Can Investors Help Tackle the Opioid Crisis

Can Investors Help Tackle the Opioid Crisis?

Opioid abuse in the United States is a public health crisis of historic proportions. Some institutional investors and Segal Marco Advisors are encouraging pharmaceutical companies to enact policies to mitigate potential governance risks to shareholders of these firms.

The Huffington Post recently borrowed a phrase from an internal medicine doctor for a headline: “The 20-Armed Octopus: Deconstructing the Opioid Epidemic.” The headline aptly describes the complexity of identifying the factors causing the rise in drug overdose deaths in the United States.

The Centers for Disease Control and Prevention reports 91 Americans die every day from an opioid overdose. One study put the economic burden of opioid abuse resulting in increased health care, substance abuse treatment, criminal justice and other costs at $78.5 billion in a single year. In October, President Trump declared the opioid epidemic a national public health emergency.

What Are the Factors Causing the Opioid Epidemic?

There are many – and addressing the crisis requires each “octopus arm” to be examined. One of those arms is the supply chain of opioid manufacturing and distribution. The five major opioid manufacturers are facing subpoenas from a coalition of 41 states attorney generals on their marketing and sales tactics. The investigation questions whether the companies minimized the risks of addiction and overdose for opioids even when they are used as directed. Similar lawsuits are mounting from more than 60 cities, counties and states throughout the country.

This supplier arm is of particular interest to investors. The three major drug distributors: AmerisourceBergen, Cardinal Health and McKesson, continue to face lawsuits for distributing to pharmacies that serve drug abusers, failing to provide effective controls against diversion of controlled substances, and failing to report suspicious orders as legally required. The distributors have collectively paid hundreds of millions of dollars to settle opioid related claims.

At the recent annual shareholder meeting at Cardinal Health, Illinois State Treasurer Michael Frerichs pointed out that the Ohio-based firm has paid nearly $100 million in legal settlements for failure to adequately flag and report suspicious shipments. The number of pills flowing to some pharmacies are staggering and call into question the distributors willingness to see the red flags. In six years, drug distributors shipped 780 million hydrocodone and oxycodone prescription opioids to West Virginia, enough for about 433 pills for every man, woman and child in the state. During that time, 1,728 people fatally overdosed from those two opioids. McKesson, Cardinal Health and AmerisourceBergen together supplied more than half of the total, according to reports in the Charleston Gazette-Mail.

What Actions Are Investors Taking?

A group of investors with $1.3 trillion in assets is collaborating through the Investors for Opioid Accountability (IOA) to examine the role of companies in the supply chain. Segal Marco is a founding member of the IOA. A group of state treasurers from Illinois, Pennsylvania, West Virginia and California – has focused specifically on how drug distributors are handling the crisis.

Whether these companies have the right governance and leadership in place to get ahead of the crisis is the question investors are discussing. The IOA has asked the independent directors of the boards of the 10 supply chain companies to investigate how they are responding to increasing business risks related to opioids. In addition to the board investigation, the IOA is also calling on the firms to improve corporate governance practices. More independent oversight and the right compensation structures will mitigate risks and deter misconduct. 

A successful push by the International Brotherhood of Teamsters prompted McKesson to launch an investigation, led by independent board members, of its opioid-related business practices. In the run up to its July shareholder meeting, the drug distributor also committed to separate the roles of CEO and board chairman when the current CEO retires, following a shareholder proposal by the International Brotherhood of Teamsters and support from the state treasurers group. After 73% of shares voted against the executive compensation plan at McKesson, the company also committed to review its pay practices.

The International Brotherhood of Teamsters also filed a proposal at Cardinal Health to separate the CEO and chairman roles. Two days prior to its shareholder meeting last month, the CEO announced he was stepping down. More recently on November 16, Cardinal Health announced an Opioid Action Program comprised of four steps:

  1. Purchase approximately 80,000 doses of the overdose-reversing drug, Narcan® (naloxone HCI) Nasal Spray 4mg, for distribution free-of-charge for first responders and law enforcement officials in Ohio, Kentucky, Tennessee and West Virginia,
  2. significantly ramp up its existing support for successful drug 'take back' and education programs,
  3. invest $3 million to expand grants focused on youth prevention education, prescriber opioid awareness and reduction efforts and community responses to the epidemic in the four Appalachian states,
  4. and partner with the Warren Alpert Medical School at Brown University to share medical school curricula that addresses opioid misuse and treatment.

Actions by these firms suggest a renewed focus on moving their leg of the octopus. The real test will be how the opioid crisis unfolds over the next year and beyond. Investors will look to the board members to assess their company’s role in the crisis and monitor efforts towards solution. The annual shareholder meeting provides investors with an opportunity to support those board members that show accountability and vote out those that don’t.

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Tim Barron, CAIA

Tim Barron, CAIA
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