McKesson Board Can't Dodge Opioid Shipment `Red Flags' Suit

(Bloomberg) -- Some McKesson Corp. directors must face an investor lawsuit accusing them of failing to honor promises to ensure internal systems for spotting suspicious opioid shipments functioned properly.

Two shareholders of the San Francisco-based company can press claims the distributor’s board was asleep at the switch when it came to overseeing such shipments after a 2008 settlement spawned by the firm’s inept monitoring of the painkillers, a federal judge in Oakland, California, ruled.

The suit raises legitimate questions about whether directors ignored “multiple red flags” about opioid shipments even after agreeing to step up compliance oversight as a result of a deal with the government, U.S. District Court Judge Claudia Wilken wrote in a May 14 order. She also threw out claims against three directors and dismissed insider-trading allegations.

The ruling comes as McKesson faces a wave of suits from states, cities and counties that say it contributed to the U.S. opioid epidemic by failing to half suspiciously large shipments of the painkillers to pharmacies to boost profits. Florida Attorney General Pam Bondi became the latest to sue the company Tuesday.

Kristen Hunter Chasen, a McKesson spokeswoman, had no immediate comment Tuesday on the judge’s decision to allow the investor suit to proceed. The company faces a similar suit in state court in Delaware.

Regulator Oversight

Last month, a McKesson board committee cleared directors and senior executives of wrongdoing in connection with oversight of opioid shipments, finding they “placed great emphasis on compliance, encouraged ethical conduct” and improved the company’s opioid-monitoring processes.

The investor lawsuit takes aim at six current and former executives and directors who were at the nation’s biggest drug distributor as the opioid epidemic intensified. McKesson Chief Executive Officer John Hammergren is named as a defendant.

Over the past decade, the company twice settled with regulators over accusations it didn’t have proper systems in place to catch illegitimate orders of painkillers. McKesson has faced questioning from congressional committees about allegations it flooded small West Virginia towns with opioids.

In her 41-page ruling, Wilken said the 2008 settlement McKesson reached with the government over its opioid oversight miscues put the company “on notice that there were serious issues with respect to their compliance with controlled substances laws.”

Investors produced evidence showing the board paid scant attention to the compliance issues for several years after reaching the deal with the government, the judge said. That forced the company to pay $150 million in fines as part of another settlement in 2017 over its mishandling of opioids.

It will be up to a jury to decide whether directors “consciously decided” to ignore their oversight responsibilities and should be held accountable, Wilken added.

The judge also allowed the investors to proceed with claims that directors erred in awarding large compensation packages to Hammergren and other executives even though the company failed to properly monitor opioid shipments.

Disgruntled shareholders said Hammergren raked in a total of $692 million in salary and bonuses since the company settled the compliance claims in 2008. Even after the company was forced to settle again over the issue, directors refused to claw back some of the CEO’s pay, investors said.

The awards granted to Hammergren and other executives, “in the same years as McKesson’s continuing and major legal violations, are so disproportionately large that they may plausibly reach the level of unconscionability,” the judge wrote.

The case is In Re McKesson Corporation Derivative Litigation, 17-cv-01850, U.S. District Court, Northern District of California (San Francisco).

©2018 Bloomberg L.P.

Bloomberg
Stay Updated With OnWeb News On BloombergQuint