And Yet It Moves …

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by Jason Norris, CFA
Executive Vice President of Research

There were a number of moving pictures this past week that we could cover. Two of them will not be tariffs or the yield curve, as our team has shared our perspective on many occasions this summer through our Weekly Market Makers.

One topic that we have not covered in our communication that caught our attention this week is … opioids. There are over 2,000 lawsuits currently filed against drug companies, drug distributors and pharmacies with respect to the opioid crisis in the United States. The majority of these are originating from states and municipalities. Their argument is that for decades, defendants exacerbated the sale and distribution of opioids, knowing they were more additive than advertised, thus contributing to the massive addiction problem facing the U.S. today.

Plaintiffs are looking for financial restitution to cover the costs and prevention of this epidemic. The major defendants are:

Drug Companies

  • Purdue Pharma

  • Johnson & Johnson

  • Teva

  • Mylan

  • Endo Pharma

  • Mallinckrodt

  • Abbott Labs

Distributors and Pharmacies

  • Cardinal Health

  • McKesson

  • Amerisource Bergen

  • CVS

  • Walgreens

Analysts estimate that the total liability paid could be upward of $200 billion. We believe this liability will not be spread amongst those with the greatest culpability, but to those with the largest balance sheets.

Defendants argue that the products were approved by the FDA, regulated by the DEA and were prescribed by licensed physicians. Thus, linking manufacturers and distributors to the epidemic is loose at best. A recent decision in Oklahoma against Johnson & Johnson claimed that JNJ was a “public nuisance” contributing to the problem. JNJ was ordered to pay $572 million, which is large, yet meaningfully less than expected.

Settlements and Trials

While JNJ seeks to stay out of settlements, we believe the smaller producers and distributors may look to put this behind them. Due to the fact that there are so many plaintiffs, it is difficult to see a broad settlement in the near future. City and county governments are looking to put together a “negotiating class” to settle their claims, but naturally there has been pushback from defendants. Also, this class would not include other plaintiffs such as states and hospitals.

A trial is expected to start in Ohio in October that will determine the details of which plaintiffs are in a potential class action. There are also several other cases scheduled in the coming years in various states. Handicapping a resolution is very difficult.

For investors in the healthcare space, we expect continued volatility in the names affected. Our belief is that some smaller companies may not have the balance sheets to pay multibillion-dollar settlements. We anticipate that the larger names will continue to be in the headlines, even if they may have a “looser link” to the epidemic.

Week in Review and Our Takeaways

  • The healthcare space will be driven by plenty of headlines at least through the election; we anticipate that volatility will remain heightened

  • Tweets, trade and the yield curve kept investors on edge; however, stocks recovered this week, +2 percent, after last week’s selloff

Disclosures