Get Ready for Headline Risk from Opiods
As part of our effort to be proactive for investors we periodically research issues of concern to portfolio holdings. The base research for this article was initiated by Jeff Alton, done by our intern Di Wang and expanded on by Dennis Gibb.
If you listen to the news you have heard about the opioid crisis. Opioid addiction is rampaging through the United States, causing more than 33,000 deaths in 2015, doubling from the turn of the century more that from suicide and murder combined. New York Times estimates that drug overdose deaths reached 59,000 in 2016, making it the leading cause of death for Americans under 50. In the age group of 50 to 55 white people with high school educations are dying at rates that rival the AIDS epidemic at its peak. It has even been blamed for the low labor market participation rate of 18 to 45-year-old males.
People can argue endlessly over the causes of the crisis but since our business is money and investments we will restrict our comments to the potential impact of the crisis on investor’s portfolios.
A good number of the victims of the crisis are covered under some form of government sponsored health care, Medicare, Medicaid, VA and Indian Health Service. Care for patients covered by Medicare hits the states particularly hard since it’s largely state operated.
Many are comparing the situation with the Tobacco Industry lawsuits of the late 1990s under which tobacco producers agreed to pay $206 billion to states over the first 25 years of the agreement. The success of that legal theory (although little of the damage award went to health-related spending) is now being used by the states in attempts to recoup costs associated with the opioid epidemic. States are suing major health-related corporations who have any connection to opioids. Beginning with Mississippi in 2015, the wave of lawsuits is advancing. This year Ohio, Tennessee, Missouri, and Oklahoma announced lawsuits of their own and a dozen more states are expected to follow.
The primary targets so far have been the drug manufacturers who are accused of fraudulent marketing. The list of manufacturers includes Endo Health Solutions (NASDAQ: ENDP), Cephalon, Inc. (NASDAQ: CEPH), Janssen Pharmaceuticals (NYSE: JNJ), Allergan plc (NYSE: AGN) and privately-held Purdue Pharmaceuticals. The allegation is that the drug companies pushed the edge of the advertising envelope, claiming that most individuals do not become addicted to prescribed opioids -making the drugs suitable for chronic pain sufferers. While that might have been true for older opioids the newer formulations such as OxyContin were far stronger, far more addictive and the states allege the companies knew the risks. Traditional medical wisdom and experience has shown that all opioids are addictive if abused and that opioids should only be prescribed for a limited period except in cases of severe long-term pain, such as terminal cancer patients.
Some states have also gone after large medical distributors, accusing them failing to report suspicious large orders of opioids. These distributors include Cardinal Health Inc (NYSE: CAH), McKesson Corp (NYSE: MCK), AmerisourceBergen Corp (NYSE: ABC), Walgreens (NASDAQ: WBA) and CVS Health Corp (NYSE: CVS). West Virginia sued these distributors previously, alleging that they violated state consumer protection laws. The distributors settled the case by paying millions despite of their negation on any wrongdoing in the crisis.
The economic burden is large and continuing to increase. A study in the journal Medical Care estimated the cost to the American society to be $78.5B in 2013. While the current lawsuits are based on the precedent of the tobacco settlement there are significant differences.
There will undoubtedly be enough headline risk coming to increase volatility for these stocks. The crisis is top of mind right now and the news media will cover it endlessly. Comparing this to the tobacco industry lawsuit, may however, be an over-simplification. Should investors be inoculating their portfolio against the opioid epidemic?
Unlike tobacco, the FDA has approved opioids, and if used as directed, opioids are unlikely to result in death. Second, opioid prescriptions bear warning labels as required by law. Third the access to tobacco was largely unrestricted and unregulated, while opioids can only legally be obtained from a medical practitioner. Additionally, there was a long, documented history of the medical issues related to tobacco stretching back to the original Surgeon General’s warning in 1963 paired with an equally long record of deception on the part of the tobacco companies.
Like most crisis, there has been a lot of placing of blame depending on the person’s ideological position, but opioid addiction defies simple explanation. Rather, the opioid epidemic is the result of a systematic failure of each component of the medical supply chain from the doctors to the manufacturers. Many social scientists see the atomization of society as a contributing factor. This is borne out by the shotgun approach to the litigation, sue everyone! Maybe it will stick!
No doubt opioid-related companies will end up paying some dollar amount to the states, but it probably will not resemble the large sums included in the tobacco settlement or be enough to cripple any one company. In fact, as investors watch the opioid cases unfold, any headline risk affecting stocks could provide a buying opportunity which should be undertaken after through research.
This crisis is one more reason that doing the fundamental analytical work on a company is necessary to avoid ugly surprises. The calumny of litigation drove tobacco stocks down and made them pariahs. Since the litigation however, an investor would be hard pressed to find a non-technology group that has done as well in the stock market.
