This Big Pharma CEO's 'Doh' Moment Could Cost Billions
The opioid crisis fallout continues... A standoff at the negotiating table... This Big Pharma CEO's 'Doh' moment could cost billions... 'Devon's almost completely out of the roof tar business!'... A Navy officer's unexpected bathroom-related 'buy' indicator...
The bills keep piling up for the opioid crisis...
We last wrote to you about the financial fallout from the crisis in late October, when we noted the sickening (and costly) behavior of some Big Pharma executives.
Back then, major drug distributors AmerisourceBergen (ABC), Cardinal Health (CAH), and McKesson (MCK) had agreed to pay a combined $215 million to just two counties in Ohio.
And we noted that these settlements were just the start of the payouts that these companies would need to make related to their role in the opioid crisis.
It's a situation we've called 'Big Tobacco 2.0'...
Drugmakers, drug distributors, and retail pharmacies are facing opioid lawsuits from nearly every state, as well as thousands of city and county governments. These lawsuits seek to recoup the costs to communities that have dealt with widespread addiction... and things like increased burdens on emergency services and medical facilities.
Since October, negotiations have continued between AmerisourceBergen, Cardinal Health, and McKesson and the attorneys general from more than 20 states. The sides had been discussing an $18 billion, 18-year so-called "universal settlement" that would let the drug companies avoid trials and pay state and local governments.
But now, the states have said "no thanks" to the universal settlement...
Last week, the attorneys general sent letters to the companies' lawyers saying as much. And remarkably, the rejection was at least in part because of a dumb and arguably reprehensible comment made by the CEO of one of the accused Big Pharma firms.
Do these guys ever learn?
Representatives of several states now want more money from all three of these companies over a shorter period of time. And as the Wall Street Journal reported last week, it's partially because...
Some dissenting states were frustrated by comments that AmerisourceBergen Chief Executive Steve Collis made last month on an earnings call, according to people familiar with the matter.
Mr. Collis said the company didn't need to save up cash for an opioid litigation settlement.
Say what?
We read the transcript of AmerisourceBergen's recent earnings call...
And it turns out, it's true... With his statement to investors, Collis basically said: We've got the money. No problem. These lawsuits won't hurt us. They're just a drop in the bucket.
Here's his actual comment on the conference call in question...
It is a lot of cash in absolute terms. [But] in relative terms, it's relative to a couple of hundred million dollars a day in sales. It's not that much.
That doesn't exactly sound like someone who was feeling pain or contrition from the proposed consequences of litigation against his company, which distributed 13 billion opioid pills throughout the country from 2006 through 2014.
And keep in mind... Collis made $14.7 million in Amerisource's 2019 fiscal year, based on realized gains on his stock.
Talk about a Homer Simpson-like "Doh" moment.
The state of Ohio hired a firm to analyze the drug distributors' books...
And, surprise, surprise... it found that an $18 billion settlement would "have limited or no impact on the companies' finances over the long term," as the Journal reported.
This is exactly the sort of "things will get more expensive" development that Stansberry's Big Trade editor Bill McGilton has been telling people to expect since last spring...
Bill, a trained lawyer, has been pounding the table that the drug companies involved in fueling the widespread opioid crisis would need to spend much more money settling the thousands of outstanding lawsuits against them than the market expects...
According to Bill, the states have leverage because companies don't want to go to court, where documents and other evidence can be entered into the public record – like during the days of the Big Tobacco legislation. As he said in October, after the Big Three companies – AmerisourceBergen, Cardinal Health, and McKesson – reached an agreement with the two counties in Ohio...
Once other counties get a whiff that these guys are desperate to avoid trial – settlements will cost more.
Bill updated subscribers again less than a month ago in his latest Big Trade issue. He wrote about the proposed universal settlement with these companies, the one that was just scuttled...
Given the emotional nature and wide reach of the opioid epidemic, the final settlement will likely be much higher.
That's especially true if the CEO of one of the accused companies says that the agreement on the table now feels like a slap on the wrist.
For more, we urge you to check out Bill's work in our Stansberry's Big Trade service...
Last April, Bill recommended a short position against one of the companies that we're talking about. And his advice remains the same today. As he wrote in that Big Trade issue...
The opioid crisis in this country has become so big that it's likely to lead to large litigation payouts and to a much stricter and costlier regulatory environment for pharmaceutical distributors...
We expect stock in these companies to perform poorly over the next few years...
Bill explained that this company is in more trouble than the others. That's because it's already operating on razor-thin profit margins... and is facing increased competition in addition to the risks of the opioid litigation influencing its bottom line.
We can't say much more about it in today's Digest. But to find out how you can get all the details about this company with instant access to Bill's Big Trade service, click here.
If only they had listened to our advice...
If you've been following our work for a while, you might recall our founder Porter Stansberry's suggestion back in April 2014 to oil and gas producer Devon Energy (DVN).
In a special "Open Letter" edition of Stansberry's Investment Advisory that month, Porter advised the company to sell all of its Canadian assets and focus solely on developing its U.S. shale properties in Texas. And of course, he detailed all the reasons why.
A few months later, Porter devoted an entire Friday Digest to the subject... He described his "quixotic quest to fix Devon" and even encouraged Stansberry Research subscribers to send their own letters to the company's board of directors.
As we noted last June, the company said it was finally taking the free recommendation and selling its Canadian businesses to Canadian Natural Resources (CNQ) for $2.8 billion.
Almost six years later, Devon Energy's leaders are finally catching up to Porter's vision...
Today, the company's pivot to primarily American-only oil assets is nearly finished. And now, we're starting to see a steady stream of positive sentiment about the company in financial news headlines.
Stansberry Venture Value editor Bryan Beach alerted us to one such article recently, along with some brief commentary. As he wrote to us in a private note last week... "Devon's almost completely out of the roof tar business!"
That's a reference to the great detail that Porter included in his April 2014 issue...
During the greatest oil boom in the U.S. since the early 1930s, Devon has become the North American independent leader in... roof tar. This remains the core problem with the stock in the eyes of most investors.
At the time, Devon was spending a lot of money on oil and gas extraction in Canada to make... yes, you read that correctly... low-margin roof tar products. What a lousy model.
But as Porter explained, a company of Devon's capability could be, and should be, pursuing plenty of higher-margin-producing business lines – especially as the U.S. was getting closer to exporting more energy than it was taking in. And of course, American energy exports have only picked up since Porter originally penned that message nearly six years ago.
Porter responded to Bryan's note, saying that "10 years+ of work went into that" open letter to Devon. It's too bad for shareholders that the company's leaders didn't heed his advice sooner.
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In today's mailbag, more reasons not to be in the Canadian oil business... and DailyWealth editor Dr. Steve Sjuggerud received a fascinating note that includes unexpected bathroom-related investing advice from an unlikely source. Do you have a comment or question? As always, you can e-mail us at feedback@stansberryresearch.com.
"In [Friday's] Digest, Bill McGilton said 'But no one starts a new drilling project to lose money.' He should have exempted governments, especially the Canadian government, which have spent over CAD $4 billion (now expanded to $16 billion) to acquire the TransMountain pipeline, which will transport Canadian Oil-Sands oil, which in turn will apparently only breakeven at US $83! – Paid-up subscriber Nick A.
"Steve, I received a memorandum from the Secretary of the Navy yesterday, and a part of that memo hit home for me. The first thing that came to my mind was to send it forward to you for consideration as a valuable data point in your algorithms for company evaluation.
"I don't know if this is already obvious to you and your boots on the ground team, but it was certainly an eye opener for me.
"Here is the observation...
Very shortly after I [Acting Secretary of the Navy Thomas B. Modly] left the military and transitioned to the private sector, I learned one of my greatest lessons in business. I was working as the lead corporate development executive for an aviation service company and I traveled all over the country evaluating other companies as potential acquisition candidates for my firm. During this process, someone told me of a nearly foolproof indicator that I should always assess before making a determination as to whether the business I was visiting was healthy and a good candidate to be acquired: the quality of the employee bathroom.
I quickly learned that this advice was profound because the condition of that bathroom invariably told the story of what management thought about their employees – and what the employees thought about their management. A dirty, unkept employee bathroom indicated that neither felt positively about the other. It was a cultural sign that took precedence for me regardless of the many other factors I evaluated in the business itself.
"I hope this will make your models better, and look forward to riding the Melt Up and getting out before the melt down, with your guidance (and those at Stansberry Research) to reinvest with contrarian bear market investment strategies for the next 20 years.
"Thanks for your leadership, guidance, [willingness] to share, and insights into your research." – Paid-up subscriber Joe G.
All the best,
Corey McLaughlin
Baltimore, Maryland
February 18, 2020