41 Attorneys General Lock Horns With Opioid Manufacturers

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America’s addiction to opioids has risen to crisis levels. The matter has captured the attention of President Trump, and now 41 state attorneys are widening their investigation into the marketing practices of opioid manufacturers:

They announced Tuesday that they had served subpoenas requesting information from five companies that make powerful prescription painkiller and three distributors. Forty-one attorneys general are involved.

The investigation into marketing and sales practices seeks to find out whether the industry’s own actions worsened the epidemic.

If the industry cooperates, the investigation could lead to a national settlement.

“We must hold opioid manufacturers and distributors accountable for their roles in the nationwide opioid epidemic,” Illinois Attorney General Lisa Madigan said. “My investigations have shown that drug companies pressure physicians into prescribing powerful, addictive drugs without regard for the law or patients’ well-being.”

The attorney general have served subpoenas on five companies who make powerful prescription painkillers and three distributors. The companies include Endo (ENDP), Johnson & Johnson (JNJ), Allergan (AGN), Teva (TEVA), AmerisourceBergen (ABC), Cardinal Health (CAH), McKesson (MCK) and privately held Purdue Pharma.

The Situation

America’s opioid crisis could be quantified by the rising number of accidental deaths caused by drug overdoses, and the rising percent of opioid related accidental deaths. According to the National Institute on Drug Abuse, in 2015, the number of drug overdoses were 52,404, more than twice 23,518 in 2002. Drug overdoses are not the leading cause of accidental deaths, surpassing car accidents. In 2002 opioid prescription drug overdoses were 32% of total drug overdoses. That figure increased to 43% in 2015; opioid prescription overdoses continue to hit record highs even after the government made concerted efforts to reduce them.

Some believe the rise in opioid addiction and overdose could be driven by the rise in prescriptions. Opioid prescriptions were 219 million in 2011; this was nearly triple number reported 20 years earlier despite the fact that the level of pain felt by Americans may not have increased proportionately. Others believe opioid manufacturers might have aggressively market these drugs to doctors without informing them. In his lawsuit against certain opioid manufacturers earlier this year, Missouri Attorney General Josh Hawley even accused them of fraudulently misrepresenting how deadly and addictive prescription opioids were.

In some cases, patients with unused opioid pills might have offered them to friends or family members to treat pain relief, though they were not specifically prescribed to take them.  Ultimately, the rise in opioid prescriptions have led to the rise in opioid use.

A Tobacco-Sized Settlement?

Opioid manufacturers and distributors face a growing number of lawsuits pursuant to opioids, in addition to the 41 attorneys general previously mentioned. The popular narrative is that the opioid investigations could lead to tobacco-sized settlements:

The number of government officials launching legal action against drugmakers and wholesalers has soared in the past year in what some lawyers see as a harbinger of a settlement that could echo the more than $200bn extracted from the tobacco industry in 1998. At least 30 states, cities and counties have either filed lawsuits or are formally recruiting lawyers using a process that tends to prelude full-blown legal action, according to a Financial Times analysis.

There likely will be financial settlements with opioid manufacturers. However, their pockets might not be as deep as tobacco companies’ so a settlement in the hundreds of billions of dollars might not be feasible. Secondly, in its defense of a lawsuit brought by the state of Ohio, Purdue Pharma said opioids are government regulated products and unlike tobacco:

Purdue contends that since the U.S. Food and Drug Administration approved Oxycontin for use as a painkiller, and approved its safety warnings, federal law bars Ohio from seeking to hold it liable under state law.

Unlike suits brought against tobacco makers that resulted in a $246 billion settlement in 1999, cases focusing on opioids are targeting a government-regulated product. That means judges must defer to the FDA’s finding that the painkillers are safe and effective, and that Purdue properly disclosed addiction risks on its warning label, according to the company’s filing.

Whether or not other manufacturers use this argument remains to be seen. Mallinckrodt (MNK) recently agreed to pay $35 million settlement for failure to report suspicious orders of pharmaceuticals and for violating certain provisions of the Controlled Substances Act (“CSA”). Using Mallinckrodt as an example, lawmakers appear to have a plethora of arguments and tools at their disposal if they seek a financial settlement from opioid manufacturers.

Who Is Most At Risk?

A financial settlement could cause financial pain for each of the companies mentioned. Of the publicly-traded companies included in the probe, Endo is the most vulnerable to a curb in opioid drug sales, in my opinion. Sales of pain-related drugs make a larger percentage of its sales, so I believe it is most at risk. Its Q2 revenue of $876 million fell 5% Y/Y. It pain-related drugs (15% of total revenue) experienced a revenue decline of 30%; this drove the fall off in total revenue.  Endo’s Opana was so addictive that the FDA asked the company to remove it from the market.

The loss of Opana (4% of revenue) and headwinds in other pain-related products could cause total revenue to decline for a few more quarters. Endo’s debt/EBITDA is currently at 5.2x. A diminution in its credit metrics hurt sentiment for its share price, which is already down 60% over the past 12 months.

Conclusion

State AGs continue to lock horns with opioid manufacturers. Cash pay outs might not come near those experienced by big tobacco, but it could create a decline in opioid sales. ENDP appears the most vulnerable. Avoid the stock.

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