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Should Investors Steer Clear of Opioid Drug Stocks?

By Keith Speights – Updated Jun 20, 2017 at 8:06AM

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State and local governments are targeting Johnson & Johnson, Teva, and other opioid drugmakers and distributors. Could their stocks be at risk?

More than 50,000 Americans died as a result of opioid overdoses last year. The opioid epidemic is taking a huge toll on families across the country. It's also placing a heavy burden on state and local governments that must bear the added costs of healthcare and law enforcement. And many of them are fighting back.

During the past year, more than 20 state and local governments have filed lawsuits against drugmakers and pharmaceutical distributors that they claim have fueled the opioid drug crisis in the U.S. These corporate targets include Johnson & Johnson (JNJ 0.92%), Endo International (ENDP 7.17%), Teva Pharmaceutical (TEVA 0.57%), AmerisourceBergen (ABC -4.68%), and McKesson (MCK -2.03%).

Should investors steer clear of these stocks while the controversy rages?

Opiods on prescription pad

Image source: Getty Images.

Tobacco road

The current wave of opioid lawsuits being filed by state and local governments is reminiscent of the legal battles that many of these same entities waged against big tobacco companies in the 1990s. Back then, the legal argument was that tobacco companies had misled the public about how addictive and problematic for health tobacco was.

A similar allegation is being made now against drugmakers and pharmaceutical distributors who market opioid drugs. These companies are being accused of making false and misleading statements about the risks and benefits of opioid drugs.

There are a couple of key differences between the tobacco litigation of two decades ago and the current lawsuits against opioid drugmakers and distributors, though. Tobacco makers sold an unregulated product, while pharmaceutical makers and distributors that sell opioid drugs market products that have gone through an extensive regulatory approval process with the U.S. Food and Drug Administration (FDA).

Also, the costs to state and local governments are quite different. Tobacco use led to diseases that developed years later. The costs of opioid addiction and overdoses are hitting governments now rather than later.

Varying vulnerability

How vulnerable to the growing number of lawsuits are the stocks of companies that make or distribute opioid drugs? It depends.

In general, pharmaceutical distributors like AmerisourceBergen and McKesson would seem to be dealing with less risk than the drugmakers. These distributors will probably maintain that they're simply middlemen in the process. They don't make the drugs or advertise them. Instead, they only act as wholesalers that sell the opioid drugs to pharmacies.

On the other hand, pharmaceutical companies like Johnson & Johnson, Endo, and Teva typically have sales reps out in the field promoting their drugs to physicians. There's more of a chance that some individuals in these companies could potentially make misleading statements about the opioid drugs they're selling to generate higher sales. (This higher risk, of course, doesn't necessarily mean that individuals actually do make such misleading statements.)

There are also different levels of vulnerability based on each company's financial strength. Johnson & Johnson stock, for example, isn't likely to be impacted significantly even if the company loses in court. Endo Pharmaceuticals, with lower revenue and net losses, would be much more likely to suffer if the legal battles don't go its way.

Question mark sign in road

Image source: Getty Images.

What should investors do?

So should investors steer clear of all stocks related to opioid drugs because of the big legal fights on the way? No.

For one thing, there's a long way to go before the outcome of the litigation is known. State and local governments probably have a much more difficult case to argue than they did with the tobacco lawsuits years ago.

More important, each stock would be impacted differently even if the legal battles are lost. For example, Johnson & Johnson and Allergan likely wouldn't feel the same effects of a loss as Endo would.

That's not to say, however, that all these stocks are necessarily good ones to buy right now. Teva faces its own set of issues totally unrelated to the opioid litigation. Endo stock has already plunged following the FDA requiring opioid drug Opana ER be withdrawn from the market.

There's also one other thing to consider: your investing time horizon. Tobacco stocks went through a period of uncertainty back in the 1990s with state and local governments suing tobacco makers. However, many of those same stocks have racked up huge gains since then. Even stocks that experience short-term difficulties can be long-term winners.

Keith Speights has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Johnson & Johnson. The Motley Fool recommends McKesson and Teva Pharmaceutical Industries. The Motley Fool has a disclosure policy.

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