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S&P: Opioid distributors could absorb legal settlements, but uncertainty remains

Opioid distributors AmerisourceBergen Corp., Cardinal Health Inc. and McKesson Corp. could have the capacity to handle liability from opioid litigation settlements, according to S&P Global Ratings credit analysts.

But the possible settlements, which could reach into the billions of dollars, have not been incorporated into the analysts' models.

The pharmaceutical distributors, three of the largest in the industry, have come under fire for allegedly fueling the opioid epidemic, which kills about 200 Americans every day. The distributors have been accused of shipping large amounts of opioids despite red flags of suspicious orders. The companies are currently facing thousands of lawsuits from various U.S. cities and states.

Drug manufacturers such as Purdue Pharma LP, Teva Pharmaceutical Industries Ltd., Johnson & Johnson and INSYS Therapeutics Inc. are also facing similar opioid-related charges.

"It is too early to reasonably estimate a potential opioids settlement amount," the Ratings analysts wrote in an Aug. 20 report.

AmerisourceBergen, Cardinal Health and McKesson offered to settle the lawsuits in more than 35 states for $10 billion, an offer that was reportedly countered by the National Association of Attorneys General who suggested $45 billion to cover public health costs of the opioid epidemic as of Aug. 6.

The distributors' potential capacity for liability payments varies, according to the Ratings report. AmerisourceBergen has a $2 billion capacity to absorb potential litigation settlements, Cardinal Health has a $1.5 billion capacity and McKesson has $4 billion. All three companies' ratings would likely be downgraded should they receive sizable settlement payments, the report said.

AmerisourceBergen's A-/Stable/A-2 rating would see a 1.5x downgrade trigger, the analysts estimated. Cardinal Health, with a BBB+/Stable/A-2 rating, could see a 2.5x downgrade, and McKesson, also rated at BBB+/Stable/A-2, could have the same downgrade trigger.

The analysts noted that the lawsuits could take years to resolve, especially as AmerisourceBergen, Cardinal Health and McKesson have insisted on a global settlement. The settlement payments may also be structured over multiple years, meaning the companies could use their cash flow.

So far the three opioid distributors have made a number of smaller settlements with West Virginia and the Department of Justice, paying upward of $16 million per case.

Other pressures

Beyond opioids, distributors like AmerisourceBergen, Cardinal Health and McKesson are operating in an uncertain environment, Ratings said. For example, healthcare distributors may experience additional pressure in the form of Amazon.com Inc.'s entrance into the pharma distribution business, though the effects on traditional distributors' profitability will likely be more gradual, the analysts said.

Drug pricing pressure could also pose a gradual risk to distributors, as generic drug prices are deflating, although price declines may eventually stabilize, according to the analysts.

"Drug pricing pressure and the threat of Amazon's entry into pharmacy may be manageable within the ratings, especially if the companies continue to invest as the marketplace changes," the report concluded. "Opioids may not be. It depends on the size and structure of a settlement."

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions of credit ratings in this news article were not prepared by S&P Global Ratings. The original S&P Global Ratings document referred to in this news brief can be found here.