The impact of opioid litigation on pharma stocks

Is it a case of too little, too late? And what does it mean for Canadian investors?

Ruth Saldanha 24 September, 2019 | 1:13AM

 

 

This video is a part of our ESG Special Report week

Ruth Saldanha: At the end of August, an Oklahoma judge found that Johnson & Johnson and its subsidiaries helped fuel the state's opioid crisis and ordered the company to pay US$572 million. And this is one of just thousands of similar cases that are currently open. What does all of this opiate litigation mean for healthcare stocks? And will Canadian stocks be impacted? Morningstar equity analyst Soo Romanoff is here with us from Chicago to discuss it.

Soo, thank you so much for being here today.

Soo Romanoff: Hi. Thank you for having me.

Saldanha: What do these opioid cases mean from an ESG perspective for these pharmaceutical companies? Is it a case of shutting the stable door after the horse has left?

Romanoff: I agree with you. I don't know that the current environment is helpful in solving the epidemic. If you kind of look at the current federal case that's occurring in Ohio, I'd say the lion's share of the dollars being discussed will be in manufacturing more opioid drugs. So, we're talking about $9 billion of the $10 billion that are proposed in the settlements right now.

Saldanha: What is the kind of impact that you anticipate on the companies themselves as a result of this litigation?

Romanoff: Longer term, I don't know that there will be a big impact, mostly because many of these cases will be settled before then. There's a lot of litigation fatigue. I think Teva (TEVA), in particular, they spend about $100 million to $500 million in legal fees just annually just for this. And a lot of those dollars should really be directed toward operations.

Saldanha: Do you foresee any changes to our estimates based purely on the fact of this?

Romanoff: Right now, we've kind of baked in about $1 billion in settlement for Teva. We've also included some litigation fees as well. So, longer term, I do not see that impacting longer term financials.

Saldanha: How will this litigation impact the ESG attractiveness of these companies?

Romanoff: Yeah. So, I think this is a highly publicized matter. I don't know that something like this could have been avoided. It seems that they've kind of targeted the largest companies, the largest distributors and the largest manufacturers. If anything, they'll probably want to include terms in the settlements where new cases won't come up. So, we won't have this recurring again. Specifically, for the distributors, they'll probably have to look at their technology and make sure that it can monitor large flux of volume and report those actively to the DEA. Manufacturers, they'll probably have to look at longer-term impacts of the drugs that they manufacture. And maybe overall, they'll tweak governance, but I don't know that there are any other things that come to mind.

Saldanha: Finally, MCK (MCK), Jean Coutu and Shoppers Drug Mart are three Canadian companies that are involved with these issues. What are your views on these companies?

Romanoff: Interestingly enough, I think these litigations have really been targeted to companies in the U.S. or more U.S.-based operations, because culturally, we're so different, maybe has something to do with the multiple pairs, but I don't know that any of this will be kind of migrating to Canada anytime soon.

Saldanha: Thanks so much for being here today, Soo.

Romanoff: All right. Thank you.

Saldanha: For Morningstar, I'm Ruth Saldanha.

You can find our Sustainability page here

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
McKesson Corp142.27 USD1.18
Teva Pharmaceutical Industries Ltd ADR9.92 USD1.02

About Author

Ruth Saldanha

Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca