qui tam suit and it is determined that we violated prohibitions relating to the promotion of products for unapproved uses in connection with past or future activities, we could be subject to substantial civil or criminal fines or damage awards and other sanctions such as the possible exclusion from federal healthcare programs including Medicare and Medicaid, consent decrees and corporate integrity agreements pursuant to which our activities would be subject to ongoing scrutiny and monitoring to ensure compliance with applicable laws and regulations.regulations and/or burdensome remediation measures. Any such fines, awards, or other sanctions or required remediation could have an adverse effect on our competitive position, business, financial condition, results of operations and cash flows.
Specific to our business, in September 2012, prior to our acquisition of Questcor Pharmaceuticals, Inc. ("Questcor") in August 2014, a subpoena was received from the U.S. Attorney's Office ("USAO") for the EDPA, requesting documents pertaining to an investigation of its promotional practices for Acthar Gel. The USAO later expanded the scope of its investigation to include Questcor's donations to third-party independent charitable foundations that provide co-pay assistance to patients. In March 2019, the U.S. District Court for EDPA unsealed two qui tam actions involving the allegations under investigation by the USAO for the EDPA. The DOJ intervened in both actions, which were later consolidated. In September 2019, we executed a settlement agreement to resolve the portion of the investigation and the litigation involving Questcor's promotional practices for $15.4 million. As referenced above, on October 12, 2020, we announced the Proposed Acthar Gel-Related Settlement, which would resolve the second EDPA qui tam case relating to Questcor's donations to an independent third-party charitable foundation.
In addition, in December 2016, we received a subpoena from the USAO for the District of Massachusetts for documents related to our payments to charitable foundations, the provision of financial and other support by charitable foundations to patients receiving Acthar Gel, and related matters. We have responded to these requests and cooperated in the investigation.
It is possible that any actions taken by the DOJ or one of the USAOs as a result of this inquiry or any future action taken by federal or local governments, legislative bodies and enforcement agencies on this subject could result in civil penalties or injunctive relief, negative publicity or other negative actions that could harm our reputation, and could reduce demand for our products and/or reduce coverage of our products, including by federal healthcare programs such as Medicare and Medicaid and state health care, which would negatively impact sales of our products. If any or all of these events occur, it could have an adverse effect on our reputation, business, financial condition, results of operations and cash flows.
We face significant competition and may not be able to compete effectively.
The industries in which we operate are highly competitive. Competition takes many forms, such as price reductions on products that are comparable to our own, development of new products with different mechanisms that obviate the need for our treatments, acquisition or in-licensing of new products that may be more cost-effective than or have performance superior to our products, the introduction of generic versions when our proprietary products lose their patent protection or market exclusivity, and technologies that are similar to our devices but may operate either more effectively or less expensively. This competition may limit the effectiveness of any price increases we initiate. Following any price increase by us, competitors may elect to maintain a lower price point that may result in a decline in our sales volume. Our failure to compete effectively could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.
As to competition for our specific products:
•Acthar Gel—Given the recent approval by the FDA of a competitor's purified cortrophin gel product for the treatment of certain chronic autoimmune disorders (including acute exacerbations of multiple sclerosis and rheumatoid arthritis as well as excess urinary protein due to nephrotic syndrome), we anticipate that competition will likely continue to intensify, following the commercial launch of this product during the first quarter of 2022, which could have an adverse effect on our financial condition, results of operations and cash flows.
•INOmax—We have seen increased competition following the launch of a competitive nitric oxide product before the expiration of the last of the listed patents on May 3, 2026 (November 3, 2026 including pediatric exclusivity), which has had an adverse effect on our ability to successfully maximize the value of INOmax, and if it continues, could have an adverse effect on our financial condition, results of operations and cash flows.
In addition, manufacturers of generic pharmaceuticals typically invest far less in R&D than research-based pharmaceutical companies, allowing generic versions to typically be significantly less expensive than the related branded products. The generic form of a drug may also enjoy a preferred position relative to the branded version under third-party reimbursement programs, or be routinely dispensed in substitution for the branded form by pharmacies. If competitors introduce new products, delivery systems or processes with therapeutic or cost advantages, our products can be subject to progressive price reductions, decreased sales volume or both.
For further discussion on the competitive nature of our business, as well as the intellectual property rights and market exclusivity that play a key role in our business, refer to Item 1. Business included within this Annual Report on Form 10-K.Report. Our failure to compete effectively could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.
We may experience pricing pressure on certain of our products due to competitor's product entries, legal changes or changes in insurers' reimbursement practices resulting from increased public scrutiny of healthcare and pharmaceutical costs, which could reduce our future revenue and profitability.
Public and governmental scrutiny of the cost of healthcare generally and pharmaceuticals in particular, especially in connection with price increases of certain products, could affect our ability to maintain or increase the prices of one or more of our products, which could negatively impact our future revenue and profitability. Certain press reports and other commentary have criticized the increases in the price of Acthar Gel over time, including related to the period prior to our acquisition of the product. Acthar Gel represented 26.9%28.3% and 25.4% of our net sales for fiscal 2021.period of June 17, 2022 through December 30, 2022 (Successor) and January 1, 2022 through June 16, 2022 (Predecessor), respectively. In addition, U.S. federal prosecutors have issued subpoenas to certain pharmaceutical companies seeking information about their drug pricing practices, among other issues, and in October 2020, the U.S. House of Representatives Committee on Oversight and Reform held hearings relating to drug pricing at which our former CEO testified along with executives from other major pharmaceutical companies. On December 10, 2021, the committee issued its final majority report detailing findings from the investigation. We cannot predict whether any particular legislative or regulatory changes or changes in insurers' reimbursement practices may result from any such public scrutiny, what the nature of any such changes might be or what impact they may have on us. If legislative or regulatory action were taken or insurers changed their reimbursement practices to limitin
a manner that limits our ability to maintain or increase the prices of our products, our financial condition, results of operations and cash flows could be negatively affected.
Sales of our products are affected by, and we may be negatively impacted by any changes to, the reimbursement practices of governmental health administration authorities, private health coverage insurers and other third-party payers. In addition, reimbursement criteria or policies and the use of tender systems outside the U.S. could reduce prices for our products or reduce our market opportunities.
Sales of our products depend, in part, on the extent to which the costs of our products are reimbursed by governmental health administration authorities, private health coverage insurers and other third-party payers. The ability of patients to obtain appropriate reimbursement for products and services from these third-party payers affects the selection of products they purchase and the prices they are willing to pay. In the U.S., there have been, and we expect there will continue to be, a number of state and federal proposals that limit the amount that third-party payers may pay to reimburse the cost of drugs, including with respect to Acthar Gel. We believe the increasing emphasis on managed care in the U.S. has and will continue to put pressure on the usage and reimbursement of Acthar Gel. Our ability to commercialize our products depends, in part, on the extent to which reimbursement for the costs of these products is available from government healthcare programs, such as Medicaid and Medicare, private health insurers and others. We cannot be certain that, over time, third-party reimbursements for our products will be adequate for us to maintain price levels sufficient for realization of an appropriate return on our investment. Furthermore, demand for new products may be limited unless we obtain reimbursement approval from governmental and private third-party payers prior to introduction. Reimbursement criteria, which vary by country, are becoming increasingly stringent and require management expertise and significant attention to obtain and maintain qualification for reimbursement.
For any marketed drug products which are covered in the U.S. by the federal or state healthcare programs, such as the Medicare and Medicaid programs, we have various obligations, including government price reporting and rebate requirements, which generally require medicines be offered at substantial rebates and/or discounts to the government and certain private purchasers including “covered entities”"covered entities" purchasing under the 340B Drug Discount Program. Some of these programs require submission of pricing data and calculation of discounts and rebates pursuant to complex statutory formulas, as well as the entry into government procurement contracts governed by the Federal Acquisition Regulations, and the guidance governing such calculations is not always clear or
precise. Compliance with such requirements can require significant investment in personnel, systems and resources, but failure to properly calculate our prices, or offer required discounts or rebates could subject us to substantial penalties. One component of the rebate and discount calculations under the Medicaid and 340B programs, respectively, is the “additional"additional rebate,”" a complex calculation which is based, in part, on the extent that a branded drug's price increases over time more than the rate of inflation (based on the Consumer Price Index for All Urban Consumers). This “additional rebate”"additional rebate" calculation can result in Medicaid rebates up to 100% of a drug's “average"average manufacturer price”price" and 340B prices of one penny. With respect to Acthar Gel, the “additional rebate”"additional rebate" scheme of the 340B pricing rules, as applied to the historical pricing of Acthar Gel both before and after we acquired the medicine, have resulted in a 340B ceiling price of one penny, which has negatively impacted and is expected to continue to negatively impact our net sales of Acthar Gel.
In the E.U., each E.U. member state can restrict the range of medicinal products for which its national health insurance system provides reimbursement and can control the prices of medicinal products for human use marketed on its territory. In many countries in the E.U., procedures to obtain price approvals, coverage and reimbursement can take considerable time after the receipt of marketing authorization. Many European countries periodically review their reimbursement of medicinal products, which could have an adverse impact on reimbursement status. In addition, we expect that legislators, policymakers and healthcare insurance funds in the E.U. member states will continue to propose and implement cost-containing measures, such as lower maximum prices, lower or lack of reimbursement coverage and incentives to use cheaper, usually generic, products as an alternative to branded products, and/or branded products available through parallel import to keep healthcare costs down. Moreover, in order to obtain reimbursement for our products in some European countries, including some E.U. member states, we may be required to compile additional data comparing the cost-effectiveness of our products to other available therapies. Health Technology Assessment ("HTA"), of medicinal products is becoming an increasingly common part of the pricing and reimbursement procedures in some E.U. member states, including those representing the larger markets. The HTA process, which is currently governed by national laws in each E.U. member state, is the procedure to assess the therapeutic, economic and societal impact of a given medicinal product in the national healthcare systems of the individual country. The outcome of an HTA will often influence the pricing and reimbursement status granted to these medicinal products by the competent authorities of individual E.U. member state. The extent to which pricing and reimbursement decisions are influenced by the HTA of the specific medicinal product currently varies between E.U. member states. The E.U. HTA Regulation (EU) 2021/2282, which was adopted in December 2021 and entered into force in January 2022, aims to harmonize the clinical benefit assessment of HTA across the E.U. and will apply from January 12, 2025. It provides for common HTA tools, methodologies and procedures and complements Directive 2011/24/EU on the application of patients’ rights in cross-border healthcare under which a voluntary network of national authorities or bodies responsible for HTA in the individual E.U. member states was established.
If we are unable to obtain, then maintain favorable pricing and reimbursement status in E.U. member states that represent significant markets, our anticipated revenue from and growth prospects for our products in the E.U. could be negatively affected. Due
to persisting effects of the novel coronavirus ("COVID-19") pandemic, we may still anticipate delays by certain European regulatory authorities in their pricing and reimbursement reviews. If we experience setbacks or unforeseen difficulties in obtaining favorable pricing and reimbursement decisions, including as a result of regulatory review delays due to the COVID-19 pandemic, planned launches in the affected E.U. member states would be delayed, which could negatively impact anticipated revenue from and growth prospects for any product candidate.
With regard to private payers, reimbursement of highly-specialized products, such as Acthar Gel, is typically reviewed and approved or denied on a patient-by-patient, case-by-case basis, after careful review of details regarding a patient's health and treatment history that is provided to the insurance carriers through a prior authorization submission, and appeal submission, if applicable. During this case-by-case review, the reviewer may refer to coverage guidelines issued by that carrier. These coverage guidelines are subject to on-going review by insurance carriers. Because of the large number of insurance carriers, there are a large number of guideline updates issued each year.
In addition, a number of markets outside the U.S. in which we operate have implemented or may implement tender systems in an effort to lower prices. Under such tender systems, manufacturers submit bids which establish prices for products. The company that wins the tender receives preferential reimbursement for a period of time. Accordingly, the tender system often results in companies underbidding one another by proposing low pricing in order to win the tender. Certain other countries may consider implementation of a tender system. Even if a tender system is ultimately not implemented, the anticipation of such could result in price reductions. Failing to win tenders, or the implementation of similar systems in other markets leading to price declines, could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.
We are unable to predict what additional legislation or regulation or changes in third-party coverage and reimbursement policies may be enacted or issued in the future or what effect such legislation, regulation and policy changes would have on our business.
Specific to our business, in May 2019, CMS issued a final decision directing the Company to revert to the original base date average manufacturer price ("AMP") used to calculate Medicaid drug rebates for Acthar Gel despite CMS having given the previous owner of the product, Questcor, written authorization in 2012 to reset the base date AMP. Upon receipt of CMS's final decision, we filed suit in U.S. District Court for the District of Columbia ("D.C. District Court") against HHS and CMS seeking to have the decision declared unlawful and set aside. In March 2020, we received an adverse decision from the D.C. District Court. We immediately sought reconsideration by the D.C. District Court, which was denied. We then appealed to the U.S. Court of Appeals for the District of Columbia ("D.C. Circuit"). In June 2020, while our appeal remained pending, we were required to revert to the original base date AMP for Acthar Gel in the government's price reporting system.
As a result of this contingency, we incurred a retrospective one-time charge of $641.1 million (the "Acthar Gel Medicaid Retrospective Rebate"), of which $535.1 million and $105.1 million have been reflected as a component of net sales and operating expense, respectively, in the consolidated statement of operations for fiscal 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 our acquisition of Questcor in August 2014.
The D.C. Circuit heard argument on the merits of our appeal in September 2020, prior to our filing of the Chapter 11 Cases on October 12, 2020. At the joint request of the parties, the D.C. Circuit has agreed to hold the case in abeyance pending completion of the Proposed Acthar Gel-Related Settlement discussed above which was conditioned upon the Company entering the Chapter 11 restructuring process. Pursuant to the Proposed Acthar Gel-Related Settlement, we have 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 effectiveness of the Proposed Acthar Gel-Related Settlement, we will dismiss our D.C. Circuit appeal. We have also entered into a five-year CIA agreement with the OIG of the HHS, which took effect in March 2022. The failure of the settlement may subject us to additional risk and uncertainties that could adversely affect our business prospects, as further described in the risk factor captioned "The Amended Proposed Opioid-Related Litigation Settlement and the Proposed Acthar Gel-Related Settlementare subject to certain contingencies and may not go into effect in their current form or at all, which may have an adverse impact on our ability to consummate the Plan and our business, financial condition, results of operations and cash flows."
Our reporting and payment obligations under the Medicare and Medicaid rebate programs, and other governmental purchasing and rebate programs, are complex. Any determination of failure to comply with these obligations or those relating to healthcare fraud and abuse laws could have a material adverse effect on our business.
The regulations regarding reporting and payment obligations with respect to Medicare and Medicaid reimbursement programs, and rebates and other governmental programs, are complex. Because our processes for these calculations and the judgments used in
making these calculations involve subjective decisions and complex methodologies, these accruals may have a higher inherent risk for material changes in estimates. In addition, they are subject to review and challenge by the applicable governmental agencies and in the case of the 340B program, certain private beneficiaries, and it is possible that such reviews could result in material adjustments to amounts previously paid. See the risk factor captioned “"Sales of our products are affected by, and we may be negatively impacted by any changes to, the reimbursement practices of governmental health administration authorities, private health coverage insurers and other third-party payers. In addition, reimbursement criteria or policies and the use of tender systems outside the U.S. could reduce prices for our products or reduce our market opportunities."
Pricing and rebate calculations vary among products and programs. The calculations are complex and are often subject to interpretation by us, governmental or regulatory agencies and the courts. The Medicaid rebate amount will be computed each quarter based on each manufacturer’s submission to CMS of its current average manufacturer prices and, in the case of innovator products, best prices for the quarter. If a manufacturer becomes aware that its Medicaid reporting for a prior period was incorrect, or has changed as a result of recalculation of the pricing data, the manufacturer is obligated to resubmit the corrected data. Such restatements and recalculations could increase our costs for complying with the laws and regulations governing the Medicaid Drug Rebate Program. Any corrections to its rebate calculations could result in an overage or underage in a manufacturer’s rebate liability for past quarters, depending on the nature of the correction. Price recalculations also may affect the ceiling price at which a manufacturer is required to offer its products to covered entities under the 340B program, and may require us to issue refunds to 340B covered entities, which can be costly and burdensome. It is unclear how these restatements will impact a manufacturer’s liability with respect to the Part B and Part D inflation rebates, passed as part of the Inflation Reduction Act.
Each manufacturer that participates in the Medicaid Drug Rebate Program could be held liable for errors associated with affiliates’ submission of or failure to submit pricing data. Civil monetary penalties can be applied if a manufacturer is found to have made a misrepresentation in the reporting of its average sales price for each misrepresentation and for each day in which the misrepresentation was applied, or if the manufacturer is found to have charged 340B covered entities more than the statutorily mandated ceiling price. In addition to retroactive rebates and the potential for 340B program refunds, if a manufacturer is found to have knowingly submitted false average manufacturer price or best price information to the government, or to have misrepresented that information, the manufacturer may be liable for significant civil monetary penalties per item of false information. A manufacturer’s failure to submit monthly/quarterly average manufacturer price and best price data on a timely basis could result in a significant civil monetary penalty per day for each day the information is late beyond the due date. Such failures also could be grounds for CMS to terminate the manufacturer’s Medicaid drug rebate agreement, pursuant to which it participates in the Medicaid program, or, if the manufacturer fails to comply with 340B program requirements, HRSA could decide to terminate its 340B program participation agreement. In the event that CMS terminates a manufacturer’s rebate agreement or HRSA terminates its 340B program participation agreement, no federal payments would be available under Medicaid or Medicare Part B for the manufacturer’s covered
outpatient drugs. Finally, manufacturers that fail to offer discounts under the Medicare Part D coverage gap discount program may be liable for additional civil monetary penalties.
CMS and the OIG have pursued manufacturers that were alleged to have failed to report these data to the government in a timely manner. Governmental agencies may also make changes in program interpretations, requirements or conditions of participation, some of which may have implications for amounts previously estimated or paid. Manufacturers cannot guarantee that a submissions will not be found by CMS to be incomplete or incorrect.
Further, the Inflation Reduction Act, as noted in the Healthcare Reform section, establishes Medicare Part B and Part D inflation rebate schemes (the first Part B inflation rebate period is the first quarter of 2023; the first Part D inflation rebate period is the fourth quarter of 2022 through the third quarter of 2023) and a drug price negotiation program (with the first negotiated prices to take effect in 2026). It also makes changes to the Medicare Part D benefit, including the creation of a new manufacturer discount program in place of the current coverage gap discount program (beginning in 2025). Manufacturers may be subject to civil monetary penalties for certain violations of the negotiation and inflation rebate provisions and an excise tax during a noncompliance period under the negotiation program. Drug manufacturers may be subject to civil monetary penalties with respect to their compliance with the new Part D manufacturer drug discount program. Manufacturers thus could be subject to additional liability with respect to these programs as well.
In order to be eligible to have our products paid for with federal funds under the Medicaid and Medicare Part B programs and purchased by the Big Four agencies and certain federal grantees, we are required to participate in the FSS pricing program, established under Section 603 of the Veterans Health Care Act of 1992. Under this program, we are obligated to make our "covered" drugs (”i.e., innovator drugs and biologics) available for procurement on an FSS contract and charge a price to the Big Four agencies that is no higher than the FCP, which is a price calculated pursuant to a statutory formula. The FSS program also allows us (but does not require us) to list certain non-covered drugs on an FSS contract at negotiated pricing, not capped at the FCP. The FCP is derived from a calculated price point called the non-FAMP, which we are required to calculate and report to the VA on a quarterly and annual basis. Pursuant to applicable law, knowing provision of false information in connection with a non-FAMP filing can subject a manufacturer to significant civil monetary penalties for each item of false information. The FSS contract also contains extensive disclosure and certification requirements. In addition, Section 703 of the National Defense Authorization Act for Fiscal Year 2008, requires us to pay quarterly rebates to DoD on utilization of covered drugs that are dispensed through DoD’s Tricare network pharmacies to Tricare beneficiaries. The rebates are calculated as the difference between the annual non-FAMP and FCP for the calendar year that the product was dispensed. If we overcharge the government in connection with the FSS contract or Tricare Retail Pharmacy Rebate Program, whether due to a misstated FCP or otherwise, we will be required to refund the difference to the government. Failure to make necessary disclosures and/or to identify contract overcharges can result in allegations against us under the FCA and other laws and regulations. Unexpected refunds to the government, and any response to government investigation or enforcement action, would be expensive and time-consuming, and could have a material adverse effect on our business, financial condition, results of operations and growth prospects.
Any governmental agencies that have commenced, or may commence, an investigation of us relating to the sales, marketing, pricing, quality or manufacturing of pharmaceutical products could seek to impose, based on a claim of violation of fraud and false claims laws or otherwise, civil and/or criminal sanctions, including fines, penalties and possible exclusion from federal healthcare programs including Medicare and Medicaid. Some of the applicable laws may impose liability even in the absence of specific intent to defraud. Furthermore, should there be ambiguity with regard to how to properly calculate and report payments, and even in the absence of any such ambiguity, a governmental authority may take a position contrary to a position we have taken, and may impose civil and/or criminal sanctions. For example, as noted elsewhere in this Annual Report on Form 10-K, in May 2019, CMS issued a final decision directing the Company to revert to the original base date AMPaverage manufacturer price ("AMP") used to calculate Medicaid drug rebates for Acthar Gel despite having granted Questcor Pharmaceuticals, Inc. ("Questcor") written authorizations to reset the base date AMP in 2012. In addition, from time to time, state attorneys general have brought cases against us that allege generally that we and numerous other pharmaceutical companies reported false pricing information in connection with certain drugs that are reimbursable under Medicaid, resulting in overpayment by state Medicaid programs for those drugs, and generally seek monetary damages and attorneys' fees. Any such penalties or sanctions that we might become subject to in this or other actions could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.
Cost-containment efforts of our customers, purchasing groups, third-party payers and governmental organizations could materially adversely affect our business.
In an effort to reduce cost, many existing and potential customers for our products within the U.S. are members of GPOs and integrated delivery networks ("IDNs"). GPOs and IDNs negotiate pricing arrangements with healthcare product manufacturers and distributors and offer the negotiated prices to affiliated hospitals and other members. GPOs and IDNs typically award contracts on a category-by-category basis through a competitive bidding process. Bids are generally solicited from multiple manufacturers with the intention of driving down pricing. Due to the highly competitive nature of the GPO and IDN contracting processes, there is no assurance that we will be able to obtain or maintain contracts with major GPOs and IDNs across our product portfolio. Furthermore,
the increasing leverage of organized buying groups may reduce market prices for our products, thereby reducing our profitability. While having a contract with a GPO or IDN for a given product can facilitate sales to members of that GPO or IDN, having a contract is no assurance that sales volume of those products will be maintained. GPOs and IDNs increasingly are awarding contracts to multiple suppliers for the same product category. Even when we are the sole contracted supplier of a GPO or IDN for a certain product, members of the GPO or IDN generally are free to purchase from other suppliers. Furthermore, GPO and IDN contracts typically are terminable without cause upon 60 to 90 days prior notice. Accordingly, our net sales and results of operations may be negatively affected by the loss of a contract with a GPO or IDN. In addition, although we have contracts with many major GPOs and IDNs, the members of such groups may choose to purchase from our competitors, which could result in a decline in our net sales. Distributors of our products are also forming strategic alliances and negotiating terms of sale more aggressively in an effort to increase their profitability. Failure to negotiate distribution arrangements having advantageous pricing and other terms of sale could cause us to lose market share to our competitors or result in lower pricing on volume we retain, both of which could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows. Outside the U.S., we have experienced pricing pressure due to the concentration of purchasing power in centralized governmental healthcare authorities and increased efforts by such authorities to lower healthcare costs. We frequently are required to engage in competitive bidding for the sale of our products to governmental purchasing agents. Our failure to maintain volume and pricing with historical or anticipated levels could materially adversely affect our business, financial condition, results of operations and cash flows.
Extensive laws and regulations govern the industry in which we operate and any failure to comply with such laws and regulations, including any changes to those laws and regulations may materially adversely affect us.
The testing, development, manufacture, quality control, safety, effectiveness, approval, labeling, storage, record-keeping, reporting, import, export, marketing, sale, promotion, and distribution of our products are subject to comprehensive government regulations that govern and influence the development, testing, manufacturing, processing, packaging, holding, record keeping, safety, efficacy, approval, advertising, promotion, sale, distribution and import/export of our products.
Under these laws and regulations, we are subject to periodic inspection of our facilities, procedures and operations and/or the testing of our products by the FDA, the DEA and similar authorities within and outside the U.S., which conduct periodic inspections to confirm that we are in compliance with all applicable requirements. We are also required to monitor, track and (periodically) report adverse events and product quality problems associated with our products to the FDA and other regulatory authorities.authorities including the competent authorities of the E.U. member states on behalf of the EMA and the competent authorities of other European countries. Failure to comply with the
requirements of FDA or other regulatory authorities, including a failed inspection or a failure in our adverse event reporting system, or any other unexpected or serious health or safety concerns associated with our products, including our opioid pain products and Acthar Gel, could result in adverse inspection reports, warning letters, product recalls or seizures, product liability claims, labeling changes, monetary sanctions, injunctions to halt the manufacture and distribution of products, civil or criminal sanctions, refusal of a government to grant approvals or licenses, restrictions on operations or withdrawal of existing approvals and licenses. For instance, in the E.U. the EMA's Pharmacovigilance Risk Assessment Committee may propose to the Committee for Medicinal Products for Human Use that the authorization holder be required to take specific steps or advise that the existing marketing authorization be varied, suspended or revoked. Any of these actions could cause a loss of customer confidence in our products, which could adversely affect our sales, or otherwise have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows. In addition, the requirements of regulatory authorities, including interpretative guidance, are subject to change and compliance with additional or changing requirements or interpretative guidance may subject us to further review, result in product delays or otherwise increase our costs, and thus have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.
Furthermore, the FDA and various foreign regulatory authorities approve drugs and medical devices for the treatment of specific indications, and products may only be promoted or marketed for the indications for which they have been approved. For example, applicable laws in the E.U. require that promotional materials and advertising in relation to medicinal products comply with the product’s Summary of Product Characteristics ("SmPC") as approved by the competent authorities in connection with a marketing authorization approval. The SmPC is the document that provides information to physicians concerning the safe and effective use of the product. Promotional activity that does not comply with the SmPC is considered off-label and is prohibited in the E.U. However, in the U.S. the FDA does not attempt to regulate physicians' use of approved products, and physicians are free to prescribe most approved products for purposes outside the indication for which they have been approved. This practice is sometimes referred to as “off-label”"off-label" use. While physicians are free to prescribe approved products for unapproved uses, it is unlawful for drug and device manufacturers to market or promote a product for an unapproved use. The laws and regulations relating to the promotion of products for unapproved uses are complex and subject to substantial interpretation by the FDA and other governmental agencies. Promotion of a product for unapproved use is prohibited; however, certain activities that we and others in the pharmaceutical industry engage in are permitted by the FDA. We have compliance programs in place, including policies, training and various forms of monitoring, designed to address these risks. Nonetheless, these programs and policies may not always protect us from conduct by individual employees that violate these laws. If the FDA or any other governmental agency initiates an enforcement action against us and it is determined that we violated prohibitions relating to the promotion of products for unapproved uses in connection with past or future activities, we could
be subject to substantial civil or criminal fines or damage awards and other sanctions such as consent decrees and corporate integrity agreements pursuant to which our activities would be subject to ongoing scrutiny and monitoring to ensure compliance with applicable laws and regulations. Any such fines, awards or other sanctions could have an adverse effect on our business, financial condition, results of operations and cash flows.
Our approved products and investigational products, if successfully developed and approved, may cause undesirable side effects that limit their commercial profile; delay or prevent further development or regulatory approval; cause regulatory authorities to require labeling statements, such as boxed warnings or a REMS; or result in other negative consequences.
We may observe undesirable side effects or other potential safety issues in nonclinical studies, in clinical trials at any stage of development of our product candidates, as part of an expanded access program or in commercial use or post-approval studies of any approved product. Clinical trials by their nature utilize a sample of the potential patient population. With a limited number of patients and limited duration of exposure, certain side effects of our product candidates, if successfully developed and approved, may only be uncovered with a larger number of patients exposed to the product. Those side effects could be serious or life-threatening. If we or others identify undesirable side effects caused by our products:
•regulatory authorities may withdraw or limit their approval of such products;
•the FDA or regulatory authorities outside the U.S. may impose a clinical hold or partial clinical hold prior to the initiation of development or during development of our product candidates which could cause us or our collaborators to have to stop, delay or restrict further development; or we or our collaborators may, even without a clinical hold, decide to interrupt, delay or halt existing non-clinical studies and clinical trials or stop development;
•we may have difficulty enrolling patients in our clinical trials and completing such trials on the timelines we expect or at all, or we may have to conduct additional non-clinical studies or clinical trials as part of a development program;
•we may not be able ultimately to demonstrate, to the satisfaction of the FDA or other regulatory authorities, that our product candidates are safe and that the benefits outweigh the safety risks, and the FDA or applicable foreign regulatory authorities may not approve the product candidate;
•regulatory authorities may require the addition of labeling statements, such as a boxed warning or additions to an existing boxed warning, or a contraindication, including as a result of inclusion in a class of drugs for a particular disease, or may require a REMS, or modifications to an existing REMS;
•we may be required to change the way such products are distributed or administered, conduct post-approval studies or change the labeling of the products;
•we may be subject to regulatory investigations and government enforcement actions;
•we may decide to remove such products from the marketplace;
•we could be sued and held liable for injury caused to individuals exposed to or taking our products or product candidates; and
•our reputation may suffer.
We believe that any of these events could prevent us from achieving or maintaining market acceptance of the affected products, could substantially increase the risks and costs of developing our product candidates or commercializing our products, and could significantly adversely impact our ability to successfully develop, gain regulatory approval for, and commercialize our current product candidates or future products and generate revenues.
We may be unable to successfully develop, commercialize or launch new products or expand commercial opportunities for existing products or adapt to a changing technology and, as a result, our business may suffer.
Our future results of operations will depend, to a significant extent, upon our ability to successfully develop, commercialize and launch new products or expand commercial opportunities for existing products in a timely manner. There are numerous difficulties in developing, commercializing and launching new products or expanding commercial opportunities for existing products, including:
•developing, testing and manufacturing products in compliance with regulatory and quality standards in a timely manner;
•our ability to successfully engage with the FDA or other regulatory authorities as part of the development and approval process and to receive requisite regulatory approvals for such products in a timely manner, or at all;
•agreement on acceptable terms with prospective clinical research organizations ("CROs") and clinical trial sites, the terms of which can be subject to extensive negotiation and may vary significantly among CROs and trial sites;
•the availability, on commercially reasonable terms, of raw materials, including API and other key ingredients;ingredients for our products;
•delay or failure in obtaining IRB approval or the approval of other reviewing entities, including comparable foreign regulatory authorities, to conduct a clinical trial at each site;
•withdrawal of clinical trial sites from our clinical trials as a result of changing standards of care or the ineligibility of a site to participate in our clinical trials;
•delay or failure in recruiting and enrolling suitable trial patients to participate in a trial;
•clinical sites and investigators deviating from a trial protocol, failing to conduct the trial in accordance with regulatory requirements, or dropping out of a trial;
•inability to identify and maintain a sufficient number of trial sites, many of which may already be engaged in other clinical trial programs, including some that may be for competing product candidates with the same indication;
•failure of our third-party clinical trial sites to satisfy their contractual duties or meet expected deadlines;
•ambiguous or negative interim results or results that are inconsistent with earlier results;
•feedback from the FDA or a comparable regulatory authority outside the United States, IRBs, or data safety monitoring boards, or results from earlier stage or concurrent preclinical studies and clinical trials, that might require modification to the protocol for the trial;
•decision by the FDA or a comparable regulatory authority outside the United States, an IRB or us, or a recommendation by a data safety monitoring board to suspend or terminate clinical trials at any time for safety issues or for any other reason;
•unacceptable risk-benefit profile, unforeseen safety issues or adverse side effects or adverse reactions associated with a product candidate;
•failure of a product candidate to demonstrate any or enough of a benefit;
•difficulties in manufacturing or obtaining from third parties sufficient quantities of a product candidate for use in clinical trials or commercial use that meet internal and regulatory standards
•lack of adequate funding to continue the clinical trial, including the incurrence of unforeseen costs due to enrollment delays, requirements to conduct additional clinical trials or increased expenses associated with the services of our CROs and other third parties;
•developing, commercializing and launching a new product is time-consuming, costly and subject to numerous factors, including legal actions brought by our competitors, that may delay or prevent the development, commercialization and/or launch of new products;
•multiple product launches in a short period of time may be challenging, particularly for an organization that has not launched a new product in many years, and may result in strained resources that could lead to launch delays and cost;
•other unanticipated costs;
•payment of prescription drug user fees to the FDA to defray the costs of review and approval of marketing applications for branded and generic drugs;
•experiencing delays as a result of limited resources at the FDA or other regulatory authorities;
•changing review and approval policies and standards at the FDA or other regulatory authorities;
•changing standards of care;
•potential delays in the commercialization of generic products by up to 30 months resulting from the listing of patents with the FDA;
•effective execution of the product launches in a manner that is consistent with expected timelines and anticipated costs; and
•identifying appropriate partners for distribution of our products, including any future over-the-counter commercialization opportunities, and negotiating contractual arrangements in a timely manner with commercially reasonable terms.terms; and
•changes in governmental regulations or administrative actions.
As a result of these and other difficulties, products currently in development by us may or may not receive timely regulatory approvals, or approvals at all. This risk is heightened with respect to the development of proprietary branded products due to the uncertainties, higher costs and length of time associated with R&D of such products and the inherent unproven market acceptance of such products. Moreover, the FDA regulates the facilities, processes and procedures used to manufacture and market pharmaceutical products in the U.S. Manufacturing facilities must be registered with the FDA and all products made in such facilities must be manufactured in accordance with cGMP regulations enforced by the FDA. Compliance with cGMP regulations requires the dedication of substantial resources and requires significant expenditures. Prior to approval of any product, the FDA inspects both our facilities and procedures to ensure compliance with regulatory standards, and those inspections are also conducted periodically once a product is approved. The FDA has been impeded in conducting such inspections due to the challenges of the COVID-19 pandemic, which could lead to delays to approval of our products. The FDA may also cause a suspension or withdrawal of product approvals if regulatory standards are not maintained. In the event an approved manufacturing facility for a particular drug is required by the FDA to curtail or cease operations, or otherwise becomes inoperable, obtaining the required FDA authorization to manufacture at the same or a different manufacturing site could result in production delays, which could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows. If we or the manufacturing facilities for our products fail to comply with applicable regulatory requirements, a regulatory authority may, among other things:
•issue warning letters or untitled letters;
•mandate modifications to promotional materials or require us to provide corrective information to healthcare practitioners;
•require us to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required due dates for specific actions and penalties for noncompliance;
•seek an injunction or impose civil or criminal penalties or monetary fines;
•suspend or withdraw regulatory approval;
•suspend any ongoing clinical trials;
•refuse to approve pending applications or supplements to applications filed by us;
•suspend or impose restrictions on operations, including costly new manufacturing requirements; or
•seize or detain products, refuse to permit the import or export of products, or require us to initiate a product recall.
The occurrence of any event or penalty described above may inhibit or preclude our ability to commercialize our products and generate revenue.
Advertising and promotion of our products is heavily scrutinized by, among others, the FDA, the DOJ, the OIG within the HHS, state attorneys general, members of Congress and the public. Failure to comply with applicable FDA requirements and restrictions in this area may subject a company to adverse publicity and enforcement action, including enforcement letters, inquiries and investigations, and civil and criminal sanctions by the FDA or other government agencies.
Furthermore, the market perception and reputation of our products are important to our business and the continued acceptance of our products. Any negative press reports or other commentary about our products, whether accurate or not, could have a material adverse effect on our business, reputation, financial condition, results of operation or cash flows or could cause the market value of our common shares and/or debt securities to decline.
With respect to generic products for which we are the first developer to have its application accepted for filing by the FDA, and which filing includes a certification that the applicable patent(s) are invalid, unenforceable and/or not infringed (known as a "Paragraph IV certification"), our ability to obtain and realize the full benefits of 180-days of market exclusivity is dependent upon a number of factors, including, being the first to file, the status of any litigation that might be brought against us as a result of our filing or our not meeting regulatory, manufacturing or quality requirements or standards. If any of our products are not approved timely, or if we are unable to obtain and realize the full benefits of the respective market exclusivity period for our products, or if our products cannot be successfully manufactured or commercialized timely, our results of operations could be materially adversely affected. In addition, we cannot guarantee that any investment we make in developing products will be recouped, even if we are successful in commercializing those products. Finally, once developed and approved, new products may fail to achieve commercial acceptance due to the price of the product, third-party reimbursement of the product and the effectiveness of sales, marketing and distribution efforts to support the product.
We may not be successful in our efforts to identify or discover additional products or product candidates beyond our existing products and product candidates at the rate we expect, or we may expend our limited resources to pursue a particular product candidate or indication and fail to capitalize on product candidates or indications that may be more profitable or for which there is a greater likelihood of success.
The success of our business depends upon our ability to successfully develop, gain approval of and commercialize our products and on our ability to identify compounds for development and commercialization in the future and to successfully complete the non-clinical work necessary to file INDs to pursue clinical development of such new compounds. Our programs may fail to identify or generate new compounds that meet our standards for development and commercialization, and, even if we are successful in generating or identifying such compounds, we may not be able to produce the data necessary to support a regulatory approval.
Because we have limited financial and management resources, we focus on a limited number of commercial and R&D programs. As a result, we may forego or delay pursuit of opportunities with other products or product candidates that later prove to have greater commercial potential. We may focus our efforts and resources on potential programs or product candidates that ultimately prove to be unsuccessful and may not yield any commercially viable products. Our resource allocation decisions may cause us to fail to capitalize on other viable opportunities. If we do not accurately evaluate the commercial potential or target market for a particular product candidate, we may relinquish valuable rights through future collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to retain such sole development and commercialization rights. If any of these events occur, it may have a material adverse effect on our business.
We may not achieve the anticipated benefits of price increases enacted on our pharmaceutical products, which may adversely affect our business.
From time to time, we may initiate price increases on certain of our pharmaceutical products. There is no guarantee that our customers will be receptive to these price increases and continue to purchase the products at historical quantities. In addition, it is unclear how market participants will react to price increases, particularly in light of the scrutiny being paid to drug pricing in the U.S. If customers do not maintain or increase existing sales volumes, we may be unable to replace lost sales with orders from other customers, and it could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.
Our customer concentration may materially adversely affect our business.
We sell a significant amount of our products to a limited number of independent wholesale drug distributors, large pharmacy chains and specialty pharmaceutical distributors. In turn, these wholesale drug distributors, large pharmacy chains and specialty pharmaceutical distributors supply products to pharmacies, hospitals, governmental agencies and physicians. Sales to one of our distributors that supplies our products to many end user customers CuraScript Inc., accounted for 10.0% or more of our total net sales, in each ofFFF Enterprises, Inc. for the past threeperiod April 2, 2022 (Predecessor) through December 30, 2022 (Successor) and previously CuraScript, Inc. from fiscal years.2020 through April 1, 2022 (Predecessor), respectively. If we were to lose the business of this distributor, if this distributor failed to fulfill their obligations, if this distributor was to experience difficulty in paying us on a timely basis, or if this distributor negotiates lower pricing terms, the occurrence of one or more of these factors could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.
Our product concentration may materially adversely affect our business.
We sell a wide variety of products including specialty branded and specialty generic pharmaceuticals, as well as API. However, a small number of relatively significant products, most notably Acthar Gel, INOmax and Therakos, represent a significant percentage of our net sales. Our ability to maintain and increase net sales from these products depends on several factors, including:
•our ability to increase market demand for products through our own marketing and support of our sales force;
•our ability to implement and maintain pricing and continue to maintain or increase market demand for these products;
•our ability to achieve hospital and other third-party payer formulary acceptance, and maintain reimbursement levels by third-party payers;
•our ability to maintain confidentiality of the proprietary know-how and trade secrets relating to Acthar Gel;
•our ability to continue to procure raw materials or finished goods, as applicable, for Acthar Gel, INOmax and Therakos from internal and third-party manufacturers in sufficient quantities and at acceptable quality and pricing levels in order to meet commercial demand;
•our ability to maintain fees and discounts payable to the wholesalers and distributors and GPOs, at commercially reasonable levels;
•whether the DOJ or other third parties seek to challenge and are successful in challenging patents or patent-related settlement agreements or our sales and marketing practices;
•warnings or limitations that may be required to be added to FDA-approved labeling; and
•the occurrence of adverse side effects related to or emergence of new information related to the therapeutic efficacy of these products, and any resulting product liability claims or product recalls.
Moreover, net sales of Acthar Gel may also be materially impacted by the decrease in the relatively small number of prescriptions written for Acthar Gel as compared to other products in our portfolio, given Acthar Gel's use in treating rare diseases. Any disruption in our ability to generate net sales from Acthar Gel could have an adverse impact on our business, financial condition, results of operations and cash flows.
We may be unable to protect our intellectual property rights, intellectual property rights may be limited or we may be subject to claims that we infringe on the intellectual property rights of others.
We rely on a combination of patents, trademarks, trade secrets, proprietary know-how, market exclusivity gained from the regulatory approval process and other intellectual property to support our business strategy. However, our efforts to protect our intellectual property rights may not be sufficient. If we do not obtain sufficient protection for our intellectual property, or if we are unable to effectively enforce our intellectual property rights, or if there is a change in the way courts and regulators interpret the laws, rules and regulations applicable to our intellectual property, our competitiveness could be impacted, which could adversely affect our competitive position, business, financial condition, results of operations and cash flows.
Our pending patent applications may not result in the issuance of patents, or the patents issued to or licensed by us in the past or in the future may be challenged or circumvented by competitors. Existing patents may be found to be invalid or insufficiently broad to preclude our competitors from using methods or making or selling products similar or identical to those covered by our patents and patent applications. Regulatory agencies may refuse to grant us the market exclusivity that we were anticipating, or may unexpectedly grant market exclusivity rights to other parties. In addition, our ability to obtain and enforce intellectual property rights is limited by the unique laws of each country. In some countries, it may be particularly difficult to adequately obtain or enforce intellectual property rights, which could make it easier for competitors to capture market share in such countries by utilizing technologies and product features that are similar or identical to those developed or licensed by us. Competitors also may harm our sales by designing products that mirror the capabilities of our products or technology without infringing our patents, including by coupling separate technologies to replicate what our products accomplish through a single system. Competitors may diminish the value of our trade secrets by reverse engineering or by independent invention. Additionally, current or former employees may improperly disclose such trade secrets to competitors or other third parties. We may not become aware of any such improper disclosure, and, in the event we do become aware, we may not have an adequate remedy available to us.
We operate in an industry characterized by extensive patent litigation, and we may from time to time be a party to such litigation.
The pursuit of or defense against patent infringement is costly and time-consuming and we may not know the outcomes of such litigation for protracted periods of time. We may be unsuccessful in our efforts to enforce our patent or other intellectual property rights. In addition, patent litigation can result in significant damage awards, including the possibility of treble damages and injunctions. Additionally, we could be forced to stop manufacturing and selling certain products, or we may need to enter into license agreements that require us to make significant royalty or up-front payments in order to continue selling the affected products. Given
the nature of our industry, we are likely to face additional claims of patent infringement in the future. A successful claim of patent or other intellectual property infringement against us could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.
Specifically, we believe that the following risks could impact our existing product portfolio:
•Acthar Gel – The composition patent for Acthar Gel has expired and we have no patent-based market exclusivity with respect to any indication or condition we might target. We rely on trade secrets and proprietary know-how to protect the commercial viability and value of Acthar Gel. We currently obtain such protection, in part, through confidentiality and proprietary information agreements. These agreements may not provide meaningful protection or adequate remedies for proprietary technology in the event of unauthorized use or disclosure of confidential and proprietary information. The parties may not comply with or may breach these agreements. Furthermore, our trade secrets may otherwise become known to, or be independently developed by, competitors.
•INOmax – Certain patents related to the use of therapeutic nitric oxide for treating or preventing bronchoconstriction or reversible pulmonary vasoconstriction expired in 2013. Prior to their expiration, we depended, in part, upon these patents to provide us with exclusive marketing rights for our product for some period of time. Since then, we have obtained
additional patents, which expire at various dates through 2036, including patents on methods of identifying patients at risk of serious adverse events when nitric oxide is administered to patients with particular heart conditions. Such methods have been approved by the FDA for inclusion in the Warnings and Precautions sections of the INOmax label. Other patents are on inhaled nitric oxide gas delivery systems as well as methods of using such systems, and on use of nitric oxide gas sensors. The Paragraph IV patent litigation trial against Praxair Distribution, Inc. and Praxair, Inc. (collectively "Praxair") to prevent the marketing of its potential infringing nitric oxide drug product delivery system prior to the expiration of the patents covering INOmax was held in March 2017 and a decision was rendered in September 2017 that ruled five patents invalid and six patents not infringed. We appealed the decision all the way up to the U.S. Supreme Court but were unsuccessful in those efforts. As a result, a broader-scale launch of competitive nitric oxide products has taken place in the market which has adversely impacted our business and may continue to adversely affect our ability to successfully maximize the value of INOmax and could have an adverse effect on our competitive position, business, financial condition, results of operations and cash flows.
•Therakos – Our Therakos products provide extracorporeal photopheresis, which is an autologous immune cell therapy that is indicated in the U.S. for skin manifestations of CTCL and is available for several additional indications in markets outside the U.S. In the ECP process, blood is drawn from the patient, separating white blood cells from plasma and red blood cells (which are immediately returned to the patient). The separated white blood cells are treated with a UVA light activated drug, UVADEX, followed by UVA radiation in the photopheresis instrument, prior to being returned to the patient. Patents related to the methoxsalen composition have expired. Therakos historically manufactured two photopheresis systems, the CELLEX®CELLEX® Photopheresis System (“CELLEX”("CELLEX"), which is the only FDA-approved closed ECP system, and the UVAR XTS®XTS® Photopheresis System (“UVAR XTS”).System. Patents related to the CELLEX system, disposable kit and overall photopheresis method expire in 2023. We continue to pursue additional patentable enhancements to the Therakos ECP system. Recently granted patents relating to improvements to the CELLEX system, processing of blood, disposable kit and overall photopheresis method may offer additional patent protection through approximately 2037.
Clinical trials demonstrating the efficacy of Acthar Gel are limited. The absence of such clinical trial datalimited, which could cause physicians not to prescribe Acthar Gel, or payers not to reimburse the drug, which could negatively impact our business.
Our net sales of Acthar Gel, which comprise a significant portion of our overall product portfolio, could be negatively impacted by the level of clinical data available on the product. Acthar Gel was originally approved by the FDA in 1952, prior to the enactment of the 1962 Kefauver Harris Amendment, or the “Drug"Drug Efficacy Amendment,”" to the FFDCA. This amendment introduced the requirement that drug manufacturers provide proof of the effectiveness (in addition to the previously required proof of safety) of their drugs in order to obtain FDA approval. As such, the FDA's original approval in 1952 was based on safety data as clinical trials evaluating efficacy were not then required. In the 1970s, the FDA reviewed the safety and efficacy of Acthar Gel during its approval of Acthar Gel for the treatment of acute exacerbations in multiple sclerosis and evaluated all other previous indications on the label through the Drug Efficacy Study Implementation (“DESI”("DESI") process. In this process, the medical and scientific merits of the label and each indication on the label were evaluated based on publications, information from sponsors, and the judgment of the FDA. The label obtained after the DESI review and the addition of the multiple sclerosis indication is the Acthar Gel label that was used until the changes in 2010.
In 2010, in connection with its review of a supplemental NDA for use of Acthar Gel in treatment of IS, the FDA again reviewed evidence of safety and efficacy of Acthar Gel, and added the IS indication to the label of approved indications while maintaining approval of Acthar Gel for treatment of acute exacerbations in multiple sclerosis and 17 other indications. In conjunction with its decision to retain these 19 indications on a modernized Acthar Gel label, the FDA eliminated approximately 30 other indications from
the label. The FDA review included a medical and scientific review of Acthar Gel and each indication and an evaluation of available clinical and non-clinical literature as of the date of the review. The FDA did not require additional clinical trials for Acthar Gel.
Accordingly, evidence of efficacy is largely based on physician's clinical experience with Acthar Gel and does not include clinical trials except for the MS and IS indications. We conducted several Phase 4 clinical trials to supplement the non-clinical evidence supporting the use of Acthar Gel. The completion of future clinical trials to provide further evidence on the efficacy of Acthar Gel in the treatment of its approved indications could take several years to complete and will require the expenditure of significant time and financial and management resources. Such clinical trials may not result in data that supports the use of Acthar Gel to treat any of its approved indications. In addition, a clinical trial to evaluate the use of Acthar Gel to treat indications not on the current Acthar Gel label may not provide a basis to pursue adding such indications to the current Acthar Gel label. Furthermore, even if prescribed by a physician, third-party payers may implement restrictions on reimbursement of Acthar Gel due, in part, to the limited clinical data of efficacy, which may negatively impact our business, financial condition, results of operations and cash flows.
Clinical studies required for our product candidates and new indications of our marketed products are expensive and time-consuming, and their outcome is highly uncertain. If any such studies are delayed or yield unfavorable results, regulatory approval for our product candidates or new indications of our marketed products may be delayed or become unobtainable.
We must conduct extensive testing of our product candidates and new indications of our marketed products before we can obtain regulatory approval to market and sell them. For example, INOmax is approved for sale in the U.S. only for the treatment of HRF associated with pulmonary hypertension in term and near-term infants, and the Therakos systems are approved for sale in the U.S. only for the palliative treatment of the skin manifestations of CTCL in persons who have not been responsive to other forms of treatment. In order to market these products in the U.S. for any other indications, we will need to conduct appropriate clinical trials, obtain positive results from those trials, and obtain regulatory approval for such proposed indications. Conducting such studies is a lengthy, time-consuming, and expensive process and obtaining regulatory approval is uncertain. Even well conducted studies of effective drugs will sometimes appear to be negative in either safety or efficacy results, or otherwise may not achieve approval. The regulatory review and approval process to obtain marketing approval for a new indication can take many years, often requires multiple clinical trials and requires the expenditure of substantial resources. This process can vary substantially based on the type, complexity, novelty and indication of the product candidate involved. Success in early clinical trials does not ensure that later clinical trials will be successful, and interim results of a clinical trial do not necessarily predict final results.
These tests and trials may not achieve favorable results for many reasons, including, among others, failure of the product candidate to demonstrate safety or efficacy, the development of serious or life-threatening adverse events (or side effects) caused by or connected with exposure to the product candidate (or prior or concurrent exposure to other products or product candidates), difficulty in enrolling and maintaining subjects in a clinical trial, lack of sufficient supplies of the product candidate or comparator drug, and the failure of clinical investigators, trial monitors, contractors, consultants, or trial subjects to comply with the trial plan, protocol, or applicable regulations related to GLPs or GCPs. A clinical trial may fail because it did not include and retain a sufficient number of patients to detect the endpoint being measured or reach statistical significance. A clinical trial may also fail because the dose(s) of the investigational drug included in the trial were either too low or too high to determine the optimal effect of the investigational drug in the disease setting. The FDA and other regulatory authorities have substantial discretion in the approval process and may refuse to accept any application or may decide that any data submitted is insufficient for approval and require additional studies or clinical trials or varying interpretations of the data obtained from preclinical and clinical testing could delay, limit or prevent regulatory approval of product candidate or a new indication for a product candidate.
We will need to reevaluate any drug candidate that does not test favorably and either conduct new studies, which are expensive and time consuming, or abandon that drug development program. The failure of clinical trials to demonstrate the safety and effectiveness of our clinical candidates for the desired indication(s) would preclude the successful development of those candidates for such indication(s), which would have a material adverse effect on our business, financial condition, results of operations and cash flows.
We may incur litigation liability, including product liability losses and other litigation liability.losses.
As noted elsewhere in this Item 1A, weWe are or may bebecome involved in various legal proceedings and certain government inquiries and investigations, including with respect to, but not limited to, patent infringement, product liability, personal injury, antitrust matters, securities class action lawsuits, disclosure matters, breach of contract, Medicare and Medicaid reimbursement claims, opioid related matters, promotional practices, and compliance with laws relating to the manufacture and sale of controlled substances.substances, and matters relating to the Chapter 11 Cases (including appeals of orders issued in the Chapter 11 Cases). Such proceedings, inquiries and investigations may involve claims for, or the possibility of, fines and penalties involving substantial amounts of money or other relief, including but not limited to civil or criminal fines and penalties, changes in business practices and exclusion from participation in various government healthcare-related programs. Such litigationSome of our existing legal proceedings, inquiries and investigations and related matters are described in Note 19 of the Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on
Form 10-K.Report. If any of theseexisting or future legal proceedings, inquiries or investigations were to result in an adverse outcome, the impact could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows. Even if one or more of these matters do not result in a direct adverse outcome, they could lead to distraction of management, the incurrence of additional costs and damage to our reputation, among other potential results that could have a material adverse effect on our business.
With respect to product liability and clinical trial risks, in the ordinary course of business we are subject to liability claims and lawsuits, including potential class actions, alleging that our marketed products or products in development have caused, or could cause, serious adverse events or other injury. Side effects or adverse events known or reported to be associated with, or manufacturing defects in, the products sold by us could exacerbate a patient’s condition, or could result in serious injury or impairment or even death. This could result in product liability claims against us and/or recalls of one or more of our products. In many countries, including in E.U. member states, national laws provide for strict (no-fault) liability which applies even where damages are caused both by a defect in a product and by the act or omission of a third party. Any such claim brought against us, with or without merit, could be costly to defend and could result in an increase in our insurance premiums. We retain liability for $10.0 million per claim of the first $50.0 million of a loss in our primary liability policies and purchase an additional $60.0 million using a combination of umbrella/excess
liability policies with respect to any such claims. We believe this coverage level is adequate to address our current risk exposure related to product liability claims and lawsuits. However, some claims, such as those brought against us related to our sale of opioids, might not be covered by our insurance policies. Moreover, where the claim is covered by our insurance, if our insurance coverage is inadequate, we would have to pay the amount of any settlement or judgment that is in excess of our policy limits. We may not be able to obtain insurance on terms acceptable to us or at all since insurance varies in cost and can be difficult to obtain. Our failure to maintain adequate insurance coverage or successfully defend against product liability claims could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our operations expose us to the risk of violations of applicable health, safety and environmental laws and regulations and related liabilities and litigation.
We are subject to numerous federal, state, local and non-U.S. environmental protection and health and safety laws and regulations governing, among other things:
•the generation, storage, use and transportation of hazardous materials;
•emissions or discharges of substances into the environment;
•investigation and remediation of hazardous substances or materials at various sites;
•chemical constituents in products and end-of-life disposal, mandatory recycling and take-back programs; and
•the health and safety of our employees.
We may not have been, or we may not at all times be, in full compliance with environmental and health and safety laws and regulations. In the event a regulatory authority concludes that we are not in full compliance with these laws, we could be fined, criminally charged or otherwise sanctioned. Environmental laws are becoming more stringent, including outside the U.S., resulting in increased costs and compliance burdens.
Certain environmental laws assess liability on current or previous owners of real property and current or previous owners or operators of facilities for the costs of investigation, removal or remediation of hazardous substances or materials at such properties or at properties at which parties have disposed of hazardous substances. Liability for investigative, removal and remediation costs under certain federal and state laws is retroactive, strict (i.e., can be imposed regardless of fault) and joint and several. In addition to cleanup actions brought by governmental authorities, private parties could bring personal injury or other claims due to the presence of, or exposure to, hazardous substances. We have received notification from the EPA and similar state environmental agencies that conditions at a number of sites where the disposal of hazardous substances has taken place requires investigation, cleanup and other possible remedial action. These agencies may require that we reimburse the government for its costs incurred at these sites or otherwise pay for the costs of investigation and cleanup of these sites, including by providing compensation for natural resource damage claims arising from such sites.
In the ordinary course of our business planning process, we take into account our known environmental matters as we plan for our future capital requirements and operating expenditures. The ultimate cost of site cleanup and timing of future cash outflows 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.
We concluded that, as of December 31, 2021,30, 2022 (Successor), it was probable that we would incur remediation costs in the range of $72.3$18.4 million to $120.9$48.5 million. We also concluded that, as of December 31, 2021,30, 2022 (Successor), the best estimate within this range was $95.8 million, of which $52.0 million was classified as liabilities subject to compromise as of December 31, 2021.$36.9 million. For further information on our environmental obligations, refer to Note 19 of the Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.Report. Based upon information known to date, we believe our current capital and operating plans are adequate to address costs associated with the investigation, cleanup and potential remedial action for our known environmental matters.
While we have planned for future capital and operating expenditures to comply with environmental laws, our costs of complying with current or future environmental protection and health and safety laws and regulations, or our liabilities arising from past or future releases of, or exposures to, hazardous substances may exceed our estimates or could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows. We may also be subject to additional environmental
claims for personal injury or cost recovery actions for remediation of facilities in the future based on our past, present or future business activities.
Potential indemnification liabilities to Covidien pursuant to the separation and distribution agreement could materially adversely affect us.
In connection with the separation of the Company from Covidien (which was subsequently acquired by Medtronic plc) we entered into a separation and distribution agreement that provided for, among other things, the principal corporate transactions required to effect our separation from Covidien, certain conditions to the distribution of equity interests in the Company and provisions governing the relationship between us and Covidien following such separation. The separation and distribution agreement was filed with the SEC as Exhibit 2.1 to our Current Report on Form 8-K on July 1, 2013. Among other things, the separation and distribution agreement imposes upon us certain indemnification obligations, which Covidien has asserted required us to indemnify Covidien for certain opioid-related claims brought against Covidien. If we are required to indemnify Covidien under the circumstances set forth in the separation and distribution agreement and such liabilities are not discharged pursuant to the Plan or otherwise, we may be subject to substantial liabilities. These potential indemnification obligations, if not discharged pursuant to the Plan or otherwise, could have a material adverse effect on our financial condition, results of operations and cash flows. While the Amended Proposed Opioid-Related Litigation Settlement requires as a condition precedent that any of our indemnification liabilities to Covidien will be channeled to the establishment of a trust for the benefit of plaintiffs holding opioid-related claims against the Company (the "Opioid Claimant Trust") or otherwise resolved in a manner acceptable to us, there is no guarantee that such condition will be satisfied or that the Amended Proposed Opioid-Related Litigation Settlement will be effectuated on its current terms or at all. See the risk factor captioned "The Amended Proposed Opioid-Related Litigation Settlement and the Proposed Acthar Gel-Related Settlement are subject to certain contingencies and may not go into effect in their current form or at all, which may have an adverse impact on our ability to consummate the Plan and our business, financial condition, results of operations and cash flows."
If our business development activities are unsuccessful, it may adversely affect us.
One of our business strategies includes evaluating potential business development opportunities to potentially grow the business through merger, acquisition, licensing agreements or other strategic transactions. The process to evaluate potential opportunities may be complex, time-consuming and expensive. Once a potential opportunity is identified, we may not be able to conclude negotiations of
a potential transaction on terms that are satisfactory to us, which could result in a significant diversion of management and other employee time, as well as substantial out-of-pocket costs. In addition, there are a number of risks and uncertainties relating to our ability to close a potential transaction.
Once an acquisition or licensing transaction is consummated, there are further potential risks related to integration activities, including with regard to operations, personnel, technologies and products. If we are not able to successfully integrate our acquisitions in the expected time frame, we may not obtain the advantages and synergies that such acquisitions were intended to create, which may have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.
In addition, we intend to continue to explore opportunities to enter into strategic collaborations with other parties, which may include other pharmaceutical companies, academic and research institutions, government agencies and other public and private research organizations. These third-party collaborators are often directly responsible for certain obligations under these types of arrangements, and we may not have the same level of decision-making capabilities for the prioritization and management of development-related activities as we would for our internal research and development activities. Failures by these partners to meet their contractual, regulatory, or other obligations to us, or any disruption in the relationships with these partners, could have a material adverse effect on our pipeline and business. In addition, these collaborative relationships for research and development could extend for many years and may give rise to disputes regarding the relative rights, obligations and revenues of us versus our partners, including the ownership of intellectual property and associated rights and obligations. These could result in the loss of intellectual property rights or other intellectual property protections, delay the development and sale of potential products, and lead to lengthy and expensive litigation or arbitration.
Furthermore, the due diligence that we conduct in conjunction with an acquisition or other strategic collaboration may not sufficiently discover risks and contingent liabilities associated with the other party and, consequently, we may consummate an acquisition or otherwise enter into a strategic collaboration for which the risks and contingent liabilities are greater than were projected. In addition, in connection with acquisitions or other strategic collaborations, we could experience disruption in our business, technology and information systems, and our customers, licensors, suppliers and employees and may face difficulties in managing the expanded operations of a larger and more complex company. There is also a risk that key employees of companies that we acquire or key employees necessary to successfully commercialize technologies and products that we acquire or otherwise collaborate on may seek employment elsewhere, including with our competitors. Furthermore, there may be overlap between our products or customers and the companies which we acquire or enter into strategic collaborations with that may create conflicts in relationships or other commitments detrimental to the integrated businesses or impacted products. Additionally, the time between our expenditures to
acquire new products, technologies or businesses and the subsequent generation of revenues from those acquired products, technologies or businesses, or the timing of revenue recognition related to licensing agreements and/or strategic collaborations, could cause fluctuations in our financial performance from period to period. Finally, if we are unable to successfully integrate products, technologies, businesses or personnel that we acquire, we could incur significant impairment charges or other adverse financial consequences. Many of these factors are outside of our control and any one of them could result in increased costs, decreases in the amount of expected revenues and diversion of management's time and energy, which could materially impact our business, financial condition, results of operations and cash flows.
If we are unable to attract and retain key scientific, technical, regulatory and commercial personnel, we may be unable to maintain or expand our business.
Because of the specialized scientific nature of our business, our ability to develop products and to compete with our current and future competitors will remain highly dependent, in large part, upon our ability to attract and retain qualified scientific, technical, regulatory and commercial personnel. The loss of key scientific, technical, regulatory and commercial personnel, or the failure to recruit additional key scientific, technical, regulatory and commercial personnel, could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows. There is intense competition for qualified personnel in our industry, and we may not be able to continue to attract and retain the qualified personnel necessary for the development or operation of our business.
Our business depends on the continued effectiveness and availability of our information technology infrastructure, and failures of this infrastructure could harm our operations.
Significant disruptions to our information technology systems or breaches of information security could adversely affect our business. To remain competitive in our industry, we must employ information technologies to support manufacturing processes, quality processes, distribution, financial reporting, as well as R&D and regulatory applications that capture, manage and analyze the large streams of data generated in our clinical trials, and it is critical that we do so in a secure manner to maintain the confidentiality and integrity of such confidential information. We also rely extensively on technology to allow concurrent work sharing around the world. As with all information technology, our systems are vulnerable to potential damage or interruptions from fires, blackouts, telecommunications failures and other unexpected events, as well as physical and electronic break-ins, sabotage, piracy or intentional
acts of vandalism. Given the extensive reliance of our business on technology, any substantial disruption or resulting loss of data that is not avoided or corrected by our backup measures could harm our business, financial condition, results of operations and cash flows.
We also have outsourced significant elements of our operations to third parties, some of which are outside the U.S., including significant elements of our information technology infrastructure, and as a result we are managing many independent vendor relationships with third parties who may or could have access to our confidential information. The size and complexity of our information technology systems, and those of our third-party vendors with whom we contract, make such systems potentially vulnerable to service interruptions. The size and complexity of our and our vendors' systems and the large amounts of confidential information that is present on them also makes them potentially vulnerable to security breaches from inadvertent or intentional actions by our employees, partners or vendors, or from attacks by malicious third parties. We and our vendors could be susceptible to third-party attacks on our information security systems, which attacks are of ever increasingever-increasing levels of sophistication and are made by groups and individuals with a wide range of motives and expertise, including criminal groups, “hackers”"hackers" and others.
Maintaining the secrecy of all of our confidential, proprietary, and/or trade secret information is important to our competitive business position. However, such information can be difficult to protect. While we have taken steps to protect such information and invested heavily in information technology, there can be no assurance that our efforts will prevent service interruptions or security breaches in our systems or the unauthorized or inadvertent wrongful use or disclosure of confidential information, including those caused by our own employees or others to whom we have granted access to our systems, that could adversely affect our business operations or result in the loss, dissemination, or misuse of critical or sensitive information. A breach of our security measures or the accidental loss, inadvertent disclosure, unapproved dissemination, misappropriation or misuse of trade secrets, proprietary information, or other confidential information, whether as a result of theft, hacking, human error, sabotage, industrial espionage, fraud, trickery or other forms of deception, or for any other cause, could enable others to produce competing products, use our proprietary technology or information, and/or adversely affect our business position. Further, any such interruption, security breach, loss or disclosure of confidential information, could result in financial, legal, business, and reputational harm to us and could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Some of our products are regulated as controlled substances, the making, use, sale, importation, exportation, and distribution of which are subject to significant regulation by the DEA and other regulatory agencies.
Some of our products are considered controlled substances under the federal CSA. The manufacturing, shipping, distribution, import, export, packaging, storing, prescribing, dispensing, selling and use of controlled substances are subject to additional regulations, including under the CSA and DEA regulations. These regulations increase the personnel needs and the expense associated with commercialization of products. Because of their restrictive nature, these laws and regulations could also limit commercialization of our controlled substance products. Failure to comply with these laws and regulations could also result in loss of DEA registrations, disruption in manufacturing and distribution activities, consent decrees, criminal and civil penalties and state actions, among other consequences.
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The DEA regulates the availability of controlled substances, including API, drug products under development and marketed drug products. At times, the procurement and manufacturing quotas granted by the DEA may be insufficient to meet our needs.
The DEA is the U.S. federal agency responsible for domestic enforcement of the CSA. The CSA classifies drugs and other substances based on identified potential for abuse. Schedule I controlled substances, such as heroin and LSD, have a high abuse potential and have no currently accepted medical use; thus, they cannot be lawfully marketed or sold. Schedule II controlled substances include molecules such as oxycodone, oxymorphone, morphine, fentanyl and hydrocodone. The manufacture, storage, distribution and sale of these controlled substances are permitted, but highly regulated. The DEA regulates the availability of API, products under development and marketed drug products that are in the Schedule II category by setting annual quotas. Every year, we must apply to the DEA for manufacturing quota to manufacture API and procurement quota to manufacture finished dosage products. Given that the DEA has discretion to grant or deny our manufacturing and procurement quota requests, the quota the DEA grants may be insufficient to meet our needs. In 2021,2022, manufacturing and procurement quotas granted by the DEA were sufficient to meet our sales and inventory requirements on most products. Over the past several years and into 2022,2023, the DEA has steadily reduced the amount of opioid medication that may be manufactured in the U.S. by approximately 10% to 20%, annually, as a response to the opioid crisis. These quota reductions have included oxycodone, hydrocodone, oxymorphone, hydromorphone, and fentanyl. The DEA could take similar actions in the future. Future delay or refusal by the DEA to grant, in whole or in part, our quota requests could delay or result in stopping the manufacture
of our marketed drug products, new product launches or the conduct of bioequivalence studies and clinical trials. Such delay or refusal also could require us to allocate marketed drug products among our customers. These factors, along with any delay or refusal by the DEA to provide customers who purchase API from us with sufficient quota, could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows. In addition, the DEA conducts periodic inspections of registered establishments that handle controlled substances and has stringent regulations on those establishments to prevent loss and diversion. Failure to maintain compliance with these regulations, particularly as manifested in loss or diversion, can result in regulatory action that could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows. The DEA may seek civil penalties, refuse to renew necessary registrations or initiate proceedings to revoke those registrations. In certain circumstances, violations could lead to criminal proceedings.
The manufacture of our products is highly exacting and complex, and our business could suffer if we, or our suppliers, encounter manufacturing or supply problems.
The manufacture of our products is highly exacting and complex, due in part to strict regulatory and manufacturing requirements, as well as due to the biologic nature of some of our products, which are inherently more difficult to manufacture than chemical-based products. Problems may arise during manufacturing for a variety of reasons including equipment malfunction, failure to follow specific protocols and procedures, defective raw materials and environmental factors. If a batch of finished product fails to meet quality standards during a production run, then that entire batch of product may have to be discarded. These problems could lead to launch delays, product shortages, backorders, increased costs (including contractual damages for failure to meet supply requirements), lost revenue, damage to our reputation and customer relationships, time and expense spent investigating, correcting and preventing the root causes and, depending on the root causes, similar losses with respect to other products. If manufacturing problems are not discovered before the product is released to the market, we also could incur product recall and product liability costs. If we incur a product recall or product liability costs involving one of our products, such product could receive reduced market acceptance and thus reduced product demand and could harm our reputation and our ability to market our products in the future. Significant manufacturing problems could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.
We rely on third-party manufacturers to manufacture certain components of our products and certain of our finished products. In the event that these third-party manufacturers cease to manufacture sufficient quantities of our products or components in a timely manner and on terms acceptable to us, we could be forced to locate alternate third-party manufacturers. Additionally, if our third-party manufacturers determine to no longer partner with us, experience a failure in their production process, are unable to obtain sufficient quantities of the components necessary to manufacture our products or otherwise fail to meet regulatory or quality requirements, we may be forced to delay the manufacture and sale of our products or locate an alternative third-party manufacturer. Any failure by our third-party manufacturers to comply with cGMP or failure to scale up manufacturing processes for our investigational product candidates, including any failure to deliver sufficient quantities of our investigational product candidates in a timely manner, could lead to a delay in, or failure to obtain, regulatory approval of our investigational products. In addition, such failure, or failures by our third-party manufacturers to comply with cGMP in manufacturing our approved products, could be the basis for the FDA or other regulatory authorities to issue a warning letter, withdraw approvals, or take other regulatory or legal action, including recall or seizure of outside supplies of our products, total or partial suspension of production, suspension of ongoing clinical trials, refusal to approve pending applications or supplemental applications, detention of product, refusal to permit the import or export of products, injunction, or imposing civil and criminal penalties. Several of our products are manufactured at a single manufacturing facility or stored at a single storage site. Loss or damage to a manufacturing facility or storage site due to a natural disaster or otherwise could adversely affect our ability to manufacture sufficient quantities of key products or otherwise deliver products to meet customer demand or contractual requirements which may result in a loss of revenue and other adverse business consequences. Furthermore, while we work closely with our suppliers to ensure the continuity of supply and to diversify our sources of components and materials, in certain instances we do acquire components and materials from a sole supplier. Although we do carry strategic inventory and maintain insurance to mitigate the potential risk related to any related supply disruption, there can be no assurance that such measures will be effective. Because of the time required to obtain regulatory approval and licensing of a manufacturing facility, an alternate third-party manufacturer may not be available on a timely basis to replace production capacity in the event we lose manufacturing capacity, experience supply challenges, or products are otherwise not available due to natural disaster, regulatory action or otherwise.
Significant manufacturing problems could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.
Our global operations expose us to risks and challenges associated with conducting business internationally.
We operate globally with offices or activities in Europe, Africa, Asia, South America, Australia and North America. We face several risks inherent in conducting business internationally, including compliance with international and U.S. laws and regulations that apply to our international operations. These laws and regulations include data privacy requirements, labor relations laws, tax laws, anti-competition regulations, import and trade restrictions, export requirements, U.S. anti-bribery laws such as the FCPA and similar
local laws, regulations, industry self-regulation codes of conduct and physicians' codes of professional conduct, which also prohibit corrupt payments to governmental officials or certain payments or remunerations to customers. Given the high level of complexity of these laws, there is a risk that some provisions may be violated, inadvertently or through fraudulent or negligent behavior of individual employees, or through our failure to comply with certain formal documentation requirements or otherwise. Violations of these laws and regulations could result in fines or criminal sanctions against us, our officers or our employees, and prohibitions on the conduct of our business. Any such violations could include prohibitions on our ability to offer our products in one or more countries and could materially damage our reputation, our international expansion efforts and our ability to attract and retain employees.
In addition to the foregoing, engaging in international business inherently involves a number of other difficulties and risks, including:
•potentially longer payment cycles and difficulties in enforcing agreements and collecting receivables through certain non-U.S. legal systems;
•potential inability to sell products into certain countries given the delay of foreign governments in responding to changes in our U.S. business licensing;
•political and economic instability, including the impact of U.K.'s exit from the E.U. (commonly known as Brexit) and the related uncertainties;
•the unpredictability of U.S. trade policy, including Section 301 tariffs and U.S. trade relations with other countries, that may increase raw material cost or impact our ability to obtain the raw materials we need to manufacture our products and impact our ability to sell our products outside of the U.S.;
•potentially adverse tax consequences, tariffs, customs charges, bureaucratic requirements and trade barriers;
•difficulties and costs of staffing and managing our non-U.S. operations;
•exposure to global economic conditions;
•exposure to potentially unfavorable movements in foreign currency exchange rates associated with international net sales and operating expense and intercompany debt financings; and
•potential negative impact of public health epidemics on employees, our supply chain and the global economy.
These or other factors or any combination of them may have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.
We may not achieve some or all of the expected benefits of any restructuring activities we may undertake and such restructuring activities may adversely affect our business.
From time to time, we may initiate organizational restructuring activities as we continue to realign our cost structure due to the changing nature of our business and look for opportunities to achieve operating efficiencies that will reduce costs. We may not be able to obtain the cost savings and benefits initially anticipated when such restructuring activities were initiated. Additionally, as a result of our restructuring activities we may experience a loss of continuity, loss of accumulated knowledge and/or inefficiency during transitional periods. Reorganizations and restructurings can require a significant amount of management and other employees' time and focus, which may divert attention from operating and growing our business. If we fail to achieve some or all of the expected benefits of such restructuring activities, it could have a material adverse effect on our business, financial condition, results of operations and cash flows.
We have significant levels of intangible assets which utilize our future projections of cash flows in impairment testing. Should we experience unfavorable variances from these projections these assets may have an increased risk of future impairment.
Past acquisitions have significantly increased ourOur intangible assets which were $5,448.4$2,843.8 million as of December 31, 2021.30, 2022 (Successor). At least annually, we review the carrying value of our non-amortizing intangible assets, and for amortizing intangible assets when indicators of impairment are present. Conditions that could indicate impairment and necessitate an evaluation of intangible assets include, but are not limited to, a significant adverse change in the business climate or the legal or regulatory environment.
In performing our impairment tests, we utilize our future projections of cash flows. Projections of future cash flows are inherently subjective and reflect assumptions that may or may not ultimately be realized. Significant assumptions utilized in our projections include, but are not limited to, our evaluation of the market opportunity for our products, the current and future competitive landscape and resulting impacts to product pricing, future legislative and regulatory actions or the lack thereof, planned strategic initiatives, the ability to achieve cost synergies from acquisitions, the realization of benefits associated with our existing and anticipated patents and regulatory approvals. Given the inherent subjectivity and uncertainty in projections, we could experience significant unfavorable variances in future periods or revise our projections downward. This would result in an increased risk that our intangible assets may be impaired. If an impairment were recognized, this could have a material impact to our financial condition and results of operations.
We are subject to labor and employment laws and regulations, which could increase our costs and restrict our operations in the future.
We employAs of December 30, 2022, we employed approximately 2,8002,700 employees worldwide. Some of our employees are represented by labor organizations and national works councils. Our management believes that our employee relations are satisfactory. However, further organizing activities or collective bargaining may increase our employment-related costs and we may be subject to work stoppages and other labor disruptions. Moreover, if we are subject to employment-related claims, such as individual and class actions relating to alleged employment discrimination, wage-hour and labor standards issues, and such actions are successful in whole or in
part, this may affect our ability to compete or have a material adverse effect on our business, financial condition, results of operations and cash flows.
Our operations may be interrupted by the occurrence of a natural disaster or other catastrophic event at our facilities.
We depend on our manufacturing facilities, laboratories and equipment for the continued operation of our business. Our principal executive offices and our Specialty Brands global manufacturing operations are located in Dublin, Ireland. In addition, we have other locations in the U.S., most notably our corporate shared services facility in Hazelwood, Missouri, our Specialty Brands commercial headquarters in Hampton, New Jersey and our Specialty Generics headquarters and technical development center in Webster Groves, Missouri. As of December 31, 2021, we owned a total of ten facilities in the U.S., Ireland and Japan. We have 11 manufacturing sites: one in Ireland; two in Japan; and eight in the U.S. Although we have contingency plans in effect for natural disasters or other catastrophic events, these events could still disrupt our operations. Even though we carry business interruption insurance policies, we may suffer losses as a result of business interruptions that exceed the coverage available under our insurance policies. Any natural disaster or catastrophic event at any of our facilities could have a significant negative impact on our business, financial condition, results of operations and cash flows.
Risks Related to Our Indebtedness and Settlement Obligations
Our substantial indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations and could further adversely affect our ability to make ongoing payments in respect of the Proposed Settlements.Plan.
We have substantial indebtedness.indebtedness and settlement obligations. As of December 31, 2021,30, 2022 (Successor), total debt principal was $5,145.8$3,534.1 million, of which $1,395.0$44.1 million was classified as current, and the remainder classified as liabilities subject to compromise. Even if our existingcurrent. Our substantial indebtedness is reduced or discharged in part through the Plan, we expect to have substantial remaining indebtedness upon emergence from bankruptcy, which could adversely affect our ability to fulfill our financial obligations (including our ability to service our indebtedness and our settlement obligations in respect of the Proposed Settlements)remaining $1,275.0 million and $245.0 million for our Opioid-Related Litigation Settlement and Acthar Gel-Related Litigation Settlement, respectively (as defined within Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report) and have a negative impact on our financing options and liquidity positions.
Our degree of debt leverage even ifand our existing indebtedness is reduced or discharged in part through the Plan, couldsignificant settlement obligations have significant consequences, including the following:
•making it more difficult for us to satisfy our obligations with respect to our debt and our ongoing obligations in respect of the Proposed Settlements;Opioid-Related Litigation Settlement and Acthar Gel-Related Litigation Settlement;
•limiting our ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions or other corporate requirements;
•requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of other purposes, thereby reducing the amount of cash flows available for working capital, capital expenditures, acquisitions, and other general corporate purposes;purposes, and research and development;
•limiting our ability to refinance our indebtedness or make prepayments of our ongoing obligations in respect of the Proposed SettlementsOpioid-Related Litigation Settlement and Acthar Gel-Related Litigation Settlement on terms acceptable to us or at all;
•placing us at a competitive disadvantage to other less leveraged competitors;
•making us more vulnerable to economic downturns and limiting our ability to withstand competitive pressures;
•limiting our flexibility in planning for and reacting to changes, opportunities, and challenges in our business, including changes in the industry in which we compete;compete, changes in our business and strategic opportunities, and adverse developments in our operations; and
•increasing our costs of borrowing.
As discussed in greater detail in "Significant Events: Voluntary Filing Under Chapter 11 and Going Concern" within Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of this Annual Report on Form 10-K, Mallinckrodt plc and certain of its subsidiaries initiated the Chapter 11 Cases to, among other things, restructure its existing indebtedness. As discussed in greater detail above in "Risks Related to Our Chapter 11 Cases," although the Plan has been confirmed, it has not yet been consummated and our ability to consummate the contemplated restructuring is subject to many risks and a number of conditions. We cannot guarantee that we will satisfy all such conditions and otherwise consummate the contemplated restructuring.
Even if our existing indebtedness is restructured, weWe may not be able to generate sufficient cash to service all of our indebtedness and settlement obligations and may be forced to take other actions to satisfy our obligations under our indebtedness and settlement obligations, which may not be successful.
Even if our existing indebtedness is reduced or discharged in part through the Plan, ourOur ability to make scheduled payments on or to refinance our debt obligations and settlement obligations depends on our financial condition and operating performance, which are subject to prevailing economic and competitive conditions and to certain financial, business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to fund our day-to-day operations or to pay the principal, premium, if any, and interest on our indebtedness.indebtedness and satisfy our settlement obligations.
If our cash flows and capital resources following emergence from bankruptcy are insufficient to fund our debt service obligations and other cash requirements (including our settlement obligations), we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to sell assets or operations, seek additional capital or restructure or refinance our indebtedness.indebtedness and our settlement obligations. We may not be able to effect any such alternative measures, if necessary, on commercially reasonable terms or at all and, even if successful, such alternative actions may not allow us to meet our scheduled debt service obligations and settlement obligations. The agreements governing our existing indebtedness restrict (and we expectand settlement obligations (a) have terms and conditions that any agreement governing our remaining indebtedness upon emergence from bankruptcy will restrict) (a)restrict our ability to dispose of assets and the use theof proceeds from any such dispositions and (b) restrict our ability to raise debt capital to be used to repay our indebtedness when it becomes due. We may not be able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations or settlement obligations then due.
Our inability to generate sufficient cash flows following emergence from bankruptcy to satisfy our debt obligations and settlement obligations, or to refinance our indebtedness on commercially reasonable terms or at all, would materially and adversely affect our financial position and results of operations.
Certain of our secured indebtedness has near-term maturity dates, most notably our First Lien Senior Secured Notes due 2025 and our Second Lien Senior Secured Notes due 2025. Adequate funds may not be available to us, or, depending on market conditions, we may be unable to refinance or fund the repayment of our debt maturities as they come due, resulting in an event of default under the applicable indentures, permitting our creditors to exercise various remedies. A refinancing, depending upon market conditions, could increase borrowing costs and add restrictive covenants which could have a material adverse effect on our competitive position, business, financial condition, results of operations, and cash flows.
If we cannot make scheduled payments on our debt, following emergence from bankruptcy,Opioid-Related Litigation Settlement, or the Acthar Gel-Related Litigation Settlement, we will be in default and, as a result, lenders under any of our then-outstanding indebtedness could declare essentially all outstanding principal and interest to be due and payable, beneficiaries of our then-outstanding settlement obligations could declare such obligations to be due and payable, our secured lenders could foreclose against the assets securing such borrowings and we could be forced to return to bankruptcy or into liquidation.
The terms of the agreements that govern our indebtedness and settlement obligations restrict our current and future operations, particularly our ability to respond to changes or to pursue our business strategies.
The agreements that govern the terms of our existing indebtedness contain, and the agreements that will govern our restructured indebtedness following emergence from bankruptcy are expected tosettlement obligations contain a number of restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our long-term best interest, including limitations or restrictions on our ability to:
•incur, assume or guarantee additional indebtedness;
•declare or pay dividends, make other distributions with respect to equity interests, or purchase or otherwise acquire or retire equity interests;
•make any principal payment on, or redeem or repurchase, subordinated, junior secured or unsecured debt and, with respect to certain of our restructured indebtedness, following emergence from bankruptcy, certain deferred settlement obligations;the Opioid-Related Litigation Settlement and the Acthar Gel-Related Litigation Settlement;
•make loans, advances or other investments;
•sell or otherwise dispose of assets, including capital stock of subsidiaries;
•incur liens;
•enter into transactions with affiliates;
•enter into sale and lease-back transactions; and
•permit the occurrence of certain change of control transactions;
•consolidate or merge with or into or sell all or substantially all of our assets to, another person or entity.entity; and
In addition,•draw the restrictive covenants in the credit agreement governingfull amount otherwise available of our existing senior secured credit facilities require us to comply with a financial maintenance covenant in certain circumstances. Our ability to satisfy this financial maintenance covenant can be affected by events beyond our control and we cannot assure you that we will be able to comply.receivables-based financing lending facility.
A breach of the covenants under the agreements that govern the terms of any of our indebtedness or settlement obligations could result in an event of default under the applicable indebtedness permitting ouror settlement obligations. Such default may allow the creditors to exercise various remedies. Althoughaccelerate the commencementrelated debt or settlement obligations and may result in the acceleration of the Chapter 11 Cases itself constitutedany other debt or settlement obligations to which a cross-acceleration or cross-default provision applies. In addition, an event of default under substantiallythe credit agreement that governs our receivables-based financing facility would permit the lenders under such facilities to terminate all commitments to extend further credit thereunder. Furthermore, if we are unable to repay the amounts due and payable under our secured indebtedness, those creditors will be able to proceed against the collateral granted to them to secure that secured indebtedness. Additionally, if a change in control transaction were to occur, such a transaction may accelerate the maturity dates on our indebtedness and opioid-related litigation settlement. If the holders of our existing indebtedness and any efforts to exercise remedies in respectdebt or settlement obligations accelerate the repayment of our indebtedness are automatically stayed as a result ofborrowings or the Chapter 11 Cases, the RSA contemplates the reinstatement of certainpayment of our existingsettlement obligations for the above reasons, or any other, we may not have sufficient assets to repay such indebtedness through the Plan. As it is a condition to reinstatement of indebtedness that most defaults under the applicable indebtedness must be cured, we continue to adhere to the covenants in respect of such indebtedness. Moreover, we expect that any indebtedness that remains outstanding following our emergence from bankruptcy will be subject to similar covenants.or settlement obligations.
As a result of these restrictions, coupled with operating limitations imposed by the Plan and related arrangements, we may be:
•limited in how we conduct our business;
•unable to raise additional debt or equity financing to operate during general economic or business downturns;
•unable to respond to changing circumstances or to pursue our business strategies; or
•unable to compete effectively, execute our growth strategy or take advantage of new business opportunities.
These restrictions may affect our ability to growoperate in accordance with our plans.
Even if our existing indebtedness is restructured, our
Our debt levels and challenges in the commercial and credit environment may materially adversely affect our ability to issue debt on acceptable terms and our future access to capital.
Our ability to issue debt or enter into other financing arrangements on acceptable terms could be materially adversely affected by the Chapter 11 Cases, our debt levels (even if our existing indebtedness is reduced or discharged in part through the Plan) or if there is a material decline in the demand for our products or in the solvency of our customers or suppliers or other significantly unfavorable changes in economic conditions occur. In addition, volatility in the world financial markets could increase borrowing costs or affect our ability to access the capital markets, which could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows.
Borrowing capacity under our receivables-based financing facility may decrease, may not be extended upon maturity, or the maturity date may be accelerated.
The borrowing capacity under our receivables-based financing facility is dependent upon the level of accounts receivable securing the borrowing capacity as well as certain financial covenants. The amount of accounts receivable may decrease due to various factors such as normal business variations, business contractions, or asset divestitures, any of which may result in a decrease of the associated borrowing capacity. Failure to comply with the financial covenants may decrease our ability to borrow up to the full borrowing capacity. Further, the issuance of additional debt having a maturity date that precedes the facility’s current maturity date may result in the acceleration of the existing maturity date, or, separately, we may be unable to extend the date of existing maturity date to have continued access to such borrowing capacity beyond the current maturity date. These could have a material adverse effect on our competitive position, business, financial condition, results of operations, and cash flows.
Our variable-rate indebtedness exposes us to interest rate risk, which could cause our debt service obligations to increase significantly.
During the pendency of the Chapter 11 Cases, we expect to pay interest on certain of our secured indebtedness as it accrues. Following emergence from the Chapter 11 Cases, we expect to pay interest on all of our indebtedness as it accrues. Certain of our secured indebtedness, including borrowings under our existing senior secured credit facilities, is or is expected to be, as applicable, subject to variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable-rate indebtedness would increase and our net loss would increase, even though the amount borrowed under the facilitiesfacility remained the same. As of December 31, 2021,30, 2022 (Successor), we had $1,767.2$1,738.9 million outstanding variable-rate debt on our senior secured term loans and $900.0 million outstanding on our senior secured revolving credit facility.loans. An unfavorable movement in interest rates, primarily LIBOR,London Interbank Offered Rate ("LIBOR") and Secured Overnight Financing Rate ("SOFR"), could result in higher interest expense and cash payments for us. Although we may enter into interest rate swaps,hedges, involving the partial or full (i) exchange of floating for fixed-rate interest payments or (ii) obtaining an interest rate cap, to reduce interest rate volatility, we cannot provide assurance that we will enter into such arrangements or that they will successfully mitigate such interest rate volatility.
Despite current and anticipated indebtedness levels, we may still be able to incur more debt. This could further exacerbate the risks described above.
We may be able to incur substantial additional indebtedness in the future. Although agreements governing our existing indebtedness and settlement obligations restrict (and agreements governing our post-emergence indebtedness are expected to restrict) the incurrence of additional indebtedness, these restrictions are and will be subject to a number of qualifications and exceptions and the additional indebtedness incurred in compliance with these restrictions could be substantial. Applicable Bankruptcy Court orders in the Chapter 11 Cases may also permit the incurrence of additional indebtedness. If new debt is added to our current debt levels, the related risks that we now face could intensify.
We may need additional financing in the future to meet our capital needs or to make acquisitions, and such financing may not be available on favorable or acceptable terms, and may be dilutive to existing shareholders.
We may need to seek additional financing for general corporate purposes. For example, we may need to increase our investment in R&D activities or need funds to make acquisitions. We may be unable to obtain any desired additional financing on terms that are favorable or acceptable to us. Depending on market conditions, adequate funds may not be available to us on acceptable terms and we may be unable to fund our expansion, successfully develop or enhance products, or respond to competitive pressures, any of which could have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows. If we raise additional funds through the issuance of equity securities, our shareholders will experience dilution of their ownership interest.
The phase out of LIBOR, or the replacement of LIBOR with a different reference rate, may adversely affect interest rates.rates associated with our debt.
In July 2017, the Financial Conduct Authority (the authority that regulates LIBOR) announced that it would phase out LIBOR by the end of 2021. The Financial Conduct Authority also announced that certain of the commonly used LIBOR tenors will continue to be published until June 30, 2023; however, the Federal Reserve, Federal Deposit Insurance Corporation and the Office of the Comptroller of Currency (and certain other government agencies) in the U.S. as well as the Financial Conduct Authority announced that all market participants should stop using LIBOR in new contracts after December 31, 2021, subject to limited exemptions. Accordingly, new contracts entered into after December 31, 2021, generally must utilize an alternative reference rate. Certain of our existing indebtedness, including our existing senior secured credit facilities, bears interest (and certain of our post-emergence indebtedness may bear interest) at rates that are currently indexed to LIBOR.LIBOR and expected to convert to SOFR in June 2023. Changes in the method of calculating LIBOR, SOFR, or the replacement of LIBOR or SOFR with an alternative rate or benchmark, may adversely affect interest rates on our current or future indebtedness and result in higher borrowing costs. This could materially and adversely affect our results of operations, cash flows and liquidity. We cannot predict the effect of the potential changes to LIBOR, SOFR, or the establishment and use of alternative rates or benchmarks.
Risks Related to Tax Matters
The Company'sUnited States could treat Mallinckrodt plc (parent corporation) as a U.S. taxpayer under Internal Revenue Code Section 7874.
Following the emergence from bankruptcy, Mallinckrodt plc continues to be an Irish tax attributesresident. The IRS may, however, assert that Mallinckrodt plc should be treated as a U.S. corporation for U.S. federal income tax purposes pursuant to Internal Revenue Code ("IRC") Section 7874. For U.S. federal income tax purposes, a corporation is generally considered to be tax resident in the jurisdiction of its organization or incorporation. Because Mallinckrodt plc is an Irish incorporated entity, it would generally be classified as a foreign corporation under these rules. IRC Section 7874 provides an exception to this general rule under which a foreign corporation may, in certain circumstances, be treated as a U.S. corporation for U.S. federal income tax purposes if the following requirements are met: (i) the foreign corporation completes the direct or indirect acquisition of substantially all of the assets held directly or indirectly by a U.S. corporation (including the indirect acquisition of assets of the U.S. corporation by acquiring the outstanding shares of the U.S. corporation), (ii) the former shareholders of the acquired U.S. corporation hold at least 80% (or 60% in certain circumstances) of the shares of the foreign acquiring corporation, and future tax deductions may(iii) the foreign corporation's "expanded affiliated group" does not have substantial business activities in the foreign corporation's country of organization or incorporation compared to the expanded affiliated group's worldwide activities. Although it is not free from doubt, we believe that after implementation of the Plan, Mallinckrodt plc should not be reducedtreated as acquiring directly or significantly limitedindirectly substantially all of the properties of a U.S. corporation and, as a result, Mallinckrodt plc is not expected to be treated as a U.S. corporation or otherwise subject to the adverse tax consequences of IRC Section 7874. The law and the Treasury Regulations promulgated under IRC Section 7874 are, however, unclear and there can be no assurance that the IRS will agree with this conclusion. If it is determined that IRC Section 7874 is applicable, Mallinckrodt plc would be treated as a U.S. corporation for U.S. federal income tax purposes which could result in additional adverse tax consequences. In addition, although Mallinckrodt plc would be treated as a U.S. corporation for U.S. federal income tax purposes, it would also be considered an Irish tax resident for Irish tax and other non-U.S. tax purposes.
The IRS may interpret IRC Section 382 limitation and cancellation of debt income attribution rules differently.
In general, IRC Section 382, provides an annual limitation with respect to the ability of a corporation to utilize its tax attributes, as well as certain built-in-losses ("BILs"), against future taxable income in the event of a change in ownership. Emergence from Chapter 11 filing.
Generally, anybankruptcy proceedings resulted in a change in ownership for purposes of IRC Section 382. Any discharge of our external or internal debt obligations as a result of the Chapter 11 filing for an amount less than the adjusted issue price may give rise to cancellation of indebtednessdebt income, which must either be included in our taxable income or result in a reduction to our tax attributes.
Certain tax attributes otherwise available and of value to the Company may be reduced, in most cases by the principal amount of the indebtedness forgiven. U.S. and non U.S. tax attributes subject to reduction include: (i) net operating lossesloss ("NOL(s)") and NOL carryforwards; (ii) credit carryforwards (iii) capital losses and capital loss carryforwards; and (iv) the tax basis of the Company'sour depreciable, amortizable and other assets. Loss of these tax attributes may have an adverse effect on the Company's prospective cash flow.
To the extent, if any, that U.S. NOL carryforwards, other losses and credits generated by the Company prior to emergence from bankruptcy are available as deductions after emergence, the ability of the Company to utilize such deductions may be limited by Section 382 of the Internal Revenue Code (the “IRC”). Section 382 provides rules limiting the utilization of a corporation's NOLs and other losses, deductions and credits following a more than 50% change in ownership of a corporation's equity (an “ownership change”). An ownership change may occur with respect to the Company in connection with bankruptcy, unless the IRC Section 382(l)(5) exception applies. This exception is not easily met as it requires a majority of the holders of the Company's stock after bankruptcy to meet certain specific and narrow conditions. Therefore, the Company's U.S. NOLs may be significantly limited by Section 382 of the IRC. The amount of the Company's post ownershipour post-ownership change annual U.S. taxable income that can be offset by the pre-ownership change U.S. NOLs and BILs generally cannot exceed an amount equal to the product of (a) the applicable federal long-term tax exempt rate in effect on the date of the ownership change and (b) the value of the Company'sour U.S. affiliate stock immediately prior to implementation of the Plan (the “Annual Limitation”("Annual Limitation"). However, ifThe Annual Limitation may also be increased or decreased during the valuefirst five years post-ownership change for certain realized built-in-gains or realized BILs, respectively. Our interpretation of the Company's U.S. affiliate stock is zero, ifimpact of the Company does not continue its historic business or use a significant portionIRC's limitations on the utilization of its assets in a new business for two yearstax attributes after the
ownership change, the Annual Limitation resulting from the ownership change is zero andcaused by the Companyemergence from bankruptcy may be significantly limited in its ability to use any of its pre-emergence U.S. NOLs. In addition, ifdiffer from the Company has a net unrealized built in loss at the time of an ownership change, future deductions for items such as amortization, depreciation, and settlement liabilities may also be significantly limited. LimitationsIRS's interpretation. Any additional limitations on our ability to prospectively use these tax attributes may have an adverse effect on the Company'sour prospective cash flow.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
Under IRC Sections 382 and 383, if a corporation undergoes an "ownership change", generally defined as a greater than 50 percent change, determined by value in its equity ownership by certain stockholders over a rolling three-year period, the corporation’s ability to use its pre-ownership change NOLs and other pre-ownership change tax attributes to offset its post-ownership change taxable income or tax liability may be limited. We may experience ownership changes in the future due to shifts in our stock ownership, some of which is outside of our control. Additionally, similar laws at the state level may apply.
A loss of a major tax dispute or a challenge to our operating structure or intercompany pricing policies could result in a higher tax rate on our worldwide earnings, which could result in a material adverse effect on our financial condition, results of operations and cash flows.
Income tax returns that we file are subject to review and examination. We recognize the benefit of income tax positions we believe are more likely than not to be sustained upon challenge by a tax authority. If any tax authority successfully challenges our operational structure, intercompany pricing or financing policies; if the terms of certain income tax treaties are interpreted in a manner that is adverse to our structure; or if we lose a material tax dispute in any country; our effective tax rate on our worldwide earnings could increase substantially and result in a material adverse effect on our financial condition.
Our status as a foreign corporation for U.S. federal tax purposes could be affected by a change in law.
We believe that, under current law, we are treated as a foreign corporation for U.S. federal tax purposes. However, changes in tax law, such as additional changes to the rules under IRC Section 7874 or the U.S. Treasury Regulations promulgated thereunder or other IRS guidance, could adversely affect our status as a foreign corporation for U.S. federal tax purposes, and any such changes could have prospective or retroactive application to us and our shareholders and affiliates. In addition, legislative proposals issued by the U.S. Department of the Treasury and Congress have aimed to expand the scope of U.S. corporate tax residence, and such proposals, if passed, could have an adverse effect on us. Although the proposals would generally apply to prospective transactions, no assurance can be given that such proposals will not be changed to apply retroactively.
Future changes to U.S. and foreign tax laws could adversely affect us.
The European Commission, U.S. Congress and Treasury Department, the Organization for Economic Co-operation and Development ("the OECD"), and other government agencies in jurisdictions where we and our affiliates do business have had an extended focus on issues related to the taxation of multinational corporations, particularly payments made between affiliates from a jurisdiction with high tax rates to a jurisdiction with lower tax rates. As a result, the tax laws in the U.K., Ireland, E.U., Switzerland, Japan, U.S. and other countries in which we and our affiliates do business could change on a prospective or retroactive basis, and any such changes could adversely affect us and our affiliates.
Recent examples include the OECD's recommendations on base erosion and profit shifting, the European Commission's Anti-Tax Avoidance Directives (ATAD I and ATAD II), the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (Multilateral Instrument), and the proposednew corporate alternative minimum tax created in the U.S. by the Inflation Reduction Act.
Additionally, on December 20, 2021, the OECD released the Global Anti-Base Erosion ("GloBE") Model Rules ("Pillar Two") providing a legislative framework for the Income Inclusion Rule and the Under-Taxed Payment Rule ("UTPR"). Pillar Two is designed to ensure that large multinational enterprise groups pay a minimum level of tax on the income arising in each of the Biden administration's Build Back Better Act, the OECD's model rules for Pillar Two and the creation ofjurisdictions where they operate, principally creating a 15% minimum global effective tax rate and changes in otherrate. On December 15, 2022, the E.U. jurisdictionmember states unanimously adopted a directive implementing the Pillar Two global minimum tax lawsrules. E.U. member states have until December 31, 2023 to implementtranspose the recommendationsdirective into national legislation with the rules to be applicable for fiscal years beginning on or after December 31, 2023, with the exception of the OECD.UTPR which is to be applicable for fiscal years beginning on or after December 31, 2024. On December 20, 2022, the OECD released three guidance documents related to Pillar Two. These initiatives include recommendationsdocuments included guidance on safe harbors and proposals that, if enacted in countries in which wepenalty relief and our affiliates do business,consultation papers on the GloBE Information Return and Tax Certainty for the GloBE rules. The latter two releases were open for public consultation until February 3, 2023.
These rules could adversely affect us and our affiliates.affiliates by increasing our effective tax rate and cash tax obligations, which could have a material adverse effect on our competitive position, business, financial condition, results of operations, and cash flows.
We may not be able to maintain a competitive worldwide effective corporate tax rate.
We cannot give any assurance as to what our effective tax rate will be in the future, because of, among other things, uncertainty regarding the tax policies of the jurisdictions where we operate. Our actual effective tax rate may vary from our expectation and that variance may be material. Additionally, the tax laws of Ireland and other jurisdictions could change in the future, and such changes could cause a material change in our effective tax rate.
A change in our tax residency could have a negative effect on our future profitability and taxes on dividends.
Under current Irish legislation, a company is regarded as resident in Ireland for tax purposes if it is centrally managed and controlled in Ireland, or, in certain circumstances, if it is incorporated in Ireland. Under current U.K. legislation, a company is regarded as resident in the U.K. for tax purposes if it is centrally managed and controlled in the U.K. Where a company is treated as tax resident under the domestic laws of both the U.K. and Ireland then the provisions of article 4(3) of the Double Taxation Convention between Ireland and the U.K. provide that such company shall be treated as resident only in the jurisdiction in which its place of effective management is situated. From May 21, 2015 until July 15, 2020, we managed the affairs of Mallinckrodt plc so that it was effectively managed and controlled in the U.K. and therefore treated as resident only in the U.K. for tax purposes, by operation
of the Double Taxation Convention. However, if subject to any review by applicable tax authorities, we cannot provide assurance that Mallinckrodt plc will be treated as a resident only in the U.K. for tax purposes during this period. As of July 15, 2020, the activities of the Company's principal executive offices were relocated from the U.K. to Ireland, which resulted in a change in the Company's tax residence to Ireland. It is possible that in the future, whether as a result of a change in law or a change in the practice or conduct of the affairs of any relevant tax authority, Mallinckrodt plc could become, or be regarded as having become resident in a jurisdiction other than Ireland. If Mallinckrodt plc were considered to be a tax resident of a jurisdiction other than Ireland, in addition to any Irish consequences, it could become liable for corporate tax in that jurisdiction and any dividends paid by it could be subject to dividend withholding tax in that jurisdiction.
Risks Related to Our Jurisdiction of Incorporation
Irish law differs from the laws in effect in the U.S. and may afford less protection to holders of our securities.
It may not be possible to enforce court judgments obtained in the U.S. against us in Ireland based on the civil liability provisions of the U.S. federal or state securities laws. In addition, there is some uncertainty as to whether the courts of Ireland would recognize or enforce judgments of U.S. courts obtained against us or our directors or officers based on the civil liabilities provisions of the U.S. federal or state securities laws or hear actions against us or those persons based on those laws. We have been advised the U.S. currently does not have a treaty with Ireland providing for the reciprocal recognition and enforcement of judgments in civil and commercial matters. Therefore, a final judgment for the payment of money rendered by any U.S. federal or state court based on civil liability, whether or not based solely on U.S. federal or state securities laws, would not automatically be enforceable in Ireland.
A judgment obtained against us will be enforced by the courts of Ireland if the following general requirements are met: (i) U.S. courts must have had jurisdiction in relation to the particular defendant according to Irish conflict of law rules (the submission to jurisdiction by the defendant would satisfy this rule) and (ii) the judgment must be final and conclusive and the decree must be final and unalterable in the court which pronounces it. A judgment can be final and conclusive even if it is subject to appeal or even if an appeal is pending. Where however the effect of lodging an appeal under the applicable law is to stay execution of the judgment, it is possible that in the meantime the judgment may not be actionable in Ireland. It remains to be determined whether final judgment given in default of appearance is final and conclusive. However, Irish courts may refuse to enforce a judgment of the U.S. courts which meets the above requirements for one of the following reasons: (i) if the judgment is not for a definite sum of money; (ii) if the judgment was obtained by fraud; (iii) the enforcement of the judgment in Ireland would be contrary to natural or constitutional justice; (iv) the judgment is contrary to Irish public policy or involves certain U.S. laws which will not be enforced in Ireland; or (v) jurisdiction cannot be obtained by the Irish courts over the judgment debtors in the enforcement proceedings by personal service in Ireland or outside Ireland under Order 11 of the Ireland Superior Courts Rules.
As an Irish company, we are governed by the Irish Companies Act 2014, which differs in some material respects from laws generally applicable to U.S. corporations and shareholders, including, among others, differences relating to interested director and officer transactions and shareholder lawsuits. Likewise, the duties of directors and officers of an Irish company generally are owed to the company only. Shareholders of Irish companies generally do not have a personal right of action against directors or officers of the company and may exercise such rights of action on behalf of the company only in limited circumstances. Accordingly, holders of our securities may have more difficulty protecting their interests than would holders of securities of a corporation incorporated in a jurisdiction of the U.S.
Irish law imposes restrictions on certain aspects of capital management.
Irish law allows our shareholders to pre-authorize shares to be issued by our Board of Directors without further shareholder approval for up to a maximum of five years. The Board of Directors does not currently have such pre-authorization as we did not seek to renew this authority at the 2021 Annual General Meeting. Additionally, subject to specified exceptions, including as opt-out approved by a shareholder vote, Irish law grants statutory pre-emptive rights to existing shareholders to subscribe for new issuances of shares for cash. We do not have any such opt-out in place as we did not seek to renew this opt-out at the 2021 Annual General Meeting. The Company currently proposesCompany's current Memorandum and Articles of Association, adopted on June 16, 2022, contains that a five-year pre-authorization of the Board of Directors to issue shares and opt-out of pre-emption rights be included in the Company's constitution to be adopted with effect from the emergence from Chapter 11 and the effectiveness of the adoption of the scheme of arrangement and the conclusion of the examinership proceedings in Ireland; however the terms of such scheme and revised constitution, including the pre-authorization of the Directors to issue shares and opt-out of pre-emption rights, will be subject to the discretion of the Examiner and, ultimately, approval of the High Court of Ireland. If such an authority is not included in the constitution, it is the Board of Directors' current intention that a pre-authorization of the Directors to issues shares and opt-out of pre-emption rights will be sought at the Annual General Meeting to be held in 2022, assuming the emergence by the Company from Chapter 11 and the examinership proceedings.rights. We cannot guarantee that renewal of the pre-authorization or opt-out from pre-emptive rights will always be sought or approved. We cannot provide assurance that these Irish legal restrictions will not interfere with our capital management.
Risks Related to Our Ordinary Shares
OurAlthough our ordinary shares are quotedrecently began to trade on the Pink Open Market,NYSE American stock exchange, an active trading market may not develop and thus may have a limited marketthe price and lack of liquidity.
The delistingtrading volume of our ordinary shares may fluctuate significantly.
Our ordinary shares were previously delisted from the New York Stock Exchange ("NYSE") has, and the subsequent cancellation of our ordinary shares and issuance of new ordinary shares in connection with our emergence from bankruptcy resulted in significantly lower trading volumes and reduced liquidity for investors seeking to buy or sell our ordinary shares. Our ordinary shares are currentlywere quoted on the Pink Open Market which may have an unfavorable impact(formerly known as the OTC Pink Marketplace) after our emergence from bankruptcy. On October 27, 2022, our ordinary shares began to trade on our share pricethe New York Stock Exchange American LLC ("NYSE American"), and liquidity. The Pink Open Market is a significantly more limited market than the NYSE. The quotation of our sharestrading on the Pink Open Market may result inceased concurrent with the NYSE American listing. To maintain listing on this market, we must meet certain listing requirements, including requirements for a less liquidminimum stockholders' equity, minimum market available for existingcapitalization or total assets and potentialrevenue, minimum public float, minimum market value of public float, minimum number of round lot shareholders, to tradeand continued business operations. If our ordinary shares are delisted for any reason, it could further depressreduce the trading pricevalue of our ordinary shares and could have a long-term adverse impact on our abilityliquidity.
We cannot predict the extent to raise capitalwhich investor interest in us will lead to the future. Theredevelopment of an active trading market or how liquid that market might become, and there can be no assurance that there will be an active trading market for our ordinary shares, either now or in the future, or that shareholders will be able to liquidate their investment or the price at which itfuture. If an active trading market does not develop, holders of our shares may be liquidated. Accordingly, we urge extreme caution with respect to existing and future investments in our equity and other securities.
The Plan contemplates the cancellationhave difficulty selling any of our ordinary shares without any value being deliveredthat may now be owned or may be purchased later. In addition, the number of investors willing to shareholders. Any trading inhold or acquire our ordinary shares duringmay be reduced, the pendency of our Chapter 11 Cases is highly speculative and poses substantial risks to purchaserstrading price of our ordinary shares.shares may be depressed, we may receive decreased news and analyst coverage and we may be limited in our ability to issue additional securities or obtain additional financing in the future on terms acceptable to us, or at all.
The Plan, which has been confirmed, but consummation of which remains subject toEven if an active trading market develops for our ordinary shares, the satisfaction of certain conditions, contemplates the cancellationmarket price of our ordinary shares. We have a significant amount of indebtednessshares may be highly volatile and other liabilities that are seniorcould be subject to our current ordinary shares in our capital structure, and the Plan contemplates value being distributed in respect of such indebtedness and liabilities and not our shares.wide fluctuations. In addition, our existing ordinary shares have substantially decreased in value leading up to and during the Chapter 11 Cases. Accordingly, any trading involume of our ordinary shares duringmay fluctuate and cause significant price variations to occur. Volatility in the pendency of our Chapter 11 Cases is highly speculative and poses substantial risks to purchasersmarket price or trading volume of our ordinary shares.shares may prevent investors from being able to sell shares at or above the price they paid to acquire their ordinary shares, or at all.
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| Item 1B. | Unresolved Staff Comments. |
None.
Our principal executive offices and Specialty Brands global external manufacturing operations are located in Dublin, Ireland. In addition, we have other locations in the U.S., most notably our corporate shared services facility in Hazelwood, Missouri, our Specialty Brands commercial headquarters in Hampton,Bridgewater, New Jersey and our Specialty Generics headquarters and technical development center in Webster Groves, Missouri. As of December 31, 2021,30, 2022 (Successor), we owned a total of ten facilities in the U.S., Ireland and Japan. Our owned facilities consist of approximately 2.1 million square feet, and our leased facilities consist of approximately 0.5 million square feet. We have 11 manufacturing sites: one in Ireland; two in Japan; and eight in the U.S. We believe all of these facilities are well-maintained and suitable for the operations conducted in them.
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| Item 3. | Legal Proceedings. |
We are subject to various legal proceedings and claims, including government investigations, environmental matters, product liability matters, patent infringement claims, antitrust matters, securities class action lawsuits, personal injury claims, employment disputes, contractual and other commercial disputes, and other legal proceedings, in the ordinary course of business. Although it is not feasible to predict the outcome of these matters, we believe, unless otherwise indicated, given the information currently available, that their ultimate resolution will not have a material adverse effect on our financial condition, results of operations and cash flows.
Notwithstanding the foregoing, any litigation pending against us and any claims that could be asserted against us that arose prior to October 12, 2020 (the "Petition Date") (subject to certain exceptions) are automatically stayed as a result of the commencement of the Chapter 11 Cases pursuant to the Bankruptcy Code, subject to certain statutory exceptions.
For further information, refer to Note 19 of the Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report, on Form 10-K, which is incorporated by reference into this Part I, Item 3.
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| Item 4. | Mine Safety Disclosures. |
Not applicable.
PART II
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| Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. |
Market Information
Prior to our filing for Chapter 11, our ordinary shares were traded on the NYSE under the ticker symbol "MNK." On October 13, 2020, the NYSE filed a Form 25 with the SEC to delist theour ordinary shares $0.20 par value, of the registrant from the NYSE. The delisting became effective October 26, 2020. The deregistration of the ordinary shares under Section 12(b) of the Exchange Act became effective on January 11, 2021, at which point the ordinary shares were deemed registered under Section 12(g) of the Exchange Act. The registrant'sOur ordinary shares began trading on the Pink Open Market (formerly known as the OTC Pink Marketplace) on October 13, 2020, under the symbol "MNKKQ." On October 24, 2022, we received approval to list our ordinary shares on the NYSE American. Our ordinary shares were listed on NYSE American and began trading on October 27, 2022, under the ticker symbol "MNK". At such time, trading of our ordinary shares on the OTC Pink Current Market ceased, concurrent with the NYSE American listing.
There were approximately 2,255 shareholderswas one shareholder of record of our ordinary shares as of March 11, 2022.February 24, 2023. However, there are substantially more shareholders who own their shares beneficially or in "street name," whose shares are held by banks, brokers and other financial institutions.
Dividends and Issuer Purchase of Equity Securities
Under Irish law, we can only pay dividends and repurchase shares out of distributable reserves. We did not declare or pay any dividends and we do not currently intend to pay dividends in the foreseeable future. We made no repurchases of our ordinary shares during fiscal 2022.
On the Effective Date, we issued 3,290,675 warrants with a strike price of $103.40 to opioid claimants that are exercisable at any time on or prior to the sixth anniversary of the Effective Date ("Opioid Warrants"); and subsequently, we repurchased all of our outstanding Opioid Warrants during the fourth quarter of 2022. For additional information, on repurchases of shares, refer to Note 162 of the Notes to the Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report.
Performance Graph
The following performance graph and related information shall not be deemed "soliciting material" or to be "filed" with the Annual ReportSEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
Pursuant to the Plan, on Form 10-K.the Effective Date, all of our ordinary shares issued and outstanding before the Effective Date were cancelled and we issued 13,770,932 ordinary shares to holders of our former unsecured notes. Therefore, the following graph does not reflect the total value of an investment in our ordinary shares prior to the Effective Date, as such shares were cancelled. The increase in value of the ordinary shares shown in the graph represents a hypothetical $100 investment in new ordinary shares issued in the bankruptcy on the Effective Date. The following graph compares the changes, for the period indicated, in the cumulative total value of $100 hypothetically invested on the Effective Date, which is the date the Plan became effective and the date on which we emerged from the Chapter 11 and Irish examinership proceedings, in each of (a) Mallinckrodt ordinary shares, (b) the Russell 1000 index and (c) the NYSE Pharmaceutical Index.
Comparison of Cumulative Total Return
Among Mallinckrodt plc, the Russell 1000 Index and NYSE Pharmaceutical Index
The following graph covers the period from June 17, 2022 (Successor) through December 30, 2022 (Successor):
The share price performance included in this graph is not necessarily indicative of future share price performance.
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| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the accompanying notes included within this Annual Report on Form 10-K.Report. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs and involve risks, uncertainties and assumptions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed in Item 1A. Risk Factors and "Forward-Looking Statements" included within this Annual Report on Form 10-K.Report.
Fiscal Year
We report ourThe Company reports its results based on a "52-53 week" year ending on the last Friday of December. The period June 17, 2022 through December 30, 2022 reflects the Successor period, while the period January 1, 2022 through, and including, June 16, 2022 reflects the Predecessor period. Fiscal 2021 (Predecessor) consisted of 53 weeks, while fiscal 2022 and fiscal 2020 and 2019 each(Predecessor) consisted of 52 weeks.
Overview
We are a global business consisting of multiple wholly owned subsidiaries 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, hepatology, nephrology, pulmonology, ophthalmology and oncology; immunotherapy and neonatal respiratory critical care therapies; analgesics; cultured skin substitutes and gastrointestinal products.
We operate our business 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 API(s).
For further information on our business and products, refer to Item 1. Business included within this Annual Report on Form 10-K.Report.
Significant Events
INOmax
On September 28, 2022, we submitted a 510(k) premarket notification to the FDA for an investigational inhaled nitric oxide delivery system for INOmax (nitric oxide) gas, for inhalation, which has been previously approved by the FDA for treating hypoxic respiratory failure in newborns. The safety and efficacy of the inhaled nitric oxide delivery system has not been evaluated by the FDA and is subject to the pending 510(k) premarket notification. The delivery system combines automation, integration and interaction into one device, and if the 510(k) premarket notification is cleared, would be the latest in a long line of dual channel delivery systems implemented with the objective of building on our dedication to meeting clinicians' evolving needs.
Terlivaz
On September 14, 2022, we announced that the FDA had approved Terlivaz for injection and during the fourth quarter of fiscal 2022, we released our first commercial shipment of the product. The FDA approval gave rise to a $17.5 million milestone payment. A corresponding intangible asset was recorded and began amortizing over the useful life of the related asset beginning with the first commercial shipment of the product, which occurred in October 2022.
StrataGraft
During the three months ended April 1, 2022 (Predecessor), we released our first commercial shipment of StrataGraft. Net sales of this product have been and are expected to continue to be uneven as a result of contracting with hospitals and the government procurement schedule associated with sales to the BARDA for placement in the Strategic National Stockpile.
On June 30, 2022, we completed the sale for $100.0 million of the PRV we were awarded under an FDA program intended to encourage the development of certain product applications for therapies used to treat or prevent material threat medical countermeasures. We received the PRV upon FDA approval of StrataGraft for the treatment of adults with thermal burns containing intact dermal elements for which surgical intervention is clinically indicated (deep partial-thickness burns). We received from the buyer $65.0 million and the buyer remitted $35.0 million to the General Unsecured Claims Trustee pursuant to the terms of (i) the Plan, and (ii) the General Unsecured Claims Trust Agreement entered into in connection with the Plan.
Emergence from Voluntary Filing Under Chapter 11 and Going Concern
Chapter 11 ProceedingsReorganization
On the Petition Date, we voluntarily initiated the Chapter 11 Cases under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. On March 2, 2022, the Bankruptcy Court to modify our capital structure, including restructuring portions of our debt, and resolve otherwise unmanageable potential legal
liabilities. We are continuing to operate our business as debtors-in-possession and supply customers and patients with products as normal.
We intend to useentered an order confirming the Chapter 11 process to provide a fair, orderly, efficient and legally binding mechanism to implement a RSA pursuant to which, among other things, the parties thereto have agreed to support:
•a financial restructuring that would, among other things, reduce our total debt, improving our financial position and better positioning us for long-term growth;
•the Amended Proposed Opioid-Related Litigation Settlement; and
•the Proposed Acthar Gel-Related Settlement.
Taken together, these actions are intended to enable us to move forward with our vision to become an innovation-driven biopharmaceutical company meeting the needs of underserved patients with severe and critical conditions.
Plan. Subsequent to the filing of the Chapter 11 Cases, Chapter 11 proceedings commenced by a limited subset of the Debtors have beendebtors were recognized and given effect in Canada, and separately Mallinckrodt plc has commenced an examinership process with the High Court of Ireland.Ireland made an order confirming the Scheme of Arrangement on April 27, 2022. The references toPlan and Scheme of Arrangement became effective on the Effective Date, and on such date we emerged from the Chapter 11 Cases included within this Annual Report on Form 10-K shall include, where applicable, such proceedingsand Irish examinership proceedings.
On the Effective Date, pursuant to the Plan and Scheme of Arrangement, among other things:
•We issued 13,170,932 ordinary shares to holders of the former unsecured notes;
•All opioid claims against us were deemed to have been settled, discharged, waived, released and extinguished in Canadafull in exchange for $1,725.0 million in deferred payments over the next eight years ("Opioid-Related Litigation Settlement");
•We issued 3,290,675 Opioid Warrants;
•We adopted a management incentive plan providing for the issuance to management, key employees and Ireland. On February 3, 2022,directors of the Bankruptcy CourtCompany of equity awards with respect to up to an aggregate of 1,829,068 shares;
•All claims of the DOJ and other governmental parties relating to Acthar Gel were deemed to have been settled, discharged, waived, released and extinguished in full in exchange for $260.0 million of deferred payments over the next seven years ("Acthar Gel-Related Settlement");
•All shares of our stock issued a written ruling confirmingand outstanding immediately prior to the Chapter 11 plan (whichEffective Date were canceled;
•Principal debt outstanding was subsequently revised February 8, 2022reduced by more than $1.3 billion; and
•General unsecured claims were satisfied in an aggregate settlement of $135.0 million in cash plus other potential consideration, including but not limited to make minor corrections). On March 2, 2022,35.0% of the Bankruptcy Court enteredproceeds of the Confirmation Order confirmingsale of the fourth amended joint planStrataGraft PRV and $20.0 million payable upon the achievement of reorganization (with technical modifications) proposed by the Debtors. While we have achieved these significant milestones, consummation(i) FDA approval of Terlivaz and (ii) cumulative net sales of $100.0 million of Terlivaz.
For further details of the Plan and emergence from the Chapter 11 Cases remains subject tosubsequent repurchase of the satisfaction of certain conditions. For further information on the Chapter 11 Cases,Opioid Warrants, refer to Note 2 of the Notes to the Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of the Annual Report.
New Financing
In connection with emergence from bankruptcy, we issued $650.0 million in aggregate principal amount of new first lien senior secured notes. The net proceeds of the issuance of such notes were applied to repay in part our former senior secured revolving credit facility. We also entered into a $200.0 million accounts receivable financing facility, which was undrawn as of December 30, 2022 (Successor).
Pursuant to the Plan and Scheme of Arrangement, as of the Effective Date, we reinstated $495.0 million in aggregate principal amount of our existing first lien senior secured notes and issued $1,762.6 million in aggregate principal amount of new first lien senior secured term loans to the holders of our existing term loans in satisfaction thereof, issued $322.9 million in aggregate principal amount of new second lien senior secured notes to the holders of our existing second lien senior secured notes in satisfaction thereof and issued $375.0 million in aggregate principal amount of new second lien senior secured notes to the holders of certain of our existing unsecured senior notes in partial satisfaction thereof.
Fresh-Start Accounting
We adopted fresh-start accounting as of the Effective Date. As a result of the application of fresh-start accounting, our financial statements for periods prior to the Effective Date are not comparable to those for periods subsequent to the Effective Date. References in this Annual Report to "Successor" refer to the results of operations of the Company after the Effective Date. References to "Predecessor" refer to the results of operations of the Company on Form 10-K.or prior to the Effective Date. Operating results for the Successor and Predecessor periods are not necessarily indicative of the results to be expected for a full fiscal year. References such as the "Company," "we," "our," and "us" refer to Mallinckrodt and its consolidated subsidiaries, whether Predecessor and/or Successor, as appropriate.
Our results of operations as reported in our Consolidated Financial Statements for the Successor and Predecessor periods are in accordance with generally accepted accounting principles in the U.S. ("GAAP"). The presentation of the combined financial information of the Predecessor and Successor for fiscal 2022 is not in accordance with GAAP. However, we believe that for purposes of discussion and analysis in this Annual Report the combined financial information is useful for management and investors to assess our ongoing financial and operational performance and trends.
For further information, refer to Note 3 of the Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report.
Reorganization items, net
ReorganizationDuring the period January 1, 2022 through June 16, 2022 (Predecessor), we incurred expenses of $630.9 million from reorganization items, net. These expenses were primarily driven by the loss on application of fresh-start accounting of $1,354.6 million and professional and lender fees, partially offset by a $943.7 million gain on settlement of liabilities subject to compromise ("LSTC") in accordance with the Plan. During the period from June 17, 2022 through December 30, 2022 (Successor), fiscal 2021 (Predecessor) and fiscal 2020 (Predecessor), we incurred expenses of $23.2 million, $428.2 million and $61.4 million from reorganization items, net, respectively. The Successor expenses represent amounts incurred after the PetitionEffective Date as a direct resultthat directly resulted from Chapter 11 and were entirely comprised of professional fees associated with the implementation of the Chapter 11 CasesPlan. The amounts incurred in fiscal 2021 (Predecessor) and are comprised offiscal 2020 (Predecessor) were primarily professional fees and adjustments to reflect the carrying value of liabilities subject to compromise ("LSTC")LSTC at their estimated allowed claim amounts, as such adjustments are approved by the Bankruptcy Court. During fiscal 2021 and 2020, reorganization items, net were $428.2 million and $61.4 million, respectively.
During fiscal 2020 we incurred $55.7 million and $93.4 million in opioid defense costs and separation costs, respectively, which were both included within SG&A expenses. As of the Petition Date, the majority of these costs are being classified on a go-forward basis as reorganization items, net, as they directly relate to the Chapter 11 proceedings.
Going Concern
The accompanying consolidated financial statements have been prepared assuming we will continue as a going concern. Although the Bankruptcy Court has entered the Confirmation Order confirming the plan of reorganization proposed by the Debtors, consummation of such plan of reorganization and the transactions contemplated thereby and emergence from the Chapter 11 proceedings remains subject to the satisfaction of various conditions, including completion of the Canadian and Irish proceedings. Accordingly, no assurance can be given that the plan of reorganization or the transactions contemplated thereby will be consummated. As a result, we have concluded that management's plans at this stage do not alleviate substantial doubt about our ability to continue as a going concern.amounts.
On June 15, 2021, we announced that the FDA had approved the StrataGraft BLA for the treatment of adults with deep partial-thickness burns and during the first quarter of fiscal 2022, we released our first commercial shipment of the product. Concurrent with the approval of StrataGraft, the FDA granted us a Priority Review Voucher ("PRV"). A PRV is a voucher that may be used to obtain an accelerated FDA review of one of our future products or sold to a third party to obtain accelerated review of one of its future products.
Terlipressin
During September 2020, the FDA issued a CRL regarding our NDA seeking approval for the investigational agent terlipressin to treat adults with 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, we had an End of Review Meeting on October 26, 2020 and a Type A Meeting on January 29, 2021 with the FDA where both parties engaged in constructive dialogue in an effort to clarify a viable path to approval. On August 18, 2021, we resubmitted our NDA for terlipressin to the FDA and on February 18, 2022 (the PDUFA date), the FDA issued a CRL. In the weeks leading up to the PDUFA date, it became necessary for us to identify a new packaging and labeling manufacturing facility, which meant that an inspection by the FDA could not be completed by the PDUFA date. A satisfactory inspection is required before the NDA can be approved. This is the only outstanding issue noted in the CRL, and it is important to note that there were no safety or efficacy issues cited. We are working with the new facility to have it ready for inspection by the FDA. We remain committed to this critically ill patient population, who currently have no approved treatment option in the U.S for HRS-1 and we believe that there is a path to approval in 2022. We 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 ("IPR&D") asset of $81.0 million included within intangible assets, net on the consolidated balance sheets as of December 31, 2021 and December 25, 2020.
Amitiza
During the three months ended December 31, 2021, due to lower anticipated cash flows expected from Amitiza, we identified a triggering event with respect to the Amitiza intangible asset within the Specialty Brands segment and assessed the recoverability of the definite-lived asset. We determined that the undiscounted cash flows related to the Amitiza intangible asset were less than its net book value, which required us to record an impairment charge of $90.4 million for the difference between the fair value of the Amitiza intangible asset and its net book value.
MNK-6105 and MNK-6106
During fiscal 2021, we decided that we would no longer pursue further development of this asset. As a result, we recognized a full impairment on our Specialty Brands IPR&D asset related to MNK-6105 and MNK-6106 of $64.5 million.
Business Factors Influencing the Results of Operations
COVID-19 Business Update
The COVID-19 pandemic has presented a substantial public healthWe cannot adequately benchmark certain operating results of fiscal 2022 against fiscal 2021 (Predecessor) as the comparison would include the twelve months ended December 30, 2022 combined Successor and economic challenge aroundPredecessor periods against the world. As we navigate the unprecedented challenges created by the COVID-19 pandemic, we remain committedfiscal 2021 Predecessor period, which would be considered to supporting our employees, customers, patients and the broader communitiesnot be in which we operate.
Since the onset of the COVID-19 pandemic, we have continued to manufacture, supply and deliver our products largely without interruption. At present, weaccordance with GAAP. We do not anticipate significant COVID-19-related manufacturingbelieve that reviewing the results of these Successor periods in isolation would be useful in identifying trends in or supply chain disruptions, and we continue to evaluatereaching conclusions regarding our end-to-end supply chain and assess opportunities to refineoverall operating performance. Management believes that our processes going forward.
We expect the coming months to continue to be challenging due to the impact of COVID-19. Our businesskey performance was significantly impacted by COVID-19 during fiscal 2021 and 2020. The ultimate business impact going forward will largely be determined by the ongoing return to work guidance issued by international, national, and local governments and health officials and organizations. We are monitoring the demand for our products, including the duration and degree to which we may see declines in customer orders or delays in starting new patients on a product,metrics such as Acthar Gel, due to the limited ability of ournet sales representatives to meet with physicians and patients to visit their doctors and pharmacists to receive prescriptions for certain of our products. In regards to Acthar Gel, we continue to see a reduction in new patients, which may impact results in fiscal 2022. Furthermore, while we are supporting the continuation of ongoing patients in our clinical trials, as much as possible, we expect that COVID-19 precautions may directly or indirectly impact the timeline for some of our clinical trials.
Given the rapid and evolving nature of the COVID-19 virus, the full extent to which the COVID-19 pandemic will directly or indirectly impact our business,segment results of operations for the Successor Period combined with the current Predecessor year-to-date period for fiscal 2022, provide more meaningful comparisons to prior Predecessor periods and are more useful in identifying current business trends. Accordingly, in addition to presenting our results of operations as reported in our consolidated financial condition will depend on future developments that are highly uncertainstatements in accordance with GAAP, in certain circumstances the discussion in "Results of Operations" and cannot be predicted. For additional information on"Segment Results" below utilizes the various risks posed by the COVID-19 pandemic, refer to Part I, Item 1A. Risk Factors included within this report.combined results for fiscal 2022.
Specialty Brands
Net sales of OfirmevINOmax for the period June 17, 2022 through December 30, 2022 (Successor) were $173.9 million. Net sales of INOmax for the period January 1, 2022 through June 16, 2022 (Predecessor) and fiscal 2021 (Predecessor) were $165.8 million and $448.5 million, respectively. Non-GAAP combined net sales for fiscal 2022 were $339.7 million. Net sales decreased $247.6$108.8 million, or 89.5%24.3%, to $28.9 million driven primarily by the entrance of genericcontinued competition during fiscal 2021.
Net sales of Acthar Gel for fiscal 2021 decreased $174.3 million, or 22.7%, to $593.6 million driven primarily by the marketplace
impact of the COVID-19 pandemic and continued payer scrutiny on overall specialty pharmaceutical spending. We anticipate that competition will likely intensify in relation to our Acthar Gel product following ANI's expected commercial launch of their purified cortrophin gel product during the first quarter of 2022, which could have an adverse effect on our financial condition, results of operations and cash flows. ANI's purified cortrophin gel product was recently approved by the FDA for the treatment of certain chronic autoimmune disorders, including acute exacerbations of multiple sclerosis and rheumatoid arthritis, in addition to excess urinary protein due to nephrotic syndrome. We continue our efforts to extend the value of the Acthar Gel product through product enhancements including the ongoing development of the Acthar Gel self-injection device, which will create an easier and more patient-friendly application for single unit dosage indications, as well as through conducting and sponsoring additional studies of the drug.
Net sales for INOmax decreased $125.6 million or 21.9% to $448.5 million driven primarily by increased competition following the launch of a competitivefrom alternative nitric oxide product before the expiration of the last of the listed patents on May 3, 2036 (November 3, 2036 including pediatric exclusivity),products, which could continue to adversely affect our ability to successfully maximize the value of INOmax and have an adverse effect on our financial condition, results of operations and cash flows. We continue to develop and pursue patent protection of next generation nitric oxide delivery systems and additional uses of nitric oxide.oxide through our submission of a 510(k) premarket notification to the FDA for our next generation nitric oxide delivery system, as discussed above. We further intend to vigorously enforce our intellectual property rights relating to our nitric oxide products against any additional parties that may seek to market an alternative version of our INOmax product and/or next generation delivery systems.
Net sales of Acthar Gel for the period June 17, 2022 through December 30, 2022 (Successor) were $294.1 million. Net sales of Acthar Gel for the period January 1, 2022 through June 16, 2022 (Predecessor) and fiscal 2021 (Predecessor) were $221.9 million and $593.6 million, respectively. Non-GAAP combined net sales for fiscal 2022 were $516.0 million. Net sales decreased $77.6 million, or 13.1%, driven primarily by continued scrutiny on overall specialty pharmaceutical spending and the entrance of new competition in fiscal 2022. Competition intensified with the commercial launch of a purified cortrophin gel product in 2022 and this competitive pressure is expected to continue to negatively impact sales of Acthar Gel in 2023. The ongoing competition is expected to continue to have an adverse effect on our financial condition, results of operations and cash flows. We continue to differentiate Acthar Gel through pre-clinical studies and through product enhancements, including the development of the Acthar Gel self-injection device, which was has been completed, but we do not anticipate a launch in 2023. We continue to work toward the resolution of a regulatory matter involving one of our partners and not specific to our device. If approved, this product is expected to create an easier and more patient-friendly application for single unit dosage indications.
Net sales of Amitiza for the period June 17, 2022 through December 30, 2022 (Successor) were $77.1 million. Net sales of Amitiza for the period January 1, 2022 through June 16, 2022 (Predecessor) and fiscal 2021 (Predecessor) were $81.5 million and $196.9 million, respectively. Non-GAAP combined net sales for fiscal 2022 were $158.6 million. Net sales decreased $38.3 million, or 19.5%, driven primarily by a decline in royalties associated with loss of exclusivity in the U.S. Additional generic competitors have entered the market in 2023, resulting in the reduction of the Par U.S. royalties to zero going forward.
Net sales of Therakos for the period June 17, 2022 through December 30, 2022 (Successor) were $130.5 million. Net sales of Therakos for the period January 1, 2022 through June 16, 2022 (Predecessor) and fiscal 2021 (Predecessor) were $109.6 million and $266.5 million, respectively. Non-GAAP combined net sales for fiscal 2022 were $240.1 million. Net sales decreased $26.4 million, or 9.9%, driven primarily by the lagging effect of the COVID-19 pandemic that contributed to a reduction in use of the platform for treatment of graft-versus-host disease ("GvHD"), which is a non-promoted use in the U.S. market, and to a lesser extent the impact of competitive oral therapies for GvHD.
Specialty Generics
Net sales fromof the Specialty Generics segment for the period June 17, 2022 through December 30, 2022 (Successor) were $357.3 million. Net sales of the Specialty Generics segment for the period January 1, 2022 through June 16, 2022 (Predecessor) and fiscal 2021 (Predecessor) were $287.5 million and $661.8 million, respectively. Non-GAAP combined net sales for fiscal 2021 compared to $689.82022 were $644.8 million. Net sales decreased $17.0 million, for fiscal 2020. This decrease in net sales wasor 2.6%, driven primarily by increased competitiona decrease in API net sales of $15.4 million and a changedecrease in product mix due to market shifts as a resultgenerics net sales of COVID-19.$1.6 million.
Results of Operations
This reportAnnual Report contains certain financial measures, including net sales, gross profit, gross profit margin, SG&A expenses as a percentage of net sales and R&D expenses as a percentage of net sales, which exclude the one-time charge related to the Medicaid lawsuit that is included as a component of net sales for fiscal 2020. For further information on the Medicaid lawsuit, refer to Note 19 of the Notes to the Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.2020 (Predecessor).
We have provided these measures because they are used by management to evaluate our operating performance. In addition, we believe that they will be used by certain investors to measure Mallinckrodt's operating results. Management believes that presenting these measures provides useful information about our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. These measures should be considered supplemental to and not a substitute for financial information prepared in accordance with accounting principles generally accepted in the U.S. ("GAAP").GAAP.
Because these measures exclude the effect of items that will increase or decrease our reported results of operations, management strongly encourages investors to review our consolidated financial statements and this reportAnnual Report in its entirety. A reconciliation of certain of these financial measures to the most directly comparable GAAP financial measures is included herein.
Period from June 17, 2022 through December 30, 2022 (Successor) and Period from January 1, 2022 through June 16, 2022 (Predecessor) Compared with Fiscal Year Ended December 31, 2021 Compared with Fiscal Year Ended December 25, 2020(Predecessor)
Net Sales
Net sales by geographic area are as follows (dollars in millions):
| | | Fiscal Year | | | Successor | | | Predecessor | | Non-GAAP | | Predecessor | | Non-GAAP |
| | 2021 | | 2020 | | Percentage
Change | | Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Combined Fiscal Year Ended December 30, 2022 | | Fiscal Year Ended December 31, 2021 | | Percentage
Change |
| U.S. | U.S. | $ | 1,991.8 | | $ | 2,465.5 | | (19.2) | % | U.S. | $ | 928.3 | | | $ | 784.2 | | $ | 1,712.5 | | $ | 1,991.8 | | (14.0) | % |
| Europe, Middle East and Africa | Europe, Middle East and Africa | 181.8 | | 227.5 | | (20.1) | | Europe, Middle East and Africa | 100.4 | | | 73.6 | | 174.0 | | 181.8 | | (4.3) | |
| Other | Other | 35.2 | | 56.4 | | (37.6) | | Other | 11.0 | | | 16.8 | | 27.8 | | 35.2 | | (21.0) | |
| Geographic area net sales | 2,208.8 | | 2,749.4 | | (19.7) | | |
| Medicaid lawsuit (Note 19) | — | | (536.0) | | * | |
| | Net sales | Net sales | $ | 2,208.8 | | $ | 2,213.4 | | (0.2)% | Net sales | $ | 1,039.7 | | | $ | 874.6 | | $ | 1,914.3 | | $ | 2,208.8 | | (13.3)% |
*Not meaningful
Net sales infor the period June 17, 2022 through December 30, 2022 (Successor) were $1,039.7 million. Net sales for the period January 1, 2022 through June 16, 2022 (Predecessor) and fiscal 2021 (Predecessor) were $874.6 million and $2,208.8 million, which was relatively flat when compared with $2,213.4 million in fiscal 2020.
respectively. Net sales (excludingdecreased $294.5 million, or 13.3%, for the one-time charge relatednon-GAAP combined fiscal 2022, compared to the Medicaid lawsuit) in fiscal 2021 decreased $540.6 million, or 19.7%, to $2,208.8 million, compared with $2,749.4 million in fiscal 2020.(Predecessor). This decrease was primarily driven by a decrease in our Specialty Brands segment including a significant decrease in net sales of Ofirmev,INOmax, Acthar Gel, Amitiza, and INOmax,Therakos, as previously discussed. For further information on changes in our net sales, refer to "Business Segment Results" within this Item 2.7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Operating Loss
Gross profit. Gross profit for the period June 17, 2022 through December 30, 2022 (Successor) was $48.7 million. Gross profit for the period January 1, 2022 through June 16, 2022 (Predecessor) and fiscal 2021 (Predecessor) was $292.6 million and $891.7 million, respectively. Gross profit margin was 4.7% for the period June 17, 2022 through December 30, 2022 (Successor), 33.5% for the period January 1, 2022 through June 16, 2022 (Predecessor) and 40.4% for fiscal 2021 (Predecessor). The decrease during the period June 17, 2022 through December 30, 2022 (Successor) was primarily driven by a decrease in net sales and a change in product mix, coupled with $268.7 million of inventory step-up amortization expense and $30.0 million in fresh-start inventory-related expenses. The decrease during the period January 1, 2022 through June 16, 2022 (Predecessor) was primarily driven by a $13.6 million increase in amortization expense for the Amitiza intangible asset resulting from a change in amortization method as discussed further in Note 13 of the Notes to the Consolidated Financial Statements.
Selling, general and administrative expenses. SG&A expenses for the period June 17, 2022 through December 30, 2022 (Successor) were $290.1 million. SG&A expenses for the period January 1, 2022 through June 16, 2022 (Predecessor) and fiscal 2021 (Predecessor) were $275.3 million and $581.8 million, respectively. As a percentage of net sales, SG&A expenses were 27.9% for the period June 17, 2022 through December 30, 2022 (Successor), 31.5% for the period January 1, 2022 through June 16, 2022 (Predecessor) and 26.3% for fiscal 2021 (Predecessor). The decrease in SG&A expense for the period June 17, 2022 through December 30, 2022 (Successor) and the period January 1, 2022 through June 16, 2022 (Predecessor) as compared to fiscal 2021 (Predecessor) was primarily driven by continued cost containment initiatives coupled with an $11.1 million increase to certain of our environmental liabilities during the period January 1, 2022 through June 16, 2022 (Predecessor), compared to the $35.0 million increase to our environmental liabilities during fiscal 2021 (Predecessor). The decrease was partially offset by $21.2 million and $9.0
million of separation costs incurred during the period June 17, 2022 through December 30, 2022 (Successor) and the period January 1, 2022 through June 16, 2022 (Predecessor), respectively, related to the severance for the former CEO and certain former executives of the Predecessor, expense associated with the Predecessor directors' and officers' insurance policies and professional fees and costs incurred as we explore potential sales of non-core assets to enable further deleveraging post-emergence, respectively, compared to $1.2 million during fiscal 2021 (Predecessor). Also included in the offset was $6.4 million of bad debt expense attributable to a customer bankruptcy during the period June 17, 2022 through December 30, 2022 (Successor).
Research and development expenses. R&D expenses for the period June 17, 2022 through December 30, 2022 (Successor) were $64.2 million. R&D expenses for the period January 1, 2022 through June 16, 2022 (Predecessor) and fiscal 2021 (Predecessor) were $65.5 million and $205.2 million, respectively. As a percentage of net sales, R&D expenses were 6.2% for the period June 17, 2022 through December 30, 2022 (Successor), 7.5% for the period January 1, 2022 through June 16, 2022 (Predecessor) and 9.3% for fiscal 2021 (Predecessor). These decreases were driven by cost containment initiatives coupled with the completion of certain development programs. We continue to focus current R&D activities on performing clinical studies and publishing clinical and non-clinical experiences and evidence that support health economic activities and patient outcomes.
Restructuring and related charges, net. During the period June 17, 2022 through December 30, 2022 (Successor), the period January 1, 2022 through June 16, 2022 (Predecessor) and fiscal 2021 (Predecessor), we incurred $12.1 million, $9.6 million and $29.0 million of restructuring charges and related charges, net, respectively. Included in these charges was $0.8 million and $0.2 million of accelerated depreciation in cost of sales and SG&A, respectively, related to restructuring charges incurred during the period June 17, 2022 through December 30, 2022 (Successor), and $2.1 million of accelerated depreciation in SG&A related to restructuring charges incurred during fiscal 2021. The remaining charges primarily related to employee severance and benefits.
Non-restructuring impairment charges. Non-restructuring impairment charges were $154.9 million for fiscal 2021 (Predecessor) resulting from a partial impairment of $90.4 million related to the Amitiza intangible asset and a full impairment of $64.5 million related to the MNK-6105 and MNK-6106 in-process research & development ("IPR&D") asset.
Non-Operating Items
Interest expense and interest income. During the period June 17, 2022 through December 30, 2022 (Successor), the period January 1, 2022 through June 16, 2022 (Predecessor) and fiscal 2021 (Predecessor), net interest expense was $320.4 million, $108.0 million and $220.7 million, respectively. During the period June 17, 2022 through December 30, 2022 (Successor), interest expense included $87.5 million and $51.7 million of accretion expense associated with our settlement obligations and debt, respectively. The period June 17, 2022 through December 30, 2022 (Successor) and the period January 1, 2022 through June 16, 2022 (Predecessor) reflected increased interest rates on our variable interest rate debt as compared to fiscal 2021 (Predecessor). Interest expense during the period January 1, 2022 through June 16, 2022 (Predecessor) and fiscal 2021 (Predecessor) included $28.8 million and $63.1 million, respectively, in expense related to cash adequate protection payments on certain of our predecessor senior secured debt instruments. Fiscal 2021 (Predecessor) also included the recognition of a $15.8 million benefit to interest expense due to a lapse of certain statute of limitations.
Other income (expense), net. During the period from June 17, 2022 through December 30, 2022 (Successor), the period from January 1, 2022 through June 16, 2022 (Predecessor) and fiscal 2021 (Predecessor), we recorded other income of $10.0 million, other expense of $14.6 million and other income of $22.0 million, respectively. We recognized a $9.2 million unrealized gain, a $22.2 million unrealized loss, and a $4.7 million unrealized gain on our equity investments for the period from June 17, 2022 through December 30, 2022 (Successor), the period from January 1, 2022 through June 16, 2022 (Predecessor) and fiscal 2021 (Predecessor), respectively. The period from January 1, 2022 through June 16, 2022 (Predecessor) also included $5.8 million of miscellaneous credits. Additionally, there were one-time milestone receivables of $9.0 million as well as a one-time Japanese consumption tax credit of $6.8 million in fiscal 2021 (Predecessor).
Reorganization items, net. During the period June 17, 2022 through December 30, 2022 (Successor), we recorded a loss of $23.2 million in reorganization items, net entirely driven by professional fees related to the implementation of the Plan. During the period January 1, 2022 through June 16, 2022 (Predecessor), we recorded a loss of $630.9 million in reorganization items, net driven primarily by the loss on fresh-start adjustments of $1,678.8 million and professional fees and lender fees of $205.4 million, partially offset by a gain on adjustments to LSTC of $1,253.3 million. During fiscal 2021 (Predecessor), we recorded a loss of $428.2 million in reorganization items, net, driven primarily by professional fees of $405.6 million and $23.1 million of deferred financing fee write-offs related to the predecessor term loans.
(Benefit) expense from income taxes. We recognized an income tax benefit of $52.0 million on a loss from continuing operations before income taxes of $650.3 million for the period from June 17, 2022 through December 30, 2022 (Successor). This resulted in an effective tax rate of 8.0%. The income tax benefit was comprised of $27.1 million of current tax benefit and $24.9 million of deferred tax benefit.
Our effective tax rate for the period from June 17, 2022 through December 30, 2022 (Successor) was impacted by $52.1 million tax benefit associated with $268.7 million of inventory step-up amortization expense, $44.0 million tax benefit associated with $318.7 million of intangible asset amortization expense, $19.1 million of tax benefit associated with $87.5 million of accretion expense
related to our settlement obligations, and $2.4 million of tax benefit associated with $51.7 million of accretion expense related to our debt offset by $4.7 million withholding tax expense associated with a Swiss distribution. The remaining $60.9 million of tax expense is predominately associated with pretax earnings in various jurisdictions and valuation allowances.
We recognized an income tax benefit of $497.3 million on a loss from continuing operations before income taxes of $811.3 million for the period from January 1, 2022 through June 16, 2022 (Predecessor). This resulted in an effective tax rate of 61.3%. The income tax benefit was comprised of $23.9 million of current tax benefit and $473.4 million of deferred tax benefit.
Our effective tax rate for the period from January 1, 2022 through June 16, 2022 (Predecessor) was impacted by $600.8 million of tax benefit associated with valuation allowance and $31.6 million of tax benefit associated with emergence further detailed in Note 8 of the Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report. Additional impacts include $80.9 million of tax benefit associated with the $1,678.8 million loss on fresh-start adjustments, $29.1 million of tax benefit associated with $205.4 million of professional and lender fees, and $14.7 million of tax benefit predominately associated with pretax earnings in various jurisdictions offset with $259.8 million of tax expense associated with $1,253.0 million of gain on adjustments to LSTC.
During fiscal 2021 (Predecessor), we recognized an income tax benefit of $106.3 million on a loss from continuing operations before income taxes of $829.8 million. The fiscal 2021 (Predecessor) income tax benefit was comprised of $46.4 million of current tax benefit and $59.9 million of deferred tax benefit. The current tax benefit was primarily the result of an increase to prepaid taxes and a decrease to uncertain tax positions. The deferred tax benefit was predominately related to intangible asset amortization, partially offset by utilization of loss carryforwards in non-valuation allowance jurisdictions.
Our effective tax rate was 12.8% for fiscal 2021 (Predecessor). Our effective tax rate for fiscal 2021 (Predecessor) was most significantly impacted by the tax benefit of $286.3 million predominately related to changes in the jurisdictional mix of operating loss resulting from the fiscal 2020 (Predecessor) reorganization of the Company's intercompany financing and associated asset and legal entity ownership and a $9.7 million tax benefit associated with accrued income tax liabilities and uncertain tax positions, partially offset with $189.7 million of tax expense associated with valuation allowances recorded against our net deferred tax assets in applicable tax jurisdictions. Additional impacts to the fiscal 2021 (Predecessor) effective tax rate include a tax benefit of $49.9 million associated with $428.2 million of reorganization items, net,$34.8 million of tax benefit associated with an impairment charge of $154.9 million, and $21.1 million of tax benefit associated with the $125.0 million opioid-related litigation settlement charge. These additional impacts are significantly offset with the above referenced valuation allowance, thus resulting in a tax benefit of $15.0 million included within our jurisdictional mix of operating loss.
Income from discontinued operations, net of income taxes. We recorded income from discontinued operations of $0.2 million, $0.9 million and $6.1 million for the period June 17, 2022 through December 30, 2022 (Successor), the period from January 1, 2022 through June 16, 2022 (Predecessor) and fiscal 2021 (Predecessor), respectively. The income during fiscal 2021 (Predecessor) primarily related to the recognition of a tax benefit related to the releases of tax and interest on unrecognized tax benefits due to lapses of certain statute of limitations related to the Nuclear Imaging business that we divested in 2017. The remaining activity in both periods related to various post-sale adjustments associated with our previous divestitures.
Fiscal Year Ended December 31, 2021 (Predecessor) Compared with Fiscal Year Ended December 25, 2020 (Predecessor)
Net Sales
Net sales by geographic area are as follows (dollars in millions):
| | | | | | | | | | | | | | | | | |
| Fiscal Year | | |
| 2021 | | 2020 | | Percentage
Change |
| U.S. | $ | 1,991.8 | | $ | 2,465.5 | | (19.2) | % |
| Europe, Middle East and Africa | 181.8 | | 227.5 | | (20.1) | |
| Other | 35.2 | | 56.4 | | (37.6) | |
| Geographic area net sales | 2,208.8 | | 2,749.4 | | (19.7) | |
| Medicaid lawsuit | — | | (536.0) | | * |
| Net sales | $ | 2,208.8 | | $ | 2,213.4 | | (0.2)% |
*Not meaningful
Net sales in fiscal 2021 (Predecessor) were $2,208.8 million, which was relatively flat when compared with $2,213.4 million in fiscal 2020 (Predecessor).
Net sales in fiscal 2021 (Predecessor) decreased $540.6 million, or 19.7%, to $2,208.8 million, compared with $2,749.4 million in fiscal 2020 (Predecessor) (excluding the one-time charge related to the Medicaid lawsuit). This decrease was primarily driven by a
decrease in our Specialty Brands segment including a significant decrease in net sales of Ofirmev, Acthar Gel and INOmax. For further information on changes in our net sales, refer to "Business Segment Results" within this Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Operating Loss
Gross profit. Gross profit for fiscal 2021 (Predecessor) increased $222.3 million, or 33.2%, to $891.7 million, compared with $669.4 million in fiscal 2020.2020 (Predecessor). This increase was primarily driven by the retrospective one-time charge of $536.0 million reflected as a component of net sales related to the Medicaid lawsuit in fiscal 2020.2020 (Predecessor).
Gross profit (excluding the one-time charge related to the Medicaid lawsuit) in fiscal 2021 (Predecessor) decreased $313.7 million, or 26.0%, to $891.7 million, compared with $1,205.4 million in fiscal 2020.2020 (Predecessor) (excluding the one-time charge related to the Medicaid lawsuit). Gross profit margin was 40.4% for fiscal 2021 (Predecessor), compared with 43.8% in fiscal 2020.2020 (Predecessor). The decrease in gross profit and gross profit margin was primarily attributable to the $540.6 million decrease in net sales, as discussed above, as well as a change in product mix.
Selling, general and administrative expenses. SG&A expenses for fiscal 2021 (Predecessor) were $581.8 million, compared with $884.1 million for fiscal 2020 (Predecessor), a decrease of $302.3 million, or 34.2%. As a percentage of net sales, SG&A expenses were 26.3% for fiscal 2021 (Predecessor), compared to 39.9%, or 32.2% % when excluding the one-time charge related to the Medicaid lawsuit, for fiscal 2020.2020 (Predecessor). These decreases were primarily driven by the bankruptcy-related professional fees being classified as reorganization items, net, subsequent to the Petition Date. Comparatively, during fiscal 2020 (Predecessor), we incurred $93.4 million and $55.7 million in separation costs and opioid defense costs, respectively, that were reflected in SG&A. These decreases were also driven by cost containment initiatives and lower employee compensation costs, coupled with a $7.4 million decrease in the fair value of our former contingent consideration liabilities during fiscal 2021 (Predecessor), compared to a $9.9 million increase during fiscal 2020.2020 (Predecessor). The decrease was partially offset by a $35.0 million increase to our environmental liabilities during fiscal 2021.2021 (Predecessor).
Research and development expenses. R&D expenses decreased $85.6 million, or 29.4%, to $205.2 million in fiscal 2021 (Predecessor), compared with $290.8 million in fiscal 2020.2020 (Predecessor). This decrease was driven by the completion of certain development programs coupled with the abandonment of the MNK-6105 and MNK-6106 asset in fiscal 2021.2021 (Predecessor). The Company continues to focus current R&D activities on performing clinical studies and publishing clinical and non-clinical experiences and evidence that support health economic activities and patient outcomes. As a percentage of our net sales, R&D expenses were 9.3% for fiscal 2021 (Predecessor) compared to 13.1%, or 10.6% when excluding the one-time charge related to the Medicaid lawsuit, for fiscal 2020 (Predecessor), respectively.
Restructuring and related charges, net. During fiscal 2021 (Predecessor), we recognized $29.0 million of restructuring and related charges, net, of which $2.1 million related to accelerated depreciation and was included in SG&A. The remaining $26.9 million primarily related to employee severance and benefits. The fiscal 2020 (Predecessor) charge of $49.8 million, which included $12.3 million related to accelerated depreciation, primarily related to the exiting of our Bedminster, New Jersey facility as we moved our Specialty Brands commercial headquarters from Bedminster to Hampton, New Jersey, as well as employee severance and benefits.
Non-restructuring impairment charges. Non-restructuring impairment charges were $154.9 million for fiscal 2021 (Predecessor) resulting from a partial impairment of $90.4 million related to the Amitiza intangible asset and a full impairment of $64.5 million related to the MNK-6105 and MNK-6106 IPR&D asset. Non-restructuring impairment charges were $63.5 million for fiscal 2020 (Predecessor) primarily related to the partial impairment related to the Ofirmev intangible asset.
Losses (gains) on divestiture. During fiscal 2021 (Predecessor) and 2020 (Predecessor), we incurred a loss on divestiture of $0.8 million and a gain of $16.6 million, respectively. Fiscal 2020 (Predecessor) included a gain of $16.5 million, related to the achievement of milestones affiliated with the sale of a portion of our Hemostasis business in fiscal 2018 to Baxter International, Inc. ("Baxter").
Opioid-related litigation settlement loss (gain). During fiscal 2021 (Predecessor), we recorded a charge of $125.0 million as a result of an additional payment expected to be made on the eighth anniversary of the effective date of the Amended Proposed Opioid-Related Litigation Settlement, in accordance with the agreement in principle reached on September 2, 2021. For further information, refer to Note 2 of the Notes to the Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of thethis Annual Report on Form 10-K.Report. For fiscal 2020 (Predecessor), we recorded a gain of $43.4 million due to the decrease in the fair value of the New Opioid Warrants,settlement warrants, which were determined to have no value given we cannotcould not reasonably estimate the equity value at emergence.
Medicaid lawsuit. During fiscal 2020 (Predecessor), we incurred a retrospective one-time charge of $105.1 million, which represents a pre-acquisition contingency related to the portion of the Acthar Gel Medicaid Retrospective Rebateliability that arose from sales of Acthar Gel prior to our acquisition of Questcor in August 2014.
Non-Operating Items
Interest expense and interest income. During fiscal 2021 (Predecessor) and fiscal 2020 (Predecessor), net interest expense was $220.7 million and $255.2 million, respectively. The $38.5 million decrease in interest expense was primarily attributable to a $72.5 million decrease resulting from the cessation of interest accruals as of the Petition Date on outstanding unsecured pre-petition debt classified as LSTC in connection with the Chapter 11 Cases, coupled with a lower average outstanding debt balance and a $7.6 million decrease in the amortization of discount and debt issuance costs. This decrease was partially offset by a $51.4 million increase in expense related to
expense related to adequate protection payments in fiscal 2021 (Predecessor) as compared to fiscal 2020.2020 (Predecessor). Additionally, fiscal 2021 (Predecessor) and 2020 (Predecessor) included the recognition of a $15.8 million and $19.2 million benefit to interest expense, respectively, due to lapses of certain statutes of limitations. Interest income decreased $4.0 million to $1.9 million during fiscal 2021 (Predecessor), compared to $5.9 million during fiscal 2020 (Predecessor), primarily driven by interest earned on our preferred equity certificates that were received as contingent consideration related to the sale of the Nuclear Imaging business during fiscal 2020 (Predecessor) and lower interest rates during fiscal 2021.2021 (Predecessor).
Other income, net. During fiscal 2021 (Predecessor) and 2020 (Predecessor), we recorded other income, net, of $22.0 million and $7.4 million, respectively. This increase was primarily driven by $9.0 million of one-time milestone receivables in fiscal 2021 (Predecessor), coupled with a $6.8 million one-time Japanese consumption tax credit. The remaining activity in both periods represented unrealized gains on our equity investment in Silence Therapeutics plc, non-service pension expense and other items, including gains and losses on intercompany financing, foreign currency transactions and related hedging instruments.
Reorganization items, net. During fiscal 2021 (Predecessor) and 2020 (Predecessor), we recorded $428.2 million and $61.4 million of reorganization items, net in conjunction with our Chapter 11 proceedings, respectively. The fiscal 2021 (Predecessor) charges included $405.6 million of advisor and legal fees directly related to the Chapter 11 Cases and $23.1 million of deferred financing fee write-offs related to the senior secured term loan due September 2024, (the "2017 Term Loan"), senior secured term loan due February 2025 (the "2018 Term Loan") and second lien senior notes in order to reflect the carrying value of the notes within LSTC on the consolidated balance sheet as of December 31, 2021, at their estimated allowed claim amounts. The fiscal 2020 (Predecessor) charges included $51.1 million of advisor and legal fees directly related to the Chapter 11 Cases and $10.2 million of deferred financing fee write-offs related to the unsecured notes.
(Benefit) expense from income taxes. During fiscal 2021 (Predecessor), we recognized an income tax benefit of $106.3 million on a loss from continuing operations before income taxes of $829.8 million. The fiscal 2021 (Predecessor) income tax benefit was comprised of $46.4 million of current tax benefit and $59.9 million of deferred tax benefit. The current tax benefit was primarily the result of an increase to prepaid taxes and a decrease to uncertain tax positions. The deferred tax benefit was predominately related to intangible asset amortization, partially offset by utilization of loss carryforwards in non-valuation allowance jurisdictions. During fiscal 2020 (Predecessor), we recognized an income tax expense of $8.9 million on a loss from continuing operations before income taxes of $960.8 million. The fiscal 2020 (Predecessor) income tax expense was comprised of $375.3 million of current tax benefit and $384.2 million of deferred tax expense. The current tax benefit was primarily the result of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act and unrecognized tax benefits, partially offset by the fiscal 2020 (Predecessor) reorganization of our intercompany financing and associated asset and legal entity ownership. The deferred tax expense was predominantlypredominately related to the valuation allowance recorded against our net deferred tax assets, and the fiscal 2020 (Predecessor) reorganization of our intercompany financing and associated asset and legal entity ownership.
Our effective tax rate was 12.8% and negative 0.9% for fiscal 2021 (Predecessor) and 2020 (Predecessor), respectively. Our effective tax rate for fiscal 2021 (Predecessor) was most significantly impacted by the tax benefit of $286.3 million predominately related to changes in the jurisdictional mix of operating loss resulting from the fiscal 2020 (Predecessor) reorganization of the Company's intercompany financing and associated asset and legal entity ownership and a $9.7 million tax benefit associated with accrued income tax liabilities and uncertain tax positions, partially offset with $189.7 million of tax expense associated with valuation allowances recorded against our net deferred tax assets in applicable tax jurisdictions. Additional impacts to the fiscal 2021 (Predecessor) effective tax rate include a tax benefit of $49.9 million associated with $428.2 million of reorganization items, net, $34.8 million of tax benefit associated with an impairment charge of $154.9 million, and $21.1 million of tax benefit associated with the $125.0 million opioid-related litigation settlement charge. These additional impacts are significantly offset with the above referenced valuation allowance, thus resulting in a tax benefit of $15.0 million included within our jurisdictional mix of operating loss. Our effective tax rate for fiscal 2020 (Predecessor) was most significantly impacted by $618.2 million of tax expense associated with valuation allowances and an $82.0 million tax expense associated with the reorganization of our intercompany financing and associated asset and legal entity ownership, partially offset by a $281.5 million tax benefit associated with the CARES Act and $11.9 million of tax benefit associated with accrued income tax liabilities and uncertain tax positions. Additional impacts to the fiscal 2020 (Predecessor) effective tax rate included a tax benefit of $11.8 million associated with $93.4 million of separation costs, $5.4 million of tax benefit associated with $61.4 million of reorganization items, net, $0.5 million of tax benefit associated with $25.3 million of share-based compensation, and no tax expense associated with a gain of $43.4 million due to the decrease in the fair value of the New Opioid Warrants. All of these additional impacts are offset with the above referenced valuation allowance, thus resulting in no net impact on tax expense or benefit.
Income from discontinued operations, net of income taxes. We recorded income of $6.1 million and $25.1 million on discontinued operations, net of income taxes, during fiscal 2021 (Predecessor) and 2020 (Predecessor), respectively. Fiscal 2021 (Predecessor) and 2020 (Predecessor) both included the recognition of a tax benefit related to a release of tax and interest on unrecognized tax benefits due to lapses of certain statutes of limitations related to the Nuclear Imaging business. The remaining income during fiscal 2020 (Predecessor) primarily related to the receipt of contingent consideration associated with the sale of the Nuclear Imaging business, partially offset by various post-sale adjustments associated with our previous divestitures.
Fiscal Year Ended December 25, 2020 Compared with Fiscal Year Ended December 27, 2019
Net Sales
Net sales by geographic area are as follows (dollars in millions):
| | | | | | | | | | | | | | | | | |
| Fiscal Year | | |
| 2020 | | 2019 | | Percentage
Change |
| U.S. | $ | 2,465.5 | | $ | 2,765.6 | | (10.9) | % |
| Europe, Middle East and Africa | 227.5 | | 281.8 | | (19.3) | |
| Other | 56.4 | | 115.1 | | (51.0) | |
| Geographic area net sales | 2,749.4 | | 3,162.5 | | (13.1) | |
| Medicaid lawsuit (Note 19) | (536.0) | | — | | * |
| Net sales | $ | 2,213.4 | | $ | 3,162.5 | | (30.0)% |
*Not meaningful
Net sales in fiscal 2020 decreased $949.1 million, or 30.0%, to $2,213.4 million, compared with $3,162.5 million in fiscal 2019. This decrease was primarily driven by the retrospective one-time charge of $536.0 million reflected as a component of net sales related to the Medicaid lawsuit.
Net sales (excluding the one-time charge related to the Medicaid lawsuit) in fiscal 2020 decreased $413.1 million, or 13.1%, to $2,749.4 million, compared with $3,162.5 million in fiscal 2019. This decrease was primarily driven by a decrease in our Specialty Brands segment including a significant decrease in net sales of Acthar Gel and Ofirmev, as previously discussed. In addition, Other Specialty Brands products included an additional $40.1 million of net sales in fiscal 2019 related to BioVectra, Inc. ("BioVectra") prior to the completion of the sale of this business in November 2019. For further information on changes in our net sales, refer to "Business Segment Results" within this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Operating Loss
Gross profit. Gross profit for fiscal 2020 decreased $752.0 million, or 52.9%, to $669.4 million, compared with $1,421.4 million in fiscal 2019. This decrease was primarily driven by the retrospective one-time charge of $536.0 million reflected as a component of net sales related to the Medicaid lawsuit.
Gross profit (excluding the one-time charge related to the Medicaid lawsuit) in fiscal 2020 decreased $216.0 million, or 15.2%, to $1,205.4 million, compared with $1,421.4 million in fiscal 2019. Gross profit margin was 43.8% for fiscal 2020, compared with 44.9% in fiscal 2019. The decrease in gross profit and gross profit margin was primarily attributable to the $413.1 million decrease in net sales, as discussed above, as well as the change in product mix driven by the decrease in Acthar Gel net sales. This decrease was partially offset by decreases in amortization in fiscal 2020 as compared to fiscal 2019. Fiscal 2019 had additional amortization related to the Ofirmev intangible asset resulting from an accelerated amortization method, and amortization of the inventory fair value adjustment related to Amitiza, which was fully amortized during the first quarter of 2019.
Selling, general and administrative expenses. SG&A expenses for fiscal 2020 were $884.1 million, compared with $831.0 million for fiscal 2019, an increase of $53.1 million, or 6.4%. As a percentage of net sales, SG&A expenses were 39.9% for fiscal 2020. As a percentage of net sales, (excluding the one-time charge related to the Medicaid lawsuit, as previously discussed above), SG&A expenses were 32.2% and 26.3% in fiscal 2020 and 2019, respectively. These increases were attributable to a $9.9 million increase in the fair value of our contingent consideration liabilities in fiscal 2020, compared to a $60.2 million decrease in fiscal 2019, a $29.4 million increase in separation costs, as well as an increase in employee compensation and benefits driven by certain changes made to the design of our long-term incentive compensation program in an effort to manage share usage and dilution and the approval of a key employee incentive program during fiscal 2020, both of which reflect the shorter-term nature of our target opportunities. These increases were partially offset by decreases in legal expenses driven by a $28.2 million charge during fiscal 2019 associated with the settlement of the MDL Track 1 Cases, as defined within Note 19 of the Notes to the Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K, decreased professional fees, and a decrease in travel expense due to temporary travel restrictions as a result of COVID-19.
Research and development expenses. R&D expenses decreased $58.6 million, or 16.8%, to $290.8 million in fiscal 2020, compared with $349.4 million in fiscal 2019. This decrease was driven by the completion of certain development programs as well as a $20.0 million upfront payment made to Silence during fiscal 2019. The Company continues to focus current R&D activities on performing clinical studies and publishing clinical and non-clinical experiences and evidence that support health economic activities and patient outcomes. As a percentage of our net sales, R&D expenses were 13.1% for fiscal 2020. As a percentage of net sales, (excluding the one-time charge related to the Medicaid lawsuit, as previously discussed above), R&D expenses were 10.6% and 11.0% in fiscal 2020 and 2019, respectively.
Restructuring and related charges, net. During fiscal 2020, we recognized $49.8 million of restructuring and related charges, net, of which $12.3 million related to accelerated depreciation and was included in SG&A. The accelerated depreciation and remaining $37.5 million primarily related to the exiting of our Bedminster, New Jersey facility as we moved our Specialty Brands commercial headquarters from Bedminster to Hampton, New Jersey, as well as employee severance and benefits. During fiscal 2019, we recognized a benefit of $1.7 million, of restructuring and related charges, net, primarily related to the settlement of the contract termination costs related to the production of Raplixa resulting in a $14.1 million reversal of the associated restructuring reserve that was previously established in fiscal 2018. This was partially offset by restructuring charges related to employee severance and benefits.
Non-restructuring impairment charges. Non-restructuring impairment charges were $63.5 million for fiscal 2020 resulting from the partial impairment related to the Ofirmev intangible asset, as previously discussed. Non-restructuring impairment charges were $388.0 million for fiscal 2019 primarily related to a $274.5 million full impairment related to the VTS-270 intangible asset and a $113.5 million full impairment related to the stannsoporfin intangible asset.
(Gains) losses on divestiture. During fiscal 2020 we recorded gains on divestiture of $16.6 million, related to the achievement of milestones affiliated with the sale of a portion of our Hemostasis business in fiscal 2018 to Baxter. During fiscal 2019, we completed the sale of BioVectra for a loss of $33.5 million.
Opioid-related litigation settlement (gain) loss. During fiscal 2020, we recorded a gain of $43.4 million due to the decrease in the fair value of the New Opioid Warrants, which were determined to have no value given we cannot reasonably estimate the equity value at emergence. During fiscal 2019, we recorded a charge of $1,643.4 million attributed to the anticipated structured cash payments and the Settlement Warrants that are to be issued upon effectiveness of the superseded Opioid-Related Litigation Settlement.
Medicaid lawsuit. During fiscal 2020, we incurred a retrospective one-time charge of $105.1 million, which 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 our acquisition of Questcor in August 2014.
Non-Operating Items
Interest expense and interest income. During fiscal 2020 and fiscal 2019, net interest expense was $255.2 million and $299.5 million, respectively. This $44.3 million decrease was attributable to a lower average outstanding debt balance during fiscal 2020, partially offset by $11.7 million of expense related to adequate protection payments. This yielded a decrease in interest expense of $39.2 million. Additionally, fiscal 2020 and fiscal 2019 included the recognition of a $19.2 million and $8.6 million benefit to interest expense, respectively, due to lapses of certain statutes of limitations. For further information, refer to Note 19 of the Notes to the Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K. Interest income decreased to $5.9 million during fiscal 2020, compared to $9.5 million during fiscal 2019, primarily driven by lower interest rates during fiscal 2020, partially offset by interest earned on our preferred equity certificates that were received as contingent consideration related to the sale of the Nuclear Imaging business.
Gains on debt extinguishment, net. During fiscal 2019, we recorded gains on debt extinguishment, net, of $466.6 million, primarily related to a private exchange of our senior unsecured notes resulting in a gain of $377.4 million, net of the write-off of associated deferred financing fees of $4.9 million. For further information, refer to Note 14 of the Notes to the Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K. Fiscal 2019 also included a gain of $98.6 million on debt repurchases that aggregated to a total principal amount of $492.1 million, partially offset by the write-off of associated deferred financing fees of $9.4 million.
Other income, net. During fiscal 2020 and 2019, we recorded other income, net, of $7.4 million and $63.6 million, respectively. This decrease was primarily driven by a $39.0 million decrease in royalty income, as well as a $16.4 million decrease in unrealized gain on investment related to our equity investment in Silence. The remaining income in both periods represented non-service pension expense and other items, including gains and losses on intercompany financing, foreign currency transactions and related hedging instruments.
Reorganization items, net. During fiscal 2020, we recorded $61.4 million of reorganization items, net in conjunction with our Chapter 11 proceedings. These charges included $51.1 million of advisor and legal fees directly related to the Chapter 11 Cases and $10.2 million of deferred financing fee write-offs related to the unsecured notes in order to reflect the carrying value of the unsecured notes within LSTC on the consolidated balance sheet as of December 25, 2020 at their estimated allowed claim amounts.
Expense (benefit) from income taxes. During fiscal 2020, we recognized an income tax expense of $8.9 million on a loss from continuing operations before income taxes of $960.8 million. The fiscal 2020 income tax expense was comprised of $375.3 million of current tax benefit and $384.2 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 our intercompany financing and associated asset and legal entity ownership. The deferred tax expense was predominantly related to the valuation allowance recorded against our net deferred tax assets, and the fiscal 2020 reorganization of our intercompany financing and associated asset and legal entity ownership. During fiscal 2019, we recognized an income tax benefit of $584.3 million on a loss from continuing operations before income taxes of $1,591.5 million. The fiscal 2019 income tax benefit was comprised of $21.8 million of current tax expense and $606.1 million of
deferred tax benefit, which was predominantly related to previously acquired intangibles, the opioid-related litigation settlement charge, the generation of tax loss and credit carryforwards net of valuation allowances, the non-restructuring impairment charge, as well as the reorganization of our intercompany financing and associated legal entity ownership, which eliminated the interest-bearing deferred tax obligation.
Our effective tax rate was negative 0.9% and 36.7% for fiscal 2020 and 2019, respectively. Our effective tax rate for fiscal 2020 was most significantly impacted by $618.2 million of tax expense associated with valuation allowances and an $82.0 million tax expense associated with the reorganization of our intercompany financing and associated asset and legal entity ownership, partially offset by a $281.5 million tax benefit associated with the CARES Act and $11.9 million of tax benefit associated with accrued income tax liabilities and uncertain tax positions. Additional impacts to the fiscal 2020 effective tax rate included a tax benefit of $11.8 million associated with $93.4 million of separation costs, $5.4 million of tax benefit associated with $61.4 million of reorganization items, net, $0.5 million of tax benefit associated with $25.3 million of share-based compensation, and no tax expense associated with a gain of $43.4 million due to the decrease in the fair value of the New Opioid Warrants. All of these additional impacts are offset with the above referenced valuation allowance, thus resulting in no net impact on tax expense or benefit. Our effective tax rate for fiscal 2019 was most significantly impacted by $212.8 million of tax benefit associated with the reorganization of our intercompany financing and associated legal entity ownership. Further impacts included a tax benefit of $211.9 million associated with the $1,643.4 million opioid-related litigation settlement charge, $71.9 million of tax benefit associated with $386.3 million of restructuring costs and non-restructuring impairment charges, $18.7 million of tax benefit associated with accrued income tax liabilities and uncertain tax positions, $13.5 million of tax benefit primarily associated with U.S. tax credits, $11.4 million of tax benefit associated with separation costs of $63.9 million, $10.2 million of tax expense associated with a gain on debt extinguishment of $466.6 million, $8.0 million of tax benefit associated with a legal settlement charge of $28.2 million, $7.6 million of tax expense associated with the $60.2 million of income from the decrease in the fair value of contingent consideration liabilities and zero tax impact associated with a $33.5 million loss associated with the sale of BioVectra. Remaining impacts were related to the impact of recent acquisitions.
Income from discontinued operations, net of income taxes. We recorded income of $25.1 million and $10.7 million on discontinued operations, net of income taxes, during fiscal 2020 and 2019, respectively. Fiscal 2020 included the recognition of a tax benefit related to a release of tax and interest on unrecognized tax benefits due to a lapse of certain statutes of limitations related to the Nuclear Imaging business. The remaining income during fiscal 2020 and fiscal 2019 primarily related to the receipt of contingent consideration associated with the sale of the Nuclear Imaging business, partially offset by various post-sale adjustments associated with our previous divestitures.
Business Segment Results
Management measures and evaluates our 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 include, but are not limited to, depreciation and amortization, share-based compensation, net restructuring charges, non-restructuring impairment charges, separation costs, 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. Although these amounts are excluded from segment net sales and segment operating income, as applicable, they are included in reported consolidated net sales and operating (loss) incomeloss and in the reconciliations presented below. Selected information by business segment is as follows:
Period from June 17, 2022 through December 30, 2022 (Successor) and Period from January 1, 2022 through June 16, 2022 (Predecessor) Compared with Fiscal Year Ended December 31, 2021 Compared with Fiscal Year Ended December 25, 2020(Predecessor)
Net Sales
Net sales by segment are shown in the following table (dollars in millions):
| | | Fiscal Year | | | Successor | | | Predecessor | | Non-GAAP | | Predecessor | | Non-GAAP |
| | 2021 | | 2020 | | Percentage Change | | Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Combined Fiscal Year Ended December 30, 2022 | | Fiscal Year Ended December 31, 2021 | | Percentage
Change |
| Specialty Brands | Specialty Brands | $ | 1,547.0 | | | $ | 2,059.6 | | | (24.9) | % | Specialty Brands | $ | 682.4 | | | | $ | 587.1 | | | $ | 1,269.5 | | | $ | 1,547.0 | | | (17.9) | % |
| Specialty Generics | Specialty Generics | 661.8 | | | 689.8 | | | (4.1) | | Specialty Generics | 357.3 | | | | 287.5 | | | 644.8 | | | 661.8 | | | (2.6) | |
| Net sales | Net sales | 2,208.8 | | | 2,749.4 | | | (19.7) | | Net sales | $ | 1,039.7 | | | | $ | 874.6 | | | $ | 1,914.3 | | | $ | 2,208.8 | | | (13.3) | % |
| Medicaid lawsuit (Note 19) | — | | | (536.0) | | | * | |
| Net sales | $ | 2,208.8 | | | $ | 2,213.4 | | | (0.2) | | |
*Not meaningful
Specialty Brands. Net sales for the period June 17, 2022 through December 30, 2022 (Successor) were $682.4 million. Net sales for the period January 1, 2022 through June 16, 2022 (Predecessor) and fiscal 2021 (Predecessor) were $587.1 million and $1,547.0 million, respectively. Net sales decreased $277.5 million, or 17.9%, for the non-GAAP combined fiscal 2022, compared to fiscal 2021 (Predecessor). The decrease in combined net sales was primarily driven by a decrease of $108.8 million, or 24.3% in INOmax, a decrease of $77.6 million, or 13.1%, in Acthar Gel, a decrease of $38.3 million, or 19.5%, in Amitiza, and a decrease of $26.4 million, or 9.9%, in Therakos.
Net sales for Specialty Brands by geography are as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | Non-GAAP | | Predecessor | | Non-GAAP |
| Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Combined Fiscal Year Ended December 30, 2022 | | Fiscal Year Ended December 31, 2021 | | Percentage
Change |
| U.S. | $ | 642.1 | | | $ | 547.1 | | $ | 1,189.2 | | $ | 1,450.5 | | (18.0) | % |
| Europe, Middle East and Africa | 33.9 | | | 29.2 | | 63.1 | | 75.3 | | (16.2) | |
| Other | 6.4 | | | 10.8 | | 17.2 | | 21.2 | | (18.9) | |
| Net sales | $ | 682.4 | | | $ | 587.1 | | $ | 1,269.5 | | $ | 1,547.0 | | (17.9) | % |
Net sales for Specialty Brands by key products are as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | Non-GAAP | | Predecessor | | Non-GAAP |
| Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Combined Fiscal Year Ended December 30, 2022 | | Fiscal Year Ended December 31, 2021 | | Percentage
Change |
| Acthar Gel | $ | 294.1 | | | $ | 221.9 | | $ | 516.0 | | $ | 593.6 | | (13.1) | % |
| INOmax | 173.9 | | | 165.8 | | 339.7 | | 448.5 | | (24.3) | |
| Ofirmev | (0.3) | | | 2.5 | | 2.2 | | 28.9 | | (92.4) | |
| Therakos | 130.5 | | | 109.6 | | 240.1 | | 266.5 | | (9.9) | |
| Amitiza | 77.1 | | | 81.5 | | 158.6 | | 196.9 | | (19.5) | |
| Other | 7.1 | | | 5.8 | | 12.9 | | 12.6 | | 2.4 | |
| Specialty Brands | $ | 682.4 | | | $ | 587.1 | | $ | 1,269.5 | | $ | 1,547.0 | | (17.9) | % |
Specialty Generics. Net sales for the period June 17, 2022 through December 30, 2022 (Successor) were $357.3 million. Net sales for the period January 1, 2022 through June 16, 2022 (Predecessor) and fiscal 2021 (Predecessor) were $287.5 million and $661.8 million, respectively. Net sales decreased $17.0 million, or 2.6%, for the non-GAAP combined fiscal 2022, compared to fiscal 2021 (Predecessor). The decrease in combined net sales was primarily driven by a decrease in API of $15.4 million, or 4.7%, and a decrease in generics of $1.6 million, or 0.5%.
Net sales for Specialty Generics by geography are as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | Non-GAAP | | Predecessor | | Non-GAAP |
| Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Combined Fiscal Year Ended December 30, 2022 | | Fiscal Year Ended December 31, 2021 | | Percentage
Change |
| U.S. | $ | 286.2 | | | $ | 237.1 | | $ | 523.3 | | $ | 541.3 | | (3.3) | % |
| Europe, Middle East and Africa | 66.5 | | | 44.4 | | 110.9 | | 106.5 | | 4.1 | |
| Other | 4.6 | | | 6.0 | | 10.6 | | 14.0 | | (24.3) | |
| Net sales | $ | 357.3 | | | $ | 287.5 | | $ | 644.8 | | $ | 661.8 | | (2.6) | % |
Net sales for Specialty Generics by key products are as follows (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | Non-GAAP | | Predecessor | | Non-GAAP |
| Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Combined Fiscal Year Ended December 30, 2022 | | Fiscal Year Ended December 31, 2021 | | Percentage
Change |
| Opioids | $ | 117.9 | | | $ | 88.8 | | $ | 206.7 | | $ | 213.2 | | (3.0) | % |
| ADHD | 28.4 | | | 17.5 | | 45.9 | | 37.4 | | 22.7 | |
| Addiction treatment | 35.0 | | | 30.0 | | 65.0 | | 68.3 | | (4.8) | |
| Other | 6.8 | | | 4.9 | | 11.7 | | 12.0 | | (2.5) | |
| Generics | 188.1 | | | 141.2 | | 329.3 | | 330.9 | | (0.5) | |
| Controlled substances | 47.0 | | | 37.6 | | 84.6 | | 93.4 | | (9.4) | |
| APAP | 111.4 | | | 96.5 | | 207.9 | | 215.9 | | (3.7) | |
| Other | 10.8 | | | 12.2 | | 23.0 | | 21.6 | | 6.5 | |
| API | 169.2 | | | 146.3 | | 315.5 | | 330.9 | | (4.7) | |
| Specialty Generics | $ | 357.3 | | | $ | 287.5 | | $ | 644.8 | | $ | 661.8 | | (2.6) | % |
Operating Loss
Operating income by segment and as a percentage of segment net sales for the period June 17, 2022 through December 30, 2022 (Successor), the period January 1, 2022 through June 16, 2022 (Predecessor) and fiscal 2021 (Predecessor) is shown in the following table (dollars in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | Non-GAAP | | Predecessor |
| Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Combined Fiscal Year Ended December 30, 2022 | | Fiscal Year Ended December 31, 2021 |
Specialty Brands (1) | $ | 113.8 | | 16.7 | % | | | $ | 267.2 | | 45.5 | % | | $ | 381.0 | | 30.0 | % | | $ | 812.8 | | 52.5 | % |
Specialty Generics (2) | (3.6) | | (1.0) | | | | 65.3 | | 22.7 | | | 61.7 | | 9.6 | | | 107.9 | | 16.3 | |
| Segment operating income | 110.2 | | 10.6 | % | | | 332.5 | | 38.0 | % | | 442.7 | | 23.1 | % | | 920.7 | | 41.7 | % |
| Unallocated amounts: | | | | | | | | | | | | |
Corporate and unallocated expenses (3) | (39.3) | | | | | (48.2) | | | (87.5) | | | | (129.6) | | |
| Depreciation and amortization | (347.5) | | | | | (321.8) | | | (669.3) | | | | (675.8) | | |
| Share-based compensation | (1.4) | | | | | (1.7) | | | (3.1) | | | | (10.2) | | |
| Restructuring charges, net | (11.1) | | | | | (9.6) | | | (20.7) | | | | (26.9) | | |
| Non-restructuring impairment charges | — | | | | | — | | | — | | | | (154.9) | | |
Separation costs (4) | (21.2) | | | | | (9.0) | | | (30.2) | | | | (1.2) | | |
| Opioid-related litigation settlement loss | — | | | | | — | | | — | | | | (125.0) | | |
| Bad debt expense - customer bankruptcy | (6.4) | | | | | — | | | (6.4) | | | | — | | |
| Total operating loss | $ | (316.7) | | | | | $ | (57.8) | | | $ | (374.5) | | | | $ | (202.9) | | |
(1)Includes $241.7 million of inventory fair-value step-up expense during the period from June 17, 2022 through December 30, 2022 (Successor).
(2)Includes $30.0 million of fresh-start inventory-related expense primarily driven by the Company's change in accounting estimate as disclosed in Note 1 of the Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report and $27.0 million of inventory fair-value step-up expense during the period from June 17, 2022 through December 30, 2022 (Successor).
(3)Includes administration expenses and certain compensation, legal, environmental and other costs not charged to our reportable segments.
(4)Represents costs included in SG&A, primarily related to expenses incurred related to severance for the former CEO and certain former executives of the Predecessor and the Predecessor directors' and officers' insurance policies, in addition to professional fees and costs incurred as we explore potential sales of non-core assets to enable further deleveraging post-emergence from bankruptcy.
Specialty Brands. Operating income for the period June 17, 2022 through December 30, 2022 (Successor) was $113.8 million. Operating income for the period January 1, 2022 through June 16, 2022 (Predecessor) and fiscal 2021 (Predecessor) was $267.2 million and $812.8 million, respectively. Operating income decreased $431.8 million, or 53.1%, for the non-GAAP combined fiscal 2022 when compared to fiscal 2021 (Predecessor). Operating margin decreased to 30.0% for the non-GAAP combined fiscal 2022 from 52.5% for fiscal 2021 (Predecessor). These decreases in operating income and margin were primarily driven by the $277.5 million, or 17.9%, decrease in combined net sales and a change in product mix over the same period, coupled with $241.7 million of inventory fair-value step-up expense during the period June 17, 2022 through December 30, 2022 (Successor), which resulted in a $489.2 million decrease in combined gross profit. Partially offsetting the decrease in operating income and serving to increase operating margin was a $56.6 million, or 35.5%, decrease in combined R&D expenses driven by continued cost containment initiatives.
Specialty Generics. Operating loss for the period June 17, 2022 through December 30, 2022 (Successor) was $3.6 million. Operating income for the period January 1, 2022 through June 16, 2022 (Predecessor) and fiscal 2021 (Predecessor) was $65.3 million and $107.9 million, respectively. Operating income decreased $46.2 million, or 42.8%, for the non-GAAP combined fiscal 2022 when compared to fiscal 2021 (Predecessor). Operating margin increased to 9.6% for the non-GAAP combined fiscal 2022, compared with 16.3% for fiscal 2021 (Predecessor). The decrease in combined operating income and operating margin was primarily attributable to $30.0 million of fresh-start inventory-related expense primarily driven by the Company's change in accounting estimate and $27.0 million of inventory fair-value step-up expense during the period from June 17, 2022 through December 30, 2022 (Successor), coupled with a $17.0 million decrease to combined net sales resulting in a decrease in combined gross profit of $57.2 million, or 26.1%. The decrease in combined operating income and operating margin was also partially offset by a $13.7 million, or 37.0%, decrease in combined R&D expense driven by continued cost containment initiatives.
Corporate and unallocated expenses. Corporate and unallocated expenses were $39.3 million, $48.2 million and $129.6 million for the period June 17, 2022 through December 30, 2022 (Successor), the period January 1, 2022 through June 16, 2022 (Predecessor) and fiscal 2021 (Predecessor), respectively. Corporate and unallocated expenses decreased by $42.1 million for the non-GAAP combined fiscal 2022 compared to fiscal 2021 (Predecessor). The combined decrease in corporate and unallocated expenses was predominately driven by continued cost containment initiatives, coupled with an $11.1 million increase to certain of our environmental liabilities during the period January 1, 2022 through June 16, 2022 (Predecessor) compared to the $34.3 million increase during fiscal 2021 (Predecessor). These decreases were partially offset by a $7.4 million gain related to the change in the fair value of our
contingent consideration liabilities during fiscal 2021 compared to a $0.5 million loss during the period June 17, 2022 through December 30, 2022 (Successor).
Fiscal Year Ended December 31, 2021 (Predecessor) Compared with Fiscal Year Ended December 25, 2020 (Predecessor)
Net Sales
Net sales by segment are shown in the following table (dollars in millions):
| | | | | | | | | | | | | | | | | |
| Predecessor | | |
| Fiscal Year Ended December 31, 2021 | | Fiscal Year Ended December 25, 2020 | | Percentage Change |
| Specialty Brands | $ | 1,547.0 | | | $ | 2,059.6 | | | (24.9) | % |
| Specialty Generics | 661.8 | | | 689.8 | | | (4.1) | |
| Net sales | 2,208.8 | | | 2,749.4 | | | (19.7) | |
| Medicaid lawsuit | — | | | (536.0) | | | * |
| Net sales | $ | 2,208.8 | | | $ | 2,213.4 | | | (0.2) | % |
*Not meaningful
Specialty Brands. Net sales for fiscal 2021 (Predecessor) decreased $512.6 million, or 24.9%, to $1,547.0 million, compared with $2,059.6 million for fiscal 2020.2020 (Predecessor). This decrease was primarily driven by a $247.6 million, or 89.5%, decrease in Ofirmev driven by the loss of exclusivity at the end of fiscal 2020 (Predecessor) and the entrance of generic competition during fiscal 2021.2021 (Predecessor). The decrease in net sales was also impacted by a $174.3 million, or 22.7%, decrease in Acthar Gel net sales driven primarily by the marketplace impact of the COVID-19 pandemic and continued payer scrutiny on overall specialty pharmaceutical spending and a $125.6 million, or 21.9%, decrease in INOmax due to increased competition. These decreases were partially offset by a $27.9 million, or 11.7%, increase in Therakos net sales driven by increased demand as the product begun to see a recovery from the impact of the COVID-19 pandemic during the first half of fiscal 2021 (Predecessor) and an $8.1 million, or 4.3%, increase in Amitiza, primarily as a result of the royalty from Par beginning in fiscal 2021.2021 (Predecessor).
Net sales for Specialty Brands by geography are as follows (dollars in millions):
| | | Fiscal Year | | | Predecessor | |
| | 2021 | | 2020 | | Percentage
Change | | Fiscal Year Ended December 31, 2021 | | Fiscal Year Ended December 25, 2020 | | Percentage
Change |
| U.S. | U.S. | $ | 1,450.5 | | $ | 1,901.0 | | (23.7) | % | U.S. | $ | 1,450.5 | | $ | 1,901.0 | | (23.7) | % |
| Europe, Middle East and Africa | Europe, Middle East and Africa | 75.3 | | 116.7 | | (35.5) | | Europe, Middle East and Africa | 75.3 | | 116.7 | | (35.5) | |
| Other | Other | 21.2 | | 41.9 | | (49.4) | | Other | 21.2 | | 41.9 | | (49.4) | |
| Net sales | Net sales | $ | 1,547.0 | | $ | 2,059.6 | | (24.9) | | Net sales | $ | 1,547.0 | | $ | 2,059.6 | | (24.9) | % |
Net sales for Specialty Brands by key products are as follows (dollars in millions):
| | | Fiscal Year | | | Predecessor | |
| | 2021 | | 2020 | | Percentage Change | | Fiscal Year Ended December 31, 2021 | | Fiscal Year Ended December 25, 2020 | | Percentage Change |
| Acthar Gel | Acthar Gel | $ | 593.6 | | $ | 767.9 | | (22.7) | % | Acthar Gel | $ | 593.6 | | $ | 767.9 | | (22.7) | % |
| INOmax | INOmax | 448.5 | | 574.1 | | (21.9) | | INOmax | 448.5 | | 574.1 | | (21.9) | |
| Ofirmev | Ofirmev | 28.9 | | 276.5 | | (89.5) | | Ofirmev | 28.9 | | 276.5 | | (89.5) | |
| Therakos | Therakos | 266.5 | | 238.6 | | 11.7 | | Therakos | 266.5 | | 238.6 | | 11.7 | |
| Amitiza | Amitiza | 196.9 | | 188.8 | | 4.3 | | Amitiza | 196.9 | | 188.8 | | 4.3 | |
| Other | Other | 12.6 | | 13.7 | | (8.0) | | Other | 12.6 | | 13.7 | | (8.0) | |
| Specialty Brands | Specialty Brands | $ | 1,547.0 | | $ | 2,059.6 | | (24.9) | | Specialty Brands | $ | 1,547.0 | | $ | 2,059.6 | | (24.9) | % |
Specialty Generics. Net sales for fiscal 2021 (Predecessor) decreased $28.0 million, or 4.1%, to $661.8 million, compared to $689.8 million for fiscal 2020.2020 (Predecessor). The decrease in net sales was primarily driven by a $17.2$27.5 million, or 5.9%, and $15.3 million, or 15.6%7.7%, decrease in other controlled substances and hydrocodone-related products, respectively,generics net sales, driven by an increased competitive environment. These decreases were partially offset by a $2.9 million, or 1.4%, and $1.5 million, or 7.3%, increase in acetaminophen and other products net sales, respectively.
Net sales for Specialty Generics by geography are as follows (dollars in millions):
| | | Fiscal Year | | | Predecessor | |
| | 2021 | | 2020 | | Percentage Change | | Fiscal Year Ended December 31, 2021 | | Fiscal Year Ended December 25, 2020 | | Percentage Change |
| U.S. | U.S. | $ | 541.3 | | $ | 564.5 | | (4.1) | % | U.S. | $ | 541.3 | | $ | 564.5 | | (4.1) | % |
| Europe, Middle East and Africa | Europe, Middle East and Africa | 106.5 | | 110.8 | | (3.9) | | Europe, Middle East and Africa | 106.5 | | 110.8 | | (3.9) | |
| Other | Other | 14.0 | | 14.5 | | (3.4) | | Other | 14.0 | | 14.5 | | (3.4) | |
| Net sales | Net sales | $ | 661.8 | | $ | 689.8 | | (4.1) | | Net sales | $ | 661.8 | | $ | 689.8 | | (4.1) | % |
Net sales for Specialty Generics by key products are as follows (dollars in millions):
| | | | | | | | | | | | | | | | | |
| Fiscal Year | | |
| 2021 | | 2020 | | Percentage Change |
| Hydrocodone (API) and hydrocodone-containing tablets | $ | 82.7 | | $ | 98.0 | | (15.6) | % |
| Oxycodone (API) and oxycodone-containing tablets | 68.5 | | 68.4 | | 0.1 | |
| Acetaminophen (API) | 215.9 | | 213.0 | | 1.4 | |
| Other controlled substances | 272.7 | | 289.9 | | (5.9) | |
| Other | 22.0 | | 20.5 | | 7.3 | |
| Specialty Generics | $ | 661.8 | | $ | 689.8 | | (4.1) | |
| | | | | | | | | | | | | | | | | |
| Predecessor | | |
| Fiscal Year Ended December 31, 2021 | | Fiscal Year Ended December 25, 2020 | | Percentage Change |
| Opioids | $ | 213.2 | | $ | 233.9 | | (8.8) | % |
| ADHD | 37.4 | | 48.3 | | (22.6) | |
| Addiction treatment | 68.3 | | 68.9 | | (0.9) | |
| Other | 12.0 | | 7.3 | | 64.4 | |
| Generics | 330.9 | | 358.4 | | (7.7) | |
| Controlled substances | 93.4 | | 98.3 | | (5.0) | |
| APAP | 215.9 | | 213.0 | | 1.4 | |
| Other | 21.6 | | 20.1 | | 7.5 | |
| API | 330.9 | | 331.4 | | (0.2) | |
| Specialty Generics | $ | 661.8 | | $ | 689.8 | | (4.1) | % |
Operating Loss
Operating income by segment and as a percentage of segment net sales for fiscal 2021 (Predecessor) and 2020 (Predecessor) is shown in the following table (dollars in millions):
| | | Fiscal Year | | Predecessor |
| | 2021 | | 2020 | | Fiscal Year Ended
December 31, 2021 | | Fiscal Year Ended
December 25, 2020 |
| Specialty Brands | Specialty Brands | $ | 812.8 | | 52.5 | % | | $ | 1,015.7 | | 49.3 | % | Specialty Brands | $ | 812.8 | | 52.5 | % | | $ | 1,015.7 | | 49.3 | % |
| Specialty Generics | Specialty Generics | 107.9 | | 16.3 | | | 206.4 | | 29.9 | | Specialty Generics | 107.9 | | 16.3 | | | 206.4 | | 29.9 | |
| Segment operating income | Segment operating income | 920.7 | | 41.7 | | | 1,222.1 | | 44.4 | | Segment operating income | 920.7 | | 41.7 | | | 1,222.1 | | 44.4 | |
| Unallocated amounts: | Unallocated amounts: | | Unallocated amounts: | |
Corporate and unallocated expenses (1) | Corporate and unallocated expenses (1) | (129.6) | | | (166.1) | | | Corporate and unallocated expenses (1) | (129.6) | | | (166.1) | | |
| Depreciation and amortization | Depreciation and amortization | (675.8) | | | (885.2) | | | Depreciation and amortization | (675.8) | | | (885.2) | | |
| Share-based compensation | Share-based compensation | (10.2) | | | (25.3) | | | Share-based compensation | (10.2) | | | (25.3) | | |
| Restructuring charges, net | Restructuring charges, net | (26.9) | | | (37.5) | | | Restructuring charges, net | (26.9) | | | (37.5) | | |
| Non-restructuring impairment charges | Non-restructuring impairment charges | (154.9) | | | (63.5) | | | Non-restructuring impairment charges | (154.9) | | | (63.5) | | |
Separation costs (2) | Separation costs (2) | (1.2) | | | (93.4) | | | Separation costs (2) | (1.2) | | | (93.4) | | |
R&D upfront payment (3) | R&D upfront payment (3) | — | | | (5.0) | | | R&D upfront payment (3) | — | | | (5.0) | | |
| Opioid-related litigation settlement (loss) gain (Note 19) | (125.0) | | | 43.4 | | | |
| Medicaid lawsuit (Note 19) | — | | | (641.1) | | | |
| Opioid-related litigation settlement (loss) gain | | Opioid-related litigation settlement (loss) gain | (125.0) | | | 43.4 | | |
| Medicaid lawsuit | | Medicaid lawsuit | — | | | (641.1) | | |
| Total operating loss | Total operating loss | $ | (202.9) | | | $ | (651.6) | | | Total operating loss | $ | (202.9) | | | $ | (651.6) | | |
(1)Includes administration expenses and certain compensation, legal, environmental and other costs not charged to our reportable segments.
(2)Represents costs included in SG&A expenses, primarily related to professional fees and costs incurred in preparation for the Chapter 11 proceedings. As of the Petition Date, professional fees directly related to the Chapter 11 proceedings that were previously reflected as separation costs were classified on a go-forward basis as reorganization items, net.
(3)Represents R&D expense incurred related to an upfront payment made to acquire product rights in Japan for terlipressin in fiscal 2020.2020 (Predecessor).
Specialty Brands. Operating income for fiscal 2021 (Predecessor) decreased $202.9 million to $812.8 million, compared with $1,015.7 million for fiscal 2020.2020 (Predecessor). Operating margin increased to 52.5% for fiscal 2021 (Predecessor), compared with 49.3% for fiscal 2020.2020 (Predecessor). The decrease in operating income is primarily driven by the $512.6 million, or 24.9%, decrease
in net sales over the same period, which resulted in a $410.0 million decrease in gross profit. Partially offsetting the decrease in operating income and serving to increase operating margin was a $125.9 million, or 26.2%, decrease in SG&A expenses primarily driven by cost containment initiatives and lower employee compensation costs in addition to bankruptcy-related legal fees being classified as reorganization items, net, subsequent to the Petition Date, and an $81.3 million, or 33.7%, decrease in R&D expenses driven by the completion of certain development programs during fiscal 2020 (Predecessor), coupled with the decision to no longer pursue further development of the MNK-6105 and MNK-6106 asset in fiscal 2021.2021 (Predecessor).
Specialty Generics. Operating income for fiscal 2021 (Predecessor) decreased $98.5 million to $107.9 million, compared with $206.4 million for fiscal 2020. Operating margin decreased to 16.3% for fiscal 2021 (Predecessor), compared with 29.9% for fiscal 2020. The decrease in operating income and operating margin was primarily attributable to a $97.1 million decrease in gross profit, primarily driven by an increased competitive environment with respect to other controlled substances and hydrocodone-related products.
Corporate and unallocated expenses. Corporate and unallocated expenses were $129.6 million and $166.1 million for fiscal 2021 (Predecessor) and fiscal 2020 (Predecessor), respectively. This decrease was primarily driven by the bankruptcy-related professional fees being classified as reorganization items, net, subsequent to the Petition Date, in addition to cost containment initiatives and lower employee compensation costs. Comparatively, during fiscal 2020 (Predecessor), we incurred $55.7 million of opioid defense costs that were reflected in SG&A. The decrease also included changes in the fair value of our former contingent consideration liabilities with a $7.4 million gain during fiscal 2021 (Predecessor) compared to a $9.9 million charge during fiscal 2020.2020 (Predecessor). The decrease was partially offset by a $35.0 million increase to our environmental remediation liabilities during fiscal 2021.2021 (Predecessor).
Fiscal Year Ended December 25, 2020 Compared with Fiscal Year Ended December 27, 2019
Net Sales
Net sales by segment are shown in the following table (dollars in millions):
| | | | | | | | | | | | | | | | | |
| Fiscal Year | | |
| 2020 | | 2019 | | Percentage Change |
| Specialty Brands | $ | 2,059.6 | | | $ | 2,423.8 | | | (15.0) | % |
| Specialty Generics | 689.8 | | | 738.7 | | | (6.6) | |
| Net sales | 2,749.4 | | | 3,162.5 | | | (13.1) | |
| Medicaid lawsuit (Note 19) | (536.0) | | | — | | | * |
| Net sales | $ | 2,213.4 | | | $ | 3,162.5 | | | (30.0) | |
*Not meaningful
Specialty Brands. Net sales for fiscal 2020 decreased $364.2 million, or 15.0%, to $2,059.6 million, compared with $2,423.8 million for fiscal 2019. This decrease was primarily driven by a $184.8 million, or 19.4%, decrease in Acthar Gel net sales driven primarily by the marketplace impact of the COVID-19 pandemic and continued payer scrutiny on overall specialty pharmaceutical spending. The prospective change to the Medicaid rebate calculation also served to reduce Acthar Gel net sales by $40.4 million during fiscal 2020. The decrease was also driven by a $107.5 million, or 28.0%, decrease in Ofirmev net sales primarily due to overall reduction in elective surgeries due to public health orders implemented as part of the COVID-19 pandemic, as well as the product's loss of exclusivity in December 2020. In addition, Other Specialty Brands product sales included an additional $40.1 million of net sales in fiscal 2019 related to BioVectra, which was sold in November 2019, and net sales for Amitiza decreased $19.7 million, or 9.4%, due to decreased volumes driven by increased competition. The remaining decrease relates to Therakos net sales due to stay-at-home directives issued as part of COVID-19 public health orders.
Net sales for Specialty Brands by geography are as follows (dollars in millions): | | | | | | | | | | | | | | | | | |
| Fiscal Year | | |
| 2020 | | 2019 | | Percentage
Change |
| U.S. | $ | 1,901.0 | | $ | 2,164.3 | | (12.2) | % |
| Europe, Middle East and Africa | 116.7 | | 161.4 | | (27.7) | |
| Other | 41.9 | | 98.1 | | (57.3) | |
| Net sales | $ | 2,059.6 | | $ | 2,423.8 | | (15.0) | |
Net sales for Specialty Brands by key products are as follows (dollars in millions): | | | | | | | | | | | | | | | | | |
| Fiscal Year | | |
| 2020 | | 2019 | | Percentage Change |
| Acthar Gel | $ | 767.9 | | $ | 952.7 | | (19.4) | % |
| INOmax | 574.1 | | 571.4 | | 0.5 | |
| Ofirmev | 276.5 | | 384.0 | | (28.0) | |
| Therakos | 238.6 | | 246.9 | | (3.4) | |
| Amitiza | 188.8 | | 208.5 | | (9.4) | |
| Other | 13.7 | | 60.3 | | (77.3) | |
| Specialty Brands | $ | 2,059.6 | | $ | 2,423.8 | | (15.0) | |
Specialty Generics. Net sales for fiscal 2020 decreased $48.9 million, or 6.6%, to $689.8 million, compared to $738.7 million for fiscal 2019. The decrease in net sales was driven by decreased net sales of $62.6 million, or 17.8%, and $24.6 million, or 54.5%, for Other controlled substance and Other products, respectively. These decreases were partially offset by a $23.1 million, or 12.2%, increase in acetaminophen net sales, and a $21.7 million, or 28.4%, increase in hydrocodone-related products net sales.
Net sales for Specialty Generics by geography are as follows (dollars in millions): | | | | | | | | | | | | | | | | | |
| Fiscal Year | | |
| 2020 | | 2019 | | Percentage Change |
| U.S. | $ | 564.5 | | $ | 601.3 | | (6.1) | % |
| Europe, Middle East and Africa | 110.8 | | 120.4 | | (8.0) | |
| Other | 14.5 | | 17.0 | | (14.7) | |
| Net sales | $ | 689.8 | | $ | 738.7 | | (6.6) | |
Net sales for Specialty Generics by key products are as follows (dollars in millions): | | | | | | | | | | | | | | | | | |
| Fiscal Year | | |
| 2020 | | 2019 | | Percentage Change |
| Hydrocodone (API) and hydrocodone-containing tablets | $ | 98.0 | | $ | 76.3 | | 28.4 | % |
| Oxycodone (API) and oxycodone-containing tablets | 68.4 | | 74.9 | | (8.7) | |
| Acetaminophen (API) | 213.0 | | 189.9 | | 12.2 | |
| Other controlled substances | 289.9 | | 352.5 | | (17.8) | |
| Other | 20.5 | | 45.1 | | (54.5) | |
| Specialty Generics | $ | 689.8 | | $ | 738.7 | | (6.6) | |
Operating Loss
Operating income by segment and as a percentage of segment net sales for fiscal 2020 and 2019 is shown in the following table (dollars in millions): | | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2020 | | 2019 |
Specialty Brands (1) | $ | 1,015.7 | | 49.3 | % | | $ | 1,210.1 | | 49.9 | % |
| Specialty Generics | 206.4 | | 29.9 | | | 168.5 | | 22.8 | |
| Segment operating income | 1,222.1 | | 44.4 | | | 1,378.6 | | 43.6 | |
| Unallocated amounts: | | | | | |
Corporate and unallocated expenses (2) | (166.1) | | | | (102.3) | | |
| Depreciation and amortization | (885.2) | | | | (951.1) | | |
| Share-based compensation | (25.3) | | | | (33.8) | | |
| Restructuring charges, net | (37.5) | | | | 1.7 | | |
| Non-restructuring impairment charges | (63.5) | | | | (388.0) | | |
| Separation costs | (93.4) | | | | (63.9) | | |
R&D upfront payment (3) | (5.0) | | | | (20.0) | | |
| Opioid-related litigation settlement gain (loss) (Note 19) | 43.4 | | | | (1,643.4) | | |
| Medicaid lawsuit (Note 19) | (641.1) | | | | — | | |
| Total operating loss | $ | (651.6) | | | | $ | (1,822.2) | | |
(1)Includes $10.0 million of inventory fair-value step up expense related to Amitiza during fiscal 2019.
(2)Includes administration expenses and certain compensation, legal, environmental and other costs not charged to our reportable segments.
(3)Represents R&D expense incurred related to an upfront payment made to acquire product rights in Japan for terlipressin in fiscal 2020 and an upfront payment made to Silence in connection with the license and collaboration agreement entered into in fiscal 2019.
Specialty Brands. Operating income for fiscal 2020 decreased $194.4 million to $1,015.7 million, compared with $1,210.1 million for fiscal 2019. Operating margin decreased to 49.3% for fiscal 2020, compared with 49.9% for fiscal 2019. These decreases were primarily driven by the $364.2 million, or 15.0%, decrease in net sales over the same period, which resulted in a $278.9 million decrease in gross profit. This was partially offset by a $47.9 million or 9.1% decrease in SG&A expenses primarily driven by lower travel costs due to temporary travel restrictions for COVID-19, lower consulting and professional fees and a $36.5 million or 13.2% decrease in R&D expenses.
Specialty Generics. Operating income for fiscal 2020 increased $37.9 million to $206.4 million, compared with $168.5 million for fiscal 2019. Operating margin increased to 29.9% for fiscal 2020, compared with 22.8% for fiscal 2019. As a result of the Opioid-Related Litigation Settlement announced during the three months ended March 27, 2020, the corresponding opioid defense costs are considered to be non-recurring; therefore, such costs are excluded from segment operating income and presented as a corporate and unallocated expense on a go-forward basis. In comparison, there were $56.2 million of opioid defense costs reflected in operating income during fiscal 2019. This was partially offset by a decrease in gross profit primarily driven by the decrease in net sales.
Corporate and unallocated expenses. Corporate and unallocated expenses were $166.1 million and $102.3 million for fiscal 2020 and 2019, respectively. This increase was attributable to a $9.9 million increase in the fair value of our contingent consideration
liabilities in fiscal 2020, compared to a $60.2 million decrease in fiscal 2019, as well as opioid defense costs of $55.7 million being presented as a corporate and unallocated expense beginning during the three months ended March 27, 2020, resulting from the Opioid-Related Litigation Settlement, as previously discussed. The remaining increase is primarily related to employee compensation and benefits driven by certain changes made to the design of our long-term incentive compensation program in an effort to manage share usage and dilution and the approval of a key employee incentive program during fiscal 2020. This is partially offset by gains on divestiture in fiscal 2020 of $16.6 million primarily related to the achievement of milestones related to the sale of a portion of our Hemostasis business in fiscal 2018 to Baxter, compared with a $33.5 million loss on the divestiture of BioVectra during fiscal 2019, and lower consulting and professional fees. In addition, fiscal 2019 included a $28.2 million charge associated with the settlement of the MDL Track 1 Cases.
Liquidity and Capital Resources
Significant factors driving our liquidity position include cash flows generated from operating activities, financing transactions (inclusive of interest on our variable-rate debt instruments), capital expenditures, cash paid in connection with legal settlements (refer to Note 2 of the Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report), acquisitions and licensing agreements and cash received as a result of our divestitures. We have historically generated and expect to continue to generate positive cash flows from operations.operations, and we believe that our sources of liquidity are adequate to fund our operations for the next twelve months and the foreseeable future. Our ability to fund our capital needs is impacted by our ongoing ability to generate cash from operations and access to capital markets. Our material
As market conditions warrant, we may from time to time repurchase debt securities issued by us, in the open market, in privately negotiated transactions, by tender offer or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements and other factors. In September 2022 (Successor), our Board of Directors authorized us to utilize certain cash requirements are highly dependent uponto reduce our outstanding debt at a discount through the planend of reorganizationfiscal 2022. During the period June 17, 2022 through December 30, 2022 (Successor), we repurchased debt that aggregated to a principal amount of $46.7 million and successful emergence from Chapter 11.
Anticipated Sources and Uses for Chapter 11 Emergence
In the event we are able to successfully emerge from Chapter 11, our primary cash sources upon emergence are expected to include cash on hand, which was $1,345.0$1.0 million as of December 31, 2021, and proceeds of newly incurred debt.
Our primary cash uses upon emergence are expected to include the following:
•$900.0 million revolving credit facility with a stated maturity of February 28, 2022, for which efforts to enforce payment obligations were automatically stayed during the pendency of the Chapter 11 Cases;
•$450.0 million upfront payment related to our Amended Proposed Opioid-Related Litigation Settlement;
•$135.0 million payment of general unsecured claims in accordance with the agreement in principle with the unsecured creditors committee;
•$15.0 million upfront payment related to our Proposed Acthar Gel-Related Settlement;10.00% second lien senior secured notes due 2029 and
•Payment of administrative, priority and trade claims, for which the amount is not yet finalized 10.00% second lien senior secured notes due to ongoing claims reconciliation efforts; and
•Fees related to exit-financing activities.
Refer to Note 2 of the Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for further information on our plan of reorganization and related expected sources and uses.2025, respectively.
Cash Requirements and Sources From Existing Contractual Arrangements
Under the Bankruptcy Code, the Debtors may assume, modify, assign or reject certain executory contracts and unexpired leases, including, without limitation, leases of real property and equipment, subject to the approval of the Bankruptcy Court and to certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Debtors from performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach. Generally, the assumption of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease in this Annual Report on Form 10-K, including, where applicable, the express termination rights thereunder or a quantification of their obligations, must be read in conjunction with, and is qualified by, any overriding rejection rights the Debtors have under the Bankruptcy Code.
Our material cash requirements from known contractual obligations include debt obligations, legal settlements, income taxes, lease obligations, purchase obligations and other liabilities reflected on our balance sheet, as presented and discussed below.
The following table summarizes our contractual obligations as of December 31, 202130, 2022 (Successor) (dollars in millions): | | | Payments Due By Period | | Payments Due By Period |
| | Total | | Less than 1 year | | 1 - 3 years | | 3 - 5 years | | More than 5 years | | Total | | Less than 1 year | | 1 - 3 years | | 3 - 5 years | | More than 5 years |
Long-term debt obligations (1) | Long-term debt obligations (1) | $ | 5,145.8 | | | $ | 1,539.2 | | | $ | 2,042.4 | | | $ | 1,564.2 | | | $ | — | | Long-term debt obligations (1) | $ | 3,534.1 | | | $ | 44.1 | | | $ | 894.0 | | | $ | 1,617.7 | | | $ | 978.3 | |
Interest on long-term debt obligations (2) | Interest on long-term debt obligations (2) | 773.4 | | | 288.4 | | | 429.8 | | | 55.2 | | | — | | Interest on long-term debt obligations (2) | 1,663.0 | | | 365.7 | | | 672.9 | | | 500.4 | | | 124.0 | |
Operating lease obligations (3) | 44.4 | | | 15.3 | | | 18.9 | | | 7.3 | | | 2.9 | | |
Purchase obligations (4) | 4.7 | | | 3.0 | | | 1.1 | | | 0.6 | | | — | | |
Opioid-Related Litigation Settlement (3) | | Opioid-Related Litigation Settlement (3) | 1,275.0 | | | 200.0 | | | 350.0 | | | 300.0 | | | 425.0 | |
Acthar Gel-Related Litigation Settlement (3) | | Acthar Gel-Related Litigation Settlement (3) | 252.6 | | | 16.5 | | | 42.7 | | | 67.2 | | | 126.2 | |
Operating lease obligations (4) | | Operating lease obligations (4) | 62.4 | | | 16.0 | | | 19.9 | | | 8.2 | | | 18.3 | |
Purchase obligations (5) | | Purchase obligations (5) | 21.8 | | | 8.9 | | | 10.6 | | | 2.3 | | | — | |
| Total contractual obligations | Total contractual obligations | $ | 5,968.3 | | | $ | 1,845.9 | | | $ | 2,492.2 | | | $ | 1,627.3 | | | $ | 2.9 | | Total contractual obligations | $ | 6,808.9 | | | $ | 651.2 | | | $ | 1,990.1 | | | $ | 2,495.8 | | | $ | 1,671.8 | |
(1)The commencement of the Chapter 11 Cases on October 12, 2020 constituted an event of default under certain of our debt agreements. Accordingly, all long-term debt is classified as current on the consolidated balance sheets. Certain of our long-term debt instruments are classified as LSTC, for which no principal payments will be made during the pendency of the proceedings. We intend to use the Chapter 11 process to reduce our total debt. For further details on our Chapter 11 proceedings and debt obligations, refer to Notes 2 andNote 14 respectively of the Notes to the Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.Report.
(2)Interest on long-term debt obligations are projected for future periods using interest rates in effect as of December 31, 2021.30, 2022 (Successor). Contractual obligations under the long-term debt agreements have been shown in the table above. Certain of our long-term debt instruments are classified as LSTC, with the corresponding contractual interest reflected above, for which no interest payments will be made during the pendency of the proceedings. Certain of these projected interest payments may differ in the future based on changes in market interest rates.
We are contractually obligated under the cash collateral order approved by the Bankruptcy Court to make adequate protection payments on the senior secured revolving credit facility and senior secured term loans at a rate that is 200 and 250 basis points, respectively, greater than the otherwise applicable non-default rate based on LIBOR. Under the cash collateral order, we expect to make approximately $15.5 million of adequate protection payments during fiscal 2022, which is subject to change based on ultimate timing of emergence from Chapter 11. This incremental expense, which is classified as interest expense, is reflected above.
For further information regarding the fixed and variable rates of our debt obligations, refer to Note 14 of the Notes to the Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.Report.
(3)Acthar Gel-Related Litigation Settlement includes interest of $1.5 million, $2.7 million, $2.2 million and $1.2 million for obligations due within one year, one to three years, three to five years and more than five years, respectively. For further details on these litigation settlements, refer to Note 2 of the Notes to the Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report.
(4)Includes obligations for leases with an initial term of 12 months or less and not recorded on the consolidated balance sheet. Refer to Note 12 of the Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for further information on our lease liabilities.
(4)(5)Purchase obligations consist of commitments for purchases of goods and services made in the ordinary course of business to meet operational requirements.
The preceding table does not include our legal settlement obligations of $1,725.0 million for our Amended Proposed Opioid-Related Litigation Settlement and $260.0 million for our Proposed Acthar Gel-Related Settlement, which are further discussed in Note 2 and 19 of the Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K. We may be subject to other legal matters that may require further cash requirements that we are unable to reasonably estimate the expected amount or range of cost at this time.
Non-current income taxes payable, primarily related to unrecognized tax benefits, is included within other income tax liabilities on the consolidated balance sheet and, as of December 31, 2021,30, 2022 (Successor), was $83.2$18.2 million. Payment of these liabilities is uncertain and, even if payments are determined to be necessary, they are subject to the timing of rulings by the taxing authorities related to tax positions we take. Additionally, we expect to receive CARES Act income tax refunds totaling $135.9 million, excluding related interest, within the next twelve months, of which $112.1 million, plus interest, was received on February 28, 2023. The remaining refund is expected to be received during fiscal 2023. For further information on income tax related matters and the partial receipt of the CARES Act income tax refunds, refer to NoteNotes 8 and 22 of the Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report, on Form 10-K.respectively.
We are obligated to pay royalties under certain agreements with third parties. During the period of June 17, 2022 through December 30, 2022 (Successor), the period January 1, 2022 through June16, 2022 (Predecessor), fiscal 2021 (Predecessor) and fiscal 2020 and 2019,(Predecessor), we made payments under these arrangements of $0.5 million, $0.8 million, $14.1 million $81.9 million and $95.7$81.9 million, respectively. The timing and amounts to be paid in future periods are uncertain as they are dependent upon net sales generated in future periods and the ultimate outcome of the Chapter 11 process.periods. The decrease in royalties paid during fiscal 2022 and 2021 (Predecessor) was primarily driven by loss of exclusivity and entrance of competition for our Ofirmev product, which caused a large decline in net sales coupled with the cessation of Acthar Gel royalty payments as a result of the Chapter 11 process. Accrued royalties related to our Acthar Gel product were $29.0 million as of December 31, 2021 and have been classified as LSTC on the consolidated balance sheet. Refer to Note 2 of the Notes to the Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for further information.
As of December 31, 2021,30, 2022 (Successor), we had net unfunded pension and postretirement benefit obligations of $27.3$18.7 million and $37.3$26.8 million, respectively. The timing and amounts of long-term funding requirements for pension and postretirement obligations are uncertain. We do not anticipate making material involuntary contributions in fiscal 2022,2023, but may elect to make voluntary contributions to our defined pension plans or our postretirement benefit plans during fiscal 2022. As a result of our Chapter 11 filing on October 12, 2020, $32.0 million defined benefit obligations have been classified as LSTC on our consolidated balance sheet as of December 31, 2021, which included the U.S. pension benefit plans and a portion of the postretirement benefit plans.2023. For further information regarding pension and postretirement benefit obligations, refer to Note 15 of the Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.Report.
We are involved in various stages of investigation and cleanup related to environmental remediation matters at a number of sites. The ultimate cost of cleanup and timing of future cash outlays is difficult to predict given uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations and alternative cleanup methods. As of December 31, 2021,30, 2022 (Successor), we
believe that it is probable that we will incur investigation and remediation costs of approximately $95.8$36.9 million, of which $0.8$1.1 million was included in accrued and other current liabilities $52.0 million was included in LSTC, and the remaining $43.0$35.8 million was included in environmental liabilities on the consolidated balance sheet as of December 31, 2021.30, 2022 (Successor). Refer to Notes 2 and 19 of the Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for additional information regarding LSTC and environmental matters, respectively.
As part of our acquisition of Stratatech Corporation ("Stratatech"), we are subject to a contractual arrangement to pay contingent consideration to former owners of this business. The payment of obligations under this arrangement is uncertain, and even if payments are expected to be made the timing of these payments may be uncertain as well. As of December 31, 2021, we have accrued $27.3 million for these potential payments, which are classified as LSTC. For further information on our contingent consideration arrangement, refer to Note 20 of the Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
In general, we intend to fund capital expenditures with cash generated from operations. As of December 31, 2021,30, 2022 (Successor), we had no capital expenditure commitments.
Our remaining cash requirements are obligations that arise from the normal course of our business.
As part of our divestitures and licensing agreements, we have the potential to earn in excess of $50.0 million in milestone payments in the future.
A summary of our cash flows from operating, investing and financing activities is provided in the following table (dollars in millions):
| | | Fiscal Year | | Successor | | | Predecessor |
| | 2021 | | 2020 | | 2019 | | Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
| Net cash from: | Net cash from: | | | | | | Net cash from: | | | | | | | | |
| Operating activities | Operating activities | $ | 455.4 | | | $ | 498.9 | | | $ | 742.9 | | Operating activities | $ | 47.1 | | | | $ | (642.3) | | | $ | 455.4 | | | $ | 498.9 | |
| Investing activities | Investing activities | (37.8) | | | (11.2) | | | (8.3) | | Investing activities | 27.5 | | | | (33.0) | | | (37.8) | | | (11.2) | |
| Financing activities | Financing activities | (137.5) | | | (185.6) | | | (280.1) | | Financing activities | (54.1) | | | | (278.7) | | | (137.5) | | | (185.6) | |
| Effect of currency exchange rate changes on cash, cash equivalents and restricted cash | Effect of currency exchange rate changes on cash, cash equivalents and restricted cash | (1.9) | | | 2.3 | | | 0.6 | | Effect of currency exchange rate changes on cash, cash equivalents and restricted cash | (1.1) | | | | (3.9) | | | (1.9) | | | 2.3 | |
| Net increase in cash, cash equivalents and restricted cash | Net increase in cash, cash equivalents and restricted cash | $ | 278.2 | | | $ | 304.4 | | | $ | 455.1 | | Net increase in cash, cash equivalents and restricted cash | $ | 19.4 | | | | $ | (957.9) | | | $ | 278.2 | | | $ | 304.4 | |
Operating Activities
Net cash provided by operating activities of $47.1 million for the period June 17, 2022 through December 30, 2022 (Successor) was attributable to a net loss of $598.1 million, adjusted for non-cash items of $480.0 million, driven by depreciation and amortization of $347.5 million and accretion on our settlement obligations and debt of $139.2 million, partially offset by $165.2 million of cash inflow from net changes in working capital. The change in working capital was primarily driven by a $267.9 million decrease in inventory primarily driven by the fair-value step-up expense of $268.7 million and an $8.1 million net cash inflow related to an increase in accounts payable coupled with a $28.1 million net cash inflow in other working capital driven by an increase in our accrued rebates, partially offset by a $90.7 million net cash outflow related to a decrease in accrued consulting driven by payment of professional fees related to emergence from Chapter 11, a $30.1 million change in income taxes, primarily driven by an increase in prepaid income taxes and an $18.1 million increase in accounts receivable, net.
Net cash used in operating activities of $642.3 million for the period January 1, 2022 through June 16, 2022 (Predecessor) was attributable to a net loss of $313.1 million, adjusted for non-cash items of $311.2 million, driven by non-cash reorganization items of $425.4 million and depreciation and amortization of $321.8 million, partially offset by a $473.0 million change in net deferred tax assets coupled with cash used in working capital of $640.4 million. The change in working capital was primarily driven by a $629.0 million cash outflow related to the payment of claims as a result of the Plan coupled with a $2.5 million net cash outflow related to a decrease in other working capital, a $26.9 million change in income taxes, primarily driven by a decrease in income taxes payable and a $33.2 million increase in inventory, partially offset by a $49.8 million decrease in accounts receivable primarily due to lower net sales.
Net cash provided by operating activities of $455.4 million for fiscal 2021 (Predecessor) included a loss of $717.4 million, adjusted for non-cash items of $802.7 million driven by depreciation and amortization of $675.8 million and a $154.9 million non-cash impairment charge related to the Amitiza asset and the MNK-6105 and MNK-6106 asset, partially offset by a $59.9 million reduction in our deferred income tax liabilities. The net loss was also offset by cash provided from net investment in working capital of $370.1 million, which was primarily driven by an increase to the opioid-related litigation settlement liability of $125.0 million, a $108.5 million decrease in net tax receivables driven by the receipt of CARES Act income tax refunds, partially offset by an increase in prepaid income taxes and a $98.2 million decrease in accounts receivable. These inflows were partially offset by a $14.0 million increase in inventory.
Net cash provided by operating activities of $498.9 million for fiscal 2020 (Predecessor) included a loss of $944.6 million, adjusted for non-cash items of $1,331.2 million driven by depreciation and amortization of $885.2 million, a $385.3 million reduction in our deferred income tax assets, and a $63.5 million non-cash impairment charge related to the Ofirmev intangible asset. The net loss was also offset by cash provided from net investment in working capital of $112.3 million, primarily driven by the $638.9 million Medicaid lawsuit liability. Also included within this change in working capital was a $37.9 million decrease in accounts receivable, and a $15.7 million increase in accounts payable, net of transfers to LSTC. These items were offset by a $433.8 million increase in net receivables related to income taxes that was driven by tax benefits from the CARES Act and changes in uncertain tax positions, a $95.3 million net cash outflow related to other assets and liabilities primarily driven by decreases in accrued payroll and accrued restructuring, net of transfers to LSTC, and a $51.1 million increase in inventory.
Net cash provided by operating activities of $742.9 million for fiscal 2019 included a loss from continuing operations, as adjusted for non-cash items including a $466.6 million gain on debt extinguishment, net and a $388.0 million adjustment for non-cash impairment charges. The loss from continuing operations adjusted for non-cash items was offset by a $1,451.6 million inflow from net changes in working capital, primarily driven by the portion of the opioid-related litigation settlement liability related to the structured cash payments of $1,600.0 million with the remaining $43.4 million related to the Settlement Warrants (as defined in Note 19 of the Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K) reflected as a non-cash item. This was partially offset by a $161.5 million net outflow from other assets and liabilities primarily driven by cash outflows related to separation costs, one time legal settlement payments of $24.0 million and $15.4
million related to the settlement of the MDL Track 1 Cases and the Questcor DOJ settlement, respectively, a $26.5 million decrease in accrued restructuring charges, a $16.3 million decrease in payroll related accruals and decreases in other accrual balances attributable to cost benefits gained from restructuring actions.
Investing Activities
Net cash provided by investing activities was $27.5 million for the period June 17, 2022 through December 30, 2022 (Successor) primarily driven primarily by the sale of our PRV for $100.0 million in which we received from the buyer $65.0 million and the buyer remitted $35.0 million to the General Unsecured Claims Trustee pursuant to the terms of (i) the Plan, and (ii) the General Unsecured Claims Trust Agreement entered into in connection with the Plan as previously discussed, partially offset by capital expenditures of $28.8 million and a $17.5 million milestone payment related to the FDA approval of Terlivaz, as previously discussed.
Net cash used in investing activities was $33.0 million for the period January 1, 2022 through June 16, 2022 (Predecessor), primarily driven by $33.4 million in capital expenditures.
Net cash used in investing activities of $37.8 million for fiscal 2021 (Predecessor) was primarily attributable to capital expenditures of $55.3 million, partially offset by cash proceeds of $16.5 million related to the sale of a portion of our Hemostasis business in fiscal 2018.
Net cash used in investing activities of $11.2 million for fiscal 2020 (Predecessor) was primarily attributable to capital expenditures of $47.7 million, partially offset by cash proceeds of $29.8 million for the redemption of 100% of the outstanding preferred equity certificates received as part of contingent earn-out payments related to the sale of the Nuclear Imaging business, as previously discussed. The remaining activity primarily relates to post-sale adjustments from various divestitures.
Net cash used in investing activities of $8.3 million for fiscal 2019 was primarily attributable to capital expenditures of $133.0 million, partially offset by $95.1 million in proceeds received related to the sale of BioVectra, net of cash, as well as proceeds from other long-term asset disposals.
Under our term loan credit agreement and our notes, the proceeds from the sale of assets and businesses must be either reinvested into capital expenditures or business development activities within one year of the respective transaction or we are required to make prepayments on our term loans and offer to repurchase certain of our notes.
Financing Activities
Net cash used in financing activities was $54.1 million for the period June 17, 2022 through December 30, 2022 (Successor) driven primarily by debt repayments of $50.1 million on our variable-rate term loans and open market debt repurchases at a discount that aggregated to a total principal amount of $47.7 million coupled with the repurchase of the Opioid Warrants for $4.0 million.
Net cash used in financing activities was $278.7 million for the period January 1, 2022 through June 16, 2022 (Predecessor) which was inclusive of debt repayments of $904.6 million primarily driven by the repayment of our predecessor revolving credit facility of $900.0 million, as well as $24.1 million of debt issuance costs, partially offset by $650.0 million in proceeds from the issuance of the 11.50% first lien senior secured notes due December 2028.
Net cash used in financing activities was $137.5 million for fiscal 2021 (Predecessor), compared with $185.6 million for fiscal 2020.2020 (Predecessor). This decrease was primarily attributable to payments of contingent considerations related to the acquisition of Questcor and Stratatech Corporation during fiscal 2020 (Predecessor) of $25.0 million and $20.0 million, respectively, $9.4 million in debt issuance costs incurred in fiscal 2020 (Predecessor) and a $2.0 million decrease in debt repayments. Our fiscal 2021 (Predecessor) debt repayments included $137.5 million in aggregate payments on our variable-rate term loans. Our fiscal 2020 (Predecessor) debt repayments included a $119.8 million payment on the remaining principal amount of the 4.875% senior unsecured notes that had a maturity date of April 15, 2020, and $19.7 million in aggregate payments on our variable-rate senior secured term loans.
Net cash used in financing activities was $185.6 million for fiscal 2020, compared with $280.1 million for fiscal 2019. This decrease was primarily attributable to a $110.6 million decrease in debt repayments, net of issuances. The significant components of our debt repayments during fiscal 2019 included aggregate debt repayments of $286.4 million on our variable-rate term loans, open market debt repurchases that aggregated to a total principal amount of $492.1 million and a repayment of $250.0 million on the receivable securitization program. These repayments were partially offset by a net draw of $680.0 million on our revolving credit facility.
Concentration of Credit and Other Risks
Financial instruments that potentially subject us to concentrations of credit risk primarily consist of accounts receivable. We generally do not require collateral from customers. A portion of our 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.
Capitalization
Shareholders' equity was $1,613.7 million as of December 30, 2022 (Successor) compared with $313.4 million atas of December 31, 2021 compared with $1,019.2 million at December 25, 2020.(Predecessor). The decreaseincrease in shareholders' equity is primarily attributed to the fiscal 2021cancellation of the Predecessor equity and issuance of Successor common stock of approximately $2.2 billion as a result of the emergence from Chapter 11 and application of fresh-start accounting. The remaining activity is primarily attributable to the net loss.loss of $313.1 million and $598.1 million during the period from January 1, 2022 through June 16, 2022 (Predecessor) and the period from June 17, 2022 through December 30, 2022 (Successor).
From time to time,The Company issued 3,290,675 Opioid Warrants as part of the Company's Boardeffectuation of Directors have authorized share repurchase programs. We did not make any share repurchases during fiscal 2021 or fiscal 2020.the Plan with a value of $13.9 million. In December 2022, the Company repurchased and cancelled all outstanding Opioid Warrants for $4.0 million. For further information, refer to Note 162 of the Notes to the Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.Report.
Dividends
Historically, we have not made any cash dividend payments asand we have retained earningsdo not currently intend to finance acquisitions, R&D andpay dividends in the operation and expansion of our business, while executing disciplined capital allocation. Currently, the declaration and payment of dividends is subject to the approval of the Bankruptcy Court until such proceedings are complete upon emergence.
Commitments and Contingencies
Legal Proceedings
We are subject to various legal proceedings and claims, including presentgovernment investigations, environmental matters, product liability matters, patent infringement claims, antitrust matters, securities class action lawsuits, personal injury claims, employment disputes, contractual and former operations, including those describedother commercial disputes, and all other legal proceedings, all in Note 19the ordinary course of the Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K, which are incorporated by reference into this Part II, Item 7.business. Although it is not feasible to predict the outcome of these matters, we believe, unless otherwise indicated, given the information currently available, that their ultimate resolution shouldwill not have a material adverse effect on our business, financial condition, results of operations and cash flows.
For further information, refer to Note 19 of the Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report, which are incorporated by reference into this Part II, Item 7.
Guarantees
In disposing of assets or businesses, we have from time to time provided representations, warranties and indemnities to cover various risks and liabilities, including unknown damage to the 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. We assess the probability of potential liabilities related to such representations, warranties and indemnities and adjust potential liabilities as a result of changes in facts and circumstances. We believe, given the information currently available, that the ultimate resolutions will not have a material adverse effect on our financial condition, results of operations and cash flows. These representations, warranties and indemnities are discussed in Note 18 of the Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.Report.
Off-Balance Sheet Arrangements
As of December 31, 2021,30, 2022 (Successor), we had various other letters of credit, guarantees and surety bonds totaling $34.7$30.1 million and restricted cash of $41.2$37.9 million held in segregated accounts primarily to collateralize surety bonds for our environmental liabilities.
Critical Accounting Estimates
The consolidated financial statements have been prepared in U.S. dollars and in accordance with GAAP. The preparation of the 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. The following critical accounting estimates are based on, among other things, judgments and assumptions made by management that include inherent risks and uncertainties. Management's estimates are based on the relevant information available at the end of each period.
Liabilities Subject to Compromise
As a result of the commencement of the Chapter 11 Cases, the payment of pre-petition liabilities is subject to compromise or other treatment pursuant to a plan of reorganization. The determination of how liabilities will ultimately be settled or treated cannot be made until the confirmed Chapter 11 plan of reorganization becomes effective. Accordingly, the ultimate amount of such liabilities is not determinable at this time. Pre-petition liabilities that are subject to compromise are to be reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for different amounts. The amounts currently classified as LSTC are preliminary and may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determinations of the secured status of certain claims, the values of any collateral securing such claims, rejection of executory contracts, continued reconciliation or other events.
Revenue Recognition
Product Sales Revenue
We sell products through independent channels, including direct to retail pharmacies, end user customers and through distributors who resell our products to retail pharmacies, institutions and end user customers, while certain products are sold and distributed directly to hospitals. We also enter into arrangements with indirect customers, such as health care providers and payers, wholesalers, government agencies, institutions, managed care organizations and GPOs to establish contract pricing for certain products that provide for government-mandated and/or privately-negotiated rebates, sales incentives, chargebacks, distribution service agreement fees, fees for services and administration fees and discounts with respect to the purchase of our products.
Reserve for Variable Considerations
Product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established. These reserves result from estimated chargebacks, rebates, product returns and other sales deductions that are offered within contracts between us and our customers, health care providers and payers relating to the sale of our products. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than a customer). Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as our historical experience, estimated future trends, estimated customer inventory levels, current contracted sales terms with customers, level of utilization of our products and other competitive factors. Overall, these reserves reflect our best estimate of the amount of consideration to which we are entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may be constrained (reduced), and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. We adjust reserves for chargebacks, rebates, product returns and other sales deductions to reflect differences between estimated and actual experience. Such adjustments impact the amount of net sales recognized in the period of adjustment.
The following table reflects activity in our sales reserve accounts (dollars in millions):
| | | Rebates and Chargebacks | | Product Returns | | Other Sales Deductions | | Total | | Rebates and Chargebacks | | Product Returns | | Other Sales Deductions | | Total |
| Balance as of December 28, 2018 | $ | 354.3 | | | $ | 34.0 | | | $ | 17.1 | | | $ | 405.4 | | |
| Balance as of December 27, 2019 (Predecessor) | | Balance as of December 27, 2019 (Predecessor) | $ | 295.8 | | | $ | 28.4 | | | $ | 13.2 | | | $ | 337.4 | |
| Provisions | | Provisions | 2,065.9 | | | 28.9 | | | 59.5 | | | 2,154.3 | |
Provision for Medicaid lawsuit (1) | | Provision for Medicaid lawsuit (1) | 536.0 | | | — | | | — | | | 536.0 | |
| Payments or credits | | Payments or credits | (2,701.2) | | | (30.7) | | | (60.4) | | | (2,792.3) | |
| Balance as of December 25, 2020 (Predecessor) | | Balance as of December 25, 2020 (Predecessor) | 196.5 | | | 26.6 | | | 12.3 | | | 235.4 | |
| Provisions | Provisions | 2,347.3 | | | 22.2 | | | 68.2 | | | 2,437.7 | | Provisions | 2,087.1 | | | 23.7 | | | 55.2 | | | 2,166.0 | |
| Payments or credits | Payments or credits | (2,405.8) | | | (27.8) | | | (72.1) | | | (2,505.7) | | Payments or credits | (2,041.8) | | | (28.8) | | | (58.0) | | | (2,128.6) | |
| Balance as of December 27, 2019 | 295.8 | | | 28.4 | | | 13.2 | | | 337.4 | | |
| Provisions | 2,065.9 | | | 28.9 | | | 59.5 | | | 2,154.3 | | |
Provision for Medicaid lawsuit (Note 19) (1) | 536.0 | | | — | | | — | | | 536.0 | | |
| Payments or credits | (2,701.2) | | | (30.7) | | | (60.4) | | | (2,792.3) | | |
| Balance as of December 25, 2020 | 196.5 | | | 26.6 | | | 12.3 | | | 235.4 | | |
| Balance as of December 31, 2021 (Predecessor) | | Balance as of December 31, 2021 (Predecessor) | 241.8 | | | 21.5 | | | 9.5 | | | 272.8 | |
| Provisions | Provisions | 2,087.1 | | | 23.7 | | | 55.2 | | | 2,166.0 | | Provisions | 693.4 | | | 5.2 | | | 17.1 | | | 715.7 | |
| Payments or credits | Payments or credits | (2,041.8) | | | (28.8) | | | (58.0) | | | (2,128.6) | | Payments or credits | (684.6) | | | (8.1) | | | (18.9) | | | (711.6) | |
| Balance as of December 31, 2021 | $ | 241.8 | | | $ | 21.5 | | | $ | 9.5 | | | $ | 272.8 | | |
| Balance as of June 16, 2022 (Predecessor) | | Balance as of June 16, 2022 (Predecessor) | $ | 250.6 | | | $ | 18.6 | | | $ | 7.7 | | | $ | 276.9 | |
| | | Balance as of June 17, 2022 (Successor) | | Balance as of June 17, 2022 (Successor) | $ | 250.6 | | | $ | 18.6 | | | $ | 7.7 | | | $ | 276.9 | |
| Provisions | | Provisions | 804.4 | | | 7.0 | | | 36.7 | | | 848.1 | |
| Payments or credits | | Payments or credits | (789.7) | | | (9.6) | | | (31.7) | | | (831.0) | |
| Balance as of December 30, 2022 (Successor) | | Balance as of December 30, 2022 (Successor) | $ | 265.3 | | | $ | 16.0 | | | $ | 12.7 | | | $ | 294.0 | |
(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.Questcor in August 2014. For further information, refer to Note 19 of the Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.
Provisions presented in the table above are recorded as reductions to net sales. As of December 31, 2021,30, 2022 (Predecessor), a five percent change in our sales reserve accounts would have led to an approximately $13.6$14.7 million impact on our loss from continuing operations before income taxes. For our presentation of net sales by product family, refer to Note 21 of the Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.Report.
Total provisions for the period June 17, 2022 through December 30, 2022 (Successor) were $848.1 million and the total provisions for the period from January 1, 2022 through June 16, 2022 (Predecessor) were $715.7 million for a non-GAAP combined $1,563.8 million for fiscal 2022, compared to $2,166.0 million for fiscal 2021 (Predecessor). The decrease of $602.2 million was driven primarily by a decrease in rebates and chargebacks within the Specialty Generics segment of $504.6 million as a result of price reductions, coupled with a $71.8 million decrease in rebates and chargebacks in Specialty Brands primarily driven by the decrease in net sales and loss of exclusivity for Ofirmev during fiscal 2021 (Predecessor). Provisions for returns decreased $11.5 million driven by the Specialty Generics segment, and other sales deductions decreased by $1.4 million from the non-GAAP combined fiscal 2022 to fiscal 2021 (Predecessor).
Total provisions for fiscal 2021 (Predecessor) decreased $524.3 million compared with fiscal 2020 (Predecessor), which was inclusive of the $536.0 million provision for the Medicaid lawsuit incurred in fiscal 2020.2020 (Predecessor). Excluding the impact of the Medicaid lawsuit, the increase in rebates and chargebacks of $21.2 million primarily related to an increase of $32.7 million in the Specialty Generics segment as result of pricing pressure on our business, partially offset by an $11.5 million decrease in Specialty Brands. Provisions for returns decreased $5.2 million driven by the Specialty Generics segment, and other sales deductions decreased by $4.3 million from fiscal 2020 (Predecessor) to fiscal 2021.
Total provisions for fiscal 2020 increased $252.6 million compared with fiscal 2019, which was inclusive of the $536.0 million provision for the Medicaid lawsuit incurred in fiscal 2020. Excluding the impact of the Medicaid lawsuit, the decrease in rebates and chargebacks of $281.4 million primarily related to a decrease of $315.2 million in the Specialty Generics segment driven by decreased pricing resulting in lower chargeback amounts, offset by a $33.8 million increase in Specialty Brands. Provisions for returns increased $6.7 million driven by the Specialty Generics segment, and other sales deductions increased by $8.7 million from fiscal 2019 to fiscal 2020.2021 (Predecessor).
Product sales are recognized when the customer obtains control of our product. Control is transferred either at a point in time, generally upon delivery to the customer site, or in the case of certain of our products, over the period in which the customer has access to the product and related services. Revenue recognized over time is based upon either consumption of the product or passage of time based upon our determination of the measure that best aligns with how the obligation is satisfied. Our considerations of why such measures provide a faithful depiction of the transfer of our products are as follows:
•For those contracts whereby revenue is recognized over time based upon consumption of the product, we either have:
1.the right to invoice the customer in an amount that directly corresponds with the value to the customer of our performance to date, for which the practical expedient to recognize in proportion to the amount it has the right to invoice has been applied, or
2.the remaining goods and services to which the customer is entitled is diminished upon consumption.
•For those contracts whereby revenue is recognized over time based upon the passage of time, the benefit that the customer receives from unlimited access to our product does not vary, regardless of consumption. As a result, our obligation diminishes with the passage of time; therefore, ratable recognition of the transaction price over the contract period is the measure that best aligns with how the obligation is satisfied.
For additional information, refer to Note 4 of the Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.Report.
Intangible Assets
Intangible assets include completed technology licenses, trademarks and IPR&D. Intangible assets acquired in a business combination are recorded at fair value, while intangible assets acquired in other transactions are recorded at cost. Intangible assets with finite useful lives are subsequently amortized generally usingaccording to the straight-line methodpattern in which the economic benefit of the asset is used up over five to thirty years.their estimated useful lives. We assess the remaining useful life and the recoverability of finite-lived intangible assets whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. When a triggering event occurs, we evaluate potential impairment of finite-lived intangible assets by first comparing undiscounted cash flows associated with the asset, or the asset group they are a part of, to its carrying value. If the carrying value is greater than the undiscounted cash flows, the amount of potential impairment is measured by comparing the fair value of the assets, or asset group, with their carrying value. The fair value of the intangible asset, or asset group, is estimated using an income approach. If the fair value is less than the carrying value of the intangible asset, or asset group, the amount recognized for impairment is equal to the difference between the carrying value of the asset and the fair value of the asset. We annually test 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. We compare the fair value of the assets with their carrying value and record an impairment when the carrying value exceeds the fair value. Changes in economic and operating conditions impacting these assumptions could result in intangible asset impairment in future periods.
For more information on our intangible impairment analyses and the results thereof, refer to Notes 3 and 13 of the Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.Report.
Acquisitions
For acquisitions that meet the criteria for business combination accounting, the amounts paid are allocated to the tangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. We then allocate the purchase price in excess of net tangible assets acquired to identifiable intangible assets, including purchased research and development. The fair value of identifiable intangible assets is based on detailed valuations. These valuations rely on a number of factors including operating results, business plans, economic projections, anticipated future cash flows, transactions and market place data. There are inherent uncertainties related to these factors and judgment in applying them to estimate the fair value of individual assets acquired in a business combination. Due to these inherent uncertainties, there is risk that the carrying value of our recorded intangible assets may be overstated, which may result in an increased risk of impairment in future periods. We perform our intangible asset valuations using an income approach based on the present value of future cash flows. This approach incorporates many assumptions including future growth rates, discount factors and income tax rates. Changes in economic and operating conditions impacting these assumptions could result in impairment in future periods.
Our purchased research and development represents the estimated fair value as of the acquisition date of in-process projects that have not reached technological feasibility. The primary basis for determining technological feasibility of these projects is obtaining regulatory approval.
The fair value of IPR&D is determined using the discounted cash flow method. In determining the fair value of IPR&D, we consider, among other factors, appraisals, the stage of completion of the projects, the technological feasibility of the projects, whether the projects have an alternative future use and the estimated residual cash flows that could be generated from the various projects and technologies over their respective projected economic lives. The discount rate used includes a rate of return that accounts for the time value of money, as well as risk factors that reflect the economic risk that the cash flows projected may not be realized.
The fair value attributable to IPR&D projects at the time of acquisition is capitalized as an indefinite-lived intangible asset and tested annually for impairment until the project is completed or abandoned. Upon completion of the project, the indefinite-lived
intangible asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. If the project is abandoned, the indefinite-lived intangible asset is charged to expense.
Certain asset acquisitions or license agreements may not meet the criteria for a business combination. We account for these transactions as an asset acquisition and recognize the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquired entity. Any initial up-front payments incurred in connection with the acquisition or licensing of IPR&D product candidates that do not meet the definition of a business are treated as research and development expense.
Contingent Consideration
As part of certain acquisitions, we are subject to contractual arrangements to pay contingent consideration to former owners of these businesses. The payment of obligations under these arrangements are uncertain, and even if payments are expected to be made the timing of these payments may be uncertain as well. These contingent consideration obligations are required to be recorded at fair value within the consolidated balance sheet and adjusted at each respective balance sheet date, with changes in the fair value being recognized in the consolidated statement of operations. The determination of fair value is dependent upon a number of factors, which include projections of future revenues, the probability of successfully achieving certain regulatory milestones, competitive entrants into the marketplace, the timing associated with the aforementioned criteria and market place data (e.g., interest rates). Several of these assumptions require projections several years into the future. Due to these inherent uncertainties, there is risk that the contingent consideration liabilities may be overstated or understated. Changes in economic and operating conditions impacting these assumptions are expected to impact future operating results, with the magnitude of the impact tied to the significance in the change in assumptions. For additional information, refer to Note 20 of the Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.Report.
Contingencies
We are involved, either as a plaintiff or a defendant, in various legal proceedings that arise in the ordinary course of business, including, without limitation, government investigations, environmental matters, product liability matters, patent infringement claims, antitrust matters, securities class action lawsuits, personal injury claims, employment disputes, contractual and other commercial disputes, and other legal proceedings, all in the ordinary course of business as further discussed in Note 19 of Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.Report. Accruals recorded for various contingencies, including legal proceedings, self-insurance and other claims, are based on judgment, the probability of losses and, where applicable, the consideration of opinions of internal and/or external legal counsel, internal and/or external technical consultants and actuarially determined estimates. When a range is established but a best estimate cannot be made, we record the minimum loss contingency amount. These estimates are often initially developed substantially earlier than the ultimate loss is known, and the estimates are reevaluated each accounting period as additional information becomes available. When we are initially unable to develop a best estimate of loss, we record the minimum amount of loss, which could be zero. As information becomes known, additional loss provisions are recorded when either a best estimate can be made or the minimum loss amount is increased. When events result in an expectation of a more favorable outcome than previously expected, our best estimate is changed to a lower amount. We record receivables from third-party insurers up to the amount of the related liability when we have determined that existing insurance policies will provide reimbursement. In making this determination, we consider applicable deductibles, policy limits and the historical payment experience of the insurance carriers. Receivables are not netted against the related liabilities for financial statement presentation.
Income Taxes
In determining income for financial statement purposes, we must make certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities and the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense.
Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence including our past operating results, the existence of cumulative losses in the most recent years and our forecast of future taxable income. In estimating future taxable income, we develop assumptions including the amount of future state, federal and international pre-tax operating income, the reversal of temporary differences, and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates we use to manage the underlying businesses.
As previously discussed, we concluded that there is substantial doubt about our ability to continue as a going concern within one year from the date of issuance of the consolidated financial statements. We considered this in determining that certain net deferred tax assets were no longer more likely than not realizable. As a result, we continue to maintain a valuation allowance against our net
deferred tax assets. Our income tax benefit or expense recorded in the future may be impacted to the extent of changes in our valuation allowances.
We determine whether it is more likely than not that a tax position will be sustained upon examination. The tax benefit of any tax position that meets the more-likely-than-not recognition threshold is calculated as the largest amount that is more than 50.0% likely of being realized upon resolution of the uncertainty. To the extent a full benefit is not realized on the uncertain tax position, an income tax liability or a reduction to a deferred tax asset (“contra-DTA”("contra-DTA"), is established. We adjust these liabilities and contra-DTAs as a result of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the tax liabilities.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across our global operations. Changes in tax laws and rates could affect recorded deferred tax assets and liabilities in the future. Management is not aware of any such changes, however, which would have a material adverse effect on our competitive position, business, financial condition, results of operations and cash flows. Refer to Note 8 of Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for further information.
| | | | | |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk. |
Our operations include activities in the U.S. and countries outside of the U.S. These operations expose us to a variety of market risks, including the effects of changes in interest rates and currency exchange rates. We monitor and manage these financial exposures as an integral part of our overall risk management program. We do not utilize derivative instruments for trading or speculative purposes.
Interest Rate Risk
Our exposure to interest rate risk relates primarily to our variable-rate debt instruments, which bear interest based on LIBOR plus margin. As of December 30, 2022 (Successor), our outstanding debt included $1,738.9 million variable-rate debt on our senior secured term loans. Assuming a one percent increase in the applicable interest rates, in excess of applicable minimum floors, annual interest expense for fiscal 2023 would increase by approximately $17.4 million.
The remaining outstanding debt as of December 30, 2022 (Successor) is fixed-rate debt. Changes in market interest rates generally affect the fair value of fixed-rate debt, but do not impact earnings or cash flows.
Currency Risk
Certain net sales and costs of our international operations are denominated in the local currency of the respective countries. As such, profits from these subsidiaries may be impacted by fluctuations in the value of these local currencies relative to the U.S. dollar. We also have significant intercompany financing arrangements that may result in gains and losses in our results of operations. In an effort to mitigate the impact of currency exchange rate effects we may hedge certain operational and intercompany transactions; however, our hedging strategies may not fully offset gains and losses recognized in our results of operations.
The consolidated statement of operations is exposed to currency risk from intercompany financing arrangements, which primarily consist of intercompany debt and intercompany cash pooling, where the denominated currency of the transaction differs from the functional currency of one or more of our subsidiaries. The aggregate potential unfavorable impact from a smaller reporting companyhypothetical 10.0% adverse change in foreign exchange rates was $2.1 million as defined by Item 10 of Regulations S-K and areDecember 30, 2022 (Successor), with all other variables held constant. This hypothetical loss does not requiredreflect any hypothetical benefits that would be derived from hedging activities, including cash holdings in similar foreign currencies, that we have historically utilized to provide the information otherwise required under this Item.mitigate our exposure to movements in foreign exchange rates.
| | | | | |
| Item 8. | Financial Statements and Supplementary Data. |
INDEX TO FINANCIAL STATEMENTS
| | | | | |
| Consolidated Financial Statements | |
| |
| Report of Independent Registered Public Accounting Firm (PCAOB ID No. 34). | |
Consolidated Statements of Operations for the period from June 17, 2022 through December 30, 2022 (Successor), the period from January 1, 2022 through June 16, 2022 (Predecessor) and the fiscal years ended December 31, 2021 (Predecessor) and December 25, 2020 and December 27, 2019.(Predecessor). | |
Consolidated Statements of Comprehensive Operations for the period from June 17, 2022 through December 30, 2022 (Successor), the period from January 1, 2022 through June 16, 2022 (Predecessor) and the fiscal years ended December 31, 2021 (Predecessor) and December 25, 2020 and December 27, 2019.(Predecessor). | |
Consolidated Balance Sheets as of December 30, 2022 (Successor) and December 31, 2021 and December 25, 2020.(Predecessor). | |
Consolidated Statements of Cash Flows for the period from June 17, 2022 through December 30, 2022 (Successor), the period from January 1, 2022 through June 16, 2022 (Predecessor) and the fiscal years ended December 31, 2021 (Predecessor) and December 25, 2020 and December 27, 2019.(Predecessor). | |
Consolidated Statement of Changes in Shareholders' Equity for the period from June 17, 2022 through December 28, 201831, 2022 (Successor) and for the period from December 27, 2019 to December 31, 2021.2021 (Predecessor). | |
| Notes to Consolidated Financial Statements. | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Mallinckrodt plc
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Mallinckrodt plc (Debtor-in-Possession) (in examination under Part 10 of the Irish Companies Act 2014) (the "Company") as of December 30, 2022 (Successor Company balance sheet) and December 31, 2021 and December 25, 2020,(Predecessor Company balance sheet), the related consolidated statements of operations, comprehensive operations, changes in shareholders' equity, and cash flows for the period from June 17, 2022 through December 30, 2022 (Successor Company operations), for the period from January 1, 2022 through June 16, 2022 (Predecessor Company operations), and the fiscal years ended December 31, 2021 (Predecessor Company operations) and December 25, 2020 and December 27, 2019(Predecessor Company operations), and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the Successor Company financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and December 25, 2020,30, 2022, and the results of its operations and its cash flows for the period from June 17, 2022 through December 30, 2022, in conformity with accounting principles generally accepted in the United States of America. Further, in our opinion, the Predecessor Company financial statements present fairly, in all material respects, the financial position of the Predecessor Company as of December 31, 2021, and the results of its operations and its cash flows for the period from January 1, 2022 through June 16, 2022, and the fiscal years ended December 31, 2021 and December 25, 2020, and December 27, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021,30, 2022, based on criteria established in Internal Control—Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 15, 2022,3, 2023, expressed an unqualified opinion on the Company's internal control over financial reporting.
Going ConcernFresh-Start Accounting
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company initiated proceedings under chapter 11 of title 11 ("Chapter 11") ofon March 2, 2022, and April 27, 2022, the United States Code (the "Bankruptcy Code")Bankruptcy Court for the District of Delaware and the High Court of Ireland, respectively, entered an order confirming the fourth amended plan of reorganization and the scheme of arrangement, respectively, which became effective after the close of business on June 16, 2022. Accordingly, the accompanying financial statements have been prepared in conformity with FASB Accounting Standard Codification 852, Reorganizations, which raises substantial doubt about its ability to continuefor the Successor Company as a going concern. Management's plans in regard to these matters are alsonew entity with assets, liabilities, and a capital structure having carrying values not comparable with prior periods as described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Bankruptcy Proceedings
As discussed in Note 23 to the financial statements, the Company has filed for reorganization under Chapter 11 of the Bankruptcy Code. The accompanying financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such financial statements do not purport to show (1)statements. Fresh start accounting is also communicated as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (2) as to prepetition liabilities, the settlement amounts for allowed claims, or the status and priority thereof; (3) as to shareholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (4) as to operations, the effect of any changes that may be made in its business.critical audit matter below.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinionopinions on the critical audit matters or on the accounts or disclosures to which they relate.
Intangible Assets, net – Finite-lived Intangibles–Fresh-start Accounting - Refer to Note 133 to the financial statements (also see fresh-start accounting explanatory paragraph above)
Critical Audit Matter Description
The Company has finite-lived intangible assets, net of approximately $5.4 billion at December 31, 2021, comprised of completed technology, licensesOn March 2, 2022, and trademarks. The Company recorded a non-restructuring impairment charge of $90.4 million related toApril 27, 2022, the Amitiza intangible asset in the consolidated statement of operationsUnited States Bankruptcy Court for the year ended December 31, 2021.District of Delaware and the High Court of Ireland, respectively, entered an order confirming the fourth amended plan of reorganization and the scheme of arrangement, respectively, which became effective on June 16, 2022 (the “Effective Date”) and the Company emerged from chapter 11 of title 11 of the United States Code. In connection with its emergence and in accordance with Accounting Standard Codification ("ASC") 350 – Intangibles – Goodwill and Other, finite-lived intangible assets are assessed for recoverability when events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. When a triggering event occurs,ASC 852, Reorganizations, the Company evaluates finite-lived intangible assetsqualified for recoverability by comparingand adopted fresh-start accounting which resulted in a new basis of accounting and the Company becoming a new entity for financial reporting purposes. Management derived a reorganization value from the Company’s enterprise value which was estimated undiscounted cash flows to be $5,223.0 million. Under fresh-start accounting, reorganization value represents the carrying amount and fair value of the asset. IfSuccessor Company's total assets and is intended to approximate the carrying amount a willing buyer would pay for the assets immediately after restructuring. Upon the application of fresh-start accounting, the Company allocated the reorganization value to its individual assets based on their estimated fair values in accordance with Accounting Standards Codification Topic 805 - Business Combinations. The Company engaged a third-party valuation advisor to assist with the determination of the asset exceedsfair value of certain assets, liabilities, and equity.
Auditing the estimated undiscounted cash flows,adoption of fresh-start accounting was complex due to the amount ofsignificant estimation uncertainty in determining the potential impairment is measured based on the difference between the carrying amount and fair value of the asset.Company’s assets and liabilities and required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists. The Company also assesses the remaining useful life and the recoverability of finite-livedidentified intangible assets for impairment, or whenever events or changes in circumstances indicate thatof $3,152.2 million, which principally consisted of completed technology and in-process research and development, were subject to significant estimation uncertainty primarily due to the carrying value may not be recoverable by either a qualitative or income approach.
We identified finite-lived intangible assets as a critical audit matter becausesensitivity of the significant judgment by management when developingrespective fair values to underlying assumptions in the discounted cash flow models used to measure the intangible assets. Significant assumptions of cash flows. The estimation of cash flows for finite-lived intangible assets requires management to make assumptions regarding operating results, business plans, future growth rates, anticipated futureincluded projected cash flows and discount rate. This required a higher degreerates. The Successor Company equity value of auditor judgment, subjectivity, and effort in performing procedures$2,203.6 million, was subject to evaluate these assumptions. Our evaluation included assessing whethersignificant estimation uncertainty primarily due to the assumptions usedadjustments made by management were reasonable and consistent with audit evidence obtained.to the estimated enterprise value as a result of changes to certain cash flow projections.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to finite-lived intangiblemanagement’s significant assumptions related to the application of fresh-start accounting, specifically the fair value of intangibles assets, included the following, among others:
•We evaluated management's assessmenttested the operating effectiveness of potential triggering events for consistency with internal controls related to the Company’s projected financial information and external events and transactions.
•We evaluated management's ability to accurately estimate undiscounted future cash flows by comparing actual undiscounted cash flows to management's historical estimates.discount rates.
•We evaluated the reasonableness of management's assumptionsmanagement’s projected financial information by comparing estimated undiscounted future cash flowsperforming the following:
–Compared the projected financial information to historical results by product, evaluated certain assumptions that form the basis of the projected financial information.information, such as revenue growth rates and margins, which may be affected by future economic and market conditions.
•–We evaluatedInspected internal communications from members of management to (1) other members of management and (2) the reasonablenessBoard of management's assumptions by inspecting external information.Directors.
•With the assistance of our fair value specialists, we evaluated the reasonableness ofassessed the discount rate used in the Amitiza intangible asset fair value calculation.rates.
•We inspectedevaluated the Company’s third-party valuation advisor’s experience and qualifications.
•We obtained an understanding and evaluated the methodologies used by the Company’s third-party valuation advisor for the development of the fair values of the intangible assets.
•We obtained an understanding of the methodology used by the Company’s third-party valuation advisor for determining the significant assumptions related to the discount rates, tax rates, and contributory asset charges.
–We evaluated the methods and significant assumptions used by management for the development of the fair values of the intangible assets.
–We evaluated the completeness and accuracy of the underlying data supporting the significant assumptions and estimates used by management for the development of the fair values of the intangible assets.
Our audit procedures related to management’s significant assumptions related to the application of fresh-start accounting, specifically the determination of Successor Company equity value, included the following, among others:
•We tested the operating effectiveness of internal communicationscontrols related to the Company’s determination of Successor Company equity value.
•We evaluated the Company’s third-party valuation advisor’s experience and documentationqualifications.
•We evaluated the estimated enterprise value of the Successor Company, which was estimated with the assistance of a third-party valuation advisor using various valuation methods.
•We evaluated the adjustments made by management to corroborate our inquiries with management.the estimated enterprise value to determine the implied fair value of the Successor Company’s equity value.
Chapter 11 Bankruptcy – Liabilities Subject to Compromise –Income Taxes - Income Tax Impacts from Emergence from Voluntary Reorganization - Refer to NoteNotes 2, 3, 4 and 8 to the financial statements
Critical Audit Matter Description
As a resultOn March 2, 2022, and April 27, 2022, the United States Bankruptcy Court for the District of Delaware and the commencementHigh Court of Ireland, respectively, entered an order confirming the Chapter 11 proceedings, the payment of pre-petition liabilities is subject to compromise or other treatment pursuant to a plan of reorganization. The determination of how liabilities will ultimately be settled or treated cannot be made until the confirmed Chapter 11fourth amended plan of reorganization becomes effective. Pre-petition liabilities that areand the scheme of arrangement, respectively, which became effective on June 16, 2022, and the Company emerged from chapter 11 of title 11 of the United States Code. Evaluating the associated income tax impacts involved the interpretation of multi-jurisdictional tax laws and regulations, supported by third-party tax opinions. Interpretation of tax laws can be inherently uncertain as tax law is complex and often subject to compromise are to be reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for different amounts. The amounts currently classified as liabilities subject to compromise are preliminary and mayvaried interpretations. Accordingly, tax law interpretations can be subject to future adjustments based on Bankruptcy Court actions, further developmentspotential challenges by the relevant tax authorities and the ultimate outcome with respect to disputed claims, determinations oftaxes the secured status of certain claims,Company may owe may differ from the values of any collateral securing such claims, rejection of executory contracts, continued reconciliation, or other events.
amounts recognized, which the Company considered in assessing the need for reserves for uncertain tax positions. We identified liabilities subject to compromisethe income taxes associated with Chapteremergence from chapter 11 bankruptcy and the related disclosure as a critical audit matter because of the significant judgment exercisedjudgments made by management inand the complex nature of identifying, measuring, and interpreting the tax implications, particularly related to the interpretation of multi-jurisdictional tax laws and application of the Accounting Standard Codification (“ASC”) 852 – Reorganizations when determining how to appropriately measure and classify the liabilities on the consolidated financial statements.regulations. This required a high degree of auditor judgment and an increased extent of effort, including the need to involve our tax specialists with specialized skills and knowledge when performing audit procedures to evaluate the reasonablenessCompany's interpretation of, management's conclusions.and compliance with multi-jurisdictional tax laws.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to Chapter 11 bankruptcythe income taxes associated with the restructuring transactions and emergence from voluntary reorganization included the following, among others:
•We tested the operating effectiveness of controls including management's reviewthe internal control related to the Company’s income taxes for the restructuring transactions, emergence from voluntary reorganization, the realizability of deferred tax assets, and the legal backgroundinterpretation of tax laws and facts, applicable accounting guidance, and related disclosure.
•We inspected Bankruptcy Court documents, including motions and orders.
•We corroborated key facts about the bankruptcy proceedings through our inquiries with internal legal counsel and executive members of management.
•We requested and received written responses from internal and external legal counsel regarding the bankruptcy proceedings.regulations.
•With the assistance of professionals in our firm having expertise in complex accounting and reporting matters,tax specialists, we evaluated the income taxes associated with the restructuring transactions and emergence from voluntary reorganization by performing the following:
–Obtained an understanding of the Company's conclusionsrestructuring transactions.
–Obtained and evaluated management and third-party tax specialist memoranda regarding the applicationanalysis of ASC 852 – Reorganizations.relevant tax laws and regulations.
•–We evaluatedEvaluated the Company's disclosuresCompany’s third-party tax specialists’ experience and qualifications.
–Evaluated the appropriateness of management's judgments and conclusions with respect to reserves for consistency with our knowledgeuncertain tax positions, including the technical merits and reasonableness of probabilities applied to uncertain tax positions.
–Evaluated the completeness and accuracy of the statusunderlying data, calculations, and allocations supporting the amount of current and deferred income tax benefit recorded.
–Tested significant assumptions and key inputs to assess the Chapter 11 bankruptcy proceedings.Company’s recognition and measurement of current and deferred income tax benefit.
/s/ DELOITTEDeloitte & TOUCHETouche LLP
St. Louis, Missouri
March 15, 20223, 2023
We have served as the Company's auditor since 2011.
MALLINCKRODT PLC
(DEBTOR-IN-POSSESSION)
(IN EXAMINATION UNDER PART 10 OF THE IRISH COMPANIES ACT 2014)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
| | | Fiscal Year | | Successor | | | Predecessor |
| | 2021 | | 2020 | | 2019 | | Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
| Net sales (includes refined estimate of the retrospective one-time charge of $536.0 related to the Medicaid lawsuit for fiscal 2020) | $ | 2,208.8 | | | $ | 2,213.4 | | | $ | 3,162.5 | | |
| Net sales (includes retrospective one-time charge of $536.0 related to the Medicaid lawsuit for fiscal 2020) | | Net sales (includes retrospective one-time charge of $536.0 related to the Medicaid lawsuit for fiscal 2020) | $ | 1,039.7 | | | | $ | 874.6 | | | $ | 2,208.8 | | | $ | 2,213.4 | |
| Cost of sales | Cost of sales | 1,317.1 | | | 1,544.0 | | | 1,741.1 | | Cost of sales | 991.0 | | | | 582.0 | | | 1,317.1 | | | 1,544.0 | |
| Gross profit | Gross profit | 891.7 | | | 669.4 | | | 1,421.4 | | Gross profit | 48.7 | | | | 292.6 | | | 891.7 | | | 669.4 | |
| Selling, general and administrative expenses | Selling, general and administrative expenses | 581.8 | | | 884.1 | | | 831.0 | | Selling, general and administrative expenses | 290.1 | | | | 275.3 | | | 581.8 | | | 884.1 | |
| Research and development expenses | Research and development expenses | 205.2 | | | 290.8 | | | 349.4 | | Research and development expenses | 64.2 | | | | 65.5 | | | 205.2 | | | 290.8 | |
| Restructuring charges, net | Restructuring charges, net | 26.9 | | | 37.5 | | | (1.7) | | Restructuring charges, net | 11.1 | | | | 9.6 | | | 26.9 | | | 37.5 | |
| Non-restructuring impairment charges | Non-restructuring impairment charges | 154.9 | | | 63.5 | | | 388.0 | | Non-restructuring impairment charges | — | | | | — | | | 154.9 | | | 63.5 | |
| Losses (gains) on divestiture | Losses (gains) on divestiture | 0.8 | | | (16.6) | | | 33.5 | | Losses (gains) on divestiture | — | | | | — | | | 0.8 | | | (16.6) | |
| Opioid-related litigation settlement loss (gain) (Note 19) | 125.0 | | | (43.4) | | | 1,643.4 | | |
| Medicaid lawsuit (Note 19) | — | | | 105.1 | | | — | | |
| Opioid-related litigation settlement loss (gain) | | Opioid-related litigation settlement loss (gain) | — | | | | — | | | 125.0 | | | (43.4) | |
| Medicaid lawsuit | | Medicaid lawsuit | — | | | | — | | | — | | | 105.1 | |
| Operating loss | Operating loss | (202.9) | | | (651.6) | | | (1,822.2) | | Operating loss | (316.7) | | | | (57.8) | | | (202.9) | | | (651.6) | |
| Interest expense | Interest expense | (222.6) | | | (261.1) | | | (309.0) | | Interest expense | (324.3) | | | | (108.6) | | | (222.6) | | | (261.1) | |
| Interest income | Interest income | 1.9 | | | 5.9 | | | 9.5 | | Interest income | 3.9 | | | | 0.6 | | | 1.9 | | | 5.9 | |
| Gains on debt extinguishment, net | — | | | — | | | 466.6 | | |
| Other income, net | 22.0 | | | 7.4 | | | 63.6 | | |
| | Other income (expense), net | | Other income (expense), net | 10.0 | | | | (14.6) | | | 22.0 | | | 7.4 | |
| Reorganization items, net | Reorganization items, net | (428.2) | | | (61.4) | | | — | | Reorganization items, net | (23.2) | | | | (630.9) | | | (428.2) | | | (61.4) | |
| Loss from continuing operations before income taxes | Loss from continuing operations before income taxes | (829.8) | | | (960.8) | | | (1,591.5) | | Loss from continuing operations before income taxes | (650.3) | | | | (811.3) | | | (829.8) | | | (960.8) | |
| (Benefit) expense from income taxes | (Benefit) expense from income taxes | (106.3) | | | 8.9 | | | (584.3) | | (Benefit) expense from income taxes | (52.0) | | | | (497.3) | | | (106.3) | | | 8.9 | |
| Loss from continuing operations | Loss from continuing operations | (723.5) | | | (969.7) | | | (1,007.2) | | Loss from continuing operations | (598.3) | | | | (314.0) | | | (723.5) | | | (969.7) | |
| Income from discontinued operations, net of tax (benefit) expense of ($5.0), $(16.2) and $1.7 | 6.1 | | | 25.1 | | | 10.7 | | |
| Income from discontinued operations, net of tax benefit of $—, $—, $(5.0) and $(16.2) | | Income from discontinued operations, net of tax benefit of $—, $—, $(5.0) and $(16.2) | 0.2 | | | | 0.9 | | | 6.1 | | | 25.1 | |
| Net loss | Net loss | $ | (717.4) | | | $ | (944.6) | | | $ | (996.5) | | Net loss | $ | (598.1) | | | | $ | (313.1) | | | $ | (717.4) | | | $ | (944.6) | |
| | Basic loss per share (Note 9): | Basic loss per share (Note 9): | | Basic loss per share (Note 9): | | | |
| Loss from continuing operations | Loss from continuing operations | $ | (8.54) | | | $ | (11.48) | | | $ | (12.00) | | Loss from continuing operations | $ | (45.43) | | | | $ | (3.70) | | | $ | (8.54) | | | $ | (11.48) | |
| Income from discontinued operations | Income from discontinued operations | 0.07 | | | 0.30 | | | 0.13 | | Income from discontinued operations | 0.02 | | | | 0.01 | | | 0.07 | | | 0.30 | |
| Net loss | Net loss | $ | (8.47) | | | $ | (11.18) | | | $ | (11.88) | | Net loss | $ | (45.41) | | | | $ | (3.69) | | | $ | (8.47) | | | $ | (11.18) | |
| Basic weighted-average shares outstanding | Basic weighted-average shares outstanding | 84.7 | | | 84.5 | | | 83.9 | | Basic weighted-average shares outstanding | 13.2 | | | | 84.8 | | | 84.7 | | | 84.5 | |
| | Diluted loss per share (Note 9): | Diluted loss per share (Note 9): | | Diluted loss per share (Note 9): | | | |
| Loss from continuing operations | Loss from continuing operations | $ | (8.54) | | | $ | (11.48) | | | $ | (12.00) | | Loss from continuing operations | $ | (45.43) | | | | $ | (3.70) | | | $ | (8.54) | | | $ | (11.48) | |
| Income from discontinued operations | Income from discontinued operations | 0.07 | | | 0.30 | | | 0.13 | | Income from discontinued operations | 0.02 | | | | 0.01 | | | 0.07 | | | 0.30 | |
| Net loss | Net loss | $ | (8.47) | | | $ | (11.18) | | | $ | (11.88) | | Net loss | $ | (45.41) | | | | $ | (3.69) | | | $ | (8.47) | | | $ | (11.18) | |
| Diluted weighted-average shares outstanding | Diluted weighted-average shares outstanding | 84.7 | | | 84.5 | | | 83.9 | | Diluted weighted-average shares outstanding | 13.2 | | | | 84.8 | | | 84.7 | | | 84.5 | |
See Notes to Consolidated Financial Statements.
MALLINCKRODT PLC
(DEBTOR-IN-POSSESSION)
(IN EXAMINATION UNDER PART 10 OF THE IRISH COMPANIES ACT 2014)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
(in millions)
| | | Fiscal Year | | Successor | | | Predecessor |
| | 2021 | | 2020 | | 2019 | | Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
| Net loss | Net loss | $ | (717.4) | | | $ | (944.6) | | | $ | (996.5) | | Net loss | $ | (598.1) | | | | $ | (313.1) | | | $ | (717.4) | | | $ | (944.6) | |
| Other comprehensive income (loss), net of tax | Other comprehensive income (loss), net of tax | | Other comprehensive income (loss), net of tax | | | |
| Currency translation adjustments | Currency translation adjustments | (0.5) | | | 2.1 | | | 18.3 | | Currency translation adjustments | 2.1 | | | | (1.5) | | | (0.5) | | | 2.1 | |
| Unrecognized gain on derivatives | Unrecognized gain on derivatives | — | | | 0.4 | | | 1.8 | | Unrecognized gain on derivatives | — | | | | — | | | — | | | 0.4 | |
| Unrecognized gain (loss) on benefit plans | Unrecognized gain (loss) on benefit plans | 1.8 | | | (4.2) | | | (4.2) | | Unrecognized gain (loss) on benefit plans | 8.7 | | | | — | | | 1.8 | | | (4.2) | |
| | Total other comprehensive income (loss), net of tax | Total other comprehensive income (loss), net of tax | 1.3 | | | (1.7) | | | 15.9 | | Total other comprehensive income (loss), net of tax | 10.8 | | | | (1.5) | | | 1.3 | | | (1.7) | |
| Comprehensive loss | Comprehensive loss | $ | (716.1) | | | $ | (946.3) | | | $ | (980.6) | | Comprehensive loss | $ | (587.3) | | | | $ | (314.6) | | | $ | (716.1) | | | $ | (946.3) | |
See Notes to Consolidated Financial Statements.
MALLINCKRODT PLC
(DEBTOR-IN-POSSESSION)
(IN EXAMINATION UNDER PART 10 OF THE IRISH COMPANIES ACT 2014)
CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
| | | | | | | | | | | | | Successor | | | Predecessor |
| | December 31,
2021 | | December 25,
2020 | | December 30,
2022 | | | December 31,
2021 |
| Assets | Assets | | | | Assets | | | | |
| Current Assets: | Current Assets: | | Current Assets: | | | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 1,345.0 | | | $ | 1,070.6 | | Cash and cash equivalents | $ | 409.5 | | | | $ | 1,345.0 | |
| Accounts receivable, less allowance for doubtful accounts of $4.7 and $4.5 | 439.1 | | | 538.8 | | |
| Accounts receivable, less allowance for doubtful accounts of $4.4 and $4.7 | | Accounts receivable, less allowance for doubtful accounts of $4.4 and $4.7 | 405.3 | | | | 439.1 | |
| Inventories | Inventories | 347.2 | | | 344.9 | | Inventories | 947.6 | | | | 347.2 | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | 178.3 | | | 350.0 | | Prepaid expenses and other current assets | 273.4 | | | | 178.3 | |
| | Total current assets | Total current assets | 2,309.6 | | | 2,304.3 | | Total current assets | 2,035.8 | | | | 2,309.6 | |
| Property, plant and equipment, net | Property, plant and equipment, net | 776.0 | | | 833.1 | | Property, plant and equipment, net | 457.6 | | | | 776.0 | |
| | Intangible assets, net | Intangible assets, net | 5,448.4 | | | 6,184.5 | | Intangible assets, net | 2,843.8 | | | | 5,448.4 | |
| Deferred income taxes | | Deferred income taxes | 475.5 | | | | — | |
| Other assets | Other assets | 382.3 | | | 393.5 | | Other assets | 201.1 | | | | 382.3 | |
| Total Assets | Total Assets | $ | 8,916.3 | | | $ | 9,715.4 | | Total Assets | $ | 6,013.8 | | | | $ | 8,916.3 | |
| | Liabilities and Shareholders' Equity | Liabilities and Shareholders' Equity | | Liabilities and Shareholders' Equity | | | |
| Current Liabilities: | Current Liabilities: | | Current Liabilities: | | | |
| Current maturities of long-term debt | Current maturities of long-term debt | $ | 1,388.9 | | | $ | 3,587.9 | | Current maturities of long-term debt | $ | 44.1 | | | | $ | 1,388.9 | |
| Accounts payable | Accounts payable | 123.0 | | | 93.3 | | Accounts payable | 114.0 | | | | 123.0 | |
| Accrued payroll and payroll-related costs | Accrued payroll and payroll-related costs | 84.6 | | | 79.4 | | Accrued payroll and payroll-related costs | 49.5 | | | | 84.6 | |
| Accrued interest | Accrued interest | 17.0 | | | 26.9 | | Accrued interest | 29.0 | | | | 17.0 | |
| Acthar Gel-Related Settlement liability | | Acthar Gel-Related Settlement liability | 16.5 | | | | — | |
| Opioid-Related Litigation Settlement liability | | Opioid-Related Litigation Settlement liability | 200.0 | | | | — | |
| Accrued and other current liabilities | Accrued and other current liabilities | 328.7 | | | 331.2 | | Accrued and other current liabilities | 290.7 | | | | 328.7 | |
| | Total current liabilities | Total current liabilities | 1,942.2 | | | 4,118.7 | | Total current liabilities | 743.8 | | | | 1,942.2 | |
| | Long-term debt | | Long-term debt | 3,027.7 | | | | — | |
| Acthar Gel-Related Settlement liability | | Acthar Gel-Related Settlement liability | 75.0 | | | | — | |
| Opioid-Related Litigation Settlement liability | | Opioid-Related Litigation Settlement liability | 379.9 | | | | — | |
| Pension and postretirement benefits | Pension and postretirement benefits | 30.1 | | | 34.6 | | Pension and postretirement benefits | 41.0 | | | | 30.1 | |
| Environmental liabilities | Environmental liabilities | 43.0 | | | 59.8 | | Environmental liabilities | 35.8 | | | | 43.0 | |
| Deferred income taxes | Deferred income taxes | 20.9 | | | 80.6 | | Deferred income taxes | 0.3 | | | | 20.9 | |
| Other income tax liabilities | Other income tax liabilities | 83.2 | | | 100.1 | | Other income tax liabilities | 18.2 | | | | 83.2 | |
| Other liabilities | Other liabilities | 85.8 | | | 109.8 | | Other liabilities | 78.4 | | | | 85.8 | |
| Liabilities subject to compromise (Note 2) | 6,397.7 | | | 4,192.6 | | |
| Liabilities subject to compromise | | Liabilities subject to compromise | — | | | | 6,397.7 | |
| Total Liabilities | Total Liabilities | 8,602.9 | | | 8,696.2 | | Total Liabilities | 4,400.1 | | | | 8,602.9 | |
| Shareholders' Equity: | Shareholders' Equity: | | Shareholders' Equity: | | | |
| Preferred shares, $0.20 par value, 500,000,000 authorized; none issued or outstanding | — | | | — | | |
| Ordinary A shares, €1.00 par value, 40,000 authorized; none issued or outstanding | — | | | — | | |
| Ordinary shares, $0.20 par value, 500,000,000 authorized; 94,296,235 and 94,111,303 issued; 84,726,590 and 84,605,156 outstanding | 18.9 | | | 18.8 | | |
| Ordinary shares held in treasury at cost, 9,569,645 and 9,506,147 | (1,616.1) | | | (1,616.1) | | |
| Predecessor preferred shares, $0.20 par value, 500,000,000 authorized; none issued or outstanding | | Predecessor preferred shares, $0.20 par value, 500,000,000 authorized; none issued or outstanding | — | | | | — | |
| Successor preferred shares, $0.01 par value, 500,000,000 authorized; none issued or outstanding | | Successor preferred shares, $0.01 par value, 500,000,000 authorized; none issued or outstanding | — | | | | — | |
| Predecessor ordinary A shares, €1.00 par value, 40,000 authorized; none issued or outstanding | | Predecessor ordinary A shares, €1.00 par value, 40,000 authorized; none issued or outstanding | — | | | | — | |
| Successor ordinary A shares, €1.00 par value, 40,000 authorized; none issued or outstanding | | Successor ordinary A shares, €1.00 par value, 40,000 authorized; none issued or outstanding | — | | | | — | |
| Predecessor ordinary shares, $0.20 par value, 500,000,000 authorized; 94,296,235 issued; 84,726,590 outstanding | | Predecessor ordinary shares, $0.20 par value, 500,000,000 authorized; 94,296,235 issued; 84,726,590 outstanding | — | | | | 18.9 | |
| Successor ordinary shares, $0.01 par value, 500,000,000 authorized; 13,170,932 issued and outstanding | | Successor ordinary shares, $0.01 par value, 500,000,000 authorized; 13,170,932 issued and outstanding | 0.1 | | | | — | |
| Ordinary shares held in treasury at cost, none and 9,569,645 | | Ordinary shares held in treasury at cost, none and 9,569,645 | — | | | | (1,616.1) | |
| Additional paid-in capital | Additional paid-in capital | 5,597.8 | | | 5,587.6 | | Additional paid-in capital | 2,191.0 | | | | 5,597.8 | |
| Retained deficit | Retained deficit | (3,678.9) | | | (2,961.5) | | Retained deficit | (588.2) | | | | (3,678.9) | |
| Accumulated other comprehensive loss | (8.3) | | | (9.6) | | |
| Accumulated other comprehensive income (loss) | | Accumulated other comprehensive income (loss) | 10.8 | | | | (8.3) | |
| Total Shareholders' Equity | Total Shareholders' Equity | 313.4 | | | 1,019.2 | | Total Shareholders' Equity | 1,613.7 | | | | 313.4 | |
| Total Liabilities and Shareholders' Equity | Total Liabilities and Shareholders' Equity | $ | 8,916.3 | | | $ | 9,715.4 | | Total Liabilities and Shareholders' Equity | $ | 6,013.8 | | | | $ | 8,916.3 | |
See Notes to Consolidated Financial Statements.
MALLINCKRODT PLC
(DEBTOR-IN-POSSESSION)
(IN EXAMINATION UNDER PART 10 OF THE IRISH COMPANIES ACT 2014)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| | | Fiscal Year | | Successor | | | Predecessor |
| | 2021 | | 2020 | | 2019 | | Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
| Cash Flows From Operating Activities: | Cash Flows From Operating Activities: | | | | | | Cash Flows From Operating Activities: | | | | | | | | |
| Net loss | Net loss | $ | (717.4) | | | $ | (944.6) | | | $ | (996.5) | | Net loss | $ | (598.1) | | | | $ | (313.1) | | | $ | (717.4) | | | $ | (944.6) | |
| Adjustments to reconcile net cash provided by operating activities: | Adjustments to reconcile net cash provided by operating activities: | | Adjustments to reconcile net cash provided by operating activities: | | | |
| Depreciation and amortization | Depreciation and amortization | 675.8 | | | 885.2 | | | 951.1 | | Depreciation and amortization | 347.5 | | | | 321.8 | | | 675.8 | | | 885.2 | |
| Share-based compensation | Share-based compensation | 10.2 | | | 25.3 | | | 33.8 | | Share-based compensation | 1.4 | | | | 1.7 | | | 10.2 | | | 25.3 | |
| Deferred income taxes | Deferred income taxes | (59.9) | | | 385.3 | | | (604.3) | | Deferred income taxes | (24.9) | | | | (473.0) | | | (59.9) | | | 385.3 | |
| Non-cash impairment charges | Non-cash impairment charges | 154.9 | | | 63.5 | | | 388.0 | | Non-cash impairment charges | — | | | | — | | | 154.9 | | | 63.5 | |
| Inventory provisions | 11.5 | | | 18.5 | | | 18.0 | | |
| | Losses (gains) on divestiture | Losses (gains) on divestiture | 0.8 | | | (16.6) | | | 33.5 | | Losses (gains) on divestiture | — | | | | — | | | 0.8 | | | (16.6) | |
| Gain on debt extinguishment, net | — | | | — | | | (466.6) | | |
| | Reorganization items, net | | Reorganization items, net | — | | | | 425.4 | | | 22.5 | | | 10.2 | |
| Non-cash accretion expense | | Non-cash accretion expense | 139.2 | | | | — | | | — | | | — | |
| Other non-cash items | Other non-cash items | (13.1) | | | (40.2) | | | (65.7) | | Other non-cash items | 16.8 | | | | 35.3 | | | (1.6) | | | (21.7) | |
| Reorganization items, net | 22.5 | | | 10.2 | | | — | | |
| Changes in assets and liabilities, net of the effects of acquisitions: | Changes in assets and liabilities, net of the effects of acquisitions: | | Changes in assets and liabilities, net of the effects of acquisitions: | | | |
| Accounts receivable, net | Accounts receivable, net | 98.2 | | | 37.9 | | | 31.6 | | Accounts receivable, net | (18.1) | | | | 49.8 | | | 98.2 | | | 37.9 | |
| Inventories | Inventories | (14.0) | | | (51.1) | | | (23.1) | | Inventories | 267.9 | | | | (33.2) | | | (14.0) | | | (51.1) | |
| Accounts payable | Accounts payable | (1.1) | | | 15.7 | | | 6.7 | | Accounts payable | 8.1 | | | | (3.6) | | | (1.1) | | | 15.7 | |
| Accrued consulting | | Accrued consulting | (90.7) | | | | 0.1 | | | 14.3 | | | 38.1 | |
| Income taxes | Income taxes | 108.5 | | | (433.8) | | | (2.1) | | Income taxes | (30.1) | | | | (26.9) | | | 108.5 | | | (433.8) | |
| Opioid-related litigation settlement liability | Opioid-related litigation settlement liability | 125.0 | | | — | | | 1,600.0 | | Opioid-related litigation settlement liability | — | | | | — | | | 125.0 | | | — | |
| Medicaid lawsuit | Medicaid lawsuit | (4.2) | | | 638.9 | | | — | | Medicaid lawsuit | — | | | | — | | | (4.2) | | | 638.9 | |
| | Payment of claims | | Payment of claims | — | | | | (629.0) | | | — | | | — | |
| Other | Other | 57.7 | | | (95.3) | | | (161.5) | | Other | 28.1 | | | | 2.4 | | | 43.4 | | | (133.4) | |
| Net cash from operating activities | Net cash from operating activities | 455.4 | | | 498.9 | | | 742.9 | | Net cash from operating activities | 47.1 | | | | (642.3) | | | 455.4 | | | 498.9 | |
| Cash Flows From Investing Activities: | Cash Flows From Investing Activities: | | | | | | Cash Flows From Investing Activities: | | | | | | | | |
| Capital expenditures | Capital expenditures | (55.3) | | | (47.7) | | | (133.0) | | Capital expenditures | (28.8) | | | | (33.4) | | | (55.3) | | | (47.7) | |
| | Proceeds (payments) related to divestiture, net of cash | Proceeds (payments) related to divestiture, net of cash | 15.7 | | | (0.7) | | | 95.1 | | Proceeds (payments) related to divestiture, net of cash | 70.0 | | | | — | | | 15.7 | | | (0.7) | |
| Other | Other | 1.8 | | | 37.2 | | | 29.6 | | Other | (13.7) | | | | 0.4 | | | 1.8 | | | 37.2 | |
| Net cash from investing activities | Net cash from investing activities | (37.8) | | | (11.2) | | | (8.3) | | Net cash from investing activities | 27.5 | | | | (33.0) | | | (37.8) | | | (11.2) | |
| Cash Flows From Financing Activities: | Cash Flows From Financing Activities: | | | | | | Cash Flows From Financing Activities: | | | | | | | | |
| Issuance of external debt | Issuance of external debt | — | | | — | | | 695.0 | | Issuance of external debt | — | | | | 650.0 | | | — | | | — | |
| Repayment of external debt | Repayment of external debt | (137.5) | | | (139.5) | | | (945.1) | | Repayment of external debt | (50.1) | | | | (904.6) | | | (137.5) | | | (139.5) | |
| Debt financing costs | Debt financing costs | — | | | (9.4) | | | (10.1) | | Debt financing costs | — | | | | (24.1) | | | — | | | (9.4) | |
| Proceeds from exercise of share options | — | | | — | | | 0.6 | | |
| Repurchase of shares | — | | | (0.4) | | | (2.6) | | |
| | Other | Other | — | | | (36.3) | | | (17.9) | | Other | (4.0) | | | | — | | | — | | | (36.7) | |
| Net cash from financing activities | Net cash from financing activities | (137.5) | | | (185.6) | | | (280.1) | | Net cash from financing activities | (54.1) | | | | (278.7) | | | (137.5) | | | (185.6) | |
| Effect of currency rate changes on cash | Effect of currency rate changes on cash | (1.9) | | | 2.3 | | | 0.6 | | Effect of currency rate changes on cash | (1.1) | | | | (3.9) | | | (1.9) | | | 2.3 | |
| Net change in cash, cash equivalents and restricted cash | Net change in cash, cash equivalents and restricted cash | 278.2 | | | 304.4 | | | 455.1 | | Net change in cash, cash equivalents and restricted cash | 19.4 | | | | (957.9) | | | 278.2 | | | 304.4 | |
| Cash, cash equivalents and restricted cash at beginning of period | Cash, cash equivalents and restricted cash at beginning of period | 1,127.0 | | | 822.6 | | | 367.5 | | Cash, cash equivalents and restricted cash at beginning of period | 447.3 | | | | 1,405.2 | | | 1,127.0 | | | 822.6 | |
| Cash, cash equivalents and restricted cash at end of period | Cash, cash equivalents and restricted cash at end of period | $ | 1,405.2 | | | $ | 1,127.0 | | | $ | 822.6 | | Cash, cash equivalents and restricted cash at end of period | $ | 466.7 | | | | $ | 447.3 | | | $ | 1,405.2 | | | $ | 1,127.0 | |
| | Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | $ | 1,345.0 | | | $ | 1,070.6 | | | $ | 790.9 | | Cash and cash equivalents at end of period | $ | 409.5 | | | | $ | 297.9 | | | $ | 1,345.0 | | | $ | 1,070.6 | |
| Restricted cash included in prepaid expenses and other assets at end of period | Restricted cash included in prepaid expenses and other assets at end of period | 24.0 | | | 20.2 | | | — | | Restricted cash included in prepaid expenses and other assets at end of period | 20.6 | | | | 113.0 | | | 24.0 | | | 20.2 | |
| Restricted cash included in other long-term assets at end of period | Restricted cash included in other long-term assets at end of period | 36.2 | | | 36.2 | | | 31.7 | | Restricted cash included in other long-term assets at end of period | 36.6 | | | | 36.4 | | | 36.2 | | | 36.2 | |
| Cash, cash equivalents and restricted cash at end of period | Cash, cash equivalents and restricted cash at end of period | $ | 1,405.2 | | | $ | 1,127.0 | | | $ | 822.6 | | Cash, cash equivalents and restricted cash at end of period | $ | 466.7 | | | | $ | 447.3 | | | $ | 1,405.2 | | | $ | 1,127.0 | |
| | Supplemental Disclosures of Cash Flow Information: | Supplemental Disclosures of Cash Flow Information: | | Supplemental Disclosures of Cash Flow Information: | | | |
| Cash paid for interest | Cash paid for interest | $ | 243.2 | | | $ | 256.1 | | | $ | 314.2 | | Cash paid for interest | $ | 164.1 | | | | $ | 111.5 | | | $ | 243.2 | | | $ | 256.1 | |
| Cash (received) paid for income taxes, net | (160.0) | | | 39.9 | | | 30.7 | | |
| Cash paid (received) for income taxes, net | | Cash paid (received) for income taxes, net | 3.0 | | | | 3.0 | | | (160.0) | | | 39.9 | |
See Notes to Consolidated Financial Statements.
MALLINCKRODT PLC
(DEBTOR-IN-POSSESSION)
(IN EXAMINATION UNDER PART 10 OF THE IRISH COMPANIES ACT 2014)
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(in millions)
| | | Ordinary Shares | | Treasury Shares | | Additional Paid-In Capital | | Retained Earnings (Deficit) | | Accumulated
Other
Comprehensive
Loss | | Total
Shareholders'
Equity | | Ordinary Shares | | Treasury Shares | | Additional Paid-In Capital | | Retained Deficit | | Accumulated
Other
Comprehensive
(Loss) Income | | Total
Shareholders'
Equity |
| | Number | | Par
Value | | Number | | Amount | | | Number | | Par
Value | | Number | | Amount | |
| Balance as of December 28, 2018 | 92.7 | | | $ | 18.5 | | | 9.4 | | | $ | (1,617.4) | | | $ | 5,528.2 | | | $ | (1,017.7) | | | $ | (24.3) | | | $ | 2,887.3 | | |
| Impact of accounting standard adoption | — | | | — | | | — | | | — | | | — | | | (0.5) | | | 0.5 | | | — | | |
| Balance as of December 27, 2019 (Predecessor) | | Balance as of December 27, 2019 (Predecessor) | 93.5 | | | $ | 18.7 | | | 9.4 | | | $ | (1,615.7) | | | $ | 5,562.5 | | | $ | (2,016.9) | | | $ | (7.9) | | | $ | 1,940.7 | |
| | Net loss | Net loss | — | | | — | | | — | | | — | | | — | | | (996.5) | | | — | | | (996.5) | | Net loss | — | | | — | | | — | | | — | | | — | | | (944.6) | | | — | | | (944.6) | |
| Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 15.9 | | | 15.9 | | |
| Share options exercised | — | | | — | | | — | | | — | | | 0.6 | | | — | | | — | | | 0.6 | | |
| Other comprehensive loss | | Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (1.7) | | | (1.7) | |
| | Vesting of restricted shares | Vesting of restricted shares | 0.8 | | | 0.2 | | | 0.2 | | | (2.6) | | | (0.1) | | | — | | | — | | | (2.5) | | Vesting of restricted shares | 0.6 | | | 0.1 | | | 0.1 | | | (0.4) | | | (0.2) | | | — | | | — | | | (0.5) | |
| | Share-based compensation | Share-based compensation | — | | | — | | | — | | | — | | | 33.8 | | | — | | | — | | | 33.8 | | Share-based compensation | — | | | — | | | — | | | — | | | 25.3 | | | — | | | — | | | 25.3 | |
| Reissuance of treasury shares | — | | | — | | | (0.2) | | | 4.3 | | | — | | | (2.2) | | | — | | | 2.1 | | |
| | Balance as of December 27, 2019 | 93.5 | | | $ | 18.7 | | | 9.4 | | | $ | (1,615.7) | | | $ | 5,562.5 | | | $ | (2,016.9) | | | $ | (7.9) | | | $ | 1,940.7 | | |
| | Balance as of December 25, 2020 (Predecessor) | | Balance as of December 25, 2020 (Predecessor) | 94.1 | | | $ | 18.8 | | | 9.5 | | | $ | (1,616.1) | | | $ | 5,587.6 | | | $ | (2,961.5) | | | $ | (9.6) | | | $ | 1,019.2 | |
| | Net loss | Net loss | — | | | — | | | — | | | — | | | — | | | (944.6) | | | — | | | (944.6) | | Net loss | — | | | — | | | — | | | — | | | — | | | (717.4) | | | — | | | (717.4) | |
| Other comprehensive loss | Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (1.7) | | | (1.7) | | Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | 1.3 | | | 1.3 | |
| | Vesting of restricted shares | Vesting of restricted shares | 0.6 | | | 0.1 | | | 0.1 | | | (0.4) | | | (0.2) | | | — | | | — | | | (0.5) | | Vesting of restricted shares | 0.2 | | | 0.1 | | | 0.1 | | | — | | | — | | | — | | | — | | | 0.1 | |
| Share-based compensation | Share-based compensation | — | | | — | | | — | | | — | | | 25.3 | | | — | | | — | | | 25.3 | | Share-based compensation | — | | | — | | | — | | | — | | | 10.2 | | | — | | | — | | | 10.2 | |
| | Balance as of December 25, 2020 | 94.1 | | | $ | 18.8 | | | 9.5 | | | $ | (1,616.1) | | | $ | 5,587.6 | | | $ | (2,961.5) | | | $ | (9.6) | | | $ | 1,019.2 | | |
| Balance as of December 31, 2021 (Predecessor) | | Balance as of December 31, 2021 (Predecessor) | 94.3 | | | $ | 18.9 | | | 9.6 | | | $ | (1,616.1) | | | $ | 5,597.8 | | | $ | (3,678.9) | | | $ | (8.3) | | | $ | 313.4 | |
| Net loss | | Net loss | — | | | — | | | — | | | — | | | — | | | (313.1) | | | — | | | (313.1) | |
| Other comprehensive loss | | Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (1.5) | | | (1.5) | |
| Share-based compensation | | Share-based compensation | — | | | — | | | — | | | — | | | 1.7 | | | — | | | — | | | 1.7 | |
| Cancellation of Predecessor equity | | Cancellation of Predecessor equity | (94.3) | | | (18.9) | | | (9.6) | | | 1,616.1 | | | (5,599.5) | | | 3,992.0 | | | 9.8 | | | (0.5) | |
| Issuance of Successor common stock | | Issuance of Successor common stock | 13.2 | | | 0.1 | | | — | | | — | | | 2,189.6 | | | — | | | — | | | 2,189.7 | |
| Issuance of Successor Opioid Warrants | | Issuance of Successor Opioid Warrants | — | | | — | | | — | | | — | | | 13.9 | | | — | | | — | | | 13.9 | |
Balance as of June 16, 2022
(Successor) | | Balance as of June 16, 2022
(Successor) | 13.2 | | | 0.1 | | | — | | | — | | | 2,203.5 | | | — | | | — | | | 2,203.6 | |
| Net loss | Net loss | — | | | — | | | — | | | — | | | — | | | (717.4) | | | — | | | (717.4) | | Net loss | — | | | — | | | — | | | — | | | — | | | (598.1) | | | — | | | (598.1) | |
| Other comprehensive income | Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 1.3 | | | 1.3 | | Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 10.8 | | | 10.8 | |
| Vesting of restricted shares | 0.2 | | | 0.1 | | | 0.1 | | | — | | | — | | | — | | | — | | | 0.1 | | |
| Share-based compensation | Share-based compensation | — | | | — | | | — | | | — | | | 10.2 | | | — | | | — | | | 10.2 | | Share-based compensation | — | | | — | | | — | | | — | | | 1.4 | | | — | | | — | | | 1.4 | |
| Balance as of December 31, 2021 | 94.3 | | | $ | 18.9 | | | 9.6 | | | $ | (1,616.1) | | | $ | 5,597.8 | | | $ | (3,678.9) | | | $ | (8.3) | | | $ | 313.4 | | |
| Repurchase of Successor Opioid Warrants | | Repurchase of Successor Opioid Warrants | — | | | — | | | — | | | — | | | (13.9) | | | 9.9 | | | — | | | (4.0) | |
| Balance as of December 30, 2022 (Successor) | | Balance as of December 30, 2022 (Successor) | 13.2 | | | $ | 0.1 | | | — | | | $ | — | | | $ | 2,191.0 | | | $ | (588.2) | | | $ | 10.8 | | | $ | 1,613.7 | |
See Notes to Consolidated Financial Statements.
MALLINCKRODT PLC
(DEBTOR-IN-POSSESSION)
(IN EXAMINATION UNDER PART 10 OF THE IRISH COMPANIES ACT 2014)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, expect share data and where indicated)
| | | | | |
| 1. | Background and Basis of Presentation |
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, hepatology, nephrology, pulmonology, ophthalmology and oncology; immunotherapy and neonatal respiratory critical care therapies; analgesics; cultured skin substitutes 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 is incorporated and maintains its principal executive offices in Ireland. The Company continues to be subject to United States ("U.S.") Securities and Exchange Commission ("SEC") reporting requirements.
Basis of Presentation
On October 12, 2020 ("Petition Date"), Mallinckrodt plc and substantially all of its U.S. subsidiaries, including certain subsidiaries of Mallinckrodt plc operating the Specialty Generics business ("Specialty Generics Subsidiaries") and the Specialty Brands business ("Specialty Brands Subsidiaries"), and certain of the Company's international subsidiaries (together with the Company, Specialty Generics Subsidiaries and Specialty Brands Subsidiaries, the "Debtors") voluntarily initiated proceedings ("Chapter 11 Cases") under chapter 11 of title 11 ("Chapter 11") of the United States Code ("Bankruptcy Code"). On March 2, 2022, the U.S. Bankruptcy Court for the District of Delaware ("Bankruptcy Court") entered an order confirming the fourth amended plan of reorganization (with technical modifications) ("Plan"). Subsequent to the filing of the Chapter 11 Cases, Chapter 11 proceedings commenced by a limited subset of the Debtors were recognized and given effect in Canada, and separately the High Court of Ireland made an order confirming a scheme of arrangement on April 27, 2022, which is based on and consistent in all respects with the Plan ("Scheme of Arrangement"). On June 8, 2022, the Bankruptcy Court entered an order approving a minor modification to the Plan. The Plan became effective on June 16, 2022 ("Effective Date"), and on such date the Company emerged from the Chapter 11 and the Scheme of Arrangement became effective concurrently.
See Note 2 for further information on the Plan and emergence from Chapter 11.
Upon emergence from Chapter 11, the Company adopted fresh-start accounting in accordance with the provisions of Financial Accounting Standards Board Accounting Standards Codification ("ASC") Topic 852 - Reorganizations ("ASC 852"), and became a new entity for financial reporting purposes as of the Effective Date. References to "Successor" relate to the financial position as of June 16, 2022 and results of operations of the reorganized Company subsequent to June 16, 2022, while references to "Predecessor" relate to the financial position prior to June 16, 2022 and results of operations of the Company prior to, and including, June 16, 2022. All emergence-related transactions of the Predecessor were recorded as of June 16, 2022. Accordingly, the consolidated financial statements for the Successor are not comparable to the consolidated financial statements for the Predecessor. See Note 3 for further information.
The Company's significant accounting policies are described within Note 4. In connection with the adoption of fresh-start accounting, the Company elected to make an accounting policy change as described below:
Predecessor Contingencies — Legal fees pertaining to asbestos-related matters were estimated and accrued as part of the Company's projected asbestos liability.
Successor Contingencies — Legal fees pertaining to asbestos matters are expensed as incurred.
This change in accounting policy resulted in a $22.8 million fresh-start adjustment to the asbestos-related liability and a $20.3 million adjustment to the corresponding indemnification receivable as of the Effective Date.
Also in connection with the adoption of fresh-start accounting, the Company made a change in estimate related to the Specialty Generics segment inventory turn calculation. This prospective change is expected to result in the discrete amortization of $20.5 million of capitalized variances through the first quarter of fiscal 2023. The amount recognized for the period June 17, 2022 through December 30, 2022 (Successor) was $19.9 million.
The Company also reassessed and updated its product line net sales presentation for its Specialty Generics segment. Beginning with the Quarterly Report on Form 10-Q for the quarterly period ended July 1, 2022 (Successor), the Company's consolidated financial
statements reflect the updated product line net sales structure for its Specialty Generics segment. Prior year amounts have been recast to conform to current presentation.
The 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 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 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 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 loss.
Going Concern
The accompanyingCertain prior-period amounts on the 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 19 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 amended, supplemented or otherwise modified, the "RSA") (further detail for which is provided in Note 2) as part of a prearranged plan of reorganization. Subsequent to the filing of the Chapter 11 Cases, Chapter 11 proceedings commenced by a limited subset of the Debtors have been recognized and given effect in Canada, and separately Mallinckrodt plc has commenced an examinership process with the High Court of Ireland. The referencesreclassified to the Chapter 11 Cases included within this Annual Report on Form 10-K shall include, where applicable, such proceedings in Canada and Ireland.
See Note 2 for further information on the voluntary petitions for reorganization, the RSA and agreements in principle subsequently memorialized in the Company's Chapter 11 plan of reorganization.
Substantial doubt about the Company's abilityconform 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 (repository corticotropin injection) ("Acthar Gel")-related settlements, restructured debt obligations, 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 become effective, (b) the RSA 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.
Although the Bankruptcy Court has entered an order (the "Confirmation Order") confirming the plan of reorganization proposed by the Debtors, consummation of such plan of reorganization and the transactions contemplated thereby and emergence from the Chapter 11 proceedings remains subject to the satisfaction of various conditions, including completion of the Canadian and Irish proceedings noted above. Accordingly, no assurance can be given that the plan of reorganization or the transactions contemplated thereby 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 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.
Pursuant to sections 1107(a) and 1108 of the Bankruptcy Code, the Debtors (as defined in Note 2) retain control of their assets and are authorized to operate their business as debtors-in-possession while being subject to the jurisdiction of the Bankruptcy Court. While operating as debtors-in-possession under Chapter 11, the Debtors may sell or otherwise dispose of or liquidate assets or settle liabilities, subject to the approval of the Bankruptcy Court or as otherwise permitted in the ordinary course of business and subject to applicable orders of the Bankruptcy Court, for amounts other than those reflected in the accompanying consolidated financial statements. Any such actions occurring during the Chapter 11 Cases authorized by the Bankruptcy Court could materially impact the amounts and classifications of assets and liabilities reported in the Company's consolidated financial statements. For more information regarding the Chapter 11 Cases, see Note 2.current-period presentation.
Fiscal Year
The Company reports its results based on a "52-53 week" year ending on the last Friday of December. The period June 17, 2022 through December 30, 2022 reflects the Successor period, while the period January 1, 2022 through, and including, June 16, 2022 reflects the Predecessor period. Fiscal year ended December 31, 2021 (Predecessor) ("fiscal 2021") consisted of 53 weeks, while the combined periods of January 1, 2022 through June 16, 2022 and June 17, 2022 through December 30, 2022 ("fiscal 2022") and fiscal year ended December 25, 2020 and 2019 each(Predecessor) ("fiscal 2020") consisted of 52 weeks. Unless otherwise indicated, fiscal 2021, 2020 and 2019 refer to the Company's fiscal years ended December 31, 2021, December 25, 2020 and December 27, 2019, respectively.
| | | | | |
| 2. | Bankruptcy ProceedingsEmergence from Voluntary Reorganization |
Voluntary Filing Under Chapter 11
On October 12, 2020 (the "Petition Date"), Mallinckrodt plc and certainDuring the pendency of its subsidiaries voluntarily initiated the Chapter 11 Cases, under the Bankruptcy Code in the Bankruptcy Court to effectuate settlements contemplated in the RSA. 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"). Pursuant to orders granted by the Ontario Superior Court of Justice, the Chapter 11 proceedings commenced by a limited subset of the Company's subsidiaries have also been recognized and given effect in Canada. The Chapter 11 Cases are being jointly administered under the caption In re Mallinckrodt plc, Case No. 20-12522 (JTD). Information about the Chapter 11 Cases, including the case docket, may be found free of charge at https://restructuring.primeclerk.com/Mallinckrodt/.
The Debtors continue to operateoperated their businesses as debtors-in-possession under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. As debtors in possession,debtors-in-possession, the Debtors arewere authorized to continue to operate as ongoing businesses, and maywere allowed to pay all debts and honor all obligations arising in the ordinary course of their businesses after the Petition Date. However, the Debtors maywere not allowed to pay third-party claims or creditors on account of obligations arising before the Petition Date or engage in transactions outside the ordinary course of business without approval of the Bankruptcy Court.
Under the Bankruptcy Code, third-party actions to collect pre-petition indebtedness owed by the Debtors, as well as most litigation pending against the Company as of the Petition Date, arewere subject to an automatic stay. However, under the Bankruptcy Code, certain regulatory or criminal proceedings generally are not subject to the automatic stay and may continue unless otherwise ordered by the Bankruptcy Court. Absent an order of the Bankruptcy Court providing otherwise, substantially all pre-petition liabilities will be resolved under a Chapter 11 plan of reorganization.
Among other requirements, a Chapter 11 plan of reorganization must comply with the priority scheme established by the Bankruptcy Code, under which certain post-petition and secured or “priority” pre-petition liabilities need to be satisfied before general unsecured creditors and holders of the Company's equity are entitled to receive any distribution. Upon solicitation of the plan of reorganization to creditors, with an accompanying court-approved disclosure statement, certain impaired creditors and interest holders will vote by ballot to approve or reject the plan. No assurance can be given as to what values, if any, will be ascribed in the Chapter 11 Cases to the claims and interests of each of these constituencies. SeeRestructuring Support Agreement and Plan of Reorganization section below for contemplatedthe distributions to creditors and interest holders.
Under the Bankruptcy Code, the Debtors may assume, modify, assign or reject certain executory contracts and unexpired leases, including, without limitation, leases of real property and equipment, subject to the approval of the Bankruptcy Court and to certain other conditions. Generally, the rejection of an executory contract or unexpired lease is treated as a pre-petition breach of such executory contract or unexpired lease and, subject to certain exceptions, relieves the Debtors from performing their future obligations under such executory contract or unexpired lease but entitles the contract counterparty or lessor to a pre-petition general unsecured claim for damages caused by such deemed breach. Generally, the assumption of an executory contract or unexpired lease requires the Debtors to cure existing monetary defaults under such executory contract or unexpired lease and provide adequate assurance of future performance. Accordingly, any description of an executory contract or unexpired lease in this Annual Report on Form 10-K, including, where applicable, the express termination rights thereunder or a quantification of their obligations, must be read in conjunction with, and is qualified by, any overriding rejection rights the Debtors have under the Bankruptcy Code.
As discussed further below, the Debtors obtained approval from the Bankruptcy Court for certain "first day" motions, including motions to obtain customary relief intended to continue ordinary course operations after the Petition Date.
Significant Bankruptcy Court Actions
First Day Motions
On October 14, 2020, the Debtors received Bankruptcy Court approval of their customary motions filed on the Petition Date ("First Day Motions") on an interim basis 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, continuation of customer programs, continuation of use of existing cash management programs and allowance of certain financing payments under a cash collateral order. The First Day Motions were subsequently approved by the Bankruptcy Court on a final basis at hearings.
Chapter 11 Financing
The Company obtained an order of the Bankruptcy Court in the Chapter 11 Cases (in a form agreed with, among others, the agent under the senior secured credit facilities, lenders under the senior secured revolving credit facility and the senior secured term loans and holders of the first lien senior notes and the second lien senior notes) permitting the use of cash collateral to finance the Chapter 11 Cases. Such use is subject to an approved budget, updated and submitted every four weeks, consisting of rolling thirteen-week periods subject to the consent of the lenders under the senior secured revolving credit facility and the senior secured term loans.
Such order requires that the Company make cash adequate protection payments on the senior secured revolving credit facility and the senior secured term loans for, among other things, unpaid pre-petition and post-petition fees, unpaid pre-petition interest (at the specified contract rate) and post-petition interest (at a rate equal to (1) the adjusted London Inter-Bank Offered Rate ("LIBOR"), plus (2) the contract-specified applicable margin, and plus (3) an incremental 200 basis points), quarterly amortization payments on the senior secured term loans and reimbursement of certain costs. Such order further requires that the Company make cash adequate protection payments on the first lien senior notes and the second lien senior notes for, among other things, unpaid pre-petition and post-petition interest (at the specified non-default interest rate) and reimbursement of certain costs. On April 13, 2021, the Debtors received Bankruptcy Court approval of their motion to amend the final cash collateral order as of March 22, 2021 to pay post-petition interest on the senior secured term loans at a rate equal to (1) the adjusted LIBOR, plus (2) the contract-specified applicable margin, and plus (3) an incremental 250 basis points for its senior secured term loans.
Interest expense incurred and paid with respect to the incremental adequate protection payments on the senior secured revolving credit facility and the senior secured term loans, respectively, were as follows:
| | | | | | | | | | | |
| Fiscal Year |
| 2021 | | 2020 |
| Interest expense incurred for adequate protection payments | $ | 63.1 | | | $ | 11.7 | |
| Cash paid for adequate protection payments | 66.7 | | 7.8 | |
The cash collateral order provides that it is without prejudice to (i) the rights of certain parties to request additional or alternative adequate protection from the Bankruptcy Court, (ii) the rights of lenders under the senior secured revolving credit facility and the
senior secured term loans to seek a higher rate of interest and (iii) the rights of the holders of the first lien senior notes and the second lien senior notes to seek payment of a make-whole premium.
Bar Dates
On December 31, 2020, the Bankruptcy Court entered an order approving a deadline of February 16, 2021 at 5:00 pm (Eastern Time) (the General Bar Date) and April 12, 2021, at 5:00 p.m. (Eastern Time) (the Governmental Bar Date) for filing claims against the Debtors relating to the period prior to the Petition Date for general claims and government claims, respectively. On May 20, 2021, the Bankruptcy Court entered an order approving a deadline of June 28, 2021 at 5:00 pm (Eastern Time) for filing claims against the Debtors relating to the period from the Petition Date to April 30, 2021 for administrative expense requests by certain creditors. The preceding bar dates do not cover opioid claims (inclusive of voluntary injunction opioid claims). The Company's review and reconciliation of asserted claims and administrative expense requests is ongoing and discussed further below in Chapter 11 Claims Process.
Injunctive Litigation Relief
The Bankruptcy Court entered an order extending its prior injunctions against certain opioid and Acthar Gel-related litigation matters proceeding against the Debtors and also against certain covered non-Debtors on August 30, 2021. Refer to Note 19 for further discussion.
Restructuring Support Agreement and Plan of Reorganization
Restructuring Support Agreement
On October 11, 2020, the Company and the other Debtors entered into a 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 "Initial RSA Supporting Parties"). After the bankruptcy filing, the Multi-State Governmental Entities Group (the "MSGE Group") entered into a joinder to the RSA that gained the support of approximately 1,300 cities, municipalities, hospital and school districts, amongst others. On March 11, 2021, an ad hoc group of lenders holding (collectively, together with the Initial RSA Supporting Parties and the MSGE Group, the "RSA Supporting Parties") approximately $1,300.0 million, by aggregate principal amount, of the Company's outstanding senior secured term loan due September 2024 (the "2017 Term Loan") and senior secured term loan due February 2025 (the "2018 Term Loan") agreed to join the RSA as supporting parties and certain of the existing supporting parties agreed to certain amendments thereto (the "Joinder and Amendment").
The restructuring transactions will be effectuated through the Chapter 11 plan of reorganization, which among other things provides for a financial restructuring that would reduce the Company's total debt. Pursuant to the RSA, each of the Debtors and the RSA 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 RSA Supporting Parties' representatives in the bankruptcy process; and satisfy certain other covenants. The RSA Supporting Parties have committed to support and vote for the Chapter 11 plan of reorganization implementing the terms of the RSA and have agreed to use commercially reasonable efforts to take, or refrain from taking, certain actions in furtherance of such support.
The RSA (as supplemented by the above-described joinders, including the Joinder and Amendment) incorporates the terms agreed to by the parties reflected in the term sheets attached to the RSA and such joinders, including the Joinder and Amendment, including an agreement by the RSA Supporting Parties. Each of the parties to the RSA may terminate the agreement (and thereby their support for the associated plan of reorganization) 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 RSA Supporting Parties also have specified termination rights, including, among other circumstances, termination rights that arise if certain 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 Debtors' Chapter 11 plan that embodies the transactions set forth in the RSA was the subject of a confirmation hearing that commenced on November 1, 2021 and concluded on January 6, 2021. On February 3, 2022, the Bankruptcy Court issued a written ruling confirming the Chapter 11 plan (which was subsequently revised February 8, 2022 to make minor corrections). On March 2, 2022, the Bankruptcy Court entered the Confirmation Order. The consummation of the Chapter 11 plan is subject to satisfaction of certain conditions precedent. Accordingly, no assurance can be given that the transactions described therein will be consummated. Refer to Note 22 for further information on confirmation of the Chapter 11 plan.
Plan of Reorganization
On September 2, 2021, the Debtors reached agreements in principle with (1) the Governmental Plaintiff Ad Hoc Committee (the “GAHC”), the MSGE Group, and the Official Committee of Opioid Related Claimants appointed in the Chapter 11 Cases (the “OCC” and, together with the GAHC and the MSGE Group, the “Opioid Claimants”), (2) the Official Committee of Unsecured Creditors appointed in the Chapter 11 Cases (the “UCC”) and (3) holders of more than two-thirds of the outstanding principal amount of the 10.00% second lien senior secured notes due April 2025 (the "Second Lien Notes") issued by Company's subsidiaries Mallinckrodt International Finance S.A. and Mallinckrodt CB LLC (the “Settling Second Lien Noteholders”) and the trustee for the Second Lien Notes, in each case relating to the treatment of certain claims pursuant to the proposed Joint Chapter 11 Plan of Reorganization of Mallinckrodt plc and Its Debtor Affiliates Under Chapter 11 of the Bankruptcy Code dated as of June 18, 2021 (the "Proposed Plan"), as it was amended to conform to such agreements in principle (the “Amended Plan”) as filed by the Debtors on September 29, 2021.
The RSA Supporting Parties along with the OCC, the UCC and the Settling Second Lien Noteholders (inIn accordance with the agreements in principle) agree to supporteffectuated Plan, the following as memorialized insignificant transactions occurred upon the AmendedCompany's emergence from bankruptcy on the Effective Date:
Resolution of Opioid-Related Claims.
Pursuant to the Plan which may be amended, modified or supplemented from time to time:
•A proposed resolutionand the Scheme of Arrangement, on the Effective Date all opioid-relatedopioid claims against the Company and its subsidiaries. Under were deemed to have been settled, discharged, waived, released and extinguished in full against the terms ofCompany and its subsidiaries, and the amended proposed settlement (the "Amended Proposed Opioid-Related Litigation Settlement"),Company and its subsidiaries ceased to have any liability or obligation with respect to such claims, which would become effective upon Mallinckrodt's emergence fromwere treated in accordance with the Chapter 11 process, subject to court approval and other conditions:Plan as follows:
◦Opioid claims would bewere channeled to one or morecertain trusts, which wouldwill receive $1,725.0 million in structureddeferred payments from the Company and certain of its subsidiaries ("Opioid-Related Litigation Settlement") consisting of (i) a $450.0 million payment upon the Company's emergence from Chapter 11;Effective Date (of which $2.6 million was prefunded); (ii) a $200.0 million payment upon each of the first and second anniversaries of emergence;the Effective Date; (iii) a $150.0 million payment upon each of the third through seventh anniversaries of emergence;the Effective Date; and (iv) a $125.0 million payment upon the eighth anniversary of emergenceEffective Date (collectively, the "Opioid Deferred Payments") with the Company retaining an eighteen-month prepayment option to prepay outstanding Opioid Deferred Payments (other than the initial Effective Date payment) at a discount for all but(and to prepay the first payment.Opioid Deferred Payments at their undiscounted value even after the expiration of such eighteen-month period). The Opioid Deferred Payments are unsecured and are guaranteed by Mallinckrodt and its subsidiaries that are borrowers, issuers or guarantors under the Takeback Term
Loans and the New 1L Notes, Existing 1L Notes, New 2L Notes and Takeback 2L Notes (such notes collectively, the "Effective Date Notes") (except for the Effective Date Notes), and certain future indebtedness (subject to certain exceptions). The Opioid Deferred Cash Payments Agreement contains affirmative and negative covenants (including an obligation to offer to pay the Opioid Deferred Payments without discount upon the occurrence of certain change of control triggering events) and events of default (subject in certain cases to customary grace and cure periods). The occurrence of an event of default under the Opioid Deferred Cash Payments Agreement could result in the required repayment of all outstanding Opioid Deferred Payments and could cause a cross-default that could result in the acceleration of certain indebtedness of Mallinckrodt and its subsidiaries.
•Opioid claimants would also receivereceived, in addition to other potential consideration, 3,290,675 warrants for approximately 19.99% of the reorganized Company'sCompany’s new outstanding shares, with a nominal value $0.01 per share ("Ordinary Share(s)"), after giving effect to the exercise of the warrants, but subject to dilution from equity reserved under the management incentive plan, exercisable at any time on or prior to the sixth anniversary of the Company's emergence,Effective Date, at a strike price reflecting an aggregate equity value for the reorganized Debtors of $1,551.0 million (the "New $103.40 per Ordinary Share ("Opioid Warrants"Warrant(s)").
◦•Upon commencingPursuant to the Chapter 11 filing,Plan, certain subsidiaries of the Company has begunwill remain subject to comply with an agreed-upon operating injunction with respect to the operation of itstheir opioid business.
Governmental Acthar Gel Settlement
•A proposed resolution withPursuant to the Plan and the Scheme of Arrangement, on the Effective Date, all claims of the U.S. Department of Justice ("DOJ") and other governmental parties relating to Acthar® Gel (repository corticotropin injection) ("Acthar Gel") against the Company were deemed to have been settled, discharged, waived, released and extinguished in full against the Company, and the Company ceased to have any liability or obligation with respect to such claims, which were treated in accordance with the Plan and the terms of the settlement that is summarized below:
•The Company entered into an agreement with the DOJ and other governmental parties to settle a range of litigation matters and disputes relating to Acthar Gel.
◦The Company has reached an agreement with the U.S. Department of Justice ("DOJ") and other governmental parties to settle a range of litigation matters and disputes relating to Acthar Gel (the "Proposed Acthar Gel-Related Settlement") including thea Medicaid lawsuit with the Centers for Medicare and Medicaid Services ("CMS"), a related False Claims Act ("FCA") lawsuit in Boston, and an Eastern District of Pennsylvania ("EDPA") FCA lawsuit principally relating to interactions of Acthar Gel's previous owner'sowner (Questcor Pharmaceuticals Inc. ("Questcor")) interactions with an independent charitable foundation. To implement the Acthar Gel-Related Settlement, the Company entered into two settlement agreements with the U.S. and certain relators. Under the Proposed Acthar Gel-Related Settlement, which was conditioned upon the Company entering thecommencing its Chapter 11 restructuring process,proceeding and provided for the distributions the applicable claimants received under the Plan, the Company has agreed towill pay $260.0 million to the DOJ and other parties over seven years and reset Acthar Gel'sGel’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. The $260.0 million in payments consists of (i) a $15.0 million payment upon the Effective Date; (ii) a $15.0 million payment upon the first anniversary of the Effective Date; (iii) a $20.0 million payment upon each of the second and third anniversaries of the Effective Date; (iv) a $32.5 million payment upon each of the fourth and fifth anniversaries of the Effective Date; and (v) a $62.5 million payment upon the sixth and seventh anniversaries of Effective Date. Also in connection with the Proposed Acthar Gel-Related Settlement, the Company entered into (a) separate settlement agreements with certain states, the Commonwealth of Puerto Rico, the District of Columbia and the above-noted relators, which further implement the Acthar Gel-Related Settlement, and (b) a five-year corporate integrity agreement ("CIA") with the Office of Inspector General ("OIG") of the U.S. Department of Health and Human Services ("HHS") in March 2022. As a result of these agreements, upon effectiveness of the settlement,Acthar Gel-Related Settlement in connection with the effectiveness of the Plan, the U.S. Government will drophas dropped its demand for approximately $640 million in retrospective Medicaid rebates for Acthar Gel and agreeagreed to dismiss the FCA lawsuit in Boston and the EDPA FCA lawsuit upon consummation of the plan of reorganization and emergence from the Chapter 11 Cases.lawsuit. Similarly, state and territory Attorneys General willhave also dropdropped related lawsuits. In turn, the Company will dismisshas dismissed its appeal of the U.S. District Court for the District of Columbia's ("D.C. District Court") adverse decision in the Medicaid lawsuit, which was filed in the U.S. Court of Appeals for the District of Columbia Circuit ("D.C. Circuit").
•Mallinckrodt has entered into the Proposed Acthar Gel-Related Settlement with the DOJ and other governmental parties solely to move past these litigation matters and disputes and does not make any admission of liability or wrongdoing.
•A modificationIn accordance with the effectuated Acthar Gel-Related Settlement, on June 28, 2022, the Bankruptcy Court entered an order dismissing the federal government's FCA lawsuit with prejudice, and further ordered the related state lawsuits dismissed without prejudice.
•In accordance with the effectuated Acthar Gel-Related Settlement, on July 20, 2022, the court entered an order dismissing the EDPA FCA lawsuit with prejudice.
Satisfaction of Existing Term Loans and Repayment of Existing Revolver
On the Effective Date and pursuant to the Plan, Mallinckrodt International Finance S.A. ("MIFSA") and Mallinckrodt CB LLC ("MCB" and together with MIFSA, the "Issuers"), each of which is a subsidiary of the Company'sCompany, entered into a senior secured term
loan facility with an aggregate principal amount of $1,392.9 million ("2017 Replacement Term Loans") and a senior secured term loans. Atloan facility with an aggregate principal amount of $369.7 million ("2018 Replacement Term Loans", and together with the end2017 Replacement Term Loan, the "Takeback Term Loans"). Pursuant to the Plan and Scheme of Arrangement, on the court-supervised process,Effective Date, lenders holding allowed claims in respect of the Company's 2017 and 2018 Term Loans are expected to receive either (1) newexisting senior secured term loans due September 2024 ("2024 Term Loans") and senior secured term loans due February 2025 ("2025 Term Loans" and, together with the 2024 Term Loans, the "Existing Term Loans") incurred by the Issuers received their pro rata share of the 2017 Replacement Term Loans (in the case of the 2024 Term Loans) or the 2018 Replacement Term Loans (in the case of the 2025 Term Loans) and payment in cash of an amountexit fee equal to 1.00% of the remaining principal amount of claims (as reducedExisting Term Loans held by inter alia, the excess cash flowsuch lenders in satisfaction thereof.
payment) bearing interest at a rate per annum equal to LIBOR plus 5.25% (with respectPursuant to the 2017 Term Loan) or LIBOR plus 5.50% (with respect to the 2018 Term Loan)(the "Adjusted Interest Rate"), maturingPlan and Scheme of Arrangement, on the earlier of September 30, 2027 and 5.75 years after emergence and without any financial maintenance covenant or (2) paymentEffective Date, lenders’ allowed claims in full in cash. A mandatory prepayment in an amount equal to $114.0 million arising from excess cash flow with respect to fiscal 2020 was paid to the holders of the Company's 2017 and 2018 Term Loans on March 19, 2021.
•The reinstatement or repayment of the Company'sexisting $900.0 million senior secured revolving credit facility. At ("Existing Revolver") incurred by the endIssuers and certain of the court-supervised process, all allowed claims under such facility would betheir respective subsidiaries were paid in full in cash withcash.
Reinstatement of Existing 10.00% First Lien Senior Secured Notes due 2025
On the proceedsEffective Date and pursuant to the Plan and the Scheme of newly incurred debt.
•The reinstatementArrangement, the Issuers’ existing 10.00% First Lien Senior Secured Notes due 2025 ("Existing 1L Notes") in an aggregate principal amount of $495.0 million and the note documents relating thereto were reinstated. In addition, pursuant to the terms of the agreements associated withindenture governing the Company's 10.00% first lien senior notes. AtExisting 1L Notes, the endIssuers, Mallinckrodt plc and the subsidiary guarantors of the court-supervised process, all allowed claims under these agreements will be reinstated at existing rates and maturities as the applicable holders' purported make-whole claims were disallowed.
•A modificationExisting 1L Notes entered into a supplemental indenture, dated of the Company'sEffective Date ("Existing 1L Notes Indenture"), pursuant to which certain additional assets were added to the collateral securing the Existing 1L Notes and the guarantees thereof.
Satisfaction of 10.00% second lien senior notes. AtSecond Lien Senior Secured Notes due 2025
Pursuant to the endPlan and Scheme of Arrangement, on the court-supervised process,Effective Date, lenders holding allowed claims in respect of the Company'sIssuers’ existing 10.00% second lien senior secured notes are expected to receivedue 2025 ("Existing 2L Notes") in an aggregate principal amount of $322.9 million received their pro rata share of a like aggregate principal amount of new 10.00% second lien senior secured notes due 2025 that will have("New 2L Notes") in satisfaction thereof.
Discharge of Mallinckrodt's Guaranteed Unsecured Notes
Pursuant to the same principal amountPlan and other economic terms asScheme of Arrangement, on the existing second lien senior secured notes.
•A restructuring of the Company's unsecured notes under the guaranteed unsecured notes indentures. At the end of the court-supervised process,Effective Date, holders of allowed claims under indentures governingin respect of the Guaranteed Unsecured Notes (theIssuers' 5.75% Senior Notes due 2022, the 5.625% Senior Notes due 2023 and the 5.50% Senior Notes due 2025) and the 2025 ("Guaranteed Unsecured Notes are expected to receiveNotes") received their pro rata share of $375.0 million aggregate principal amount of new 10.00% second lien senior secured notes due seven years after emergence2029 ("Takeback 2L Notes") and 100% of the new Mallinckrodt ordinary shares,13,170,932 Ordinary Shares issued, subject to dilution by the warrantsOpioid Warrants described above and certain other equity.the management incentive plan. Otherwise, pursuant to the Plan and the Scheme of Arrangement, all claims in respect of the Guaranteed Unsecured Notes and the indentures governing them were settled, discharged, waived, released and extinguished in full.
Resolution of Other Remaining Claims
•A proposed resolutionPursuant to the Plan and Scheme of other remainingArrangement, on the Effective Date, certain trade claims and treatment of equity holders. At the end of the court-supervised process, certain trade creditors and holders of other allowed general unsecured claims, including the claims of 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 expectedagainst the Debtors were deemed to have been settled, discharged, waived, released and extinguished in full, and Mallinckrodt ceased to have any liability or obligation with respect to such claims, which were then treated in accordance with the Plan and Scheme of Arrangement, which provided for the holders of such claims to share in $135.0 million in cash, plus other potential consideration, including but not limited to 35.0% of the proceeds of the sale of the StrataGraft® (allogenic cultured keratinocytes and dermal fibroblasts in murine collagen - dsat) ("StrataGraft") Priority Review Voucher ("PRV") and $20.0 million payable upon the achievement of (1) U.S. Food and Drug Administration ("FDA") approval of Terlivaz® (terlipressin) ("Terlivaz") and (2) cumulative net sales of $100.0 million of Terlivaz.
On June 30, 2022, subsequent to the Effective Date, the Company completed the sale of its PRV for $100.0 million and received net proceeds of $65.0 million as the buyer remitted the remaining $35.0 million to the General Unsecured Claims Trustee pursuant to the terms of (i) the Plan, and (ii) that certain General Unsecured Claims Trust Agreement entered into in connection with the Plan.
New Warrant Agreement
On the Effective Date and pursuant to the Plan, Mallinckrodt entered into a warrant agreement and issued 3,290,675 Opioid Warrants to purchase the Ordinary Shares to MNK Opioid Abatement Fund, LLC ("Initial Holder"), a wholly owned subsidiary of the Opioid Master Disbursement Trust II, a master disbursement trust established in accordance with the allocations as prescribedPlan. Each Opioid Warrant was initially exercisable for one Ordinary Share at an initial exercise price of $103.40 per Ordinary Share ("Exercise Price"), subject to the cashless exercise provisions contained in the Amended Plan, and equity holders would receive no recovery.
On April 20, 2021,warrant agreement. The Opioid Warrants were exercisable from the Debtors filed a joint plandate of reorganizationissuance until the sixth anniversary of the Debtors (the "Original Plan") reflectingEffective Date. The warrant agreement governing the termsOpioid Warrants contained customary anti-dilution adjustments in the event of the RSA, as amended by the Joinder and Amendment and a related proposed Disclosure Statement (the “Original Disclosure Statement”). On eachany share dividends, share splits, distributions, issuance of June 8, 2021 (or, with respect to the Original Disclosure Statement, June 9, 2021), June 15, 2021 and June 17, 2021, the Debtors filed with the Bankruptcy Court amended versions of the Original Plan and the Original Disclosure Statement. Finally, on June 18, 2021, the Debtors filed with the Bankruptcy Court a solicitation version of the Proposed Plan, and a solicitation version of a related Disclosure Statement (the “Disclosure Statement”). Contemporaneously, the Debtors filed a motion requesting that the Bankruptcy Court (i) establish the Proposed Plan solicitation and voting procedures, (ii) approve the forms of ballots, solicitation packages, and related notices to be sent to the various creditors and interest holders in connection with confirmation of the Plan, and (iii) establish certain deadlines in connection with the approval of the disclosure statement (the “Solicitation and Voting Procedures”). On September 29, 2021, the Debtors filed the Amended Plan with the Bankruptcy Court incorporating the Amended Proposed Opioid-Related Litigation Settlement, the settlement with the UCC and the settlement with the Settling Second Lien Noteholders. The Debtors filed a third and fourth amendment to the Amended Plan on December 29, 2021 and January 6, 2022, respectively, and subsequently technical modifications to the fourth amendment on February 18, 2022, in conjunction with the plan confirmation process as described further below.
The Amended Plan and the related Disclosure Statement describe, among other things, the terms of the Amended Plan; the Debtors contemplated financial restructuring (the “Restructuring”); the events leading up to the Chapter 11 Cases; certain events that have occurredadditional shares or are anticipated to occur during the Chapter 11 Cases, including solicitation of votes to approve the Proposed Plan from certain of the Debtors' creditors andoptions, or certain other aspects of the Restructuring.
By order dated June 17, 2021, the Bankruptcy Court approved the Disclosure Statement and the Solicitation and Voting Procedures. Pursuant to the Solicitation and Voting Procedures, the Debtors mailed the ballots, solicitation packages and related notices by June 24, 2021, and votes were due by October 13, 2021, with exception of holders of class 8 and 9 whose votes were due October 20, 2021. In accordance with the Debtors' proposed confirmation timeline, which is subject to change by the Bankruptcy Court, a hearing to consider confirmation of the Amended Plan (which may be adjourned or extended from time to time) commenced on November 1, 2021. On February 3, 2022, the Bankruptcy Court issued a written ruling confirming the Chapter 11 plan (which was subsequently revised February 8, 2022 to make minor corrections). On March 2, 2022, the Bankruptcy Court entered the Confirmation Order. Mallinckrodt plc commenced the examinership process with the High Court of Ireland on February 14, 2022. Refer to Note 22 for further details on confirmation of the Amended Plan and the examinership process.
EventWarrant Termination Agreement
On December 8, 2022, the Company, the Initial Holder and Opioid Master Disbursement Trust II entered into an agreement to accelerate the expiration date of defaultthe Opioid Warrants and to terminate the warrant agreement in exchange for a payment by the Company of $4.0 million to the Initial Holder ("Warrant Termination Agreement"). At the closing of the transactions contemplated by the Warrant Termination Agreement, which also occurred on December 8, 2022, the Company and the warrant agent entered into an amendment to the warrant agreement that accelerated the expiration of the Opioid Warrants to such date. As a result of such expiration, the Opioid Warrants were cancelled and each of the warrant agreement and the registration rights agreement that were entered into on the Effective date terminated in accordance with its terms.
Exit Financing
On the Effective Date, the Company issued $650.0 million aggregate principal amount of new 11.50% First Lien Senior Secured Notes due 2028 ("New 1L Notes") and entered into a receivables financing facility based on a borrowing base with a maximum draw of up to $200.0 million. See Note 14 for further information on these debt instruments.
Financing
Predecessor Chapter 11 Financing
The commencementCompany obtained an order of the Bankruptcy Court in the Chapter 11 Cases above constituted an event of default(in a form agreed with, among others, the agent under certainthe predecessor senior secured credit facilities, lenders under the Existing Revolver and the Existing Term Loans and holders of the Company's debt agreements. SubjectExisting 1L Notes and the Existing 2L Notes) permitting the use of cash collateral to any applicable provisions of the Bankruptcy Code, the Company's debt instruments and agreements described in Note 14 provide that, as a result of the commencement offinance the Chapter 11 Cases,Cases.
Such order required that 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 currentCompany make cash adequate protection payments on the consolidated balance sheets as of December 31, 2021Existing Revolver and December 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.
Financial Reporting in Reorganization
Effective on the Petition Date, the Company began to apply Financial Accounting Standards Board Accounting Standards Codification ("ASC") Topic 852 - Reorganizations, which specifies the accounting and financial reporting requirementsExisting Term Loans for, entities reorganizing through Chapter 11 bankruptcy proceedings. These requirements include distinguishing transactions directly associated with the reorganization from activities related to the ongoing operations of the business within the financial statements for periods subsequent to the Petition Date. Expenses, realized gains and losses, and provisions for losses that are directly associated with reorganization proceedings must be reported separately as reorganization items, net in the consolidated statements of operations. In addition, the consolidated balance sheet must distinguish pre-petition liabilities subject to compromise ("LSTC") of the Debtors from pre-petition liabilities that are not subject to compromise, post-petition liabilities, and liabilities of the subsidiaries of the Company that are not debtors in the Chapter 11 Cases. LSTC are pre-petition obligations that are not fully secured and have at least a possibility of not being repaid at the full claim amount. Where there is uncertainty about whether a secured claim will be paid or impaired pursuant to the Chapter 11 Cases, the Debtors have classified the entire amount of the claim as LSTC.
Furthermore, the realization of assets and the satisfaction of liabilities are subject to uncertainty. While operating as debtors-in-possession, actions to enforce or otherwise effect the payment of certain claims against the Debtors in existence before the Petition Date are stayed while the Debtors continue business operations as debtors-in-possession. These claims are reflected as LSTC in the consolidated balance sheets as of December 31, 2021 and December 25, 2020. Additional claims (which could be LSTC) may arise after the Petition Date resulting from the rejection of executory contracts, including leases, and from the determination by the Bankruptcy Court (or agreement by parties-in-interest) of allowed claims for contingencies and other disputed amounts.
Certain subsidiary entities are not debtors under the Chapter 11 Cases. However, condensed combined financial statements of the Debtors are not presented in the notes to the consolidated financial statements as the assets and liabilities, operating results and cash flows of the non-debtor entities included in the consolidated financial statements are insignificant and, therefore, the consolidated financial statements presented herein materially represent the condensed combined financial statements of the debtor entities for all periods presented.
Non-debtor entity intercompany balances from/due to the debtor entities at the end of each period were:
| | | | | | | | | | | |
| December 31,
2021 | | December 25,
2020 |
| Intercompany receivables | $ | 119.1 | | | $ | 282.3 | |
| Intercompany payables | 112.9 | | | 120.3 | |
The intercompany balances were primarily attributable to the Company's centralized approach to cash management and financing of its operations. The permission to continue the use of existing cash management systems during the pendency of the Chapter 11 Cases was approved by the Bankruptcy Court on a final basis as part of the First Day motions as described further above.
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 its consolidated balance sheets as of December 31, 2021 and December 25, 2020.
Liabilities Subject to Compromise
As a result of the commencement of the Chapter 11 Cases, the payment of pre-petition liabilities is subject to compromise or other treatment pursuant to a plan of reorganization. Generally, actions to enforce or otherwise effect payment of pre-petition liabilities are stayed. Although payment of pre-petition claims generally is not permitted, the Bankruptcy Court granted the Debtors the authority to pay certain pre-petition claims in designated categories and subject to certain terms and conditions. This relief generally was designed to preserve the value of the Debtors' business and assets. As described above, among other things, unpaid pre-petition and post-petition fees, unpaid pre-petition interest (at the specified contract rate) and post-petition interest (at a rate equal to (1) the adjusted London Interbank Offered Rate ("LIBOR"), plus (2) the contract-specified applicable margin, and plus (3) an incremental 200 basis points), quarterly amortization payments on the Existing Term Loans and reimbursement of certain costs. Such order further required that the Company make cash adequate protection payments on the Existing 1L Notes and Existing 2L Notes for, among other things, unpaid pre-petition and post-petition interest (at the specified non-default interest rate) and reimbursement of certain costs. On April 13, 2021, the Debtors received Bankruptcy Court authorized,
but did not require,approval of their motion to amend the Debtorsfinal cash collateral order as of March 22, 2021 to pay certain pre-petition claims relating to employee wages and benefits, critical and foreign vendors and customer programs.
The determination of how liabilities will ultimately be settled or treated cannot be made untilpost-petition interest on the confirmed Chapter 11 plan of reorganization becomes effective. Accordingly, the ultimate amount of such liabilities is not determinable at this time. Pre-petition liabilities that are subject to compromise to be reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for different amounts. The amounts currently classified as LSTC are preliminary and may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determinations of the secured status of certain claims, the values of any collateral securing such claims, rejection of executory contracts, continued reconciliation or other events.
Liabilities subject to compromise at the end of each period consisted of the following:
| | | | | | | | | | | |
| December 31,
2021 | | December 25,
2020 |
Accounts payable (1) | $ | 42.9 | | | $ | 61.9 | |
| Accrued interest | 35.2 | | | 35.2 | |
Debt (2) | 3,750.8 | | | 1,660.7 | |
Environmental liabilities (3) | 52.0 | | | — | |
| | | |
| Medicaid lawsuit | 634.7 | | | 638.9 | |
Opioid-related litigation settlement liability (4) | 1,725.0 | | | 1,600.0 | |
Other current and non-current liabilities (5) | 125.1 | | | 163.5 | |
| Pension and postretirement benefits | 32.0 | | | 32.4 | |
| Total liabilities subject to compromise | $ | 6,397.7 | | | $ | 4,192.6 | |
(1)Pre-petition accounts payable balances have been repaid under effectuated trade agreements pursuant to the critical vendor motion approved by the Bankruptcy Court.
(2)Subsequent to December 25, 2020, in accordance with the agreement in principle reached with the Settling Second Lien Noteholders on September 2, 2021 and Joinder and Amendment to the RSA entered into in March 2021, $322.9 million of Second Lien Notes and $1,767.2 million of outstanding senior secured term loans respectively, were classified as LSTC in the Company's consolidated balance sheet as of December 31, 2021.
(3)Represents certain environmental liabilities intended to be discharged upon effectiveness of the plan of reorganization.
(4)In accordance with the agreement in principle reached with the Opioid Claimants on September 2, 2021, and subsequently memorialized in the Amended Plan on September 29, 2021, the Company recorded an accrual of $125.0 million related to the additional payment expected to be made on the eighth anniversary of the effective date of emergence, which has been classified as LSTC in the Company's consolidated balance sheet as of December 31, 2021.
(5)The decrease in other current and non-current liabilities was attributableat a rate equal to (1) the Bankruptcy Court's approval ofadjusted LIBOR, plus (2) the Company's rejection ofcontract-specified applicable margin, and plus (3) an incremental 250 basis points for its Bedminster facility lease, which resulted in a $34.8 million adjustmentExisting Term Loans. The cash collateral order expired on June 16, 2022.
Interest expense incurred and paid with respect to the carrying valueincremental adequate protection payments of 200 basis points and 250 basis points on the respective lease liability in LSTC to reflect the estimated allowed claim amountExisting Revolver and (2) a decrease of $15.6 million in the fair value of contingent consideration related to MNK-6105 and MNK-6106 . These decreasesExisting Term Loans, respectively, were partially offset by an increase of $17.3 million related to Acthar Gel royalty accruals as a result of the December 2021 Bankruptcy Court ruling, which found that the Acthar Insurance Claimants' (as defined in Note 19) administrative claims were without merit. The remaining change in other current and non-current liabilities was attributable to various increases and decreases as a result of adjustments in the ordinary course of business.follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | Predecessor |
| | | | | Period from
January 1, 2022
through
June 16. 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
| Interest expense incurred for adequate protection payments | | | | | $ | 28.8 | | | $ | 63.1 | | | $ | 11.7 | |
| Cash paid for adequate protection payments | | | | | 28.8 | | | 66.7 | | | 7.8 | |
Contractual interest
While the Chapter 11 Cases arewere pending, the Company iswas not accruing interest on its unsecured debt instruments as of the Petition Date on a go-forward basis as the Debtors dodid 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 payments contractually due under the Company's unsecured debt instruments, for fiscal 2021 and 2020, which itthe Company did not pay as the obligation was extinguished pursuant to the Plan, was $46.5 million, $93.0 million and $28.8 million for the period January 1, 2022 through June 16, 2022 (Predecessor), fiscal 2021 (Predecessor) and fiscal 2020 (Predecessor), respectively.
Chapter 11 Claims Process
The Debtors have received over 50,000 proofsCompany qualified for and adopted fresh-start accounting as of claim since the Petition Date. The Debtors continue their reviewEffective Date in accordance with ASC 852 as (i) the reorganization value of the assets of the Company immediately prior to the date of effectuation of the Plan was less than the post-petition liabilities and analysis of certain claims including litigation claims, trade creditor claims, non-qualified benefit plan claims, customer deposits and advances, along with other tax and regulatoryallowed claims and therefore,(ii) the ultimate liabilityholders of the Debtors for such claims may differ fromvoting shares of the Predecessor immediately before effectuation of the Plan received less than 50% of the voting shares of the Successor.
Reorganization Value
Reorganization value represents the fair value of the Successor Company's total assets and is intended to approximate the amount recordeda willing buyer would pay for the assets immediately after restructuring. Upon the application of fresh-start accounting, the Company allocated the reorganization value to its individual assets based on their estimated fair values in LSTC. Toaccordance with ASC Topic 805 - Business Combinations. Deferred income tax amounts were determined in accordance with ASC Topic 740 - Income Taxes.
As set forth in the extent that the Debtors believe that such claims will be alloweddisclosure statement approved by the Bankruptcy Court, the Debtors will continueestimated enterprise value of the Successor was estimated to recordbe between $5,200.0 million and $5,700.0 million, with a midpoint of $5,450.0 million, which was estimated with the assistance of third-party valuation advisors using various valuation methods, including (i) discounted cash flow analysis, a calculation of the present value of the future cash flows to be generated by the business based on its projection, and (ii) comparable public company analysis, a method to estimate the value of a company relative to other publicly traded companies with similar operation and financial characteristics. The estimated enterprise value per the disclosure statement included estimated equity value in a range between $563.0 million and $1,063.0 million, with a midpoint of $813.0 million. Subsequent to the filing of the disclosure statement, the Company made revisions to certain of the cash flow projections due to declines in projected operating performance. Based upon a reevaluation of relevant factors used in determining the range of enterprise value and updated expected allowed amountscash flow projections, the Company concluded the enterprise value, or fair value, was $5,223.0 million.
The basis of the discounted cash flow analysis used in developing the enterprise value was based on Company prepared projections that included a variety of estimates and assumptions. While the Company considers such claims as LSTC. Theestimates and assumptions reasonable, they are inherently subject to significant business, economic and competitive uncertainties, many of which are beyond the Company’s control and, therefore, may not be realized. Changes in these estimates and assumptions may have had a significant effect on the determination of the expected allowed amountCompany’s enterprise value.
The following table reconciles the enterprise value to the implied fair value of a claim isthe Successor's equity as of the Effective Date:
| | | | | | | | |
| Enterprise value | | $ | 5,223.0 | |
Plus: Enterprise value adjustments (1) | | 197.0 | |
| Adjusted enterprise value | | 5,420.0 | |
Plus: Cash and cash equivalents | | 297.9 | |
Plus: Non-operating assets, net (2) | | 178.7 | |
Less: Fair value of debt | | (3,067.2) | |
Less: Fair value of Opioid-Related Litigation Settlement, Acthar Gel-Related Settlement, StrataGraft PRV proceeds and Terlivaz contingent value rights | | (625.8) | |
| Successor equity value | | $ | 2,203.6 | |
(1)Represents incremental tax benefits not contemplated in the projections utilized in the disclosure statement.
(2)Represents non-operating assets and liabilities which were excluded from the enterprise value as put forth in the disclosure statement as there were no cash projections associated with these net assets.
Upon the application of fresh-start accounting, the Company allocated the reorganization value to its individual assets based on many factors, including whethertheir estimated fair values. Reorganization value represents the Debtors are partyfair value of the Successor’s assets before considering liabilities.
The following table reconciles the Company's enterprise value to a settlement agreement with applicable claimholders or their representatives, and is not necessarily limited to information available toits reorganization value as of the Debtors. Claims covered by a settlement agreement include the Proposed Acthar Gel-Related Settlement and Amended Proposed Opioid-Related Litigation Settlement (collectively, the "Proposed Settlements"). See Restructuring Support Agreement and Plan of Reorganization section within this note for more information on settlement of these claims. As the Debtors continue to resolve claims, differences between those final allowed claims and the liabilities recorded in the consolidated balance sheet will be recognized as reorganization items,Effective Date:
| | | | | | | | |
| Adjusted enterprise value | | $ | 5,420.0 | |
Plus: Cash and cash equivalents | | 297.9 | |
Plus: Non-operating assets, net | | 178.7 | |
Plus: Current liabilities (excluding debt or debt-like items) | | 522.5 | |
Plus: Other non-current liabilities (excluding debt or debt-like items) | | 183.2 | |
| Reorganization value of Successor assets | | $ | 6,602.3 | |
Consolidated Balance Sheet
The four-column consolidated balance sheet as of the Effective Date included herein, applies effects of the Plan (reflected in the Company's consolidatedcolumn "Reorganization Adjustments") and fresh-start accounting (reflected in the column "Fresh-Start Adjustments") to the carrying values and classifications of assets or liabilities. Upon adoption of fresh-start accounting, the recorded amounts of assets and liabilities were adjusted to reflect their estimated fair values. Accordingly, the reported historical financial statements of operations in the period in which theyPredecessor prior to the adoption of fresh-start accounting for periods ended on or prior to the Effective Date are resolved.not comparable to those of the Successor. The determinationexplanatory notes highlight methods used to determine fair values or other amounts of howthe assets and liabilities will ultimately be resolved cannot be made untilas well as significant assumptions.
The four-column consolidated balance sheet as of June 16, 2022 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Predecessor | | Reorganization Adjustments | | | Fresh-Start Adjustments | | | Successor |
| Assets | | | | | | | | | |
| Current Assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 1,392.6 | | | $ | (1,094.7) | | (a) | | $ | — | | | | $ | 297.9 | |
| Accounts receivable, less allowance for doubtful accounts | 387.4 | | | — | | | | — | | | | 387.4 | |
| Inventories | 375.2 | | | — | | | | 851.8 | | (q) | | 1,227.0 | |
| Prepaid expenses and other current assets | 322.6 | | | 75.3 | | (b) | | (58.3) | | (r) | | 339.6 | |
| Current asset held for sale | — | | | — | | | | 100.0 | | (j) | | 100.0 | |
| Total current assets | 2,477.8 | | | (1,019.4) | | | | 893.5 | | | | 2,351.9 | |
| Property, plant and equipment, net | 748.6 | | | — | | | | (299.2) | | (s) | | 449.4 | |
| Intangible assets, net | 5,166.6 | | | — | | | | (2,014.4) | | (t) | | 3,152.2 | |
| Deferred income taxes | — | | | — | | | | 453.4 | | (l) | | 453.4 | |
| Other assets | 222.8 | | | (3.9) | | (c) | | (23.5) | | (u) | | 195.4 | |
| Total Assets | $ | 8,615.8 | | | $ | (1,023.3) | | | | $ | (990.2) | | | | $ | 6,602.3 | |
| | | | | | | | | |
| Liabilities and Shareholders' Equity | | | | | | | | | |
| Current Liabilities: | | | | | | | | | |
| Current maturities of long-term debt | $ | 1,389.9 | | | $ | (1,355.2) | | (d) | | $ | — | | | | $ | 34.7 | |
| Accounts payable | 156.4 | | | (53.8) | | (e) | | — | | | | 102.6 | |
| Accrued payroll and payroll-related costs | 71.4 | | | — | | | | — | | | | 71.4 | |
| Accrued interest | 20.8 | | | (13.0) | | (f) | | — | | | | 7.8 | |
| Acthar Gel-Related Settlement | — | | | 16.5 | | (g) | | — | | | | 16.5 | |
| Opioid-Related Litigation Settlement | — | | | 200.0 | | (h) | | — | | | | 200.0 | |
| Accrued and other current liabilities | 296.1 | | | 50.8 | | (i) | | (6.1) | | (v) | | 340.8 | |
| Current liability held for sale | — | | | 35.0 | | (j) | | — | | | | 35.0 | |
| Total current liabilities | 1,934.6 | | | (1,119.7) | | | | (6.1) | | | | 808.8 | |
| Long-term debt | — | | | 3,050.9 | | (d) | | (18.4) | | (w) | | 3,032.5 | |
| Acthar Gel-Related Settlement | — | | | 63.2 | | (g) | | — | | | | 63.2 | |
| Opioid-Related Litigation Settlement liability | — | | | 304.3 | | (h) | | — | | | | 304.3 | |
| Pension and postretirement benefits | 27.6 | | | 27.2 | | (k) | | — | | | | 54.8 | |
| Environmental liabilities | 37.1 | | | — | | | | — | | | | 37.1 | |
| Deferred income taxes | 20.4 | | | 102.7 | | (l) | | (121.7) | | (l) | | 1.4 | |
| Other income tax liabilities | 75.9 | | | — | | | | (61.9) | | (x) | | 14.0 | |
| Other liabilities | 68.6 | | | 23.6 | | (m) | | (9.6) | | (v) | | 82.6 | |
| Liabilities subject to compromise | 6,402.7 | | | (6,402.7) | | (n) | | — | | | | — | |
| Total Liabilities | 8,566.9 | | | (3,950.5) | | | | (217.7) | | | | 4,398.7 | |
| Shareholders' Equity: | | | | | | | | | |
| Predecessor preferred shares | — | | | — | | | | — | | | | — | |
| Predecessor ordinary A shares | — | | | — | | | | — | | | | — | |
| Predecessor ordinary shares | 18.9 | | | (18.9) | | (o) | | — | | | | — | |
| Successor ordinary shares | — | | | 0.1 | | (o) | | — | | | | 0.1 | |
| Predecessor ordinary shares held in treasury | (1,616.1) | | | 1,616.1 | | (o) | | — | | | | — | |
| Predecessor additional paid-in capital | 5,599.5 | | | (5,599.5) | | (o) | | — | | | | — | |
| Successor additional paid-in capital | — | | | 2,203.5 | | (o) | | — | | | | 2,203.5 | |
| Predecessor accumulated other comprehensive loss | (9.9) | | | — | | | | 9.9 | | (y) | | — | |
| Retained (deficit) earnings | (3,943.5) | | | 4,725.9 | | (p) | | (782.4) | | (z) | | — | |
| Total Shareholders' Equity | 48.9 | | | 2,927.2 | | | | (772.5) | | | | 2,203.6 | |
| Total Liabilities and Shareholders' Equity | $ | 8,615.8 | | | $ | (1,023.3) | | | | $ | (990.2) | | | | $ | 6,602.3 | |
Reorganization Adjustments
(a)The table below reflects the plansources and uses of reorganization is consummated orcash on the Bankruptcy Court approves ordersEffective Date:
| | | | | | | | |
| Sources: | | |
| Proceeds from New 1L Notes | | $ | 637.0 | |
| Total Sources | | 637.0 | |
| Uses: | | |
| Payment of Predecessor revolving credit facility | | (900.0) | |
| Upfront payment of the Opioid-Related Litigation Settlement | | (447.4) | |
| Upfront payment of the Acthar Gel-Related Settlement, inclusive of settlement interest | | (17.8) | |
| Payment of secured, administrative, priority and trade claims | | (26.2) | |
| Payment of professional fees | | (43.5) | |
| Payment to fund professional fees escrow (prepaid and other current assets restricted cash) | | (89.0) | |
| Payment of general unsecured claims | | (135.0) | |
| Payment of noteholder consent fees | | (19.3) | |
| Payment of costs, fees and expenses related to exit-financing activities, an exit fee associated with senior secured loans and accrued and unpaid interest on certain pre-emergence debt | | (53.5) | |
| Total Uses | | (1,731.7) | |
| Net Uses of Cash | | $ | (1,094.7) | |
(b)Represents the transfer of funds to a restricted cash account for purposes of funding the $89.0 million professional fee reserve offset by the release of a $10.9 million prepaid success fee as a result of emergence from bankruptcy and the write off of prepaid expenses related to settlementpremiums for the Predecessor Company's directors' and officers' insurance policy.
(c)Debt issuance costs of specific liabilities. Accordingly,$2.6 million related to entering into a receivables financing facility. These costs were capitalized as other non-current assets as the ultimate amount or resolutionfacility was undrawn as of such liabilities is not determinable at this time. The resolutionJune 16, 2022. Refer to Note 14 for further information on the receivables financing facility. Also reflects a write-off of such claims could result in substantial$6.5 million of prepaid expenses related to premiums for the Predecessor Company's directors' and officers' insurance policy.
(d)Impacts to long-term debt, net of current maturities, pursuant to the Plan, include the following:
•Repayment of the $900.0 million Existing Revolver;
•Issuance of the 2017 and 2018 Replacement Term Loans of $1,392.9 million and $369.7 million, respectively, of which $34.7 million was current;
•Issuance of the New 2L Notes of $322.9 million;
•Issuance of the Takeback 2L Notes of $375.0 million;
•Reinstatement of the Existing 1L Notes of $495.0 million principal, net of $5.1 million deferred financing fees; and
•Issuance of $650.0 million New IL Notes, net of a $13.0 million original issuance discount and $9.7 million of deferred debt issuance costs.
Fair value adjustments to the carrying value of debt instruments impacted by the Plan as determined by the Black-Derman-Toy model as follows:
| | | | | | | | |
| 2017 Replacement Term Loan | | $ | (169.4) | |
| 2018 Replacement Term Loan | | (42.2) | |
| New 2L Notes | | (95.7) | |
| Takeback 2L Notes | | (184.8) | |
| Total fair value adjustment to debt instruments | | $ | (492.1) | |
Predecessor debt for certain of these instruments described above were classified in liabilities subject to compromise ("LSTC") as of the Effective Date.
(e)Represents $43.5 million of professional fees paid to the Company’s restructuring advisors upon the Company's financial statements.emergence from Chapter 11 bankruptcy and $25.2 million of secured, administrative and priority payments, partially offset by $14.6 million of professional advisor success fees incurred on the Effective Date plus reinstatement of LSTC.
(f)Represents payments of accrued interest on the Company's Existing Revolver, Existing Term Loans and Existing 2L Notes in accordance with the cash collateral order on the Effective Date.
(g)Pursuant to the Plan, the Company agreed to pay $260.0 million to the DOJ and other parties over seven years to settle the Acthar Gel-related matters. The Company reduced its estimated allowed claim amount related to these matters to the settlement amount of $260.0 million and reclassified it from LSTC to other non-current liabilities. On the Effective Date, the Company made an upfront payment of $17.8 million, inclusive of settlement interest. The remaining deferred cash payments of $245.0 million and related settlement interest were recorded at fair value utilizing a discounted cash flow model with an average credit-adjusted discount rate of 27.8%. The fair value of the liability was $16.5 million and $63.2 million, respectively, reflected within current and other non-current liabilities in the above table.
(h)Pursuant to the Plan, the Company agreed to pay $1,725.0 million into certain trusts to resolve all opioid claims, and made an upfront payment of $447.4 million on the Effective Date. The remaining deferred cash payments of $1,275.0 million were recorded at fair value utilizing the Black-Derman-Toy model, which incorporates the option to prepay as well as other inputs such as an average credit-adjusted discount rate of 27.8%. The fair value of the liability was $200.0 million and $304.3 million, respectively, reflected within current and other non-current liabilities in the above table.
(i)The following table reconciles reorganization adjustments to accrued and other current liabilities:
| | | | | | | | |
| Severance - Exiting Chief Executive Officer ("CEO") | | $ | 5.7 | |
| Reinstatement of various successor obligations from LSTC | | 15.4 | |
| Success fees for professionals incurred on Effective Date | | 29.7 | |
| | $ | 50.8 | |
(j)As part of fresh-start accounting, the Company recorded a $100.0 million intangible asset in relation to the Company's PRV that was awarded under an FDA program intended to encourage the development of certain product applications for therapies used to treat or prevent material threat medical countermeasures. It also recorded a $35.0 million liability related to the proceeds from a sale of the PRV which is due to the general unsecured claims trustee pursuant to the term of the Plan and the general unsecured claims trust agreement entered into with the Plan. As of the Effective Date, this asset and liability were classified as held-for-sale. Refer to Note 13 for further information on the subsequent sale of the PRV.
(k)Reinstatement of certain long-term pension and other postretirement plans from LSTC to other liabilities.
(l)Reflects reorganization adjustments consisting of (1) the reduction in federal and state net operating loss ("NOL") carryforwards from cancellation of debt income ("CODI") realized upon emergence from bankruptcy and limitations under Sections 382 and 383 of the U.S. Internal Revenue Code of 1986 ("IRC"); (2) the net decrease in deferred tax assets resulting from reorganization adjustments; (3) the reduction in the valuation allowance on the Company's deferred tax assets and fresh-start adjustments consisting of (4) the net decrease in deferred tax liabilities resulting from fresh-start adjustments; and (5) the release of uncertain tax positions that are no longer required upon emergence from bankruptcy.
(m)Reinstatement of the Company's $16.8 million asbestos-related defense costs from LSTC to other liabilities and establishment of a liability for the contingent value right ("CVR") associated with Terlivaz in accordance with the Plan and Scheme of Arrangement. The CVR is based upon the achievement of a cumulative net sales milestone. The Company will assess the likelihood of and timing of making such payment at each balance sheet date. The fair value of the contingent payment was measured based on the net present value of a probability-weighted assessment estimated using a Monte Carlo simulation. The Company determined the fair value of the CVR to be $6.8 million as of the Effective Date.
(n)LSTC were settled as follows in accordance with the Plan (in millions):
| | | | | | | | |
| Liabilities subject to compromise | | |
| Accounts payable | | $ | 17.7 | |
| Accrued interest | | 35.2 | |
| Debt | | 3,746.2 | |
| Environmental liabilities | | 67.2 | |
| Acthar Gel-Related Settlement liability | | 630.0 | |
| Opioid-Related Litigation Settlement liability | | 1,722.4 | |
| Other current and non-current liabilities | | 151.6 | |
| Pension and postretirement benefits | | 32.4 | |
| Total liabilities subject to compromise | | $ | 6,402.7 | |
| | |
| To be reinstated on the Effective Date: | | |
| Accounts payable | | $ | (0.1) | |
| | |
| Other current and non-current liabilities | | (27.3) | |
| Pension and postretirement benefits | | (32.4) | |
| Total liabilities reinstated | | $ | (59.8) | |
| | |
| Consideration provided to settle amounts per the Plan | | |
| Issuance of Successor common stock | | $ | (2,189.7) | |
| Issuance of Opioid Warrants | | (13.9) | |
| Issuance of Takeback Term Loans and New 2L Notes | | (1,778.3) | |
| Acthar Gel-Related Settlement liability | | (79.7) | |
| Opioid-Related Litigation Settlement liability | | (504.3) | |
| Issuance of Takeback 2L Notes to holders of the Guaranteed Unsecured Notes | | (190.2) | |
| Contingent liabilities for proceeds of sale of StrataGraft PRV and Terlivaz CVR | | (41.8) | |
| Cash payment | | (601.3) | |
| Total consideration provided to settle amounts per the Plan | | $ | (5,399.2) | |
| | |
| Gain on settlement of liabilities subject to compromise | | $ | 943.7 | |
(o)Pursuant to the Plan, as of the Effective Date, all Predecessor's preferred and ordinary shares were cancelled without any distribution. The following table reconciles reorganization adjustments made to Successor common stock, Opioid Warrants and additional paid in capital:
| | | | | | | | |
Par value of 13,170,932 shares of Successor Common Stock issued to former holders of the Guaranteed Unsecured Notes (par valued at $0.01 dollars per share) | | $ | 0.1 | |
Fair value of Opioid Warrants issued to holders of the Guaranteed Unsecured Notes (1) | | 13.9 | |
| Additional paid in capital - Successor Common Stock | | 2,189.6 | |
| Successor equity | | $ | 2,203.6 | |
(1)The fair value of the Opioid Warrants was estimated using a Black-Scholes model with the following assumptions: $18.50 stock price of the Successor Company; exercise price per share of $103.40; expected volatility of 62.28%; risk free interest rate of 3.34%, continuously compounded; and a holding period of six years. The expected volatility assumption is based on the historical and implied volatility of the Company's peer group with similar business models.
(p)Retained deficit - The cumulative effect of the consummation of the Plan on the Predecessor's retained deficit is as follows:
| | | | | | | | |
| Gain on settlement of LSTC | | $ | 943.7 | |
| Professional, success and exit fees | | (91.6) | |
| Release of prepaid success fee | | (10.9) | |
Release of prepaid insurance (1) | | (9.2) | |
| Accrual of severance for former CEO | | (5.7) | |
| Income tax expense on plan adjustments | | (102.7) | |
| Cancellation of Predecessor equity | | 4,002.3 | |
| Net impact on retained deficit | | $ | 4,725.9 | |
(1) Write off of prepaid expenses related to premiums for the Predecessor Company's directors' and officers' insurance policy.
Fresh-Start Adjustments
(q)Reflects the fair value adjustment related to the Company's inventory. Both the bottom-up and top-down approach were used. The bottom-up approach considers the inventory value that had been created by the Company including the costs incurred, profit realized, and tangible and intangible assets used pre-Effective Date. The top-down approach measures the incremental inventory value created by the market participant buyer as part of its selling effort to an end customer and considers the costs that will be incurred, the profit that will be realized, and the tangible and intangible assets that will be used post-Effective Date.
(r)Reflects the reduction of $54.0 million in prepaid income taxes due to remeasurement as a result of fresh-start accounting. Also reflects a write-off of $4.3 million of asbestos indemnification receivable affiliated with asbestos-related defense costs in line with the Company's accounting policy change as outlined in Note 1.
(s)Reflects the fair value adjustment related to the Company's property, plant and equipment. Both the market and cost approaches were utilized to fair value land and buildings. The cost approach was utilized to fair value capitalized software and machinery and equipment. Construction in process was reported at its cost less adjustments for economic obsolescence.
(t)Reflects the fair value adjustment related to the Company's intangible assets. The fair value of the completed technology and in-process research and development ("IPR&D") intangible assets were determined using the income approach. The cash flows were discounted commensurate with the level of risk associated with each asset or its projected cash flows. The valuation used discount rates ranging from 13.0% through 15.0%, depending on the asset. The IPR&D discount rate was developed after assigning a probability of success to achieving the projected cash flows based on the current stages of development, inherent uncertainty in the FDA approval process and risks associated with commercialization of a new product. See Note 13 for further information on intangible assets.
(u)Reflects the write-off of (i) $16.0 million of asbestos indemnification receivable affiliated with asbestos-related defense costs in line with the Company's accounting policy change as outlined in Note 1; (ii) $3.9 million of spare parts that did not meet the Company's capitalization threshold; and (iii) $1.1 million of third party debt issuance costs. Also reflects a decrease of $0.9 million to income tax receivables associated with a change in uncertain tax positions as a result of fresh-start accounting.
In addition, the Company’s lease obligations were revalued using the incremental borrowing rate applicable to the Company upon emergence from the Chapter 11 proceedings and commensurate with its new capital structure. The incremental borrowing rate used in the revaluation of the lease obligations increased from 8.85% in the Predecessor period to 11.83% in the Successor period. The revaluation of lease obligations includes the adjustment for contract-based off-market intangibles for favorable or unfavorable terms to the right-of-use assets as well as the removal of right-of-use assets (and affiliated lease liabilities) associated with the Company’s leases with a remaining contract term of less than one year as of the Effective Date. The revaluation resulted in a reduction in the right-of-use asset of $1.6 million.
(v)Reflects the write-off of (i) $6.1 million and $16.7 million of current and non-current asbestos-related defense costs, respectively, in line with the Company's accounting policy change as outlined in Note 1; and (ii) an adjustment of $6.9 million to increase the Company's total lease liabilities as a result of the revaluation of the lease obligations as described in footnote (t) above.
(w)Reflects the write-off of $5.1 million of unamortized debt issuance costs and a $23.5 million fair value adjustment to debt principal as determined by the Black-Derman-Toy model related to the reinstated Existing 1L Notes.
(x)Reflects the reduction of liabilities for unrecognized tax benefits that are no longer required upon emergence from bankruptcy.
(y)Reflects the fair value adjustment to eliminate the accumulated other comprehensive income of $8.1 million related to pension benefits and $2.1 million of currency translation adjustment, partially offset by the elimination of $0.3 million of income tax effects, which resulted in income tax benefit of $0.3 million.
(z)The cumulative effect of the fresh-start accounting on the Successor's retained deficit is as follows:
| | | | | | | | |
| Fresh-start adjustment: | | |
| Inventories | | $ | 851.8 | |
| Property, plant and equipment, net | | (299.2) | |
| Intangible assets, net | | (2,014.4) | |
| Current asset held for sale | | 100.0 | |
| Debt | | 18.4 | |
| Other assets and liabilities | | (11.2) | |
| Total fresh-start adjustments impacting reorganization items, net | | (1,354.6) | |
| Fresh-start adjustments to accumulated other comprehensive income, net of $0.3 million of tax benefit | | (9.9) | |
| Total fresh-start adjustments recorded to income tax benefit | | 582.1 | |
| Net fresh-start impact to accumulated deficit | | $ | (782.4) | |
Reorganization items, net
Reorganization items, net, for the Predecessor represent amounts incurred after the Petition Date but prior to emergence from bankruptcy as a direct result of the Chapter 11 Cases and arewere comprised of gains and losses associated with the reorganization, primarily the loss on fresh-start adjustments, gain on settlement of LSTC, bankruptcy-related professional fees, debt financing fees and adjustments to reflectwrite-off of debt issuance costs and related unamortized premiums and discounts. Successor reorganization items, net represent amounts incurred after the carrying valueEffective Date that directly resulted from Chapter 11 and were entirely comprised of LSTC at their estimated allowed claim amounts, as such adjustments are approved byprofessional fees associated with the Bankruptcy Court.implementation of the Plan. Cash paid for reorganization items, net for the period from June 17, 2022 through December 30, 2022 (Successor), January 1, 2022 through June 16, 2022 (Predecessor), fiscal 2021 (Predecessor) and fiscal 2020 was(Predecessor) were $18.4 million, $304.1 million, $333.1 million, and $8.7 million, respectively. Reorganization items, for fiscal 2021 and 2020 includenet, were comprised of the following:
| | | Fiscal Year | | Successor | | | Predecessor |
| | 2021 | | 2020 | | Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
| Professional fees | $ | 405.6 | | | $ | 51.1 | | |
| Gain on settlements of LSTC | | Gain on settlements of LSTC | $ | — | | | | $ | (943.7) | | | $ | — | | | $ | — | |
| Loss on fresh-start adjustments | | Loss on fresh-start adjustments | — | | | | 1,354.6 | | | — | | | — | |
| Professional and other service provider fees | | Professional and other service provider fees | 23.2 | | | | 161.1 | | | 405.6 | | | 51.1 | |
| Success fees for professional service providers | | Success fees for professional service providers | — | | | | 44.3 | | | — | | | — | |
| Write off of prepaid premium for directors and officers' insurance policies | | Write off of prepaid premium for directors and officers' insurance policies | — | | | | 9.2 | | | — | | | — | |
| Debt valuation adjustments | Debt valuation adjustments | 23.1 | | | 10.2 | | Debt valuation adjustments | — | | | | — | | | 23.1 | | | 10.2 | |
| Adjustments of other claims | Adjustments of other claims | (0.5) | | | 0.1 | | Adjustments of other claims | — | | | | 5.4 | | | (0.5) | | | 0.1 | |
| | Total reorganization items, net | Total reorganization items, net | $ | 428.2 | | | $ | 61.4 | | Total reorganization items, net | $ | 23.2 | | | | $ | 630.9 | | | $ | 428.2 | | | $ | 61.4 | |
| | | | | |
3.4. | Summary of Significant Accounting Policies |
Liabilities Subject to Compromise
As a result of the commencement of the Chapter 11 Cases, the payment of pre-petition liabilities is subject to compromise or other treatment pursuant to a plan of reorganization. The determination of how liabilities will ultimately be settled or treated cannot be made until the confirmed Chapter 11 plan of reorganization becomes effective. Accordingly, the ultimate amount of such liabilities is not determinable at this time. Pre-petition liabilities that are subject to compromise are to be reported at the amounts expected to be allowed by the Bankruptcy Court, even if they may be settled for different amounts. The amounts currently classified as LSTC are preliminary and may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determinations of the secured status of certain claims, the values of any collateral securing such claims, rejection of executory contracts, continued reconciliation or other events.
Revenue Recognition
Product Sales Revenue
The Company sells its products through independent channels, including direct to retail pharmacies, end user customers and through distributors who resell the products to retail pharmacies, institutions and end user customers, while certain products are sold and distributed directly to hospitals. The Company also enters into arrangements with indirect customers, such as health care providers and payers, wholesalers, government agencies, institutions, managed care organizations and group purchasing organizations to establish contract pricing for certain products that provide for government-mandated and/or privately-negotiated rebates, sales incentives, chargebacks, distribution service agreements fees, fees for services and administration fees and discounts with respect to the purchase of the Company's products.
Reserve for Variable Considerations
Product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established. These reserves result from estimated chargebacks, rebates, product returns and other sales deductions that are offered within contracts between the Company and its customers, health care providers and payers relating to the sale of the Company's products. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than a customer). Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as the Company's historical experience, estimated future trends, estimated customer inventory levels, current contracted sales terms with customers, level of utilization of the Company's products and other competitive factors. Overall, these reserves reflect the Company's best estimate of the amount of consideration to which it is entitled based on the terms of the contract. The amount of variable consideration that is included in the transaction price may be constrained (reduced) and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. The Company adjusts reserves for chargebacks, rebates, product returns and other sales deductions to reflect differences between estimated and actual experience. Such adjustments impact the amount of net sales recognized in the period of adjustment.
Product sales are recognized when the customer obtains control of the Company's product. Control is transferred either at a point in time, generally upon delivery to the customer site, or in the case of certain of the Company's products, over the period in which the customer has access to the product and related services. Revenue recognized over time is based upon either consumption of the product or passage of time based upon the Company's determination of the measure that best aligns with how the obligation is satisfied. The Company's considerations of why such measures provide a faithful depiction of the transfer of its products are as follows:
•For those contracts whereby revenue is recognized over time based upon consumption of the product, the Company either has:
1.the right to invoice the customer in an amount that directly corresponds with the value to the customer of the Company's performance to date, for which the practical expedient to recognize in proportion to the amount it has the right to invoice has been applied, or
2.the remaining goods and services to which the customer is entitled is diminished upon consumption.
•For those contracts whereby revenue is recognized over time based upon the passage of time, the benefit that the customer receives from unlimited access to the Company's product does not vary, regardless of consumption. As a result, the Company's obligation diminishes with the passage of time; therefore, ratable recognition of the transaction price over the contract period is the measure that best aligns with how the obligation is satisfied.
Transaction price allocated to the remaining performance obligations
The majority of the Company's contracts have a term of less than one year; therefore, the related disclosure ofand the amount of transaction price allocated to the performance obligations that are unsatisfied at period end has been omitted.is generally expected to be satisfied within one year.
Cost to obtain a contract
As the majority of the Company's contracts are short-term in nature, sales commissions are generally expensed when incurred as the amortization period would have been less than one year. These costs are recorded within selling, general and administrative expense ("SG&A") in the consolidated statements of operations. For contracts that extend beyond one year, the incremental expense recognition matches the recognition of related revenue.
Costs to fulfill a contract
The Company capitalizes the costs associated with the devices used in the Company's portfolio of drug-device combination products, which are used in satisfaction of future performance obligations. Capital expenditures for these devices represent cash outflows for the Company's cost to produce the asset, which is classified in property, plant and equipment, net on the consolidated balance sheets and expensed to cost of sales over the useful life of the equipment.
Product Royalty Revenues
The Company licenseslicensed certain rights to Amitiza® (lubiprostone) ("Amitiza") to third parties in exchange for royalties on net sales of the product. The Company recognizesrecognized such royalty revenue as the related sales occur.occurred.
Contract Balances
Accounts receivable are recorded when the right to consideration becomes unconditional. Payments received from customers are typically based upon payment terms of 30 days. The Company does not maintain contract asset balances aside from the accounts receivable balance as presented on the consolidated balance sheets as costs to obtain a contract are expensed when incurred as the amortization period would have been less than one year. These costs are recorded within SG&A on the consolidated statements of
operations. Contract liabilities are recorded when cash payments are received in advance of the Company's performance, including amounts that are refundable.
Taxes collected from customers relating to product sales and remitted to governmental authorities are accounted for on a net basis. Accordingly, such taxes are excluded from both net sales and expenses.
Shipping and Handling Costs
Shipping costs, which are costs incurred to physically move product from the Company's premises to the customer's premises, are classified as SG&A. Handling costs, which are costs incurred to store, move and prepare product for shipment, are classified as cost of sales. Shipping costs included in SG&A expenses in continuing operations were as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2021 | | 2020 | | 2019 |
| Shipping costs | $ | 23.6 | | | $ | 20.1 | | | $ | 17.6 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
| Shipping costs | $ | 13.9 | | | | $ | 12.8 | | | $ | 23.6 | | | $ | 20.1 | |
Research and Development
Internal research and development costs are expensed as incurred. Research and development ("R&D") expenses include salary and benefits, allocated overhead and occupancy costs, clinical trial and related clinical manufacturing costs, contract services, medical affairs and other costs.
From time to time, the Company has entered into licensing or collaborative agreements with third parties to develop a new drug candidate or intellectual property asset. These agreements may include R&D, marketing, promotion and selling activities to be performed by one or all parties involved. These collaborations generally include upfront, milestone and royalty or profit sharing payments contingent upon future events tied to the developmental and commercial success of the asset. In general, upfront and milestone payments made to third parties under these agreements are expensed as incurred up to the point of regulatory approval of the product. Milestone payments made to third parties upon regulatory approval are capitalized as an intangible asset and amortized to cost of sales over the estimated useful life of the related product.
Currency Translation
For the Company's non-U.S. subsidiaries that transact in a functional currency other than U.S. dollars, assets and liabilities are translated into U.S. dollars using fiscal year-end exchange rates. Revenues and expenses are translated at the average exchange rates in effect during the related month. The net effect of these translation adjustments is shown in the consolidated financial statements as a component of accumulated other comprehensive loss.income (loss). From time to time, the Company has entered into derivative instruments to mitigate the exposure of movements in certain of these foreign currency transactions. Gains and losses resulting from foreign currency transactions are included in net loss.
Cash and Cash Equivalents
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 to the Company of three months or less, as cash and cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are presented net of an allowance for doubtful accounts. The allowance for doubtful accounts reflects an estimate of losses inherent in the Company's accounts receivable portfolio determined on the basis of historical experience, current facts and circumstances, reasonable and supportable forecasts and other available evidence. Accounts receivable are written off when management determines they are uncollectible. Trade accounts receivable are also presented net of reserves related to chargebacks and rebates payable to customers with whom the Company has trade accounts receivable and the right of offset exists.
Inventories
Inventories are recorded at the lower of cost or net realizable value, primarily using the first-in, first-out convention. The Company reduces the carrying value of inventories for those items that are potentially excess, obsolete or slow-moving based on changes in customer demand, technology developments or other economic factors.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated depreciation and impairment. Major renewals and improvements are capitalized, while routine maintenance and repairs are expensed as incurred. Depreciation for property, plant and equipment, other than land and construction in process, is generally based upon the following estimated useful lives, using the straight-line method:
| | | | | | | | | | | |
| Buildings | 10 | to | 45 years |
| Leasehold improvements | 1 | to | 20 years |
| Capitalized software | 1 | to | 10 years |
| Machinery and equipment | 1 | to | 20 years |
The Company capitalizes certain computer software and development costs incurred in connection with developing or obtaining software for internal use.
Upon retirement or other disposal of property, plant and equipment, the cost and related amount of accumulated depreciation are eliminated from the asset and accumulated depreciation accounts, respectively. The difference, if any, between the net asset value and the proceeds is included in net loss.
The Company assesses the recoverability of assets or asset groups using undiscounted cash flows whenever events or circumstances indicate that the carrying value of an asset or asset group may not be recoverable. If an asset or asset group is found to be impaired, the amount recognized for impairment is equal to the difference between the carrying value of the asset or asset group and its fair value.
Leases
The Company assesses all contracts at inception to determine whether a lease exists. The Company leases office space, manufacturing and warehousing facilities, equipment and vehicles, which are generally operating leases. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are accounted for separately. The Company's lease agreements generally do not contain variable lease payments or any material residual value guarantees.
Lease assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term as of the commencement date. As the Company's leases do not generally provide an implicit rate, the Company utilizes its incremental borrowing rate based on the information available at commencement date in determining the present value of future lease payments. Most leases include one or more options to terminate or renew, with renewal terms that can extend the lease term from one to five years. The exercise of lease renewal options is at the Company's sole discretion. Termination and renewal options are included within the lease assets and liabilities only to the extent they are reasonably certain.
Acquisitions
Amounts paid for acquisitions that meet the criteria for business combination accounting are allocated to the tangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The Company then allocates the purchase price in excess of net tangible assets acquired to identifiable intangible assets, including purchased R&D. The fair value of identifiable intangible assets is based on detailed valuations. The Company allocates any excess purchase price over the fair value of the net tangible and intangible assets acquired to goodwill.
The Company's purchased R&D represents the estimated fair value as of the acquisition date of in-process projects that have not reached technological feasibility. The primary basis for determining technological feasibility of these projects is obtaining regulatory approval.
The fair value of in-process research and development ("IPR&D") is determined using the discounted cash flow method. In determining the fair value of IPR&D, the Company considers, among other factors, appraisals, the stage of completion of the projects, the technological feasibility of the projects, whether the projects have an alternative future use and the estimated residual cash flows
that could be generated from the various projects and technologies over their respective projected economic lives. The discount rate used includes a rate of return that accounts for the time value of money, as well as risk factors that reflect the economic risk that the cash flows projected may not be realized.
The fair value attributable to IPR&D projects at the time of acquisition is capitalized as an indefinite-lived intangible asset and tested annually for impairment until the project is completed or abandoned. Upon completion of the project, the indefinite-lived intangible asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. If the project is abandoned, the indefinite-lived intangible asset is charged to expense.
Certain asset acquisitions or license agreements may not meet the criteria for a business combination. The Company accounts for these transactions as asset acquisitions and recognizes the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity. Any initial up-front payments incurred in connection with the acquisition or licensing of IPR&D product candidates that do not meet the definition of a business are treated as R&D expense.
Intangible Assets
Intangible assets acquired in a business combination are recorded at fair value, while intangible assets acquired in other transactions are recorded at cost. Intangible assets with finite useful lives are subsequently amortized generally usingaccording to the straight-line method,pattern in which the economic benefit of the asset is used up over thetheir estimated useful lives, of the assets.as shown below. The estimated useful lives of the Company's intangible assets as of December 31, 202130, 2022 (Successor) were the following:
| | | | | | | | | | | |
| Completed technology | 93 | to | 2520 years |
License agreements | | | 30 years |
Trademarks | 22 | to | 30 years |
Amortization expense related to completed technology and certain other intangible assets is included in cost of sales, while amortization expense related to intangible assets that contribute to the Company's ability to sell, market and distribute products is included in SG&A.sales.
When a triggering event occurs, the Company evaluates potential impairment of finite-lived intangible assets by first comparing undiscounted cash flows associated with the asset, or the asset group they are part of, to its carrying value. If the carrying value is greater than the undiscounted cash flows, the amount of potential impairment is measured by comparing the fair value of the assets, or asset group, with their carrying value. The fair value of the intangible asset, or asset group, is estimated using an income approach. If the fair value is less than the carrying value of the intangible asset, or asset group, the amount recognized for impairment is equal to the difference between the carrying value of the asset and the fair value of the asset. The Company assesses the remaining useful life and the recoverability of finite-lived intangible assets whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. 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. The Company will compare the fair value of the assets with their carrying value and record an impairment when the carrying value exceeds the fair value.
Contingencies
The Company is subject to various legal proceedings and claims, including government investigations, environmental matters, product liability matters, patent infringement claims, antitrust matters, securities class action lawsuits, personal injury claims, employment disputes, contractual and other commercial disputes, and all other legal proceedings, all in the ordinary course of business as further discussed in Note 19. The Company records accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. The Company discounts environmental liabilities using a risk-free rate of return when the obligation is fixed or reasonably determinable. The impact of the discount in the consolidated balance sheets was not material in any period presented. Legal fees, other than those pertaining to environmental and asbestos matters, are expensed as incurred. Insurance recoveries related to potential claims are recognized up to the amount of the recorded liability when coverage is confirmed and the estimated recoveries are probable of payment. Assets and liabilities are not netted for financial statement presentation.
Liabilities Subject to Compromise
As a result of the commencement of the Chapter 11 Cases, the payment of pre-petition liabilities was subject to compromise or other treatment pursuant to a plan of reorganization. The determination of how liabilities would ultimately be settled or treated could not be made until the confirmed Chapter 11 plan of reorganization became effective. Accordingly, the ultimate amount of such liabilities was not determinable prior to the Effective Date. Pre-petition liabilities that were subject to compromise were reported at the amounts that were expected to be allowed by the Bankruptcy Court, even if they may be settled for different amounts. The amounts classified as LSTC prior to the Effective Date were preliminary and were subject to future adjustments dependent upon Bankruptcy Court actions, further developments with respect to disputed claims, determinations of the secured status of certain claims, the values of any collateral securing such claims, rejection of executory contracts, continued reconciliation or other events.
Share-Based CompensationProduct Royalty Revenues
The Company recognizes the cost of employee services receivedlicensed certain rights to Amitiza® (lubiprostone) ("Amitiza") to third parties in exchange for awardsroyalties on net sales of equity instrumentsthe product. The Company recognized such royalty revenue as the related sales occurred.
Contract Balances
Accounts receivable are recorded when the right to consideration becomes unconditional. Payments received from customers are typically based upon payment terms of 30 days. The Company does not maintain contract asset balances aside from the accounts receivable balance as presented on the grant-date fair value of those awards. That cost is recognized overconsolidated balance sheets as costs to obtain a contract are expensed when incurred as the amortization period during which an employee is required to provide service in exchange for the award, the requisite service period (generally the vesting period).
Restructuring
The Company recognizes charges associated with the Company's Board of Directors approved restructuring programs designed to transform its business and improve its cost structure. Restructuring charges can include severance costs, infrastructure charges, distributor contract cancellations and other items. The Company accrues for costs when they are probable and reasonably estimable.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future tax consequences of events thatwould have been reflected inless than one year. These costs are recorded within SG&A on the consolidated financial statements. Deferred tax assets and liabilities are determined based on the differences between the book and tax basesstatements of assets and liabilities and operating loss carryforwards, using tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is provided to reduce net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company determines whether it is more likely than not that a tax position will be sustained upon examination. The tax benefit of any tax position that meets the more-likely-than-not recognition threshold is calculated as the largest amount that is more than 50.0% likely of being realized upon resolution of the uncertainty. To the extent a full benefit is not expected to be realized on the uncertain tax position, an income tax liability, or a reduction to a deferred tax asset is established. Interest and penalties on income tax obligations, associated with uncertain tax positions, are included in the provision for income taxes.
The calculation of the Company's tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across the Company's global operations. Due to the complexity of some of these uncertainties, the
ultimate resolutionoperations. Contract liabilities are recorded when cash payments are received in advance of the Company's performance, including amounts that are refundable.
Taxes collected from customers relating to product sales and remitted to governmental authorities are accounted for on a net basis. Accordingly, such taxes are excluded from both net sales and expenses.
Shipping and Handling Costs
Shipping costs, which are costs incurred to physically move product from the Company's premises to the customer's premises, are classified as SG&A. Handling costs, which are costs incurred to store, move and prepare product for shipment, are classified as cost of sales. Shipping costs included in SG&A expenses in continuing operations were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
| Shipping costs | $ | 13.9 | | | | $ | 12.8 | | | $ | 23.6 | | | $ | 20.1 | |
Research and Development
Internal research and development costs are expensed as incurred. Research and development ("R&D") expenses include salary and benefits, allocated overhead and occupancy costs, clinical trial and related clinical manufacturing costs, contract services, medical affairs and other costs.
From time to time, the Company has entered into licensing or collaborative agreements with third parties to develop a new drug candidate or intellectual property asset. These agreements may resultinclude R&D, marketing, promotion and selling activities to be performed by one or all parties involved. These collaborations generally include upfront, milestone and royalty or profit sharing payments contingent upon future events tied to the developmental and commercial success of the asset. In general, upfront and milestone payments made to third parties under these agreements are expensed as incurred up to the point of regulatory approval of the product. Milestone payments made to third parties upon regulatory approval are capitalized as an intangible asset and amortized to cost of sales over the estimated useful life of the related product.
Currency Translation
For the Company's non-U.S. subsidiaries that transact in a payment that is materially different from current estimates offunctional currency other than U.S. dollars, assets and liabilities are translated into U.S. dollars using fiscal year-end exchange rates. Revenues and expenses are translated at the tax liabilities. Ifaverage exchange rates in effect during the Company's estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If paymentrelated month. The net effect of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities may result in income tax benefits being recognized in the period when ittranslation adjustments is determined that the liabilities are no longer necessary. Refer to Note 8 for further information regarding the classification of such amountsshown in the consolidated balance sheets.financial statements as a component of accumulated other comprehensive income (loss). From time to time, the Company has entered into derivative instruments to mitigate the exposure of movements in certain of these foreign currency transactions. Gains and losses resulting from foreign currency transactions are included in net loss.
Cash and Cash Equivalents
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 to the Company of three months or less, as cash and cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are presented net of an allowance for doubtful accounts. The allowance for doubtful accounts reflects an estimate of losses inherent in the Company's accounts receivable portfolio determined on the basis of historical experience, current facts and circumstances, reasonable and supportable forecasts and other available evidence. Accounts receivable are written off when management determines they are uncollectible. Trade accounts receivable are also presented net of reserves related to chargebacks and rebates payable to customers with whom the Company has trade accounts receivable and the right of offset exists.
Inventories
Inventories are recorded at the lower of cost or net realizable value, primarily using the first-in, first-out convention. The Company reduces the carrying value of inventories for those items that are potentially excess, obsolete or slow-moving based on changes in customer demand, technology developments or other economic factors.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated depreciation and impairment. Major renewals and improvements are capitalized, while routine maintenance and repairs are expensed as incurred. Depreciation for property, plant and equipment, other than land and construction in process, is generally based upon the following estimated useful lives, using the straight-line method:
| | | | | | | | | | | |
4.Buildings | Revenue from Contracts with Customers10 | to | 45 years |
| Leasehold improvements | 1 | to | 20 years |
| Capitalized software | 1 | to | 10 years |
| Machinery and equipment | 1 | to | 20 years |
Product Sales Revenue
See Note 21The Company capitalizes certain computer software and development costs incurred in connection with developing or obtaining software for presentationinternal use.
Upon retirement or other disposal of property, plant and equipment, the cost and related amount of accumulated depreciation are eliminated from the asset and accumulated depreciation accounts, respectively. The difference, if any, between the net asset value and the proceeds is included in net loss.
The Company assesses the recoverability of assets or asset groups using undiscounted cash flows whenever events or circumstances indicate that the carrying value of an asset or asset group may not be recoverable. If an asset or asset group is found to be impaired, the amount recognized for impairment is equal to the difference between the carrying value of the Company's net sales by product family.asset or asset group and its fair value.
Reserves
Leases
The Company assesses all contracts at inception to determine whether a lease exists. The Company leases office space, manufacturing and warehousing facilities, equipment and vehicles, which are generally operating leases. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are accounted for separately. The Company's lease agreements generally do not contain variable considerationlease payments or any material residual value guarantees.
On November 16, 2020,Lease assets and liabilities are recognized based on the Debtors received final approval from the Bankruptcy Court to continue customer programs during the pendencypresent value of the Chapter 11 Cases. The following table reflects activity infuture minimum lease payments over the lease term as of the commencement date. As the Company's sales reserve accounts:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Rebates and Chargebacks | | Product Returns | | Other Sales Deductions | | Total |
| Balance as of December 28, 2018 | $ | 354.3 | | | $ | 34.0 | | | $ | 17.1 | | | $ | 405.4 | |
| Provisions | 2,347.3 | | | 22.2 | | | 68.2 | | | 2,437.7 | |
| Payments or credits | (2,405.8) | | | (27.8) | | | (72.1) | | | (2,505.7) | |
| Balance as of December 27, 2019 | 295.8 | | | 28.4 | | | 13.2 | | | 337.4 | |
| Provisions | 2,065.9 | | | 28.9 | | | 59.5 | | | 2,154.3 | |
Provision for Medicaid lawsuit (Note 19) (1) | 536.0 | | | — | | | — | | | 536.0 | |
| Payments or credits | (2,701.2) | | | (30.7) | | | (60.4) | | | (2,792.3) | |
| Balance as of December 25, 2020 | 196.5 | | | 26.6 | | | 12.3 | | | 235.4 | |
| Provisions | 2,087.1 | | | 23.7 | | | 55.2 | | | 2,166.0 | |
| Payments or credits | (2,041.8) | | | (28.8) | | | (58.0) | | | (2,128.6) | |
| Balance as of December 31, 2021 | $ | 241.8 | | | $ | 21.5 | | | $ | 9.5 | | | $ | 272.8 | |
(1)Excludesleases do not generally provide an implicit rate, the $105.1 millionCompany utilizes its incremental borrowing rate based on the information available at commencement date in determining the present value of future lease payments. Most leases include one or more options to terminate or renew, with renewal terms that can extend the lease term from one to five years. The exercise of lease renewal options is reflected as a component of operating expenses as it represents a pre-acquisition contingency relatedat the Company's sole discretion. Termination and renewal options are included within the lease assets and liabilities only to the portionextent they are reasonably certain.
Acquisitions
Amounts paid for acquisitions that meet the criteria for business combination accounting are allocated to the tangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The Company then allocates the purchase price in excess of net tangible assets acquired to identifiable intangible assets, including purchased R&D. The fair value of identifiable intangible assets is based on detailed valuations. The Company allocates any excess purchase price over the fair value of the liability that arose from sales of Acthar Gel priornet tangible and intangible assets acquired to goodwill.
The Company's purchased R&D represents the Company's acquisition of Questcor in August 2014. See Note 19 for further detail on the statusestimated fair value as of the Medicaid lawsuit.acquisition date of in-process projects that have not reached technological feasibility. The primary basis for determining technological feasibility of these projects is obtaining regulatory approval.
The fair value of in-process research and development ("IPR&D") is determined using the discounted cash flow method. In determining the fair value of IPR&D, the Company considers, among other factors, appraisals, the stage of completion of the projects, the technological feasibility of the projects, whether the projects have an alternative future use and the estimated residual cash flows
Product sales transferredthat could be generated from the various projects and technologies over their respective projected economic lives. The discount rate used includes a rate of return that accounts for the time value of money, as well as risk factors that reflect the economic risk that the cash flows projected may not be realized.
The fair value attributable to customersIPR&D projects at the time of acquisition is capitalized as an indefinite-lived intangible asset and tested annually for impairment until the project is completed or abandoned. Upon completion of the project, the indefinite-lived intangible asset is then accounted for as a pointfinite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. If the project is abandoned, the indefinite-lived intangible asset is charged to expense.
Certain asset acquisitions or license agreements may not meet the criteria for a business combination. The Company accounts for these transactions as asset acquisitions and recognizes the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in time and over time werethe acquired entity. Any initial up-front payments incurred in connection with the acquisition or licensing of IPR&D product candidates that do not meet the definition of a business are treated as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2021 | | 2020 | | 2019 |
| Product sales transferred at a point in time | 79.4 | % | | 78.9 | % | | 81.8 | % |
| Product sales transferred over time | 20.6 | | | 21.1 | | | 18.2 | |
Transaction price allocatedIntangible Assets
Intangible assets acquired in a business combination are recorded at fair value, while intangible assets acquired in other transactions are recorded at cost. Intangible assets with finite useful lives are amortized according to the remaining performance obligations
pattern in which the economic benefit of the asset is used up over their estimated useful lives, as shown below. The following table includes estimated revenue from contracts extending greater than one year for certainuseful lives of the Company's hospital products that are expected to be recognized in the future related to performance obligations that were unsatisfied or partially unsatisfiedintangible assets as of December 31, 2021:30, 2022 (Successor) were the following:
| | | | | |
Fiscal 2022 | $ | 112.1 | | | |
Fiscal 2023Completed technology | 69.7 3 | to | 20 years |
| | | |
Thereafter | 14.7 | | |
CostsWhen a triggering event occurs, the Company evaluates potential impairment of finite-lived intangible assets by first comparing undiscounted cash flows associated with the asset, or the asset group they are part of, to fulfill a contract
For both December 31, 2021 and December 25, 2020,its carrying value. If the total net bookcarrying value is greater than the undiscounted cash flows, the amount of potential impairment is measured by comparing the fair value of the devices usedassets, or asset group, with their carrying value. The fair value of the intangible asset, or asset group, is estimated using an income approach. If the fair value is less than the carrying value of the intangible asset, or asset group, the amount recognized for impairment is equal to the difference between the carrying value of the asset and the fair value of the asset. The Company assesses the remaining useful life and the recoverability of finite-lived intangible assets whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. 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. The Company will compare the fair value of the assets with their carrying value and record an impairment when the carrying value exceeds the fair value.
Contingencies
The Company is subject to various legal proceedings and claims, including government investigations, environmental matters, product liability matters, patent infringement claims, antitrust matters, securities class action lawsuits, personal injury claims, employment disputes, contractual and other commercial disputes, and all other legal proceedings, all in the Company's portfolioordinary course of drug-device combination products, which are usedbusiness as further discussed in satisfying future performance obligationsNote 19. The Company records accruals for contingencies when it is probable that a liability has been incurred and reflectedthe amount can be reasonably estimated. The Company discounts environmental liabilities using a risk-free rate of return when the obligation is fixed or reasonably determinable. The impact of the discount in property, plant and equipment, net, on the consolidated balance sheets was $25.8 million. The associated depreciation expensenot material in any period presented. Legal fees, other than those pertaining to environmental matters, are expensed as incurred. Insurance recoveries related to potential claims are recognized during fiscal 2021up to the amount of the recorded liability when coverage is confirmed and 2020 was $6.1 millionthe estimated recoveries are probable of payment. Assets and $5.5 million, respectively.liabilities are not netted for financial statement presentation.
Liabilities Subject to Compromise
As a result of the commencement of the Chapter 11 Cases, the payment of pre-petition liabilities was subject to compromise or other treatment pursuant to a plan of reorganization. The determination of how liabilities would ultimately be settled or treated could not be made until the confirmed Chapter 11 plan of reorganization became effective. Accordingly, the ultimate amount of such liabilities was not determinable prior to the Effective Date. Pre-petition liabilities that were subject to compromise were reported at the amounts that were expected to be allowed by the Bankruptcy Court, even if they may be settled for different amounts. The amounts classified as LSTC prior to the Effective Date were preliminary and were subject to future adjustments dependent upon Bankruptcy Court actions, further developments with respect to disputed claims, determinations of the secured status of certain claims, the values of any collateral securing such claims, rejection of executory contracts, continued reconciliation or other events.
Product Royalty Revenues
The Company licenseslicensed certain rights to Amitiza® (lubiprostone) ("Amitiza") to third parties in exchange for royalties on net sales of the product. The Company recognized such royalty revenue as the related sales occurred.
Contract Balances
Accounts receivable are recorded when the right to consideration becomes unconditional. Payments received from customers are typically based upon payment terms of 30 days. The Company does not maintain contract asset balances aside from the accounts receivable balance as presented on the consolidated balance sheets as costs to obtain a contract are expensed when incurred as the amortization period would have been less than one year. These costs are recorded within SG&A on the consolidated statements of
operations. Contract liabilities are recorded when cash payments are received in advance of the Company's performance, including amounts that are refundable.
Taxes collected from customers relating to product sales and remitted to governmental authorities are accounted for on a net basis. Accordingly, such taxes are excluded from both net sales and expenses.
Shipping and Handling Costs
Shipping costs, which are costs incurred to physically move product from the Company's premises to the customer's premises, are classified as SG&A. Handling costs, which are costs incurred to store, move and prepare product for shipment, are classified as cost of sales. Shipping costs included in SG&A expenses in continuing operations were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
| Shipping costs | $ | 13.9 | | | | $ | 12.8 | | | $ | 23.6 | | | $ | 20.1 | |
Research and Development
Internal research and development costs are expensed as incurred. Research and development ("R&D") expenses include salary and benefits, allocated overhead and occupancy costs, clinical trial and related clinical manufacturing costs, contract services, medical affairs and other costs.
From time to time, the Company has entered into licensing or collaborative agreements with third parties to develop a new drug candidate or intellectual property asset. These agreements may include R&D, marketing, promotion and selling activities to be performed by one or all parties involved. These collaborations generally include upfront, milestone and royalty or profit sharing payments contingent upon future events tied to the developmental and commercial success of the asset. In general, upfront and milestone payments made to third parties under these agreements are expensed as incurred up to the point of regulatory approval of the product. Milestone payments made to third parties upon regulatory approval are capitalized as an intangible asset and amortized to cost of sales over the estimated useful life of the related product.
Currency Translation
For the Company's non-U.S. subsidiaries that transact in a functional currency other than U.S. dollars, assets and liabilities are translated into U.S. dollars using fiscal year-end exchange rates. Revenues and expenses are translated at the average exchange rates in effect during the related month. The net effect of these translation adjustments is shown in the consolidated financial statements as a component of accumulated other comprehensive income (loss). From time to time, the Company has entered into derivative instruments to mitigate the exposure of movements in certain of these foreign currency transactions. Gains and losses resulting from foreign currency transactions are included in net loss.
Cash and Cash Equivalents
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 to the Company of three months or less, as cash and cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are presented net of an allowance for doubtful accounts. The allowance for doubtful accounts reflects an estimate of losses inherent in the Company's accounts receivable portfolio determined on the basis of historical experience, current facts and circumstances, reasonable and supportable forecasts and other available evidence. Accounts receivable are written off when management determines they are uncollectible. Trade accounts receivable are also presented net of reserves related to chargebacks and rebates payable to customers with whom the Company has trade accounts receivable and the right of offset exists.
Inventories
Inventories are recorded at the lower of cost or net realizable value, primarily using the first-in, first-out convention. The Company reduces the carrying value of inventories for those items that are potentially excess, obsolete or slow-moving based on changes in customer demand, technology developments or other economic factors.
Property, Plant and Equipment
Property, plant and equipment is stated at cost less accumulated depreciation and impairment. Major renewals and improvements are capitalized, while routine maintenance and repairs are expensed as incurred. Depreciation for property, plant and equipment, other than land and construction in process, is generally based upon the following estimated useful lives, using the straight-line method:
| | | | | | | | | | | |
| Buildings | 10 | to | 45 years |
| Leasehold improvements | 1 | to | 20 years |
| Capitalized software | 1 | to | 10 years |
| Machinery and equipment | 1 | to | 20 years |
The Company capitalizes certain computer software and development costs incurred in connection with developing or obtaining software for internal use.
Upon retirement or other disposal of property, plant and equipment, the cost and related amount of accumulated depreciation are eliminated from the asset and accumulated depreciation accounts, respectively. The difference, if any, between the net asset value and the proceeds is included in net loss.
The Company assesses the recoverability of assets or asset groups using undiscounted cash flows whenever events or circumstances indicate that the carrying value of an asset or asset group may not be recoverable. If an asset or asset group is found to be impaired, the amount recognized for impairment is equal to the difference between the carrying value of the asset or asset group and its fair value.
Leases
The Company assesses all contracts at inception to determine whether a lease exists. The Company leases office space, manufacturing and warehousing facilities, equipment and vehicles, which are generally operating leases. Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are accounted for separately. The Company's lease agreements generally do not contain variable lease payments or any material residual value guarantees.
Lease assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term as of the commencement date. As the Company's leases do not generally provide an implicit rate, the Company utilizes its incremental borrowing rate based on the information available at commencement date in determining the present value of future lease payments. Most leases include one or more options to terminate or renew, with renewal terms that can extend the lease term from one to five years. The exercise of lease renewal options is at the Company's sole discretion. Termination and renewal options are included within the lease assets and liabilities only to the extent they are reasonably certain.
Acquisitions
Amounts paid for acquisitions that meet the criteria for business combination accounting are allocated to the tangible assets acquired and liabilities assumed based on their estimated fair values at the date of acquisition. The Company then allocates the purchase price in excess of net tangible assets acquired to identifiable intangible assets, including purchased R&D. The fair value of identifiable intangible assets is based on detailed valuations. The Company allocates any excess purchase price over the fair value of the net tangible and intangible assets acquired to goodwill.
The Company's purchased R&D represents the estimated fair value as of the acquisition date of in-process projects that have not reached technological feasibility. The primary basis for determining technological feasibility of these projects is obtaining regulatory approval.
The fair value of in-process research and development ("IPR&D") is determined using the discounted cash flow method. In determining the fair value of IPR&D, the Company considers, among other factors, appraisals, the stage of completion of the projects, the technological feasibility of the projects, whether the projects have an alternative future use and the estimated residual cash flows
that could be generated from the various projects and technologies over their respective projected economic lives. The discount rate used includes a rate of return that accounts for the time value of money, as well as risk factors that reflect the economic risk that the cash flows projected may not be realized.
The fair value attributable to IPR&D projects at the time of acquisition is capitalized as an indefinite-lived intangible asset and tested annually for impairment until the project is completed or abandoned. Upon completion of the project, the indefinite-lived intangible asset is then accounted for as a finite-lived intangible asset and amortized on a straight-line basis over its estimated useful life. If the project is abandoned, the indefinite-lived intangible asset is charged to expense.
Certain asset acquisitions or license agreements may not meet the criteria for a business combination. The Company accounts for these transactions as asset acquisitions and recognizes the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquired entity. Any initial up-front payments incurred in connection with the acquisition or licensing of IPR&D product candidates that do not meet the definition of a business are treated as R&D expense.
Intangible Assets
Intangible assets acquired in a business combination are recorded at fair value, while intangible assets acquired in other transactions are recorded at cost. Intangible assets with finite useful lives are amortized according to the pattern in which the economic benefit of the asset is used up over their estimated useful lives, as shown below. The estimated useful lives of the Company's intangible assets as of December 30, 2022 (Successor) were the following:
| | | | | | | | | | | |
| Completed technology | 3 | to | 20 years |
| | | |
| | | |
Amortization expense related to completed technology and certain other intangible assets is included in cost of sales.
When a triggering event occurs, the Company evaluates potential impairment of finite-lived intangible assets by first comparing undiscounted cash flows associated with the asset, or the asset group they are part of, to its carrying value. If the carrying value is greater than the undiscounted cash flows, the amount of potential impairment is measured by comparing the fair value of the assets, or asset group, with their carrying value. The fair value of the intangible asset, or asset group, is estimated using an income approach. If the fair value is less than the carrying value of the intangible asset, or asset group, the amount recognized for impairment is equal to the difference between the carrying value of the asset and the fair value of the asset. The Company assesses the remaining useful life and the recoverability of finite-lived intangible assets whenever events or circumstances indicate that the carrying value of an asset may not be recoverable. 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. The Company will compare the fair value of the assets with their carrying value and record an impairment when the carrying value exceeds the fair value.
Contingencies
The Company is subject to various legal proceedings and claims, including government investigations, environmental matters, product liability matters, patent infringement claims, antitrust matters, securities class action lawsuits, personal injury claims, employment disputes, contractual and other commercial disputes, and all other legal proceedings, all in the ordinary course of business as further discussed in Note 19. The Company records accruals for contingencies when it is probable that a liability has been incurred and the amount can be reasonably estimated. The Company discounts environmental liabilities using a risk-free rate of return when the obligation is fixed or reasonably determinable. The impact of the discount in the consolidated balance sheets was not material in any period presented. Legal fees, other than those pertaining to environmental matters, are expensed as incurred. Insurance recoveries related to potential claims are recognized up to the amount of the recorded liability when coverage is confirmed and the estimated recoveries are probable of payment. Assets and liabilities are not netted for financial statement presentation.
Liabilities Subject to Compromise
As a result of the commencement of the Chapter 11 Cases, the payment of pre-petition liabilities was subject to compromise or other treatment pursuant to a plan of reorganization. The determination of how liabilities would ultimately be settled or treated could not be made until the confirmed Chapter 11 plan of reorganization became effective. Accordingly, the ultimate amount of such liabilities was not determinable prior to the Effective Date. Pre-petition liabilities that were subject to compromise were reported at the amounts that were expected to be allowed by the Bankruptcy Court, even if they may be settled for different amounts. The amounts classified as LSTC prior to the Effective Date were preliminary and were subject to future adjustments dependent upon Bankruptcy Court actions, further developments with respect to disputed claims, determinations of the secured status of certain claims, the values of any collateral securing such claims, rejection of executory contracts, continued reconciliation or other events.
Share-Based Compensation
The Company recognizes the cost of employee services received in exchange for awards of equity or liability-based instruments based on the grant-date fair value of those awards. That cost is recognized over the period during which an employee is required to provide service in exchange for the award, the requisite service period (generally the vesting period). The cost for liability-based instruments is remeasured accordingly each reporting period throughout the requisite service period.
Restructuring
The Company recognizes charges associated with the Company's Board of Directors approved restructuring programs designed to transform its business and improve its cost structure. Restructuring charges can include severance costs, infrastructure charges, distributor contract cancellations and other items. The Company accrues for costs when they are probable and reasonably estimable.
Income Taxes
Deferred tax assets and liabilities are recognized for the expected future tax consequences of events that have been reflected in the consolidated financial statements. Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and operating loss carryforwards, using tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is provided to reduce net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
The Company determines whether it is more likely than not that a tax position will be sustained upon examination. The tax benefit of any tax position that meets the more-likely-than-not recognition threshold is calculated as the largest amount that is more than 50.0% likely of being realized upon resolution of the uncertainty. To the extent a full benefit is not realized on the uncertain tax position, an income tax liability or a reduction to a deferred tax asset ("contra-DTA(s)") is established. Interest and penalties on income tax obligations, associated with uncertain tax positions, are included in the provision for income taxes.
The calculation of the Company's tax liabilities involves dealing with uncertainties in the application of complex tax regulations in a multitude of jurisdictions across the Company's global operations. The Company adjusts these liabilities and contra-DTAs as a result of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from current estimates of the tax liabilities. If the Company's estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities may result in income tax benefits being recognized in the period when it is determined that the liabilities are no longer necessary. Refer to Note 8 for further information regarding the classification of such amounts in the consolidated balance sheets.
| | | | | |
| 5. | Revenue from Contracts with Customers |
Product Sales Revenue
See Note 21 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:
| | | | | | | | | | | | | | | | | | | | | | | |
| | Rebates and Chargebacks (1) | | Product Returns | | Other Sales Deductions | | Total |
| Balance as of December 27, 2019 (Predecessor) | $ | 295.8 | | | $ | 28.4 | | | $ | 13.2 | | | $ | 337.4 | |
| Provisions | 2,065.9 | | | 28.9 | | | 59.5 | | | 2,154.3 | |
Provision for Medicaid lawsuit (2) | 536.0 | | | — | | | — | | | 536.0 | |
| Payments or credits | (2,701.2) | | | (30.7) | | | (60.4) | | | (2,792.3) | |
| Balance as of December 25, 2020 (Predecessor) | 196.5 | | | 26.6 | | | 12.3 | | | 235.4 | |
| Provisions | 2,087.1 | | | 23.7 | | | 55.2 | | | 2,166.0 | |
| Payments or credits | (2,041.8) | | | (28.8) | | | (58.0) | | | (2,128.6) | |
| Balance as of December 31, 2021 (Predecessor) | 241.8 | | | 21.5 | | | 9.5 | | | 272.8 | |
| Provisions | 693.4 | | | 5.2 | | | 17.1 | | | 715.7 | |
| Payments or credits | (684.6) | | | (8.1) | | | (18.9) | | | (711.6) | |
| Balance as of June 16, 2022 (Predecessor) | $ | 250.6 | | | $ | 18.6 | | | $ | 7.7 | | | $ | 276.9 | |
| | | | | | | |
| | | | | | | |
| Balance as of June 17, 2022 (Successor) | $ | 250.6 | | | $ | 18.6 | | | $ | 7.7 | | | $ | 276.9 | |
| Provisions | 804.4 | | | 7.0 | | | 36.7 | | | 848.1 | |
| Payments or credits | (789.7) | | | (9.6) | | | (31.7) | | | (831.0) | |
| Balance as of December 30, 2022 (Successor) | $ | 265.3 | | | $ | 16.0 | | | $ | 12.7 | | | $ | 294.0 | |
(1)Includes $89.3 million and $49.6 million of accrued Medicaid and $55.3 million and $30.4 million of accrued rebates as of December 30, 2022 and December 31, 2021, respectively, included within accrued and other current liabilities in the consolidated balance sheets.
(2)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 in August 2014.
Product sales transferred to customers at a point in time and over time were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
| Product sales transferred at a point in time | 83.0 | % | | | 80.8 | % | | 79.4 | % | | 78.9 | % |
| Product sales transferred over time | 17.0 | | | | 19.2 | | | 20.6 | | | 21.1 | |
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 December 30, 2022 (Successor):
| | | | | |
| Fiscal 2023 | $ | 115.4 | |
| Fiscal 2024 | 23.5 | |
| Thereafter | 2.7 | |
Costs to fulfill a contract
As of December 30, 2022 (Successor) and December 31, 2021 (Predecessor), 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 and reflected in property, plant and equipment, net, on the consolidated balance sheets was $10.3 million and $25.8 million, respectively. The associated depreciation expense recognized during the period from June 17, 2022 through December 30, 2022 (Successor), the period from January 1, 2022 through June 16, 2022 (Predecessor), fiscal 2021 (Predecessor) and fiscal 2020 (Predecessor) was $1.0 million, $2.9 million, $6.1 million and $5.5 million, respectively.
Product Royalty Revenues
The Company licensed certain rights to Amitiza to third parties in exchange for royalties on net sales of the product. The Company receivesreceived a double-digit royalty based on a percentage of the gross profits of the licensed products sold during the term of the agreements. The Company recognizesrecognized such royalty revenue as the related sales occur.occurred. The associated royalty revenue recognized during fiscal 2021, 2020 and 2019 was $102.4 million, $70.3 million and $81.3 million, respectively.as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
| Royalty revenue | $ | 36.2 | | | | $ | 34.9 | | | $ | 102.4 | | | $ | 70.3 | |
| | | | | |
5.6. | Discontinued Operations and Divestitures |
Discontinued Operations
Nuclear Imaging: The Company received a total of $9.0 million in contingent consideration in both fiscal 2020 and 2019, respectively,(Predecessor) related to the 2017 sale of the Nuclear Imaging business, consisting primarily of the issuance of $9.0 million par value non-voting preferred equity certificates. The preferred equity certificates accrued interest at a rate of 10.0% per annum and were redeemable on the retirement date of July 27, 2025, or earlier if elected by the issuer, for cash at a price equal to the par value and any accrued but unpaid interest. Interest was able to be paid on an annual basis in additional preferred equity certificates. The receipt of the preferred equity certificates are presented as a non-cash investing activity on the consolidated statements of cash flows for fiscal 2020 and 2019.(Predecessor). In December 2020, the issuer elected to redeem 100% of the outstanding preferred equity certificates, and the Company received a cash payment of $32.5 million, which included $29.8 million for the outstanding preferred equity certificates and $2.7 million for accrued interest receivable through the redemption date. In addition, during fiscal 2021 (Predecessor) and fiscal 2020 (Predecessor), a tax benefit of $5.1 million and $18.1 million, respectively, comprised of tax and interest on unrecognized tax benefits related to the Nuclear Imaging business, was recognized due to a lapse of statutes of limitations.
Divestitures
The below businesses did not meet the criteria for discontinued operations classification and accordingly were included in continuing operations for all periods presented.
BioVectra: In November 2019, the Company completed the sale of its wholly owned subsidiary BioVectra to an affiliate of H.I.G. Capital for total consideration of up to $250.0 million, including an upfront payment of $135.0 million and contingent consideration of $115.0 million based on long-term performance of the business. During fiscal 2019, the Company recorded a loss on the sale of $33.5 million, which excluded any potential proceeds from future milestones, in the event they are achieved.
PreveLeak/Recothrom: In March 2018, the Company completed the sale of a portion of its Hemostasis business, inclusive of its PreveLeak™ Surgical Sealant and RECOTHROM® Thrombin topical (Recombinant) ("Recothrom") products to Baxter International Inc. During fiscal 2020 (Predecessor), the Company recorded a $16.5 million gain on divestiture related to certain commercial milestones for the Recothrom product.
Silence Therapeutics
In July 2019, the Company entered into a license and collaboration agreement with Silence Therapeutics plc ("Silence") to develop and commercialize ribonucleic acid interference ("RNAi") drug targets designed to inhibit the complement cascade, a group of proteins that are involved in the immune system and that play a role in the development of inflammation and made an upfront payment of $20.0 million, recorded within R&D expense. Under the terms of the agreement, the Company obtained an exclusive worldwide license to Silence's SLN501 silencing therapy. Silence will be responsible for preclinical activities, and for executing the development program until the end of Phase 1, after which the Company will assume clinical development and responsibility for global commercialization.
Advanced Accelerator Applications
In 2007, the Company's Nuclear Imaging business entered into a license agreement with BioSynthema, Inc. ("BioSynthema"), which was subsequently amended in 2010 when Advanced Accelerator Applications ("AAA") acquired BioSynthema. Pursuant to the amended agreement, upon the first commercial sale of Lutathera® ("Lutathera"), AAA was to provide the Company with a royalty based on net sales of the product through January 1, 2020. In early 2018, the U.S. Food and Drug Administration ("FDA") approved Lutathera for treatment of gastroenteropancreatic neuroendocrine tumors and commercial sales commenced. During fiscal 2019, in relation to this agreement, the Company recognized royalty income of $39.0 million, which was recognized within other income, net in the consolidated statement of operations.
| | | | | |
| 7. | Restructuring and Related Charges |
During fiscal 2021 (Predecessor), fiscal 2018 (Predecessor) and fiscal 2016 (Predecessor), the Company launched restructuring programs designed to improve its cost structure.structure, neither of which has a specified time period. Charges of $50.0 million to $100.0 million were provided for under the 2021 program and $100.0 million to $125.0 million were provided for under the 2018 and 2016 programs. EachThe 2021 program will generally commence upon substantial completion of the previous program. The 20212018 program, and has not commenced as of December 31, 2021 and there is no specified time period associated with this program.30, 2022 (Successor). In addition to the aforementioned restructuring programs, the Company has taken restructuring actions to generate synergies from its acquisitions.
Net restructuring and related charges by segment were as follows:
| | | Fiscal Year | | Successor | | | Predecessor |
| | 2021 | | 2020 | | 2019 | | Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
| Specialty Brands | Specialty Brands | $ | 0.1 | | | $ | 0.1 | | | $ | (13.7) | | Specialty Brands | $ | — | | | | $ | — | | | $ | 0.1 | | | $ | 0.1 | |
| Specialty Generics | Specialty Generics | 4.9 | | | 0.1 | | | 10.0 | | Specialty Generics | 0.8 | | | | 3.5 | | | 4.9 | | | 0.1 | |
| Corporate | Corporate | 24.0 | | | 49.6 | | | 2.0 | | Corporate | 11.3 | | | | 6.1 | | | 24.0 | | | 49.6 | |
| Restructuring and related charges, net | Restructuring and related charges, net | 29.0 | | | 49.8 | | | (1.7) | | Restructuring and related charges, net | 12.1 | | | | 9.6 | | | 29.0 | | | 49.8 | |
| Less: accelerated depreciation | Less: accelerated depreciation | (2.1) | | | (12.3) | | | — | | Less: accelerated depreciation | (1.0) | | | | — | | | (2.1) | | | (12.3) | |
| Restructuring charges, net | Restructuring charges, net | $ | 26.9 | | | $ | 37.5 | | | $ | (1.7) | | Restructuring charges, net | $ | 11.1 | | | | $ | 9.6 | | | $ | 26.9 | | | $ | 37.5 | |
Net restructuring and related charges by program from continuing operations were comprised of the following:
| | | Fiscal Year | | Successor | | | Predecessor |
| | 2021 | | 2020 | | 2019 | | Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
| 2018 Program | 2018 Program | $ | 29.0 | | | $ | 52.0 | | | $ | 9.8 | | 2018 Program | $ | 12.1 | | | | $ | 9.6 | | | $ | 29.0 | | | $ | 52.0 | |
| 2016 Program | 2016 Program | — | | | (0.3) | | | (10.6) | | 2016 Program | — | | | | — | | | — | | | (0.3) | |
| Acquisition programs | Acquisition programs | — | | | (1.9) | | | (0.9) | | Acquisition programs | — | | | | — | | | — | | | (1.9) | |
| Total programs | Total programs | 29.0 | | | 49.8 | | | (1.7) | | Total programs | 12.1 | | | | 9.6 | | | 29.0 | | | 49.8 | |
| Less: non-cash charges, including accelerated depreciation | Less: non-cash charges, including accelerated depreciation | (6.3) | | | (23.8) | | | — | | Less: non-cash charges, including accelerated depreciation | (2.2) | | | | (3.6) | | | (6.3) | | | (23.8) | |
| Total charges expected to be settled in cash | Total charges expected to be settled in cash | $ | 22.7 | | | $ | 26.0 | | | $ | (1.7) | | Total charges expected to be settled in cash | $ | 9.9 | | | | $ | 6.0 | | | $ | 22.7 | | | $ | 26.0 | |
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:
| | | 2018 Program | | 2016 Program | | Acquisition Programs | | Total | | 2018 Program | | 2016 Program | | Acquisition Programs | | Total |
| Balance as of December 28, 2018 | $ | 2.2 | | | $ | 61.0 | | | $ | 7.8 | | | $ | 71.0 | | |
| Balance as of December 27, 2019 (Predecessor) | | Balance as of December 27, 2019 (Predecessor) | $ | 2.7 | | | $ | 31.3 | | | $ | 0.2 | | | $ | 34.2 | |
| Charges from continuing operations | Charges from continuing operations | 11.2 | | | 4.0 | | | 0.1 | | | 15.3 | | Charges from continuing operations | 28.6 | | | 0.1 | | | — | | | 28.7 | |
| Changes in estimate from continuing operations | Changes in estimate from continuing operations | (1.4) | | | (14.6) | | | (1.0) | | | (17.0) | | Changes in estimate from continuing operations | (0.4) | | | (0.4) | | | (1.9) | | | (2.7) | |
| Cash payments | Cash payments | (9.3) | | | (13.1) | | | (2.4) | | | (24.8) | | Cash payments | (20.1) | | | (30.7) | | | (0.2) | | | (51.0) | |
Reclassifications (1) | Reclassifications (1) | — | | | (5.0) | | | (4.3) | | | (9.3) | | Reclassifications (1) | (10.0) | | | — | | | — | | | (10.0) | |
| Currency translation and other | Currency translation and other | — | | | (1.0) | | | — | | | (1.0) | | Currency translation and other | 0.2 | | | (0.3) | | | 1.9 | | | 1.8 | |
| Balance as of December 27, 2019 | 2.7 | | | 31.3 | | | 0.2 | | | 34.2 | | |
| Charges from continuing operations | 28.6 | | | 0.1 | | | — | | | 28.7 | | |
| Changes in estimate from continuing operations | (0.4) | | | (0.4) | | | (1.9) | | | (2.7) | | |
| Cash payments | (20.1) | | | (30.7) | | | (0.2) | | | (51.0) | | |
Reclassifications (2) | (10.0) | | | — | | | — | | | (10.0) | | |
| Currency translation and other | 0.2 | | | (0.3) | | | 1.9 | | | 1.8 | | |
| Balance as of December 25, 2020 | 1.0 | | | — | | | — | | | 1.0 | | |
| Balance as of December 25, 2020 (Predecessor) | | Balance as of December 25, 2020 (Predecessor) | 1.0 | | | — | | | — | | | 1.0 | |
| Charges from continuing operations | Charges from continuing operations | 23.7 | | | — | | | — | | | 23.7 | | Charges from continuing operations | 23.7 | | | — | | | — | | | 23.7 | |
| Changes in estimate from continuing operations | Changes in estimate from continuing operations | (1.0) | | | — | | | — | | | (1.0) | | Changes in estimate from continuing operations | (1.0) | | | — | | | — | | | (1.0) | |
| Cash payments | Cash payments | (12.8) | | | — | | | — | | | (12.8) | | Cash payments | (12.8) | | | — | | | — | | | (12.8) | |
| | Balance as of December 31, 2021 | $ | 10.9 | | | $ | — | | | $ | — | | | $ | 10.9 | | |
| Balance as of December 31, 2021 (Predecessor) | | Balance as of December 31, 2021 (Predecessor) | 10.9 | | | — | | | — | | | 10.9 | |
| Charges from continuing operations | | Charges from continuing operations | 7.1 | | | — | | | — | | | 7.1 | |
| Changes in estimate from continuing operations | | Changes in estimate from continuing operations | (1.1) | | | — | | | — | | | (1.1) | |
| Cash payments | | Cash payments | (15.9) | | | — | | | — | | | (15.9) | |
| | Balance as of June 16, 2022 (Predecessor) | | Balance as of June 16, 2022 (Predecessor) | $ | 1.0 | | | $ | — | | | $ | — | | | $ | 1.0 | |
| | | Balance as of June 17, 2022 (Successor) | | Balance as of June 17, 2022 (Successor) | $ | 1.0 | | | $ | — | | | $ | — | | | $ | 1.0 | |
| Charges from continuing operations | | Charges from continuing operations | 12.7 | | | — | | | — | | | 12.7 | |
| Changes in estimate from continuing operations | | Changes in estimate from continuing operations | (2.8) | | | — | | | — | | | (2.8) | |
| Cash payments | | Cash payments | (6.3) | | | — | | | — | | | (6.3) | |
| | Balance as of December 30, 2022 (Successor) | | Balance as of December 30, 2022 (Successor) | $ | 4.6 | | | $ | — | | | $ | — | | | $ | 4.6 | |
(1)Represents the reclassification of lease liabilities, net to lease liabilities and lease assets, which are reflected within other liabilities and other assets on the consolidated balance sheet, due to the adoption of Accounting Standard Update (ASU) 2016-02.
(2)Represents the reclassification of certain restructuring reserve balances to LSTC as a result of the Company rejecting certain of its executory contracts.
As of December 31, 2021,30, 2022 (Successor), net restructuring and related charges incurred cumulative to date for the 2018 Program were as follows:
| | | | | | | | | | | |
| 2018 Program (1) | | 2016 Program (2) |
| Specialty Brands | $ | 3.1 | | | $ | 68.1 | |
| Specialty Generics | 15.0 | | | 14.6 | |
| | | |
| Corporate | 77.9 | | | 28.6 | |
| $ | 96.0 | | | $ | 111.3 | |
(1)There is no specified time period associated with this restructuring program.
(2)The 2016 Program was completed in fiscal 2020. | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | |
| | | | | | |
| Specialty Brands | $ | — | | | | $ | 3.1 | | | |
| Specialty Generics | 0.8 | | | | 18.5 | | | |
| Corporate | 11.3 | | | | 84.0 | | | |
| $ | 12.1 | | | | $ | 105.6 | | | |
All of the restructuring reserves were included in accrued and other current liabilities on the Company's consolidated balance sheets. Amounts paid in the future may differ from the amount currently recorded.
The domestic and international components(1) of loss from continuing operations before income taxes were as follows:
| | | Fiscal Year | | Successor | | | Predecessor |
| | 2021 | | 2020 | | 2019 | | Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
| Domestic | Domestic | $ | (512.2) | | | $ | (656.9) | | | $ | (75.3) | | Domestic | $ | (359.4) | | | | $ | (2,883.3) | | | $ | (512.2) | | | $ | (656.9) | |
| International | International | (317.6) | | | (303.9) | | | (1,516.2) | | International | (290.9) | | | | 2,072.0 | | | (317.6) | | | (303.9) | |
| Total | Total | $ | (829.8) | | | $ | (960.8) | | | $ | (1,591.5) | | Total | $ | (650.3) | | | | $ | (811.3) | | | $ | (829.8) | | | $ | (960.8) | |
(1) Domestic reflects Ireland in fiscal 2021 and 2020, and U.K. in fiscal 2019.Ireland.
Significant components(1) of income taxes related to continuing operations are as follows:
| | | Fiscal Year | | Successor | | | Predecessor |
| | 2021 | | 2020 | | 2019 | | Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
| Current: | Current: | | | | | | Current: | | | | | | | | |
| Domestic | Domestic | $ | (33.7) | | | $ | 0.1 | | | $ | 0.1 | | Domestic | $ | (32.8) | | | | $ | 33.7 | | | $ | (33.7) | | | $ | 0.1 | |
| International | International | (12.7) | | | (375.4) | | | 21.7 | | International | 5.7 | | | | (57.6) | | | (12.7) | | | (375.4) | |
| Current income tax (benefit) provision | Current income tax (benefit) provision | (46.4) | | | (375.3) | | | 21.8 | | Current income tax (benefit) provision | (27.1) | | | | (23.9) | | | (46.4) | | | (375.3) | |
| Deferred: | Deferred: | | | | | | Deferred: | | | | | | | | |
| Domestic | Domestic | (59.5) | | | 102.2 | | | (1.1) | | Domestic | (44.6) | | | | (82.3) | | | (59.5) | | | 102.2 | |
| International | International | (0.4) | | | 282.0 | | | (605.0) | | International | 19.7 | | | | (391.1) | | | (0.4) | | | 282.0 | |
| Deferred income tax (benefit) provision | Deferred income tax (benefit) provision | (59.9) | | | 384.2 | | | (606.1) | | Deferred income tax (benefit) provision | (24.9) | | | | (473.4) | | | (59.9) | | | 384.2 | |
| Total | Total | $ | (106.3) | | | $ | 8.9 | | | $ | (584.3) | | Total | $ | (52.0) | | | | $ | (497.3) | | | $ | (106.3) | | | $ | 8.9 | |
(1) Domestic reflects Ireland in fiscal 2021 and 2020, and the U.K. in fiscal 2019.Ireland.
The domestic current income tax provision reflects a tax benefit of $7.9 million, $4.1 million, $2.2 million, $0.2 million and $1.2$0.2 million from using net operating loss ("NOL")NOL carryforwards for the period from June 17, 2022 through December 30, 2022 (Successor), the period from January 1, 2022 through June 16, 2022 (Predecessor), fiscal 2021 (Predecessor), and fiscal 2020 and 2019,(Predecessor), respectively. For fiscal 2021 and 2020, domestic reflects Ireland; and for fiscal 2019, domestic reflects the U.K. The international current income tax provision reflects a tax benefit of $61.0 million, $0.1 million, $1.2 million, $33.4 million and $0.9$33.4 million from using NOL carryforwards for the period from June 17, 2022 through December 30, 2022 (Successor), the period from January 1, 2022 through June 16, 2022 (Predecessor), fiscal 2021 (Predecessor), and fiscal 2020 and 2019,(Predecessor), respectively. The fiscal 2020 (Predecessor) international current income tax provision also included a tax benefit of $1.0 million related to refundable credits and a tax benefit of $281.5 million related to carryback claims. The international credit utilization is comprised of credit carryforwards.
During the period from June 17, 2022 through December 30, 2022 (Successor) and the period from January 1, 2022 through June 16, 2022 (Predecessor), net cash payments for income taxes were $3.0 million and $3.0 million, respectively. During fiscal 2021 (Predecessor) net cash refunds for income taxes were $160.0 million and during fiscal 2020 and 2019,(Predecessor) net cash payments for income taxes were $39.9 million and $30.7 million, respectively.million. Included within the net cash refunds of $160.0 million were refunds of $178.8 million received as a result of the provisions in the Coronavirus Aid, Relief and Economic Security ("CARES") Act and net payments of $18.8 million related to operational activity.
The reconciliation between domestic income taxes at the statutory rate and the Company's provision for income taxes on continuing operations is as follows:
| | | Fiscal Year | | Successor | | | Predecessor |
| | 2021 | | 2020 | | 2019 | | Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
Benefit for income taxes at domestic statutory income tax rate (1) | Benefit for income taxes at domestic statutory income tax rate (1) | $ | (103.7) | | | $ | (120.1) | | | $ | (302.4) | | Benefit for income taxes at domestic statutory income tax rate (1) | $ | (81.3) | | | | $ | (101.4) | | | $ | (103.7) | | | $ | (120.1) | |
| Adjustments to reconcile to income tax provision: | Adjustments to reconcile to income tax provision: | | Adjustments to reconcile to income tax provision: | | | |
Rate difference between domestic and international jurisdictions (2) | Rate difference between domestic and international jurisdictions (2) | (224.9) | | | (315.3) | | | (206.3) | | Rate difference between domestic and international jurisdictions (2) | (4.7) | | | | 226.5 | | | (224.9) | | | (315.3) | |
Adjustments to accrued income tax liabilities and uncertain tax positions (3)(2) | Adjustments to accrued income tax liabilities and uncertain tax positions (3)(2) | (9.7) | | | 16.7 | | | (18.7) | | Adjustments to accrued income tax liabilities and uncertain tax positions (3)(2) | — | | | | — | | | (9.7) | | | 16.7 | |
| | Credits, principally research and orphan drug | Credits, principally research and orphan drug | (4.7) | | | (11.2) | | | (13.5) | | Credits, principally research and orphan drug | — | | | | (0.9) | | | (4.7) | | | (11.2) | |
| Permanently nondeductible and nontaxable items (4)(3) | Permanently nondeductible and nontaxable items (4)(3) | 9.8 | | | 2.8 | | | 98.1 | | Permanently nondeductible and nontaxable items (4)(3) | 3.1 | | | | (1.7) | | | 9.8 | | | 2.8 | |
| Divestitures (5) | — | | | — | | | 9.6 | | |
| Emergence | | Emergence | — | | | | (31.6) | | | — | | | — | |
| Withholding tax on Swiss distribution | | Withholding tax on Swiss distribution | 4.7 | | | | — | | | — | | | — | |
U.S. Tax Reform (6)(4) | U.S. Tax Reform (6)(4) | — | | | (281.5) | | | — | | U.S. Tax Reform (6)(4) | — | | | | — | | | — | | | (281.5) | |
Legal entity reorganization (6)(5) | Legal entity reorganization (6)(5) | — | | | 82.0 | | | (212.8) | | Legal entity reorganization (6)(5) | — | | | | — | | | — | | | 82.0 | |
| Separation costs | Separation costs | — | | | 8.4 | | | — | | Separation costs | — | | | | — | | | — | | | 8.4 | |
| Reorganization items, net | Reorganization items, net | 36.9 | | | 8.8 | | | — | | Reorganization items, net | 1.7 | | | | 15.7 | | | 36.9 | | | 8.8 | |
| Other | Other | 0.3 | | | 0.1 | | | — | | Other | (1.4) | | | | (3.1) | | | 0.3 | | | 0.1 | |
Valuation allowances (4)(6) | Valuation allowances (4)(6) | 189.7 | | | 618.2 | | | 61.7 | | Valuation allowances (4)(6) | 25.9 | | | | (600.8) | | | 189.7 | | | 618.2 | |
| (Benefit) provision for income taxes | (Benefit) provision for income taxes | $ | (106.3) | | | $ | 8.9 | | | $ | (584.3) | | (Benefit) provision for income taxes | $ | (52.0) | | | | $ | (497.3) | | | $ | (106.3) | | | $ | 8.9 | |
(1)The statutory tax rate reflects the Irish statutory tax rate of 12.5% for fiscal 2021 and 2020, and the U.K. statutory tax rate of 19.0% for fiscal 2019..
(2)For fiscal 2019, includes the impact of certain recurring valuation allowances for domestic and international jurisdictions.
(3)Includes interest and penalties on accrued income tax liabilities and uncertain tax positions.
(4)(3)For fiscal 2021 (Predecessor), the permanently nondeductible and nontaxable itemsitem were primarily driven by the opioid-related litigation settlement loss that is partially permanently nondeductible. loss.
(4)For fiscal 2020 an(Predecessor), the Company recognized a tax benefit as a result of the CARES Act. Associated unrecognized tax benefit and valuation allowance are netted within this line.
(5)Associated unrecognized tax benefit and valuation allowance are netted within this line.
(6)Fiscal 2020 (Predecessor) includes a tax expense of $204.9 million was included as a discretefor an increase to the valuation allowance on certain net deferred tax assets that were no longer more likely than not realizable due to the Company's former substantial doubt about its ability to continue as a going concern, further explained within Note 1. For fiscal 2019, the valuation allowances and permanently nondeductible and nontaxable item were primarily driven by the impact from the opioid-related litigation settlement charge that is partially permanently nondeductible, further explained within Note 19.concern. Additional valuation allowance impacts are netted within other line items, as referenced in the associated footnotesfootnotes.
The Successor Company’s rate difference between domestic and international jurisdictions was $4.7 million of tax benefit for the period from June 17, 2022 through December 30, 2022 (Successor). The rate difference between domestic and international jurisdictions was primarily related to this table.$19.7 million of tax benefit attributable to inventory step-up amortization expense, $8.9 million of tax benefit attributable to accretion expense associated with our settlement liabilities and $6.3 million of tax benefit attributable to accretion expense associated with our debt offset by $30.2 million of tax expense predominately attributable to the pretax earnings in various jurisdictions.
(5)The Predecessor Company’s rate difference between domestic and international jurisdictions was $226.5 million of tax expense for the period from January 1, 2022, through June 16, 2022 (Predecessor). The rate difference between domestic and international jurisdictions was primarily related to $128.9 million of tax expense related to fresh-start adjustments, $103.4 million of tax expense attributable to gain on adjustments to LSTC and $12.8 million of tax expense predominately related to the pretax earnings in various jurisdictions offset by $18.6 million of tax benefit related to professional and lender fees.
As a result of the Plan, the Company recognized CODI on its indebtedness, resulting in the utilization of, and reduction to, certain of its tax losses and tax credits in the U.S. and Luxembourg. The emergence from Chapter 11 bankruptcy proceedings resulted in a change in ownership for purposes of IRC Section 382, causing the remaining U.S. tax losses and credits to be limited under IRC Sections 382 and 383. The Company completedalso recognized a U.S. capital loss as a result of the salePlan, which may be carried forward to offset capital gains recognized by the Company in the next five years, to the extent it is not reduced by CODI or limited under IRC section 382 or 383. The deferred tax asset associated with the capital loss carryforward is offset by a valuation allowance due to significant uncertainty regarding the Company’s ability to utilize the carryforward prior to its expiration. The portion of its wholly-owned subsidiary BioVectradeferred tax assets associated with the tax losses and credits that are limited under IRC Section 382 or 383, and that have a remote possibility of being utilized, have been written off. The Plan's tax effect, and impacts on the Company's tax losses and credits, is expected to be finalized when the associated U.S. Federal income tax return is filed in November 2019.2023. Refer to Note 4 for further information regarding the Company's income tax accounting policies.
(6)Associated unrecognizedDuring the period from January 1, 2022 through June 16, 2022 (Predecessor), the Company recognized a tax benefit of $31.6 million upon emergence from Chapter 11 bankruptcy. These impacts of emergence consist of a $1,202.0 million tax benefit related to the revaluation of net deferred tax assets as a result of fresh-start accounting and valuation allowance are netted within this line.a $285.3 million tax benefit related to the release of uncertain tax positions, offset by $1,209.8 million of tax expense for the reduction in federal and state NOL carryforwards
from the CODI realized upon emergence from bankruptcy and limitations under IRC Sections 382 and 383, $191.9 million of tax expense related to permanently nondeductible impacts on fair value adjustments, and $54.0 million of tax expense related to prepaid income taxes.
During the period from January 1, 2022 through June 16, 2022 (Predecessor), the Company recognized a tax benefit of $600.8 million related to valuation allowances, consisting of $512.1 million of tax benefit for the reduction in the valuation allowance on the Company's deferred tax assets due to the alleviation of the previous substantial doubt about the Company’s ability to continue as a going concern and $88.7 million of tax benefit which mainly offsets impacts included within the benefit for income taxes at the domestic statutory income tax rate and the rate difference between domestic and international jurisdictions.
The rate difference between domestic and international jurisdictions changed to $224.9 million of tax benefit for fiscal 2021 (Predecessor) from $315.3 million of tax benefit for fiscal 2020.2020 (Predecessor). Of the $90.4 million decrease in the tax benefit, $48.9 million of the decrease is attributable to the Medicaid lawsuit and $92.9 million of decrease is predominately attributable to changes in the jurisdictional mix of operating loss resulting from the fiscal 2020 (Predecessor) reorganization of the Company's intercompany financing and associated asset and legal entity ownership, partially offset by $27.6 million of an increase attributable to reorganization items, $13.2 million of an increase attributable to non-restructuring impairment charges and $10.6 million of an increase attributable to the opioid-related litigation settlement loss.
The Company's valuation allowance tax expense was $189.7 million for fiscal 2021 (Predecessor), compared to $618.2 million for fiscal 2020.2020 (Predecessor). Of the $428.5 million decrease in tax expense, $288.9 million of decrease was attributable to operational activity in applicable tax jurisdictions that are fully offset by a valuation allowance and $204.9 million of decrease was attributable to the discrete valuation allowance recorded in fiscal 2020 (Predecessor) on certain beginning-of-the-year net deferred tax assets, partially offset by a $65.3 million increase attributable to deferred remeasurement as a result of tax rate changes. The valuation allowance tax expense mainly offsets impacts included within the benefit for income taxes at the domestic statutory income tax rate and the rate difference between domestic and international jurisdictions.
The rate difference between domestic and international jurisdictions was $315.3 million of tax benefit for fiscal 2020, compared to $206.3 million of tax benefit for fiscal 2019. Of the $109.0 million increase in the tax benefit, $92.7 million of the increase resulted from presenting the impact of recurring valuation allowances within the rate difference between domestic and international jurisdictions in fiscal 2019 and within valuation allowances in fiscal 2020 and an increase of $48.9 million was attributable to the Medicaid lawsuit; partially offset by a $79.0 million decrease attributable to the fiscal 2019 gain on debt extinguishment, a $60.9 million decrease attributable to the fiscal 2019 opioid-related settlement loss and a $30.0 million decrease attributable to changes in operating loss. The remaining $137.3 million increase was predominately attributable to the change in the referenced rate from the U.K. statutory rate of 19.0% to the Irish statutory rate of 12.5%.
The following table summarizes the activity related to the Company's unrecognized tax benefits, excluding interest:
| | | Fiscal Year | | Successor | | | Predecessor |
| | 2021 | | 2020 | | 2019 | | Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
| Balance at beginning of period | Balance at beginning of period | $ | 349.0 | | | $ | 398.6 | | | $ | 287.7 | | Balance at beginning of period | $ | 24.8 | | | | $ | 333.5 | | | $ | 349.0 | | | $ | 398.6 | |
| Additions related to current year tax positions | Additions related to current year tax positions | — | | | 71.1 | | | 123.5 | | Additions related to current year tax positions | — | | | | — | | | — | | | 71.1 | |
| Additions related to prior period tax positions | Additions related to prior period tax positions | 9.3 | | | 9.8 | | | 19.2 | | Additions related to prior period tax positions | — | | | | — | | | 9.3 | | | 9.8 | |
| Reductions related to prior period tax positions | Reductions related to prior period tax positions | (2.8) | | | (14.2) | | | (5.7) | | Reductions related to prior period tax positions | — | | | | (306.1) | | | (2.8) | | | (14.2) | |
| | Settlements | Settlements | (0.2) | | | (80.3) | | | (1.0) | | Settlements | — | | | | (2.6) | | | (0.2) | | | (80.3) | |
| Lapse of statutes of limitations | Lapse of statutes of limitations | (21.8) | | | (36.0) | | | (25.1) | | Lapse of statutes of limitations | — | | | | — | | | (21.8) | | | (36.0) | |
| Balance at end of period | Balance at end of period | $ | 333.5 | | | $ | 349.0 | | | $ | 398.6 | | Balance at end of period | $ | 24.8 | | | | $ | 24.8 | | | $ | 333.5 | | | $ | 349.0 | |
Unrecognized tax benefits, excluding interest, were reported in the following consolidated balance sheet captions in the amounts shown:
| | | | | | | | | | | | | Successor | | | Predecessor |
| | December 31, 2021 | | December 25, 2020 | | December 30, 2022 | | | December 31, 2021 |
Other assets (1) | Other assets (1) | $ | 255.7 | | | $ | 256.4 | | Other assets (1) | $ | — | | | | $ | 255.7 | |
| Deferred income tax asset | | Deferred income tax asset | 9.4 | | | | — | |
| Other income tax liabilities | | Other income tax liabilities | 15.4 | | | | 64.1 | |
| Deferred income tax liability | | Deferred income tax liability | — | | | | 13.7 | |
| | | $ | 24.8 | | | | $ | 333.5 | |
| Other income tax liabilities | 64.1 | | | 83.2 | | |
| Deferred income taxes | 13.7 | | | 9.4 | | |
| $ | 333.5 | | | $ | 349.0 | | |
(1)Included as a reduction to deferred tax assets.
Included within total
Total unrecognized tax benefits ("UTB(s)") of $24.8 million as of both December 30, 2022 (Successor) and June 16, 2022 (Predecessor), if favorably settled, would benefit the effective tax rate. Total UTBs of $77.0 million and $85.9 million as of December 31, 2021 (Predecessor) and December 25, 2020 and December 27, 2019 were $77.0 million, $85.9 million and $395.9 million,(Predecessor), respectively, of unrecognized tax benefits, which if favorably settled, would benefit the effective tax rate of which approximately $20.0 million related to discontinued operations in fiscal 2019. Thewith the remaining unrecognized tax benefits are reflected as a write-off of related other tax assets. If these unrecognized tax benefits were recognized, they would be offset by a valuation allowance in fiscal 2021 and 2020.During the period January 1, 2022 through June 16, 2022 (Predecessor), the decrease of $306.1 million primarily resulted from fresh-start adjustments. During fiscal 2021 (Predecessor) and 2020 (Predecessor), due to a lapse of statutes of limitations, $5.1 million and $18.1 million of tax and interest on unrecognized tax benefits related to the Nuclear Imaging business were eliminated, and a benefit of $5.1 million and $18.1 million was recorded in discontinued operations within the consolidated statement of operations, respectively. During fiscal 2021, theThe Company recorded $6.4 million of additional an increase to accrued
interest and penalties of $0.6 million during the period from June 17, 2022 through tax provisionDecember 30, 2022 (Successor) and decreased accrued interest and penalties by $4.2 million related to prior period reductions, settlements and lapse of statutes of limitations. During fiscal 2020 and 2019, the Company had a net decrease of interest$16.7 million during the period from January 1, 2022 through June 16, 2022 (Predecessor). Interest and penalties activity during fiscal 2021 (Predecessor) and fiscal 2020 (Predecessor), was a net increase of $16.2$2.2 million and $4.2a net decrease of $16.2 million, respectively. The total amount of accrued interest and penalties related to uncertain tax positions was $2.8 million and $18.9 million $16.7 millionas of December 30, 2022 (Successor) and $32.9 million,December 31, 2021 (Predecessor), respectively.
It is reasonably possible that withinWithin the next twelve months, the unrecognized tax benefits could decrease by up to $139.2 million and the amount of related interest and penalties could decrease by upare not expected to $17.2 million as a result of paymentssignificantly increase or releases due to the resolution of examinations, appeals and litigation, successful emergence from Chapter 11 and the expiration of various statutes of limitation.decrease.
Certain of the Company's subsidiaries continue to be subject to examination by taxing authorities. The earliest open years subject to examination for variousthe U.S. federal, U.S. state and other jurisdictions, including Ireland, the U.S., Japan, Luxembourg, Switzerland and the U.K. are from 2013 to present and the earliest open year for the U.S. state tax jurisdictions is 2009.2013.
Income taxes payable, including uncertain tax positions and related interest accruals, was reported in the following consolidated balance sheet captions in the amounts shown:
| | | | | | | | | | | | | Successor | | | Predecessor |
| | December 31, 2021 | | December 25, 2020 | | December 30, 2022 | | | December 31, 2021 |
| Accrued and other current liabilities | Accrued and other current liabilities | $ | 1.7 | | | $ | 26.5 | | Accrued and other current liabilities | $ | 3.6 | | | | $ | 1.7 | |
| Other income tax liabilities | Other income tax liabilities | 83.2 | | | 100.1 | | Other income tax liabilities | 18.2 | | | | 83.2 | |
| | $ | 84.9 | | | $ | 126.6 | | | $ | 21.8 | | | | $ | 84.9 | |
Tax receivables were included in the following consolidated balance sheet captions in the amounts shown:
| | | | | | | | | | | |
| December 31, 2021 | | December 25, 2020 |
| Other assets | $ | 141.3 | | | $ | 139.4 | |
| Prepaid expenses and other current assets | 36.5 | | | 188.7 | |
| $ | 177.8 | | | $ | 328.1 | |
| | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| December 30, 2022 | | | December 31, 2021 |
| Other assets | $ | — | | | | $ | 141.3 | |
| Prepaid expenses and other current assets | 179.5 | | | | 36.5 | |
| $ | 179.5 | | | | $ | 177.8 | |
Deferred income taxes result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. The components of the net deferred tax asset (liability) at the end of each fiscal year were as follows:
| | | | | | | | | | | | | Successor | | | Predecessor |
| | December 31, 2021 | | December 25, 2020 | | December 30, 2022 | | | December 31, 2021 |
| Deferred tax assets: | Deferred tax assets: | | | | Deferred tax assets: | | | | |
| | Tax loss and credit carryforward | Tax loss and credit carryforward | $ | 4,147.5 | | | $ | 4,026.0 | | Tax loss and credit carryforward | $ | 3,646.0 | | | | $ | 4,147.5 | |
| Capital tax loss carryforward and related assets | Capital tax loss carryforward and related assets | 1,605.0 | | | 1,600.1 | | Capital tax loss carryforward and related assets | 1,412.6 | | | | 1,605.0 | |
| | Opioid-related litigation settlement liability | 294.7 | | | 269.3 | | |
| Intangible assets | | Intangible assets | 278.4 | | | | — | |
| Opioid-Related Litigation Settlement liability | | Opioid-Related Litigation Settlement liability | 111.7 | | | | 294.7 | |
| Excess interest | Excess interest | 159.5 | | | 150.7 | | Excess interest | 84.0 | | | | 159.5 | |
| Other | Other | 292.2 | | | 294.9 | | Other | 159.8 | | | | 292.2 | |
| | 6,498.9 | | | 6,341.0 | | | 5,692.5 | | | | 6,498.9 | |
| Deferred tax liabilities: | Deferred tax liabilities: | | | | Deferred tax liabilities: | | | | |
| | Intangible assets | Intangible assets | (108.5) | | | (191.2) | | Intangible assets | — | | | | (108.5) | |
| | Investment in partnership | Investment in partnership | (67.1) | | | (74.8) | | Investment in partnership | (67.4) | | | | (67.1) | |
| Other | Other | — | | | (44.8) | | Other | (157.0) | | | | — | |
| | (175.6) | | | (310.8) | | | (224.4) | | | | (175.6) | |
| Net deferred tax asset before valuation allowances | Net deferred tax asset before valuation allowances | 6,323.3 | | | 6,030.2 | | Net deferred tax asset before valuation allowances | 5,468.1 | | | | 6,323.3 | |
| Valuation allowances | Valuation allowances | (6,344.2) | | | (6,110.8) | | Valuation allowances | (4,992.9) | | | | (6,344.2) | |
| Net deferred tax liability | $ | (20.9) | | | $ | (80.6) | | |
| Net deferred tax asset (liability) | | Net deferred tax asset (liability) | $ | 475.2 | | | | $ | (20.9) | |
The net deferred tax asset before valuation allowances was $5,468.1 million as of December 30, 2022 (Successor), compared to $6,323.3 million as of December 31, 2021 compared(Predecessor). This decrease consists of $904.5 million of a decrease related to $6,030.2fresh-start activity and $72.8 million as of December 25, 2020. Thisa net decrease associated with payments and accretion on the opioid-related litigation settlement offset by a $61.5 million increase was due toassociated with amortization on intangible assets and a $178.8$60.6 million increase predominately related to tax loss and other operational activity. The $904.5 million decrease related to fresh-start activity consists of (i) CODI realized upon emergence from bankruptcy and limitations under IRC Sections 382 and 383 which resulted in reductions to tax loss and credit carryforward, additionscapital tax loss carryforward, and current and prior years' operational activity, a $21.4 million increase associated withexcess interest deferred tax assets; (ii) fair value adjustments which resulted in
reductions to the opioid-related litigation settlement liability deferred tax assets and a $92.9 million increase associated with intangible assets.asset deferred tax liabilities, and increases to other deferred tax liabilities and (iii) increases to certain deferred tax assets due to the release of uncertain tax positions.
The deferred tax asset valuation allowances ofwere $4,992.9 million and $6,344.2 million as of December 30, 2022 (Successor) and $6,110.8 millionDecember 31, 2021 (Predecessor), respectively. The valuation allowance as of December 30, 2022 (Successor) relates primarily to the uncertainty of the utilization of certain deferred tax assets, driven by domestic and international net operating and capital losses, credits, and intangible assets. As of December 30, 2022 (Successor), due to the alleviation of the previous substantial doubt about the Company’s ability to continue as a going concern, the associated valuation allowances were released through fresh-start accounting at emergence. The valuation allowance as of December 31, 2021 and December 25, 2020, respectively, relate both(Predecessor) was related to the Company's substantial doubt about its ability to continue as a going concern, as well as the uncertainty of the utilization of certain deferred tax assets, driven by domestic and international net operating and capital losses, credits, intangible assets and the opioid-related litigation settlement liability.
Net deferred tax liabilities of $20.9 million and $80.6 millionDeferred taxes were included in deferred income taxes on the following consolidated balance sheets as of December 31, 2021 and December 25, 2020, respectively.sheet captions in the amounts shown:
| | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| December 30, 2022 | | | December 31, 2021 |
| Deferred income tax asset | $ | 475.5 | | | | $ | — | |
| Deferred income tax liability | (0.3) | | | | (20.9) | |
| Net deferred tax asset (liability) | $ | 475.2 | | | | $ | (20.9) | |
As of December 31, 2021,30, 2022 (Successor), the Company had approximately $4,024.0$3,600.6 million of NOL carryforwards in certain international jurisdictions measured at the applicable statutory rates, of which $1,851.3$1,532.4 million have no expiration and the remaining $2,172.7$2,068.2 million will expire in future years through 2042.2043. As of December 31, 2021,30, 2022 (Successor), the Company had $39.5$43.5 million of domestic NOL carryforwards measured at the applicable statutory rates, which have no expiration date.
As of December 31, 2021,30, 2022 (Successor), the Company had $184.7$8.7 million of capital loss carryforwards in certain international jurisdictions measured at the applicable statutory rates, which will expire in future years through 2026.2027. As of December 31, 2021,30, 2022 (Successor), the Company had approximately $969.5 million of domestic capital loss carryforwards measured at the applicable statutory rates, which have no expiration date.
As of December 31, 2021,30, 2022 (Successor), the Company also had $83.9$1.9 million of tax credits available to reduce future income taxes payable, in international jurisdictions, of which $2.3 million have no expiration and the remainder will expire in future years through 2042.2043.
As of December 31, 2021,30, 2022 (Successor), the Company's taxable financial reporting basis in subsidiaries that may be subject to tax was in excess ofexceeded its corresponding tax basis by $12.1$3.1 million. Such excess amount is considered to be indefinitely reinvested and it is not practicable to determine the cumulative amount ofassociated potential tax liability that would arise if this indefinitely reinvested amount were realized due to a variety of factors including the complexity of the Company's legal entity structure as well as the timing, extent, and nature of any hypothetical realization.
Loss per share is computed by dividing net loss by the number of weighted-average shares outstanding during the period. Dilutive securities, including participating securities, have not been included in the computation of loss per share as the Company reported a net loss from continuing operations during all periods presented below and therefore, the impact would have been anti-dilutive.
The weighted-average number of shares outstanding used in the computations of both basic and diluted loss per share were as follows (in millions):
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2021 | | 2020 | | 2019 |
| Basic | 84.7 | | | 84.5 | | | 83.9 | |
| | | | | |
| | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
| Basic | 13.2 | | | | 84.8 | | | 84.7 | | | 84.5 | |
| | | | | | | | |
| | | | | | | | |
The computation of diluted weighted-average shares outstanding for the periods June 17, 2022 through December 30, 2022 (Successor), the period January 1, 2022 through June 16, 2022 (Predecessor), fiscal 2021 (Predecessor) and fiscal 2020 and 2019(Predecessor) excluded approximately zero, 0.5 million, 5.2 million 5.6 million and 6.35.6 million, respectively, shares of equity awards because the effect would have been anti-dilutive.
Inventories were comprised of the following at the end of each period:
| | | | | | | | | | | | | Successor | | | Predecessor |
| | December 31,
2021 | | December 25,
2020 | | December 30,
2022 | | | December 31,
2021 |
| Raw materials | Raw materials | $ | 59.8 | | | $ | 58.1 | | Raw materials | $ | 80.2 | | | | $ | 59.8 | |
| Work in process | Work in process | 196.4 | | | 200.7 | Work in process | 552.1 | | | | 196.4 |
| Finished goods | Finished goods | 91.0 | | | 86.1 | Finished goods | 315.3 | | | | 91.0 |
| Inventories | Inventories | $ | 347.2 | | | $ | 344.9 | | Inventories | $ | 947.6 | | | | $ | 347.2 | |
| | | | | |
| 11. | 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:
| | | | | | | | | | | | | Successor | | | Predecessor |
| | December 31, 2021 | | December 25, 2020 | | December 30, 2022 | | | December 31, 2021 |
| Land | Land | $ | 43.5 | | | $ | 43.6 | | Land | $ | 51.0 | | | | $ | 43.5 | |
| Buildings | Buildings | 387.8 | | | 416.9 | | Buildings | 127.2 | | | | 387.8 | |
| Capitalized software | Capitalized software | 121.1 | | | 134.0 | | Capitalized software | 17.5 | | | | 121.1 | |
| Machinery and equipment | Machinery and equipment | 1,254.1 | | | 1,260.4 | | Machinery and equipment | 216.8 | | | | 1,254.1 | |
| Construction in process | Construction in process | 80.1 | | | 56.0 | | Construction in process | 72.5 | | | | 80.1 | |
| | 1,886.6 | | | 1,910.9 | | | 485.0 | | | | 1,886.6 | |
| Less: accumulated depreciation | Less: accumulated depreciation | (1,110.6) | | | (1,077.8) | | Less: accumulated depreciation | (27.4) | | | | (1,110.6) | |
| Property, plant and equipment, net | Property, plant and equipment, net | $ | 776.0 | | | $ | 833.1 | | Property, plant and equipment, net | $ | 457.6 | | | | $ | 776.0 | |
Depreciation expense was as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2021 | | 2020 | | 2019 |
| Depreciation expense | $ | 94.7 | | | $ | 114.0 | | | $ | 97.7 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
| Depreciation expense | $ | 28.8 | | | | $ | 40.0 | | | $ | 94.7 | | | $ | 114.0 | |
As a result of the Chapter 11 Cases, certain of the Company's lease liabilities were classified as LSTC as of December 25, 2020 due to rejection of executory contracts. Refer to Note 2 for further information on LSTC.
Lease assets and liabilities related to the Company's operating leases are reported in the following consolidated balance sheet captions:
| | | | | | | | | | | | | Successor | | | Predecessor |
| | December 31,
2021 | | December 25,
2020 | | December 30,
2022 | | | December 31,
2021 |
| Other assets | Other assets | $ | 35.0 | | | $ | 58.6 | | Other assets | $ | 38.1 | | | | $ | 35.0 | |
| | Accrued and other current liabilities | Accrued and other current liabilities | $ | 11.1 | | | 13.0 | | Accrued and other current liabilities | $ | 10.3 | | | | $ | 11.1 | |
| Other liabilities | Other liabilities | 20.0 | | | 28.0 | | Other liabilities | 30.4 | | | | 20.0 | |
| Other current and non-current liabilities subject to compromise | Other current and non-current liabilities subject to compromise | 0.4 | | | 31.9 | | Other current and non-current liabilities subject to compromise | — | | | | 0.4 | |
| Total lease liabilities | Total lease liabilities | $ | 31.5 | | | $ | 72.9 | | Total lease liabilities | $ | 40.7 | | | | $ | 31.5 | |
Dependent on the nature of the leased asset, lease expense is included within cost of sales or SG&A. The primary components of lease expense were as follows:
| | | Fiscal Year | | Successor | | | Predecessor |
| | 2021 | | 2020 | | 2019 | | Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
| Lease cost: | Lease cost: | | | | | | Lease cost: | | | | | | | | |
| Operating lease cost | Operating lease cost | $ | 19.6 | | | $ | 21.2 | | | $ | 21.3 | | Operating lease cost | $ | 7.9 | | | | $ | 8.7 | | | $ | 19.6 | | | $ | 21.2 | |
| Short-term lease cost | Short-term lease cost | 1.1 | | | 1.1 | | | 3.5 | | Short-term lease cost | 1.6 | | | | 0.4 | | | 1.1 | | | 1.1 | |
| Variable lease cost | Variable lease cost | 2.4 | | | 3.1 | | | — | | Variable lease cost | 1.5 | | | | 1.2 | | | 2.4 | | | 3.1 | |
| Total lease cost | Total lease cost | $ | 23.1 | | | $ | 25.4 | | | $ | 24.8 | | Total lease cost | $ | 11.0 | | | | $ | 10.3 | | | $ | 23.1 | | | $ | 25.4 | |
Lease terms and discount rates were as follows:
| | | | | | | | | | | | | Successor | | | Predecessor |
| | December 31,
2021 | | December 25,
2020 | | December 30,
2022 | | | December 31,
2021 |
| Weighted-average remaining lease term (in years) - operating lease | Weighted-average remaining lease term (in years) - operating lease | 5.7 | | 6.1 | Weighted-average remaining lease term (in years) - operating lease | 6.7 | | | 5.7 |
| Weighted-average discount rate - operating leases | Weighted-average discount rate - operating leases | 4.4 | % | | 3.9 | % | Weighted-average discount rate - operating leases | 11.9 | % | | | 4.4 | % |
Contractual maturities of operating lease liabilities as of December 31, 202130, 2022 (Successor) were as follows:
| | | | | |
Fiscal 20222023 | $ | 14.7 | |
Fiscal 2023 | 11.014.9 | |
| Fiscal 2024 | 7.912.0 | |
| Fiscal 2025 | 4.57.9 | |
| Fiscal 2026 | 2.85.0 | |
| Fiscal 2027 | 3.2 | |
| Thereafter | 2.918.3 | |
| Total lease payments | 43.861.3 | |
| Less: Interest | (12.3)(20.6) | |
| Present value of lease liabilities | 31.5$ | 40.7 | |
Less: Amounts reclassified to liabilities subject to compromise | (0.4) | |
Present value of lease liabilities not subject to compromise | $ | 31.1 | |
Other supplemental cash flow information related to leases were as follows:
| | | Fiscal Year | | Successor | | | Predecessor |
| | 2021 | | 2020 | | 2019 | | Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | Cash paid for amounts included in the measurement of lease liabilities: | | | | | | Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
| Operating cash flows from operating leases | Operating cash flows from operating leases | $ | 20.4 | | | $ | 23.1 | | | $ | 23.2 | | Operating cash flows from operating leases | $ | 9.2 | | | | $ | 9.4 | | | $ | 20.4 | | | $ | 23.1 | |
| Lease assets obtained in exchange for lease obligations: | Lease assets obtained in exchange for lease obligations: | | Lease assets obtained in exchange for lease obligations: | | | |
| Operating leases | Operating leases | 2.6 | | | 6.9 | | | 7.3 | | Operating leases | 7.1 | | | | 13.4 | | | 2.6 | | | 6.9 | |
Intangible Assets
The gross carrying amount and accumulated amortization of intangible assets were comprised of the following at the end of each period:
| | | | | | | | | | | | | | | | | | | | | | | Successor | | | Predecessor |
| | December 31, 2021 | | December 25, 2020 | | December 30, 2022 | | | December 31, 2021 |
| | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization | | | Gross Carrying Amount | | Accumulated Amortization |
| Amortizable: | Amortizable: | | | | | | | | Amortizable: | | | | | | | | |
| Completed technology | Completed technology | $ | 10,404.0 | | | $ | 5,160.4 | | | $ | 10,394.6 | | | $ | 4,586.6 | | Completed technology | $ | 3,041.2 | | | $ | 318.7 | | | | $ | 10,404.0 | | | $ | 5,160.4 | |
| License agreements | License agreements | 120.1 | | 82.1 | | | 120.1 | | 78.1 | | License agreements | — | | | — | | | | 120.1 | | 82.1 | |
| Trademarks | Trademarks | 77.7 | | 26.9 | | | 77.7 | | 23.5 | Trademarks | — | | | — | | | | 77.7 | | 26.9 |
| | Total | Total | $ | 10,601.8 | | | $ | 5,269.4 | | | $ | 10,592.4 | | | $ | 4,688.2 | | Total | $ | 3,041.2 | | | $ | 318.7 | | | | $ | 10,601.8 | | | $ | 5,269.4 | |
| Non-Amortizable: | Non-Amortizable: | | | | | | | | Non-Amortizable: | | | | | | | | |
| Trademarks | Trademarks | $ | 35.0 | | | $ | 35.0 | | | Trademarks | $ | — | | | | $ | 35.0 | | |
| In-process research and development | In-process research and development | 81.0 | | | 245.3 | | | In-process research and development | 121.3 | | | | 81.0 | | |
| Total | Total | $ | 116.0 | | | $ | 280.3 | | | Total | $ | 121.3 | | | | $ | 116.0 | | |
The Company recorded impairment charges related to its Specialty Brands segment totaling $154.9 million $63.5 million and $388.0$63.5 million during fiscal 2021 (Predecessor) and fiscal 2020 and 2019,(Predecessor), respectively. The valuation method used to approximate fair value in each of these periods was based on the estimated discounted cash flows for the respective asset. The fiscal 2021 (Predecessor) impairment charge included a partial impairment of $90.4 million related to Amitiza as discussed further below,the undiscounted cash flows were less than its net book value, and a full impairment of $64.5 million related to MNK-6105 and MNK-6106 as the Company decided it would no longer pursue further development of this IPR&D asset. The fiscal 2020 impairment charge was related to the Ofirmev® (acetaminophen) injection ("Ofirmev") product and was primarily driven by a change in the estimate of the asset's useful life resulting in its undiscounted cash flow being less than its net book value. The fiscal 2019 impairment charge included $274.5 million related to VTS-270, primarily driven by continued regulatory challenges, and $113.5 million related to stannsoporfin
As part of fresh-start accounting, as a result of the Effective Date, the Company endingwrote-off the existing intangible assets and accumulated amortization of the Predecessor and recorded $3,152.2 million to reflect the fair value of intangible assets of the Successor (see also Note 3). Such adjustment included $100.0 million in relation to the Company's PRV that was awarded under an FDA program intended to encourage the development program.of certain product applications for therapies used to treat or prevent material threat medical countermeasures. On June 30, 2022, subsequent to the Effective Date, the Company completed the sale of its PRV for $100.0 million and received net proceeds of $65.0 million as the buyer remitted the remaining $35.0 million to the General Unsecured Claims Trustee pursuant to the terms of (i) the Plan, and (ii) that certain General Unsecured Claims Trust Agreement entered into in connection with the Plan.
Intangible assets of the Successor as of the Effective Date consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Carrying Amount | | Amortization Method | | Amortization Period (in years) | | Discount Rate | | Segment |
| Amortizable completed technology: | | | | | | | | | |
| Acthar Gel | $ | 1,069.0 | | | Sum of the years digits | | 13.5 | | 14.2% | | Specialty Brands |
| Therakos | 913.8 | | Sum of the years digits | | 10.0 | | 14.0 | | Specialty Brands |
| Amitiza | 84.5 | | | Sum of the years digits | | 3.0 | | 14.0 | | Specialty Brands |
| INOmax | 652.9 | | | Sum of the years digits | | 9.0 | | 14.0 | | Specialty Brands |
| StrataGraft | 56.8 | | | Straight-line | | 11.0 | | 14.0 | | Specialty Brands |
| Generics | 71.4 | | | Straight-line | | 5.0 | | 13.3 | | Specialty Generics |
| APAP | 70.5 | | | Straight-line | | 20.5 | | 13.0 | | Specialty Generics |
| 2,918.9 | | | | | | | | | |
| | | | | | | | | |
| Non-Amortizable in-process research and development: | | | | | | | | | |
Terlivaz (1) | 104.8 | | | Straight-line | | 7.0 | | 15.0 | | Specialty Brands |
| Generics IPR&D | 128.5 | | | Not applicable | | Not applicable | | 14.0 | | Specialty Generics |
| 233.3 | | | | | | | | | |
| $ | 3,152.2 | | | | | | | | | |
(1)Subsequent to the Effective Date, Terlivaz was approved by the FDA and was transferred to amortizable, finite-lived completed technology. See further discussion below.
Amitiza
During the three months ended December 31, 2021, due to lower anticipated cash flows expected from Amitiza,Beginning January 1, 2022 (Predecessor), the Company identified a triggering event with respect to the associated intangible asset within the Specialty Brands segment and assessed the recoverability of the definite-lived asset. The Company determined that the undiscounted cash flows related tochanged its amortization method used for the Amitiza intangible asset were less than its net book value, which requiredfrom the Companystraight-line method to record an impairment charge for the difference between the fair value of the Amitiza intangible asset and its net book value. In connection with this analysis, the Company concluded that the sum of the years digits method, an accelerated method of amortization, on a prospective basis (beginning with the first quarter of fiscal 2022) wouldto more accurately reflect the consumption of the economic benefits over the remaining useful life of the asset.
The Company determined the fair value of the Amitiza 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 This change in determining the fair value of the intangible asset. The Company's projections in relation to the Amitiza intangible asset included long-term net sales and operating income at lower than historical levels. These changes in assumptionsamortization method resulted in a fair valueadditional amortization expense of $21.7 million, which impacted basic loss per share by $0.26 for the Amitiza intangible asset that was less than its net book value. Therefore, the Company recorded an impairment charge of $90.4 million.period January 1, 2022 through June 16, 2022 (Predecessor).
StrataGraft®Terlivaz
On June 15, 2021,September 14, 2022, the Company announced that the FDA had approved the StrataGraft biologics license application (BLA)Terlivaz for the treatment of adults with deep partial-thickness burns.injection. Upon FDA approval, the Company transferred the total $99.8$104.8 million of asset value from non-amortized,non-amortizable indefinite-lived acquired IPR&D product rights to amortizable, finite-lived completed technology and will beginbegan amortization of the asset in tandem with the first commercial shipment of the product during the firstfourth quarter of fiscal 2022. ConcurrentThe FDA approval gave rise to a $17.5 million milestone payable and a corresponding intangible asset was recorded, which is amortized over the useful life of the related asset that began with the approval of StrataGraft, the FDA granted the Company a Priority Review Voucher ("PRV"). A PRV is a voucher that may be used to obtain an accelerated FDA review of onefirst commercial shipment of the Company's future products or sold to a third party to obtain accelerated reviewproduct during the fourth quarter of one of its future products.
Terlipressin
During September 2020, the 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, the Company had an End of Review Meeting on October 26, 2020 and a Type A Meeting on January 29, 2021 with the FDA where both parties engaged in constructive dialogue in an effort to clarify a viable path to approval. On August 18, 2021, the Company resubmitted its NDA for terlipressin to the FDA and on February 18, 2022 (the Prescription Drug User Fee Act, or "PDUFA date"), the FDA issued a CRL. In the weeks leading up to the PDUFA date, it became necessary for the Company to identify a new packaging and labeling manufacturing facility, which meant that an inspection by the FDA could not be completed by the PDUFA date. A satisfactory inspection is required before the NDA can be approved. This is the only outstanding issue noted in the CRL, and it is important to note that there were no safety or efficacy issues cited. The Company remains committed to this critically ill patient population, who currently have no approved treatment option in the U.S for HRS-1 and believes that there is a path to approval infiscal 2022. The Company 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 consolidated balance sheets as of December 31, 2021 and December 25, 2020.
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:
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2021 | | 2020 | | 2019 |
| Amortization expense | $ | 581.1 | | | $ | 771.2 | | | $ | 853.4 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
| Amortization expense | $ | 318.7 | | | | $ | 281.8 | | | $ | 581.1 | | | $ | 771.2 | |
The estimated aggregate amortization expense on intangible assets owned by the Company and being amortized as of December 31, 2021,30, 2022 (Successor), is expected to be as follows:
| | | | | |
Fiscal 20222023 | $ | 605.3509.3 | |
Fiscal 2023 | 585.1 |
| Fiscal 2024 | 564.8446.1 | |
| Fiscal 2025 | 543.1385.1 | |
| Fiscal 2026 | 517.2337.5 | |
| Fiscal 2027 | 284.4 | |
Debt was comprised of the following at the end of each period:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| December 30, 2022 | | | December 31, 2021 |
| Principal | | Carrying Value (1) | | Unamortized Discount and Debt Issuance Costs (1) | | | Principal | | Unamortized Discount and Debt Issuance Costs |
| 10.00% first lien senior secured notes due April 2025 | $ | 495.0 | | | $ | 475.9 | | | $ | — | | | | $ | 495.0 | | | $ | 5.9 | |
| 10.00% second lien senior secured notes due April 2025 | 321.9 | | | 242.2 | | | — | | | | — | | | — | |
| 2017 Replacement Term loan due September 2027 | 1,374.1 | | | 1,222.1 | | | — | | | | — | | | — | |
| 2018 Replacement Term loan due September 2027 | 364.8 | | | 326.9 | | | — | | | | — | | | — | |
| 11.50% first lien senior secured notes due December 2028 | 650.0 | | | 650.0 | | | 20.8 | | | | — | | | — | |
| 10.00% second lien senior secured notes due June 2029 | 328.3 | | | 175.5 | | | — | | | | — | | | — | |
| Revolving credit facility due February 2022 | — | | | — | | — | | | 900.0 | | | 0.2 |
| 9.50% debentures due May 2022 | — | | | — | | | — | | | | 10.4 | | | — | |
| 5.75% senior notes due August 2022 | — | | | — | | | — | | | | 610.3 | | | — | |
| 8.00% debentures due March 2023 | — | | | — | | | — | | | | 4.4 | | | — | |
| 4.75% senior notes due April 2023 | — | | | — | | | — | | | | 133.7 | | | — | |
| 5.625% senior notes due October 2023 | — | | | — | | | — | | | | 514.7 | | | — | |
| Term loan due September 2024 | — | | | — | | | — | | | | 1,396.5 | | | — | |
| Term loan due February 2025 | — | | | — | | | — | | | | 370.7 | | | — | |
| 10.00% second lien senior notes due April 2025 | — | | | — | | — | | | 322.9 | | | — |
| 5.50% senior notes due April 2025 | — | | | — | | | — | | | | 387.2 | | | — | |
| Total debt | 3,534.1 | | | 3,092.6 | | | 20.8 | | | | 5,145.8 | | | 6.1 | |
| Less: Current portion | (44.1) | | | (44.1) | | | — | | | | (1,395.0) | | | (6.1) | |
| Less: Amounts reclassified to liabilities subject to compromise | — | | | — | | | — | | | | (3,750.8) | | | — | |
| Total long-term debt, net of current portion | $ | 3,490.0 | | | $ | 3,048.5 | | | $ | 20.8 | | | | $ | — | | | $ | — | |
(1)Upon adoption of fresh-start accounting, the Company recorded its debt instruments at fair value utilizing the Black-Derman-Toy model, which takes into consideration prepayment options and a credit-adjusted discount rate. Subsequent to the Effective Date, the Company accounted for its debt instruments utilizing the amortized cost method and accretes the instruments up from their fair value to the principal amount over the term of the respective instruments. Such accretion expense is reflected as interest expense on the consolidated statement of operations for the successor period.
The commencement of the Chapter 11 Cases constituted an event of default under certain of the Company's predecessor debt agreements. Accordingly, all debt not reclassified as LSTC with original long-term stated maturities was classified as current on the consolidated balance sheets as of December 31, 2021 and December 25, 2020. However, any efforts to enforce payment obligations under the debt instruments are automatically stayed asAs a result of the Chapter 11 Cases, the principal and the creditors' rights in respect of theinterest due under these debt instruments are subjectbecame immediately due and payable. However, any efforts to enforce payment was automatically stayed in accordance with the applicable provisions of the Bankruptcy Code. See
On the Effective Date, the principal balance outstanding under the Existing Term Loans of $1,762.6 million, Existing 2L Notes of $322.9 million, Guaranteed Unsecured Notes of $1,512.2 million, 9.50% debentures of $10.4 million, 8.00% debentures of $4.4 million and 4.75% senior notes due April 2023 of $133.7 million were canceled and the Company entered into new Takeback Term Loans, New 2L Notes, and Takeback 2L Notes (all further described in Note 2 for2). The Existing 1L Notes were reinstated and the Existing Revolver was paid in full in cash. Additionally, the Company issued New 1L Notes and entered into a receivables financing facility (discussed further information.below).
Debt was comprised
Successor Company Indebtedness
Takeback Term Loans
On the Effective Date and pursuant to the Plan, the Issuers entered into the Takeback Term Loans, each pursuant to a Credit Agreement, dated as of the followingEffective Date ("Credit Agreement"), among Mallinckrodt plc, the Issuers, the lenders party thereto from time to time, Acquiom Agency Services LLC and Seaport Loan Products LLC, as co-administrative agents, and Deutsche Bank AG New York Branch, as collateral agent. The Takeback Term Loans were issued to the holders of the existing senior secured term loans incurred by the Issuers in satisfaction thereof. All obligations under the Takeback Term Loans are unconditionally guaranteed by Mallinckrodt plc, certain of its direct or indirect wholly owned U.S. subsidiaries, each of its direct or indirect wholly owned subsidiaries that owns directly or indirectly any such wholly owned U.S. subsidiary, and certain other subsidiaries, subject to certain exceptions (collectively, the "Guarantors") and are secured by a security interest in certain assets of the Issuers and the Guarantors.
The 2017 Replacement Term Loans bear interest at a rate equal to, at the option of the borrowers thereunder, adjusted LIBOR, subject to a floor of 0.75%, plus a spread equal to 5.25% or an alternate base rate, subject to a floor of 1.75%, plus a spread equal to 4.25%. The 2018 Replacement Term Loans bear interest at a rate equal to, at the option of the borrowers thereunder, adjusted LIBOR, subject to a floor of 0.75%, plus a spread equal to 5.50% or an alternate base rate, subject to a floor of 1.75%, plus a spread equal to 4.50%. The LIBOR reference rate under the Takeback Term Loans will be replaced with the Secured Overnight Financing Rate ("SOFR") plus a spread of (i) 0.11448% for an available tenor of one-month’s duration, (ii) 0.26161% for an available tenor of three months’ duration, or (iii) 0.42826% for an available tenor of six-months’ duration and is currently anticipated to occur on or about June 30, 2023. Interest on the Takeback Term Loans is payable at the end of each period:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | December 25, 2020 |
| Principal | | Unamortized Discount and Debt Issuance Costs (1) | | Principal | | Unamortized Discount and Debt Issuance Costs |
| Secured debt: | | | | | | | |
| Term loan due September 2024 | $ | 1,396.5 | | | $ | — | | | $ | 1,505.2 | | | $ | 12.3 | |
| Term loan due February 2025 | 370.7 | | | — | | | 399.5 | | | 5.0 | |
| 10.00% first lien senior notes due April 2025 | 495.0 | | | 5.9 | | | 495.0 | | | 7.7 | |
| 10.00% second lien senior notes due April 2025 | 322.9 | | | — | | 322.9 | | | 8.0 | |
| Revolving credit facility | 900.0 | | | 0.2 | | 900.0 | | | 1.7 | |
| Total secured debt | 3,485.1 | | | 6.1 | | | 3,622.6 | | | 34.7 | |
| Unsecured debt: | | | | | | | |
| 9.50% debentures due May 2022 | 10.4 | | | — | | | 10.4 | | | — | |
| 5.75% senior notes due August 2022 | 610.3 | | | — | | | 610.3 | | | — | |
| 8.00% debentures due March 2023 | 4.4 | | | — | | | 4.4 | | | — | |
| 4.75% senior notes due April 2023 | 133.7 | | | — | | | 133.7 | | | — | |
| 5.625% senior notes due October 2023 | 514.7 | | | — | | | 514.7 | | | — | |
| 5.50% senior notes due April 2025 | 387.2 | | | — | | | 387.2 | | | — | |
| Total unsecured debt: | 1,660.7 | | | — | | | 1,660.7 | | | — | |
| Total debt, prior to reclassification to liabilities subject to compromise | 5,145.8 | | | 6.1 | | | 5,283.3 | | | 34.7 | |
| Less: Current portion | (1,395.0) | | | (6.1) | | | (3,622.6) | | | (34.7) | |
Less: Amounts reclassified to liabilities subject to compromise (2) | (3,750.8) | | | — | | | (1,660.7) | | | — | |
| Total long-term debt, net of current portion | $ | — | | | $ | — | | | $ | — | | | $ | — | |
(1)As a result ofapplicable interest period, but in no event less frequently than quarterly. The Takeback Term Loans mature on September 30, 2027. Amounts outstanding under the Company's Chapter 11 Cases, the Company expensed $23.1 million and $10.2 million of unamortized discount and debt issuance costs, net, recorded in reorganization items, net in the consolidated statements of operations for fiscal 2021 and 2020, respectively.
(2)In connection with the Company's Chapter 11 Cases, $3,750.8 million and $1,660.7 million of outstanding debt instruments have been classified as LSTC in the Company's consolidated balance sheets as of December 31, 2021 and December 25, 2020, respectively. Up to the Petition Date, the Company continued to accrue interest expense in relation to the unsecured debt instruments classified as LSTC. The Company continues to accrue and pay interest on the outstanding secured debt instruments classified as LSTC in conjunction with the cash collateral order. Refer to Note 2 for further information.
Mallinckrodt International Finance S.A. ("MIFSA") is a wholly owned subsidiary of the Company. MIFSA functions as a holding company, established to own, directly or indirectly, substantially all of the operating subsidiaries of the Company, as well as to issue debt securities and to perform treasury operations.
In April 2013, MIFSA issued a $600.0 million aggregate principal amount of 4.75% senior unsecured notes due April 2023 (the "April 2023 Notes"). Mallinckrodt plc has fully and unconditionally guaranteed the April 2023 Notes on an unsecured and unsubordinated basis. The April 2023 Notes are subject to an indenture which contains covenants limiting the ability of MIFSA, its restricted subsidiaries (as defined in the April 2023 Notes) and Mallinckrodt plc, as guarantor, to incur certain liens or enter into sale and lease-back transactions. It also restricts Mallinckrodt plc and MIFSA's ability to merge or consolidate with any other person or sell or convey all or substantially all of their assets to any one person. MIFSATakeback Term Loans may redeem all of the April 2023 Notesbe prepaid at any time, and somesubject, under certain circumstances, to a 1.00% prepayment premium on prepayments made within the first nine months of the April 2023 Notes from timeEffective Date. The Issuers may be obligated to time, at a redemption price equal toprepay the principal amountTakeback Term Loans with the net proceeds of the April 2023 Notes redeemed plus a make-whole premium. The Company pays interest on the April 2023 Notes semiannually in arrears on April 15thcertain asset sales and October 15th of each year, which commenced on October 15, 2013.
In August 2014, MIFSA and Mallinckrodt CB LLC ("MCB") (the "Issuers") issued $900.0 million aggregate principal amount of 5.75% senior unsecured notes due August 2022 (the "2022 Notes”). The 2022 Notes are guaranteed by Mallinckrodt plc and each of its subsidiaries that guarantee the obligations under the Senior Secured Credit Facilities (as defined below). The 2022 Notes arerecovery events, subject to an indenture thatcertain qualifications and exceptions. The Issuers may also be obligated to prepay the Term Loans with a specified percentage of excess cash flow, subject to certain qualifications and exceptions.
The Credit Agreement contains certain customary affirmative and negative covenants, representations and warranties and events of default (subject in certain cases to customary grace and cure periods). The occurrence of an event of default under the indentureCredit Agreement could result in the acceleration of all outstanding borrowings under the 2022 NotesTakeback Term Loans and could cause a cross-default that could result in the acceleration of other indebtedness of Mallinckrodt plc and its subsidiaries.
11.50% First Lien Senior Secured Notes due 2028
On June 15, 2022, the Issuers and Mallinckrodt plc entered into a purchase agreement ("Note Purchase Agreement") with certain Purchasers (as defined in the Note Purchase Agreement) with respect to the issuance and sale of $650.0 million aggregate principal amount of New 1L Notes. The Note Purchase Agreement contains customary representations, warranties and covenants and includes the terms and conditions for the sale of the New 1L Notes, and other terms and conditions customary in agreements of this type. The net proceeds of the issuance of the New 1L Notes were applied to repay in part the existing senior secured revolving credit facility incurred by the Issuers and certain of their respective subsidiaries. The issuance of the New 1L Notes was exempt from registration under the Securities Act.
The New 1L Notes were issued by the Issuers on the Effective Date pursuant to an indenture, dated as of the Effective Date ("New 1L Notes Indenture") among the Issuers, Mallinckrodt plc, the Subsidiary Note Guarantors (as defined below), Wilmington Savings Fund Society, FSB, as first lien trustee, and Deutsche Bank AG New York Branch, as first lien collateral agent. The New 1L Notes mature on December 15, 2028.
Interest on the New 1L Notes, at a rate of 11.50% per annum, is payable semi-annually in cash on June 15 and December 15 of each year, which commenced on December 15, 2022.
The Issuers may redeem some or all of the 2022New 1L Notes at specified redemption prices. The Issuers are obligatedprior to offer to repurchase the 2022
Notes atJune 15, 2027 by paying a price of (a) 101% of their principal amount"make-whole" premium, plus accrued and unpaid interest, if any, as a result of certain change of control events and (b) 100% of their principal amount plus accrued and unpaid interest of net proceeds from certain asset sales. These obligations are subject to certain qualifications and exceptions. The Company pays interest on the 2022 Notes semiannually in arrears on February 1st and August 1st of each year, which commenced on February 1, 2015.
In April 2015, in connection with the Company's acquisition of Ikaria, Inc. ("Ikaria"), MIFSA and MCB issued $700.0 million aggregate principal amount of 4.875% senior unsecured notes due April 2020 (the "2020 Notes") and $700.0 million aggregate principal amount of 5.50% senior unsecured notes due April 2025 (the "2025 Notes", and together with the 2020 Notes, the "Ikaria Notes"). The Ikaria Notes are guaranteed by Mallinckrodt plc and each of its subsidiaries that guarantee the obligations under the Senior Secured Credit Facilities (as defined below), which following the acquisition of Ikaria includes Compound Holdings II, Inc. (or its successors) and its U.S. subsidiaries. The Ikaria 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 Ikaria Notes and could cause a cross-default that could result in the acceleration of other indebtedness of the Company.any. The Issuers may redeem some or all of the 2025 Notes prior to April 15, 2020 by paying a “make-whole” premium. The Issuers may redeem some or all of the (i) 2020 Notes and (ii) 2025New 1L Notes on or after AprilJune 15, 2020, in each case,2027 at specified redemption prices. The Issuers are obligated to offer to repurchase the Ikaria Notes (a) at a price of 101% of their respective principal amountpar, plus accrued and unpaid interest, if any, as a result of certain change of control events and (b) at a price of 100% of their respective principal amount plus accrued and unpaid interest of net proceeds from certain asset sales. These obligations are subject to certain qualifications and exceptions.any. The Company pays interest on the Ikaria Notes semiannually on April 15th and October 15th of each year, which commenced on October 15, 2015.
In September 2015, in connection with the Company's acquisition of Therakos, Inc. ("Therakos"), MIFSA and MCB issued $750.0 million aggregate principal amount of 5.625% senior unsecured notes due October 2023 (the “October 2023 Notes”). The October 2023 Notes are guaranteed by Mallinckrodt plc and each of its subsidiaries under the Senior Secured Credit Facilities (as defined below), which following the acquisition of Therakos, includes TGG Medical Solutions, Inc. (or its successors) and its U.S. subsidiaries. The October 2023 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 October 2023 Notes and could cause a cross-default that could result in the acceleration of other indebtedness of the Company. The issuers may call some or all of the October 2023 Notes at specified redemption prices. The issuersIssuers may also redeem all, but not less than all, of the October 2023New 1L Notes at any time at a price of 100% of their principal amount, plus accrued and unpaid interest, if any, in the event the issuersIssuers become obligated to pay additional amounts as a result of changes affecting certain withholding tax laws applicable to payments on the October 2023New 1L Notes. The Issuers are obligated to offer to repurchase the October 2023New 1L Notes (a) 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) at a price of 100% of their principal amount plus accrued and unpaid interest, ofif any, with the net proceeds fromof certain asset sales. These obligations are subject to certain qualifications and exceptions. The Company pays interest on the October 2023 Notes semiannually on April 15th and October 15th of each year, which commenced on April 15, 2016.
In February 2017, MIFSA and MCB refinanced certain then-outstanding outstanding term loans. The refinanced term loan had an initial aggregate principal amount of $1,865.0 million, is due September 2024 and, pursuant to its terms, bears interest at a per annum rate equal to LIBOR plus 2.75%, subject to certain adjustments (the "2017 Term Loan"). The 2017 Term Loan requires quarterly principal amortization payments in an amount equal to 0.25% of the original principal balance of the 2017 Term Loan, which may be reduced by making optional prepayments. The quarterly principal amortization is payable on the last day of each calendar quarter, which commenced on June 30, 2017, with the remaining balance due September 2024.
In conjunction with the term loan refinancing, MIFSA and MCB entered into a $900.0 million revolving credit facility that matures on February 28, 2022 (the "Revolving Credit Facility"), replacing, and increasing the commitments under, an existing revolving credit facility. Efforts to enforce payment obligations under the Revolving Credit Facility were automatically stayed during the pendency of the Chapter 11 Cases. The Revolving Credit Facility bears interest at a per annum rate equal to LIBOR plus 2.25% and contains a $50.0 million letter of credit provision, of which none had been issued as of December 31, 2021. Unused commitments on the Revolving Credit Facility are subject to an annual commitment fee, which was 0.275% as of December 31, 2021, and the fee applied to outstanding letters of credit is based on the interest rate applied to borrowings. The Revolving Credit Facility added certain wholly owned subsidiaries of the Company as borrowers, in addition to MIFSA and MCB.
In July 2017, Mallinckrodt Securitization S.à r.l. ("Mallinckrodt Securitization"), a wholly owned special purpose subsidiary of the Company, entered into a $250.0 million accounts receivable securitization facility ("the Receivable Securitization") with PNC Bank, National Association, as administrative agent, and Mallinckrodt LLC, a wholly owned subsidiary of the Company, as initial servicer (the "Servicer"). Loans under the Receivable Securitization bore interest (including facility fees) at a rate equal to one month LIBOR rate plus a margin of 0.90%. In July 2019, the Company repaid all $200.0 million of then-outstanding obligations under the Receivables Securitization. Upon payment in full of such outstanding obligations under the Receivable Securitization, the $250.0 million receivables securitization program was automatically terminated (including (i) the Receivable Securitization, (ii) the Amended and Restated Purchase and Sale Agreement, dated as of July 28, 2017 (as amended, the "Purchase and Sale Agreement"), among certain wholly owned subsidiaries of the Company, the Servicer, and Mallinckrodt Securitization, (iii) the Sale Agreements (together,
the "Sale Agreements"), between Mallinckrodt LLC and certain subsidiaries of the Company and (iv) all agreements and documents entered into in connection therewith, and all security interests, liens or other rights securing the receivables securitization program were automatically released and terminated. Certain indemnification and other obligations in the Receivable Securitization, the Purchase and Sale Agreement, the Sale Agreements and the documents related thereto, which by their terms expressly survive termination of such documents, will survive the termination of Mallinckrodt Securitization's receivables securitization program.
In February 2018, in connection with the Sucampo Acquisition, MIFSA and MCB issued a $600.0 million senior secured term loan due February 2025 (the "2018 Term Loan"). Pursuant to its terms, the 2018 Term Loan bears interest at a per annum rate equal to LIBOR plus 3.00%, subject to certain potential adjustments. The 2018 Term Loan requires quarterly principal amortization payments in an amount equal to 0.25% of the original principal balance of the 2018 Term Loan, which may be reduced by making optional prepayments. The quarterly principal amortization is payable on the last day of each calendar quarter, which commenced on June 30, 2018.
The 2017 Term Loan, 2018 Term Loan and Revolving Credit Facility (collectively the "Senior Secured Credit Facilities") are fully and unconditionally guaranteed by Mallinckrodt plc,New 1L Notes Indenture contains certain of its direct or indirect wholly owned U.S. subsidiaries and each of its direct or indirect wholly owned subsidiaries that owns directly or indirectly any such wholly owned U.S. subsidiaries and certain of its other subsidiaries (collectively, the "Guarantors"). The Senior Secured Credit Facilities are secured by a security interest in certain assets of MIFSA, MCB and the Guarantors. The Senior Secured Credit Facilities contain customary affirmative and negative covenants, which include, among other things, restrictions on the Company's ability to declare or pay dividends, create liens, incur additional indebtedness, enter into sale and lease-back transactions, make investments, dispose of assets and merge or consolidate with any other person.
In December 2019, upon the terms and conditions set forth in a confidential offering memorandum dated November 5, 2019, the Issuers, completed private offers to exchange (the "2019 Exchange Offers") (i) $83.2 million of the 2020 Notes issued by the Issuers for $70.2 million of new 10.00% Second Lien Senior Secured Notes due April 2025 to be issued by the Issuers (the "Second Lien Notes") and (ii) $52.9 million of the 2022 Notes, $216.4 million of the April 2023 Notes, $144.7 million of the October 2023 Notes and $208.9 million of the 2025 Notes issued by the Issuers (collectively, and together with the 2020 Notes, the "Existing Notes") for $252.7 million of Second Lien Notes. The Second Lien Notes are subject to an indenture that contains customary covenants and events of default (subject in certain cases to customary grace and cure periods). The Second Lienoccurrence of an event of default under the New 1L Notes Indenture could result in the acceleration of the New 1L Notes and could cause a cross-default that could result in the acceleration of other indebtedness of Mallinckrodt plc and its subsidiaries. The New 1L Notes are jointly and severally guaranteed on a secured, unsubordinated basis by Mallinckrodt plc and each of its subsidiaries (other than the Issuers) that guarantees the obligations under the Takeback Term Loans ("Subsidiary Note Guarantors"). The New 1L Notes and the guarantees thereof are secured by a second lien security interest in all collateralliens on the same assets of the Issuers, Mallinckrodt plc and the Subsidiary Note Guarantors that currently securesare subject to liens securing the Senior Secured Credit Facilities,Takeback Term Loans, subject to certain exceptions.
Existing 10.00% First Lien Senior Secured Notes due 2025
The Second LienExisting 1L Notes are guaranteedwere initially issued by the Issuers on April 7, 2020 pursuant to an indenture, dated as of April 7, 2020 among the Issuers, Mallinckrodt plc, the Subsidiary Note Guarantors, Wilmington Savings Fund Society, FSB, as first lien trustee, and Deutsche Bank AG New York Branch, as first lien collateral agent. The Existing 1L Notes mature on April 15, 2025. On the Effective Date and pursuant to the Plan and the Scheme of Arrangement, the Issuers' Existing 1L Notes in an aggregate principal amount of $495.0 million and the note documents relating thereto were reinstated.
In addition, pursuant to the terms of the Existing 1L Notes Indenture, the Issuers, Mallinckrodt plc, the Subsidiary Note Guarantors, Wilmington Savings Fund Society, FSB, as first lien trustee, and Deutsche Bank AG New York Branch, as first lien
collateral agent, entered into the Existing 1L Notes Indenture, dated as of the Effective Date, pursuant to which certain additional assets were added to the collateral securing the Existing 1L Notes and the guarantees thereof.
Interest on the Existing 1L Notes, at a rate of 10.00% per annum, is payable semi-annually in cash on April 15 and October 15 of each entity that currently guarantees Mallinckrodt plc's senior secured notes, subject to certain exceptions. year, which commenced on October 15, 2020.
The Issuers may redeem anysome or all of the Second LienExisting 1L Notes prior to April 15, 2024 at specified redemption prices, plus accrued and unpaid interest, if any. The Issuers may redeem some or all of the Existing 1L Notes on or after April 15, 2024 at par, plus accrued and unpaid interest, if any. The Issuers may also redeem all, but not less than all, of the Existing 1L Notes at any time at specified redemption prices.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 Existing 1L Notes. The Issuers are obligated to (a) offer to repurchase all of the Second LienExisting 1L Notes (a) at a price of 101% of their principal amount plus accrued and unpaid interest, if any, upon the occurrenceas a result of certain change of control events and (b) offer to repurchase Second Lien Notes with the net proceeds of certain asset sales at a price equal toof 100% of their principal amount plus accrued and unpaid interest, if any.any, with the net proceeds of certain asset sales. These obligations are subject to certain qualifications and exceptions.
The Company accounted for the 2019 Exchange Offers as a debt extinguishment, which resulted in the extinguishment of $383.2 million of principal of Existing 1L Notes and the transfer of $322.9 million of Existing Notes to Second Lien Notes. The exchanges also resulted in the capitalization of $10.1 million of deferred financing fees related to the Second Lien Notes. In conjunction with the exchanges, the Company recorded a gain on debt extinguishment of $377.4 million primarily associated with retiring a portion of its Existing Notes at less than face value, net of the write-off of associated deferred financing fees of $4.9 million.
On April 7, 2020, the Company, Mallinckrodt International Finance S.A. and Mallinckrodt CB LLC (the "Exchange Issuers") entered into an exchange agreement (the “Exchange Agreement”) withIndenture contains certain third parties (collectively, the “Exchanging Holders”). Pursuant to the Exchange Agreement, the Exchanging Holders agreed to exchange with the Exchange Issuers, on April 7, 2020, their holdings of 2020 Notes (consisting of approximately $495.0 million aggregate principal amount of the 2020 Notes) for new 10.00% First Lien Senior Secured Notes due 2025 issued by the Exchange Issuers (the “First Lien Notes”), at a rate of $1,000 of First Lien Notes for every $1,000 of 2020 Notes exchanged (such exchange, the “Exchange”). The Exchange Issuers and Exchanging Holders consummated the Exchange on April 7, 2020.
The First Lien Notes are subject to an indenture that contains customary covenants and events of default (subject in certain cases to customary grace and cure periods). The First Lienoccurrence of an event of default under the Existing 1L Notes could result in the acceleration of all outstanding borrowings under the Existing 1L Notes and could cause a cross-default that could result in the acceleration of other indebtedness of Mallinckrodt plc and its subsidiaries. The Existing 1L Notes are jointly and severally guaranteed on a secured, unsubordinated basis by Mallinckrodt plc and the Subsidiary Note Guarantors. The Existing 1L Notes and the guarantees thereof are secured by a first lien security interest in all collateralliens on the same assets of the Issuers, Mallinckrodt plc and the Subsidiary Note Guarantors that currently securesare subject to liens securing the Senior Secured Credit Facilities,Takeback Term Loans, subject to certain exceptions. The First
10.00% Second Lien Notes are guaranteed by each entity that currently guarantees the Senior Secured Credit Facilities, subjectNotes due 2025
On the Effective Date, pursuant to certain exceptions. the Plan and the Scheme of Arrangement, the Issuers issued New 2L Notes in an aggregate principal amount of $322.9 million to the holders of the Issuers' Existing 2L Notes in satisfaction thereof. The New 2L Notes were issued pursuant to an Indenture, dated as of the Effective Date ("New 2L Notes Indenture"), among the Issuers, Mallinckrodt plc, the Subsidiary Note Guarantors and Wilmington Savings Fund Society, FSB, as second lien trustee and second lien collateral agent. The New 2L Notes mature on April 15, 2025. The issuance of the New 2L Notes was exempt from registration under the Securities Act.
Interest on the New 2L Notes, at a rate of 10.00% per annum, is payable semi-annually in cash on April 15 and October 15 of each year, which commenced on October 15, 2022.
The Issuers may redeem anysome or all of the First LienNew 2L Notes prior to April 15, 2024 at specified redemption prices, plus accrued and unpaid interest, if any. The Issuers may redeem some or all of the New 2L Notes on or after April 15, 2024 at par, plus accrued and unpaid interest, if any. The Issuers may also redeem all, but not less than all, of the New 2L Notes at any time at specified redemption prices.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 New 2L Notes. The Issuers are obligated to (a) offer to repurchase all of the First LienNew 2L Notes (a) at a price of 101% of their principal amount plus accrued and unpaid interest, if any, upon the occurrenceas a result of certain change of control events and (b) offer to repurchase First Lien Notes with the net proceeds of certain asset sales at a price equal toof 100% of their principal amount plus accrued and unpaid interest, if any.any, with the net proceeds of certain asset sales. These obligations are subject to certain qualifications and exceptions.
The New 2L Notes Indenture 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 New 2L Notes Indenture could result in the acceleration of the New 2L Notes and could cause a cross-default that could result in the acceleration of other indebtedness of Mallinckrodt plc and its subsidiaries. The New 2L Notes are jointly and severally guaranteed, subject to certain exceptions, on a secured, unsubordinated basis by Mallinckrodt plc and the Subsidiary Note Guarantors. The New 2L Notes and the guarantees thereof are secured by liens on the same assets of the Issuers, Mallinckrodt plc and the Subsidiary Note Guarantors that are subject to liens securing the Takeback Term Loans, subject to certain exceptions.
10.00% Second Lien Senior Secured Notes due 2029
On April 15, 2020, the Company paidEffective Date, pursuant to the Plan and the Scheme of Arrangement, the Issuers issued Takeback 2L Notes in full the remaining approximately $119.8 million inan aggregate principal amount of outstanding 2020$375.0 million to the holders of the Issuers' Guaranteed Unsecured Notes in partial satisfaction thereof. The Takeback 2L Notes were issued pursuant to an indenture, dated as of the Effective Date ("Takeback 2L Notes Indenture"), among the Issuers, Mallinckrodt plc, the Subsidiary Note Guarantors and Wilmington Savings Fund Society, FSB, as second lien trustee and second lien collateral agent. The Takeback 2L Notes mature on June 15, 2029. The issuance of the Takeback 2L Notes was exempt from registration under the Securities Act.
Interest on the Takeback 2L Notes, at the maturity thereof witha rate of 10.00% per annum, is payable semi-annually in cash on hand.June 15 and December 15 of each year, which commenced on December 15, 2022.
The Issuers may redeem some or all of the Takeback 2L Notes prior to June 15, 2026 by paying a "make-whole" premium, plus accrued and unpaid interest, if any. The Issuers may redeem some or all of the Takeback 2L Notes on or after June 15, 2026 but prior
to June 15, 2028 at specified redemption prices, plus accrued and unpaid interest, if any. The Issuers may redeem some or all of the Takeback 2L Notes on or after June 15, 2028 at par, plus accrued and unpaid interest, if any. In addition, prior to June 15, 2026, the Issuers may redeem up to 40% of the aggregate principal amount of the Takeback 2L Notes with the net proceeds of certain equity offerings. The Issuers may also redeem all, but not less than all, of the Takeback 2L 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 Takeback 2L Notes. The Issuers are obligated to offer to repurchase the Takeback 2L Notes (a) 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) at a price of 100% of their principal amount plus accrued and unpaid interest, if any, with the net proceeds of certain asset sales. These obligations are subject to certain qualifications and exceptions.
The Takeback 2L Notes Indenture 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 Takeback 2L Notes Indenture could result in the acceleration of the Takeback 2L Notes and could cause a cross-default that could result in the acceleration of other indebtedness of Mallinckrodt plc and its subsidiaries. The Takeback 2L Notes are jointly and severally guaranteed, subject to certain exceptions, on a secured, unsubordinated basis by Mallinckrodt plc and the Subsidiary Note Guarantors. The Takeback 2L Notes and the guarantees thereof are secured by liens on the same assets of the Issuers, Mallinckrodt plc and the Subsidiary Note Guarantors that are subject to liens securing the Takeback Term Loans, subject to certain exceptions.
Accounts Receivable Financing Facility
On the Effective Date, MEH, Inc. ("MEH"), as servicer, ST US AR Finance LLC, a direct wholly owned subsidiary of MEH ("ST US AR"), as borrower, the lenders party thereto, and the letter of credit issuers party thereto entered into a receivables financing facility ("Receivables Financing Facility") pursuant to an ABL Credit Agreement ("Receivables Financing Credit Agreement") and a Purchase and Sale Agreement ("Purchase and Sale Agreement"). Under the Receivables Financing Facility, ST US AR may borrow money up to an amount based on a borrowing base with a maximum draw of up to $200.0 million, which may vary depending on the underlying receivables amount. Borrowings are secured by a first-lien security interest under the Receivables Financing Facility on existing and future accounts receivables and related assets that have been sold from certain subsidiaries of MEH to ST US AR. The Receivables Financing Facility includes customary affirmative and negative covenants for transactions of this type. From the closing date until the last day of the first fiscal quarter after the closing date, borrowings bear interest at a rate of (a) either (i) the alternate base rate or (ii) SOFR, and (b) an applicable margin. On the first day of each fiscal quarter thereafter, the applicable margins shall be determined from a pricing grid based upon the historical excess availability for the most recent fiscal quarter ended immediately prior. The Receivables Financing Facility matures on the earlier of June 16, 2026 and a date that is 91 days prior to the maturity date of other material debt or any other material indebtedness that is incurred after the closing date. ST US AR may borrow, pay or prepay and reborrow under the Receivables Financing Facility at any time. So long as there is not an overadvance under the Receivables Financing Facility, and subject to certain other conditions, ST US AR can elect to repay borrowings or use cash to make distributions to MEH and certain subsidiaries of MEH that have contributed receivables to ST US AR. The obligations under the Receivables Financing Facility are not guaranteed by MEH or any of its restricted subsidiaries. The Receivables Financing Facility is subject to customary events of defaults for transactions of this type. As of December 31, 2021,30, 2022 (Successor), the Company had no outstanding borrowings on its Receivables Financing Facility.
Applicable interest rate
As of December 30, 2022 (Successor), the applicable interest rate and outstanding borrowingsprincipal on the Company's variable-rate debt instruments were as follows:
| | | | | | | | | | | |
| Applicable interest rate (1) | | Outstanding borrowings |
| Term loan due September 2024 | 6.00 | % | | $ | 1,396.5 | |
| Term loan due February 2025 | 6.25 | | | 370.7 | |
| Revolving credit facility | 4.42 | | | 900.0 | |
| | | | | | | | | | | |
| Applicable interest rate | | Outstanding principal |
| Fixed-rate instruments | 10.54 | % | | $ | 1,795.2 | |
| 2017 Replacement Term Loan due September 2027 | 9.99 | | | 1,374.1 | |
| 2018 Replacement Term Loan due September 2027 | 10.24 | | | 364.8 | |
(1)Includes the incremental 200 basis points and 250 basis points related to the cash adequate protection payments for the revolving credit facility and senior secured term loans, respectively. Refer to Note 2 for further information.
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 not subject to compromise was classified as current on the consolidated balance sheet as of December 31, 2021. The Company's stated long-term debt principal maturity amounts as of December 31, 202130, 2022 are as follows:
| | | | | |
Fiscal 20222023 | $ | 1,539.2 | |
Fiscal 2023 | 671.344.1 | |
| Fiscal 2024 | 1,371.133.0 | |
| Fiscal 2025 | 1,564.2861.0 | |
| Fiscal 2026 | 44.0 | |
| Fiscal 2027 | 1,573.7 | |
| |
Defined Benefit Plans
The Company sponsors a number of defined benefit retirement plans covering certain of its U.S. employees and non-U.S. employees. As of December 31, 2021,30, 2022 (Successor), U.S. plans represented 36.1%33.9% of the Company's remaining projected benefit obligation. The Company generally does not provide postretirement benefits other than retirement plan benefits for its employees; however, certain of the Company's U.S. employees participate in postretirement benefit plans that provide medical benefits. These plans are unfunded.
On November 16, 2020, the Debtors received approval from the Bankruptcy Court to maintain foreign pensionThe benefit plans and certain postretirement benefit plans during the pendency of the Chapter 11 Cases. As such, these obligations are not classified as LSTCobligation recognized on the consolidated balance sheets were $18.7 million and $27.3 million as of December 30, 2022 (Successor) and December 31, 2021 (Predecessor), respectively, for pension benefits and $26.8 million and $37.3 million as of December 30, 2022 (Successor) and December 25, 2020. For further information refer31, 2021 (Predecessor), respectively, for postretirement benefits. The weighted-average discount rate to Note 2.
The net periodicdetermine benefit cost (credit)obligations for the Company's pension and postretirement benefit plans was as follows:
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| Pension Benefits | | Postretirement Benefits |
| Fiscal Year | | Fiscal Year |
| 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
| Service cost | $ | 0.2 | | | $ | 0.2 | | | $ | 0.1 | | | $ | — | | | $ | — | | | $ | — | |
| Interest cost | 0.3 | | | 0.5 | | | 0.7 | | | 0.7 | | | 1.2 | | | 1.6 | |
| | | | | | | | | | | |
| Amortization of net actuarial loss | 0.9 | | | 0.7 | | | 0.5 | | | 0.2 | | | — | | | — | |
| Amortization of prior service cost (credit) | 0.1 | | | 0.1 | | | 0.2 | | | (2.1) | | | (2.1) | | | (2.1) | |
| | | | | | | | | | | |
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| Net periodic benefit cost (credit) | $ | 1.5 | | | $ | 1.5 | | | $ | 1.5 | | | $ | (1.2) | | | $ | (0.9) | | | $ | (0.5) | |
The following table represents the changes in benefit obligations and the net amounts recognized on the consolidated balance sheets for pension and postretirement benefit plans at the end of each period:
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | Postretirement Benefits |
| December 31,
2021 | | December 25,
2020 | | December 31,
2021 | | December 25,
2020 |
| Change in benefit obligations: | | | | | | | |
| Projected benefit obligations at beginning of year | $ | 29.4 | | | $ | 27.0 | | | $ | 40.1 | | | $ | 40.5 | |
| Service cost | 0.2 | | | 0.2 | | | — | | | — | |
| Interest cost | 0.3 | | | 0.5 | | | 0.7 | | | 1.2 | |
| Actuarial (gain) loss | (0.9) | | | 1.8 | | | (1.7) | | | 1.2 | |
| Benefits and administrative expenses paid | (0.7) | | | (1.5) | | | (1.8) | | | (2.8) | |
| Plan settlements | — | | | (0.1) | | | — | | | — | |
| | | | | | | |
| | | | | | | |
| Currency translation | (1.0) | | | 1.5 | | | — | | | — | |
| Projected benefit obligations at end of year | $ | 27.3 | | | $ | 29.4 | | | $ | 37.3 | | | $ | 40.1 | |
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| Pension Benefits | | Postretirement Benefits |
| December 31,
2021 | | December 25,
2020 | | December 31,
2021 | | December 25,
2020 |
| Amounts recognized on the consolidated balance sheet: | | | | | | | |
| | | | | | | |
| Current liabilities | $ | 0.8 | | | $ | 0.8 | | | $ | 1.7 | | | $ | 1.9 | |
| Non-current liabilities | 16.7 | | | 18.9 | | | 13.4 | | | 15.5 | |
| Liabilities subject to compromise | 9.8 | | | 9.7 | | | 22.2 | | | 22.7 | |
| Net amount recognized on the consolidated balance sheet | $ | 27.3 | | | $ | 29.4 | | | $ | 37.3 | | | $ | 40.1 | |
| | | | | | | |
| Amounts recognized in accumulated other comprehensive loss consist of: | | | | | | | |
| Net actuarial loss | $ | (9.7) | | | $ | (11.8) | | | $ | (0.1) | | | $ | (2.0) | |
| Prior service (cost) credit | — | | | (0.1) | | | 1.7 | | | 3.8 | |
| Net amount recognized in accumulated other comprehensive loss | $ | (9.7) | | | $ | (11.9) | | | $ | 1.6 | | | $ | 1.8 | |
The estimated amounts that will be amortizedranged from accumulated other comprehensive loss into net periodic benefit cost (credit) in fiscal 2022 are as follows:
| | | | | | | | | | | |
| Pension Benefits | | Postretirement Benefits |
| Amortization of net actuarial loss (gain) | $ | 0.6 | | | $ | (0.1) | |
| Amortization of prior service credit | — | | | (1.7) | |
Actuarial Assumptions
Weighted-average assumptions used each period1.0% to determine net periodic benefit cost for the Company's pension plans were as follows:
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| U.S. Plans | | Non-U.S. Plans |
| Fiscal Year | | Fiscal Year |
| 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
| Discount rate | 1.8 | % | | 2.8 | % | | 4.0 | % | | 1.0 | % | | 1.3 | % | | 2.0 | % |
| | | | | | | | | | | |
| Rate of compensation increase | — | | | — | | | — | | | 2.5 | | | 2.5 | | | 2.5 | |
Weighted-average assumptions used each period to determine benefit obligations for the Company's pension plans were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Plans | | Non-U.S. Plans |
| Fiscal Year | | Fiscal Year |
| 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
| Discount rate | 2.3 | % | | 1.8 | % | | 2.8 | % | | 1.3 | % | | 1.0 | % | | 1.3 | % |
| Rate of compensation increase | — | | | — | | | — | | | 2.5 | | | 2.5 | | | 2.5 | |
5.5%. For the Company's unfunded U.S. plans, the discount rate is based on the market rate for a broad population of AA-rated (Moody's Investor Services, Inc. or Standard & Poor's Corporation) corporate bonds over $250.0 million. For the Company's U.S. plans that were funded in prior periods, the discount rate was based on the estimated final settlement discount rates based on quotes received from a group of well-rated insurance carriers who are active in the single premium group annuity marketplace. The group of insurance carriers are rated A or better by AM best.
The weighted-average discount rate used to determine net periodic benefit credit and obligations for the Company's postretirement benefit plans were as follows:
| | | | | | | | | | | | | | | | | |
| Fiscal Year |
| 2021 | | 2020 | | 2019 |
| Net periodic benefit credit | 2.0 | % | | 3.0 | % | | 4.1 | % |
| Benefit obligations | 2.5 | | | 2.0 | | | 3.0 | |
Healthcare cost trend assumptions for postretirement benefit plans were as follows:
| | | | | | | | | | | |
| December 31,
2021 | | December 25,
2020 |
| Healthcare cost trend rate assumed for next fiscal year | 5.7 | % | | 5.8 | % |
| Rate to which the cost trend rate is assumed to decline | 4.5 | | | 4.5 | |
| Fiscal year the ultimate trend rate is achieved | 2038 | | 2038 |
Contributions
The Company's funding policy is to make contributions in accordance with the laws and customs of the various countries in which the Company operates, as well as to make discretionary voluntary contributions from time to time. In fiscal 2021 and 2020 the Company made $0.7 million and $1.6 million in contributions, respectively, to the Company's pension plans.
Expected Future Benefit Payments
Benefit payments expected to be paid, reflecting future expected service as appropriate, were as follows:
| | | | | | | | | | | |
| Pension Benefits | | Postretirement Benefits |
| Fiscal 2022 | $ | 2.9 | | | $ | 4.7 | |
| Fiscal 2023 | 1.7 | | | 3.0 | |
| Fiscal 2024 | 1.7 | | | 2.9 | |
| Fiscal 2025 | 1.6 | | | 2.8 | |
| Fiscal 2026 | 1.5 | | | 2.7 | |
| Fiscal 2027 - 2031 | 6.9 | | | 11.7 | |
Defined Contribution Retirement Plans
The Company maintains one active tax-qualified 401(k) retirement plan and one active non-qualified deferred compensation plan in the U.S. The 401(k) retirement plan provides for an automatic Company contribution of 3% of an eligible employee's pay, with an additional Company matching contribution generally equal to 50.0% of each employee's elective contribution to the plan up to 8% of the employee's eligible pay. The deferred compensation plan permitspermitted eligible employees to defer a portion of their compensation. The deferred compensation plan is currently frozen for employee deferrals. Total defined contribution expense related to continuing operations was $7.8 million, $9.6 million, $22.2 million and $26.0 million and $21.9 million for the period June 17, 2022 through December 30, 2022 (Successor), January 1, 2022 through June 16, 2022 (Predecessor), fiscal 2021 (Predecessor) and fiscal 2020 and 2019,(Predecessor), respectively.
Rabbi Trusts and Other Investments
The Company maintains several rabbi trusts, the assets of which are used to pay retirement benefits. The rabbi trust assets are subject to the claims of the Company's creditors in the event of the Company's insolvency. Plan participants are general creditors of the Company with respect to these benefits. The trusts primarily hold life insurance policies and debt and equity securities, the value of which is included in other assets on the consolidated balance sheets. Note 20 provides additional information regarding the debt and equity securities. The carrying value of the 5755 and 6157 life insurance contracts held by these trusts was $43.4$39.5 million and $45.0$43.4 million as of December 30, 2022 (Successor) and December 31, 2021 and December 25, 2020,(Predecessor), respectively. These contracts had a total death benefit of $86.4$81.0 million and $92.7$86.4 million as of December 30, 2022 (Successor) and December 31, 2021 and December 25, 2020,(Predecessor), respectively. However, there are outstanding loans against the policies amounting to $20.8$21.6 million and $23.2$20.8 million as of December 30, 2022 (Successor) and December 31, 2021 and December 25, 2020,(Predecessor), respectively.
The Company has insurance contracts that serve as collateral for certain of the Company's non-U.S. pension plan benefits. These insurance contracts totaled $7.9$7.3 million and $7.3$7.9 million as of December 30, 2022 (Successor) and December 31, 2021 and December 25, 2020,(Predecessor), respectively. These amounts were included in other assets on the consolidated balance sheets.
Preferred Shares
Mallinckrodt is authorized to issue 500,000,000 preferred shares, par value of $0.20$0.01 per share, none of which were issued or outstanding atas of December 31, 2021.30, 2022 (Successor). Rights as to dividends, return of capital, redemption, conversion, voting and otherwise with respect to these shares may be determined by Mallinckrodt's Board of Directors on or before the time of issuance. In the event of the liquidation of the Company, the holders of any preferred shares then outstanding would, if issued on such terms that they carry a preferential distribution entitlement on liquidation, be entitled to payment to them of the amount for which the preferred shares were subscribed and any unpaid dividends prior to any payment to the ordinary shareholders.
Share Repurchases
From time to time, the Company'sThe Predecessor's Board of Directors havepreviously authorized share repurchase programs. Under the March 2017 Repurchase Program, which has no time limit or expiration date, $1,000.0 million was authorized for share repurchase. No shares were repurchased during the period from January 1, 2022 through June 16, 2022 (Predecessor), fiscal 2021(Predecessor) and fiscal 2020 (Predecessor). The March 2017 Repurchase Program
was terminated upon the emergence from bankruptcy.
On September 29, 2022, during the 2022 Annual General Meeting of Shareholders, the Company’s shareholders approved that the Company may make market purchases or overseas market purchases of a maximum of 1,317,093 Ordinary Shares of the Company. The maximum price to be paid for any Ordinary Share shall be an amount equal to 110% of the closing price on the relevant stock exchange on which the Ordinary Shares are listed (such as the New York Stock Exchange American LLC) for the Ordinary Shares on the trading day preceding the day on which the relevant share is purchased by the Company or the relevant subsidiary of the Company, and the minimum price to be paid for any Ordinary Share shall be the nominal value of such share. This repurchase program will expire at the close of business on March 29, 2024 unless renewed at the Annual General Meeting of Shareholders in fiscal 2021, 2020 and 2019. The remaining amount available for repurchase is $564.2 million, subject to limitations under Chapter 11.2023. No shares were repurchased during the period from June 17, 2022 through December 30, 2022 (Successor).
The Company also repurchases shares from certain employees in order to satisfy employee tax withholding requirements in connection with the vesting of restricted shares. In addition, the Company repurchases shares to settle certain option exercises. The Company spent zero for each of the period from June 17, 2022 through December 30, 2022 (Successor), the period from January 1, 2022 through June 16, 2022 (Predecessor) and fiscal 2021 (Predecessor), respectively, and $0.4 million during and $2.6 millionfiscal 2020 (Predecessor) to acquire shares in connection with equity-based awards in fiscal 2021, 2020 and 2019, respectively.
Total share-based compensation cost was $1.4 million, $1.7 million, $10.2 million and $25.3 million and $33.8 million for the period June 17, 2022 through December 30, 2022 (Successor), the period January 1, 2022 through June 16, 2022 (Predecessor), fiscal 2021 (Predecessor) and fiscal 2020 and 2019,(Predecessor), respectively. These amounts are generally included within SG&A expenses in the consolidated statements of operations. The Company recognized a related tax benefit associated with this expense of zero in bothfor the period June 17, 2022 through December 30, 2022 (Successor), the period January 1, 2022 through June 16, 2022 (Predecessor), fiscal 2021 (Predecessor) and fiscal 2020 and $1.2 million in fiscal 2019.(Predecessor).
Stock Compensation Plans
OverOn the years,Effective Date, all outstanding equity-based awards under the Company has adopted and amended its Mallinckrodt Pharmaceuticals Stock and Incentive Plan, as amended and restated effective February 23, 2022, were automatically cancelled without consideration.
A new Mallinckrodt Pharmaceuticals Stock and Incentive Plan became effective on the Effective Date, which provides for the award of share options, share appreciation rights, annual performance bonuses, long-term performance awards, restricted units, restricted shares, deferred share units, promissory shares and other share-based awards (collectively, "Awards"). The maximum number of common shares to be issued as Awards, subject to adjustment as provided under the terms of the respective plans were as follows:
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| | Maximum Number of Common Shares to be Issued as Awards (in millions) |
2013 Plan | | 5.7 | |
2015 Plan | | 17.8 | |
2018 Plan | | 26.8 | |
Share options. Share options are granted to purchase the Company's ordinary shares at prices that are equal to the fair market value of the shares on the date the share option is granted. Share options generally vest in equal annual installments over a period of four years and expire ten years after the date of grant. The grant-date fair value of share options, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period. Forfeitures are estimated based on historical experience.
Share option activity and information was as follows:
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| Share Options | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term
(in years) | | Aggregate Intrinsic Value |
| Outstanding as of December 28, 2018 | 7,007,051 | | | $ | 38.74 | | | | | |
| Granted | 1,378,175 | | | 22.09 | | | | | |
| Exercised | (45,324) | | | 20.67 | | | | | |
| Expired/Forfeited | (1,449,202) | | | 34.80 | | | | | |
| Outstanding as of December 27, 2019 | 6,890,700 | | | 36.39 | | | | | |
| Expired/Forfeited | (820,988) | | | 39.65 | | | | | |
| Outstanding as of December 25, 2020 | 6,069,712 | | | 35.95 | | | | | |
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| Expired/Forfeited | (516,193) | | | 45.63 | | | | | |
| Outstanding as of December 31, 2021 | 5,553,519 | | | 35.05 | | | 1.7 | | $ | — | |
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| Vested and non-vested expected to vest as of December 31, 2021 | 5,352,763 | | | 35.14 | | | 5.5 | | $ | — | |
| Exercisable as of December 31, 2021 | 4,616,911 | | | 38.56 | | | 2.0 | | — | |
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| Share Options | | Weighted-Average Exercise Price | | | | |
| | | | | | | |
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| Outstanding as of December 27, 2019 (Predecessor) | 6,890,700 | | | 36.39 | | | | | |
| Expired/Forfeited | (820,988) | | | 39.65 | | | | | |
| Outstanding as of December 25, 2020 (Predecessor) | 6,069,712 | | | 35.95 | | | | | |
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| Expired/Forfeited | (516,193) | | | 45.63 | | | | | |
| Outstanding as of December 31, 2021 (Predecessor) | 5,553,519 | | | 35.05 | | | | | |
| Expired/Forfeited | (5,553,519) | | | 35.05 | | | | | |
| Outstanding as of June 16, 2022 (Predecessor) | — | | | — | | | | | |
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As of December 31, 2021, there was $1.6 million of total unrecognized compensation cost related to non-vested share option awards, which is expected to be recognized over a weighted-average period of 1.0 year.
The grant-date fair value of share options 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 life assumption is based on the contractual and vesting term of the share option, employee exercise patterns and employee post-vesting termination behavior. 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 life assumed at the date of grant. The weighted-average assumptions used in the Black-Scholes pricing model for shares granted in fiscal 2019, along with the weighted-average grant-date fair value, were as follows:
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Expected share price volatility | | | | | 45.8 | % |
Risk-free interest rate | | | | | 2.2 | % |
Expected annual dividend per share | | | | | — | % |
Expected life of options (in years) | | | | | 5.3 |
Fair value per option | | | | | $ | 9.66 | |
In fiscal 2019, the total intrinsic value of options exercised was $0.3 million and the related tax benefit was $0.1 million.
Restricted share units. Recipients of restricted share units ("RSUs") have no voting rights and receive dividend equivalent units that vest upon the vesting of the related shares. RSUs generally vest in equal annual installments over a period of fourthree years. Restrictions on RSUs lapse upon normal retirement, death or disability of the employee. The grant-date fair value of RSUs, adjusted for estimated forfeitures, is recognized as expense on a straight-line basis over the service period. The fair market value of RSUs granted is determined based on the market value of the Company's shares on the date of grant.
RSU activity was as follows:
| | | Shares | | Weighted-Average
Grant-Date Fair Value | | Shares | | Weighted-Average
Grant-Date Fair Value |
| Non-vested as of December 28, 2018 | 1,685,101 | | | $ | 29.54 | | |
| Granted | 755,180 | | | 20.13 | | |
| Exercised | (713,274) | | | 35.29 | | |
| Expired/Forfeited | (307,987) | | | 24.81 | | |
| Non-vested as of December 27, 2019 | 1,419,020 | | | 22.68 | | |
| | Non-vested as of 12/27/2019 (Predecessor) | | Non-vested as of 12/27/2019 (Predecessor) | 1,419,020 | | | 22.68 | |
| | Exercised | Exercised | (647,167) | | | 24.23 | | Exercised | (647,167) | | | 24.23 | |
| Expired/Forfeited | Expired/Forfeited | (281,182) | | | 22.11 | | Expired/Forfeited | (281,182) | | | 22.11 | |
| Non-vested as of December 25, 2020 | 490,671 | | | 20.96 | | |
| Non-vested as of 12/25/2020 (Predecessor) | | Non-vested as of 12/25/2020 (Predecessor) | 490,671 | | | 20.96 | |
| | Exercised | Exercised | (186,930) | | | 23.43 | | Exercised | (186,930) | | | 23.43 | |
| Expired/Forfeited | Expired/Forfeited | (60,844) | | | 19.58 | | Expired/Forfeited | (60,844) | | | 19.58 | |
| Non-vested as of December 31, 2021 | 242,897 | | | 19.40 | | |
| Non-vested as of 12/31/2021 (Predecessor) | | Non-vested as of 12/31/2021 (Predecessor) | 242,897 | | | 19.40 | |
| Expired/Forfeited | | Expired/Forfeited | (242,897) | | | 19.40 | |
| Non-vested as of June 16, 2022 (Predecessor) | | Non-vested as of June 16, 2022 (Predecessor) | — | | | — | |
| | | Non-vested as of June 17, 2022 (Successor) | | Non-vested as of June 17, 2022 (Successor) | — | | | — | |
| Granted | | Granted | 890,485 | | | 12.03 | |
| Non-vested as of December 30, 2022 (Successor) | | Non-vested as of December 30, 2022 (Successor) | 890,485 | | | 12.03 | |
The total vest date fair value of Mallinckrodt RSUs vestedRSU awards granted during fiscal 2021the period from June 17, 2022 through December 30, 2022 (Successor) was $4.4$10.7 million. As of December 31, 2021,30, 2022 (Successor), there was $1.9$9.4 million of total unrecognized compensation cost related to non-vested RSUs granted, which is expected to be recognized over a weighted-average period of 1.12.2 years.
Performance share units. Similar to recipients of RSUs, recipients of performance share units ("PSUs") have no voting rights and receive dividend equivalent units. The grant-date fair value of PSUs, adjusted for estimated forfeitures, is generally recognized as expense on a straight-line basis from the grant-date through the end of the performance period. The vesting of PSUs and related dividend equivalent units is generally based on various performance metrics and relative total shareholder return (total shareholder return for the Company as compared to total shareholder return of the PSU peer group), measured over a three year performance period. The PSU peer group is comprised of various healthcare companies which attempts to replicate the Company's mix of businesses. Depending on Mallinckrodt's relative performance during the performance period, a recipient of the award is entitled to receive a number of ordinary shares equal to a percentage, ranging from 0.0% to 200.0%, of the award granted.
During December 2020, all outstanding PSUs were cancelled by the Human Resources and Compensation CommitteeA portion of the PSUs granted in fiscal 2022 will be settled in shares and are classified as equity-based awards, and a portion of the PSUs have the ability to be settled in either shares or cash and are classified as liability-based awards. The Company recognized $0.1 million of equity-based compensation costs during the period from June 17, 2022 through December 30, 2022 (Successor). The fair value of the liability-based awards is measured quarterly and is based on the Company's Board of Directors.performance. Payment, if any, for the liability-based awards is expected to be made in fiscal 2024.
PSU activity was as follows (1):
| | | Shares | | Weighted-Average
Grant-Date Fair Value | | Shares | | Weighted-Average
Grant-Date Fair Value |
| Non-vested as of December 28, 2018 | 1,161,529 | | | $ | 28.61 | | |
| Granted | 448,363 | | | 32.46 | | |
| Forfeited | (414,387) | | | 30.54 | | |
| | Non-vested as of December 27, 2019 | 1,195,505 | | | 23.85 | | |
| | Non-vested as of December 27, 2019 (Predecessor) | | Non-vested as of December 27, 2019 (Predecessor) | 1,195,505 | | | 23.85 | |
| | Forfeited | Forfeited | (1,195,505) | | | 23.85 | | Forfeited | (1,195,505) | | | 23.85 | |
| | Non-vested as of December 25, 2020 | — | | | — | | |
| Non-vested as of December 25, 2020 (Predecessor) | | Non-vested as of December 25, 2020 (Predecessor) | — | | | — | |
| | | Non-vested as of June 17, 2022 (Successor) | | Non-vested as of June 17, 2022 (Successor) | — | | | — | |
| Granted | | Granted | 675,821 | | | 8.34 | |
| Non-vested as of December 30, 2022 (Successor) | | Non-vested as of December 30, 2022 (Successor) | 675,821 | | | 8.34 | |
(1) The number of shares disclosed within this table are at the target number of 100.0%.
The Company generally uses the Monte Carlo model to estimate the probability of satisfying the performance criteria and the resulting fair value of PSU awards. The assumptions used in the Monte Carlo model for PSUs granted during fiscal 2019the period June 17, 2022 through December 30, 2022 (Successor) were as follows:
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| Expected stock price volatility | | | | | 55.238.9 | % |
| Peer group stock price volatility | | | | | 41.3128.0 | |
| Correlation of returns | | | | | 47.824.4 | |
Employee Stock Purchase Plans
Effective March 16, 2016, upon approval byThe weighted-average grant-date fair value per share of PSUs granted was $8.34 and $2.51 for the shareholdersequity-based and liability-based awards from the period from June 17, 2022 through December 30, 2022 (Successor), respectively. As of Mallinckrodt,December 30, 2022, there was $5.5 million and $1.7 million of unrecognized compensation cost related to the Company adopted a new qualified Mallinckrodt Employee Stock Purchase Plan ("ESPP"). Substantially all full-time employees of the Company's U.S. subsidiariesequity-based and employees of certain qualified non-U.S. subsidiariesliability-based awards, respectively, which are eligible to participate in the ESPP. Eligible employees authorize payroll deductionsboth expected to be made to purchase shares at 15.0% below the market price at the beginning or endrecognized over a weighted average period of an offering period. Employees
are eligible to authorize withholdings such that purchases of shares may amount to $25,000 of fair market value for each calendar year as prescribed by the IRC Section 423. Mallinckrodt has elected to deliver shares by utilizing treasury stock accumulated by the Company. The ESPP was suspended effective June 30, 2019 and remains unavailable as of December 31, 2021.1.9 years.
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 obligationswas $14.9 million and included in LSTC and other liabilities on the Company's consolidated balance sheetssheet as of December 31, 2021 and December 25, 2020, respectively, was $14.9 million and $15.4 million, respectively,(Predecessor), of which $12.1 million and $12.7 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 December 31, 2021 and December 25, 2020. As(Predecessor). The liability relating to all of December 31, 2021, the maximum future payments the Company could be required to make under these indemnification obligations was $70.2 million.governed by a contract that was rejected as part of Chapter 11 and is no longer a liability of the Successor Company. The Company was required to pay $30.0 million into an escrow account as collateral to the purchaser,purchaser. The contract governing the escrow account was assumed in the Chapter 11 proceedings. As of whichDecember 30, 2022 (Successor) and December 31, 2021 (Predecessor), $19.3 million and $19.0 million remained in restricted cash, included in other long-term assets on the consolidated balance sheets, asrespectively. As of both December 31, 2021 and December 25, 2020.30, 2022 (Successor), the Company does not expect to make future payments related to these indemnification obligations.
The Company has recorded liabilities for known indemnification obligations included as part of environmental liabilities, which are discussed in Note 19.
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 December 31, 2021,30, 2022 (Successor), the Company had various other letters of credit, guarantees and surety bonds totaling $34.7$30.1 million and restricted cash of $41.2$37.9 million held in segregated accounts primarily to collateralize surety bonds for the Company's environmental liabilities.
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| 19. | Commitments and Contingencies |
The Company is subject to various legal proceedings and claims, including government investigations, environmental matters, product liability matters, patent infringement claims, antitrust matters, securities class action lawsuits, personal injury claims, employment disputes, contractual and other commercial disputes, and other legal proceedings, all in the ordinary course of business, 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.
On October 12, 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 litigation and proceedings against the Company have been automatically stayed, subject to certain limited exceptions. In addition, the Bankruptcy Court issued orders enjoining certain litigation against the Company and various individuals named in certain of the litigation described below that might otherwise be subject to such an exception. For further information about the Chapter 11 Cases, refer to Note 2.
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 March 14, 2022, the cases the Company is aware of include, but are not limited to, approximately 2,619 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 124 cases filed by individuals; approximately 8 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 March 14, 2022, 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. 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 ("CEO"), Mark C. Trudeau, asserting similar claims relating to the marketing and distribution of prescription opioid medications. Rhode Island has voluntarily agreed to a stay of the lawsuit against Mr. Trudeau.
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 resolved 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 agreed to provide $6.0 million in generic products, including addiction treatment products and a $0.5 million payment upon the two-year anniversary of the settlement agreement 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.
Other lawsuits remain pending in various state courts. In some jurisdictions, certain of the state lawsuits have been consolidated or coordinated for pre-trial proceedings before a single court within their respective state court systems.
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, product liability, consumer fraud, unfair or deceptive trade practices, false advertising, insurance fraud, unjust enrichment, negligence, 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 by 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"). Furthermore, under the terms of the Opioid-Related Litigation Settlement, subject to court approval and other conditions, it was contemplated that, the Company would (1) make cash payments of $1,600.0 million in structured payments over eight years, beginning upon the Specialty Generics Subsidiaries' emergence from the completed Chapter 11 case, the substantial majority of which would be expected to be contributed to the Opioid Claimant Trust and (2) issue warrants with an eight year term to the Opioid Claimant Trust exercisable at a strike price of $3.15 per share to purchase the Company's ordinary shares that would represent
approximately 19.99% of the Company's fully diluted outstanding shares, including after giving effect to the exercise of the warrants (the “Settlement Warrants”).
Amended Proposed Opioid-Related Litigation Settlement. In conjunction with the Company's Chapter 11 filing on October 12, 2020, the Company entered into a RSA which includes a proposed resolution of all opioid-related claims against the Company and its subsidiaries that supersedes the Opioid-Related Litigation Settlement. On September 2, 2021, the Debtors reached an agreement in principle with the Opioid Claimants, which supersedes the Amended Opioid-Related Litigation Settlement as proposed in the RSA. The agreement in principle provides that, upon the Company'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 $1,725.0 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; (iii) a $150.0 million payment upon each of the third through seventh anniversaries of emergence; and (iv) a $125.0 million payment upon the eighth anniversary of emergence with an eighteen month prepayment option at a discount for all but the first payment.
•Opioid claimants would also receive warrants for approximately 19.99% of the reorganized Company's new outstanding shares, after giving effect to the exercise of the warrants, but subject to dilution from equity reserved under the management incentive plan, exercisable at any time on or prior to the sixth anniversary of the Company's emergence, at a strike price reflecting an aggregate equity value for the reorganized Debtors of $1,551.0 million (the "New Opioid Warrants").
•Upon commencing the Chapter 11 filing, the Company has begun to comply with an agreed-upon operating injunction with respect to the operation of its opioid business.
In accordance with the announced agreement in principle, the Company recorded an accrual for the additional structured cash payment related to this contingency of $125.0 million during fiscal 2021. As of December 31, 2021 and December 25, 2020, the Company maintained an accrual for this contingency of $1,725.0 million and $1,600.0 million within LSTC, respectively. No value has been ascribed to the warrants as of December 31, 2021 and December 25, 2020 as the Company cannot reasonably estimate the equity value upon emergence. For further information on the terms of this proposed resolution, refer to Note 2.
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 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. On December 15, 2020, the Company received a subpoena from the Western District of Virginia for documents related to services provided by an outside consulting firm. 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, Her Majesty the Queen in right of the Province of British Columbia ("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., Court File 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; (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; or (5) falling within such other class definition as the British Columbia Court may approve. 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 due to Methadose allegedly being a significantly less effective treatment than generic compounded methadone. The suit asserts that the Province, the College and the Mallinckrodt defendants knew (or ought to have known) about, 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) ("Canadian Court") 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 Canadian Court granted a further order on February 25, 2021, staying the British Columbia class action proceedings against all defendants. 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. Together with the other plaintiffs, the Company filed a petition for rehearing en banc to challenge the panel's decision, which was denied on December 18, 2020. On February 12, 2021, the Second Circuit granted the parties' request to stay the mandate. The parties filed a petition for certiorari with the Supreme Court, which was denied. On October 21, 2021, the District Court vacated its December 19, 2018 order, except for its invalidation of the "pass through prohibition" on the basis it violates the Commerce Clause. In April 2019, the State of New York passed its 2020 budget, which amended the OSA so that 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.
Acthar Gel-Related Matters
SEC Subpoena. In August 2019, the Company received a subpoena from the SEC for documents related to the Company's disclosure of its dispute with the HHS and CMS (together with HHS, the "Agency") concerning the base date average manufacturer price ("AMP") for Acthar Gel under the Medicaid Drug Rebate Program, for Mallinckrodt's Acthar Gel, which iswas also the subject of litigation that the Company filed against the Agency (see Medicaid Lawsuit below). OnAgency. The SEC issued subsequent subpoenas on January 7, 2022 the SEC issued a subsequent subpoena related to this matter,and September 28, 2022, requesting additional documents from the Company. The Company is cooperating
In connection with the SEC's investigation, which is ongoing.
Medicaid Lawsuit. In May 2019, CMSon January 13, 2023, the SEC staff issued a final decision directingWells Notices to the Company and individuals, including certain of its current and former executive officers, who were employed during 2019 (collectively, the “Individuals”). The notices indicate that the SEC staff has made a preliminary determination to revertrecommend that the SEC file an enforcement action against the Company that would allege violations of the federal securities laws, and against the Individuals that would allege violations of the federal securities laws and/or aiding and abetting violations of the federal securities laws. The recommendation as to the original base date AMP used to calculate Medicaid drug rebates for Acthar Gel despite CMS having givenCompany may involve an injunction, a cease-and-desist order and/or other appropriate relief.
The actions recommended by the previous owner of the product, Questcor, written authorization in 2012 to reset the base date AMP. Upon receipt of CMS's final decision,SEC staff would allege, among other things, that (a) the Company filed suit inimproperly omitted to disclose the D.C. District Court againstdispute with the Agency under the Administrative Procedure Act seeking to have the decision declared unlawful and set aside. In March 2020, the Company received an adverse decision from the D.C. District Court. The Company immediately sought reconsideration by the D.C. District Court, which was denied. The Company then appealed the D.C. District Court's decision to the D.C. Circuit. In June 2020, while its appeal remained pending, the Company was required to revert to the original base date AMP for Acthar in the government's price reporting system.
As a result of this contingency, the Company incurred a retrospective one-time charge of $641.1 million (the "Acthar Gel Medicaid Retrospective Rebate"), of which $536.0 million and $105.1 million was reflected as a component of net sales and operating expenses, respectively, in the consolidated statement of operations for fiscal 2020. The $105.1 million reflected as a component of operating expenses represented 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 Questcorlitigation filed by the Company in August 2014. As of December 31, 2021federal court on May 21, 2019, and December 25, 2020, $634.7 million and $638.9 million related to(b) the Medicaid lawsuit was recorded within LSTC, respectively.
The D.C. Circuit heard argument on the meritsCompany’s disclosure of the Company's appeal in September 2020, prior to the Company's filing of the Chapter 11 Cases on October 12, 2020. At the joint request of the parties, the D.C. Circuit has agreed to hold the case in abeyance pending completion of the Proposed Acthar Gel-Related Settlement, which was conditioned upon the Company entering the Chapter 11 restructuring process. Pursuant to the Proposed 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 effectiveness of the Proposed Acthar Gel-Related Settlement, the Company will dismiss its D.C. Circuit appeal. The Company has also entered into a five-year CIA with the OIG of the HHS, which took effect in March 2022. The Company has entered into the Proposed Acthar Gel-Related Settlement with the DOJ and other governmental parties solely to move past these litigation matters and disputes and does not make any admission of liability or wrongdoing.
Florida Civil Investigative Demand. In February 2019, the Companycivil investigative demand received a CID from the USAO for the Middle District of Florida for documents related to alleged payments to healthcare providers in Florida and whether those payments violated the Anti-Kickback Statute. The Company has cooperated with the investigation.
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 CEO 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. On December 10, 2021, the Committee issued its final majority report detailing findings from the investigation.
Boston Civil Investigative Demand. In January 2019, the Company received a CID from the USAOAttorney’s Office for the District of Massachusetts for documentsin January 2019 (the “Boston CID”) should have stated that the Boston CID related to the Company's participationCompany’s dispute with the Agency.
A Wells Notice is neither a formal charge of wrongdoing nor a final determination that the recipient has violated any law. Under the SEC procedures, a recipient of a Wells Notice has an opportunity to respond and make a submission to the SEC staff setting forth the recipient’s interests and position in regard to the Medicaid Drug Rebate Program. subject matter of the investigation.
The Company respondedbelieves that it has complied with all applicable laws and regulations, and it has provided a submission explaining the Company’s position and its belief that no enforcement action is warranted or appropriate. The Company understands that the Individuals have provided similar submissions to the government's requestsSEC staff. The outcome of this matter is uncertain, and cooperated with the investigation.
In March 2020, the U.S. District Court for the District of Massachusetts unsealedas a qui tam complaint under the federal FCA ("Boston FCA") againstresult, the Company in which the DOJ and 32 states and territories have intervened alleging that the Company had failedis unable to pay the correct amount of rebates for Acthar Gel. 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 lawsuitestimate the potential for damages inexposure associated with 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 consolidated balance sheet as of December 31, 2021 or December 25, 2020.matter.
As discussed above, on October 12, 2020, the Company announced the Proposed Acthar Gel-Related Settlement to resolve various Acthar Gel-related matters, which includes this associated Boston FCA lawsuit. The court administratively closed the case on November 4, 2020, upon the parties' joint request for a stay of the litigation due to the Proposed Acthar Gel-Related Settlement and Chapter 11 Cases. The Company expects the DOJ to dismiss the lawsuit after the Company's first payment toward the settlement amount.
Boston Subpoena. In December 2016, the Company received a subpoena from the USAO for the District of Massachusetts for documents related to the Company's payments to charitable foundations, the provision of financial and other support by charitable foundations to patients receiving Acthar Gel, and related matters. The Company has responded to these requests and cooperated in the investigation. The Company does not believe that the government will proceed any further with the investigation.
Questcor EDPA Qui Tam Litigation. In September 2012,Questcor received a subpoena from the USAO for the EDPA 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 EDPA unsealed two qui tam actions involving the allegations under investigation by the USAO for the EDPA. 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 FCA 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 the Proposed Acthar Gel-Related Settlement to resolve various Acthar Gel-related matters, which includes this Questcor EDPA Qui Tam Litigation. On October 15, 2020, the court agreed to stay the proceedings, at the request of the parties, as they work towards completion of the Proposed Acthar Gel-Related Settlement. The Company expects the DOJ to dismiss the lawsuit after the Company's first payment toward the settlement amount.
Other Related Matters
Florida Civil Investigative Demand. In or around February 2019, the Company received a civil investigative demand ("CID") from the U.S. Attorney's Office for the Middle District of Florida for documents related to alleged payments to healthcare providers in Florida and whether those payments violated the Anti-Kickback Statute. The Company has cooperated with the investigation.
Generic Pricing Subpoena. In March 2018, the Company received a grand jury subpoena issued by the U.S. District Court for the EDPA pursuant to which the Antitrust Division of the DOJ is seeking documents regarding generic products and pricing, communications with generic competitors and other related matters. The Company is in the process of responding to this subpoena and intends to cooperate in the investigation.
MNK 2011 Inc. (formerly known as Mallinckrodt Inc.) v. U.S. Food and Drug Administration and United States of America. In November 2014, the FDA reclassified the Company's Methylphenidate ER in the Orange Book: Approved Drug Products with Therapeutic Equivalence ("the Orange Book"). In November 2014, the Company filed a Complaint in the U.S. District Court for the District of Maryland Greenbelt Division against the FDA and the U.S. (the "MD("MD Complaint") for judicial review of the FDA's reclassification. In July 2015, the court granted the FDA's motion to dismiss with respect to three of the five counts in the MD Complaint and granted summary judgment in favor of the FDA with respect to the two remaining counts (the “MD Order”("MD Order"). On October 18, 2016, the FDA initiated proceedings, proposing to withdraw approval of the Company's Abbreviated New Drug Application ("ANDA") for Methylphenidate ER. On October 21, 2016, the U.S. Court of Appeals for the Fourth Circuit issued an order placing the Company's appeal of the MD Order in abeyance pending the outcome of the withdrawal proceedings. The parties exchanged documents and in April 2018, the Company filed its submission in support of its position in the withdrawal proceedings. A potential outcome of the withdrawal proceedings is that the Company's Methylphenidate ER products may lose their FDA approval and have to be withdrawn from the market.
Therakos® Subpoena. In March 2014, the USAO for the EDPA requested the production of documents related to an investigation of the U.S. promotion of Therakos® photopheresis ("Therakos") drug/device system UVADEX/UVAR XTS and UVADEX/CELLEX (collectively, the "Therakos System"), for indications not approved by the FDA, including treatment of patients with graft versus host disease ("GvHD") and solid organ transplant patients, including pediatric patients. The investigation also included Therakos' efforts to secure FDA approval for additional uses of, and alleged quality issues relating to, UVADEX/UVAR. In August 2015, the USAO for the EDPA sent Therakos a subsequent request for documents related to the investigation and has since made certain related requests. The Company responded to these requests. On June 28, 2021, the USAO for EDPA and the entities named as defendants in the qui tam complaint captioned United States ex. rel. Michael Johnson and Frank Strobl v. Therakos, et al., No. 12-cv-0454-JHS, that was filed under seal in 2012 filed a stipulation of dismissal in the United States District Court for the EDPA terminating the matter.
Patent Litigation
Branded Products: The Company will continue to vigorously enforce its intellectual property rights relating to its Branded products to prevent the marketing of infringing generic or competing products prior to the expiration of patents covering those products, which, if unsuccessful, could adversely affect the Company's ability to successfully maximize the value of individual Branded products and have an adverse effect on its financial condition, results of operations and cash flows. In the case of litigation filed against potential generic or competing products to Company's Branded products, those litigation matters can either be settled or the litigation pursued through a trial and any potential appeals of the lower court decision.
Amitiza Patent Litigation: 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) initiated litigation against six parties that submitted ANDAs with Paragraph IV certifications seeking to launch a generic version of Company's Amitiza product. Each of those litigation matters were subsequently settled by entering into non-exclusive license agreements that granted the right to market a competing generic version of Amitiza in the U.S. on or after a specified entry date, or earlier under certain circumstances. One party (Par Pharmaceutical) entered into a settlement agreement that granted an entry date on or after January 1, 2021, and subsequently launched an authorized generic version of Company's Amitiza product in early 2021. The other five parties (Dr. Reddy's Laboratories, Amneal Pharmaceuticals, Teva Pharmaceuticals, Sun Pharmaceutical and Zydus Pharmaceuticals) entered into settlement agreements that granted each party an entry date on or after January 1, 2023, or earlier under certain circumstances. The Company intends to vigorously enforce its intellectual property rights relating to Amitiza against any additional parties that may seek to market a generic version of Company's Amitiza product.
INOmax Patent Litigation: The Company initiated litigation against Praxair Distribution, Inc. and Praxair, Inc. (collectively “Praxair”) following receipt of a notice from Praxair concerning its submission of an ANDA containing a Paragraph IV patent certification with the FDA for a nitric oxide drug product. Praxair also made a 510(k) regulatory submission for a nitric oxide delivery system. The District Court issued a decision ruling that five of the Company's patents were invalid and six were not infringed by Praxair. The Company appealed that decision to the Federal Circuit but the District Court decision was substantively affirmed with
respect to invalidity and non-infringement. The Company's pursuit of en banc review at the Federal Circuit and review by the U.S. Supreme Court were unsuccessful. 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 adverse final outcome in the appeal of the Praxair litigation resulted in Praxair's 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. The Company continues to develop and pursue patent protection of next generation nitric oxide delivery systems and additional uses of nitric oxide. The Company further intends to vigorously enforce its intellectual property rights relating to its nitric oxide products against any additional parties that may seek to market a generic version of Company's INOmax product and/or next generation delivery systems.
Generic Products: The Company continues to pursue development of a portfolio of generic products, some of which require submission of a Paragraph IV certification against patents listed in the FDA's Orange Book for the Branded product asserting that the Company's proposed generic product does not infringe and/or the Orange Book patent(s) are invalid and/or unenforceable. In the case of litigation filed against Company for such potential generic products, those litigation matters can either be settled or the litigation pursued through a trial and any potential appeals of the lower court decision in order to successfully launch those generic products in the future.
Janssen Pharmaceuticals, Inc. and Janssen Pharmaceutica NV v. Pharmascience Inc. and SpecGx LLC. In December 2019, Janssen Pharmaceuticals, Inc. and Janssen Pharmaceutica NV (collectively “Janssen”"Janssen") initiated litigation against the Company and Pharmascience Inc. (“Pharmascience”("Pharmascience") relating to the collaboration between Company and Pharmascience that resulted in Pharmascience's ANDA submission, containing a Paragraph IV patent certification, with the FDA for a competing version of Invega Sustenna. Janssen alleges that the Company and Pharmascience infringe U.S. Patent No. 9,439,906. On July 13, 2022, the court administratively closed this case pending the outcome of the Federal Circuit's decision in Janssen Pharmaceuticals, Inc. v. Mylan Laboratories Limited, Case No. 22-1307.
Mallinckrodt Pharmaceuticals Ireland Limited et al. v. Airgas Therapeutics LLC et al. On December 30, 2022, the Company initiated litigation against Airgas Therapeutics LLC, Airgas USA LLC, and Air Liquide S.A. (collectively "Airgas") in the District of Delaware following notice from Airgas of its ANDA submission seeking approval from FDA for a generic version of INOmax® (nitric oxide) gas, for inhalation ("INOmax"). Many of the patents asserted against Airgas were previously asserted in the District of Delaware against Praxair Distribution, Inc. and Praxair, Inc. (collectively "Praxair") in 2015 and 2016 following Praxair’s submissions with FDA seeking approval for a nitric oxide drug product and delivery system. The litigation is currently stayed with respectagainst Praxair resulted in Praxair's launch of a competitive nitric oxide product. The Company continues to the Company as a resultdevelop and pursue patent protection of the Company's Chapter 11 filing. If the stay is lifted, the Companynext generation nitric oxide delivery systems and additional uses of nitric oxide and intends to vigorously defendenforce its position.
Shire Development LLC, Shire LLC and Shire US, Inc. v. SpecGx LLC. In May 2018, Shire Development LLC, Shire LLC and Shire US, Inc. (collectively “Shire”) initiated litigationintellectual property rights against the Company allegingany parties that the Company infringed U.S. Patent Nos. 6,913,768, 8,846,100, and 9,173,857 following receipt of an April 2018 notice from the Company concerning its submission of an ANDA, containing a Paragraph IV patent certification with the FDA for a competing version of Mydayis. On January 28, 2019, the parties entered into a settlement agreement under which the Company was granted the non-exclusive rightmay seek to market a competing generic version of Mydayis in the U.S. under its ANDA on Company's INOmax product and/or after May 10, 2023 (or November 10, 2023 if any pediatric exclusivity is granted by the FDA with respect to the Mydayis product), or earlier under certain circumstances.
Jazz Pharmaceuticals, Inc. and Jazz Pharmaceuticals Ireland v. Mallinckrodt PLC, Mallinckrodt Inc. and Mallinckrodt LLC. In January 2018, Jazz Pharmaceuticals, Inc. and Jazz Pharmaceuticals Ireland (collectively, "Jazz") initiated litigation against the Company alleging that the Company infringed U.S. Patent Nos. 7,668,730, 7,765,106, 7,765,107, 7,895,059, 8,457,988, 8,589,182, 8,731,963, 8,772,306, 9,050,302, and 9,486,426 following receipt of a November 2017 notice from the Company concerning its submission of an ANDA, containing a Paragraph IV patent certification with the FDA for a competing version of Xyrem. On June 4, 2018, the parties entered into a settlement agreement under which Company was granted the non-exclusive right to market a competing sodium oxybate product in the U.S. under its ANDA on or after December 31, 2025, or earlier under certain circumstances.next generation delivery systems.
Commercial and Securities Litigation
City of Rockford and Other Acthar Gel-Related Matters
On March 12, 2021, the plaintiffs in City of Rockford v. Mallinckrodt ARD, Inc., et al. (“Rockford”), United Ass'n of Plumbers and Pipefitters Local 322 of Southern New Jersey v. Mallinckrodt ARD, LLC, et al. (“Local 322”), Steamfitters Local Union No. 420 v. Mallinckrodt ARD, LLC, et al. (“Steamfitters”), Int'l Union of Operating Engineers Local 542 v. Mallinckrodt ARD Inc., et al. (“Local 542”) and Acument Global Technologies, Inc., v. Mallinckrodt ARD Inc., et al. (“Acument”) filed a motion with the Joint Panel on Multi-District Litigation (“JPML”) under 28 U.S.C. § 1407 requesting that those cases and others alleging claims related to the price of Acthar Gel (including Health Care Service Corp. v. Mallinckrodt ARD LLC, et al. (“HCSC”), City of Marietta v. Mallinckrodt ARD LLC (“Marietta”), Humana Inc. v. Mallinckrodt ARD LLC (“Humana”), MSP Recovery Claims, Series II, LLC, et al. v. Mallinckrodt ARD, Inc., et al. (“MSP”) and U.S. ex rel. Strunck v. Mallinckrodt ARD LLC ("Strunck")) be transferred to the Northern District of Illinois for coordinated or consolidated pretrial proceedings as a MDL (the “Section 1407 Motion”). The Company opposed the Section 1407 Motion. In April 2021, the U.S. District Courts in the Northern District of Illinois and the EDPA stayed consideration of the Company's motions to transfer Rockford, MSP and Steamfitters to the District of Delaware pending a decision by the JPML. The EDPA District Court also denied Local 542's motion for reconsideration of the court's order transferring that case to the District of Delaware. On June 7, 2021, the JPML denied the Section 1407 Motion on the grounds that the timing and outcome of the bankruptcy proceedings made centralization premature.
On April 30, 2021, the Company filed several pleadings in the Chapter 11 Cases in respect of Acthar Gel-based claims, including without limitation the following: (a) objections to putative class proofs of claim filed by the City of Rockford, City of Marietta,
Georgia, United Association of Plumbers and Pipefitters Local 322 of Southern New Jersey and Steamfitters Local Union No. 420; (b) objections to all purportedly Acthar Gel-related proofs of claim that state no basis for Acthar Gel-related liability against the named debtor; (c) a motion for establishment of an administrative claims bar date that would require all Acthar Gel claimants, among others, to promptly file any requests for payment of purported administrative claims; and (d) an adversary proceeding seeking a declaratory judgment that the claims of the City of Rockford, as a governmental unit, are dischargeable in the Chapter 11 Cases.
On June 16, 2021, the Bankruptcy Court held that the City of Rockford's claims are dischargeable in the Chapter 11 Cases. On June 29, 2021, the Bankruptcy Court sustained the Company's objections to the putative class proofs of claim filed by City of Rockford, City of Marietta, United Association of Plumbers and Pipefitters Local 322 of Southern New Jersey and Steamfitters Local Union No. 420.
In September 2021, the Company filed a motion in the Bankruptcy Court to assume the exclusive distribution agreement for Acthar Gel that plaintiffs in Rockford and the Rockford-related litigation matters (together, the “Ad Hoc Acthar Group”) allege is anticompetitive. The Ad Hoc Acthar Group moved to dismiss the motion to assume. In October 2021, the Company filed an adversary proceeding in the Bankruptcy Court seeking a declaratory judgment that the exclusive distribution agreement for Acthar Gel is lawful. Subsequently, the Ad Hoc Acthar Group moved to withdraw all of their claims in the bankruptcy case. The Company has objected to the withdrawal motion. The Debtors' motion to assume the exclusive distribution agreement and its adversary proceeding remain pending.
For additional details on Rockford, Local 322, Steamfitters, Local 542, Acument, Marietta, MSP and Strunck, refer below.
Law Enforcement Health Benefits Litigation. In May 2021, Law Enforcement Health Benefits, Inc. (“LEHB”) filed a putative class action complaint in the U.S. District Court for the Northern District of Illinois against the Company and certain of its officers and directors as well as third-party advisors captioned Law Enforcement Health Benefits, Inc. v. Trudeau, et al., No. 3:21-cv-50215 (N.D. Ill.) (“LEHB”). The complaintalleges antitrust claims under Section 1 and Section 2 and numerous state laws, RICO claims under 18 U.S.C. §§ 1962(a), 1962(c) and 1962(d), fraud, conspiracy to defraud, and unjust enrichment and incorporates the allegations at issue in Rockford and the Rockford-related cases discussed above. After the complaint was filed, the Company requested that the district court stay the case in light of the Chapter 11 Cases. The motion to stay was granted. In June 2021, LEHB voluntarily dismissed without prejudice the Mallinckrodt defendant entities that are debtors in the Chapter 11 Cases. In July 2021, LEHB voluntarily dismissed without prejudice most of the Company's officers and directors as named defendants in the case. As of March 10, 2022, the Bankruptcy Court lifted the stay in this matter and established an initial schedule for the proceedings. 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.
Health Care Service Corporation Litigation. In February 2020, Health Care Service Corp. ("HCSC") filed a non-class complaint against the Company in California state court alleging improper pricing, marketing and distribution of Acthar Gel, and challenging the acquisition of rights to Synacthen® Depot ("Synacthen") by the Company's predecessor-in-interest. The complaint included claims for violation of the New Jersey RICO statute and various states' antitrust laws. It also included claims 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 the Company moved to dismiss the complaint in June 2020. In August 2020, the court dismissed the antitrust and tortious interference claims without prejudice, but held that HCSC could proceed to discovery on its remaining counts. The Company disagrees with the court's decision and contests liability. The Company was preparing to move to dismiss an amended complaint when the Company filed the Chapter 11 Cases. In January 2021, the Company removed this case to federal court and moved for transfer to the District of Delaware where the Company's Chapter 11 Cases are pending. HCSC moved to remand the case back to state court. On June 17, 2021, the district court in California remanded the case back to California state court. 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.
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'scomplaint, which motion to dismiss was pending when the Company filed the Chapter 11 Cases. On October 16, 2020, the court ordered the case administratively closed in light of the Chapter 11 Cases.
Local 322. In November 2019, As a result of the United Association of Plumbers & Pipefitters Local 322 of Southern New Jersey ("Local 322") filed a putative class action complaintPlan, the litigation was discharged 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 underthereunder are now 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
payers and their beneficiaries (1) who are current citizens and residentsobligation of the Statetrust established by the Plan for the benefit of New Jersey, and (2) who, for purposes other than resale, purchasedallowed general unsecured claims ("GUC Trust"). The GUC Trust can settle the claims as long as there is no agreement to any findings nor any admission of liability 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 Company's predecessor-in-interest's acquisition of Synacthen. The Company disagrees with the court's decision and contests liability. 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. In October 2020, the court ordered the case administratively closed in light of the Company's Chapter 11 Cases. In January 2021, the Company moved to transfer this case to the District of Delaware where the Company's Chapter 11 Cases are pending. On August 23, 2021, the district court in New Jersey granted the Company's motion to transfer the case to the District of Delaware where the Chapter 11 cases are pending.
Humana Litigation. In August 2019, Humana Inc. filed a lawsuitwrongdoing against the Company in the U.S. District Court for the Central District of California captioned Humana Inc. v. Mallinckrodt ARD LLCrelevant settlement agreement. alleging violations of federal and state antitrust laws; RICO 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 and marketing of Acthar Gel and the acquisition of Synacthen by the Company's predecessor-in-interest. 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 EDPA (see Questcor EDPA Qui Tam Litigation above). In March 2020, the court granted-in-part and denied-in-part the Company's motion to dismiss Humana's claims. The courtOn February 17, 2023, this matter was 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 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 to the extent predicated on conduct before 2014 and Humana's tortious interference claims. The court ruled that Humana's federal antitrust, federal RICO, state insurance fraud and unjust enrichment claims may proceed. In September 2020, the Company answered the remaining allegations and claims of the operative complaint. In October 2020, the court entered an order acknowledging the automatic stay of this litigation pursuant to §362 of the Bankruptcy Code. In January 2021, the Company moved to transfer this case to the District of Delaware where the Company's Chapter 11 Cases are pending. Humana opposed transfer. On June 28, 2021, the district court in California granted the Company's motion to transfer the case to the District of Delaware where the Chapter 11 cases are pending. Humana, along with an assignee of claims by United Healthcare Services, Inc., Optum Rx Group Holdings and OptumRx Holdings, LLC and CVS Pharmacy, Inc. (together, the "Acthar Insurance Claimants"), has filed similar claims (including claims for administrative expense) in the Chapter 11 Cases. In August 2021, the Company filed a motion for partial summary judgement as to the Acthar Insurance Claimants' antitrust claims. In September 2021, the Bankruptcy Court denied the Company's motion for partial summary judgement in a bench ruling with a written ruling issued in October 2021. In November, 2021, the Bankruptcy Court held a multi-day trial on the Acthar Insurance Claimants' motion for allowance of post-petition administrative antitrust claims filed in the Chapter 11 Cases. In December 2021, the Bankruptcy Court ruled in favor of the Company, finding that the administrative claims were without merit. The Acthar Insurance Claimants are appealing the ruling.Company.
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 EDPA, 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 New Jersey, Illinois, Pennsylvania, Tennessee and Maryland (now dismissed; see WCBE below)dismissed), and includes references to allegations at issue in a qui tam action that was filed against the Company in the U.S. District Court for the EDPA (see Questcor EDPA Quit Tam Litigation above).EDPA. The complaint alleges RICOthe violations of Racketeer Influenced and Corrupt Organizations Act ("RICO") under 18 U.S.C. §Section 1962(c); conspiracy to violate RICO under 18 U.S.C. §Section 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 disagrees withcomplaint, and the court's decisionmatter was stayed during bankruptcy. Following lifting of the automatic stay of this litigation pursuant to Section 362 of the Bankruptcy Code and contests liability. The Company intends to vigorously defend itselfsubsequent reopening of the case 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. InEDPA, in January 2021, the Company moved to transfer this case to the District of Delaware where the Company's Chapter 11 Cases are pending. Steamfitters Local Union No. 420 opposesopposed transfer. On January 18, 2023, this matter was dismissed as to the Company.
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 discussed below,defraud and is captioned as 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 disagrees withFollowing lifting of the court's decision and contests liability. The Company intendsautomatic stay of this litigation pursuant to vigorously defend itself in this matter. At this stage,Section 362 of the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with thisBankruptcy Code, on
lawsuit. In January 2021,September 29, 2022, the court remanded the case to state court; no further action has been taken. At this stage, the Company removedwill vigorously defend itself in this case to federal courtmatter both on the merits and moved for transfer toas discharged through the District of Delaware where the Company's Chapter 11 Cases are pending. Acument has moved to remand the case back to state court.bankruptcy.
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 factsmisrepresentation captioned as the MSP and Rockford matters discussed 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. The Company disagrees with the court's decision and contest liability. 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. In January 2021, the Company removed this case to federal court and movedthe U.S. District Court for transfer to the District of Delaware where the Company's Chapter 11 Cases are pending. Local 542 has moved to remand the case back to the state court. OnEDPA. In March 10, 2021, the federal court in PennsylvaniaEDPA granted the Company's motion to transfer the case to the District of Delaware and denied without prejudice Local 542's motion to remand the case to state court. In June 2021, the District of Delaware referred this case to the Bankruptcy Court in Delaware.
Putative Class Action Litigation (MSP). In October 2017, On November 17, 2022, Local 542 filed a putative class action lawsuit was filed againstmotion to withdraw the Company and United BioSource Corporation inreference to the U.S. District Court, for the Central District of California. Pursuant to a motion filed by the defendants,and the case was transferred back to the U.S. District Courtof Delaware at Case No. 22-cv-01502. On December 22, 2022, Local 542 filed a request 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, whichwithdraw the reference to be decided by the EDPA and to permit remand to state court. On December 28, 2022, the case was granted in January 2019 with leaveassigned to amend. MSP filedJudge Ambro of 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 thatUnited States Court of Appeals for the Third Circuit due to related cases. At this stage, the Company unlawfully maintained a monopoly in a purported ACTH product market by its predecessor in interest's acquisition of the U.S. rights to 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 towill vigorously defend itself in this matter both on the merits and moved to dismissas discharged through the second amended complaint in August 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 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. In January 2021, the Company moved for transfer to the District of Delaware where the Company's Chapter 11 Cases are pending. MSP opposes transfer.bankruptcy.
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 its predecessor-in-interest's acquisition of 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 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. In January 2021, the Company moved for transfer to the District of Delaware where the Company's Chapter 11 Cases are pending. Rockford opposes transfer.
Other Commercial and Securities Litigation Matters
Shareholder Litigation (HealthCor). In October 2020, four purported shareholders of the Company's stock filed a complaint in the D.C. District Court against the Company, its 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. The complaint seeks damages in an unspecified amount. 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 on December 4, 2020, the Bankruptcy Court also enjoined the proceedings against the individual named defendants. The Bankruptcy Court extended
the injunction staying the proceedings against the individual named defendants on August 30, 2021. The plaintiffs subsequently appealed the Bankruptcy Court action to the U.S. District Court in Delaware through an interlocutory appeal, which was denied on November 10, 2021. The Bankruptcy Court further extended the injunction on November 29, 2021. Absent further extension, the injunction will expire on March 18, 2022.
Shareholder Derivative Litigation (Brandhorst). In September 2019, a purported shareholder of the Company's stock filed a shareholder derivative complaint in the D.C. District Court against the Company, as nominal defendant, as well as its CEO, its former CFO, 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 Brandhorst Defendants intend to vigorously defend themselves in this matter. As to the Company, this litigation is subject to the automatic stay under §362 of the Bankruptcy Code, and on December 4, 2020, the Bankruptcy Court also enjoined the proceedings against the Brandhorst Defendants. The Bankruptcy Court extended the injunction staying the proceedings against the Brandhorst Defendants on August 30, 2021, and further extended the injunction on November 29, 2021. Absent further extension, the injunction will expire on March 18, 2022.
Putative Class Action Securities Litigation (Strougo). In July 2019, a putative class action lawsuit was filed against the Company, its former CEO Mark C. Trudeau, its CFOChief Financial Officer ("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/or 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 various false and/or misleading statements and/or failed to 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 forvarious material facts regarding Acthar Gel each quarter since 2014; (ii) the Company's reported net income was improperly inflated in violationand its results 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 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.operations. 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 §362Section 362 of the Bankruptcy Code, and on December 4, 2020, the Bankruptcy Court also enjoined proceedings against the Strougo Defendants. The plaintiffs subsequently appealed the Bankruptcy Court action to the U.S. District Court in Delaware through a motion for reconsideration, which was denied by that court on January 27, 2021. The Bankruptcy Court extended the injunction staying the proceedings against the Strougo Defendants on August 30, 2021, and further extended the injunction on November 29, 2021. Absent further extension, the injunction will expire2021 and on March 18,17, 2022. On March 17, 2022, the Strougo action was administratively closed. On March 29, 2022, the Strougo action was reinstated only with respect to the individual defendants, and the individual defendants filed their reply in support of their motion to dismiss on May 2, 2022. On July 21, 2022, the Company filed a notice of discharge that, if approved by the court, would result in dismissal for the Company. The notice informed the court that (i) the Bankruptcy Court confirmed the Plan; (ii) the Company's discharge pursuant to Section 1141(d) of the Bankruptcy Code of the claims asserted against it in the Strougo action had taken effect; and (iii) the Plan and the discharge injunction enjoin any party from, among other things, continuing to pursue claims against the Company in the Strougo action. On December 16, 2022, the District Court issued an order denying the individual defendants' motion to dismiss in all respects. The individual defendants have answered the complaint and the case is now proceeding into the discovery phase. As to the Company, this matter was resolved in bankruptcy with no further liability against the Company.
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 inOn November 28, 2022, the Federal District Court in the Eastern District of Missouri, captioned Solomon v. Mallinckrodt plc, et al., against the Company, its CEO, 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 D.C. District Court. 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. 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. The complaint seeks damages in an unspecified amount. On July 6, 2018, this matter was stayed by agreement of the parties pending resolution of the Shenk class action lawsuit. The defendants intend to vigorously defend themselves in this matter. On October 13, 2020, the trial court entered an order acknowledging the automatic stay of this litigationpursuant to which all derivative claims were dismissed without prejudice, all remaining claims were dismissed with prejudice as to the Company pursuantplaintiffs and without prejudice as to §362all other members of the Bankruptcy Code, and on December 4, 2020, the Bankruptcy Court also enjoined the proceedings against the individual named defendants. The Bankruptcy Court extended the injunction staying the proceedings against the individual named defendants on August 30, 2021, and further extended the injunction on November 29, 2021. Absent further extension, the injunction will expire on March 18, 2022.
Putative Class Action Securities Litigation (Shenk). In January 2017, a putative class, action lawsuit was filed against the Company and its CEO in the D.C. District Court, 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.case was filed against the same defendants named in the Shenk lawsuit in the D.C. District Court. 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 D.C. District Court. 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 its former CFO in the D.C. District Court. 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, against the Company, its CEO, its former CFO, and Executive Vice President, Hugh O'Neill, as defendants (collectively, the "Shenk Defendants"), and containing similar claims, but further alleging misstatements regarding payer reimbursement restrictions for Acthar Gel. The consolidated complaint seeks damages in an unspecified amount. 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 mediation. On October 13, 2020, the trial court entered an order acknowledging the automatic stay of this litigation as to the Company pursuant to §362 of the Bankruptcy Code, and on December 4, 2020, the Bankruptcy Court also enjoined the proceedings against the individual named defendants. On December 4, 2020, the Bankruptcy Court granted the Company's motion pursuant to 11 U.S.C. §105 seeking to enjoin lawsuits or administrative proceedings brought by various parties, with an exception for the Shenk lawsuit solely to the extent necessary to allow the previously scheduled mediation to proceed to its conclusion and to potentially settle the Shenk lawsuit, subject to Bankruptcy Court approval. On December 7, 2020 and January 12, 2021, the parties participated in mediation sessions, which resulted in an agreement in principle to settle the Shenk lawsuit. The settlement will be funded solely from the proceeds of the remaining Shenk Defendant's applicable directors and officers liability insurance policies and is subject to approval of the D.C. District Court and the Bankruptcy Court, among other terms and conditions. On February 23, 2022, the Bankruptcy Court approved the Company's entry into the settlement.closed.
Generic Price Fixing Litigation
Canadian (Eaton) Litigation. In December 2020, the Company received a statement of claim filed in federal court in Toronto, Ontario, Canada, naming the Company, Mallinckrodt Canada ULC, Mallinckrodt LLC and a predecessor to MNK 2011 LLC, as well as other pharmaceutical manufacturers, as defendants in an action captioned Kathryn Eaton v Teva Canada Limited et al. The claim purports to be brought on behalf of all persons or entities in Canada who, from January 1, 2012 to the present, purchased generic drugs in the private sector. The allegations and requests for relief in the statement of claim, in substance, are similar to those in the 1199SEIU National Benefit Fund litigation, and include the claim that the Company breached the Competition Act in Canada. As a result of the Eaton action being served on the Mallinckrodt defendants, Mallinckrodt Canada ULC sought, and the Canadian Court granted, an order on April 20, 2021, among other things: (1) recognizing the Chapter 11 Cases of, and granting Canadian stays with respect to, Mallinckrodt LLC and MNK 2011 LLC; and (2) declaring that the Eaton action is stayed as against each of the Mallinckrodt defendants and the named predecessor to MNK 2011 LLC.
Walgreen Litigation. In December 2020, a direct action complaint filed in the U.S. District Court for the EDPA named the Company and other pharmaceutical manufacturers as defendants in an action captioned Walgreen Company v. Actavis Holdco U.S.,
Inc., et al. The plaintiff purports to have 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.
Winn-Dixie Litigation. In December 2020, a direct action complaint filed in the U.S. District Court for the EDPA named the Company and other pharmaceutical manufacturers as defendants in an action captioned Winn-Dixie Stores, Inc., et al v. Actavis Holdco US, 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.
J M Smith Litigation. In September 2020, a direct action complaint filed in the U.S. District Court for the EDPA 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.
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 EDPA and consolidated with the Generic Pricing MDL.
Rite Aid Litigation. In July 2020, a direct action complaint filed in the U.S. District Court for the EDPA 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. This lawsuit has been consolidated with the Generic Pricing MDL. An amended complaint was filed in December 2020.
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. This lawsuit has been consolidated with the Generic Pricing MDL and was selected as a bellwether case in May 2021. The Company disagrees with the Attorneys Generals' characterization of the facts and applicable law.
The Kroger Co. Litigation. In February 2020, a proposed amended complaint filed in the U.S. District Court for the EDPA named the Company and several other pharmaceutical manufacturers as new defendants in an action captioned The Kroger Co., et al. v. Actavis Holdco U.S., Inc. et al. The lawsuit is brought by several entities that purportedly purchased generic drugs directly from defendants. The proposed amended 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 1199SEIU National Benefit Fund and César Castillo litigations. This lawsuit has been consolidated with the Generic Pricing MDL. A revised motion for leave to file a proposed amended complaint was filed in September 2020 and remains pending.
César Castillo, Inc., Litigation. In February 2020, a putative class action lawsuit was filed against the Company and more than 30 other pharmaceutical manufacturers in the U.S. District Court for the EDPA, captioned César Castillo, Inc., et al. v. Actavis Holdco U.S., Inc., et al. The lawsuit purports to be brought on behalf of all persons or entities that directly purchased certain generic drugs from defendants or from one of defendants' direct customers-where the direct customer is alleged to be a completely involved co-conspirator-between July 1, 2009, and the present. The complaint has similar allegations as the 1199SEIU National Benefit Fund litigation and seeks damages for violations of Sections 1 and 3 of the Sherman Act. This lawsuit has been consolidated with the Generic Pricing MDL.
1199SEIU National Benefit Fund Litigation. In December 2019, a putative class action lawsuit was filed against the Company and more than 30 other pharmaceutical manufacturers in the U.S. District Court for the EDPA, captioned 1199SEIU National Benefit Fund et al. v. Actavis Holdco U.S., Inc., et al. The complaint purports to be brought on behalf of all persons and entities that indirectly purchased, paid, or provided reimbursement for the purchase of defendants' generic drugs, other than for resale, from May 2009 to the present. The lawsuit generally alleges that defendants conspired to allocate customers and fix prices for generic pharmaceutical drugs
beginning in May 2009. The complaint seeks monetary damages and injunctive relief based on violations of Sections 1 and 3 of the Sherman Act and various state antitrust, consumer protection, and unjust enrichment claims. This lawsuit has been consolidated with the Generic Pricing MDL. An amended complaint was filed on January 7, 2021.
Generic Pharmaceutical Antitrust MDL. Multi-District Litigation.
In August 2016, a multidistrictmulti-district litigation ("MDL") was established in the EDPA relating to allegations of antitrust violations with respect to generic pharmaceutical pricing (the "Generic("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, theThe Generic Pricing MDL has expanded to encompassincludes lawsuits against the Company and dozens of other pharmaceutical companies, including a complaint filed by Attorneys General for 51 States, Territories and more than 200 generic pharmaceutical drugs. Plaintiffs in the Generic Pricing MDL have proceeded with discovery collectivelyDistrict of Columbia seeking monetary damages and recently issued subpoenas to former Company employees. On October 18, 2021,injunctive relief. While the Company agreedis not subject to provide limited discovery. The Company intends tomonetary damages in connection with
these matters as a result of the Plan and vigorously defend itself in this matter. At this stage,disagrees with the plaintiffs' characterization of the facts and law, the Company is not able to reasonably estimate whether any injunctive relief will be granted, and if granted, whether it will materially impact the expected amountCompany's financial position or range of cost or any loss associated withoperations; the Company does not intend to provide further disclosure unless this lawsuit.assessment changes.
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.
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 December 31, 2021,30, 2022 (Successor), it was probable that it would incur remediation costs in the range of $72.3$18.4 million to $120.9$48.5 million. The Company also concluded that, as of December 31, 2021,30, 2022 (Successor), the best estimate within this range was $95.8$36.9 million, of which $0.8$1.1 million was included in accrued and other current liabilities $52.0 million was included in LSTC, and the remaining $43.0 millionremainder was included in environmental liabilities on the consolidated balance sheet as of December 31, 2021.30, 2022 (Successor). 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.
Lower Passaic River, New Jersey. The Company and approximately 70 other companies (“("Cooperating Parties Group”Group" or “CPG”"CPG") are parties to a May 2007 Administrative Order on Consent ("AOC") with the Environmental Protection Agency ("EPA") to perform a remedial investigation and feasibility study ("RI/FS") of the 17-mile stretch known as the Lower Passaic River ("the River") Study Area. The Company's potential liability stems from former operations at Lodi and Belleville, New Jersey.
In April 2014, the EPA issued a revised Focused Feasibility Study ("FFS"), with remedial alternatives to address cleanup of the lower 8-mile stretch of the River. The EPA estimated the cost for the remediation alternatives ranged from $365.0 million to $3.2 billion and the EPA's preferred approach had an estimated cost of $1.7 billion.
In April 2015, the CPG presented a draft of the RI/FS of the River to the EPA that included alternative remedial actions for the entire 17-mile stretch of the River.
In March 2016, the EPA issued the Record of Decision ("ROD") for the lower 8 miles of the River with a slight modification on its preferred approach and a revised estimated cost of $1.38 billion. In October 2016, the EPA announced that Occidental Chemicals Corporation ("OCC") had entered into an agreement to develop the remedial design.
In August 2018, the EPA finalized a buyout offer of $280,600 with the Company, limited to its former Lodi facility, for the lower 8 miles of the River.
On September 28, 2021, the EPA issued the Record of Decision for the upper 9 miles of the River selecting source control as the remedy for the upper 9 miles with an estimated cost of $441.0 million.
As of December 31, 2021,30, 2022 (Successor), the Company estimated that its remaining liability related to the River was $26.1$21.0 million, of which $4.6 million was included in LSTC and the remainder was included within in environmental liabilities on the consolidated balance sheet as of December 31, 2021.30, 2022 (Successor). Despite the issuance of the revised FFS and the RODs for both the lower and upper River by the EPA, the RI/FS by the CPG, and the cash out settlement by the EPA, there are many uncertainties associated with the final agreed-upon remediation, potential future liabilities and the Company's allocable share of the remediation. Given those uncertainties, the amounts accrued may not be indicative of the amounts for which the Company may be ultimately responsible and will be refined as the remediation progresses.
Occidental Chemical Corp. v. 21st Century Fox America, Inc. The Company and approximately 120 other companies were named as defendants in a lawsuit filed in June 2018, by OCC, in which OCC seeks cost recovery and contribution for past and future costs in response to releases and threatened releases of hazardous substances into the lower 8 miles of the River. A former Mallinckrodt facility located in Jersey City, NJ (located in Newark Bay) and the former Belleville facility were named in the suit. Due to an indemnification agreement with AVON Inc., Mallinckrodt has tendered the liability for the Jersey City site to AVON Inc. and they have accepted. Although the Company was not named as a defendant for the Belleville facility, the Company retains a share of the liability for this suit. A motion to dismiss several of the claims was denied by the court. While it is not possible atAs a result of the Plan, the lawsuit was discharged against the Company. Any reserves associated with this time to determine with certaintycontingency were included in LSTC as of the ultimate outcome of this matter,Effective Date, as any related liabilities were discharged under 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.U.S. Bankruptcy Code.
Crab Orchard National Wildlife Refuge Superfund Site, near Marion, Illinois. Between 1967 and 1982, International Minerals and Chemicals Corporation ("IMC"), a predecessor in interest to the Company, leased portions of the Additional and Uncharacterized Sites ("AUS") Operable Unit at the Crab Orchard Superfund Site ("the CO Site") from the government and manufactured various explosives for use in mining and other operations. In March 2002, the DOJ, the U.S. Department of the Interior and the EPA (together, "the Government Agencies") issued a special notice letter to General Dynamics Ordnance and Tactical Systems, Inc. ("General Dynamics"), one of the other potentially responsible parties ("PRPs") at the CO Site, to compel General Dynamics to perform the RI/FS for the AUS Operable Unit. General Dynamics negotiated an AOC with the Government Agencies to conduct an extensive RI/FS at the CO Site under the direction of the U.S. Fish and Wildlife Service. General Dynamics asserted in August 2004 that the Company is jointly and severally liable, along with approximately eight other lessees and operators at the AUS Operable Unit, for costs associated with alleged contamination of soils and groundwater resulting from historic operations, and the parties have entered into a non-binding mediation process. However, the mediation process has indefinitely stalled due to an "internal issue" that the U.S. is facing and cannot seem to resolve.
During As a result of the three months ended December, 31, 2021, the Company increased the accrual associated withPlan, this matter by $34.3 million to $46.3 million, which represents the Company's estimate of its liability related to this environmental site, all of which was reflected within LSTC on the consolidated balance sheet as of December 31, 2021. The non-cash charge of $34.3 million was reflected in the consolidated statement of operations as a component of operating expenses. While it is not possible at this time to determine with certainty the ultimate outcome of this matter, 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.
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 December 31, 2021, there were approximately 11,800 asbestos-related cases pendingdischarged 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 consolidated balance sheets. The Company's estimate of its liability for pending and future claims is based on claims experience over the past four 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
Bankruptcy Litigation and Appeals
First Lien Noteholder Matters. As set forth in greater detail in Note 2, the Plan proposed to reinstate the Existing First Lien Notes. Certain holders of the Existing First Lien Notes and the trustee in respect thereof (collectively, the "Noteholder Parties"), objected to the proposed reinstatement, arguing, among other things, that the Company was required to pay a significant make-whole premium as a condition to reinstatement of the Existing First Lien Notes. In the course of confirming the Plan, the Bankruptcy Court overruled these objections.
On March 30, 2022, the Noteholder Parties appealed the confirmation order's approval of the reinstatement of the Existing First Lien Notes to the United States District Court for the District of Delaware. The Company and the Existing First Lien Notes Trustee reached an agreement to hold the trustee's appeal in abeyance, to be determined by the result of the holders' appeals, subject to certain conditions, which was approved by the District Court. Briefing on the merits of the Noteholder Parties' appeals was completed on July 1, 2022. On the same date, the Company moved to dismiss the Noteholder Parties' appeals as equitably moot. Briefing on the motion was completed on August 5, 2022 and supplemental declarations have been filed in the appeal. The Noteholder Parties' appeals and the related motion to dismiss remain pending.
At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with recoveriesthese appeals. The Company will continue to vigorously defend the Plan.
Sanofi. On October 12, 2021, in the Company's bankruptcy, sanofi-aventis U.S. LLC ("Sanofi") filed a motion asking the Bankruptcy Court for an order determining that, under the Bankruptcy Code, the Company could not discharge alleged royalty obligations owed to Sanofi under an asset purchase agreement through which the Company acquired certain intellectual property from insurance,Sanofi's predecessor ("Sanofi Motion"). On November 8, 2021, the Bankruptcy Court denied the Sanofi Motion and ordered that any royalty obligations allegedly owed to Sanofi constitute prepetition unsecured claims that may be discharged under the Bankruptcy Code. On November 19, 2021, Sanofi appealed the Bankruptcy Court's ruling of the Sanofi Motion to the District Court. Briefing was completed on March 10, 2022 and the District Court affirmed on December 20, 2022, for which Sanofi filed a notice of appeal on January 17, 2023. Sanofi had also appealed the Bankruptcy Court's confirmation order, on February 18, 2022, and briefing has been completed. As of the date of this annual report, the appeal regarding the confirmation order remains pending and will likely remain pending until Sanofi's Third Circuit appeal of the Sanofi Motion is resolved.
Glenridge. On October 21, 2021, in the Company's bankruptcy, Kenneth Greathouse, Stuart Rose, and Lloyd Glenn (collectively, the "Glenridge Principals") filed a joinder to the Sanofi Motion and asked the Bankruptcy Court for an order similarly determining that royalty obligations owed by the Company to the Glenridge Principals under a royalty agreement were not dischargeable under the Bankruptcy Code and that the royalty agreement could not be rejected by the Company in its bankruptcy. On December 1, 2021, the Bankruptcy Court denied the motion, entering an order that the royalty agreement between the Company and the Glenridge Principals could be rejected under the Bankruptcy Code and that any royalties owed under the agreement were prepetition unsecured claims that could be discharged under the Bankruptcy Code. On December 15, 2021, the Glenridge Principals appealed the Bankruptcy Court's ruling to the District Court. Briefing has not been completed at this time. The parties mutually agreed to extend the briefing deadlines. Subsequently, on March 16, 2022, the Glenridge Principals appealed the confirmation order and thereafter the parties stipulated to the dismissal of both appeals on November 16, 2022 and are awaiting entry of an order approving such stipulation. The GUC Trust, the Company and the Glenridge Principals reached a settlement, which was approved by the Bankruptcy Court on October 28, 2022. Thereafter, the parties stipulated to dismissal of both appeals on November 16, 2022 and are awaiting court order closing the appeals.
Acthar Insurance Claimants. In the Company's bankruptcy, Attestor Limited and Humana Inc. (collectively, the "Acthar Insurance Claimants") filed administrative claims with the Bankruptcy Court seeking hundreds of millions of dollars based on the Company's allegedly illegal sales of Acthar Gel. The Company objected to the claims, arguing that the Company had no such liability. After a bench trial, the Bankruptcy Court, on December 6, 2021, sustained the Company's objection and disallowed the administrative claims filed by the Acthar Insurance Claimants. The Acthar Insurance Claimants appealed that ruling to the District Court on December 20, 2021. On February 4, 2022, the Acthar Insurance Claimants moved to have the District Court certify their appeal directly to the Third Circuit. Meanwhile, on July 1, 2022, the Company moved to dismiss the Acthar Insurance Claimants' appeal as equitably moot. Briefing on that motion was completed on August 5, 2022. On October 31, 2022, the District Court denied the Acthar Insurance Claimants motion for direct appeal to the Third Circuit. On February 20, 2023, the parties entered into a material adverse effectsettlement agreement in an amount immaterial to the Company, with no findings nor any admission of liability or wrongdoing against the Company, and the matter was dismissed on its financial condition, resultsFebruary 24, 2023.
Stratatech. As described in Note 20, consummation of operationsthe Plan discharged the Company's liability with respect to certain contingent consideration provided to the prior securityholders of Stratatech Corporation ("Stratatech"). However, Russell Smestad, as the representative of these securityholders, has filed a motion in the Bankruptcy Court for an order either (i) granting allowance and cash flows.immediate payment of an administrative expense claim in the amount of the liability of $20 million or (ii) finding that the claim was not susceptible to discharge and should be paid in full. The Company believes that the securityholders’ motion is without merit and intends to vigorously oppose it.
Internal Revenue Code Section 453A Interest
AsBanks et al. v. Cotter Corporation et al. v. Mallinckrodt LLC, et al. On January 29, 2023, the named plaintiffs in Banks et al. v. Cotter Corporation et al. v. Mallinckrodt LLC, et al. No. 20-CV-1227 (E.D. Mo.) filed a result of historical internal installment sales,motion to amend their class-action petition to add Mallinckrodt LLC as a defendant. Mallinckrodt LLC filed a motion in the Company has reported IRC §453A interest on its tax returnsBankruptcy Court to enjoin this petition on the basis of its interpretation of the IRC. Alternative interpretations ofgrounds that these provisions could result in additional interest payable. Duealleged claims were discharged pursuant to the inherent uncertainty in these interpretations,Plan and confirmation order. Both motions remain pending until the Company has deferredBankruptcy Court adjudicates the recognition of the benefit associated with the Company's interpretation and maintained a corresponding liability of $12.4 million and $28.2 million as of December 31, 2021 and December 25, 2020, respectively. The decrease of $15.8 million was recognized as a benefitmotion to interest expense during fiscal 2021 due to lapses of certain statutes of limitations. Further favorable resolution of this uncertainty would likely result in a reversal of this liability and a benefit being recorded to interest expense within the consolidated statements of operations.enjoin.
Other Matters
The Company is a defendant in a number of other pending legal proceedings relating to present and former operations, acquisitions and dispositions. The Company does not expect the outcome of these proceedings, either individually or in the aggregate, to have a material adverse effect on its financial condition, results of operations and cash flows.
| | | | | |
| 20. | 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:
| | | December 31,
2021 | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant Other Observable Inputs
(Level 2) | | Significant Unobservable Inputs
(Level 3) | | December 30, 2022 (Successor) | | Quoted Prices in Active Markets for Identical Assets
(Level 1) | | Significant Other Observable Inputs
(Level 2) | | Significant Unobservable Inputs
(Level 3) |
| Assets: | Assets: | | | | | | | | Assets: | | | | | | | |
| Debt and equity securities held in rabbi trusts | Debt and equity securities held in rabbi trusts | $ | 38.7 | | | $ | 24.9 | | | $ | 13.8 | | | $ | — | | Debt and equity securities held in rabbi trusts | $ | 36.6 | | | $ | 24.8 | | | $ | 11.8 | | | $ | — | |
| Equity securities | Equity securities | 36.5 | | | 36.5 | | | — | | | — | | Equity securities | 25.5 | | | 25.5 | | | — | | | — | |
| | $ | 75.2 | | | $ | 61.4 | | | $ | 13.8 | | | $ | — | | | $ | 62.1 | | | $ | 50.3 | | | $ | 11.8 | | | $ | — | |
| Liabilities: | Liabilities: | | | | | | | | Liabilities: | | | | | | | |
Deferred compensation liabilities (1) | Deferred compensation liabilities (1) | $ | 36.9 | | | $ | — | | | $ | 36.9 | | | $ | — | | Deferred compensation liabilities (1) | $ | 26.0 | | | $ | — | | | $ | 26.0 | | | $ | — | |
Contingent consideration liabilities (2) | Contingent consideration liabilities (2) | 27.3 | | | — | | | — | | | 27.3 | | Contingent consideration liabilities (2) | 7.3 | | | — | | | — | | | 7.3 | |
| | | $ | 64.2 | | | $ | — | | | $ | 36.9 | | | $ | 27.3 | | | $ | 33.3 | | | $ | — | | | $ | 26.0 | | | $ | 7.3 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 (Predecessor) | | 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 | $ | 38.7 | | | $ | 24.9 | | | $ | 13.8 | | | $ | — | |
| Equity securities | 36.5 | | | 36.5 | | | — | | | — | |
| $ | 75.2 | | | $ | 61.4 | | | $ | 13.8 | | | $ | — | |
| Liabilities: | | | | | | | |
Deferred compensation liabilities (1) | $ | 36.9 | | | $ | — | | | $ | 36.9 | | | $ | — | |
Contingent consideration liabilities (2) | 27.3 | | | — | | | — | | | 27.3 | |
| | | | | | | |
| $ | 64.2 | | | $ | — | | | $ | 36.9 | | | $ | 27.3 | |
(1)On November 16, 2020 (Predecessor), the Debtors received approval from the Bankruptcy Court to maintain existing postretirement benefit plans during the pendency of the Chapter 11 Cases. For further information refer to Note 2.
(2)These liabilities are governed by executory contracts and recorded at their estimated allowed claim amount within liabilities subject to compromise on the consolidated balance sheet as of December 31, 2021. For further information on executory contracts and LSTC refer to Note 2.
| | | | | | | | | | | | | | | | | | | | | | | |
| December 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 | $ | 33.0 | | | $ | 23.5 | | | $ | 9.5 | | | $ | — | |
| Equity securities | 31.1 | | | 31.1 | | | — | | | — | |
| $ | 64.1 | | | $ | 54.6 | | | $ | 9.5 | | | $ | — | |
| Liabilities: | | | | | | | |
Deferred compensation liabilities (1) | $ | 38.0 | | | $ | — | | | $ | 38.0 | | | $ | — | |
Contingent consideration liabilities (2) | 34.7 | | | — | | | — | | | 34.7 | |
| | | | | | | |
| $ | 72.7 | | | $ | — | | | $ | 38.0 | | | $ | 34.7 | |
(1)On November 16, 2020, the Debtors received approval from the Bankruptcy Court to maintain existing postretirement benefit plans during the pendency of the Chapter 11 Cases. For further information refer to Note 2.
(2)These liabilities are governed by executory contracts and recorded at their estimated allowed claim amount within liabilities subject to compromise on the consolidated balance sheet as of December 25, 2020. For further information on executory contracts and LSTC refer to Note 2.2021 (Predecessor).
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 and Panbela Therapeutics, Inc. for which quoted prices are available in an active market; therefore, the investment isthese investments are classified as level 1 and isare valued based on quoted market prices reported on an internationally recognized securities exchange.exchanges.
In July 2019,During the Company remitted $5.0 million of consideration to Silence in exchange for equity shares. As part of this equity investment, the Company took a non-executive Director seat on the Silence Board of Directors. The Company's investment in Silence qualifies for equity method accounting given its ability to exercise significant influence; however, the Company elected the fair value method to account for its investment in Silence. Duringperiod from June 17, 2022 through December 30, 2022 (Successor), fiscal 2021 (Predecessor) and 2020 and 2019,(Predecessor), the Company recognized an unrealized gain of $9.2 million, $4.7 million and $3.8 million, respectively, and $20.2during the period from January 1, 2022 through June 16, 2022 (Predecessor), the Company recognized an unrealized loss of $22.2 million respectively, related to this investmentour investments within other income (expense), net in the consolidated statement of operations.
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.
ContingentSuccessor contingent consideration liabilities. In accordance with the Plan and Scheme of Arrangement, the Company will provide consideration for a CVR associated with Terlivaz primarily in the form of the achievement of a cumulative net sales milestone. The Company assesses the likelihood and timing of making such payments at each balance sheet date. The fair value of the contingent payment was measured based on the net present value of a probability-weighted assessment. The Company determined the fair value of the Terlivaz CVR to be $7.3 million as of December 30, 2022 (Successor).
Predecessor contingent consideration liabilities. As part of the acquisition of Stratatech, Corporation ("Stratatech") in August 2016, 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 iswas responsible for a payment upon acceptance of the Company's submission and another upon approval by the FDA. The Company assesses the likelihood of 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 $27.3 million and $19.1 million at December 31, 2021 and December 25, 2020, respectively.
As part of the acquisition of Ocera Therapeutics, Inc. ("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. During fiscal 2021, the Company determined it would no longer pursue further development of this asset. The Company determined the fair value of the contingent consideration based on an option pricing model to be zero and $15.6 million as of December 31, 2021 (Predecessor). These liabilities were governed by a contract and recorded at their estimated allowed claim amount within LSTC in the consolidated balance sheet as of December 25, 2020, respectively.
All contingent consideration liabilities were classified aswithin other liabilities and LSTC in the consolidated balance sheets as of December 30, 2022 (Successor) and December 31, 2021 and December 25, 2020.(Predecessor), respectively. The following table summarizes the fiscal 20212022 activity for contingent consideration:
| | | | | |
Balance as of December 25, 202031, 2021(Predecessor) | $ | 34.727.3 | |
| |
| |
| |
| |
| |
| Impact of the Plan on Predecessor contingent consideration liabilities | (27.3) | |
| Establishment of Terlivaz CVR | 6.8 | |
| Balance as of June 16, 2022 (Successor) | $ | 6.8 | |
| |
| |
| Balance as of June 17, 2022 (Successor) | $ | 6.8 | |
| |
| |
| |
| |
| Fair value adjustments | (7.4) | |
Less: Liabilities subject to compromise | (27.3)0.5 | |
Balance as of December 31, 202130, 2022 (Successor) | $ | —7.3 | |
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 December 30, 2022 (Successor) and December 31, 2021 and December 25, 2020:(Predecessor):
•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 $60.2$57.2 million and $56.4$60.2 million as of December 30, 2022 (Successor) and December 31, 2021 and December 25, 2020,(Predecessor), (level 1), respectively. Included within the balance as of the Effective Date was $89.0 million related to the funding of a professional fee escrow account upon emergence from Chapter 11. Refer to Note 3 for further information. As of December 31, 2021, $24.0 million and $36.2 million of30, 2022 (Successor), the restricted cashprofessional fee escrow balance was included in prepaid and other current assets and other assets, respectively, on the consolidated balance sheet. As of December 25, 2020, $20.2 million and $36.2 million of the restricted cash balance was included in prepaid and other current assets and other assets, respectively, on the consolidated balance sheet.zero.
•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 $46.7 million and $51.3 million as of December 30, 2022 (Successor) and $52.3 million at December 31, 2021 and December 25, 2020,(Predecessor), respectively. These contracts are included in other assets on the 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. Successor debt. The Company's 5.75%, 4.75%, 5.625%, 5.50%Existing 1L Notes, New 2L Notes, New 1L Notes and 10.00% first and second lien senior notesTakeback 2L 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.
Predecessor debt. The following table presents the carrying values and estimated fair valuesvalue of the Company's debtformer revolving credit facility approximated the fair value due to the short-term nature of this instrument, and was therefore classified as level 1. The Company's former 5.75%, 4.75%, 5.625%, 5.50% senior notes and 10.00% first and second lien senior secured notes were classified as level 1, as quoted prices were available in an active market for these notes. Since the quoted market prices for the Company's former term loans and former 9.50% and 8.00% debentures were not available in an active market, they were classified as level 2 for purposes of the enddeveloping an estimate of each period:fair value.
| | | | | | | | | | | | | | | | | | | | | | | | | Successor | | Predecessor |
| | December 31, 2021 | | December 25, 2020 | | December 30, 2022 | | | December 31, 2021 |
| | Carrying
Value | | Fair
Value | | Carrying
Value | | Fair
Value | | Carrying
Value | | Fair
Value | | | Carrying
Value | | Fair
Value |
| Level 1: | Level 1: | | | | | | | | | Level 1: | | | | | | | | |
| 10.00% first lien senior secured notes due April 2025 | | 10.00% first lien senior secured notes due April 2025 | $ | 475.9 | | | $ | 425.9 | | | | $ | 495.0 | | | $ | 523.7 | |
| 10.00% second lien senior secured notes due April 2025 | | 10.00% second lien senior secured notes due April 2025 | 242.2 | | | 216.8 | | | | — | | | — | |
| 11.50% first lien senior secured notes due December 2028 | | 11.50% first lien senior secured notes due December 2028 | 650.0 | | | 552.6 | | | | — | | | — | |
| 10.00% second lien senior secured notes due June 2029 | | 10.00% second lien senior secured notes due June 2029 | 175.5 | | | 176.7 | | | | — | | | — | |
| Revolving credit facility due February 2022 | | Revolving credit facility due February 2022 | — | | | — | | | | 900.0 | | | 900.0 | |
| 5.75% senior notes due August 2022 | 5.75% senior notes due August 2022 | | $ | 610.3 | | | $ | 324.1 | | | $ | 610.3 | | | $ | 191.2 | | 5.75% senior notes due August 2022 | — | | | — | | | | 610.3 | | | 324.1 | |
| 4.75% senior notes due April 2023 | 4.75% senior notes due April 2023 | | 133.7 | | | 48.9 | | | 133.7 | | | 11.1 | | 4.75% senior notes due April 2023 | — | | | — | | | | 133.7 | | | 48.9 | |
| 5.625% senior notes due October 2023 | 5.625% senior notes due October 2023 | | 514.7 | | | 279.1 | | | 514.7 | | | 158.9 | | 5.625% senior notes due October 2023 | — | | | — | | | | 514.7 | | | 279.1 | |
| 10.00% second lien senior secured notes due April 2025 | | 10.00% second lien senior secured notes due April 2025 | — | | | — | | | | 322.9 | | | 312.7 | |
| 5.50% senior notes due April 2025 | 5.50% senior notes due April 2025 | | 387.2 | | | 211.6 | | | 387.2 | | | 115.4 | | 5.50% senior notes due April 2025 | — | | | — | | | | 387.2 | | | 211.6 | |
| 10.00% first lien senior notes due April 2025 | | 495.0 | | | 523.7 | | | 495.0 | | | 528.4 | | |
| 10.00% second lien senior notes due April 2025 | | 322.9 | | | 312.7 | | | 322.9 | | | 279.0 | | |
| Revolving credit facility | | 900.0 | | | 900.0 | | | 900.0 | | | 900.0 | | |
| | Level 2: | Level 2: | | Level 2: | | | |
| 2017 Replacement Term loan due September 2027 | | 2017 Replacement Term loan due September 2027 | 1,222.1 | | | 1,037.8 | | | | — | | | — | |
| 2018 Replacement Term loan due September 2027 | | 2018 Replacement Term loan due September 2027 | 326.9 | | | 274.8 | | | | — | | | — | |
| 9.50% debentures due May 2022 | 9.50% debentures due May 2022 | | 10.4 | | | 7.7 | | | 10.4 | | | 4.2 | | 9.50% debentures due May 2022 | — | | | — | | | | 10.4 | | | 7.7 | |
| 8.00% debentures due March 2023 | 8.00% debentures due March 2023 | | 4.4 | | | 3.2 | | | 4.4 | | | 1.3 | | 8.00% debentures due March 2023 | — | | | — | | | | 4.4 | | | 3.2 | |
| Term loan due September 2024 | Term loan due September 2024 | | 1,396.5 | | | 1,309.2 | | | 1,505.2 | | | 1,386.9 | | Term loan due September 2024 | — | | | — | | | | 1,396.5 | | | 1,309.2 | |
| Term loan due February 2025 | Term loan due February 2025 | | 370.7 | | | 347.7 | | | 399.5 | | | 367.9 | | Term loan due February 2025 | — | | | — | | | | 370.7 | | | 347.7 | |
| Total Debt | Total Debt | | $ | 5,145.8 | | | $ | 4,267.9 | | | $ | 5,283.3 | | | $ | 3,944.3 | | Total Debt | $ | 3,092.6 | | | $ | 2,684.6 | | | | $ | 5,145.8 | | | $ | 4,267.9 | |
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:
| | | Fiscal Year | | Successor | | | Predecessor |
| | 2021 | | 2020 | | 2019 | | Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
| FFF Enterprises, Inc. | | FFF Enterprises, Inc. | 26.1 | % | | | 11.8 | % | | *% | | *% |
| CuraScript, Inc. | CuraScript, Inc. | 26.1 | % | | 27.4 | % | | 29.7 | % | CuraScript, Inc. | * | | | 15.6 | | | 26.1 | | | 27.4 | |
| | AmerisourceBergen Corporation | * | | * | | 10.2 | | |
|
* Net sales to this distributor were less than 10.0% of total net sales during the respective periods presented above.
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:
| | | | | | | | | | | | | Successor | | | Predecessor |
|
| December 31,
2021 |
| December 25,
2020 |
| December 30,
2022 | |
| December 31,
2021 |
| AmerisourceBergen Corporation | AmerisourceBergen Corporation | 30.0% | | 33.6% | AmerisourceBergen Corporation | 23.3% | | | 30.0% |
| McKesson Corporation | McKesson Corporation | 15.0 | | 18.2 | McKesson Corporation | 17.3 | | | | 15.0 |
| FFF Enterprises, Inc. | | FFF Enterprises, Inc. | 16.2 | | | | * |
| CuraScript, Inc. | CuraScript, Inc. | 12.7 | | * | CuraScript, Inc. | * | | | 12.7 |
|
* Accounts receivable attributable to this distributor was less than 10.0% of total gross accounts receivable at the end of the respective period presented above.
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:
| | | Fiscal Year | | Successor | | | Predecessor |
| | 2021 | | 2020 | | 2019 | | Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
| Acthar Gel | Acthar Gel | 26.9 | % | | 27.9 | % | | 30.1 | % | Acthar Gel | 28.3 | % | | | 25.4 | % | | 26.9 | % | | 27.9 | % |
| INOmax | INOmax | 20.3 | | | 20.9 | | | 18.1 | | INOmax | 16.7 | | | | 19.0 | | | 20.3 | | | 20.9 | |
| Therakos | Therakos | 12.1 | | | * | | * | Therakos | 12.5 | | | | 12.5 | | | 12.1 | | | * |
| APAP | | APAP | 10.7 | | | | 11.0 | | | * | | * |
| Ofirmev | Ofirmev | * | | 10.1 | | | 12.1 | | Ofirmev | * | | | * | | * | | 10.1 | |
* Net sales attributable to these products were less than 10.0% of total net sales during the respective periods presented above.
| | | | | |
| 21. | Segment and Geographical Data |
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 API(s).
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 charges, non-restructuring impairment charges, separation costs, 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. Although these amounts are excluded from segment net sales and operating income, as applicable, they are included in reported consolidated net sales and operating loss and are reflected in the reconciliations presented below.
Management manages assets on a total company basis, not by operating segment. The Company's chief operating decision maker does not regularly review any asset information by operating segment and, accordingly, the Company does not report asset
information by operating segment. Total assets were approximately $8,916.3$6,013.8 million and $9,715.4$8,916.3 million as of December 30, 2022 (Successor) and December 31, 2021 and December 25, 2020,(Predecessor), respectively.
Selected information by reportable segment was as follows:
| | | Fiscal Year | | Successor | | | Predecessor |
| | 2021 | | 2020 | | 2019 | | Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
| Net sales: | Net sales: | | | | | | Net sales: | | | | | | | | |
Specialty Brands (1) | Specialty Brands (1) | $ | 1,547.0 | | | $ | 2,059.6 | | | $ | 2,423.8 | | Specialty Brands (1) | $ | 682.4 | | | | $ | 587.1 | | | $ | 1,547.0 | | | $ | 2,059.6 | |
| Specialty Generics | Specialty Generics | 661.8 | | | 689.8 | | | 738.7 | | Specialty Generics | 357.3 | | | | 287.5 | | | 661.8 | | | 689.8 | |
| Segment net sales | Segment net sales | 2,208.8 | | | 2,749.4 | | | 3,162.5 | | Segment net sales | 1,039.7 | | | | 874.6 | | | 2,208.8 | | | 2,749.4 | |
Medicaid lawsuit (Note 19) (1) | — | | | (536.0) | | | — | | |
Medicaid lawsuit (1) | | Medicaid lawsuit (1) | — | | | | — | | | — | | | (536.0) | |
| Net sales | Net sales | $ | 2,208.8 | | | $ | 2,213.4 | | | $ | 3,162.5 | | Net sales | $ | 1,039.7 | | | | $ | 874.6 | | | $ | 2,208.8 | | | $ | 2,213.4 | |
| Operating loss: | Operating loss: | | | | | | Operating loss: | | | | | | | | |
| Specialty Brands | Specialty Brands | $ | 812.8 | | | $ | 1,015.7 | | | $ | 1,210.1 | | Specialty Brands | $ | 113.8 | | | | $ | 267.2 | | | $ | 812.8 | | | $ | 1,015.7 | |
| Specialty Generics | 107.9 | | | 206.4 | | | 168.5 | | |
Specialty Generics (2) | | Specialty Generics (2) | (3.6) | | | | 65.3 | | | 107.9 | | | 206.4 | |
| Segment operating income | Segment operating income | 920.7 | | | 1,222.1 | | | 1,378.6 | | Segment operating income | 110.2 | | | | 332.5 | | | 920.7 | | | 1,222.1 | |
| Unallocated amounts: | Unallocated amounts: | | Unallocated amounts: | | | |
Corporate and unallocated expenses (2) | (129.6) | | | (166.1) | | | (102.3) | | |
Corporate and unallocated expenses (3) | | Corporate and unallocated expenses (3) | (39.3) | | | | (48.2) | | | (129.6) | | | (166.1) | |
| Depreciation and amortization | Depreciation and amortization | (675.8) | | | (885.2) | | | (951.1) | | Depreciation and amortization | (347.5) | | | | (321.8) | | | (675.8) | | | (885.2) | |
| Share-based compensation | Share-based compensation | (10.2) | | | (25.3) | | | (33.8) | | Share-based compensation | (1.4) | | | | (1.7) | | | (10.2) | | | (25.3) | |
| Restructuring charges, net | Restructuring charges, net | (26.9) | | | (37.5) | | | 1.7 | | Restructuring charges, net | (11.1) | | | | (9.6) | | | (26.9) | | | (37.5) | |
| Non-restructuring impairment charges | Non-restructuring impairment charges | (154.9) | | | (63.5) | | | (388.0) | | Non-restructuring impairment charges | — | | | | — | | | (154.9) | | | (63.5) | |
Separation costs (3)(4) | Separation costs (3)(4) | (1.2) | | | (93.4) | | | (63.9) | | Separation costs (3)(4) | (21.2) | | | | (9.0) | | | (1.2) | | | (93.4) | |
R&D upfront payment (4)(5) | R&D upfront payment (4)(5) | — | | | (5.0) | | | (20.0) | | R&D upfront payment (4)(5) | — | | | | — | | | — | | | (5.0) | |
| Opioid-related litigation settlement gain (loss) (Note 19) | (125.0) | | | 43.4 | | | (1,643.4) | | |
Medicaid lawsuit (Note 19) (1) | — | | | (641.1) | | | — | | |
| Opioid-related litigation settlement gain (loss) | | Opioid-related litigation settlement gain (loss) | — | | | | — | | | (125.0) | | | 43.4 | |
Medicaid lawsuit (1) | | Medicaid lawsuit (1) | — | | | | — | | | — | | | (641.1) | |
| Bad debt expense - customer bankruptcy | | Bad debt expense - customer bankruptcy | (6.4) | | | | — | | | — | | | — | |
| Operating loss | Operating loss | $ | (202.9) | | | $ | (651.6) | | | $ | (1,822.2) | | Operating loss | $ | (316.7) | | | | $ | (57.8) | | | $ | (202.9) | | | $ | (651.6) | |
| | Depreciation and amortization: | Depreciation and amortization: | | Depreciation and amortization: | | | |
| Specialty Brands | Specialty Brands | $ | 597.7 | | | $ | 799.3 | | | $ | 862.4 | | Specialty Brands | $ | 323.6 | | | | $ | 288.4 | | | $ | 597.7 | | | $ | 799.3 | |
| Specialty Generics | Specialty Generics | 78.1 | | | 85.9 | | | 88.7 | | Specialty Generics | 23.9 | | | | 33.4 | | | 78.1 | | | 85.9 | |
| | $ | 675.8 | | | $ | 885.2 | | | $ | 951.1 | | | $ | 347.5 | | | | $ | 321.8 | | | $ | 675.8 | | | $ | 885.2 | |
(1)Specialty Brands net sales for fiscal 2020 (Predecessor) includes the prospective change to the Medicaid rebate calculation, which served to reduce Acthar Gel net sales by $40.4 million for the period from June 15, 2020 through December 25, 2020. See Note 19 for further detail on the status of the Medicaid lawsuit.2020 (Predecessor).
(2)Includes $30.0 million of fresh-start inventory-related expense during the period from June 17, 2022 through December 30, 2022 (Successor) primarily driven by the Company's change in accounting estimate as disclosed in Note 1.
(3)Includes administration expenses and certain compensation, legal, environmental and other costs not charged to the Company's reportable segments.
(3)(4)Represents costs included in SG&A expenses, primarily related to expenses incurred related to the severance for the former CEO and certain former executives of the Predecessor, in addition to professional fees and costs incurred as the Company explores potential sales of non-core assets to enable further deleveraging post-emergence from bankruptcy during the period from June 17, 2022 through December 30, 2022 (Successor). Costs incurred during the Predecessor periods include professional fees and costs incurred in preparation for the Chapter 11 proceedings. As of the Petition Date, professional fees directly related to the Chapter 11 proceedings that were previously reflected as separation costs are beingwere classified on a go-forward basis as reorganization items, net.
(4)(5)Represents R&D expense incurred related to an upfront payment made to acquire product rights in Japan for terlipressinTerlivaz during fiscal 2020 and an upfront payment made to Silence in connection with the license and collaboration agreement entered into in fiscal 2019. See Note 6 for further information.2020.
Net sales by product family within the Company's reportable segments were as follows:
| | | Fiscal Year | | Successor | | | Predecessor |
| | 2021 | | 2020 | | 2019 | | Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
Acthar Gel (1) | Acthar Gel (1) | $ | 593.6 | | $ | 767.9 | | $ | 952.7 | Acthar Gel (1) | $ | 294.1 | | | $ | 221.9 | | $ | 593.6 | | $ | 767.9 |
| INOmax | INOmax | 448.5 | | 574.1 | | 571.4 | INOmax | 173.9 | | | 165.8 | | 448.5 | | 574.1 |
| Ofirmev | Ofirmev | 28.9 | | 276.5 | | 384.0 | Ofirmev | (0.3) | | | 2.5 | | 28.9 | | 276.5 |
| Therakos | Therakos | 266.5 | | 238.6 | | 246.9 | Therakos | 130.5 | | | 109.6 | | 266.5 | | 238.6 |
Amitiza (2) | Amitiza (2) | 196.9 | | 188.8 | | 208.5 | Amitiza (2) | 77.1 | | | 81.5 | | 196.9 | | 188.8 |
Other (3) | 12.6 | | 13.7 | | 60.3 | |
| Other | | Other | 7.1 | | | 5.8 | | 12.6 | | 13.7 |
| Specialty Brands | Specialty Brands | 1,547.0 | | 2,059.6 | | 2,423.8 | Specialty Brands | 682.4 | | | 587.1 | | 1,547.0 | | 2,059.6 |
| | Hydrocodone (API) and hydrocodone-containing tablets | 82.7 | | 98.0 | | 76.3 | |
| Oxycodone (API) and oxycodone-containing tablets | 68.5 | | 68.4 | | 74.9 | |
| Acetaminophen (API) | 215.9 | | 213.0 | | 189.9 | |
| Other controlled substances | 272.7 | | 289.9 | | 352.5 | |
| Opioids | | Opioids | 117.9 | | | 88.8 | | 213.2 | | 233.9 |
| ADHD | | ADHD | 28.4 | | | 17.5 | | 37.4 | | 48.3 |
| Addiction treatment | | Addiction treatment | 35.0 | | | 30.0 | | 68.3 | | 68.9 |
| Other | Other | 22.0 | | 20.5 | | 45.1 | Other | 6.8 | | | 4.9 | | 12.0 | | 7.3 |
| Generics | | Generics | 188.1 | | | 141.2 | | 330.9 | | 358.4 |
| Controlled substances | | Controlled substances | 47.0 | | | 37.6 | | 93.4 | | 98.3 |
| APAP | | APAP | 111.4 | | | 96.5 | | 215.9 | | 213.0 |
| Other | | Other | 10.8 | | | 12.2 | | 21.6 | | 20.1 |
| API | | API | 169.2 | | | 146.3 | | 330.9 | | 331.4 |
| Specialty Generics | Specialty Generics | 661.8 | | 689.8 | | 738.7 | Specialty Generics | 357.3 | | | 287.5 | | 661.8 | | 689.8 |
| Segment net sales | Segment net sales | 2,208.8 | | 2,749.4 | | 3,162.5 | Segment net sales | 1,039.7 | | | 874.6 | | 2,208.8 | | 2,749.4 |
| Medicaid lawsuit (Note 19) | — | | | (536.0) | | — | |
| Medicaid lawsuit | | Medicaid lawsuit | — | | | | — | | — | | (536.0) |
| Net Sales | Net Sales | $ | 2,208.8 | | $ | 2,213.4 | | $ | 3,162.5 | Net Sales | $ | 1,039.7 | | | $ | 874.6 | | $ | 2,208.8 | | $ | 2,213.4 |
(1)Fiscal 2020 (Predecessor) includes the prospective change to the Medicaid rebate calculation of $40.4 million for the period from June 15, 2020 through December 25, 2020. See Note 19 for further detail on the status of the Medicaid lawsuit.2020 (Predecessor).
(2)Amitiza net sales consist of both product and royalty net sales. Refer to Note 45 for further details on Amitiza's revenues.
(3)Fiscal 2019 includes $40.1 million of net sales related to BioVectra prior to the completion of the sale of this business in November 2019. Refer to Note 5 for further details.
Selected information by geographic area was as follows:
| | | Fiscal Year | | Successor | | | Predecessor |
| | 2021 | | 2020 | | 2019 | | Period from
June 17, 2022
through
December 30, 2022 | | | Period from
January 1, 2022
through
June 16, 2022 | | Year Ended December 31, 2021 | | Year Ended December 25, 2020 |
Net sales (1): | Net sales (1): | | | | | | Net sales (1): | | | | | | | | |
| U.S. | U.S. | $ | 1,991.8 | | | $ | 2,465.5 | | | $ | 2,765.6 | | U.S. | $ | 928.3 | | | | $ | 784.2 | | | $ | 1,991.8 | | | $ | 2,465.5 | |
| Europe, Middle East and Africa | Europe, Middle East and Africa | 181.8 | | | 227.5 | | | 281.8 | | Europe, Middle East and Africa | 100.4 | | | | 73.6 | | | 181.8 | | | 227.5 | |
| Other | Other | 35.2 | | | 56.4 | | | 115.1 | | Other | 11.0 | | | | 16.8 | | | 35.2 | | | 56.4 | |
| Geographic area net sales | Geographic area net sales | 2,208.8 | | | 2,749.4 | | | 3,162.5 | | Geographic area net sales | 1,039.7 | | | | 874.6 | | | 2,208.8 | | | 2,749.4 | |
| Medicaid lawsuit (Note 19) | — | | | (536.0) | | | — | | |
| Medicaid lawsuit | | Medicaid lawsuit | — | | | | — | | | — | | | (536.0) | |
| Net Sales | Net Sales | $ | 2,208.8 | | | $ | 2,213.4 | | | $ | 3,162.5 | | Net Sales | $ | 1,039.7 | | | | $ | 874.6 | | | $ | 2,208.8 | | | $ | 2,213.4 | |
| | December 31,
2021 | | December 25,
2020 | | |
Long-lived assets (2): | | | | | |
| U.S. | $ | 629.3 | | | $ | 676.3 | | | |
Europe, Middle East and Africa (3) | 156.2 | | | 165.5 | | | |
| Other | 4.7 | | | 4.6 | | | |
| $ | 790.2 | | | $ | 846.4 | | | |
(1)Net sales are attributed to regions based on the location of the entity that records the transaction, none of which relate to the country of Ireland.
(2)
| | | | | | | | | | | | | | |
| Successor | | | Predecessor |
| December 30,
2022 | |
| December 31,
2021 |
Long-lived assets (1): | | | | |
| U.S. | $ | 287.3 | | | | $ | 629.3 | |
Europe, Middle East and Africa (2) | 178.0 | | | | 156.2 | |
| Other | 3.1 | | | | 4.7 | |
| $ | 468.4 | | | | $ | 790.2 | |
(1)Long-lived assets are primarily composed of property, plant and equipment, net.
(2)Includes long-lived assets located in Ireland of $154.5$174.9 million and $164.0$154.5 million as of December 30, 2022 (Successor) and December 31, 2021 and December 25, 2020,(Predecessor), respectively.
Bankruptcy ProceedingsIncome Taxes
The Debtors filed a fourth amendment to the Amended Plan on January 6, 2022. On February 3, 2022,28, 2023, the Bankruptcy Court issued a written ruling confirming the Chapter 11 plan (which was subsequently revised February 8, 2022 to make minor corrections).
On March 2, 2022, the Bankruptcy Court entered the Confirmation Order confirming the fourth amended joint planCompany received $112.1 million of reorganization (with technical modifications) proposed by the Debtors (the "Plan").
It is a condition precedent to the consummationcash, plus interest, of the Plan$135.9 million CARES Act income tax refund receivable that the High Court of Ireland shall make an order pursuant to Section 541 of the Companies Act of Ireland confirming a scheme of arrangement with respect to Mallinckrodt plc which is based onwas included within prepaid expense and consistent in all respects with the Plan (a “Scheme of Arrangement”), and that such Scheme of Arrangement shall become effective in accordance with its terms (or shall become effective concurrently with the effectiveness of the Plan). As contemplated by the Plan, and in furtherance of the satisfaction of such condition precedent, on February 14, 2022 the directors of Mallinckrodt plc initiated examinership proceedings with respect to Mallinckrodt plc (the “Irish Examinership Proceedings”) by presenting a petition (the “Examinership Petition”) to the High Court of Ireland pursuant to Section 510(1)(b) of the Companies Act of Ireland seeking the appointment of an examiner to Mallinckrodt plc (the “Examiner”). On the same date, following an ex parte application made by the directors of Mallinckrodt plc, the High Court of Ireland made an order appointing the Examiner on an interim basis pending the hearing of the Examinership Petition. The hearing of the Examinership Petition took place before the High Court in Dublin, Ireland on Monday, February 28, 2022. Following that hearing, andother current assets on the same date, the High Courtconsolidated balance sheet as of Ireland made an order confirming that appointment of the Examiner. Subsequently, on March 8,December 30, 2022 the High Court of Ireland made various orders directing the Examiner to convene meetings of the creditors and shareholders of Mallinckrodt plc for the purposes of considering and voting in relation to a proposed Scheme of Arrangement that, if confirmed by High Court of Ireland, will implement certain Irish law aspects of the Plan.(Successor). The Examinerremaining refund is currently in the process of convening such meetings, which are scheduledexpected to be held over the course of April 4, 2022. If the majority in value and number of at least one class of creditors in attendance at the meetings whose interests are impaired by the proposed Scheme of Arrangement vote to accept it, the Examiner will seek a confirmation order from the High Court of Ireland with respect thereto, at a hearing that is currently anticipated to be convened at the end of April 2022.
During the continuance of the Irish Examinership Proceedings, Mallinckrodt plc will be under the protection of the High Court of Ireland. During the period of court protection, no proceedings can be commenced in Ireland to wind up Mallinckrodt plc, and no action can be taken by creditors to enforce security or take possession of any assets of Mallinckrodt plc, without the consent of the Examiner. The period of court protection will subsist for an initial 70 days, which can, in certain circumstances, be extended by order of the High Court of Ireland for a further 30 days, and potentially an additional 50 days after such 30-day period.
Certain bankruptcy proceeding matters occurred inreceived during fiscal 2021 or prior but had subsequent updates through the date of this report. See further discussion in Note 2.2023.
Commitments and Contingencies
Certain litigation matters occurred in fiscal 2021 or prior to December 30, 2022 (Successor) but had subsequent updates through the date of this report. See further discussion in Note 19.
| | | | | |
| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. |
None.
| | | | | |
| Item 9A. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended (the "Exchange("Exchange Act"), is recorded, processed, summarized and reported within the specified time periods, and that such information is accumulated and communicated to management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 under the Exchange Act) as of December 31, 2021.30, 2022 (Successor). Based on that evaluation, our CEO and CFO concluded that, as of that date, our disclosure controls and procedures were effective.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined under Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP. Internal control over financial reporting includes those policies and procedures that:
•pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Company's assets;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that the Company's receipts and expenditures are being made only in accordance with authorizations of the Company's management and directors; and
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2021.30, 2022 (Successor). In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (2013). Management's assessment included an evaluation of the design of the Company's internal control over financial reporting and testing of the operational effectiveness of its internal control over financial reporting.
Our internal control over financial reporting as of December 31, 202130, 2022 (Successor) has been audited by Deloitte & Touche LLP, the independent registered public accounting firm that audited and reported on the consolidated financial statements included in this Annual Report on Form 10-K.Report. This report is included below.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three months ended December 31, 202130, 2022 (Successor) that have materially affected, or are likely to materially affect, our internal control over financial reporting.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Mallinckrodt plc:plc
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Mallinckrodt plc ("Debtor-in-Possession") (in examination under Part 10 of the Irish Companies Act 2014) (the "Company") as of December 31, 2021,30, 2022 (Successor Company), based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021,30, 2022, based on the criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the accompanying consolidated balance sheetsfinancial statements as of December 31, 202130, 2022 and December 25, 2020, the related consolidated statements of operations, comprehensive operations, changes in shareholders' equity, and cash flows, for the fiscal years endedperiods from June 17, 2022 through December 31, 2021, December 25, 202030, 2022 (Successor Company) and December 27, 2019, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"),January 1, 2022 through June 16, 2022 (Predecessor Company) of the Company and our report dated March 15, 2022,3, 2023, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding certain conditions that give rise to substantial doubt about the Company's ability to continue as a going concern and an emphasisadoption of a matter paragraph concerning the bankruptcy proceedings.fresh-start accounting.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting.Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
DefinitionsDefinition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTEDeloitte & TOUCHETouche LLP
St. Louis, Missouri
March 15, 20223, 2023
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| Item 9B. | Other Information. |
None
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| Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections. |
Not applicable
PART III
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| Item 10. | Directors, Executive Officers and Corporate Governance. |
Information About Ourregarding our directors required under this Item 10. Directors,
Set forth below are the names, ages as of February 2, 2022, Executive Officers and current principal occupations of our directors.
| | | | | | | | |
Name | Age | Principal Occupation |
David R. Carlucci | 67 | Former Chairman, Chief Executive Officer and President of IMS Health |
J. Martin Carroll | 72 | Former President and Chief Executive Officer of Boehringer Ingelheim Corporation |
Paul R. Carter | 61 | Former Executive Vice President, Commercial Operations of Gilead Sciences, Inc. |
David Y. Norton | 70 | Former Company Group Chairman, Global Pharmaceuticals of Johnson & Johnson |
Carlos V. Paya, M.D. | 63 | Former President and Chief Executive Officer of Immune Design Corp. |
JoAnn A. Reed | 66 | Healthcare services consultant and former Senior Vice President, Finance and
Chief Financial Officer of Medco Health Solutions |
Angus C. Russell | 66 | Former Chief Executive Officer of Shire plc |
Mark C. Trudeau | 60 | President, Chief Executive Officer and Director of Mallinckrodt plc |
Anne C. Whitaker | 54 | Managing Partner of Anne Whitaker Group, LLC |
Kneeland C. Youngblood, M.D. | 66 | Founding Partner of Pharos Capital Group |
Each of the directors holds office until the earlier of the Company's next Annual General Meeting and the director's death, retirement, resignation, or removal. Set forth below is a brief description of the position and business experience of each of our directors.
David R. Carlucci has been a director since June 2013 and is a member of Mallinckrodt's Human Resources and Compensation Committee (the "Human Resources and Compensation Committee" or "HRCC"), which he chaired until December 2019. Mr. Carlucci was President and Chief Operating Officer of IMS Health Incorporated, an information services company, from October 2002 until January 2005, when he was named Chief Executive Officer and President. He became Chairman the following year. Mr. Carlucci retired from IMS Health in December 2010. Mr. Carlucci held several senior executive level positions at IBM from 1976 to 2002, including responsibilities for operations in the U.S., Canada and Latin America. Mr. Carlucci served as a director of Mastercard Inc. from 2006 to 2020 and served as Chairman of its Human Resources and Compensation Committee from 2006 to 2014. Mr. Carlucci also served as a member of the advisory board of Mitsui & Co. (USA), Inc., one of the world's most diversified comprehensive trading, investment and service companies. Mr. Carlucci's qualifications to serve on our Board of Directors (the “Board of Directors” or “Board”) include his significant experience as an executive and board member of publicly traded and private companies.
J. Martin Carroll has been a director since June 2013 and is Chair of Mallinckrodt'sCorporate Governance and Compliance Committee and a member of its Human Resources and Compensation Committee. He served as President and Chief Executive Officer of Boehringer Ingelheim Corporation and of Boehringer Pharmaceuticals, Inc. from 2003 until 2011 and as a director of Boehringer Ingelheim Corporation from 2003 until December 2012. He joined the organization in 2002 as President of Boehringer Pharmaceuticals, Inc. Mr. Carroll worked at Merck & Co., Inc. from 1976 to 2001. From 1972 to 1976, Mr. Carroll served in the United States Air Force where he attained the rank of Captain. He has served as a director of Catalent Pharma Solutions since July 2015. Mr. Carroll served as a director of TherapeuticsMD, Inc. from March 2015 until December 2021 and Inotek Pharmaceuticals Corporation from March 2016 until January 2018, including serving as Chairman of Inotek from June 2016 until January 2018. Mr. Carroll's qualifications to serve on our Board include his significant experience in leadership positions at pharmaceutical companies.
Paul R. Carter has been a director since May 2018 and is a member of Mallinckrodt's Audit Committee and its Science and Technology Committee. Mr. Carter served in various roles at Gilead Sciences, Inc., a research based biopharmaceutical company, from April 2006 to August 2016, most recently serving as Executive Vice President, Commercial Operations. Prior to joining Gilead, Mr. Carter spent 15 years in the pharmaceutical industry with GlaxoSmithKline plc and its legacy companies where he held various roles with increasing levels of senior experience, including General Manager in Europe and as a Regional Head of the International Business in Asia. Mr. Carter also serves as a healthcare advisor to several biotechnology companies. Mr. Carter has served as a director of HUTCHMED (China) Limited (formerly Hutchison China MediTech Ltd.) since 2017, Immatics N.V., VectivBio Holding AG since 2021 and Concentric Analgesics, Inc. since January 2022. He served as a director of Alder Biopharmaceuticals, Inc. from 2015 to 2019. Mr. Carter’s qualifications to serve on our Board include extensive experience with multinational companies in the
pharmaceutical industry, including involvementwill be filed with the launch and commercialization of various medicines worldwide, as well as his experience as a director of publicly traded pharmaceutical companies.
David Y. Norton has been a director since September 2017 and is Chair of Mallinckrodt's Human Resources and Compensation Committee. He was previously chairman of the board of directors of VIVUS, Inc., a biopharmaceutical company, where he had served as a director from July 2013 throughSEC within 120 days after December 2020. Mr. Norton serves on the board of directors of Forepont Capital, LLC, where he has been a director since October 2019 and has also served on the board of directors of COMPASS Pathways plc, since May 2018. Mr. Norton was company group chairman, Global Pharmaceuticals, for Johnson & Johnson, a role in which he led and developed the business' strategic growth agenda, including the strategy for licensing, acquisitions and divestments, and ensuring alignment with the global strategic functions, research and development, and commercial organizations. He retired in 2011 from Johnson & Johnson, where his 32-year tenure spanned marketing and international country management roles; serving as president of the Janssen Pharmaceuticals business in the U.S., group chairman of the Pharmaceuticals Group for Europe, Middle East and Africa, and then for the U.S. and Canada business; as well as the role of company group chairman, worldwide commercial and operations, for Johnson & Johnson's CNS and virology business. He previously served as a director for INC Research Holdings Inc. and Savient Pharmaceuticals Inc. Mr. Norton's qualifications30, 2022 pursuant to serve on our Board include his significant experience as an executive and board member of publicly traded pharmaceutical companies.
Carlos V. Paya, M.D. has been a director since May 2019 and is Chair of Mallinckrodt's Science and Technology Committee and a member of its Governance and Compliance Committee. He served as President, Chief Executive Officer of Immune Design Corp. from May 2011 until its acquisition in April 2019. Dr. Paya previously served as president of Elan Pharmaceuticals, and spent a number of years with Eli Lilly and Co. in discovery research and clinical development leadership roles, most recently global leader of the diabetes and endocrine franchise. PriorGeneral Instruction G(3) to his industry roles, Dr. Paya spent nearly a decade at the Mayo Clinic-Rochester, including his role as professor of medicine, immunology and pathology, and vice dean of the clinical investigation program. He has been a director of Fluidigm Corporation since March 2017, a director of Highlight Therapeutics S.L. since April 2020 and a director of Vaxcyte, Inc. since October 2021. He also serves as chairman of all of these boards. He also previously served as a director of Immune Design Corp. from 2011 to 2019. Dr. Paya's qualifications to serve on our Board include his significant experience as an executive and board member of publicly traded pharmaceutical and life sciences companies.
JoAnn A. Reed has been a director since June 2013 and is Chair of Mallinckrodt's Audit Committee. Ms. Reed is a healthcare services consultant. Ms. Reed served as an advisor to the Chief Executive Officer of Medco Health Solutions, Inc., a leading pharmacy benefit manager, from April 2008 to April 2009. She previously served as the Senior Vice President, Finance and Chief Financial Officer of Medco until 2008. Upon joining Medco in 1988, Ms. Reed served in finance and accounting roles of increasing responsibility and was appointed Senior Vice President, Finance in 1992 and Chief Financial Officer in 1996. Prior to joining Medco, Ms. Reed's experience included finance roles at Aetna/American Reinsurance Co., CBS Inc., Standard and Poor's Corporation and Unisys/Timeplex Inc. Ms. Reed has been a director of American Tower Corporation since 2007. She served as a director of Waters Corporation from 2006 to 2021 and Health Management Associates, Inc. from 2013 to 2014 and as a trustee of St. Mary's College of Notre Dame from 2006 to 2015. Ms. Reed's qualifications to serve on our Board include her experience as a healthcare services consultant and her financial expertise and knowledge of financial statements, corporate finance and accounting matters.
Angus C. Russell has been Chairman of the Board since May 2018, and a director since August 2014. He is also a member of Mallinckrodt's Science and Technology Committee and its Audit Committee. Mr. Russell served as a director of Questcor Pharmaceuticals, Inc. (“Questcor”) from June 2013 until Questcor was acquired by us in August 2014. Mr. Russell served as Chief Executive Officer of Shire Plc, a leading global specialty biopharmaceutical company, from 2008 until his retirement in April 2013 and was a member of its Board of Directors from 1999 to 2013. From 1999 to 2008, Mr. Russell served as Chief Financial Officer of Shire. Prior to joining Shire, Mr. Russell served at ICI, Zeneca and AstraZeneca, most recently as VP of Corporate Finance at AstraZeneca. Mr. Russell has served as the non-executive Chairman of Revance Therapeutics, Inc. since March 2014. He has served as a director of Lineage Cell Therapeutics, Inc. (formerly BioTime, Inc.) since December 2014 and as a director of TherapeuticsMD, Inc. since March 2015. Mr. Russell's qualifications to serve on our Board include his significant experience as an executive and/or board member of publicly traded pharmaceutical companies.
Mark C. Trudeau has been President, Chief Executive Officer and a director since June 2013. In anticipation of our spin transaction, Mr. Trudeau joined Covidien plc (“Covidien”) in February 2012 as a Senior Vice President and President of its Pharmaceuticals business. He joined Covidien from Bayer HealthCare Pharmaceuticals LLC USA, the U.S. healthcare business of Bayer AG, where he served as Chief Executive Officer. He simultaneously served as President of Bayer HealthCare Pharmaceuticals, the U.S. organization of Bayer's global pharmaceuticals business. In addition, he served as Interim President of the global specialty medicine business unit from January to August 2010. Prior to joining Bayer in 2009, Mr. Trudeau headed the Immunoscience Division at Bristol-Myers Squibb (“BMS”). During his 10-plus years at BMS, he served in multiple senior roles, including President of the Asia/Pacific region, President and General Manager of Canada and General Manager/Managing Director in the United Kingdom. Mr. Trudeau was also with Abbott Laboratories, serving in a variety of executive positions, from 1988 to 1998. Mr. Trudeau has served as a director of TE Connectivity Ltd. since March 2016. Mr. Trudeau is familiar with all aspects of our business and has extensive and diverse industry experience and managerial expertise and a proven record of leadership to serve as our President, Chief Executive Officer (“CEO”) and director.
Anne C. Whitaker has been a director since May 2018 and is a member of Mallinckrodt's Human Resources and Compensation Committee. Ms. Whitaker has served as the managing partner of the Anne Whitaker Group, LLC since April 2018. She also held the role of chief executive officer Aerami Therapeutics (formerly Dance Biopharm Holding Inc.) from October 2018 to November 2020. She served as chief executive officer Novoclem Therapeutics, Inc. from February 2017 until April 2018. Previously with Valeant Pharmaceuticals from 2015 to 2017, Ms. Whitaker served as executive vice president and company group chairman with responsibility for the company's branded pharmaceutical segment including key businesses like Salix, Dendreon, and Orapharma as well as the Canadian and Western Europe regions. Prior to that she served as president and chief executive officer of Synta Pharmaceuticals Corp. from 2014 to 2015; as president of North America pharmaceuticals and consumer health at Sanofi S.A. from 2011-2014; and in various commercial and senior leadership roles at GlaxoSmithKline from 1992 to 2011. Ms. Whitaker has been a director of Aerami Therapeutics since August 2018, serving as Chairman since November 2020, and a director of Caladrius Biosciences, Inc. since November 2020, Faron Pharmaceuticals Ltd since April 2021 and OraSure Technologies, Inc. since November 2021. Previously she served as non-executive director of UDG Healthcare plc from October 2020 to August 2021 as well as a director of Cree Inc. from 2013 to January 2021, Vectura Group PLC from 2018 to 2020, and Synta Pharmaceuticals Corp. from 2014 to 2015. Ms. Whitaker's qualifications to serve on our Board include her significant experience in executive positions in the pharmaceutical industry, in both commercial and organizational development roles, as well as her experience as a director of publicly traded and private companies.
Kneeland C. Youngblood, M.D. has been a director since June 2013. He is a member of Mallinckrodt's Governance and Compliance Committee. Dr. Youngblood is a founding partner of Pharos Capital Group, a private equity firm that focuses on buyouts in the healthcare services sector. Dr. Youngblood served as a director of Gap Inc. from 2006 to 2012, a director of Starwood Hotels and Resorts from 2001 to 2012, a director of Burger King Corporation from 2004 to 2010 and a director of iStar Financial from 1998 to 2001. Dr. Youngblood has been serving as a director of Scientific Games Corporation since August 2018. He has been CEO/Chairman of Pharos Capital BDC, Inc. from 2017 to 2019. He also served as a director on the Dallas Police Fire Pension Fund from 2017 to 2019. Prior to that, Dr. Youngblood served as a director of Energy Future Holdings Corp. from 2007 to 2018, as a director of Pace Holdings Corp. from 2015 to 2017 and as a director of TPG Pace Holding Corp. from 2017 to 2019, a director of TPG Pace Solutions Corp during 2021 and TPG Pace Tech Opportunities Corp. from 2020 to 2021. He is currently a director of TPG Pace Beneficial Finance Corp. and TPG Pace Beneficial II Corp., both Special Purpose Acquisition Companies. Dr. Youngblood's qualifications to serve on our Board include his extensive experience in healthcare practice, policy and business.
Information About Ourregarding our executive officers required under this Item 10. Directors, Executive Officers
Set forth below are the names, ages as of February 2, 2022, and current positions of our executive officers.
| | | | | | | | |
Name | Age | Title |
Mark C. Trudeau | 60 | President, Chief Executive Officer and Director |
Bryan M. Reasons | 53 | Executive Vice President and Chief Financial Officer |
Mark J. Casey | 58 | Executive Vice President and Chief Legal Officer |
Kassie Harrold | 42 | Senior Vice President and Chief Compliance Officer |
Hugh M. O'Neill | 58 | Executive Vice President and Chief Commercial Officer |
Steven J. Romano, MD | 62 | Executive Vice President and Chief Scientific Officer |
Ian Watkins | 59 | Executive Vice President and Chief Human Resources Officer |
Set forth belowCorporate Governance is a brief description of the position and business experience of each of our executive officers.
Mark C. Trudeau's has been President, Chief Executive Officer and a director since June 2013. Additional information regarding his business experience is provided above under “Information About Our Directors.”
Bryan M. Reasons is our Executive Vice President and Chief Financial Officer (“CFO”). He has executive responsibility for the global finance function as well as the strategy function andincluded in Item 1. Business Insights & Technology Solutions. Prior to joining Mallinckrodt in March 2019, Mr. Reasons served as Senior Vice President and Chief Financial Officer of Amneal Pharmaceuticals, Inc. (“Amneal”) from May 2018 until January 2019 and as Senior Vice President, Finance and Chief Financial Officer of Impax Laboratories, Inc. (“Impax”) from December 2012 until Amneal Pharmaceuticals LLC and Impax completed their business combination to form Amneal in May 2018. Mr. Reasons previously served as Impax's Acting Chief Financial Officer from June 2012 to December 2012 and as Impax's Vice President, Finance from January 2012 to June 2012. Prior to joining Impax in January 2012, he held various finance management positions at Cephalon, Inc. from 2005 to 2012 and at E. I. Du Pont De Nemours and Company from 2003 to 2005 and was at PricewaterhouseCoopers LLP from 1993 to 2003 last serving as senior manager. Mr. Reasons also serves as an independent board director and audit committee chair for both Aclaris Therapeutics, Inc. and Recro Pharma, Inc.
Mark J. Casey is our Executive Vice President and Chief Legal Officer, a role he assumed in August 2019. He joined Mallinckrodt in February 2018 as our General Counsel and has executive responsibility for all legal functions, including those related to litigation, intellectual property, environmental and regulatory matters, and mergers and acquisitions. Mr. Casey is also responsible for the Company's government affairs, policy and patient advocacy functions, as well as the Company's Specialty Generics business. Prior to joining Mallinckrodt, he served as Senior Vice President, General Counsel & Secretary of Idera Pharmaceuticals from June
2015 to January 2018. Mr. Casey also served as Senior Vice President, Chief Administrative Officer, General Counsel & Secretary of Hologic, Inc. (“Hologic”) from March 2012 to December 2014, and as Senior Vice President, General Counsel & Secretary at Hologic from October 2007 to February 2012. Mr. Casey began his career as a patent attorney for the Digital Equipment Corporation and for EMC Corporation, and served as Senior Patent Counsel for two years at Boston Scientific, after which he progressed to Chief Patent Counsel and Deputy General Counsel for Cytyc Corporation.
Kassie Harrold is our Chief Compliance Officer, with responsibility for global ethics and the compliance program, including risk assessment and mitigation, hotline reporting and investigations, program monitoring and governance. Ms. Harrold has more than 15 years of compliance experience in the pharmaceutical and specialty chemical industries, and has assessed, implemented and managed compliance programs in a broad range of subject matter areas. Ms. Harrold has held roles of increasing responsibility since joining Mallinckrodt in 2013, including leading the trade compliance and business support functions and advising senior management on a broad range of business matters as the Senior Staff Liaison to the President and Chief Executive Officer. Previously, Ms. Harrold held several positions, including global compliance, litigation and employment counsel and government affairs, with Solutia Inc., the specialty chemicals spin-off of Monsanto.
Hugh M. O'Neill is our Executive Vice President and Chief Commercial and Operations Officer. He has executive responsibility for the Company's Specialty Brands products, directly managing all commercialization and manufacturing efforts and broad market access activities, as well as new product launch execution for assets in Mallinckrodt's near-term development portfolio. From April 2015 to May 2018, Mr. O'Neill served as our Executive Vice President and President, Autoimmune and Rare Diseases, and from September 2013 to April 2015, he served as Senior Vice President and President, U.S. Specialty Pharmaceuticals. Prior to joining Mallinckrodt in September 2013, Mr. O'Neill worked at Sanofi-Aventis for ten years where he held various commercial leadership positions including Vice President of Commercial Excellence from June 2012 to July 2013; General Manager, President of Sanofi-Aventis Canada from June 2009 to May 2012; and Vice President Market Access and Business Development from 2006 to 2009. Mr. O'Neill joined Sanofi in 2003 as its Vice President, U.S. Managed Markets. Mr. O'Neill previously served in a variety of positions of increasing responsibility for Sandoz Pharmaceuticals, Forest Laboratories, Novartis Pharmaceuticals and Pfizer Inc.
Steven J. Romano, M.D. is our Executive Vice President and Chief Scientific Officer. Dr. Romano joined Mallinckrodt in May 2015 and has executive responsibility for research and development (“R&D”), medical affairs and regulatory affairs functions. Dr. Romano is a board-certified psychiatrist with more than 25 years of experience in the pharmaceutical industry. Previously, Dr. Romano spent 16 years at Pfizer, Inc. where he held a series of senior medical and R&D roles of increasing responsibility, culminating with his role as Senior Vice President, Head of Global Medicines Development, Global Innovative Pharmaceuticals Business. Prior to joining Pfizer, he spent four years at Eli Lilly & Co. After receiving his A.B. in Biology from Washington University in St. Louis and his medical degree from the University of Missouri-Columbia, Dr. Romano completed his residency and fellowship at New York Hospital-Cornell Medical Center, continuing on the faculty of the medical school for an additional six years. Dr. Romano also serves as a director of Silence Therapeutics plc.
Ian Watkins is our Executive Vice President and Chief Human Resources Officer. He has executive responsibility for organizational development, effectiveness and sustainability, talent acquisition, total rewards, human resources systems and service delivery and the Company's communications, facilities management and security. He is also responsible for supporting the Board of Directors in their governance activities related to executive compensation, talent and succession management. Mr. Watkins joined Covidien's Pharmaceuticals business in September 2012 as the Chief Human Resources Officer. Mr. Watkins served as Vice President, Global Human Resources at Synthes, Inc. from June 2007 to September 2012, which was acquired by Johnson & Johnson. Mr. Watkins served as Senior Vice President, Human Resources from 2003 to 2006 for Andrx Corporation.
Involvement in Certain Legal Proceedings
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”). The entities that filed the Chapter 11 Cases include Mallinckrodt plc, substantially all of our 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 our international subsidiaries (together with Mallinckrodt plc, Specialty Generics Subsidiaries and Specialty Brands Subsidiaries, the “Debtors”). In connection with the filing of the Chapter 11 Cases, we entered into a restructuring support agreement (as amended, supplemented or otherwise modified, “Restructuring Support Agreement” or “RSA”) as part of a prearranged plan of reorganization. Refer to Note 2 of the Notes to the Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K for further information on the voluntary petitions for reorganization, the RSA and agreements in principle subsequently memorialized in our Chapter 11 plan of reorganization.
Delinquent Section 16(a) Reports
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires our officers and directors and persons who beneficially own more than 10% of our ordinary shares to file reports of ownership and changes in ownership of such
ordinary shares with the SEC. These persons are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file. As a matter of practice, our legal team assists our officers and directors in preparing initial reports of ownership and reports of changes in ownership and files those reports on their behalf. Based on our review of the copies of such forms we have received, as well as information provided and representations made by the reporting persons, we believe that all required Section 16(a) reports were timely filed during our fiscal year ended December 31, 2021.
Code of Business Conduct and EthicsReport.
We have adopted the Mallinckrodt Guide to BusinessCode of Conduct, which meets the requirements of a “code"code of ethics”ethics" as defined in Item 406 of Regulation S-K, as well as the requirements of a code of business conduct and ethics under the listing standards of the New York Stock Exchange. Although our ordinary shares ceased to be listed on the NYSE following our voluntary filingOur Code of the Chapter 11 Cases, we have elected to continue to comply with the NYSE listing standards. Our Guide to Business Conduct applies to all employees, officers and directors of Mallinckrodt, including, without limitation, our CEO, CFO and other senior financial officers. Our Guide to BusinessCode of Conduct is posted on our website at mallinckrodt.com under the heading “Investor"Investor Relations - Corporate Governance.”" We will also provide a copy of our Guide to BusinessCode of Conduct to shareholders upon request. We intend to disclose any amendments to our Guide to BusinessCode of Conduct, as well as any waivers for executive officers or directors, on our website.
Audit Committee and Audit Committee Financial Experts
The Board has a separately designated Audit Committee established in accordance with the Exchange Act. The Audit Committee monitors the integrity of our financial statements, the independence and qualifications of the independent auditors, the performance of our internal auditors and independent auditors, our compliance with certain legal and regulatory requirements and the effectiveness of our internal controls. The Audit Committee is responsible for selecting, retaining, evaluating, setting the remuneration of and, if appropriate, recommending the termination of our independent auditors. The current members of the Audit Committee are Ms. Reed, Mr. Carter, and Mr. Russell. Each of them is independent under SEC rules and NYSE listing standards applicable to audit committee members. Ms. Reed is the Chair of the Audit Committee. The Board has determined that Ms. Reed is an audit committee financial expert. The Audit Committee operates under a charter approved by the Board, which is posted on our website at mallinckrodt.com.
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| Item 11. | Executive Compensation. |
Our Named Executive Officers
For purposesInformation regarding the compensation of the executive compensation disclosures, the individuals listed below are referred to collectively as our named executive officers (“NEOs”).
• Mark C. Trudeau, President and Chiefdirectors required under this Item 11. Executive Officer.
• Hugh M. O’Neill, Executive Vice President and Chief Commercial and Operations Officer.
• Steven J. Romano, M.D., Executive Vice President and Chief Scientific Officer.Compensation will be filed with the SEC within 120 days after December 30, 2022 pursuant to General Instruction G(3) to Form 10-K.
Fiscal 2021 Compensation Program
The following table summarizes the three major elements of our fiscal 2021 executive compensation program and the objective of each element. They are designed to work together, and the HRCC views the executive compensation program as an integrated total compensation program. The overall value of compensation is competitively benchmarked to the pharmaceutical industry and with peer companies. The mix of compensation elements varies based on an executive’s position and responsibilities.
During fiscal 2021, each NEO participated in the 2021 Key Employee Incentive Plan ("2021 KEIP") which is a component of our Stock and Incentive Plan. The HRCC approved the 2021 KEIP on March 8, 2021 followed by the Bankruptcy Court approval on April 5, 2021. The 2021 KEIP was put in place for similar reasons to the 2020 Key Employee Incentive Plan ("2020 KEIP"), which was implemented in the time leading up to the filing of the Chapter 11 Cases in October 2020 in order to replace the annual incentive plan and long-term incentive plan for the Company's NEOs for fiscal 2020. Due to the timing of the commencement of the Chapter 11 Case, the 2020 KEIP contained three separate stand-alone performance periods (First Half, Third Quarter, and Forth Quarter). Since the Chapter 11 proceedings continued into 2021, the 2021 KEIP was structured with the input of various creditor constituencies to include two separate stand-alone performance periods (First Half and Second Half) and added in two additional performance measures, adjusted EBITDA and a multi-faceted pipeline metric. Additional details of the 2021 KEIP can be found under the section “Fiscal 2021 KEIP Awards”. After emergence from the Chapter 11 proceedings, the Board of Directors and management of the Company at that time will review and establish the compensation philosophy and program elements appropriate for the business strategy of the emerged organization.
| | | | | | | | | | | | | | |
Element | | Key Features | | Objective |
Base salary | | Fixed cash compensation | | Offer a stable income, intended to reflect the market value of the executive’s role, with differentiation for strategic significance, individual capability and experience. |
2021 KEIP | | Market-competitive, performance-based cash bonus opportunity tied to achievement of Company goals.
Calculation for each executive’s cash incentive is based on performance versus pre-determined goals tied to financial and operational performance measures.
Two separate standalone performance periods and payout schedule (First Half and Second Half). | | Focus executives on pre-set patient, employee and stakeholder value objectives and drive specific behaviors that foster short- and long-term growth and profitability. |
Retention bonus | | Cash-based retention bonus awarded to executives in September 2020
Subject to repayment prior to the earlier of May 15, 2022 or the date the Company emerges from the Chapter 11 Cases in the event the award recipient resigns, retires, voluntarily terminates employment or is terminated by the company for cause | | Designed to stabilize the executive leadership team and reduce the possibility of turnover, which could result in the loss of expert knowledge, slow momentum and could impair the Company’s ability to navigate its critical challenges, including the Chapter 11 Cases. |
Summary Compensation Table
Our NEOs, like our employees generally and our shareholders and other stakeholders, have been significantly impacted by the Chapter 11 Cases. The information presented in the Summary Compensation Table reflects compensation for our NEOs for fiscal year 2021. The impact of the Chapter 11 Cases is not reflected in the Summary Compensation Table. Under the plan of reorganization, each existing equity interest in Mallinckrodt, including our ordinary shares and existing equity-based awards, will be cancelled and extinguished, and our shareholders will not receive any recovery upon our emergence from the Chapter 11 proceedings. Accordingly, upon our emergence from the Chapter 11 proceedings, our NEOs will not receive any value for their RSUs, stock options or any other equity interest in Mallinckrodt.
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| SUMMARY COMPENSATION TABLE |
| Name and Principal Position | | Fiscal Year | | Salary
($) | | Bonus ($) (1) | | Stock Awards
($) | | Option Awards
($) | | Non-Equity Incentive Plan Compensation ($) (2) | | All Other Compensation ($) (3) | | Total
($) |
Mark C. Trudeau
President and Chief Executive Officer | | 2021 | | 1,090,385 | | | — | | | — | | | — | | | 7,148,280 | | | 737,318 | | | 8,975,983 | |
| 2020 | | 1,050,000 | | | 1,575,000 | | | — | | | — | | | 11,407,814 | | | 854,724 | | | 14,887,538 | |
Hugh M. O’Neill
Executive Vice President and Chief Commercial Officer | | 2021 | | 643,846 | | | — | | | — | | | — | | | 2,486,775 | | | 159,060 | | | 3,289,681 | |
| 2020 | | 607,885 | | | 930,000 | | | — | | | — | | | 2,943,675 | | | 249,666 | | | 4,731,226 | |
Steven J. Romano, M.D.
Executive Vice President and Chief Science Officer | | 2021 | | 643,846 | | | — | | | — | | | — | | | 2,486,775 | | | 238,439 | | | 3,369,060 | |
| 2020 | | 620,000 | | | 930,000 | | | — | | | — | | | 2,943,675 | | | 283,990 | | | 4,777,665 | |
(1)The amounts reported represent cash retention awards paid in 2020 but will not be earned until 2022 for Mr. Trudeau, Mr. O’Neill and Dr. Romano. The terms of the retention payments include repayment of the full amount if the executive voluntarily terminates employment or is terminated for cause earlier of May 15, 2022 or the date the Company emerges from the Chapter 11 proceedings.
(2)The amounts reported for fiscal year 2021 represent incentive cash awards paid to the NEOs under our 2021 KEIP. For information regarding the calculation of these awards, see the Narrative to the Summary Compensation Table.
(3)The amounts reported represent the aggregate dollar amount for each NEO for employer contributions to the Retirement Savings Plan, employer credits to the Supplemental Savings Plan, international assignment benefits for fiscal 2021 and 2020, executive physicals, executive financial planning and tax reimbursements, and tax preparation fees. We also have Company-purchased tickets to athletic or other events which are generally used for business purposes. In limited instances our named executive officers may have personal use of Company-purchased event tickets when they are not being used for business purposes. No amounts are included because there is no incremental cost to us of such personal use. The following table shows the specific amounts included in the All Other Compensation column of the Summary Compensation Table for fiscal 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ALL OTHER COMPENSATION IN 2021 |
| Name | | Contributions to Retirement Savings Plan
($) | | Credits to Supplemental Savings Plan
($) | | Tax Reimbursement Payments ($) (1) | | Director Fees ($) (2) | | Other ($) (3) | | Total
($) |
| Mark C. Trudeau | | 18,450 | | 396,842 | | | 303,861 | | | — | | | 18,165 | | | 737,318 | |
| Hugh M. O’Neill | | 18,450 | | 130,697 | | | 9,913 | | | — | | | — | | | 159,060 | |
| Steven J. Romano, M.D. | | 17,400 | | 130,697 | | | — | | | 74,377 | | | 15,965 | | | 238,439 | |
(1)Mr. Trudeau is entitled to certain benefits as part of our Tax Equalization Policy due to his service on the Board of Directors and amounts shown represent payments under our Tax Equalization Policy during fiscal 2021. Following the filing of all tax returns, a tax equalization calculation will be prepared to
determine the ultimate amount owed either to the Company or Mr. Trudeau under our Tax Equalization Policy. Mr. O'Neill received tax reimbursement related to spousal travel to the Mallinckrodt's President's Club.
(2)The Company has appointed Mr. Romano as its representative on the Board of Directors of Silence Therapeutics plc. Mr. Romano received director fees of £55,000 from Silence Therapeutics plc for this service in 2021. For purposes of this table, the exchange rate as of December 31, 2021 of one British Pound to 1.35231 U.S. dollars was used.
(3)Includes amounts for executive physicals and executive financial planning and tax preparation fees.
Narrative to Summary Compensation Table
Fiscal 2021 KEIP Awards
For fiscal 2021, the HRCC determined the amount payable to our NEOs under the 2021 KEIP by multiplying the NEO’s individual incentive target by the funding based on Company performance for two separate standalone performance periods (First Half and Second Half, the two performance periods together are referred to as the “Full Year”).
The HRCC in partnership with independent advisors established award target amounts for each of our NEOs under the 2021 KEIP, detailed in the table below. Based on the assessment of the Company's performance, the HRCC may adjust the bonus funding factor up or down under the maximum determined by our plan.
The 2021 KEIP Full Year target amounts for the NEOs are equal to the sum of their previously approved target annual incentive opportunity for fiscal 2021 and approximately 54% of the CEO's and 77% of the other NEOs previously approved target long-term equity incentive opportunity for fiscal 2021 (a 46% reduction was applied to the CEO and a 23% reduction was applied to the other NEOs to reduce the total cost of the 2021 KEIP, reflect the shorter-term nature of this component of the award and that the award was payable in cash).
| | | | | | | | | | | | | | | | | | | | |
| Name | | 2021 KEIP
Full Year Target | | 2020 KEIP
Full Year Target | | Previously Approved Combined Annual and
Long-Term Incentive Target |
| Mark C. Trudeau | | $6,712,000 | | $9,312,500 | | $11,312,500 |
| Hugh M. O’Neill | | $2,335,000 | | $2,403,000 | | $2,903,000 |
| Steven J. Romano, M.D. | | $2,335,000 | | $2,403,000 | | $2,903,000 |
Performance Periods and Measures. The 2021 KEIP consisted of two separate standalone performance periods: the first half of fiscal 2021 (50% of award) and the second half of fiscal 2021 (50% of award). The two semi-annual performance periods and semi-annual goals placed a greater emphasis on the results we needed to achieve throughout the year. In addition, this type of incentive plan structure is aligned with market practice for companies operating under similar circumstances to us. The Company’s achievement against the following performance measures was assessed for each performance period separately and resulted in two separate award payouts: adjusted EBITDA, adjusted operating cash flow, adjusted net sales, and a pipeline metric. These performance measures were set in relation to our annual budget for the entire enterprise as approved by the Board of Directors.
The HRCC believes these measures are key drivers to preserve and maximize enterprise value and maximize cash generation during a time of significant bankruptcy and litigation overhang.
• Adjusted EBITDA is defined as earnings for the fiscal year before interest, taxes, depreciation and amortization, adjusted (with limitations and governors in place related to research and development expense) to exclude certain non-recurring items considered not a direct reflection of our core operations and our ongoing performance.
•Adjusted operating cash flow represents operating cash flow prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) adjusted for separation costs, reorganization advisor fees, working capital impacts related to the CARES Act, significant legal and environmental charges and working capital impacts resulting from the Company’s Chapter 11 bankruptcy filing, with certain limitations and governors related to research and development expense, days payable outstanding ("DPO"), severance costs and interest payments.
• Adjusted net sales represents net sales calculated in accordance with GAAP, as adjusted for certain items. Net sales is an important measure because it is a leading indicator of performance and value creation and provides a clear focus on top-line growth. For purposes of the 2021 KEIP, adjusted net sales excludes foreign exchange impacts.
• Pipeline metric focused on long-term success with targets related to achievements of operational milestones in the development, execution, and commercialization of key products.
The weighted average funding for the 2021 KEIP could range from 0% to 150% of target based upon performance against these measures for each standalone performance period, which is a reduction to the approved range of 0% to 200% from years prior to 2020. The HRCC maintains discretionary authority to further modify the funding, both negatively and positively.
Fiscal 2021 First Half performance resulted in an overall weighted average funding of 112% and the Second Half performance resulted in an overall weighted average funding of 101%. The following charts summarize the 2021 KEIP design based on the two
separate performance periods with respect to the Company performance measures, including the relative weighting, performance targets, actual results and weighted average funding for our NEOs:
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Fiscal 2021 First Half Company Performance Measures
(Applicable to all NEOs) |
| Measure | | Weighting | | Threshold
(50% Payout) | | Target
(100% Payout) | | Maximum
(150% Payout) | | Fiscal 2021 First Half Results (1) | | Weighted Average Funding |
Adjusted EBITDA
(in millions) | | 40% | | $355 | | $418 | | $481 | | $404 | | 36% |
Adjusted Operating Cash Flow
(in millions) | | 40% | | $342 | | $402 | | $463 | | $477 | | 60% |
Adjusted Net Sales
(in millions) | | 10% | | $1,067 | | $1,186 | | $1,305 | | $1,102 | | 6% |
| Pipeline Metric | | 10% | | | | | | | | | | 10% |
| | | | | | | | | | | | 112% |
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Fiscal 2021 Second Half Company Performance Measures
(Applicable to all NEOs) |
| Measure | | Weighting | | Threshold
(50% Payout) | | Target
(100% Payout) | | Maximum
(150% Payout) | | Fiscal 2021 Second Half Results (1) | | Weighted Average Funding |
Adjusted EBITDA
(in millions) | | 40% | | $358 | | $422 | | $485 | | $396 | | 32% |
Adjusted Operating Cash Flow
(in millions) | | 40% | | $263 | | $310 | | $356 | | $352 | | 58% |
Adjusted Net Sales
(in millions) | | 10% | | $1,081 | | $1,201 | | $1,321 | | $1,103 | | 6% |
| Pipeline Metric | | 10% | | | | | | | | | | 5% |
| | | | | | | | | | | | 101% |
The performance measures used for compensation purposes include non-GAAP financial measures which exclude the effects of certain items which the HRCC believes do not represent ongoing operating results and/or business trends.
Strategic Imperatives. In addition to performance against financial and operational measures, the HRCC also considers performance that supported the accomplishment of strategic imperatives, and has the ability to adjust the overall size of the executive bonuses, both negatively and positively. This allows the HRCC to decrease the size of the executive bonuses if, in the HRCC’s opinion, such amounts are not appropriately earned or should not be paid.
The HRCC took into account the progress on the strategic imperatives and challenges that faced the business in 2021 when determining the 2021 KEIP award payouts for each of the two performance periods. The following charts show the HRCC approved multipliers for each of the two performance periods.
| | | | | | | | | | | | | | | | | |
| Target Performance Multiplier | | Payout |
| First Half Target
KEIP Opportunity | x | Multiplier | | First Half
KEIP Payout |
| Mark C. Trudeau | $3,356,000 | x | 112% | = | $3,758,720 |
| Hugh M. O’Neill | $1,167,500 | | 112% | | $1,307,600 |
| Steven J. Romano, M.D. | $1,167,500 | | 112% | | $1,307,600 |
| | | | | | | | | | | | | | | | | |
| Target Performance Multiplier | | Payout |
| Second Half Target KEIP Opportunity | x | Multiplier | | Second Half
KEIP Payout |
| Mark C. Trudeau | $3,356,000 | x | 101% | = | $3,389,560 |
| Hugh M. O’Neill | $1,167,500 | | 101% | | $1,179,175 |
| Steven J. Romano, M.D. | $1,167,500 | | 101% | | $1,179,175 |
Executive Retention Bonus Program
In November 2019, the HRCC approved a key executive retention plan, also known as the Executive Retention Bonus Program (“ERBP”) for specified employees including the NEOs, and the Board approved an ERBP for the CEO. The ERBP provided a cash-based retention bonus award to specified employees of the Company. In August 2020, the HRCC approved an extension of the ERBP for a small number of employees including the NEOs, and the Board approved an extension for the CEO. The HRCC considered the challenges facing the Company including the opioid litigation, and both the Board and the HRCC believed it critical to continue to stabilize the executive leadership team and reduce the possibility of further turnover during a critical time at the Company. Further turnover would have resulted in the loss of expert knowledge, slowed momentum and could have impaired the Company’s ability to
continue to navigate the challenges, including the opioid litigation, and bring pipeline products to market. The HRCC consulted independent advisors on the extension of the program and approaches utilized by other companies facing similar uncertainties for retention of executives in determining the value of the extended ERBP. The HRCC (and the Board with regard to the CEO) approved awards under the extended ERBP for the NEOs in the following amounts.
| | | | | | | | |
2020 Executive Retention Bonuses |
Mark C. Trudeau | | $1,575,000 |
Hugh M. O’Neill | | $930,000 |
Steven J. Romano, M.D. | | $930,000 |
Awards under the 2019 ERBP, are subject to repayment prior to the 18-month anniversary of the grant date in the event the award recipient resigns, retires, voluntarily terminates employment or is terminated by the Company for cause. Awards under the extended 2020 ERBP, are subject to repayment in the event the award recipient resigns, retires, voluntarily terminates employments or is terminated by the Company for cause until the earlier of May 15, 2022 or the date the Company emerges from bankruptcy proceedings.
Other Benefits
We provide NEOs the same benefits that are provided to all employees, including defined contribution retirement benefits and health and welfare benefits. In addition, our executive officers are provided with certain additional benefits, intended to be competitive with the practices of our peer companies.
Retirement Benefits. The NEOs are eligible to participate in our Retirement Savings and Investment Plan (“Mallinckrodt Retirement Savings Plan”), which is our 401(k) plan available to all eligible U.S. employees, and our Supplemental Savings and Retirement Plan (“Mallinckrodt Supplemental Savings Plan”), our non-qualified deferred compensation plan in which executive officers and other senior employees may participate. The Mallinckrodt Supplemental Savings Plan is a so-called “excess” plan that extends the 401(k) benefits beyond the Internal Revenue Code (the “Code”) limitations.
Mallinckrodt Supplemental Savings Plan. Under the Mallinckrodt Supplemental Savings Plan, participants, including NEOs, may defer up to 50% of their base salary and 75% of their annual bonus. We provide matching credits based on the participant’s deferred base salary and bonus at the same rate that such participant is eligible to receive matching contributions under the Mallinckrodt Retirement Savings Plan and Company credits on any cash compensation (i.e., base and bonus) that the participant earns during a calendar year in excess of applicable IRS limits ($290,000 for 2021). Participants are fully vested in matching and Company credits (including earnings on such credits) upon completion of two years of service. The Mallinckrodt Supplemental Savings Plan is a non-qualified deferred compensation plan that is maintained as an unfunded “top-hat” plan and is designed to comply with Section 409A of the Code. Amounts credited to the Mallinckrodt Supplemental Savings Plan as participant deferrals or Company credits may also be credited with earnings (or losses) based upon investment selections made by each participant from investments that generally mirror investments offered under the Mallinckrodt Retirement Savings Plan. Participants may elect whether they will receive a distribution of their Mallinckrodt Supplemental Savings Plan account balances upon termination of employment or at a specified date. Distributions can be made in a lump sum or in up to 15 annual installments.
Under the Mallinckrodt Retirement Savings Plan, we make an automatic contribution of three percent (3%) of an employee’s eligible pay, irrespective of whether the employee contributes to such plan. Additionally, we match fifty cents ($0.50) for every one dollar ($1.00) employees contribute, up to the first eight percent (8%) of eligible pay. Elective deferrals of compensation were suspended for 2021.
International Assignment Benefits. We ensure that employees who are sent on an assignment outside of their home country are subject to substantially the same income tax liability as they would have paid in the U.S. pursuant to our tax equalization program. Each such employee is responsible for a theoretical U.S. income tax liability based on an estimate of his or her anticipated U.S. income tax liability, and we are responsible for any home country and assignment country taxes in excess of that amount. We deduct hypothetical income taxes from the employee’s compensation during the tax year and pay any assignment country taxes on his or her behalf.
Health and Welfare Benefits. The health and welfare benefits we provide to the NEOs are offered to all eligible U.S. based employees and include medical, dental, prescription drug, vision, life insurance, accidental death and dismemberment, business travel accident, personal and family accident, flexible spending accounts, short- and long-term disability coverage and an employee assistance program.
Additional Benefits. We maintain an executive physical examination program and an executive financial and tax planning program for executive officers. These programs are intended to encourage executives to proactively manage their health and complex financial/tax situations, thereby enabling them to focus on the business. The benefits are periodically benchmarked versus comparable companies and intended to be competitive for our industry. In addition, when we request a spouse or partner to attend a business meeting, such as our annual national sales recognition program for top performers, we reimburse executive officers for expenses related to this travel. In these circumstances, we reimburse executive officers for the income taxes associated with these travel
expenses. In addition, certain executives whose permanent residences are located more than 50 miles from our New Jersey executive offices, are reimbursed for commuting expenses and we pay for their lodging when they are working at our New Jersey executive offices.
Severance Benefits. We maintain an executive severance plan that provides benefits to certain senior executives upon an involuntary termination of employment for any reason other than cause, permanent disability or death. We provide this plan to enable our executives to devote their full attention to our business by ensuring they will have some financial security in the event of an involuntary termination of employment without cause. Severance benefits, in the form of a lump sum cash payment equal to 18 months base salary (24 months for our CEO), bonus and health benefits are generally payable following a qualifying termination of employment. Executives whose employment is involuntarily terminated without cause during the first twelve months of employment receive base salary and health benefits equivalent to 9 months (12 months for our CEO) in the form of a lump sum cash payment and do not receive a bonus. Receipt of these benefits is conditioned upon the executive signing a release of any claims against us.
Change in Control Benefits. We maintain a change in control plan that provides benefits to certain senior executives upon an involuntary termination of employment or good reason resignation that occurs during a period shortly before and continuing after a change in control (a double-trigger arrangement). We provide this plan to encourage our executives to remain neutral in the face of a potential transaction that may benefit shareholders but result in the loss of the executive’s employment. Benefits are generally payable following a qualifying termination of employment in a lump-sum cash payment equal to 1.5 times (two times for our CEO) the sum of the executive’s base salary and the average of the executive’s bonus for the previous three fiscal years. Additional benefits provided upon a change in control termination include full vesting of outstanding equity awards (double-trigger), continued subsidy for health plan premiums for an 18-month period (24 months for our CEO) and outplacement services. Receipt of change in control severance benefits is conditioned upon the executive signing a release of any claims against us. The plan does not provide excise tax gross-ups.
Employment Agreements. For our NEOs, we have entered into employment agreements which are intended to codify into a contractual arrangement the severance benefits that each executive officer was already entitled to under the executive severance plan. The term of the employment agreements is three years, with automatic one year renewals, absent notice of non-renewal.
Due to the commencement of the Chapter 11 Cases, the disbursement of severance pay and related benefits during the pendency of the Chapter 11 Cases is subject to, among other things, approval by the Bankruptcy Court and the restrictions regarding severance payments imposed by section 503(c) of the Bankruptcy Code.
Share Ownership Requirements
The Board established share ownership requirements under which executive officers have been expected to hold equity with a value expressed as a multiple of their base salary, with the CEO set at five times base salary and all other executive officers set at three times base salary, with certain allowances for including awarded but unvested equity grants in the calculations. However, as a result of the Chapter 11 Cases and related circumstances, on November 3, 2020, the Board of Directors waived compliance with the stock ownership requirements for the duration of the Chapter 11 Cases.
Anti-Hedging/Anti-Pledging Policy
Our Insider Trading Policy prohibits directors, officers and employees from entering into or trading in puts, calls, cashless collars, options or similar rights and obligations or any other hedging activity involving our securities, other than the exercise of a Company-issued stock option.
Our policy also prohibits directors, officers and employees from purchasing our securities on margin, borrowing against our securities held in a margin account or pledging our securities as collateral for a loan. However, an exception may be granted by our General Counsel if the individual clearly demonstrates the financial capacity to repay the loan without resort to the pledged securities.
Executive Financial Recoupment Program (“Clawback”)
Since its separation from Covidien plc in 2013, the Corporate Governance Guidelines have mandated that the Company have a Board-approved policy for recoupment of incentive compensation. This policy was originally implemented by the Board in 2014, and was most recently amended in 2022 in connection with at the Company’s corporate integrity agreement entered into with the Office of Inspector General of the Department of Health and Human Services. Mallinckrodt’s policy states that in the event of an accounting restatement resulting from material non-compliance with financial reporting requirements under applicable law, the HRCC is authorized to recover any incentive compensation that was overpaid taking into account such factors as the HRCC deems appropriate. In addition, Mallinckrodt's policy states that in the event of certain events of significant misconduct, including a violation of law or regulation or a significant violation of a Company policy, to the extent permitted by law, the Company must seek to recoup cash awards and all or a portion of the realized value of equity awards for the three (3) year period prior to the recoupment determination.
Under Mallinckrodt’s policy, the Company agreed to disclose annually whether, at any time during the last completed fiscal year, the Board required recoupment or forfeiture of any incentive compensation received by certain employees, including NEOs, (1) if required by law, and (2) if not required by law, so long as the disclosure (a) would not violate any individual’s privacy rights, (b) is not likely to result in or exacerbate any existing or threatened employee, shareholder or other litigation, arbitration, investigation or proceeding against the Company and (c) is not otherwise prohibited. Subject to the exceptions described in the previous sentence, if any such recoupment or forfeiture under this policy occurred, the Company will disclose the general circumstances of the recoupment and/or forfeiture, and if no such recoupment or forfeiture occurred during the last completed fiscal year, the Company will disclose that no such event occurred.
In addition, the Company’s Wage Motion which is effective during the Chapter 11 restructuring process, states all parties involved may seek disgorgement of payments from any member in a debtor entity, including the NEOs, if it is determined the member knowingly participated in criminal misconduct in connection with their employment with the Debtors or been aware of acts or omissions of others that such member knew at the time were fraudulent or criminal with respect to the Debtors’ commercial practices in connection with the sale of opioids.
In 2021, there was no recoupment or forfeiture applied to the incentive compensation of any executive officer of the Company.
Outstanding Equity Awards at Fiscal Year-End
The following table provides information regarding outstanding stock option awards and unvested restricted unit and performance unit awards held by each NEO as of December 31, 2021 and the corresponding market value based on our closing stock price as of December 31, 2021. For a more complete understanding of the table, please read the footnotes that follow the table.
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| OUTSTANDING EQUITY AWARDS AT 2021 FISCAL YEAR-END |
| | Option Awards | | Stock Awards |
| Name | | Number of Securities Underlying Unexercised Options
(#)
Exercisable | | Number of Securities Underlying Unexercised Options
(#)
Unexercisable | | Option Exercise Price
($) | | Option Expiration Date | | Number of Shares or Units of Stock That Have Not Vested
(#) | | Market Value of Shares or Units of Stock That Have Not Vested
($) | | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested
(#) | | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested
($) |
| Mark C. Trudeau | | 17,904 | | — (1) | | 37.85 | | 1/31/2022 | | — | | | — | | | — | | | — | |
| | 38,875 | | — (2) | | 41.73 | | 12/2/2022 | | — | | | — | | | — | | | — | |
| | 234,437 | | — (3) | | 44.00 | | 6/30/2023 | | — | | | — | | | — | | | — | |
| | 63,542 | | — (4) | | 51.35 | | 1/1/2024 | | — | | | — | | | — | | | — | |
| | 108,014 | | — (5) | | 96.96 | | 1/2/2025 | | — | | | — | | | — | | | — | |
| | 175,528 | | — (6) | | 72.61 | | 1/4/2026 | | — | | | — | | | — | | | — | |
| | 249,785 | | — (7) | | 51.73 | | 1/3/2027 | | — | | | — | | | — | | | — | |
| | 709,502 | | 236,501 (8) | | 13.80 | | 4/2/2028 | | — | | | — | | | — | | | — | |
| | 257,001 | | 257,001 (9) | | 22.26 | | 4/1/2029 | | — | | | — | | | — | | | — | |
| Hugh M. O’Neill | | 15,062 | | — (4) | | 51.35 | | 1/1/2024 | | — | | | — | | | — | | | — | |
| | 9,414 | | — (10) | | 51.35 | | 1/1/2024 | | — | | | — | | | — | | | — | |
| | 16,551 | | — (5) | | 96.96 | | 1/2/2025 | | — | | | — | | | — | | | — | |
| | 30,605 | | — (6) | | 72.61 | | 1/4/2026 | | — | | | — | | | — | | | — | |
| | 40,726 | | — (7) | | 51.73 | | 1/3/2027 | | — | | | — | | | — | | | — | |
| | 13,575 | | — (11) | | 51.73 | | 1/3/2027 | | — | | | — | | | — | | | — | |
| | 54,301 | | | — (12) | | 51.73 | | 1/3/2027 | | — | | | — | | | — | | | — | |
| | 96,492 | | 32,165 (8) | | 13.80 | | 4/2/2028 | | 6,160 (14) | | 770 | | | — | | | — | |
| | 51,400 | | 51,401 (9) | | 22.26 | | 4/1/2029 | | 11,231 (13) | | 1,404 | | | — | | | — | |
| Steven J. Romano, M.D. | | 11,275 | | — (15) | | 120.27 | | 7/1/2025 | | — | | | — | | | — | | | — | |
| 22,288 | | — (6) | | 72.61 | | 1/4/2026 | | — | | | — | | | — | | | — | |
| 44,798 | | — (7) | | 51.73 | | 1/3/2027 | | — | | | — | | | — | | | — | |
| 14,933 | | — (11) | | 51.73 | | 1/3/2027 | | — | | | — | | | — | | | — | |
| 59,731 | | | — (12) | | 51.73 | | 1/3/2027 | | — | | | — | | | — | | | — | |
| 141,900 | | 47,301 (8) | | 13.80 | | 4/2/2028 | | 9,058 (14) | | 1,132 | | | — | | | — | |
| 51,400 | | 51,401 (9) | | 22.26 | | 4/1/2029 | | 11,231 (13) | | 1,404 | | | — | | | — | |
(1)Represents stock options granted on February 1, 2012 to Mr. Trudeau in connection with his commencement of employment with Covidien as President of its Pharmaceuticals business, which vest 50% on each of the 3rd and 4th anniversaries of the grant date.
(2)Represents stock options granted on December 3, 2012, which vest one third on each of the 2nd, 3rd and 4th anniversaries of the grant date.
(3)Represents stock options granted on July 1, 2013 in connection with the separation from Covidien, which vest 50% on each of the 3rd and 4th anniversaries of the grant date.
(4)Represents stock options granted on January 2, 2014, which vest 25% on each of the 1st, 2nd, 3rd and 4th anniversaries of the grant date.
(5)Represents stock options granted on January 2, 2015, which vest 25% on each of the 1st, 2nd, 3rd and 4th anniversaries of the grant date.
(6)Represents stock options granted on January 4, 2016, which vest 25% on each of the 1st, 2nd, 3rd and 4th anniversaries of the grant date.
(7)Represents stock options granted on January 3, 2017, which vest 25% on each of the 1st, 2nd, 3rd and 4th anniversaries of the grant date.
(8)Represents stock options granted on April 2, 2018, which vest 25% on each of the 1st, 2nd, 3rd and 4th anniversaries of the grant date.
(9) Represents stock options granted on April 1, 2019, which vest 25% on each of the 1st, 2nd, 3rd and 4th anniversaries of the grant date.
(10)Represents stock options granted on January 2, 2014, which vest 50% each on the 3rd and 4th anniversaries of the grant date.
(11)Represents stock options granted on January 3, 2017 for the transition period, which vest 25% on each of the 1st, 2nd, 3rd and 4th anniversaries of the grant date.
(12)Represents stock options granted to certain NEOs on January 3, 2017, which fully vest on the 4th anniversary of the grant date.
(13)Represents RSUs granted on April 1, 2019, which vest 25% on each of the 1st, 2nd, 3rd and 4th anniversaries of the grant date.
(14)Represents RSUs granted on April 2, 2018, which vest 25% on each of the 1st, 2nd, 3rd and 4th anniversaries of the grant date.
(15)Represents stock options granted on July 1, 2015, which vest 25% on each of the 1st, 2nd, 3rd and 4th anniversaries of the grant date.
Potential Payments upon Termination
Due to the commencement of the Chapter 11 Cases, the disbursement of severance pay and related benefits during the pendency of the Chapter 11 Cases is subject to, among other things, approval by the Bankruptcy Court and the restrictions regarding severance payments imposed by section 503(c) of the Bankruptcy Code. The table below does not take into account changes and restrictions that apply following the commencement of the Chapter 11 Cases.
Employment Agreements. For all of the NEOs, severance benefits are payable pursuant to employment agreements entered into between each of the NEOs and a subsidiary of the Company (the “Employment Agreements”), which were intended to codify into a contractual arrangement the severance benefits that each NEO was already entitled to under the Severance Plan. Under the Employment Agreements, benefits are payable to eligible executives, including NEOs, upon an involuntary termination of employment for any reason other than cause, permanent disability or death. Post-termination benefits consist of:
• Payment of 1.5 times (2x for our CEO) the executive’s annual base salary and the average annual bonus received for the previous three fiscal years excluding any amounts paid that were attributable to the component of the award intended to replace a NEOs previously approved target long-term incentive equity opportunity;
• A lump sum payment equal to the employer subsidized portion of the cost of health insurance for the applicable executive and his dependents for 18 months;
• Accelerated vesting of stock options, restricted stock and RSUs scheduled to vest during the 12 months following the date of termination, with vested options remaining exercisable until the one year anniversary of the date of termination, subject to the earlier expiration of the option term. PSUs scheduled to vest during the 12 months following employment termination remain eligible to vest based on actual results.
• If, during the twenty-four months following the date of termination, an executive would reach the age required for early retirement or normal retirement treatment and would otherwise meet the retirement treatment criteria, the executive will be entitled to any more favorable equity award vesting included in any applicable equity award agreement with the executive;
• Outplacement services for up to 12 months; and
• Payment of a pro-rata portion of the executive’s annual incentive cash award for the fiscal year in which such executive’s employment terminates.
In addition, change in control severance benefits are payable to eligible executives, including NEOs, only if the double-trigger requirements are satisfied, meaning that, in order to receive any of the following benefits, the executive must experience an involuntary termination of employment or good reason resignation during a period that begins upon, and ends two years after, a change in control. Post-termination benefits consist of:
• Payment of 1.5 times (2x for our CEO) the executive’s annual base salary and the average annual bonus received for the previous three fiscal years excluding any amounts paid that were attributable to the component of the award intended to replace a NEOs previously approved target long-term incentive equity opportunity;
• A lump sum payment equal to the employer subsidized portion of the cost of health insurance for the applicable executive and his dependents for 18 months;
• Accelerated vesting in full of all stock options, restricted stock, RSUs and PSUs (with vested options remaining exercisable until the one year anniversary of the date of termination), with the vesting level of PSUs to be determined in the sole discretion of the HRCC;
• Outplacement services for up to 12 months; and
• Payment of a pro-rata portion of the executive’s annual incentive cash award for the fiscal year in which such executive’s employment terminates.
The payment of benefits under the Employment Agreements is conditioned upon the executive executing a general release in favor of us and is subject to the terms of the Non-Competition, Non-Solicitation, and Confidentiality Agreement by and between the executive and us, under which the executive agreed not to disclose confidential Company information at any time and not to compete with us nor solicit our employees or customers, for a period of one year following termination of employment. We may cancel benefits that are payable or seek to recover benefits previously paid if the executive does not comply with these provisions or violates the release of claims. Payments may be delayed until six months after termination of employment if necessary to comply with Section 409A of the Code.
Upon a termination of employment for cause, executives, including NEOs, are not eligible for severance benefits under the Employment Agreements and forfeit all unvested stock options, RSUs and PSUs. In addition, the stock options, RSUs and PSUs include a “clawback” feature pursuant to which we may recover the amount of any profit the NEO realized upon the exercise of stock options, or the vesting of RSUs or PSUs, during the 12-month period that occurs immediately prior to the executive officer’s involuntary termination of employment for cause.
For purposes of the Employment Agreements, as well as the “clawback” feature discussed in the preceding sentence, “cause” means substantial failure or refusal of the NEO to perform the duties and responsibilities of his job at a satisfactory level as required by us other than due to permanent disability, a material violation of any fiduciary duty or duty of loyalty owed to us, conviction of misdemeanor (other than a traffic offense) or felony, fraud, embezzlement or theft, violation of a material rule or policy, including a violation of our Guide to Business Conduct, unauthorized disclosure of any of our trade secrets or confidential information or other egregious conduct that has or could have a serious and detrimental impact on us and our employees.
For purposes of the Employment Agreements, “good reason” means any retirement or termination of employment by the NEO that is not initiated by us and that is caused by any one or more of the following events, in each case, without the NEO’s written consent during the two-year period following a change in control: (i) assignment to the NEO of any duties inconsistent in any material respect with the NEO’s authority, duties or responsibilities as in effect immediately prior to the change in control; (ii) a material diminution in the authority, duties or responsibilities of the supervisor to whom the NEO is required to report as in effect immediately prior to the change in control; (iii) a material change in the geographic location at which the NEO must perform services to a location that is more than 50 miles from the NEO’s principal place of business immediately preceding the change in control; (iv) a material reduction in the NEO’s compensation and benefits, taken as a whole, as in effect immediately prior to the change in control; (v) our failure to obtain a satisfactory agreement from any successor to assume and agree to perform our obligations to the NEO under such Employment Agreement; or (vi) a material diminution in the budget over which the NEO retains authority. Additionally, “good reason” will only exist if the NEO provides written notice stating the good reason event, we do not cure such event, and the NEO terminates employment within a certain period of time after the end of the cure period.
Other Termination Benefits. The terms of our 2021 KEIP and equity plan provide for certain benefits upon a NEO’s termination of employment due to death, disability or retirement. For this purpose, normal retirement occurs where an executive officer terminates employment after attaining age 60 and the sum of the executive’s age and years of service equals at least 70. Under the 2021 KEIP, NEOs are eligible to receive a pro-rated annual incentive cash award based on the number of days that the executive officer was employed by us during the fiscal year upon death, disability or normal retirement. Under the equity plan, NEOs are eligible to receive full vesting of stock options, RSUs and PSUs upon death, disability or normal retirement.
Compensation of Non-Employee Directors
The Board of Directors has approved a compensation structure for non-employee directors consisting of an annual cash retainer and supplemental cash retainers. This compensation structure was determined in conjunction with the Governance and Compliance Committee, after reviewing data and analyses from the Governance and Compliance Committee’s independent compensation consultant, Willis Towers Watson ("WTW").
Cash Retainers
Board members. Each director receives an annual cash retainer of $336,000, paid in quarterly installments at the end of each quarter. Directors joining the Board other than on the first day of a quarter receive a cash retainer pro-rated for the number of days served during their initial quarter of service.
Committee Chairs. The Chair of the Audit Committee receives a supplemental annual cash retainer of $25,000. The Chair of the Human Resources and Compensation Committee receives a supplemental annual cash retainer of $20,000. The Chairs of the Governance and Compliance Committee and the Science and Technology Committee each receive a supplemental annual cash retainer of $15,000. The Chair of the Strategic Review Committee does not receive any additional retainer for this service.
Committee Members. Each member of a committee (excluding committee chairs) receives a supplemental annual cash retainer of $5,000.
Non-Executive Chairman of the Board. Our non-executive Chairman receives a supplemental annual cash retainer of $139,600.
Equity Awards
RSUs. Historically, at the time of our Annual General Meeting, each non-employee director received an annual grant of RSUs with a value of $295,000. Additionally, our non-executive Chairman received, at the time of our Annual General Meeting, additional RSUs with a value of $112,000. The awards vested on the date of our next succeeding Annual General Meeting.
New directors received a pro-rated annual equity grant. A pro-rated annual equity grant would not be granted to any new director who commences service less than three months prior to the vesting date.
During fiscal 2020, the Board of Directors upon the recommendation of the Governance and Compliance Committee and the Human Resources and Compensation Committee, and with the advice of WTW, approved, in lieu of an annual equity award, an increase in the annual cash retainer for all directors by an amount equal to 80% of the annual equity award value, reflecting a 20% reduction to reflect the shorter-term nature of this component. This change was implemented due to the various uncertainties the Company was facing associated with outstanding legal issues related to opioids and Acthar Gel, and was benchmarked against similar changes implemented at other companies facing such uncertainties and is generally aligned with the approach taken by companies of comparable size to the Company. This compensation structure was again approved in fiscal 2021, as the Company's circumstances had not materially changed.
Other
Pursuant to our company-wide Matching Gift Program, we match employee and director contributions to charitable organizations up to $2,500. Directors are also reimbursed for reasonable out-of-pocket expenses incurred in attending Board meetings, committee meetings and shareholder meetings. Directors are provided with chartered private or commercial aircraft in order to travel to and from such meetings.
Director Share Retention and Ownership Guidelines
Our Corporate Governance Guidelines have provisions requiring all non-employee directors to hold Mallinckrodt ordinary shares with a market value of at least five times the annual cash retainer. Until the required ownership level is achieved, the non-employee directors would be required to retain net after tax shares received upon vesting of RSUs. However, as a result of the Chapter 11 Cases and related circumstances, on November 3, 2020, the Board of Directors waived compliance with the stock ownership guidelines for the duration of the Chapter 11 Cases.
The following table provides information concerning the compensation paid by us to each of our non-employee directors for the fiscal year ended December 31, 2021. Compensation for Mark C. Trudeau, our President and Chief Executive Officer, is shown in the Summary Compensation Table. Mr. Trudeau receives no additional compensation for his services as a director.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 Director Compensation Table |
| Name | | Fees Earned or Paid in Cash
($) | | Stock Awards
($) | | All Other Compensation
($) | | Total
($) |
| David R. Carlucci | | 341,000 | | | — | | | — | | | 341,000 | |
| J. Martin Carroll | | 356,000 | | | — | | | — | | | 356,000 | |
| Paul R. Carter | | 351,000 | | | — | | | — | | | 351,000 | |
| David Y. Norton | | 356,000 | | | — | | | — | | | 356,000 | |
| Carlos V. Paya, M.D. | | 356,000 | | | — | | | — | | | 356,000 | |
| JoAnn A. Reed | | 361,000 | | | — | | | — | | | 361,000 | |
| Angus C. Russell | | 490,600 | | | — | | | — | | | 490,600 | |
| Anne C. Whitaker | | 346,000 | | | — | | | — | | | 346,000 | |
| Kneeland C. Youngblood, M.D. | | 346,000 | | | — | | | — | | | 346,000 | |
| | | | | |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. |
Equity Compensation Plan Information
| | | | | | | | | | | | | | | | | | | | |
| | Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights (a) (1)(2) | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights (b) (3) | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans (excluding securities reflected in column (a)) (c) (4) |
| Equity compensation plans approved by security holders | | 5,346,512 | | | $34.89 | | 19,788,615 | |
| Equity compensation plans not approved by security holders | | — | | | — | | | — | |
| Total | | 5,346,512 | | | $34.89 | | 19,788,615 | |
(1)As regarding individuals or groups which own more than 5.0% of December 31, 2021, there were 5,346,512our ordinary shares, to be issued upon exerciseas well as information regarding the security ownership of outstanding options with a weighted-average exercise price of $34.89, 192,149 ordinary shares to be issued upon settlement of RSUsour executive officers and PSUs granted pursuant to our Stockdirectors, and Incentive Plan.
(2)This table does not include information regarding:
•Options converted from Covidien awards in connection with our separation from Covidien in June 2013. We did not assume any equity compensation plans from Covidien, and no grants of Mallinckrodt equity may be made pursuant to any Covidien plans. As of December 31, 2021, there were 190,963 ordinary shares to be issued upon exercise of these converted options with a weighted-average exercise price of $41.49.
•Options, RSAs and RSUs converted from Questcor awards in connection with our acquisition of Questcor in August 2014. We did not assume any equity compensation plans from Questcor, and no grants of Mallinckrodt equity may be made pursuant to any Questcor plans. As of December 31, 2021, there were 28,144 ordinary shares to be issued upon exercise of these converted options with a weighted-average exercise price of $31.31.
(3)Does not take into account RSUs and PSUs, which do not have an exercise price.
(4)As of December 31, 2021, there were 15,315,995 ordinary shares available for issuance pursuant to the Stock and Incentive Plan and 4,472,620 ordinary shares subject to purchase pursuant to the Mallinckrodt Employee Stock Purchase Plan. Ordinary shares subject to purchase pursuant to the Mallinckrodt Employee Stock Purchase Plan may be unissued shares or reacquired shares.
other shareholder matters required under this Item 12. Security Ownership of Management and Certain Beneficial Owners
The following tables show and Management and Related Stockholder Matters will be filed with the number of ordinary shares beneficially owned as of February 2,SEC within 120 days after December 30, 2022 by (i) each current director, each executive officer named in the Summary Compensation Table and our directors and executive officers as a group; and (ii) each person who we know or have reason to believe is the beneficial owner of more than 5% of our outstanding ordinary shares, based on statements filed by such persons pursuant to Section 13(d) or 13(g) of the Exchange Act, and notices deliveredGeneral Instruction G(3) to us pursuant to the Irish Companies Act. The table below does not take into account changes and restrictions that apply following the commencement of the Chapter 11 Cases.
A person is deemed to be a beneficial owner of ordinary shares if he or she, either alone or with others, has the power to vote or to dispose of those ordinary shares or the right to acquire such power within 60 days of February 2, 2022. We have assumed that ordinary shares subject to stock options which by their terms are presently exercisable or exercisable within 60 days of February 2, 2022 and RSUs that by their terms have vested or vest within 60 days of February 2, 2022 are deemed to be outstanding and beneficially owned by the person holding the securities for the purpose of computing the percentage ownership of that person, but are not treated as outstanding for the purpose of computing the percentage of any other person. There were 84,730,100 ordinary shares outstanding as of February 2, 2022 and the calculations of percentage ownership below are based on such number of outstanding shares regardless of the date of the information regarding beneficial ownership reported below.
Directors and Executive Officers
| | | | | | | | | | | | | | |
| Name of Beneficial Owner | | Number of Mallinckrodt Ordinary Shares Beneficially Owned | | Percentage Ownership |
| David R. Carlucci | | — | | | — | |
| J. Martin Carroll | | — | | | — | |
| Paul R. Carter | | 20,320 | | | * |
| David Y. Norton | | — | | | — | |
| Carlos V. Paya, M.D. | | — | | | — | |
| JoAnn A. Reed | | 34,065 | | | * |
| Angus C. Russell | | — | | | — | |
Mark C. Trudeau (1) | | 2,201,684 | | | 2.53 | % |
| Anne C. Whitaker | | — | | | — | |
| Kneeland C. Youngblood, M.D. | | — | | | — | |
Steven J. Romano (2) | | 483,687 | | | * |
Hugh M. O’Neill (3) | | 454,813 | | | * |
All directors and executive officers as a group (16 persons) (4) | | 3,762,527 | | | 4.25 | % |
* Represents less than 1% of outstanding ordinary shares.
(1)Includes 2,201,684 ordinary shares issuable upon the exercise of stock options presently exercisable or exercisable within 60 days of February 2, 2022.
(2)Includes 29,347 RSUs and 419,325 ordinary shares issuable upon the exercise of stock options presently exercisable or exercisable within 60 days of February 2, 2022. Excludes 8,275 RSUs that vest more than 60 days after February 2, 2022.
(3)Includes 23,550 RSUs and 385,990 ordinary shares issuable upon the exercise of stock options presently exercisable or exercisable within 60 days of February 2, 2022. Excludes 8,033 RSUs that vest more than 60 days after February 2, 2022.
(4)Includes 86,930 RSUs and 3,538,766 ordinary shares issuable upon the exercise of stock options presently exercisable or exercisable within 60 days of February 2, 2022. Excludes 23,839 RSUs that vest more than 60 days after February 2, 2022.Form 10-K.
| | | | | |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence. |
Information regarding transactions with related parties and director independence required under this Item 13. Certain Relationships and Related Transactions, with Related Persons
The Governance and Compliance Committee is responsible for the review and, if appropriate, approval or ratification of “related-person transactions” involving us or our subsidiaries and related persons. Under SEC rules, a related person is a director, nominee for director, executive officer or a beneficial owner of 5% or more of our ordinary shares and their immediate family members. The Board has adopted written policies and procedures that apply to any transaction or series of transactions in which we or one of our subsidiaries is a participant, the amount involved exceeds $120,000 and a related person has a direct or indirect material interest.
Director Independence of Directors
The Corporate Governance Guidelines include criteria adopted by the Board to guide determinations regarding the independence of its members. The criteria, summarized below, are consistentwill be filed with the NYSE listing standards regarding director independence. Although our ordinary shares ceasedSEC within 120 days after December 30, 2022 pursuant to be listed on the NYSE following our voluntary filing of the Chapter 11 Cases, we have electedGeneral Instruction G(3) to continue to comply with the NYSE listing standards relating to director and audit committee member independence. To be considered independent, a director must be determined by the Board to have no material relationship, directly or indirectly, with us. In assessing independence, the Board considers all relevant facts and circumstances. In particular, when assessing the materiality of a director’s relationship with us, the Board considers the issue not just from the standpoint of the director, but also from that of the persons or organizations with which the director has an affiliation. A director will not be considered independent if he or she, at the time of determination:
• Is, or has been within the prior three years, an employee of Mallinckrodt or any of its subsidiaries;
• Has an immediate family member who is, or has been within the prior three years, an executive officer of Mallinckrodt;
• Is a current partner or employee of our external auditor;
• Has an immediate family member who is a current partner of our external auditor or who is an employee of our external auditor and personally works on our audit;
• Has been, or has an immediate family member who has been, within the prior three years, a partner or employee of our external auditor who personally worked on our audit during that time;
• Is, or has an immediate family member who is, or has been within the prior three years, employed as an executive officer of another company that has or had on the compensation committee of its board of directors one of our executive officers (during the same period of time);
• Has, or has an immediate family member who has, received more than $120,000 in direct compensation from Mallinckrodt, other than director and committee fees and pension or other forms of deferred compensation for prior service (provided such compensation is not contingent in any way on continued service), in any 12-month period within the prior three years (compensation received by an immediate family member for service as an employee, other than as an executive officer, is not included for purposes of this determination);
• Is a current employee, or has an immediate family member who is a current executive officer, of a company that does business with Mallinckrodt and has made payments to, or received payments from, Mallinckrodt for property or services in an amount that, in any of the prior three fiscal years, exceeds the greater of $1 million or 2% of such other company’s consolidated gross revenues; or
• Is, or his or her spouse is, an executive officer, director or trustee of a charitable organization to which our contributions, not including our matching of charitable contributions by employees, exceed, in any single fiscal year within the prior three years, the greater of $1 million or 2% of such organization’s total charitable receipts during that year.
The Board has considered the independence of its members in light of these criteria, has reviewed our relationships with organizations with which our directors are affiliated and has determined that none of these current business relationships is material to us, any of the organizations involved, or our directors. Based on these considerations, the Board has determined that each of our directors, other than Mark C. Trudeau, our President and Chief Executive Officer, satisfies the criteria and is independent. Each independent director is
expected to notify the chair of the Governance and Compliance Committee, as soon as reasonably practicable, of changes in his or her personal circumstances that may affect the Board’s evaluation of his or her independence.Form 10-K.
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| Item 14. | Principal Accounting Fees and Services. |
AuditInformation regarding the services provided by and Non-Audit Fees
During fiscal 2021 and fiscal 2020,the fees paid to Deloitte & Touche LLP, charged fees for services rendered to us as follows:
| | | | | | | | | | | |
| Fiscal 2021 | | Fiscal 2020 |
| Audit Fees | $ | 5,438,000 | | | $ | 6,573,000 | |
| Audit-Related Fees | 20,000 | | | — | |
| Tax Fees | 67,500 | | | — | |
| All Other Fees | 285,000 | | | — | |
| Total | $ | 5,810,500 | | | $ | 6,573,000 | |
Audit Fees include fees for professional services rendered for the year-end audits of our consolidated financial statements and internal control over financial reporting, reviews of the financial statements included in our Quarterly Reports on Form 10-Q, consents, statutory audits, and procedures related to Chapter 11 proceedings and internal legal entity reorganization.
Audit-Related Fees include fees for attest services not required by statute or regulation.
Tax Fees include fees for tax compliance services.
All Other Fees include fees for professional services rendered in the preparation of an independent expert's report that was submitted to the High Court of Ireland in conjunction with Mallinckrodt plc's commencement of the examinership process.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services
The Audit Committee has adopted a pre-approval policy that provides guidelines for audit, audit-related, tax and other permissible non-audit services that may be provided by our independent auditors. Pursuant to the policy, our Corporate Controller supports the Audit Committee by providing a list of proposed services to the Audit Committee, monitoring the servicesauditors, required under this Item 14. Principal Accounting Fees and fees pre-approved by the Audit Committee, providing periodic reports to the Audit Committee with respect to pre-approved services and coordinating with management and the independent auditors to support complianceServices will be filed with the policy.
Under the policy, the Audit Committee annually pre-approves the audit fee and terms of the engagement, as set forth in the engagement letter. The Audit Committee also annually approves a specified list of audit, audit-related and tax services. Any service not included in the specified list of services must be submittedSEC within 120 days after December 30, 2022 pursuant to the Audit Committee for pre-approval. The independent auditors may not begin work on any engagement without confirmation of Audit Committee pre-approval from our Corporate Controller or their delegate.
PursuantGeneral Instruction G(3) to the policy, the Audit Committee has delegated to its Chair the authority to pre-approve the engagement of the independent auditors in her discretion. The Chair reports all such pre-approvals to the Audit Committee at the next Audit Committee meeting.Form 10-K.
PART IV
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| Item 15. | Exhibits, Financial Statement Schedules. |
Documents filed as part of this report:
1) Financial Statements. The following are included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.Report.
•Report of Independent Registered Public Accounting Firm
•Consolidated Statements of Operations for the period from June 17, 2022 through December 30, 2022 (Successor), the period from January 1, 2022, through June 16, 2022 (Predecessor), and the fiscal yearyears ended December 31, 2021 (Predecessor) and December 25, 2020 and December 27, 2019(Predecessor)
•Consolidated Statements of Comprehensive Operations for the period from June 17, 2022 through December 30, 2022 (Successor), the period from January 1, 2022, through June 16, 2022 (Predecessor), and the fiscal yearyears ended December 31, 2021 (Predecessor) and December 25, 2020 and December 27, 2019(Predecessor)
•Consolidated Balance Sheets as of December 30, 2022 (Successor) and December 31, 2021 and December 25, 2020(Predecessor)
•Consolidated Statements of Cash Flows for the period from June 17, 2022 through December 30, 2022 (Successor), the period from January 1, 2022, through June 16, 2022 (Predecessor), and the fiscal yearyears ended December 31, 2021 (Predecessor) and December 25, 2020 and December 27, 2019(Predecessor)
•Consolidated Statements of Changes in Shareholders' Equity for the period from December 28, 201827, 2019 (Predecessor) to December 31, 202130, 2022 (Successor)
•Notes to Consolidated Financial Statements
2) Financial Statement Schedules. The financial statement schedule is included below. All other schedules have been omitted because they are not applicable, not required or the information is included in the financial statements or notes thereto.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Schedule II - Valuation and Qualifying Accounts | | | | | | | | | | |
| (in millions) | | | | | | | | | | |
| Description | | Balance at Beginning of Period | | Charged to Operations | | Additions and Other | | Deductions | | Balance at End of Period |
| Allowance for doubtful accounts: | | | | | | | | | | |
| Fiscal year ended December 31, 2021 | | $ | 4.5 | | | $ | 1.2 | | | $ | — | | | $ | (1.0) | | | $ | 4.7 | |
| Fiscal year ended December 25, 2020 | | 4.0 | | | 1.2 | | | — | | | (0.7) | | | 4.5 | |
| Fiscal year ended December 27, 2019 | | 5.0 | | | 1.5 | | | — | | | (2.5) | | | 4.0 | |
| Sales reserve accounts: | | | | | | | | | | |
| Fiscal year ended December 31, 2021 | | $ | 235.4 | | | $ | 2,166.0 | | | $ | — | | | $ | (2,128.6) | | | $ | 272.8 | |
Fiscal year ended December 25, 2020 (1) | | 337.4 | | | 2,154.3 | | | 536.0 | | | (2,792.3) | | | 235.4 | |
| Fiscal year ended December 27, 2019 | | 405.4 | | | 2,437.7 | | | — | | | (2,505.7) | | | 337.4 | |
| Tax valuation allowance: | | | | | | | | | | |
| Fiscal year ended December 31, 2021 | | $ | 6,110.8 | | | $ | 233.4 | | | $ | — | | | $ | — | | | $ | 6,344.2 | |
| Fiscal year ended December 25, 2020 | | 3,131.5 | | | 2,979.3 | | | — | | | — | | | 6,110.8 | |
| Fiscal year ended December 27, 2019 | | 2,604.9 | | | 526.6 | | | — | | | — | | | 3,131.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Schedule II - Valuation and Qualifying Accounts | | | | | | | | | | |
| (in millions) | | | | | | | | | | |
| Description | | Balance at Beginning of Period | | Charged to Operations | | Additions and Other | | Deductions | | Balance at End of Period |
| Allowance for doubtful accounts: | | | | | | | | | | |
| Fiscal year ended Period from June 17, 2022 through December 30, 2022 (Successor) | | $ | 5.9 | | | $ | 0.5 | | | $ | — | | | $ | (2.0) | | | $ | 4.4 | |
| Fiscal year ended Period from January 1, 2022 through June 16, 2022 (Predecessor) | | 4.7 | | | 1.2 | | | — | | | — | | | 5.9 | |
| Fiscal year ended December 31, 2021 (Predecessor) | | 4.5 | | | 1.2 | | | — | | | (1.0) | | | 4.7 | |
| Fiscal year ended December 25, 2020 (Predecessor) | | 4.0 | | | 1.2 | | | — | | | (0.7) | | | 4.5 | |
| | | | | | | | | | |
| Sales reserve accounts: | | | | | | | | | | |
| Fiscal year ended Period from June 17, 2022 through December 30, 2022 (Successor) | | $ | 276.9 | | | $ | 848.1 | | | $ | — | | | $ | (831.0) | | | $ | 294.0 | |
| Fiscal year ended Period from January 1, 2022 through June 16, 2022 (Predecessor) | | $ | 272.8 | | | 715.7 | | | — | | | (711.6) | | | $ | 276.9 | |
| Fiscal year ended December 31, 2021 (Predecessor) | | 235.4 | | | 2,166.0 | | | — | | | (2,128.6) | | | 272.8 | |
Fiscal year ended December 25, 2020 (Predecessor) (1) | | 337.4 | | | 2,154.3 | | | 536.0 | | | (2,792.3) | | | 235.4 | |
| | | | | | | | | | |
| Tax valuation allowance: | | | | | | | | | | |
| Fiscal year ended Period from June 17, 2022 through December 30, 2022 (Successor) | | $ | 5,129.7 | | | $ | (136.0) | | | $ | (0.8) | | | $ | — | | | $ | 4,992.9 | |
| Fiscal year ended Period from January 1, 2022 through June 16, 2022 (Predecessor) | | 6,344.2 | | | (1,213.5) | | | (1.0) | | | — | | | $ | 5,129.7 | |
| Fiscal year ended December 31, 2021 (Predecessor) | | 6,110.8 | | | 233.4 | | | — | | | — | | | 6,344.2 | |
| Fiscal year ended December 25, 2020 (Predecessor) | | 3,131.5 | | | 2,979.3 | | | — | | | — | | | 6,110.8 | |
(1)The $536.0 million charge to the sales reserve accounts during fiscal 2020 relates to the Medicaid lawsuit, which is further described within Note 19 of the Notes to Consolidated Financial Statements included within Item 8. Financial Statements and Supplementary Data of this Annual Report on Form 10-K.lawsuit.
3) Exhibits. The exhibits are included in the Exhibit Index that appears at the end of this Annual Report on Form 10-K.Report.
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| Item 16. | Form 10-K Summary. |
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| MALLINCKRODT PLC |
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March 15, 20223, 2023 | By: | /s/ Bryan M. Reasons |
| | Bryan M. Reasons Executive Vice President and Chief Financial Officer (principal financial and accounting officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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| Signature | | Title | | Date |
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/s/ Mark C. TrudeauSigurdur Olafsson | | President, Chief Executive Officer and Director | | March 15, 20223, 2023 |
Mark C. TrudeauSigurdur Ofalsson | | (principal executive officer) | | |
| | | | | |
| /s/ Bryan M. Reasons | | Executive Vice President and Chief Financial Officer | | March 15, 20223, 2023 |
| Bryan M. Reasons | | (principal financial and accounting officer) | | |
| | | | | |
/s/ Angus C. RussellPaul Bisaro | | Chairman of the Board of Directors | | March 15, 20223, 2023 |
Angus C. RussellPaul Bisaro | | | | |
| | | | | |
/s/ David R. CarlucciDaniel Celentano | | Director | | March 15, 20223, 2023 |
David R. CarlucciDaniel Celentano | | | | |
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/s/ J. Martin CarrollRiad El-Dada | | Director | | March 15, 20223, 2023 |
J. Martin CarrollRiad El-Dada | | | | |
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/s/ Paul R. CarterNeal Goldman | | Director | | March 15, 20223, 2023 |
Paul R. CarterNeal Goldman | | | | |
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/s/ David Y. NortonKaren Ling | | Director | | March 15, 20223, 2023 |
David Y. NortonKaren Ling | | | | |
| | | | | |
/s/ Carlos V. PayaDr. Woodrow Myers | | Director | | March 15, 20223, 2023 |
Carlos V. PayaDr. Woodrow Myers | | | | |
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/s/ JoAnn A. ReedSusan Silbermann | | Director | | March 15, 20223, 2023 |
JoAnn A. ReedSusan Silbermann | | | | |
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/s/ Anne C. WhitakerJames Sulat | | Director | | March 15, 20223, 2023 |
Anne C. WhitakerJames Sulat | | | | |
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/s/ Kneeland C. Youngblood, M.D. | | Director | | March 15, 2022 |
Kneeland C. Youngblood, M.D. | | | | |
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EXHIBIT INDEX
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Exhibit Number | | Exhibit | |
| | | |
| 2.1 | | | |
2.2 | |
| |
2.32.2 | | |
| 2.3 | | |
| 2.4 | | |
| 2.5 | | |
| 3.1 | | | |
| 3.2 | | | |
| 4.1 | | | |
4.2 | | | |
4.3 | | | |
4.4 | | | |
4.5 | | | |
4.6 | | | |
4.7 | | |
| 4.2 | | |
| 4.3 | | |
| 4.4 | | |
| 4.5 | | |
| 4.6 | | |
| 4.7 | | |
| 4.8 | | |
| 4.9 | | |
| 4.10 | | |
| 4.11 | | | |
| 10.1 | | | |
10.2 | | | |
10.3 | | | |
10.4 | | | |
10.5 | | Refinancing Amendment No. 1 and Incremental Assumption Agreement No. 2, dated as of August 28, 2015, among Mallinckrodt plc, Mallinckrodt International Finance, S.A., Mallinckrodt CB LLC, the other subsidiaries of Mallinckrodt plc party thereto, the lenders party thereto and Deutsche Bank AG New York Branch, as administrative agent (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed August 28, 2015). | |
| | | | | | | | | | | |
10.6 | | | |
10.7 | | Refinancing Amendment No. 2 and Incremental Assumption Agreement No. 3, dated as of February 28, 2017, among Mallinckrodt plc, Mallinckrodt International Finance, S.A., Mallinckrodt CB LLC, the other subsidiaries of Mallinckrodt plc party thereto, the lenders party thereto and Deutsche Bank AG New York Branch, as administrative agent (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed March 1, 2017).
| |
10.8 | |
| |
10.9 | | Amendment, dated as of February 21, 2018, to the Credit Agreement, dated as of March 19, 2014, by and among Mallinckrodt plc, Mallinckrodt International Finance, S.A., Mallinckrodt CB LLC, the other subsidiaries of Mallinckrodt plc party thereto, the lenders party thereto and Deutsche Bank AG New York Branch, as administrative agent (incorporated by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2017). | |
10.10 | | | |
10.11 | | | |
10.12 | | | |
10.13* | | | |
10.14*10.2 | | | |
10.15*10.3 | | | |
10.16*10.4 | | |
| | | | | | | | |
10.17*10.5 | | | |
10.18* | | | |
10.19* | | | |
10.20* | | | |
10.21* | | | |
10.22* | | | |
10.23* | | | |
10.24* | | | |
10.2510.6 | | Intercreditor Agreement, dated as of December 6, 2019, among Deutsche Bank AG New York Branch, as first lien collateral agent and first lien credit agreement representative, Wilmington Savings Fund Society, FSB, as second lien collateral agent and initial second lien document representative, each other first lien representative party thereto from time to time and each other second lien representative party thereto from time to time and acknowledged and agreed to by Mallinckrodt plc, Mallinckrodt International Finance S.A, Mallinckrodt CB LLC and each other obligor party thereto from time to time (incorporated by reference to Exhibit 10.1 to the Company's Form 8-K filed December 9, 2019). | |
10.2610.7 | | | |
| | | | | | | | | | | |
10.2710.8 | | | |
10.2810.9 | | | |
10.2910.10 | | | |
10.3010.11 | | | |
10.3110.12 | | | |
10.3210.13 | | |
| 10.14 | | |
| 10.15 | | |
| 10.16 | | |
| 10.17 | | |
| 10.18 | | |
| 10.19 | | |
| 10.20* | | |
| 10.21* | | |
| 10.22* | | |
| 10.23* | | |
| 10.24* | | |
| 10.25 | | |
| | | | | | | | |
| 10.26 | | |
| 10.27 | | |
| 10.28** | | |
| 10.29* | | |
| 10.30 | | |
| 10.31* | | |
| 10.32* | | |
| 10.33* | | |
| 10.34* | | |
| 10.35* | | |
| 10.36* | | |
| 10.37* | | |
| 10.38* | | |
| 10.39* | | |
| 21.1 | | | |
| 23.1 | | | |
| 31.1 | | | |
| 31.2 | | | |
| 32.1 | | | |
| 99.1 | | |
| 99.2 | | |
| 101 | | The following materials from the Mallinckrodt plc Annual Report on Form 10-K for the fiscal year ended December 31, 202130, 2022 formatted in Extensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Operations, (ii) the Consolidated Statements of Comprehensive Operations, (iii) the Consolidated Balance Sheets, (iv) the Consolidated Statements of Cash Flows, (v) the Consolidated Statements of Shareholders' Equity and (vi) related notes. The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. | |
| 104 | | Cover Page Interactive Data File (embedded within the inline XBRL document). | |
*Compensation plans or arrangements.
**Portions of this exhibit have been omitted in accordance with Item 601(b)(10) of Regulations S-K.
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
