The Purdue Pharma Bankruptcy Case: What’s at Stake

purdue pharma bankruptcy

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Lindsey Simon from University of Georgia and Jonathan Lipson from Temple University discuss the implications of the Purdue Pharma bankruptcy filing and settlement proposal.

One wouldn’t expect the Chapter 11 bankruptcy protection filing of a small, privately owned pharmaceutical company to become a rallying point for the nationwide effort to combat the opioid epidemic that has claimed 400,000 lives over the past two decades. Yet, last week’s bankruptcy filing by Stamford, Conn.-based Purdue Pharma, and a settlement it has struck with some claimants has been viewed widely as a getaway vehicle for the company and the high profile Sackler family that owns it. Purdue Pharma has been accused of fueling the opioid epidemic with overly aggressive marketing practices for its OxyContin brand, which is an addictive pain killer.

The bankruptcy filing has brought an immediate, nationwide freeze on the more than 2,000 lawsuits and fresh litigation against the company. The company also wants that protection against lawsuits extended to the Sacklers. About half the claimants have rejected the settlement on offer worth between $10 billion and $12 billion, where the Sacklers would put in $3 billion.

As they see prospects of extracting more than that, the company is seeking to put court pressure on all parties to accept the settlement. Opacity shrouds the finances of the company and those of the Sacklers because that information is private. The plot has thickened with the discovery of a trail of wire transfers by the Sacklers to Swiss bank accounts and elsewhere over the years.

‘A Giant Sore Thumb’

The Purdue Pharma bankruptcy case “stands out like a giant sore thumb” in relation to typical bankruptcy cases, said Robert I. Field, Drexel University professor of law and also professor of health management and policy. “We don’t usually have companies that are responsible for thousands of deaths of innocent people and that have spawned a major public health crisis,” he added. In addition to the financial aspects of the bankruptcy proceedings are the “social implications” of the outcome, he said. “What kind of message can we send to future players in the addictive narcotics space?”

Purdue Pharma’s bankruptcy filing was “not a surprise to anybody,” said Lindsey Simon, professor at the University of Georgia Law School who specializes in bankruptcy practices. “[But the bankruptcy filing] changes the momentum, it changes the incentive structure, and it shifts a lot of power into Purdue’s court because the debtor in bankruptcy is the master of their case,” she said. “They control the narrative at this point.”

New York Attorney-General Letitia James said the bankruptcy filing “allows the Sacklers to evade responsibility.” She also pointed out that it comes two days after her office had said in a court filing that it had tracked about $1 billion in wire transfers by the Sackler family to foreign locations.

Unsettling Pressures

“The piece of this that concerns me the most is the insistence [of the company] that the states join the settlement and refrain from further pursuing their claims,” said Field. Purdue’s lawyers plan to seek a court injunction that would halt legal hostilities from attorneys general who won’t sign on to its proposed settlement, the Wall Street Journal reported. The company will also make a case for the protection from litigation to be extended to the Sackler family, the report added. While extending the automatic stay to the Sacklers could give them “financial protection” from lawsuits, “they can’t insulate themselves from criminal prosecution,” said Field.

“For the non-settling plaintiffs, that’s obviously a problem because they would like to continue their lawsuits outside of bankruptcy against Purdue and presumably the Sacklers,” said Jonathan Lipson, professor at the Beasley School of Law at Temple University.

“What kind of message can we send to future players in the addictive narcotics space?” –Robert I. Field

“The states that are not settling may think that they have the ability to recover far more than [the proposed settlement amount] through a litigated process outside of bankruptcy from the Sacklers,” said Lipson. “And if that’s the case, then the bankruptcy is very important to protecting the Sacklers in addition to advancing whatever public interest goals the company may now have in mind.”

Simon and Lipson explored the implications Purdue Pharma bankruptcy filing and settlement offer on the Knowledge@Wharton radio show on SiriusXM. (Listen to the podcast at the top of this page.)

A Rash of Lawsuits Ahead?

Lipson predicted a rash of smaller court battles as the bigger bankruptcy case gets underway. “There will be fights about the application of the stay to government actors (such as state attorneys-general and municipalities that have sued), and there will be fights about the application of the stay to protect the Sacklers.” He noted that the Sacklers are “not debtors in bankruptcy” and so presumptively are not entitled to the same protection that the company has.

At least 25 states have opposed the settlement, according to a tally by Connecticut’s attorney general William Tong, the Stamford Advocate reported. The states are divided on the issue along party lines, with the Republican-controlled states in favor of the settlement and those run by Democrats opposed to it, according to an AP report.

While the bankruptcy filing put an automatic stay on all litigation against Purdue Pharma, it does not protect the Sacklers from lawsuits. The company said last week that it has reached an agreement for a $10 billion settlement with 24 state attorneys-general, five U.S. territories, lawyers for more than 2,000 cities, counties and other plaintiffs.

Under the proposed settlement, the Sacklers would transfer their ownership in the company to a trust and contribute “a minimum of $3 billion” towards the settlement. The trust would control the new company, which would be governed by a new board selected by the claimants and approved by the bankruptcy court.

Further, that new company will agree “to be bound permanently by injunctive relief, including marketing restrictions on the sale and promotion of opioids.” In other words, it would stop selling opioids, Lipson noted. Purdue Pharma also asked to extend the stay on lawsuits to the Sacklers, arguing that they would hurt the company’s ability to finance its settlement obligations.

The proposed settlement also provides for the new company to supply opioid overdose reversal and addiction treatment medications at no or low cost. “They are doing everything, at least at this point, from a public facing perspective, to show that [treating the crisis is] the goal,” Simon noted.

A Complex Web

Three Sackler brothers, all doctors, had founded Purdue Pharma in 1952, which sold “moderately successful” products like earwax removers and laxatives before launching OxyContin, a long-lasting narcotic pain reliever in 1995, the report noted.

Two branches of the Sackler family now control Purdue Pharma, but they are divided over the opioid crisis, with members of one branch being openly critical of the company’s marketing practices, as a Guardian report detailed.

“[The] debtor in bankruptcy is the master of their case. They control the narrative at this point.” –Lindsey Simon

The Purdue Pharma case stands out from other bankruptcies also because it is “particularly complex” on the financial front, said Field. In addition to creditors and the plaintiffs are victims of opioid addiction who need medical assistance or some kind of support, he added. “There is another layer of interested financial parties, which is those who need protection from future addiction, and efforts to stop the crisis before it gets any worse.”

Another “unique aspect [of the case] is that the [Sackler] family has intertwined itself with the corporation particularly closely,” he said. “You don’t see that in other companies. When you have shareholders, there is someone who might put the brakes on.”

For sure, Purdue Pharma is not the only maker of addictive opioids; other companies — including Johnson & Johnson — face legal fights on that front. However, “Purdue was a particularly large player in this and their marketing was particularly aggressive,” said Field. “They were also harmed by some of the documents that came to light, such as statements by their president about promoting addiction and then demonizing the victims. So, there are aspects of this that are more damning for Purdue than for some of the other players.”

The Settlement Math

Speculation runs high on how much money Purdue Pharma and the Sacklers made from OxyContin and how much of that might be available for creditors, plaintiffs and other claimants, because privately held firms do not have to disclose that information.

Some numbers floating around offer clues. Purdue Pharma currently has $1.36 billion of cash on hand, according to a Wall Street Journal report. The Sackler family was worth $13 billion as of June 2016, and was then the 19th-richest family in America, according to Forbes magazine.

New York’s attorney general had issued subpoenas in August to 33 financial institutions and investment advisers with ties to the Sacklers in an effort to trace the full measure of the family’s wealth.

Purdue Pharma’s financials are not public since it is a private company wholly owned by the Sacklers. The Forbes report cited earlier put its revenues from OxyContin at $1.6 billion in 2003, and another Forbes report put its 2016 revenues at $3 billion and profits at $700 million. OxyContin has generated $35 billion in revenues thus far for the company, according to a New Yorker article in October 2017.

According to a Reuters report that cited court records and “people familiar with the matter,” the Sacklers would pay the $3 billion they have promised over seven years and an additional $1.5 billion or more through an eventual sale of another company they own called Mundipharma. Some news reports put the total value of the settlement at $12 billion. “I don’t think anyone expects it to be $12 billion in cash,” said Simon. “These numbers and the valuations are going to drop significantly in terms of actual dollars in the bank to be distributed.”

“There is another layer of interested financial parties, which is those who need protection from future addiction, and efforts to stop the crisis before it gets any worse.” –Robert I. Field

Purdue Pharma’s creditors aren’t likely to be made whole in the settlement, according to Simon. “Given the estimated dollar value of claims and the estimated assets available in the settlement, even in the most generous terms, there’s not enough money to give everybody 100 cents on the dollar,” she said.

The company’s unsecured creditors will likely get “pennies on the dollar,” said Lipson. “Bankruptcy is a game of fractions, and we don’t really know the numerator or the denominator here,” he added. The numerator will be the ongoing value of the company, and the denominator will be the total amount of unsecured claims, he explained.

The Opioid Trail

In 2017, more than 70,000 people died from drug overdoses, and of those deaths, almost 68% involved a prescription or illicit opioid, according to the U.S. Centers for Disease Control and Prevention. Between 1999 and 2017, almost 400,000 people died from an overdose involving any opioid, including prescription and illicit opioids, it stated.

A Purdue Pharma fact sheet on opioids states that its brand OxyContin never exceeded 4% of total opioid pain prescriptions, and currently accounts for 1.3% of that market segment. David Sackler, a third-generation member of the Sackler family, defended it in an interview to CBS News last week.

Purdue Pharma has been accused in earlier years, too, of suppressing the risk of addiction to OxyContin. In 2007, it agreed to pay $600 million in fines and other charges after its executives admitted that they “misled regulators, doctors and patients about the drug’s risk of addiction and its potential to be abused,” according to a New York Times report.

The company had already struck a $270 million settlement with the state of Oklahoma this past March. The state of Ohio, which was set to pursue its own lawsuit against the company, has agreed to the settlement; its attorney-general said the money it gets from the settlement would go towards treating opioid addiction in all of its counties.

Other opioid makers, too, have taken the bankruptcy route. Insys Therapeutics in June filed for bankruptcy protection five days after securing a $225 million settlement with the federal government. That triggered speculation that other embattled opioid producers could take the same path, according to a Knowledge@Wharton report. Insys makes the Subsys brand of the drug fentanyl, an opioid that is effective in easing pain for cancer patients.

Likely Scenarios Ahead

Lipson expected state governmental actors that are plaintiffs “to take the position that they should be treated differently at the front end of the case” as the court weighs the settlement proposal. “They will undoubtedly say that they’re not obligated to settle because the there’s an exception under the bankruptcy code from the stay for governmental entities that are enforcing their police or regulatory powers.”

However, Lipson also expected those state entities to be “forced in one way or the other” to become party to the settlement, but after much negotiations. “Right now, I think everybody is simply jockeying for position and trying to exert as much leverage as they possibly can,” he said. “For the non-settling creditors, staying out of [the] bankruptcy [settlement] is probably the best strategy that they can employ.”

The management of Purdue Pharma has 120 days to propose a plan of reorganization incorporating the settlement terms, and it will be difficult to secure an extension, said Lipson. Finalizing the settlement, if approved, “will take more than six months, at a minimum,” the company stated on its website.

“There is a great deal at stake. It is a high-stakes game of poker at this point.” –Jonathan Lipson

Lipson said it is possible that some state attorney general will ask for an examiner to be appointed to study the company’s finances. “You can have examiners poking around, and all of a sudden, all sorts of things can come out,” he added. “And then, suddenly the settlement that currently exists may change.”

Other pharmaceutical companies that make opioids will closely follow the Purdue Pharma bankruptcy proceedings as they plan for their future, Lipson noted. “There is a great deal at stake. It is a high-stakes game of poker at this point.” Field, too, said that “other companies manufacturing opioids and other dangerous products are looking at this closely with a lot of concern.”

Beyond the bankruptcy and the settlement, Simon said, “the broader public crisis question that many people are asking” is about ownership of the responsibility for all of the deaths that have occurred because of OxyContin. “Once the contours of that settlement come forward, and once the terms of whatever trust structure they create are identified, we can begin to put together the building blocks of what relief and what justice may look like in this case,” she added.

Another question is if state and local governments would use all the monies from the settlement towards treatment and prevention of opioid addiction. Lipson pointed out that after the master tobacco settlement, not every state used the money it received to help with tobacco-related illnesses. “Some states did, and many didn’t — they just dumped the money into the general fund,” he said. “The broader social issues here are in some respects beyond the scope of what the bankruptcy court can deal with, because its work is to reduce all of these problems to dollars and cents,” he said. “It’s going to be difficult for anybody to feel like bankruptcy is going to produce outcomes that make everyone happy.”

The outcomes from the Purdue Pharma settlement are likely to be “less than optimal,” according to Field. “It will provide money to help address the crisis. It will provide some kind of punishment for the corporation and the family. But it appears that the family will be able to keep a large part of its fortune.”

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