Drug manufacturer Mallinckrodt PLC (NYSE: MNK) disclosed Monday that it has voluntarily initiated Chapter 11 bankruptcy proceedings in the U.S. Bankruptcy Court to restructure its operations and pare down debt.

Mallinckrodt becomes the third major opioid maker to seek bankruptcy protection to offload liabilities related to the U.S. opioid epidemic, reports Bloomberg.

The Restructuring Support Agreement is a multi-pronged approach to change the company’s capital structure by slashing $1.3 billion debt, address claims from opioid-related lawsuits, and contingencies related to Acthar-Gel.

What Happened: Mallinckrodt, which was already struggling with Acthar-Gel payments and opioid-related fines, received a CRL from the FDA in September, related to its marketing application for terlipressin for hepatorenal syndrome type 1.

"After many months of deliberation, negotiation and consideration of alternatives, Mallinckrodt's management and Board of Directors determined that implementing a Chapter 11 restructuring provides the best opportunity to maximize the value of the enterprise and position the Company for the future in light of the current challenges it faces," said President and CEO Mark Trudeau.

The move comes as Mallinckrodt was readying for two upcoming opioid trials, as per Bloomberg.

As per the restructuring agreement, all first lien credit agreement claims, first and second lien note claims will be restored to present rates and maturity. Guaranteed unsecured noteholders will receive $375 million new secured second lien notes on a pro-rated basis and warrants convertible into ordinary shares of New Mallinckrodt.

Trade creditors and general unsecured note will share $150 million in cash while equity shareholders and unsecured note holders will get no recovery.

Why Does It Matter: The company has reached an in-principle agreement to settle contingencies and improve its financial position over the long run.

Mallinckrodt will spend $1.6 billion in structured payments to settle opioid claims. Claimants will also be entitled to receive warrants equal to 19.99% of the company’s fully diluted shares amounting to $1.551 billion when exercised.

The company will pay $260 million, over a period of seven years, to settle Acthar Gel claims and revise the Medicaid rebate calculation effective from July 1, 2020.

Price Action: MNK shares got crushed 31% on Friday to close at $0.75. The company has lost 99% of its market value in the last five years and is down 78.51% year-to-date.