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America loves second chances. So two companies merging soon after finding their footing out of bankruptcy court might sound like a heartwarming tale. On Thursday, Mallinckrodt and Endo joined forces in a stock swap that will create a speciality pharmaceutical company worth, in total, nearly $7bn. But not everyone will find equal comfort in this happy ending.
The drugmakers’ tie-up is going to be a big win for several Wall Street vulture funds who made risky bets during Mallinckrodt and Endo’s respective journeys through the Chapter 11 bankruptcy system. Firms like Brookfield, Silver Point, Canyon, Goldentree and Franklin Resources fought hard to turn their distressed loan and bond holdings into equity stakes. They will now benefit from the merger’s big projected cost savings. Wall Street banks and law firms who advised them will also mint tens of millions in fees.
The rub is that the people on the other side of the negotiating table were not all sharp-elbowed financiers. Mallinckrodt and Endo, and their creditors, were also using Chapter 11 to negotiate with victims of the US opioid crisis who had been improperly prescribed addictive painkillers.
Using the bankruptcy code to solve so-called mass tort product liability cases is controversial. Binding deals settlements, which impose final liability terms, arguably deprives victims who want their day in court.
In any event, both companies agreed to pay collectively more than $1bn to trusts dedicated to victims. That leaves them to focus on their other treatments for rare diseases and conditions.
The two drugmakers reached this point via slightly different routes. Endo emerged from bankruptcy in 2024. It pleaded guilty to a misdemeanour charge and paid nearly $1bn, of which about half went directly to the victims.
Mallinckrodt’s journey was more tortured. It filed for bankruptcy in 2020. Three years later it struck a deal to pay $1.7bn by 2028 to opioid victims — whose claims technically ranked below legacy secured creditors in the pecking order. But the new Mallinckrodt missed revenue targets and filed for bankruptcy again in 2024. This time the victim’s trust ended up in line for just $700mn.
Victims were, of course, represented in the companies’ bankruptcy proceedings — and by top lawyers. The certainty of near-term payouts, in return for releasing the companies and managers from future liability, has undeniable value.
Being “free and clear” of legacy opioid claims makes the Mallinckrodt-Endo merger possible, and leaves a publicly traded company that investors can evaluate based on its merits. In one sense, it’s a testament to the bankruptcy system, in that debt investors made an entrepreneurial wager to resolve legacy liabilities while also creating new, freestanding businesses. It’s a shame that behind this gain lies no small amount of real-world pain.
sujeet.indap@ft.com
