Opioid Relief Rally Is Likely to Stall

Momentum in settlement talks to resolve opioid litigation has spurred a stock market rally, but the danger for investors is far from over.

OxyContin maker Purdue Pharma has secured support from 23 states and thousands of local governments for a multibillion-dollar deal, The Wall Street Journal reported Wednesday. That would resolve many of the lawsuits pending against the closely held company ahead of federal trials scheduled to commence in October. Last month,

Johnson & Johnson

was ordered to pay $572 million to the state of Oklahoma after a bench trial. The company has said it plans to appeal that verdict, but the sum was well-received among investors as most analysts had expected a larger judgment.

Such progress has given a boost to publicly traded stocks facing similar lawsuits. Drug distributor

Cardinal Health

has risen by 15% since Aug. 27, while generic opioid makers

Endo International

and

Teva Pharmaceutical Industries

are up 52% and 18%, respectively. Investors face a range of outcomes, so being able to attach a dollar amount to part of the potential liability—even if it isn’t more modest—is welcome. Analysts at Morgan Stanley estimated last month that the total liability footed by manufacturers, distributors and pharmacies could be anywhere between $48 billion and $145 billion over a number of years. That is too wide of a band for investors to be confident that share prices will hold up under a bad scenario. But the companies facing potential judgments vary greatly in their ability to pay. Johnson & Johnson sports a triple-A credit rating. At the other end of the spectrum, several generic opioid makers have bonds trading in distressed territory. Large settlements could potentially cause bankruptcy in those cases. Even for companies with cleaner balance sheets, settlement money paid out over a long period could crimp cash flow on a longer-term basis and limit upside for equity holders. Moreover, companies may not have much incentive to settle claims if they aren’t sure that lawsuits will stop. Distributor

AmerisourceBergen

said at an investor conference earlier that it would require “finality” as part of any settlement. That seems unlikely; California and New York have yet to sign on to the proposed deal with Purdue. The legal claims that such large states could bring on their own would be considerable. And that isn’t all: It seems unlikely that any settlement would discharge legal claims from individuals affected by the opioid addiction crisis. Given all those remaining questions, don’t be surprised if the recent rally stalls. Write to Charley Grant at charles.grant@wsj.com

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