Bankruptcy allowed Mallinckrodt to end Acthar royalties, 3rd Circ. rules

Mallinckrodt's bankruptcy permitted the drug company to end a perpetual royalty agreement with Sanofi-Aventis involving the best-selling medication Acthar, the 3rd U.S. Circuit Court of Appeals ruled on Wednesday.

Affirming a lower court decision, the 3rd Circuit found that Mallinckrodt's termination of royalty payments after it filed for bankruptcy in 2020 created, at best, a claim by Sanofi-Aventis for damages under the sales contract.

Mallinckrodt acquired Acthar, a gel medication used to treat multiple sclerosis and infantile spasms, from Sanofi-Aventis in 2001, agreeing to make a one-time payment of $100,000 plus a 1% royalty on future sales of the drug. After Mallinckrodt ended royalty payments, Sanofi had argued that Mallinckrodt had no right to continue selling the drug without making further royalty payments.

The three-judge panel ruled that Sanofi-Aventis' claim, like other pre-petition debts, was eligible to be wiped out so that Mallinckrodt could exit bankruptcy with a "fresh start."

"Bankruptcy frees debtors from lingering claims like this one," Judge Stephanos Bibas wrote.

Mallinckrodt declined to comment, and Sanofi did not immediately respond to a request for comment.

Sanofi had argued that royalty payments were essential to the overall sale agreement. But the 3rd Circuit disagreed, saying that the agreement transferred the drug to Mallinckrodt outright, without protecting Sanofi from the risk of future non-payment.

"To protect itself, Sanofi could have structured the deal differently," Bibas wrote. "It could have licensed the rights to the drug, kept a security interest in the intellectual property, or set up a joint venture to keep part ownership. But it chose not to do so."

Acthar has been a blockbuster drug for Mallinckrodt, with sales reaching nearly $1 billion in 2019, according to the 3rd Circuit opinion.

But increased competition has caused Acthar sales to decline in recent years, eventually pushing Mallinckrodt into a second bankruptcy in 2023. Acthar generated $516 million in net sales in 2022, but sales declined by 20% for the first six months of 2023, according to Mallinckrodt's bankruptcy court filings.

The case is In re Mallinckrodt Plc, U.S. Court of Appeals for the Third Circuit, No. 23-1111.

For Sanofi: Stuart Brown, Craig Martin and Ilana Eisenstein of DLA Piper

For Mallinckrodt: Melissa Arbus Sherry of Latham & Watkins; Michael Merchant and Amanda Steele of Richards, Layton & Finger

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