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Will a $48 Billion Global Settlement End U.S. Opioid Crisis Lawsuits?

By Maxx Chatsko - Oct 23, 2019 at 7:00AM

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A settlement in a closely watched Ohio case averted a federal trial and paves the way to a nationwide settlement -- if drug companies shorten their payment timelines.

The opioid epidemic is a complex problem with no simple or ideal solution. The Centers for Disease Control and Prevention (CDC) estimates that 47,600 Americans died from opioid-related overdoses in 2017. One study published earlier this year by Massachusetts General Hospital estimates that 700,000 Americans will die from opioid overdoses between 2016 and 2025. That's nearly double the number of U.S. combat deaths in World War II.  

In addition to the human toll, responding to and combating the health crisis has come at a steep financial cost to the country, measured in tens of billions of dollars. Attorneys from dozens of U.S. cities and states have sued drug companies and drug distributors to pay up for their roles in fueling the epidemic, ideally as soon as possible. There are more than 2,000 opioid-related lawsuits pending across the nation.

After a closely watched case in Ohio ended with a $260 million settlement -- and avoided becoming the first opioid-related litigation to go federal court -- there's renewed hope for a global settlement spanning the entire U.S. using the same formula from the Ohio settlement, a global settlement -- meaning it would conclude all outstanding lawsuits in the U.S. -- could reach a total value of $48 billion, composed largely of donated drugs used to treat opioid addiction. Here's what investors need to know about the latest developments. 

Two people shaking hands next to a legal agreement and a gavel.

Image source: Getty Images.

A formula for a settlement

The Ohio settlement involves two counties and four drug companies. McKesson (MCK 1.17%), Cardinal Health (CAH -0.05%), and AmerisourceBergen (ABC 0.54%) -- drug distributors collectively responsible for delivering 90% of America's medicines -- agreed to pay a combined $215 million. Teva Pharmaceuticals (TEVA 1.93%) -- a generic-drug developer -- agreed to pay $20 million in cash and $25 million in donated addiction treatment drugs over a three-year period. 

Shares of Teva Pharmaceuticals soared on the announcement for a few reasons. First, the settlement avoided taking the Ohio lawsuit to federal court. That's not a setting in which drug companies were expected to fare very well, although a settlement also offers a speedier solution for the counties that need help now, not after a long, drawn-out trial.

Second, Wall Street analysts had previously expected the cash penalties from opioid-related lawsuits to tally in the billions of dollars. UBS analyst Navin Jacob predicted that cash settlements could cost Teva Pharmaceuticals alone as much as $2.2 billion. The $20 million cash payment in Ohio was well below expectations for the jurisdiction, which suggests its total settlements will come in sharply below $2.2 billion.

Third, Teva Pharmaceuticals said it was working on a global settlement with attorneys general from four states that would be modeled on the Ohio settlement. Under that formula, the company would make a cash payment of "only" $250 million and donate another $23 billion in generic Suboxone. It has proposed completing the payments and donations over a 10-year period. 

The proposal has increased the likelihood of a swift conclusion to the pending lawsuits, but the details are still being hammered out. According to Reuters, there are disagreements between local governments and state attorneys general over the timeline for a global settlement. McKesson, AmerisourceBergen, and Cardinal Health had proposed paying $18 billion in cash over an 18-year period, but local officials said they need funding sooner to combat the opioid epidemic.

A scientist in the lab with a disappointed look on his face.

Image source: Getty Images.

Unintended consequences

While the proposal from Teva Pharmaceuticals to donate $23 billion worth of addiction treatment drugs will lessen the ongoing financial burden for cities, states, and Medicare, the move comes at the expense of other generic-drug manufacturers and potentially leaves out another effective drug formulation. The drug to be donated, an oral formulation of buprenorphine naloxone, is a generic of Suboxone. It's the most common drug used to treat opioid drug overdoses.

Suboxone was commercialized by Indivior, which fought off generic competitors in court for several years before Dr. Reddy's (RDY 7.17%) won the right to offer a generic version of the drug in early 2019. Mylan (MYL) launched its own generic around the same time. The cost for a prescription could drop from $500 per month to just $70, according to data from Bloomberg and SEC filings. The total U.S. market generated $1.87 billion in sales of oral buprenorphine naloxone in 2018, according to Mylan.   

Those hard-fought wins by Dr. Reddy's and Mylan may unravel. The proposal by Teva Pharmaceuticals to donate $23 billion of its generic version of Suboxone would satisfy total U.S. demand for a decade, potentially excluding competitors from the market and complicating efforts by the U.S. Food and Drug Administration (FDA) to increase access and diversify sources of naloxone-based drugs.

What's more, the proposed global settlement doesn't make it more affordable for cities to purchase Narcan, a fast-acting naloxone nasal spray that may be more effective than the oral tablets. In April 2019, Teva Pharmaceuticals became the first company to earn FDA approval for a generic version of Narcan. 

Generic-drug stocks remain very risky

There are no easy solutions for the ongoing opioid epidemic, but making drug companies contribute financially to treatment and avoidance is a step in the right direction. Investors may be pleased to see that Teva Pharmaceuticals and its peers will make significantly lower cash payments under the proposed global settlement, but there are more permanent headwinds facing the generic-drug industry, including an incredible level of competition and margin pressure, a pending price-fixing lawsuit supported by attorneys general from nearly every U.S. state, and poor financial positions. Investors should continue to be wary of generic drug stocks.

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Stocks Mentioned

McKesson Corporation Stock Quote
McKesson Corporation
MCK
$322.86 (1.17%) $3.73
Cardinal Health, Inc. Stock Quote
Cardinal Health, Inc.
CAH
$55.80 (-0.05%) $0.03
Viatris Inc. Stock Quote
Viatris Inc.
MYL
Teva Pharmaceutical Industries Limited Stock Quote
Teva Pharmaceutical Industries Limited
TEVA
$8.47 (1.93%) $0.16
AmerisourceBergen Corporation Stock Quote
AmerisourceBergen Corporation
ABC
$150.18 (0.54%) $0.80
Dr. Reddy's Laboratories Limited Stock Quote
Dr. Reddy's Laboratories Limited
RDY
$55.03 (7.17%) $3.68

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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