August 14, 2020 – Capstone believes the focus of state attorneys general and municipalities opioid litigation will shift to chain pharmacies—primarily Walgreens Boots Alliance Inc. (WBA), CVS Health Corp. (CVS), Rite Aid Corp. (RAD), and Walmart Inc. (WMT)—as opioid distributors and several opioid manufacturers resolve the majority of their outstanding litigation via a settlement by the end of 2020. This shift will result in these companies facing increased outstanding litigation, more trial dates at both the federal and state court levels, and intensified negative public sentiment toward these chain pharmacies for their alleged role in perpetuating the opioid crisis. Ultimately, we believe a global settlement is a near inevitability, and the big four chain pharmacies face $30 billion to $35 billion in liabilities—a larger settlement than the $22 billion to $25 billion we expect the opioid distributors will settle for. Walgreens is particularly ill-positioned given its larger market share as a distributor and retailer.
We believe the chain pharmacies face a larger settlement price tag than the opioid distributors because of their greater, combined financial resources—relative to the distributors—and the factual strength of the allegations, which accuse them of violating their legal obligations as both distributors and retailers of prescription opioids.
- Opioid Distributors and Johnson & Johnson Settlement: We believe the three major opioid distributors—McKesson Corp. (MCK), Cardinal Health Inc. (CAH), and AmerisourceBergen Corp. (ABC)—and opioid manufacturer Johnson and Johnson (JNJ) are likely to settle the majority of their outstanding litigation with state attorneys general and municipalities by the end of 2020. We expect distributors to settle for between $22 billion and $25 billion over 15–20 years, with Johnson & Johnson agreeing to pay $5 billion over a two-year period.
- Other Opioid Manufacturer Settlements: We believe additional opioid manufacturers such as Endo International Plc (ENDP) and Teva Pharmaceutical Industries Ltd. (TEVA) will similarly be able to settle the majority of their outstanding opioid litigation shortly thereafter, using the distribution platform created by the opioid distributor and Johnson & Johnson settlement. We believe a settlement is likely because states and local government officials have lowered their ask and are in need of both a political win and additional funding for government programs in the wake of the COVID-19 pandemic. Additionally, we believe delays in near-term opioid jury trials and a weakening macroeconomic environment limits plaintiffs’ negotiating leverage and willingness to maximize potential settlement dollars of opioid distributor and manufacturer defendants.
- Chain Pharmacy Opioid Litigation: We believe opioid plaintiffs have become more confident in their ability to extract a large settlement from the chain pharmacies, further accelerating their interest in finalizing opioid distributor and manufacturer settlements and freeing legal resources to concentrate on the chain pharmacy litigation. Plaintiffs believe chain pharmacies face liabilities as both a distributor of opioids to their own pharmacies and as pharmacy operators under the federal Controlled Substances Act (CSA), as well as state laws and regulations. We expect additional lawsuits will be filed against the four major chain pharmacies—Walgreens, CVS, Rite Aid, and Walmart—in addition to certain regional chains, depending on the jurisdiction.
A DEEPER LOOK
- Walgreens’ Liability Outlook: Of the four aforementioned chain pharmacies, we believe Walgreens is the worst-positioned given it had the largest market share as both a distributor (14.5%) and retailer (18.4%) of opioids during the period for which data is available (2006–2014) despite accounting for about 8% of total US pharmacies numerically (see Exhibit 1). According to lawsuits filed in federal court as part of the Northern District of Ohio’s multi-district litigation (MDL), Walgreens also is responsible for the opioid liabilities of the Rite Aid stores it acquired, increasing its market share as an opioid retailer to 20.2% (see Exhibit 2). Walgreens’ role as a distributor stems from its operational decision to self-distribute opioids to its own stores until 2014 instead of relying on one of the major pharmaceutical distributors. As a result, during the 2006–2014 period for which we have data, Walgreens distributed approximately as many opioids as Cardinal Health and more opioids than AmerisourceBergen (see Exhibit).
Exhibit 1: Chain Pharmacy Market Share 2006–2014 (Before Rite Aid Store Sale to Walgreens)
Several issues with Walgreens’ internal opioid distribution system and opioid dispensing procedures that plaintiffs cited first came to light in the Drug Enforcement Administration’s 2013 settlement with the company. The $80 million settlement was a record at the time. It stemmed from a lack of internal controls to keep Walgreens compliant as an opioid distributor and retailer with its legal requirements under the CSA.
- Distributor Case Against Chain Pharmacies: Under the Controlled Substances Act, all opioid distributors are required to design and operate a system to identify suspicious orders, report such orders to the DEA before shipping, and halt such sales until sufficient diligence can be conducted to clear the order. Examples of suspicious orders are those of unusual size, deviating from a pharmacy’s normal ordering pattern, or of unusual frequency. Normal ordering patterns, size, and frequency for opioids are expected to be determined based not only on an individual store’s ordering behavior, but also determined in relation to similarly situated stores by customer base, size, and geography. Chain pharmacies also are subject to Ohio state laws and regulations on governing the distribution of controlled substances, as well as a requirement under Ohio law that distributors comply with the Controlled Substances Act.
As the major chain pharmacies all self-distributed at least a portion of their opioid prescriptions, they are subject to the same requirements as the major pharmaceutical wholesalers such as McKesson. Given the large volumes of opioids self-distributed by Walgreens and Walmart in proportion to their total opioid retail sales from 2006–2014, they face an even greater level of culpability as an opioid distributor if plaintiffs are successful in proving the companies failed to comply with the CSA and Ohio state laws.
Exhibit 2: Chain Pharmacy Market Share 2006–2014 (After Rite Aid Store Sale to Walgreens)
Retailer Case Against Chain Pharmacies: Under the CSA, chain pharmacies also have a duty to create and use systems to prevent diversion when dispensing opioids from their retail pharmacies. Specifically, chain pharmacies are required to identify and deny opioid prescriptions based on “red flags” at the patient, prescriber, or store level. Chain pharmacies also are obligated to report suspicious activity to the DEA and state pharmacy boards once its identified. Examples of “red flag” opioid prescriptions include: multiple prescriptions to the same patient from the same prescriber; multiple prescriptions to the same patient from multiple prescribers or different doctors; prescriptions of unusual size and frequency for the same patient; large quantities of prescriptions from out-of-state patients or prescribers; an unusual or disproportionate number of cash-pay prescriptions; opioid prescriptions paired with other drugs frequently abused with opioids such as benzodiazepines; and prescriptions with volumes, doses, or combinations were not issued for a legitimate medical purpose. Similar to the CSA requirements, Ohio state law also mandates chain pharmacies provide effective controls to prevent diversion at the retail level.
Several defendants, including Walgreens and CVS, also are accused of partnering with opioid manufactures to sponsor continuing education materials and programs that encouraged pharmacists to be less wary of suspicious prescription activity. CVS also is accused of partnering with opioid manufacturers to use pharmacists to promote their products at the point-of-sale and to encourage patients to stay on their pain medication after opioid prescriptions were filled.
Exhibit 3: Chain Pharmacy v. Drug Wholesaler, Opioid Distribution Market Share 2006–2014
- Upcoming Case Schedule: Chain pharmacies do not face the same scale of near-term trial pressure as the opioid distributors or manufacturers because their litigation is more recent. For example, 26 opioid cases had trial dates in February 2020, but only four involved the chain pharmacies. However, the chain pharmacies do have two trials scheduled in the Ohio MDL regarding chain pharmacies Walgreens, CVS, Rite Aid, and Walmart: 1) The Counties of Summit and Cuyahoga, Ohio v. Chain Pharmacies is set to begin November 9, 2020, and; 2) The Counties of Lake and Trumbull, Ohio v. Chain Pharmacies is scheduled to start May 10, 2021. These trials are differentiated by the fact that the November 2020 trial will focus only on the chain pharmacies’ role as opioid distributors while the May 2021 trial will look into the chain pharmacies’ role as both opioid distributors and as opioid prescription retailers. These trials may be subject to delay because of complications resulting from the COVID-19 crisis, which already derailed several opioid trials set to begin this year. For example, the New York state AG and NY counties case was originally set to start in March 2020, but that has been delayed due to the pandemic with no new trial date scheduled.
While the chain pharmacies are listed as defendants in this first bellwether NY state AG case, we believe they will likely be severed and moved to a second bellwether case once the original case is near to beginning its trial. Precedent for the removal of chain pharmacies from the initial distributor and manufacturer trials was set in the first Ohio MDL trial, which removed Walgreens and other chain pharmacies to a separate litigation track. We believe the chain pharmacies are the most likely defendant group to proceed to trial based on conversations with plaintiffs’ attorneys, meaning it will likely require at least one or more trials, and some one-off settlements, before a global settlement with chain pharmacies can be reached. Alternatively, the resumption of the NY state AG opioid trial could accelerate a global settlement for distributors and manufacturers, shifting the focus and resources of state AGs and plaintiff attorneys to the chain pharmacies. Frye hearings in the NY state AG lawsuit, which decode scientific evidence is admissible, were scheduled to start August 14th.
The coronavirus has resulted in a significant reduction in the number of cases with trial dates scheduled for this year. In February 2020, there were at least 12 opioid trial dates set for this year. As of July 30th, there are only four still set for trial this year, including the aforementioned chain pharmacy trial in Ohio, as most trials have been delayed to 2021. As of July 30th, there are already more than 20 opioids cases with trial dates scheduled in 2021. The other three cases still set for trial this year are:
- Barry Staubus v. Purdue Pharma, L.P. et al., Circuit Court for Sullivan County, Tennessee, trial is scheduled for September 21, 2020. The case includes only opioid manufacturers: Endo and Mallinckrodt Plc (MNK). It has been delayed twice already because of coronavirus and could likely be postponed again.
- State of Ohio ex rel. Mike DeWine, in his capacity as Attorney General of the State of Ohio v. McKesson Corporation, et al., Court of Common Pleas of Madison County, Ohio, trial scheduled for October 19, 2020. The case features only distributor defendants: McKesson, Cardinal, and AmerisourceBergen.
- Cabell County Commission v. AmerisourceBergen Drug Corporation et al., and City of Huntington, W.Va. v. AmerisourceBergen Drug Corp., et al., United States District Court for the Southern District of West Virginia, bench trial is scheduled for October 19, 2020. The case also features only distributor defendants: McKesson, Cardinal, and AmerisourceBergen.
- Risk of Department of Justice Interference: There remains concern that the US Department of Justice (DOJ) could involve itself directly in the opioid settlement negotiations, scuttling the outlook for a global opioid settlement between distributors and manufacturers in the near term. However, we do not believe the Justice Department’s involvement precipitates a breakdown in settlement discussions. While the DOJ did file claims in the Insys Therapeutics and Purdue Pharma LP bankruptcies, we expect those claims will be used as negotiating leverage to increase the total size of the settlement and will not necessarily take share away from state and county plaintiffs. We think a similar playbook will be employed if the DOJ decides to seek monetary damages in conjunction with state and county opioid settlements. Based on our conversations with plaintiff attorneys, the department has been monitoring the opioid litigation via the Ohio MDL since the beginning and has yet to express an interest in damages beyond a role in dictating the scope of any injunctive relief granted as part of a global settlement.
Additionally, the DOJ has an interest and track-record in settling claims against healthcare companies at reasonable levels; its goal is typically to cause some financial pain, but not put the company out of business. Meaning, even if it were to get involved in settlement negotiations, we expect the Justice Department would act reasonably and not undermine state and county efforts. In particular, undermining a near finalized state and county settlement would catalyze significant political and public fallout. The Justice Department also has reached settlements with several of the opioid defendants in the last decade, including Walgreens, CVS, Mallinckrodt, Cardinal Health, McKesson, possibly limiting their ability to press for additional new damages and penalties.
Finally, the DOJ cases against Purdue began in 2017, while the majority of the department’s current subpoenas that target other opioid defendants, including Johnson & Johnson, Teva, Mallinckrodt, Amneal Pharmaceuticals Inc. (AMRX), McKesson, Cardinal Health, AmerisourceBergen, Walgreens, and CVS, began in 2019. These cases are not as developed as the Purdue case, possibly reducing the DOJ’s ability to bring substantial action before a global settlement is reached. Under this scenario, the settling firms may want the DOJ to involve itself in the negotiations to add another layer of finality to the deal. To us, this would be the most concerning outcome and could present a delay to our 2020 settlement timeline for opioid distributors and Johnson & Johnson. If out of fear of a large future action from the DOJ, the opioid defendants condition any final deal on simultaneously waiving or settling their DOJ opioid-related claims, it could force the DOJ to the table before it is prepared to make a decision—and possibly in the middle of a leadership transition post-election, derailing any resolution. If the DOJ were to demand a large monetary additional settlement in conjunction with the states and counties settlement, our estimated total liability facing all opioids would increase. And if the ask is so large, and viewed as unreasonable by the companies, it would also further delay the timeline for resolution.