The US opioid crisis: An investor antidote

With law suits piling up and politicians wading in, what is in store for firms involved in US opioids?

In less than a year the Investors for Opioid Accountability coalition has swiftly brought successful shareholder resolutions at the AGMs of a number of pharma companies involved in the US opioid crisis.
Described as America’s most severe health crisis in recent times, the opioid epidemic is killing people from every walk of life. Take just two examples.
Mary Kathryn Mullins from Boone County – in opioid-flooded West Virginia – was portrayed by Eric Eyre in his Pulitzer-winning investigations at the Charleston Gazette-Mail because she was prescribed OxyContin, a drug manufactured by the Sackler family’s privately-held company Purdue, for back pain after a car crash. Mary got hooked, taking 90 to 120 pills a week. She died aged 50.  
Likewise, banker and cryptocurrency investor Matthew Taylor Mellon II, of the Bank of New York Mellon’s dynasty, died last month aged 54. According to the New York Post, he would take 80 pills a day, having reportedly become hooked after suffering a surfing injury. In 2016, already battling his addiction, he told the Post: “OxyContin is like legal heroin. And it needs to be addressed,” adding that doctors “kept writing prescriptions like they were Smarties”.
But America’s biggest public health crisis hasn’t been created by reckless doctors alone. Insurers, pharmacies, distributors and manufacturers are all part and parcel of a system that, in 2015, had caused 33,000 deaths in the US. That’s 91 people per day – almost as many as gun-related deaths for the same year, according to the Centers for Disease Control.  
Opioid abuse has also had devastating consequences for the US economy, decimating its workforce and costing municipalities chunks of their public budget to tackle the epidemic. In March, US President Trump joined those calling for litigation against opioid companies found to be contributing to the crisis. The list of law suits from public bodies is building. In the same month, Thurston Country filed a law suit in which named defendants included OxyContin, Endo Pharmaceuticals and Janssen Pharmaceuticals, a subsidiary of Johnson & Johnson. Other counties reported to have filed law suits include Sumner, Milwaukee, Camden, Salt Lake, Chatham, Palm Beach and Rutherford.
MSCI recently published one of the most comprehensive studies about the impact of the crisis on healthcare companies. Entitled Bitter Pills, the report assesses the exposure of the main players in the supply chain, factoring in the increasing litigation and regulatory risks. Against this backdrop, the Investors for Opioid Accountability (IOA) coalition was formed last summer, led by Mercy Investment Services, asset manager for the Sisters of Mercy’s funds, and Detroit-based United Automobile Workers Retiree Medical Benefits Trust. 
The coalition convenes 44 Treasurers, asset managers, faith-based investors, public and labour funds, representing over $2.2trn in assets.
Before the coalition was set up, the International Brotherhood of Teamsters General Fund (an IOA member) submitted the first shareholder resolutions at the AGMs of McKesson and Cardinal Health – two of the ‘Big Three’ opioids distributors. They called for the appointment of an independent Chair of the Board, different from the CEO, to enhance accountability of management “given the potential reputational, legal and regulatory risks”.
The resolutions’ supporting statements noted both firms’ “history of compliance challenges”, saying Mckesson has paid over $150m to the US Department of Justice for alleged violations of the Controlled Substances Act while Cardinal has forked out nearly around $80m for similar reasons. It also pointed to the growth in municipality-driven litigation.
According to proxy voting analysis firm Fund Votes, they achieved 40% and 36.4% of support respectively – a remarkable result for first-time proposals. Shareholder resolutions have since been filed at AmerisourceBergen, the remaining Big Three distributor, securing higher levels of support.
One urged the board to report on opioid-related risks, winning 62% of the vote; a second wanted enhanced clawbacks disclosure polices, garnering 52% of support; and a third called for the appointment of an independent Chair of the Board, securing 49%. The vote results do not take into account the 26% stake of the Wallgreens Boots Alliance, which grants them board representation. 
As well as distributors, the IOA’s target companies include manufacturers such as Depomed, Endo, Insys, Johnson & Johnson, Mallinckrodt, Mylan and Pernix. 
At Mallinckrodt, a NYSE-listed manufacturer headquartered in the UK, an IOA resolution requesting the board reports on how it mitigates opioid-related business risks was withdrawn ahead of its AGM today. This was due to Mallinckrodt’s pending divestiture of opioid manufacturing. Nonetheless, Donna Meyer, Director of Shareholder Advocacy at Mercy Investments, tells RI that if Mallinckrodt doesn’t end up selling as planned, the engagement will continue and a resolution could be filed next season.

Asked about the reaction from companies to their engagement, Meyer says: “The public interest definitely helps our cause as shareholders. These companies want to work on it, but they didn’t become concerned soon enough. They need to tighten their oversight of the market place.” 
At Teamsters, Michael Pryce-Jones, Senior Governance Analyst, tells RI that the engagement has been a steep learning curve.
McKesson, for example, “turned on a dime”, he says, and became more proactive as a result of the news reports coming out from West Virginia’s Charleston Gazette-Mail. 
However, the internal investigation into McKesson’s board, requested by Teamsters 18 months ago, presents “significant gaps”, Pryce-Jones claims, saying it didn’t go deep enough into what went wrong and why. He says the report, published last month, exonerates McKesson’s board and executives from their role in the crisis: “They missed the smoking gun,” he says.  
But of the Big Three, the greatest “lack of awareness” and most disappointing governance approach has been shown by AmerisourceBergen, according to Pryce-Jones. That contrasts with Cardinal, which has agreed to separate the roles of CEO and Chair of the Board.
Further data from Fund Vote, shows that an IOA resolution at Pfizer on lobbying disclosure, including opioid-related activities, was supported by 33.46% of shareholders at the AGM on April 26.
The same day, a resolution filed by the City of Philadelphia Public Employees Retirement System was voted on at Johnson & Johnson with almost 18% of support. That resolution sought to include legal and compliance costs associated with opioids litigation into calculations for compensation of senior executives.
More recently, an IOA-backed resolution achieved the highest level of support, 62.28%, at drugmaker Depomed’s AGM, held on May 8th.The IOA is also turning its attention to the manufacturers of antidotes for opioids abuse, due to recent price hikes.
“You would think why should we bother with them,” says Mercy’s Meyer. “But they’ve lobbied for legislation [under which] all the first respondents, like the fire department, etc., should all carry the antidote. Then, they’ve jacked up the price significantly, sometimes a hundred times it was before.”
In addition, she says it is more problematic to effectively engage with Purdue, a privately-held company, and with manufacturers listed overseas, such as Tel Aviv Stock Exchange’s constituent Teva Pharmaceutical Industries.
A significant development in the opioids epidemic came last week when the US House of Representatives’ Committee on Energy and Commerce grilled the CEO of the main drugs distributors. The CEOs of the ‘Big Three’ firms expressed regret, but denied responsibility for the crisis.
According to Pryce-Jones, it was very much driven by bipartisanism and felt like “when the bankers testified before Congress after the financial crisis”.
Republican Representative for West Virginia, David McKinley, told CEOs: “I just want you to feel shame about your roles, respectively, in all of this.”
Asked whether non-IOA members such as BlackRock, State Street or Vanguard have voted in favour of the resolutions, Meyer says: “I’m not sure how those are voting, but I think at least one of them had to vote with us in AmerisourceBergen, because we could have not gotten that higher vote without at least one of them.”
Pryce-Jones declined to speculate on other investors’ votes, but said that “productive discussions with big asset managers” have been underway. 
Meyer says this is a new issue, for which hardly anybody has prepared voting guidelines, but proxy advisors ISS and Glass Lewis are generally supportive of such resolutions. “I think if the needle isn’t moved now, we will have it moved soon.”

This article is part of RI’s ‘ESG Frontiers’ series, which looks at burgeoning new ESG risks for sectors and industries. Other sectors explored so far include shipping and palm oil