NEW YORK, April 25 (Reuters) - Mallinckrodt's ( MCKPF ) 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 ( MCKPF ) 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 ( MCKPF ) 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 ( MCKPF ) ended

royalty payments, Sanofi had argued that Mallinckrodt ( MCKPF ) 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 ( MCKPF ) could exit bankruptcy with a "fresh start."

"Bankruptcy frees debtors from lingering claims like this

one," Judge Stephanos Bibas wrote.

Mallinckrodt ( MCKPF ) 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 ( MCKPF )

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 ( MCKPF ), 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 ( MCKPF ) 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 ( MCKPF ) bankruptcy court filings.

The case is In re Mallinckrodt Plc ( MCKPF ), 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 ( MCKPF ): Melissa Arbus Sherry of Latham & Watkins;

Michael Merchant and Amanda Steele of Richards, Layton & Finger

Read more:

Drugmaker Mallinckrodt files for second bankruptcy in US

Court OKs Mallinckrodt restructuring, $1 billion cut to

opioid settlement