State and local governments are starting to appropriate billions of dollars flowing in from the offer of settlement made by three major pharmaceutical companies due to the opioid addiction crisis.
The often quoted $26 billion figure is tied to an offer to settle unveiled in February 2022 by three large pharmaceutical opioid distributors, McKesson, AmerisourceBergen, Cardinal Health and Johnson & Johnson, who is a manufacturer. The offer was accepted by 48 state attorneys and their subdivisions. Litigation against Purdue, Teva and large pharmacy chains remains unresolved.
The money comes with strings attached, litigation is ongoing, and one of the drug companies is already flirting with bankruptcy, which would impede the flow. States have started developing ways to spend an influx of funds that’s being compared to the 1998 Master Settlement Agreement from the Big Tobacco companies.
Securitizing the incoming funds similar to the tobacco settlements could provide a path for new debt issuance, but no issuers have yet opted to do so.
The tobacco MSA, valued at $206 billion to $246 billion, was designed to recover costs associated with smoking-related diseases. Critics of the program point to the misuse of funds including payments to tobacco farmers. Tobacco bonds became a powerful investment engine powering sometimes speculative bond issuance. Some muni leaders say the comparison to the opioid settlement is overblown.
“The lack of a recurrent payment stream doesn’t lend itself to a tobacco-like scheme. That would be true even if it was a county pooled deal versus an individual issuer,” said Joseph Krist, publisher, Muni Credit News.
County executives are working on strategies to deploy the funds toward their intended purpose. “Counties are on the frontlines of the opioid epidemic,” said Nicole Weissman, director, strategic communications, National Association of Counties. “We understand the profound difference opioid settlement funds can make and are investing these resources thoughtfully and deliberately to try to maximize their impact.”
Late last year, the Wisconsin Counties Association was taking a long look at securitizing $167 million worth of settlement funds while also trying to stay within legal guidelines of how the money can be allocated.
Strategies for spending the money are outlined in Exhibit E, a 15-page list of guidelines that emerged from the settlement. The states are required to spend 70% of the initial tranche of funds on prospective abatement interventions to help build substance use disorder treatment infrastructure.
The National Conference of State Legislators shows Colorado tapping settlement funds to expand a housing voucher program while establishing standards for recovery residences. Minnesota, North Carolina, Nevada and Texas are all using the money to establish funds targeted at battling addiction through policy, planning and forming advisory groups. Johns Hopkins has issued its own recommended for best practices on spending the money.
Securitization of the projected funding beckons but also comes with risk. The drug maker Mallinckrodt is on the hook for a $1.7 billion dollar settlement while also being advised by its hedge funds backers to declare bankruptcy.
“The settlements with drug manufacturers are still subject to legal challenges, so there is no guarantee that the full amount of the settlements will be paid out,” said Matt Posner, principal, Court Street Group.
Evaluating risk factors has attracted some interest from the rating agencies. Moody’s revaluated Teva’s position in July 2022 by balancing projected cash outflows against a final resolution and found no impact on the company’s credit rating. In 2019, Fitch declared zero effects on state and local credit ratings from the approaching settlements.
Posner notes that the money coming from the drug companies pales in comparison to federal funds dedicated to fighting opioid addiction. He thinks tapping third party experts will allow municipalities to get the most bang out of the settlement bucks.
“They need to work with the healthcare industry and academia to get the best support for how to spend the money wisely,” he said. “They should consult with outside professionals that focus on opioid misuse and the policy around opioids to maximize the dollars they receive.”