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Will Opioid Litigation Take its Toll on Pharma Companies?

Indrajit Bandyopadhyay

The recent verdict by an Ohio district court against J&J JNJ, related to its involvement in the abuse of its opioid-based drugs, has brought the rising litigation-related liabilities of several other large pharma companies into focus. There are thousands of pending lawsuits in several states, which may run into billions of dollars in penalties or settlements and significantly impact the companies’ margins going forward.

The U.S. Opioid Epidemic

Opioid drugs, which are used as painkillers, have high abuse potential. Use of drugs like morphine, codeine, oxycodone and fentanyl are opioid-based and highly controlled by the FDA.

However, the marketing practices of pharma companies including Teva TEVA, Allergan AGN, Mallinckrodt MNK, Endo International ENDP and privately held Purdue Pharma, since late 1990s, increased prescribing of opioid-based drugs as painkillers. These pharma giants assured that patients will not get addicted to opioid pain relievers. It is rumored that Purdue Pharma was the biggest beneficiary of this crisis as it aggressively marketed its opioid analgesic, OxyContin, and made huge profits from the sale of the drug, used either as a medicine or for addiction.

Per the National Institute of Drug Abuse, opioid overdose claimed lives of 47,000 Americans in 2017. About 1.7 million people in the United States, taking prescription opioid pain relievers, suffered from substance use disorders in the same year. Per Centers for Disease Control and Prevention’s estimate, prescription opioid misuse alone creates a total economic burden of $78.5 billion every year. In the past two decades, 400,000 deaths occurred related to opioid-based drug abuse.

With a significant increase in the number of deaths or instances of misuse of these drugs, and high costs related to opioid abuse, it has become a public crisis. Several government organizations are taking steps to contain the widespread misuse of these drugs. Lawsuits have been filed against pharma companies for generating funds through penalties for abatement plans. J&J is the first company this year to have received an unfavorable ruling. It has to pay a penalty of $527 million in the opioid-abuse case brought by the state of Oklahoma. Two other defendants in the same case, Teva and Purdue Pharma, settled earlier by paying significant amounts. Meanwhile, Endo International and Allergan reached settlements in opioid abuse case with the state of Ohio.

Impact of Pending Lawsuits

J&J has decided to appeal against the ruling in the litigation with the state of Oklahoma. The company stated that though it acknowledges the opioid crisis as a real problem, its drugs or marketing campaigns are not responsible for the widespread abuse. Other companies that have settled outside the court also denied any wrongdoings. J&J is set to face a federal multidistrict litigation in October, which includes several defendants and multifarious claims.

There are more than 2,000 cases against J&J and similar penalties in all these cases will aggregate to billions of dollars. Although J&J has significant cash resources to meet these liabilities, it will likely hamper its future earnings. Moreover, appealing against such decisions will also increase litigation costs. Following the Oklahoma ruling, Moody’s has revised its outlook on J&J to negative.

Meanwhile, Purdue Pharma and its owners, the Sackler family, are reportedly in discussions to settle all pending litigation related to the company's opioid-based drugs for payment in the range of $10 billion to $12 billion. However, no agreement has been reached yet. The company would file for bankruptcy if a deal materializes to meet the settlement payment.

The path forward for Teva, Allergan, Mallinckrodt and Endo International will also not be rosy, following J&J’s penalty and Purdue Pharma’s rumored settlement discussions. Most of these companies are already reeling under pressure due to pricing pressure in the generic market as well as rising competition in the branded segment. Based on the current scenario, cash resources of these companies are likely to be insufficient to meet settlement costs or penalties. They may follow the path of Purdue Pharma and declare bankruptcy. A decision related to the multidistrict litigation, due in October, will provide a better picture.

Please note that although AbbVie (ABBV) is not named in any opioid abuse litigation, the company’s pending acquisition of Allergan may have an impact on the company. Negative rulings will prove to be unfavorable for the merged entity.

Will Cannabis Become the Next Opioid?

The current state of opioid crisis has raised some questions related to recent legalization of cannabis/marijuana in certain states, which is a highly regulated substance. Cannabis-based drugs also have a high potential of abuse. These drugs may lead to a more severe crisis than opioid in the next couple of decades. However, cannabis is not yet legalized at the federal level in the United States and none of the U.S.-based pharmaceutical companies can market cannabis-based drugs, at present. However, a few companies with cannabis-based drugs are registered outside the country and they do market their drugs in the United States. These drugs should be made available in the U.S. market only after thorough research to avoid another financial burden.

J&J, Endo, Teva, Allergan and Mallinckrodt carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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Johnson & Johnson (JNJ) : Free Stock Analysis Report
Allergan plc (AGN) : Free Stock Analysis Report
Endo International plc (ENDP) : Free Stock Analysis Report
Teva Pharmaceutical Industries Ltd. (TEVA) : Free Stock Analysis Report
Mallinckrodt public limited company (MNK) : Free Stock Analysis Report
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