Billions from Big Pharma: What to Do With Opioid Lawsuit Payouts?

Plus, what the US could do with a 100-year bond

Billions from Big Pharma: What to Do With Opioid Lawsuit Payouts?

Drug companies are starting to be held accountable for the opioid crisis they helped create, with Purdue Pharma, which makes OxyContin, reportedly offering to pay $10 billion to $12 billion to settle thousands of lawsuits against it and an Oklahoma judge on Monday ordering Johnson & Johnson to pay the state $572 million.

The proposed Purdue settlement would not be a straight cash payment. “The bulk of the funds would come from restructuring the company under a Chapter 11 bankruptcy filing that would transform it from a private company into a ‘public beneficiary trust.’ That would allow the profits from all drug sales, including the opioid painkiller OxyContin, to go to the plaintiffs — largely states, cities, towns and tribes,” The New York Times reported earlier this week.

In the Johnson & Johnson case, Oklahoma had sought as much as $17.5 billion, which it said was what it will cost to abate its opioid crisis over the next few decades. In awarding $572 million, the judge said that was the amount necessary to cover one year’s worth of the state’s costs in dealing with the crisis. That ruling was seen as a partial win for Johnson & Johnson, and the company also indicated that it would pursue an appeal. In the meantime, the first trial in a federal case is set to start in Cleveland, Ohio, in October.

Yet even as lawsuits related to the opioid crisis have a long way to go, questions are already being raised about how money paid by the drug companies will be used. By some estimates, the pharmaceutical industry could face opioid-related liabilities of $100 billion or more. In an editorial, the Times warns against repeating the mistakes of the agreement reached in 1998 with tobacco companies, which has seen then pay about $125 billion to states over 20 years:

“[O]nly a fraction of the tobacco proceeds — less than 3 percent nationally in 2019 — has been spent on public health matters related to tobacco use. In New York, some of the money went to a public golf course. Alabama installed security cameras in its schools. And in North Carolina, a portion of the money was dedicated to subsidies — for tobacco companies. Today, no state finances tobacco control efforts at the level that the Centers for Disease Control and Prevention recommends.”

The Times recommends that the plaintiffs bringing the lawsuits make sure that the drug industry’s payouts go toward combatting opioid addiction. Similarly, John Jacobi, professor of health and law policy at Seton Hall Law School tells Time that the tobacco litigation should serve as a “cautionary tale” and that the government should focus on addiction more broadly and provide funding for public health programs such as Medicaid that provide substance abuse treatment.

Should the US Issue 100-Year Bonds?

Treasury Secretary Steven Mnuchin said Wednesday that the U.S. is considering issuing ultra-long bonds — debt in 50- or 100-year durations. “If the conditions are right, then I would anticipate we’ll take advantage of long-term borrowing and execute on that,” Mnuchin told Bloomberg News.

The U.S. has considered issuing longer-term bonds before, but the Treasury Borrowing Advisory Committee, an elite group of bankers that advises the Treasury Secretary on managing the national debt, has expressed concerns that doing so would reduce demand for 30-year Treasuries, currently the longest duration offered. Bloomberg’s Liz McCormick said Thursday that the committee is expected to maintain its opposition to longer-term bonds.

Bloomberg’s Marcus Ashworth argued Thursday that under the right circumstances, ultra-long U.S. Treasuries could work, with pension funds and insurers stepping up as likely customers. The key would be creating a market worth at least $5 billion, Ashworth said, with new issuances coming twice a year or more in order to maintain sufficient liquidity. Ashworth argued that recent demand for 100-year securities from Austria, Belgium and Ireland suggests there is sufficient global need for positive yield to sustain a rich and varied market for all kinds of bonds, especially as rates continue to drop.

Last week, the Wall Street Journal Editorial Board took a similar view: “Investors, especially insurers in Europe and Japan, are ravenous for high-quality government securities with positive yields as negative interest rates spread around the world. The worry that a 50- or 100-year Treasury bond might crowd out the 30-year is less salient now than it was a couple of years ago.”

A real infrastructure week, finally?

One advantage of issuing ultra-long bonds would be to lock in low interest costs for the rising pile of U.S. debt. Bloomberg columnist and money manager Barry Ritholtz argued Thursday that the country could also use new long-term debt to “make U.S. infrastructure the envy of world again.”

Infrastructure projects have long time horizons, making them an ideal match for long-term bonds, Ritholtz writes. And most infrastructure — roads, bridges, railway lines, water systems, the electrical grid, airports — needs a steady stream of money for maintenance, a crucial variable that is often ignored, at great cost to the population.

Dedicated funds from ultra-long bonds could also provide a way around the “rabid anti-tax ideology” that has made it so hard for “for the government to fund the sorts of things that governments are supposed to fund,” Ritholtz argues. For the most part, the private sector has neither the money nor the patience to take on multi-decade projects, leaving the government as the only party available to fund, build and maintain all sorts of public goods.

“Each of these systems requires a significant and long-lasting commitment from Uncle Sam,” Ritholtz writes. “The most rational way to fund them is to match each project with an appropriate ultra-long term treasury bond.”

Chart of the Day: The Cost of US Debt

The U.S. stands out from other developed countries when it comes to the cost of its government debt. Bloomberg’s Justin Fox says that the interest burden of government debt is both larger in the U.S. than in similar countries and moving in a different direction — that is, up.

According to a forecast by the 36-member Organization for Economic Cooperation and Development, the interest cost of all government debt in the U.S. (including federal, state and local) will equal about 3% of GDP in 2019. “Aside from the U.S., [the OECD] has only two members with higher projected net interest spending for 2019: Greece and Italy, at 3.6% and 3.5% of GDP, respectively,” Fox writes. “These are both countries beset by perennial worries about the sustainability of their government debt.”

While the numbers alone don’t necessarily tell us how risky U.S. fiscal policy has been, they do make clear that the country is something of an “historical outlier,” Fox says.

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A programming note: We're off until Tuesday for the Labor Day holiday.



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