McKesson Internal Review Clears Senior Management of Wrongdoing on Opioids

McKesson Corp. (MCK) , the fifth-largest company in the U.S., has issued a report rejecting the allegation that its senior management promoted a culture that led the drug distributor to distribute opioid medications in a harmful manner.

The 41-page report was produced after one of the company's shareholders, the International Brotherhood of Teamsters (IBT), sent McKesson a series of letters alleging the company had erred in its distribution of painkillers and citing a $150 million settlement in 2015 with the federal government as well as a lawsuit filed in West Virginia.

The report cleared senior management, and the board of directors, of missteps in the distribution of opioids, asserting management "tried in good faith to comply with the company's obligations with respect to the distribution of controlled substances."

The IBT holds more than $30 million in McKesson shares, according to a source familiar with the union's portfolio, but a check of large shareholders at FactSet Research Systems Inc. does not find the IBT among the 15 largest stockholders. Nevertheless, the public profile of the union was enough to prompt the company to create a special review committee made up of a trio of independent board members to review the company's behavior in light of two settlements with the federal government, one in 2008 where the company paid $13.25 million and the other in 2015.

McKesson, fellow drug distribution companies Cardinal Health Inc. (CAH) and AmerisourceBergen Corp. (ABC) and drug companies that have produced opioid drugs are parties to hundreds of lawsuits filed by counties, cities and states alleging that the opioid crisis had wreaked havoc on the citizens of those places. A federal judge in Cleveland is merging the lawsuits.

McKesson, with annual revenue of about $200 billion, also hired law firm Wilson Sonsini Goodrich & Rosati PC to assist the committee with its review.

In its correspondence with the company, the IBT questioned whether McKesson had developed a corporate culture where senior management and the board ignored compliance requirements tied to the 2008 settlement, placing profits before fulfilling settlement directives.

The letters also questioned whether senior management and the board had acted recklessly in light of the opioid crisis, emboldening the distribution of painkillers where the company should have understood the drugs would be sidetracked for illegal use.

The report said the company had met with representatives from the union in June 2017 to gain more understanding of the IBT's concerns.

The results of the review, though, have not satisfied the union. Ken Hall, general secretary of the IBT, said that while the union was proud that McKesson took up the review at the urging of the IBT, "This investigation failed to assign any responsibility for weaknesses in the company's monitoring program, reporting systems and internal audits that allowed millions of doses of prescription opioids to flood communities and fuel this crisis."

McKesson also weighed in.

"The Special Review Committee spent more than 10 months independently investigating the Teamsters' concerns, conducting extensive interviews with current and former management, members of McKesson's Board, and other relevant parties, including employees with prior experience as agents of the Drug Enforcement Administration," a McKesson spokesperson told The Deal.

"Ultimately, the Committee concluded that the company maintained a strong moral culture, emphasized compliance and encouraged ethical conduct," according to McKesson.

"They found that the company took actions to comply with government rules and regulations around the distribution of controlled substances and acted in an earnest desire to meet the DEA's expectations."

A source close to IBT said that while the union gave McKesson credit for undertaking the review, the fundamental question of whether the company's behavior as outlined in the West Virginia lawsuit was present in other locations wasn't answered.

McKesson and other drug distributors are accused of shipping millions of pills into the state despite regulatory communications and red flags from employees with some of those medications ending up on the black market. West Virginia has the highest death rate from opioid overdoses in the country.

The report was compiled based on interviews with more than 40 current and former McKesson employees as well as thousands of documents and emails, according to the company. While McKesson came through the review largely unscathed, some recommendations did emerge.

The committee called for the board of directors to become more involved with overseeing the Controlled Substance Monitoring Program, the method by which the company tracks activity tied to opioids. Mostly, the recommendations included having various individuals and committees regularly inform the board regarding company compliance with the program.

Again, the Teamsters felt the review came up short.

"Pledges to enhance board oversight of ongoing investigations and tie compliance and legal issues to executive pay are steps in the right direction, but these remain empty promises if those responsible for overseeing the flood of opioids into American communities escape accountability," Hall said.

One curious recommendation was the committee's suggestion that when McKesson's Drug Enforcement Agency compliance is criticized by a federal, state or international regulatory agency, senior management should inform the board. With the company's regulatory track record as well as the overhang of lawsuits, management informing the board of regulatory inquiries would have been thought to be standard operating procedure already.

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