... the recent campaign by the coalition of Investors for Opioid Accountability was one of the most successful social-issue shareholder campaigns in recent memory...

December 19, 2018

Opioid Accountability: The Push for Better Risk Management Continues

The opioid epidemic plaguing the U.S. has brought heightened regulatory and legal scrutiny to the pharmaceutical industry.

In addition to numerous lawsuits and investigations, the industry faces increasing questions by shareholders, including shareholder proposal filings seeking to address risks associated with the manufacturing and distribution of opioids. Based on the number of withdrawn proposals and the levels of support on ballots, the recent campaign by the coalition of Investors for Opioid Accountability was one of the most successful social-issue shareholder campaigns in recent memory, as the issue appears to resonate strongly with the investment community. With the momentum gained in 2018, we anticipate a very active year with respect to shareholder engagement and company action addressing opioid-related risks in 2019.

The Opioid Epidemic

Opioids are a drug category that include prescription drugs sold through pharmacies and black-market drugs like illegal heroine and synthetic opioids. The U.S. Centers for Disease Control and Prevention (CDC) reported that “the amount of prescription opioids sold to pharmacies, hospitals, and doctors’ offices nearly quadrupled from 1999 to 2010, yet there had not been an overall change in the amount of pain that Americans reported.” The CDC reported that deaths related to prescription opioid abuse were five times higher in 2016 than in 1999, and estimates that, on average, 115 Americans die daily from an opioid overdose, with prescription and illicit opioids purportedly involved in over 42,000 deaths in 2016.

Investors for Opioid Accountability

In late 2017, a group of asset managers, state treasurers, faith-based funds, public funds, and labor funds formed the Investors for Opioid Accountability (IOA), with a combined $ 1.3 trillion in assets under management. The coalition announced its plans to ask company boards in the pharmaceuticals sector to investigate how they are responding to increasing business risks related to opioids. The IOA cited increased public concern and rising legal and regulatory scrutiny as opioid-related business risks that “can both threaten shareholder value and have profound long-term implications for the economy and society.”

Before the formation of the IOA, the International Brotherhood of Teamsters filed two proposals related to opioids risks at McKesson Corporation in 2017. The first proposal requested the establishment of independent board chairman, and the second proposal opposed the company’s executive compensation plan due to the drug distributor’s role in the opioid epidemic. While the independent board chairman proposal was rejected, McKesson did adopt a policy that will split the roles of CEO and Chairman when the current CEO John Hammergren resigns. Teamsters also requested that the board appoint an independent committee to investigate allegations regarding a lawsuit filed by West Virginia Attorney General Patrick Morrisey that accuses the company of flooding the state with highly addictive painkillers. The board agreed to appoint such a committee.

In 2018, the IOA campaign was in full swing, and the coalition submitted ten shareholder proposals at large manufacturers and distributors of opioids and one proposal at retail pharmacy Rite Aid Corp. In addition to proposals seeking for disclosure on governance measures to address the opioid epidemic, the IOA campaign followed a unique approach to addressing the issue at some target companies, as proponents filed a number of proposals addressing specific governance practices and their linkage to the opioid epidemic. These requests included proposals asking for an independent board report on business risks pertaining to the opioid crisis, a proposal requesting a report on drug pricing strategy and risk mitigation from public backlash, proposals requesting a clawback policy on executive pay, proposals asking for independent board chairs, and requests for report on corporate political spending and lobbying. Most shareholder campaigns on environmental and social issues primarily focus on reporting and disclosure on the issue under review.

Opioids Proposals Received Positive Response from Companies and Shareholders

Seven of the proposals requesting a report on governance measures related to opioids were withdrawn as a result of positive engagement between the shareholders and the company. The shareholder proposal at Cardinal Health Inc., for instance, was withdrawn when the company announced plans to establish an ad hoc committee on opioid business risks and to provide investors with reports of two board-level investigations into allegations of oversight failures related to opioid distribution.

Of the three proposals requesting a report on governance measures that went to vote, two proposals (at Rite Aid Corp. and Depomed Inc. – now Assertio Therapeutics Inc.) received majority support, with 61-percent and 62-percent shareholder support respectively. The same proposal introduced at AmeriSource Bergen received support by 41 percent of votes cast. The level of response by both companies and investors is exceptional among social and environmental proposals, which typically receive company opposition and requests for omission, averaging shareholder support of approximately 20-25 percent of votes cast. Such high support levels are even more unusual for new campaigns, reflecting the widespread concern among investors regarding the societal impact risks posed by the opioid epidemic.

Results of 2018 Shareholder Proposals on Opioids Filed by Members of the IOA

CompanyBusinessProposal DescriptionVote Result
AmerisourceBergen Corp.DistributionReport on Governance Measures Implemented Related to Opioids41.20%
Rite Aid CorpPharmacyReport on Governance Measures Implemented Related to Opioids61.40%
Assertio Therapeutics Inc.ManufactureReport on Governance Measures Implemented Related to Opioids62.30%
McKesson Corp.DistributionReport on Governance Measures Implemented Related to OpioidsWithdrawn
Cardinal Health IncDistributionReport on Governance Measures Implemented Related to OpioidsWithdrawn
Endo International PLCManufactureReport on Governance Measures Implemented Related to OpioidsWithdrawn
INSYS Therapeutics Inc.ManufactureReport on Governance Measures Implemented Related to OpioidsWithdrawn
Johnson & JohnsonManufactureReport on Governance Measures Implemented Related to OpioidsWithdrawn
Mallinckrodt PLCManufactureReport on Governance Measures Implemented Related to OpioidsWithdrawn
Mylan NVManufactureReport on Governance Measures Implemented Related to OpioidsWithdrawn
Pernix TherapeuticsManufactureReport on Governance Measures Implemented Related to OpioidsWithdrawn

Source: ISS Analytics

However, the proposals listed above may only be a fraction of the total number of shareholder proposals motivated by concerns about opioid-related risks. As mentioned, several other proposals introduced by members of the IOA pertained to governance practices, but were in fact closely linked to concerns about opioids. Such proposals included requests for additional disclosure on lobbying, in light of investigative reports that found a targeted lobbying effort may have resulted in weaker regulations on opioid sale and distribution. In other instances, proponent requests to provide sustainability reporting were likely prompted by concerns about the company’s potential involvement in the opioid epidemic. Specifically, a proposal filed at McKesson Corp. asking for greater lobbying disclosure received support by 39 percent of votes cast. In addition, at Rite Aid Corp, a proposal requesting the separation of the chairman and CEO roles received 58-percent support, while a proposal seeking improved reporting on sustainability received a resounding support by 80 percent of votes cast.

Companies Provide Disclosures on Opioids Risks

As a result of engagement with the Investors for Opioid Accountability in 2018, Endo International PLC issued an independent directors’ report on its actions to mitigate risks related to the sale of opioids. Some of the steps that the company outlines in the report include ceasing promotion of opioid medication, eliminating the company’s pain salesforce, withdrawing one of its medications (Opana ER) from the market, discontinuing research and development on new opioid products, enhancing anti-diversion measures, and linking incentive compensation for sales personnel to compliance objectives in addition to sales performance targets. Endo has also reportedly pledged to enhance lobbying disclosures and expand its compensation clawback policy. Several other companies, such as Mylan NV, Cardinal Health, Assertio Therapeutics, and McKesson have also issued reports in response to dialogue with shareholders, including disclosures in their proxy statements. An ISS review of proxy statement filings finds that, in 2018, 32 companies mentioned the word “opioid” in their proxy disclosures, up from 25 companies in 2017, and 22 companies in 2016. Many of the new disclosures represent new efforts of the pharmaceutical industry to develop non-opioid pain-relieving drugs, which may create new market opportunities for the industry.

Outlook for 2019

We expect a high level of engagement and shareholder activity on opioid-related proposals for the coming year, given the increased focus on the opioid crisis by the public and policymakers, as well as the success of the IOA campaign so far. The January meeting of Walgreens Boots Alliance Inc. meeting will be the first meeting to feature an opioids-related proposal in the new year. Meanwhile, shareholder proponents are still formulating plans for 2019 and negotiating with companies. In discussions with ISS, members of the IOA have discussed plans to refile similar proposals in the coming year at drug manufacturers, distributors, and retailers. Such efforts will likely include initiatives by some proponents to challenge executive compensation and board capabilities, such as the Teamsters’ Vote No campaign in 2018 against McKesson director Marie Knowles and the 2017 campaign against McKesson’s CEO’s compensation package. Both initiatives were expressly linked to concerns about opioids.

Companies are also expected to take proactive measures and to respond to investor and public concerns about opioids, as observed by the results of the IOA campaign in 2018. Company actions include board oversight initiatives, adjusting compensation incentives, public policy recommendations, and partnerships with independent organizations. A number of companies may also adjust their product portfolios, moving away from opioids and investing in non-opioid pain-relieving drugs. As such, we expect a significant portion of shareholder resolutions to be withdrawn from ballots prior the general meeting, as a result of company responsiveness to shareholders’ requests. Nevertheless, the management of opioid-related risks will feature as a top engagement topic in the drug distribution and manufacturing industries in 2019.

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