Shares of Mallinckrodt (NYSE:MNK) dropped as much as 45% today after Bloomberg reported that the company is considering restructuring, and possibly bankruptcy, as a strategy to limit its legal and financial exposure related to the opioid crisis. The company is facing lawsuits claiming it and other opioid manufacturers downplayed the addictive nature of such drugs and didn't do enough to stop suspicious orders, thereby playing a central role in the complicated origins of the ongoing crisis.
While some analysts estimate the legal settlements and fines could reach into the billions of dollars, settlements to date have been much lower. That said, Mallinckrodt's balance sheet suggests even smaller fines and penalties could prove to be an existential threat.
As of 11:47 a.m. EDT, the stock had settled to a 39.4% loss.
Mallinckrodt ended the first half of 2019 with $10.2 billion in assets, but $7.7 billion, or 75% of that total, was in the form of intangible assets. It's generally a red flag when a business counts 20% of its assets as goodwill and intangibles. That means there's not much to be sold off in the event the company has to pay a large fine or settlement.
The company also exited June with just $241 million in cash and $4.8 billion in long-term debt. If Mallinckrodt receives a fine of hundreds of millions of dollars related to the opioid crisis, it won't be able to use cash on hand and might struggle to find creditors willing to extend more debt.
Generic drug companies have been some of the worst-performing pharma stocks in recent years due to a combination of headwinds ranging from increased competition to, in several cases, the legal uncertainties related to the opioid crisis. That has compounded Mallinckrodt's headache and is now forcing it to consider bankruptcy, which, given the state of its balance sheet, might be the only option.