How to Make Money off America’s Opioid Epidemic
If the title of this article made you a bit uncomfortable, it certainly should. The amount of prescription pain killers used by Americans is beyond staggering. According to an article by CNBC, “80 percent of the global opioid supply is consumed in the United States” and in 2015 “300 million pain prescriptions were written” totaling a $24 billion market. So many people are on prescription painkillers now that more Americans use them than tobacco:
Investors have been making a killing here – literally. In light of President Trump’s war on the opioid abuse problem, it’s now time for everyone to get on the other side of this trade. We see two parts to this investment thesis:
- Investing long in those stocks that benefit from selling drugs that help people overcome their addictions
- Selling short those providers of opioid pain killers.
That last bullet point shouldn’t even be a part of an investment thesis. Have Americans never thought about finding out who sells all these pills and telling them to fcuk off? Why don’t we direct all our constant outrage over the growing list of “phobias” and “isms” at the companies that are poisoning our people? Who knows what the thought process is here, but while collective America tries to get their act together, we’re going to figure out how to make some money off the whole thing. First, let’s find out who is selling the drugs in the first place.
Let’s go back to that CNBC article which states:
Based on 2015 sales, the top five opioid products were made by Purdue Pharma, Johnson & Johnson, Insys Therapeutics, Mylan and Depomed, according to EvaluatePharma, a life sciences market intelligence firm, which tracks sales.
This information can’t be that outdated already, so here are some of the companies that are
poisoning America providing relief for those who suffer from pain:
- Purdue Pharma L.P. – Privately held pharmaceutical company. In 2007 it paid out one of the largest fines ever levied against a pharmaceutical firm for mislabeling its product OxyContin, and three executives were found guilty of criminal charges. Arguably the biggest player there is and responsible for OxyContin that started it all.
- Johnson & Johnson (NYSE:JNJ) – One of our favorite DGI stocks. They’ve been named in four lawsuits alleging claims related to marketing of opioids, including DURAGESIC (this is fentayl people, 1000X stronger than heroin), and NUCYNTA. Looks like they sold NUCYNTA for nearly $1 billion to our next company.
- Depomed (NASDAQ:DEPO) – This $398 million pharma company sells nothing but pain killers, and NUCYNTA generates about 65% of their revenues. Nearly 5% of their revenues come from a fentanyl nasal spray. Recently increased their “pain salesforce” from 190 to 258 with NUCYNTA as their primary focus.
- Mylan (NASDAQ:MYL) – This $16.5 billion pharma company is perhaps best known for their controversial pricing of the EpiPen, anything to distract from the fact that they were the first company to market fentanyl patches (the ones that addicts like to suck the fentanyl out of). Last month they received a subpoena from the U.S. DOJ relating to opioids sold from 2013 to 2016. Since they sell over 7,500 products, revenues from opioid products like these fentanyl patches are all but impossible to discover.
- Insys Therapuetics (NASDAQ:INSY) – This $650 million company sells nothing but fentanyl under the brand name SUBSYS which brought in $242 million in sales for 2016. Just last month, they launched SYNDROS which is like a liquid form of Marinol (essentially cannabis in pill form). SUBSYS is the first and only fentanyl sublingual spray for “breakthrough cancer pain”. The product page just makes us feel uncomfortable. It should just say “how to convince your doctor to make you an addict” and “get your road to addiction savings card today“:
- Teva and Cephalon (NYSE:TEVA) – Teva is a $17 billion generic drug manufacturer that wasn’t on our original list but we uncovered them during our research. About 6 years ago, Teva bought Cephalon. At the time of the acquisition, Cephalon was raking in nearly $200 million a year selling fentanyl in pill form (FENTORA) and another $116 million selling fentanyl lollipops (ACTIQ). Fast forward to today and the impact of selling fentanyl on the more than $20 billion in revenues that generic drug manufacturer Teva brings in is no longer disclosed. Here’s a gentle reminder of how powerful an opioid fentanyl is:
Those are said to be the 5 companies in the opioid business with the most sales but there are many others. Another company was mentioned in an article just last week which said that the Drug Enforcement Agency is mulling a 20% reduction in opioid painkiller manufacturing. Here’s who the main targets are said to be:
- In a proposal released on Friday, the agency noted a main target for the reductions are oft-prescribed painkillers such as oxycodone, hydrocodone and fentanyl — the active ingredients in Purdue Pharma L.P.’s OxyContin, Janssen’s Duragesic and the extended release version of Pernix Therapeutics’ Zohydro, respectively, as well as a variety of other branded products.
While Purdue and Janssen (JNJ) we already disucssed, we see mention made of a pharmaceutical company called Pernix:
- Pernix (NASDAQ:PTX) – This $27 million company sells an extended release form of hydrocodone under the brand name ZOHYDRO ER. This drug accounts for about 18% of total revenues for Pernix or around $24 million a year. They have developed a technology called BeadTek which turns the hydrocode into a viscous gel if you crush it or dissolve it in liquid (prevents snorting and mainlining).
Lastly, we came across a few more names from a lawsuit filed by the State of Ohio against 5 drug companies for ‘Fueling the Opioid Epidemic‘. Ohio has reason to be concerned. According to Vice News, between 2011 and 2015, 3.8 billion opioid pills were prescribed in Ohio to roughly 20 percent of the state’s population. This lawsuit uncovered a few additional names as follows:
- Endo International (NASDAQ:ENDP) – This $1.7 billion generic drug manufactrurer has about 28% of their revenues tied to opioids. In June of this year they pulled their opioid painkiller OPANA from the market per a request by the FDA. They had already sold $67 million of it in the first half of 2017. They also sell PERCOCET (oxycodone) which brought in $61 million for the first half of 2017.
- Allergan (NYSE:AGN) – With a market cap of $78 billion, Allergan sells morphine under the brand name KADIAN along with loads of other non-opioid products. Not surprisingly there is no information about their sale of opioids in the company’s latest 10-Q except 5 mentions of the word in reference to their being sued.
So let’s look at what positions we can take for the publicly traded companies. You’d have to be on some pretty heavy painkillers to short JNJ so that’s out. While they don’t say how much Janssen makes off of DURAGESIC, we can only assume it has minimal impact to the bottom line of a $357 billion company. Then there’s Depomed. Since NUCYNTA is considered to be a “gentler” form of opioid, it may fall under the radar of the DEA crackdown. Mylan has a product line that is too diverse for an opioid crackdown to have a meaningful impact it seems, though we can’t tell for sure. Given that Insys sells nothing but fentanyl at the moment, they’re probably the best option of the bunch for shorting based on the “DEA crackdown thesis”. While Teva also sells fentanyl, they’re just too big and diversified for any sort of crackdown to have an effect on their bottom line. Pernix could be affected by a crackdown though opioids only represent 18% of their revenues. Given that Endo already lost -53% of their share price value year-to-date, the impact of an opioid crackdown may already be priced in. Allergan is just too big and diversified to be affected by any crackdown.
We’ve now sufficiently covered the first part of our opioid epidemic investment thesis (short the sellers), so let’s look at the second part of the thesis (long the sellers of drugs that combat addiction). Here are some examples of drugs that are being used to fight the opioid epidemic:
- Naloxone (also known as Narcan) – Keeps addicts alive when they overdose so they continue overdosing in the future.
- Methadone – Opioid used to help addicts taper off of their dependence on other opioids
- Buprenorphine – Like methadone, this is also used for opioid replacement therapy
- Naltrexone – Keeps addicts from getting high off opioids by blocking the effects of opioid drugs
In order to do this next part justice, we’re going to dig into these drugs and the companies that sell them in a future article. Our preliminary research shows some unique situations we need to consider such as companies that sell both the opioid and and the antidote. In those cases we need to listen to what the company is saying about their intended future direction. The same goes for companies that may have telegraphed their intent to divest their opioid business in light of the coming crackdown.
On a final note, investors should hear more from all the ESG investing types who are policing how companies ought to behave, yet haven’t said much about the opioid epidemic that’s destroying America. ESG providers should issue a list of all the companies selling opioids and bring these front and center to the minds of impact investors. We need to see more protests and outrage for perhaps the biggest problem America faces right now.
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