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J&J's $572M fine in Oklahoma opioid case may signal lower risk for drugmakers

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IFRS 9 Impairment How It Impacts Your Corporation And How We Can Help

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J&J's $572M fine in Oklahoma opioid case may signal lower risk for drugmakers

As a bellwether case for opioid litigation, the Aug. 26 decision from an Oklahoma judge demanding Johnson & Johnson pay $572 million to the state — down from a possible $17.5 billion — had investors in the pharmaceutical industry breathing a sigh of relief.

Companies that have been sued over the marketing of their opioid painkillers, allegedly contributing to the addiction epidemic in the U.S., face a series of trials that began in Oklahoma and head next to Ohio, where in October more than 1,500 suits will be decided by one federal judge.

J&J's Janssen Pharmaceuticals Inc. manufactures a fentanyl patch called Duragesic, which is no longer marketed but still produced, and previously had a pill called Nucynta in its portfolio. Nucynta was sold to Depomed in 2015. Both drugs were named in the lawsuits against J&J based on historical marketing practices.

Several companies have settled the cases against them, including Reckitt Benckiser Group PLC which paid the largest sum to date of $1.4 billion to the U.S. Department of Justice — and Ireland's Allergan PLC and Endo International PLC for a total of $15 million with counties in Ohio.

SNL Image

Judge Thad Balkman issues his decision in an opioid lawsuit against pharmaceutical giant Johnson & Johnson in Norman, Okla., Aug. 26.

Source: The Associated Press

Distributors including McKesson Corp., Cardinal Health Inc. and AmerisourceBergen Corp. have offered a $10 billion settlement to end litigation in more than 35 states.

In the Oklahoma case, Purdue Pharma LP and Teva Pharmaceutical Industries Ltd. chose not to go to trial and settled for a total amount of $355 million. Purdue has reportedly offered a $12 billion settlement to resolve the more than 2,000 cases filed against the privately held company.

Even though the amount J&J must pay Oklahoma — pending an appeal — is greater than most of the settlements so far, it eased investors' concerns that upcoming rulings might result in hefty judgments.

Shares of Teva, Endo and Allergan spiked immediately following the Oklahoma judge's decision after normal U.S. trading hours. Allergan's stock later stabilized, while Endo and Teva declined.

Leerink SVB analyst Danielle Antalffy said J&J's fine was significantly lower than what lawyers for Oklahoma had sought and was met with a 2% bump in the pharma giant's stock post-market as investors rallied. The fine leaves Leerink "cautiously positive" as J&J heads toward resolution of the more than 2,000 lawsuits that have been brought against the company by certain state and local governments. Two of the trials will begin Oct. 21.

'A prize fight'

But the Oklahoma ruling is just the beginning for J&J and other opioid makers as they test the legal waters, said University of Kentucky College of Law Professor Richard Ausness.

"I think it's still like the early stages of a prizefight they're still sort of sparring with each other a little bit," Ausness said in an interview.

The Oklahoma case was unique, and therefore may not portend the outcomes in future cases, Antalffy said. Cowen's Joshua Jennings also cautioned investors not to use the trial as a litmus test.

Ausness said the Ohio cases could be more predictive than the one in Oklahoma because the state has a narrower public nuisance statute. The plaintiff is also pursuing the matters under the Racketeer Influenced and Corrupt Organizations law, which was originally enacted to litigate against organized crime.

But the fine assigned to J&J showed that liabilities may not be as high as anticipated, according to Jason Parish of law firm Buchanan Ingersoll & Rooney.

"This decision will be rocket fuel for the bellwether federal opioid trials set to begin this October," Parish told S&P Global Market Intelligence in an email. He added that the defendants in the Ohio cases would likely see the Oklahoma result and take their chances at a trial.

Parish cited Oklahoma's strategy in pursuing a public nuisance claim similar to the way big tobacco companies were charged two decades ago, in litigation that ultimately ended with the companies settling for billions of dollars.

"This was an aggressive, shoot-for-the-moon attempt by Oklahoma Attorney General Mike Hunter to hold J&J liable for a public health crisis it did not cause," Parish wrote. "Oklahoma's claim for $17 billion to fund a 20-year abatement program was not supported by the evidence, and the court correctly found that the state failed to make its case."

Stifel analyst Rick Wise said in an Aug. 27 note that J&J would remain financially strong despite the fine. J&J is the world's biggest publicly traded healthcare company, with a market value of about $357 billion and annual revenue of more than $81 billion, according to S&P Global Market Intelligence data.

Wise predicts J&J will have free cash flow of $70 billion, or $22 billion per year, over 2019-2021, with improving cash flow expected to continue.

Ausness said public opinion could play a part in turning out rulings against J&J for higher amounts, especially as states take the stand in these visible cases.

"Oklahoma was able to paint J&J with sort of the brush that they had hitherto painted for Purdue," Ausness said. "Purdue was the bad boy in all of this for two years, maybe more, and now J&J is depicted as the villain."

He said future cases could find even more weakness in J&J's position.

"The state was successful in dragging them into it and socking them with a really large reward," Ausness said. "Other plaintiffs are going to start zeroing in on J&J as well, because after all, they've got a lot of money."