Purdue Pharma L.P. – Besieged with Opioid Litigation, Debtors Turn to Bankruptcy as Vehicle for Comprehensive $10bn (“in Value”) Settlement as “Better Way”

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September 14, 2019 − Purdue Pharma L.P. and 23 affiliated Debtors (“Purdue” or the “Debtors,” with organizational and ownership charts included on pages 17/18 of the Petition) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of New York, lead case number 19-23649. The Debtors, pharmaceutical companies that manufacture, sell, or distribute, among other products, opioid pain medications, are represented by Marshall S. Huebner of Davis Polk & Wardwell LLP. Further board-authorized engagements include (i) PJT Partners LP as investment banker, (ii) AlixPartners LLP as restructuring advisor and (iii) Prime Clerk as claims agent.

The Debtors’ lead petition notes between 1,000 and 5,000 creditors; estimated assets between $1.0bn and $10.0bn; and estimated liabilities between $500.0mn and $1.0bn. Court filings to data do not include any revenue data provided by the Debtors although they do provide a balance sheet (Schedule 4 to Docket No. 3) which states that the Debtors were sitting on $1.2bn in cash and cash equivalents at the end of August; perhaps in part due to savings incurred in the year since they terminated the rest of what was once a 1,700 member OyyContin sales force (1,700 in 2015 as per WSJ).

Documents filed with the Court list the Debtors’ three largest unsecured creditors as (i) Pension Benefit Guaranty Corporation ($Undetermined pension cliam), (ii) CVS Caremark Part D Services, LLC ($19.3mn payer rebate claim) and (iii) Ottumrx Inc ($15.8mn payer rebate claim).

Settlement Framework

In a press release (see attached pdf) announcing the filing, the Debtors advised that “Purdue Pharma L.P. today announced that it has reached an agreement in principle on a framework for settling the U.S. opioid litigation facing the Company with 24 state attorneys general, analogous officials from 5 U.S. territories, the Plaintiffs’ Executive Committee in the multidistrict litigation (MDL), and co-lead counsel in the MDL. The settlement structure is estimated to provide more than $10 billion of value to address the opioid crisis. The key elements of the settlement, which is subject to court approval, include:

  • The owners of Purdue contributing all of its assets to a trust or other entity established for the benefit of claimants and the American people;
  • The new company ('NewCo') being governed by a new board selected by claimants and approved by the Bankruptcy Court;
  • NewCo potentially contributing tens of millions of doses of opioid overdose reversal and addiction treatment medications at no or low cost;
  • NewCo agreeing to be bound permanently by injunctive relief, including marketing restrictions on the sale and promotion of opioids; and
  • In addition to 100% of Purdue, the Sackler families contributing a minimum of $3 billion, with the potential for substantial further monetary contributions from the sales of their ex-U.S. pharmaceutical businesses."

In its "Informational Brief" [Docket No. 17, see below] which details untenable legal costs, $163.0mn projected from 2019, and the inability of tort litigation to deliver anything resembling an equitable solution for opioid claimants, the Debtors continue: 

"There is a better way. After a year of intense and arduous negotiations, the Debtors, the Debtors’ ultimate owners (trusts for the benefit of members of the Sackler families ('Sackler Families')), and a critical mass of plaintiff constituencies have reached an agreement in principle on the structure of a global resolution of the Pending Actions ('Settlement Structure') – one that can be finalized and effectuated only through chapter 11. The plaintiff constituencies supporting the Settlement Structure include 24 state attorneys general and analogous officials from five U.S. territories, as well as the court-appointed Plaintiffs’ Executive Committee ('PEC') and Co-Lead Counsel in the federal multidistrict litigation pending in Ohio ('Ohio MDL'), which comprises attorneys at law firms that collectively represent over 1,000 counties, municipalities, Native American tribes, individuals, and third-party payors."

Events Leading to the Chapter 11 Filing

The Debtors declaration in support of the Chapter 11 filing [Docket No.3] does not include the normal "Events leading to the Chapter 11 filing" section (arguably because "the Debtors have no funded debt and no material past due trade obligations"), but the Debtors' "Informational Brief"  contains the Debtors' version of their role in the opioid crisis and their rationale for the proposed settlement…as actioned through Chapter 11. The briefing states: "OxyContin® Extended-Release Tablets CII (‘OxyContin’), Purdue Pharma’s most prominent pain medication, has been the target of over 2,600 civil actions pending in various state and federal courts and other fora across the United States and its territories (‘Pending Actions'). These Pending Actions name as defendants Purdue Pharma and certain of the other Debtors (‘Defendant Debtors'), among other parties, and generally allege that the Defendant Debtors falsely and deceptively marketed OxyContin and opioid pain medications, and are liable for the national opioid crisis. 

Unlike most debtors, the Debtors have no funded debt and no material past due trade obligations. Nor do they have any judgment creditors. Nonetheless, the onslaught of lawsuits has proved unmanageable and poses a grave threat to the Debtors’ continued viability.

Purdue Pharma, the Debtors’ main operating entity, is projected to spend approximately $263 million on legal and related professional costs in 2019, the vast bulk of which is related to the litigations and government investigations, and the financial pressure resulting therefrom. Indeed, by even the narrowest measure, Purdue Pharma has spent $63 million in the first half of this year on costs and fees related to litigating the Pending Actions in court, and is projected to spend $121 million by year end – a rate of over $2 million per week. Moreover, 'Copycat' complaints are being filed against the Defendant Debtors by the day, further exacerbating an already untenable situation. 

In addition, case-by-case mass tort litigation of the type the Defendant Debtors currently face in the civil tort system is neither an efficient, nor an equitable, way to resolve their alleged liability. Such litigation has only incentivized a multiplicity of ‘races to the courthouse’ as various plaintiffs vied to be the first to trial – and employed ever more aggressive and creative means to that end. Several states even commenced administrative proceedings seeking dozens of trial days to bypass the normal court process and expedite the time to a final determination of their claims. 

This kaleidoscope of piecemeal litigation was and is all but guaranteed to continue to result in inconsistent outcomes and inequitable treatment, as well as unsustainable cost. 

Any judgments or settlements extracted in the process would, at best, potentially have benefited only those select few plaintiffs who happen to be positioned at the beginning of the trial and judgment queue. And it would not have benefited even them, because defending over 2,600 lawsuits to conclusion would almost certainly have forced the Defendant Debtors to file for chapter 11 protection even had they suffered only a small number of significant adverse judgments at the trial level. In its Supreme Court filing, the state of Arizona articulated the problem at hand: “Absent resolution in a single forum, these disputes will be fought over and over in nearly every state in the Nation. This is likely to take years, lead to inconsistent judgments, and create an inequitable distribution of money damages.” 

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