What the backlash against opioids could mean for companies in the drug supply chain

Nicole Sinclair
Markets Correspondent
As the opioid crisis reaches new levels, seized prescription drugs displayed in a glass flask in the controlled substance room of the Utah state crime lab (AP Photo/Rick Bowmer)

Lawsuits against opioid drugmakers are trickling in, and they may be just the start of a broader backlash against the industry. At the end of June, Oklahoma became the latest state to accuse US drugmakers of misrepresenting the risks of opioid drugs, following Mississippi, Ohio and Missouri.

But while overall damages sought by the suits could be high, the negative impact appears to be manageable for most of the companies involved in the manufacturing, marketing, and distribution of the drugs.

To be sure, some drugmakers have outsize exposure to opioids. But opioids account for a very small percentage of prescriptions written, which is important for investors to keep in mind to understand the scale of this issue for companies along the supply chain.

Big drug makers are diversified

The opioid epidemic has been tied to the deaths of an estimated 91 Americans every day, and it has contributed to surging health care costs. However, for most individual players in the industry, the exposure to opioids is minimal. These companies include Johnson & Johnson (JNJ), Teva Pharmaceutical (TEVA), Endo International (ENDP), and Allergan (AGN).

Teva’s $864 million in revenue from its two opioid drugs over the past five years is just a small fraction of the company’s $21.9 billion reported last year alone. The $457 million in revenue from Allergan’s two opioid drugs since 2012 compares to the company’s $14.6 billion in revenue last year. Janssen’s $3.0 billion in revenue from its two opioid drugs over the last five years compares to $33.5 billion last year for the whole pharmaceutical division and $71.9 billion for all of Johnson & Johnson, including its consumer and medical device divisions.

Opioid litigation could come with substantial payouts that are far more costly than just the loss of these sales. But analysts argue that the risk is limited.

“We don’t see it as a big financial risk for the drug makers, as they are diversified,” said Credit Suisse’s Vamil Divan. “And historically, we’ve seen them pay large settlements without a significant impact.”

Privately-held Purdue, which is 100% owned by the Sackler family, has an estimated $3 billion in revenue, much of it from OxyContin. It is by far more exposed than the publicly traded and more diversified drugmakers.

Exposure appears limited for distributors, pharmacies, insurers

Drug distributors like McKesson (MCK), Cardinal Health (CAH) and AmerisourceBergen (ABC) could also be in the hot seat.

These companies, which are the middlemen between drugmakers and pharmacies, ship millions of doses of drugs each year. McKesson already agreed to a $150 million settlement in January with the Justice Department over allegations that it failed to report suspicious orders for controlled substances from doctors and patients. It will face more pressure from picketing teamsters at its shareholder meeting on July 26.

But Jefferies’ Brian Tanquilut said the distributors’ exposure to opioids is very small and that their culpability continues to be questionable.

“I estimate that McKesson’s exposure to the opioid drug class is less than 2% of total scripts dispensed,” Tanquilut said. “Plus, how could they really have affected, controlled or impacted patient access to opioids? They are a logistics provider… They don’t even touch the patient.”

The pharmacy benefit managers, or PBMs, that negotiate with manufacturers on price based on different volume levels like CVS Caremark (CVS) and Express Scripts (ESRX), may be in the crosshairs as well. But here too, impact is likely minimal. Bernstein’s Brian Wilkes said he estimates pain-related medicines to be less than 5% of drug spend.

“These names would have noticed the excess of prescribing and potentially could have caught the crisis earlier,” according to Wilkes. “One of the big things they do is information and analysis. One of the things they do is telling their clients what they are seeing more of when it comes to different drugs. They should be part of the solution. But they are very diversified.”

Pharmacies that give the drugs to individuals could be under fire, according to analysts. These include CVS with approximately 10,000 locations, Walgreens (WBA) with about 8,000 locations and Rite Aid (RAD) with about 4,500 locations. The Cherokee Nation is suing distributors along with top pharmacies, alleging they profited by “flooding” communities in Oklahoma with prescription painkillers.

While the company’s pharmacy divisions are significant—for example, Walgreen’s US pharmacy division was 48% of sales in 2016 and CVS’ pharmacy division was 30%—the drug sales are extremely diversified, according to analysts.

Lastly, the insurers could be pulled into some of these suits eventually, according to analysts. These insurers include names like Aetna (AET), Humana (HUM), UnitedHealth Group (UNH) and Anthem (ANTM), which cover and pay for the drugs.

“[A]re insurers liable if they charge high copay for safer pain drugs versus cheap generic opioid?” wrote Bernstein’s Ronny Gal. Still, insurers cover a large range of drugs, limiting their overall exposure, according to analysts.

A path forward

There is precedent for these claims to be pursued. In the 1990s, state attorneys general had sued tobacco companies, arguing that the companies should cover costs of treatment from smoking-related diseases. In 1998, the tobacco industry entered into the largest civil-litigation settlement agreement in US history, where tobacco companies agreed to make annual payments to the states.

And the initial opioid lawsuits, which allege aggressive marketing with misleading advertising, point to significant damages. For example the Ohio lawsuit sees damages exceeding $10 billion over 10 years, according to Gal. That means meaning damages across the US could be in the many billions.

Whatever the outcome, it is very likely we could see major changes, even if the individual companies don’t see a significant financial impact initially.

“We believe these lawsuits may end up being the watershed moment…in driving the market toward safer alternatives,” Gal wrote.

Nicole Sinclair is markets reporter for Yahoo Finance

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