Calvert's approach to opioid-exposed companies


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By Laura AhmadiESG Research Analyst, Calvert

Washington - The U.S. opioid crisis has serious implications for the drug industry, investors and society. The Centers for Disease Control and Prevention (CDC) reports that overdose deaths from prescription and illicit opioids increased by a factor of six from 1999 to 2017, and opioids accounted for approximately 68% of overdose deaths in 2017.1

Companies across the pharmaceutical industry and related industries are facing an increasing level of risk, thanks to pending opioid litigation in multiple jurisdictions. Here, we pinpoint some key ESG factors on which Calvert evaluates companies with opioid exposure and our responsible investment approach to such companies.

Considering the entire opioid value chain

The value chain for opioids is analogous to that of the broader pharmaceutical industry and includes manufacturers, distributors, prescribers, pharmacies, insurers and pharmacy benefits managers.

Calvert blog 6-26-19

Calvert has evaluated the risks facing companies across this value chain, identifying three key ESG exposures we consider to be financially material for companies with opioid exposure.

Product safety issues. Companies with exposure to opioid products formulated in a dosage or delivery method that is unsafe or unsupported by robust medical evidence may face product recalls or other regulatory restrictions on the sale of certain drugs. This can result in material declines in sales. In addition, failure to recognize and expediently act on unsafe products may result in litigation and reputational damage. Product safety risks most directly apply to manufacturers, prescribers and pharmacies, but may apply to all components of the supply chain.

Unethical behaviors. Companies found to have used unethical or misleading marketing practices, bribery or willful violation of various other laws and regulations could face significant financial consequences. Different components of the supply chain face different risks:

  • Manufacturers may have knowingly mismarketed opioids to prescribers as less addictive than other pain medications without proper evidence or against regulatory guidance or law, or sought to unduly influence prescriber behavior or regulation.
  • Distributors may have knowingly violated Drug Enforcement Administration (DEA) requirements to report suspicious opioid ordering activity in order to boost sales, or conspired with pharmacies to bypass DEA regulations or other laws governing opioids.
  • Retail pharmacies may have knowingly violated DEA regulations to report suspicious opioid prescriptions or failed to guard against theft or diversion.
  • Insurers or pharmacy benefits managers may have knowingly covered opioids instead of equally effective but less addictive substitutes in order to earn higher rebates from manufacturers.

Each of these could result in class action, state-level or federal prosecution as well as severe backlash from patients and the broader medical community.

Poor governance practices. Improperly aligned compensation incentives and lack of board oversight of opioid-related activities are seen as key governance issues. Best practices to mitigate opioid-related risk are the establishment of board oversight in the form of committees, task forces or regular reporting rhythms, the separation of CEO and chair roles, and the adoption of pay practices that encourage accountability. Companies may consider including opioid-related legal expenses in metrics, such as adjusted earnings per share or free cash flow, that determine bonus payouts. Companies should also ensure that sales volume targets do not perversely incentivize executives or other personnel to use unethical tactics to increase opioid sales.

Beyond assessing the material ESG risks, Calvert seeks to engage with opioid-exposed companies to advocate for improved policies, oversight and disclosure on opioid-related issues to deter misconduct in the industry and preserve shareholder value.

Calvert is a member of Investors for Opioid Accountability (IOA), a coalition of over 50 investors that engages with opioid-exposed companies as a unified force. Key actions that IOA advocates for in order to mitigate risk with respect to opioids are:

  • Installment of an independent chairman to provide strong support for management and diversified views.
  • Adoption of executive compensation policies that best align shareholder and management interests as well as appropriate compensation incentives for sales personnel to deter unethical practices.
  • Establishment of board-level oversight of opioid-related activities to better implement and monitor the company's strategic approach to opioid sales, advertising and sales tactics, anti-diversion programs, and efforts to comply with applicable laws and regulations.

As a result of the efforts of IOA and other groups, many companies have made significant progress toward the adoption of these best practices. Calvert takes these positive developments into consideration when evaluating an issuer's opioid-related ESG risk as well as any ongoing regulatory and legal risk based on the issuer's past actions.

For more information, see Opioid exposure presents risks to pharmaceutical industry.

Bottom line: Calvert recognizes the legitimate medical purpose opioids can serve. However, control deficiencies with regard to product safety, sales and marketing strategies, and prescribing and dispensing practices in the industry pose significant risks to investors as well as society as a whole. Calvert evaluates opioid-exposed companies on a case-by-case basis against these primary ESG risks and engages with companies to encourage the adoption of governance frameworks that facilitate better management of opioid-related investment risks.

The views expressed in these posts are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Eaton Vance are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness.