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Opioid Lawsuits Loom Over Walgreens Leveraged Buyout

November 9, 2019

Potentially large settlements by Walgreens Boots Alliance could play into any decision of private equity firms to finance a leveraged buyout of the global drugstore chain.

Drug makers, pharmacy chains, distributors and other healthcare companies involved in the production, sale and distribution of opioids may have reason to fear big payouts to settle cases after an Oklahoma judge’s ruling earlier this year ordered Johnson & Johnson to pay $572 million for its role in that state’s opioid crisis. And just last month, three distributors including AmerisourceBergen agreed to pay $215 million to two Ohio counties and avoid the first federal opioid trial that was scheduled to begin, a New York Times report said.  Walgreens owns 27% of AmerisourceBergen, according to its most recent 10K filing with the Securities & Exchange Commission.

There have been other settlements as well and some also in the works that could result in healthcare companies paying large settlements and perhaps be part of a potential “tobacco-style master settlement agreement.” Some industry observers believe the size of the opioid settlements could reach the more than $200 billion paid by tobacco companies from their landmark 1998 master settlement as cities and states continue to litigate cases against drug makers, pharmacy chains and distributors.

Walgreens has said it is a “defendant in numerous litigation proceedings relating to opioids,” the company has disclosed.

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A report earlier this week from Ann Hynes, managing director at Mizuho Securities USA, mentioned Walgreens potential exposure to opioid litigation as figuring into a potential leveraged buyout of the giant drugstore chain.

“Our initial LBO price target range is $60-$67,” Hynes wrote in response to media reports that Walgreens was contemplating a leveraged buyout that would take the company private. “The two greatest swing factors in our analysis are how much equity a potential sponsor would likely need to invest (we are assuming 40% equity/60% debt) and, more importantly, proforma leverage assumptions (we assume 6.0x at the high-end, 5.5x at the low-end). Given the headwinds in the industry including declining EBITDA, continued reimbursement pressure, (Walgreens) U.K. exposure and the company’s potential exposure to the opioid litigation, we think it is highly unlikely private equity would leverage higher than 6.0x.”

Walgreens has made no comment regarding whether an LBO was in the works. And Walgreens had no further comment when reached Thursday.

Healthcare companies the size of Walgreens have varying degrees of flexibility in dealing with opioid cases and potential settlements, industry analysts say.

“US healthcare opioid settlements will vary widely across companies due to the difference in the level of promotion and involvement in manufacturing and distribution of opioids, but both the amount and timing of payments will factor into credit implications,” Fitch Ratings said in a report last month. “We believe companies are increasingly inclined to settle in order to eliminate the negative overhang of drawn out litigation. However, whether settlements are satisfied with lump sum debt-financed payments or amortized over time via cash charges may result in materially different effects on financial and business profiles.”–walgreens-lbo/#2bb173c46d88

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