The U.S. opioid crisis and the avalanche of lawsuits it has produced may lead numerous pharmaceutical companies to seek bankruptcy relief, perhaps rivaling the asbestos bankruptcies of the late 1990s and early 2000s.
New legal actions are being filed against pharmaceutical manufacturers and distributers nearly every day. Due to the already enormous amount of litigation and increased regulatory scrutiny by federal and state agencies, it is likely that these companies will experience significant impacts to their profits and operational costs. The crisis is likely to force certain pharmaceutical companies into insolvency.
Dan Loeb's Third Point returned 11% in its flagship Offshore Fund and 13.2% in its Ultra Fund for the first quarter. For April, the Offshore Fund was up 1.7%, while the Ultra Fund gained 2.3%. The S&P 500 was up 6.2% for the first quarter, while the MSCI World Index gained 5%. Q1 2021 hedge Read More
In light of the 2,000 lawsuits it is facing, for example, Purdue Pharma recently hired a law firm for restructuring advice and a potential bankruptcy filing. Purdue Pharma’s OxyContin revenue was down $2.6 billion in 2017 from five years earlier, and the company has cut hundreds of jobs and has stopped marketing opioids to physicians. However, the company’s slide is likely to continue.1
Purdue Pharma is not alone in considering bankruptcy as a strategy in the face of mounting legal fees and costs associated with actions brought as a result of the opioid crisis. Insys Therapeutics, Inc. announced on May 10 that due to the substantial legal expenses, the company was running out of funds and would likely be unable to pay the amounts it agreed upon to settle earlier litigation brought by the federal government.2 To settle more recent federal criminal and civil investigations into its past practices, the company in June admitted paying doctors to prescribe one of its opioid painkillers and agreed to pay $225 million.
Insys’ quarterly report filed with the Securities and Exchange Commission revealed serious financial problems. A company press release indicates that new revenue for the first quarter of 2019 was
$7.6 million, down from $23.9 million for the first quarter of 2018.3 The report further shows that Insys spent $25.7 million in legal expenses in the first quarter of 2019. Additionally, the company accrued $73.9 million in preparation for potential losses related to outstanding legal matters.
Insys reported that it is has accumulated a deficit of $459.9 million, negative cash flows of $16.7 million, and significant mounting legal fees.4 The report further indicated that the company had engaged legal counsel to assist in analyzing various strategic alternatives to address the company’s liquidity and to plan for the possibility of filing bankruptcy. On June 10, 2019, Insys did indeed file Chapter 11 in the District of Delaware. The declaration filed in support of the first day motions accredited the extensive opioid-related litigation as the leading cause for the bankruptcy filing.5
In 2018, another drug company, Egalet Corporation, filed for Chapter 11 bankruptcy.6 In a declaration filed as part of that case, company CEO Robert Radie, Egalet cited shifting legislation and social responses to the opioid epidemic as leading causes for the company’s bankruptcy filing.
In addition, at least 40 state attorneys general have filed complaints against drug manufacturers and distributers.7 Approximately 1,600 cities, counties, Native American tribes, and others have also filed claims against the manufacturers, and distributers. Many of the pending legal actions were filed against major opioid manufacturers, including Purdue Pharma, Endo International, Janssen Pharmaceuticals, Teva Pharmaceutical Industries Ltd.,8 Cephalon Inc., and Allergan. Many of these pending cases include allegations of deceptive practices and misrepresentation in marketing opioids.
In 2008, the U.S. Drug Enforcement Administration along with six states filed lawsuit against McKesson, a pharmaceutical distributer, for supplying hundreds of suspicious hydrocodone orders to suspect pharmacies.9 McKesson paid more than $13 million in fines and agreed to monitor its pill supply more closely to settle the legal action. However, due to continued violations, McKesson ultimately paid $150 million in fines. In its recent first quarterly report for 2019, McKesson revealed that it expects to incur $151 million in opioid-related litigation costs this year.10
In 2014, Santa Clara and Orange Counties in California filed a complaint on behalf of their residents asserting that the five largest opioid manufacturers engaged in deceptive marketing tactics that targeted physicians and the public regarding the effectiveness of opioid treatment and the long-term effects of drug use.11 Due to the overwhelming number of lawsuits filed against the same pharmaceutical manufacturer defendants, the Northern District of Ohio has consolidated approximately 46 actions.12 The various actions consist of litigation from more than 10 districts from around the country.
The Commonwealth of Pennsylvania's recent lawsuit against Purdue Pharma accused the company of causing the state’s opioid epidemic by targeting the elderly and military veterans through misleading marketing.13 In the 114-page complaint, the state accuses Purdue Pharma of (1) increasing the number of opioid prescription by bombarding doctors with sales visits, (2) using deceptive marketing practices to mislead residents into taking more opioids, and (3) downplaying signs of addiction.14 Purdue Pharma in March settled a similar suit brought by the state of Oklahoma by agreeing to pay $270 million to fund addiction research and treatment programs and pay legal fees.
Pennsylvania is seeking severe financial penalties against Purdue Pharma under the state’s Unfair Trade Practices and Consumer Protection Law, an injunction barring the company from engaging in further violations of the Consumer Protection Law, and forfeiture of the company’s right to conduct business in the state until restitution, costs, and civil penalties have all been paid.15 Shortly after that lawsuit was filed, five more states—West Virginia, Maryland, Kansas, Iowa, and Wisconsin—announced that they would also take legal action against Purdue Pharma, in addition to seeking legal remedies against the members of the Sackler family, which controls the pharmaceutical company.16
Alarming Death Rates
The U.S. pharmaceutical market represents 45% of the global market for prescription drugs.17 In 2016, the U.S. pharmaceutical industry generated approximately $425 billion in annual sales, with 17% of that total attributable to opioid sales.18 While the domestic U.S. market represents only 5% of the global population, Americans consume approximately 80% of the global opioid supply.19
In 2015, approximately 240 million opioid prescriptions were dispensed in the United States. This overprescribing, coupled with addiction and illicit trade in the drugs, has resulted in alarming increases in death rates. Between 1999 and 2017, nearly 400,000 people died from opioid overdose.20 The deaths caused by overdoses from heroin and other opioids increased 200% between 2000 and 2014.21
In 2016, two-thirds of the 63,632 drug overdose deaths involved opioids, a 21.4% increase from 2015, according to the Centers for Disease Control and Prevention. Opioid deaths further increased by 12% in 2017, according to the agency, when 47,600 deaths involved opioid overdose.22 The highest rates of deaths from opioids overdose as of 2017 occurred in West Virginia, Ohio, Pennsylvania, the District of Columbia, and Kentucky.23
Due to the significant impact of the opioid crisis, federal and state agencies have taken steps to remedy the problem. In 2016, the Centers for Disease Control and Prevention published new guidelines that call for stricter standards for deciding when primary care physicians should prescribe opioids24 and recommend short-term treatment with such drugs—three to seven days—as opposed to longer term use.
The Office of National Drug Control Policy recently issued the 2019 National Drug Control Strategy, which set various goals to combat the opioid crisis. They include: (1) reducing the death rate from drug overdose by 15% within five years, (2) reducing opioid prescriptions nationally by 33% within three years, and (3) increasing public education regarding drug use.25
In addition, the Food and Drug Administration and the centers for Disease Control and Prevention have requested that pharmaceutical manufacturers develop more tamper-resistant products.26 President Donald Trump last year vowed to cut opioid prescriptions nationwide by one-third.27 In 2018, the U.S. Department of Health & Human Services awarded over $1 billion in grants to combat the crisis.28 HHS earlier this year released an additional $487 million to states through the State Opioid Response grant program.29
An overwhelming number of lawsuits have placed pharmaceutical manufacturers and distributers under significant financial pressure from large settlements and legal costs incurred in defending these cases.
While pharmaceuticals represent a multibillion-dollar industry in the U.S., the opioid crisis presents various challenges that pharmaceutical companies must overcome to survive. The significant legal costs incurred in defending mounting litigation and the continued push by state and federal governmental entities to further regulate and restrict prescriptions and overall access to opioids may result in dramatic changes in the pharmaceutical manufacturers’ production, revenue, and overall business approach.
Seeking relief under the Bankruptcy Code as financial hardship continues to batter these companies may be the ultimate solution for the industry in dealing with the increasing number of claims as a result of the opioid crisis. Opioid manufacturers and distributors may find themselves using the Bankruptcy Code and the Chapter 11 plan process to deal with current and future claimants via a 524(g) channeling injunction and trusts in the same manner used by other companies facing thousands of product liability and asbestos claims in years past.
Given the size of the pharmaceutical market, these bankruptcy filings could have a major impact on the U.S. economy and especially on the turnaround market.
This article is from the July/August 2019 issue of Turnaround Management Association’s Journal of Corporate Renewal.
About The Author
Kirk Burkley is a managing partner with Bernstein-Burkley. His experience includes representing secured and unsecured creditors in bankruptcy, financial restructuring, and workout situations, including the representation of unsecured creditors’ committees, equipment lessors, financial institutions, and commercial landlords. Burkley is certified in business bankruptcy and creditors’ rights law from the American Board of Certification. His accolades include being named a “Super Lawyer” since 2013 and one of “The Best Lawyers in America” since 2011.
Keila Estevez, an associate in the Bankruptcy & Restructuring practice group of Bernstein-Burkley, assisted with this article.
- Mike Spector, Jessica DiNapoli, & Nate Raymond, “OxyContin maker Purdue Pharma exploring bankruptcy –sources,” Reuters (March 4, 2019), reuters.com/article/uk-purduepharma-bankruptcy-exclusive/exclusive-oxycontin-maker-purdue-pharma-exploring-bankruptcy-sources-idUSKCN1QL1KP.
- Alex Keown, “Bankruptcy Looms as Insys Scrapes Together Cash for Legal Disputes,” BioSpace (May 13, 2019), biospace.com/article/insys-may-not-have-enough-cash-to-settle-legal-disputes-could-file-bankruptcy/?s=66.
- SEC filings, INSYS Therapeutics, Inc., Current Report (Form 8-K) (May 10, 2019), available at sec.gov/Archives/edgar/data/1516479/000156459019018661/insy-ex991_10.htm.
- SEC filings, INSYS Therapeutics, Inc., First Quarter Report (Form 10-Q) (May 13, 2019), available at https://www.sec.gov/Archives/edgar/data/1516479/000156459019018617/insy-10q_20190331.htm.
- In re Insys Therapeutics, Inc., et al., Case No. 19-11292 (D. Del. Bankr. Jun. 10, 2019).
- In re: Egalet Corporation, Case No. 18-12439 (D. Del. Bankr. Oct. 31, 2018).
- Lenny Bernstein, “5 more states sue Purdue Pharma over the opioid crisis,” The Washington Post (May 16, 2019), post-gazette.com/business/healthcare-business/2019/05/16/five-more-states-announced-lawsuits-Purdue-Pharma-opioid-crisis-OxyContin/stories/201905160200.
- The pharmaceutical manufacturer indicated it in first quarter report for 2019 that since May 2004 it has been named as defendant in approximately 1,500 complaints with respect to the company’s opioid sale and distribution. SEC filings, Teva Pharmaceutical Industries Ltd., First Quarter Report (Form 10-Q) (May 02, 2019), available at sec.gov/Archives/edgar/data/818686/000119312519134970/d724389d10q.htm.
- Jim Axelrod, Ashley Velie, “DEA targets drug wholesalers to stem opioid epidemic,” CBS (May 25, 2016), cbsnews.com/news/drug-distributor-mckesson-faces-lawsuit-in-effort-to-stem-opioid-painkiller-epidemic/.
- SEC filings, McKesson Corporation, First Quarter Report (Form 10-Q) (May 15, 2019), available at sec.gov/Archives/edgar/data/927653/000092765319000009/mck_10kx3312019.htm.
- Meredith Tracey, “Companies Sued in Response to Opioid Addiction Epidemic,” PM360 (Jul. 15, 2014), pm360online.com/five-pharmaceutical-companies-sued-in-response-to-opioid-addiction-epidemic/.
- In Re: National Prescription Opiate Litigation (Northern District of Ohio Dec. 08, 2017), available at www.ohnd.uscourts.gov/mdl-2804.
- Tom Winter, Rich Schapiro, “Pennsylvania sues Oxycontin maker Purdue Pharma, says it targeted elderly and vets,” NBC News (May 14, 2019), nbcnews.com/news/us-news/pennsylvania-sues-oxycontin-maker-purdue-pharma-says-it-targeted-elderly-n1005586.
- Laura Ly, “Pennsylvania attorney general sues Purdue Pharma over opioid epidemic,” CNN (May 14, 2019), cnn.com/2019/05/14/health/pennsylvania-ag-purdue-lawsuit-opioids/index.html.
- Commonwealth of Pennsylvania v. Pursue Pharma L.P., Purdue Pharma Inc., and the Purdue Frederick Company, Civil Action No. 257-MD-19 (Pa. Commvw. Ct. May 2, 2019), available at attorneygeneral.gov/wp-content/uploads/2019/05/2019-05-14-Filed-Purdue-Complaint3.pdf.
- Bernstein, op. cit.
- U.S. Pharmaceutical Industry - Statistics & Facts, Statista, statista.com/topics/1719/pharmaceutical-industry/ (last visited May 21, 2019).
- “The Opioid Epidemic: Are Drug Manufacturers Liable?” nationalparalegal.edu/ViewNews.aspx?intTakeOnNewsID=108 (last visited May 21, 2019).
- Dina Gusovsky, “Americans consume vast majority of the world’s opioids,” CNBC (Apr. 27, 2016), cnbc.com/2016/04/27/americans-consume-almost-all-of-the-global-opioid-supply.html.
- Robin Ghertner, Lincoln Groves, Ph.D., “The Opioid Crisis and Economic Opportunity: Geographic and Economic Trends,” Office of the Assistant Secretary for Planning and Evaluation (Sept. 11, 2018), aspe.hhs.gov/system/files/pdf/259261/ASPEEconomicOpportunityOpioidCrisis.pdf.
- Drug Overdose Deaths, Organisation for Economic Co-operation and Development, cdc.gov/drugoverdose/data/statedeaths.html (last visited May 20, 2019).
- Ed Silverman, “CDC issues sweeping new guidelines to restrict opioid prescribing,” (Mar. 15, 2016), statnews.com/pharmalot/2016/03/15/opioids-painkillers-cdc/.
- “2019 National Drug Control Strategy,” Office of National Drug Control Policy (May 2019), whitehouse.gov/wp-content/uploads/2019/05/ONDCP_PRS.pdf.
- “HHS Fact Sheet: Combating the Opioid Crisis,” U.S. Department of Health & Human Services (Apr. 24, 2019), hhs.gov/about/news/2019/04/24/hhs-fact-sheet-combating-the-opioid-crisis.html.
- “HHS Awards Over $1 Billion to Combat the Opioid Crisis,” U.S. Department of Health & Human Services (Sept. 19, 2018), hhs.gov/about/news/2018/09/19/hhs-awards-over-1-billion-combat-opioid-crisis.html.
- “HHS releases additional $487 million to states, territories to expand access to effective opioid treatment; 2019 SOR grants will total $1.4 billion,” U.S. Department of Health & Human Services (Mar. 24, 2019), hhs.gov/about/news/2019/03/20/hhs-releases-additional-487-million-to-states-territories-to-expand-access-to-effective-opioid-treatment.html.