Drug companies seek billion-dollar tax deductions from opioid settlement

https://www.washingtonpost.com/business/2021/02/12/opioid-settlement-tax-refund/?arc404=true

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Four companies that agreed to pay a combined $26 billion to settle claims about their roles in the opioid crisis plan to deduct some of those costs from their taxes and recoup around $1 billion apiece.

In recent months, as details of the blockbuster settlement were still being worked out, pharmaceutical giant Johnson & Johnson and the “big three” drug distributors — McKesson, AmerisourceBergen and Cardinal Health —all updated their financial projections to include large tax benefits stemming from the expected deal, a Washington Post analysis of regulatory filings found.

In one example, Dublin, Ohio-based drug distributor Cardinal Health said earlier this month it planned to collect a $974 million cash refund because it claimed its opioid-related legal costs as a “net operating loss carryback” — a tax provision Congress included in last year’s coronavirus bailout package as a way of helping companies struggling during the pandemic.

The deductions may deepen public anger toward companies prosecutors say played key roles in a destructive public health crisis that kills tens of thousands of Americans every year. In lawsuits filed by dozens of states and local jurisdictions, public officials have argued that the companies, among other corporate defendants, flooded the country with billions of highly addictive pills and ignored signs they were being steered to people who abused them.

Under the terms of the proposed settlement — which is being finalized and will ultimately be subject to federal court approval — the four companies would pay between $5 billion and $8 billion each to reimburse communities for the costs of the health crisis. Plaintiffs who support the proposal say it will resolve a highly complex litigation process and make funds available to communities and individuals still struggling with addiction.

Others including Greg McNeil, whose son became addicted to opioids and died from an overdose, have said $26 billion is only a small fraction of the epidemic’s financial toll and argue the proposal doesn’t include what many family members of opioid victims want the most: an admission of guilt.

All four firms disavow any wrongdoing or legal responsibility. The companies have said they produced government-approved prescription pills, distributed them to registered pharmacies and took steps to try to prevent their misuse.

U.S. tax laws generally restrict companies from deducting the cost of legal settlements from their taxes, with one major exception: Damages paid to victims as restitution for the misdeeds can usually be deducted. Still, Congress has placed stricter limits on such deductions in recent years, and some tax experts say the Internal Revenue Service could challenge the companies’ attempts to deduct opioid settlement costs.

Harry Cullen, a Brooklyn-based activist who has worked to hold drug companies accountable for the epidemic, said it is “incredibly insulting” that companies would try deduct the settlement payments. “As if they are donating it to these people who they harmed in the first place.”

Erich Timmerman, a spokesman for Cardinal Health, said in a statement that the company’s tax deductions are permissible under federal law. He also pointed to a statement chief executive Mike Kaufmann made in November, when he said Cardinal takes its role in the pharmaceutical supply chain seriously and remains “committed to being part of the solution to this epidemic.”

AmerisourceBergen declined to comment on its taxes but said in a statement the company takes steps to mitigate the diversion of prescription drugs, including by refusing service to customers it sees as a risk and by making daily reports to federal drug officials.

Johnson & Johnson declined to comment on the opioid settlement and tax deductions beyond its regulatory filings.A spokeswoman for McKesson did not respond to multiple requests for comment.

Cardinal Health’s use of the “carryback” tax break draws attention to what some see as a shortcoming of the $2 trillion U.S. coronavirus bailout known as the Cares Act. In their haste to funnel cash benefits to businesses facing economic peril, lawmakers made billions of dollars in tax breaks broadly available to any company, regardless of whether it suffered during the pandemic.

Cardinal, a company with a $15 billion market capitalization and $4 billion in available cash, surpassed Wall Street expectations for its most recent earnings period. Last week, CEO Kaufmann told investors a rebound in medical treatments and procedures had revived demand for Cardinal’s health devices and drugs. He said the company was boosting its investment in sophisticated supply-chain technology.

On the same day, Cardinal said it was filing for a tax break using the Cares Act provision and expected a nearly $1 billion cash refund from the IRS within the next 12 months. The company plans to pay $6.6 billion in the settlement.

Francine J. Lipman, a tax professor at the University of Nevada at Las Vegas, said Cardinal Health appears to be “getting a bit of a windfall from laws that Congress intended to help companies that are suffering due to a pandemic.”

The “carryback” tax break permits any company that lost money in 2018, 2019 or 2020 to apply those losses to previous, more profitable years. Some form of this provision has been permitted by the U.S. tax code for over a century to help businesses that face ups and downs to even out their taxes.

The Cares Act raised the limit on the amount of losses companies can use to offset taxes and permitted them to apply those losses to earlier periods. Because the corporate tax rate was higher before 2018, companies with recent losses can increase tax refunds they received before that year by up to 67 percent.

Cardinal estimated in August it expected to deduct $488 million from the expected opioid legal settlement. But in its Feb. 5 filing, the company said the amount probably would be higher in part because the Cares Act permitted it to carry back losses related to the opioid litigation to previous years when the tax rate was higher.

UNLV’s Lipman said Cardinal’s decision to apply for a tax refund before any legal settlement has been finalized could face scrutiny from the IRS. Deductions must be made against business expenses that are shown to have “economic effect,” she said, which may preclude deductions against future, unpaid legal settlements.

Timmerman, Cardinal’s spokesman, said the company has already recorded a loss related to the opioid litigation because Cardinal insures itself through a wholly-owned insurance subsidiary. The opioid litigation caused a loss to the insurance company’s reserve, and that is the loss that Cardinal is deducting, he said.

“Tax and accounting rules applicable to insurance companies, including self-insurance companies, require recognition of loss when an insurance reserve is set, thus establishing economic effect, even if the underlying settlement is not final,” Timmerman said.

The three other companies involved in the $26 billion settlement have estimated the tax benefits of the deal but have not filed for tax refunds. They all said the tax benefits could be lower if courts or regulators determined some or all of the payments are not tax-deductible.

McKesson, which expects to pay $8.1 billion in the settlement, said in a Feb. 2 filing that the actual cost of the deal would be $6.7 billion after taxes, implying a $1.4 billion tax benefit. The company also said $497 million in tax benefits were “uncertain” because of the “uncertainty in connection with the deductibility of opioid related litigation and claims.”

AmerisourceBergen, which anticipates a $6.6 billion settlement payment, said in November it expects a $1.1 billion tax benefit. The company said an additional $371.5 million tax benefit was possible but “uncertain.”

“A settlement has not been reached, and, therefore, we applied significant judgment in estimating the ultimate amount of the opioid litigation settlement that would be deductible,” the company said.

Matthew Gardner, a senior fellow at the nonprofit Institute on Taxation and Economic Policy, said these disclaimers suggest the companies are making conservative estimates. “That’s one way of saying they are likely going to claim even bigger tax benefits in their tax returns than they are showing on their financial statements,” he said.

Whether the payments will be deductible may hinge on specific word choices in the final terms of the settlement. Though recent changes to the tax code have attempted to close loopholes that permit companies to deduct taxes when they have committed wrongdoing, many companies now push to make sure their settlements include a “restitution” payment for victims — the “magic word” that often qualifies them for deductions, Gardner said.

In previous opioid-related settlements local governments reached with McKesson, Purdue Pharma and Teva Pharmaceuticals, the companies admitted no fault and agreed to restitution payments that appeared to qualify them for tax deductions, USA Today reported in 2019.

Johnson & Johnson has said it expects it could deduct as much as 21.4 percent of its $5 billion share of the settlement, which would mean a roughly $1.1 billion tax benefit. However, the company said last summer that the deductible amount may be lower if a regulation proposed by the IRS last year came into effect.

The rule, which did take effect Jan. 20, requires companies to meet a long list of specific criteria to qualify government settlements for tax deductions.

Faces on pills are seen at the Provocative Opioid Memorial in 2018 in Washington, D.C. There are 22,000 pills that represent the number of people who died of an opioid overdose in 2015. 

In 2019, The Post analyzed a database maintained by the Drug Enforcement Administration that tracks the path of every pain pill sold in the United States. The database shows that America’s largest drug companies distributed 76 billion oxycodone and hydrocodone pain pills across the country between 2006 and 2012 as the nation’s deadliest drug epidemic spun out of control.

McKesson, Cardinal Health and AmerisourceBergen distributed 44 percent of the nation’s oxycodone and hydrocodone pills — the two most abused prescription opioid drugs — during that time.

An investigation by The Post last year found that near the peak of U.S. opioid production, a Johnson & Johnson subsidiary was manufacturing enough oxycodone and hydrocodone to capture half or more of the U.S. market. The company also lobbied for years to help persuade regulators to loosen a narcotics import rule, allowing Johnson & Johnson’s U.S. subsidiary to produce rising amounts of opioids out of potent poppies harvested by its Tasmanian subsidiary, The Post found.

Attorneys for Johnson & Johnson have said its opioid-producing subsidiaries did not cause the United States’ addiction crisis, that the companies were heavily regulated, and that such companies play only a “peripheral role in the multibillion-dollar market for prescription opioids.”

Drug companies seek removal of judge in landmark opioid case

https://www.washingtonpost.com/health/drug-companies-seek-removal-of-judge-in-landmark-opioid-case/2019/09/14/1609f69a-d6f6-11e9-9343-40db57cf6abd_story.html?wpisrc=nl_most&wpmm=1

Drug companies facing more than 2,000 lawsuits over their alleged roles in the opioid epidemic demanded Saturday that the federal judge overseeing the case step aside, questioning his impartiality because he has consistently urged both sides to settle the case.

The request comes after a series of rulings against the companies by U.S. District Judge Dan Aaron Polster in the landmark trial slated to begin Oct. 21.

“Defendants do not bring this motion lightly,” the lawyers wrote in a filing Saturday morning on behalf of some of the nation’s biggest drug distributors and retailers but no drug manufacturers. “Taken as a whole and viewed objectively, the record clearly demonstrates that recusal is necessary.”

The lawyers contended Polster has overstepped his authority and created the appearance of bias. They cited his statements since the beginning of the case encouraging settlement so that money for badly needed drug treatment and other services could go quickly to communities hard hit by the opioid epidemic.

With just two counties “seeking $8 billion in cash for so-called ‘abatement,’ the Court has determined that it, not a jury, has the discretion to decide how much money defendants may pay to government agencies for medical treatment and other addiction-related services and initiatives,” the drug companies wrote.

Polster could not be reached for comment. A telephone call to his assistant Saturday went unanswered.

Lawyers for the more than 2,000 cities, towns, counties and tribal communities suing the drug industry called the attempt to remove Polster a desperate move. The lead plaintiffs’ lawyers said in a statement they “remain confident the judiciary will swiftly respond to yet another attempt by the opioid defendants to delay the trial.”

The plaintiffs have demanded the drug companies, including manufacturers, distributors and retailers, pay billions of dollars for the damage they allegedly caused. Since 1999, more than 200,000 people have died of overdoses of prescription narcotics, and another 200,000 have died from overdoses of heroin and illegal fentanyl, according to government data.

Two Ohio counties, Cuyahoga and Summit, are scheduled to begin trial next month as test cases to determine how other plaintiffs and defendants may fare before a jury.

As of now, they would face off against drug distributors McKesson Corp., Cardinal Health, AmerisourceBergen and Henry Schein; manufacturers Johnson & Johnson and Teva Pharmaceuticals; and retail drugstore chain Walgreens.

Two law professors called the defendants’ motion unusual and saw little chance it would succeed.

The law that authorizes large, consolidated cases like this one — known as “multidistrict litigation” — explicitly recognizes that judges would use the opportunity to encourage settlements, said Carl Tobias, a professor at Richmond University School of Law.

“Judges overseeing MDLs are supposed to encourage settlement and most MDLs end with settlements” for the majority of plaintiffs, Tobias wrote in an email.

Alexandra Lahav, a professor at the University of Connecticut School of Law, agreed.

“It is a highly unusual motion and not one that I think can win,” she wrote in an email. “I am not sure what the strategy is behind bringing it, and filing on Saturday, other than public relations.”

She added, however, “I don’t think there is anything wrong with filing a non-frivolous motion to bring attention to an issue and start a conversation. Given the courts’ historic emphasis on settlement, I just don’t see how that conversation goes anywhere.”

This past week, Purdue Pharma, the company most widely blamed for its role in the crisis, announced a tentative settlement with all the municipalities and about half the state attorneys general who have separately sued members of the drug industry in state courts. If finalized, that agreement would remove Purdue from the first trial.

Ohio Attorney General Dave Yost (R), whose state backs the Purdue settlement, also has asked to halt the trial, saying the municipalities should allow states to take the lead in the litigation.

In the lead-up to the trial, Polster denied a series of motions filed by the companies seeking to throw out, or limit, the case against them. Those included a defense motion to dismiss arguments that the drug companies conspired with each other to protect their companies from enforcement actions by the Drug Enforcement Administration.

Polster also rejected a motion to dismiss the plaintiffs’ legal theory that the companies created a “public nuisance” by inundating communities across the nation with enormous amounts of pain pills. And he denied a defense motion to dismiss a strategy to pursue the case under the Racketeer Influenced and Corrupt Organizations Act, originally created to prosecute the Mafia.

This past week, Polster agreed to an unusual plan that would include 30,000 jurisdictions across the United States in any settlement, if they agreed to it. It is aimed at preventing more lawsuits and ensuring that communities everywhere get some money from any settlement.

In their motion, the drug distributors and retail chains said the crucial test is whether a reasonable person would conclude that Polster appeared biased against the defendants.

They cited Polster’s statements inside and outside court “evidencing a personal objective to do something meaningful to abate the opioid crisis, with the funding to be provided through defendants’ settlements,” as well as “numerous improper comments to the media and in public forums about the litigation.”

And they noted Polster’s “apparent prejudgment of the merits and outcome of the litigation and singular focus on, and substantial involvement in, settlement discussions.”

They also protested his decision to limit defendants to 12.5 hours apiece to present their cases during the upcoming trial.

Last month, an appellate court admonished some of the defendants for a legal attack on Polster over an unrelated question. The panel of appellate judges said their claim that Polster’s “assurances are not entitled to our respect because [he] has been deceptive or duplicitous … is a very serious allegation and we find no merit to it.”