This morning the WSJ reported that more than 20 states have rejected an opioid litigation settlement framework that would have led to the distributors paying out $18B over 18 years. Instead the group of dissenting states have asked that distributors contribute $22-$32B. There was nothing in the report on whether the requested payment timeframe has changed. We note that the $27B midpoint of the new “ask” is only modestly worse than the $25B we assume in our target prices, which is generally consistent with our view of investors’ line of demarcation here before today’s news – meaning that any settlement less than this amount would be viewed positively.
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We have updated our generic drug market tracking files to reflect December data. Overall, generic sales decreased 2.4% y/y in December. The December decrease was worse than November, driven by pricing – with volumes basically flat in both months. Interestingly, our tracking indicates that the rate of deflation on mature drugs picked up in December – with chain stores appearing to drive the change. While this is somewhat surprising after several months of relative stability, we have not been able to identify any obvious anomalies or extreme outliers within the data. Following November’s data release our analysis suggested modest pressure on margins for independent pharmacy customers in calendar Q4, but inclusive of December the data now suggests independent acquisition costs and chain store acquisition costs declined by comparable amounts. See Slides 3-10 for visuals illustrating the trends discussed below.
Last week (1/30/20) ABC reported Q1 EPS that was above expectations, driven by upside in U.S. Pharma relative to our model. ABC increased FY20 EPS guidance by 3%, with almost all of the increase explained by PharMEDium and share repurchase. ABC announced it had made the difficult decision to shut down the PharMEDium business due to ongoing regulatory and operational issues. While numbers go up on this move given that losses will now be removed from adjusted earnings, this is clearly a disappointing outcome relative to potentially selling the business (acquired for $2.6B in 2015) or returning it to profitability, although the company will receive a $500-$600M tax benefit over the next few years. While the quarter was solid in absolute terms, expectations had increased following the generally positive tone from the distributors at the JPM Healthcare Conference. Our estimates increase primarily due to PharMEDium and share repurchase assumptions, with our target price of $88 unchanged.
This morning (01/30/20) ABC reported fiscal 1Q20 adjusted EPS of $1.76, above Wolfe/Consensus EPS of $1.67. EBIT was better than our est, driven by margin upside in U.S. Pharma. ABC increased adjusted EPS guidance to $7.55-$7.80 (+3%), which appears to be primarily driven by the company’s decision to exit the unprofitable PharMEDium compounding business but also positively influenced by Q1 results and a modestly lower share count assumption. The benefit from the removal of PharMEDium losses will benefit results starting in Q2, leaving Q1 upside operational in nature. Stronger than expected results will likely be well-received and are generally consistent with the positive tone from the distributors at the JPM conference earlier this month.
Yesterday (1/27/20) a status conference was held for the Track 2 bellwether case of the ongoing opioid multidistrict litigation (MDL). Recall that the Track 2 bellwether case consists of Huntington, WV and Cabell County’s cases against ABC, CAH, and MCK. From status briefs filed last week, the plaintiffs and defendants were more than a year apart in their thinking on when a trial could realistically start – with plaintiffs arguing for March 2020 and defendants arguing that any time before the summer of 2021 “would be rushed”. According to a local news report, U.S. District Judge David Faber pushed back fairly hard against the defendant’s proposed timeline: “You asked for 18 months? I’m not inclined to give you anything close to 18 months”. Judge Faber stopped short of setting a trial date and instead scheduled another status hearing in March. We suspect the ultimate timing will end up splitting the difference, leaving the trial to start in Q3 or Q4 of 2020.
Late yesterday (1/23/20) status briefs were filed ahead of a status conference for the Track 2 bellwether case of the ongoing opioid multidistrict litigation (MDL). Recall that the Track 2 bellwether case consists of Huntington, WV and Cabell County’s cases against ABC, CAH, and MCK. After reviewing the briefs, plaintiffs and defendants are more than a year apart on when they think a trial could realistically start. We will likely have a better idea of where things stand following Monday’s status conference. We have included key excerpts inside the note. Please email us for the full status briefs.
A status conference for the opioid MDL Track 2 bellwether cases in West Virginia (Huntington & Cabell County) will be held Monday 1/27/20. Statements from the parties ahead of the status conference are due Thursday 1/23/20. Key questions include: 1) are the cases ready for trial, 2) are any unresolved motions pending in MDL court, 3) are additional pre-trial motions forthcoming, 4) are any discovery issues outstanding, and 5) what does forthcoming trial look like – jury vs. bench trial, length of trial. Following the briefs and status conference, we will likely have a better idea of when the Track 2 trial could reasonably start. Recall that before being remanded to WV, the Track 2 cases were streamlined to only include distributors and retail pharmacies. MDL attorney Paul Farrell is the primary attorney for Cabell County and has previously discussed targeting a $500M settlement from the 3 distributors here if a trial is to be avoided.
Yesterday Oklahoma joined the 20+ states that have sued the 3 major drug distributors (ABC, CAH, MCK) for their alleged role in the ongoing opioid crisis. Interestingly, the lawsuit has been filed in Cleveland County District Court and assigned to Judge Thad Balkman, the same judge who oversaw the Johnson & Johnson opioid trial in August. There are some key differences relative to the J&J lawsuit – Oklahoma is seeking damages here rather than $ for an abatement plan – which was apparently challenging for the state to develop long-term estimates for. Oklahoma will also seek a jury trial instead of a bench trial. Our review of the 38 page petition found very little in terms of new allegations against the companies relative to the dozens of other complaints we have reviewed.
We are updating our year-end 2020 target prices to reflect the current S&P 500 multiple, which has increased over the past couple of months. Our target prices for all companies remain based on relative valuation. While we are not changing any relative target multiples with today’s note, we are using this opportunity to increase the size of the headline opioid litigation exposure imbedded in our distributor target price framework from $20B to $25B. Net, our CRO and Lab targets increase and our Distributor targets decrease slightly. See inside the note for our methodology.
We have updated our generic drug market tracking files to reflect November data. Overall, generic sales decreased 1.0% y/y in November. The November decrease was in line with October, with volumes basically flat in both months. So far in calendar Q4, our analysis suggests modest pressure on margins for independent pharmacy customers. This compares to stability in Q3 and modest pressure in Q2. See Slides 3-10 for visuals illustrating the trends discussed below.
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