Mallinckrodt Avoids $40 Million SEC Fine in Medicaid Overcharge Case

The U.S. Securities and Exchange Commission said Mallinckrodt failed to tell investors it had potentially overcharged Medicaid for its flagship drug, but the regulator waived a $40 million civil penalty partly because the pharmaceutical company agreed to hire a compliance consultant.

The SEC said in an administrative proceeding Thursday that the Centers for Medicare and Medicaid Services informed Mallinckrodt as early as 2016 that the company was using an incorrect rebate rate for its sales of Acthar Gel, a drug used to treat several rare autoimmune diseases, which meant it was overcharging state Medicaid programs for the drug.

Mallinckrodt, which didn’t admit or deny the SEC’s findings, agreed to hire a compliance consultant to conduct a comprehensive review of the company’s disclosure and internal accounting controls, as well as implement the consultant’s recommendations.

The SEC said it wouldn’t impose the $40 million penalty because of Mallinckrodt’s financial position and because it had committed to retain a consultant. The company in November announced it had completed its financial restructuring and emerged from chapter 11 bankruptcy.

Mallinckrodt said in a regulatory filing Thursday that the SEC wasn’t intending to take any action against former or current Mallinckrodt directors, officers or employees. The company declined to comment Friday beyond its regulatory filing.

Drug companies are required by law to pay to state Medicaid programs a rebate, or a percentage of each drug sale to a Medicaid patient, to ensure the program pays the lowest price possible.

The regulator said that in late 2018 the Centers for Medicare and Medicaid Services told Mallinckrodt to fix the rebate rate and that it would prevent further sales of Acthar Gel through Medicaid if the company didn’t comply.

The SEC alleged that Mallinckrodt lacked sufficient accounting controls and failed to maintain disclosure controls for loss contingencies. Mallinckrodt had a potential material loss contingency of more than $500 million related to the CMS claim but didn’t disclose this in its annual report in early 2019 and its quarterly report filed in May of that year, according to the regulator. The company also didn’t disclose a possible reduction of future net sales of Acthar of around $100 million resulting from the incorrect rebate rate.

Public companies are required by federal securities laws and Generally Accepted Accounting Principles to disclose possible material loss contingencies as well as other issues likely to affect future net sales.

Mallinckrodt, which disputed the claims about incorrect rebates, made its first public disclosure about the matter in a May 2019 regulatory filing, according to the SEC. The company’s stock price dropped about 25% after the disclosure, the SEC said.

Mallinckrodt in 2022 reached a $260 million settlement with the Justice Department to resolve allegations that it underpaid rebates for Acthar Gel and violated kickback laws.

The company, which also faced mass lawsuits alleging it oversold prescription painkillers, filed for bankruptcy in October 2020. It emerged from that chapter 11 proceeding only to file again in August 2023. It exited the second bankruptcy in mid-November this year.

Write to David Smagalla at [email protected]