The drugs don’t work…

For the 3rd year in a row the life expectancy in the US has declined. Why? A major contributor is the opioid crisis. In the past 20 years it has claimed 400,000 lives in the US and now, in the UK and the US, the odds of dying from an opioid overdose far exceed the odds from dying in a vehicle crash.

Overdose deaths in preceding 12 months

Source: CDC

How has this happened and what can be done about it?
The perfect conditions have been created: Pharmaceutical companies have been using aggressive marketing techniques, mix that with the enthusiasm of certain medical professionals to prescribe, and add in a lack of reporting of suspicious orders by representatives and pharmacies. Suddenly it’s simple to see why ordinary people are becoming addicted to these powerful drugs. For many, what starts as a genuine need for pain relief escalated into full blown addiction and a progression to harder illegal drugs. This is not the first time the pharmaceutical industry has got into hot water over its sales strategies (e.g. see recent article on Insulin prices, here and here.)

What is happening about this?
Currently in the US there are 22 opioid makers, distributors and pharmacies trying to negotiate settlements with 2000 municipalities pursuing them. It is expected that one of the cases being brought in Ohio by means of a “negotiation class” in October will have a significant impact on those negotiations and future legal actions.

Some well-known names have been caught up in all this. Johnson and Johnson was recently ruled as a “public nuisance” by an Oklahoma judge and ordered to pay $572mequivalent to a year’s worth of services needed to combat the epidemic in Oklahoma. Reckitt Benckiser agreed to pay a $1.4bn settlement with the Department of Justice and the Federal Trade Commission over the way a subsidiary marketed a painkiller.

Until recently, you probably wouldn’t have heard of Purdue Pharmaceutical. But as the manufacturer of OxyContin, Purdue is one of the biggest players in this whole situation. The company previously settled with the Department of Justice over aggressive marketing techniques in 2007. Unfortunately, it seems the leopard did not change its spots. Purdue is accused of continuing to market OxyContin as having lower addiction risk than other opioids, with drug salespeople aggressively remunerated.  Purdue owners, the billionaire Sackler family, have found their philanthropic activities increasingly in the spotlight.

A few weeks ago Purdue filed for bankruptcy and established a framework agreement with 27 states to set up a new company that will continue to sell OxyContin but with all proceeds going to the plaintiffs. The Sackler family themselves will have to contribute $3bn cash with the entire settlement being worth somewhere in the region of $10-12bn… albeit with no admission of wrongdoing.

The sums are enormous. But still small in comparison to the estimated total “economic burden” of prescription opioid misuse in the United States.

The estimated cost of Opioid misuse in the US currently sits at a staggering $78.5 billion a year, including the costs of healthcare, lost productivity, addiction treatment, and criminal justice involvement.

About the author

Miranda Beacham is Corporate Governance Manager in the ESG Research team. She is responsible for monitoring, engaging and voting of investee companies in line with our Responsible Investment Policy. She joined us in 1994 as a research assistant in the UK equity team and has 25 years’ industry experience (as at 30 April 2019). Miranda studied Chemistry at Napier University and has the IMC professional qualification.

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‘Just call me Paul….’

I went to a conference recently where a member of one of the UK security agencies was speaking – he couldn’t give his name, no photographs were allowed, no mention on social media and he could not be further than 6 feet away from his laptop at any time. My interest was piqued!

It was like something out of Spooks! Immediately I envisioned shifty characters skulking around in the shadows trying to steal official secrets from hapless civil servants – however, the reality is far from it. While some well publicised leaks come from carelessly leaving laptops in public places, or being photographed with sensitive data on clearly visible paperwork, that’s not the biggest danger. What is? Sophisticated cyber-attacks.

“Paul” regaled us with tales of poor passwords and cyber snooping through family member’s social media along with people plugging in dropped memory sticks to computers. I know, you’ve heard all this before, but there are instances of companies in a takeover process being completely stripped of their intellectual property before a deal is done!

You only have to open the paper to see it. The press is full of worrying data breaches at well-known companies – in the past year we have seen this everywhere, from the financial sector to airlines to supermarkets to the London Tube – investors therefore need to address cyber security with the companies they invest in.

In fact, it’s estimated that sophisticated techniques used by hostile states pass down into organised crime in around 6 years. So it makes sense to listen to the security agencies when they advise us on what we should be asking boards of investee companies. Cyber security is being addressed at a national level both in the UK and US – most recently the US has introduced the US Cybersecurity Disclosure Act requiring listed companies to disclose (in public filings) whether any of the board members are considered to be a cyber security expert.

The discussions we have with boards of the companies we invest in include: how they identify their most valuable assets whether that be physical or intellectual, how they identify the threats to those assets and how they adapt a risk management programme to deal with those threats. We are interested at what level within the organisation these issues are considered at, whether there is sufficient expertise on the board to understand them and how often the company tests their defences and how they learn from incidents.

It’s not perfect; we aren’t able to attend board meetings. However, by addressing this issue with companies when we have the opportunity, we hope it encourages them to start having serious discussions around the board table.

About the author

Miranda Beacham is Corporate Governance Manager in the ESG Research team. She is responsible for monitoring, engaging and voting of investee companies in line with our Responsible Investment Policy. She joined us in 1994 as a research assistant in the UK equity team and has 25 years’ industry experience*. Miranda studied Chemistry at Napier University and has the IMC professional qualification.

*As at 30 April 2019.

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Let’s Talk About Sex

To be honest, the majority of large US and UK boards are still “pale, male (and occasionally stale)”.

In the US, a Harvard Study in 2017 found that the S&P 1500 had only 10% of directors from an ethnic minority. Contrast this with the 2017 US population census, where 42% of the general population classified themselves as non-white. Common sense would suggest that company boards should reflect the general population, but what are the proven benefits of diversity?

According to a McKinsey study in 2018, companies in the top quartile for (a) gender diversity or (b) ethnic and cultural diversity were statistically more likely to experience above-average profitability than companies in the fourth quartile, (21% & 33% respectively). And I’m sure you won’t be surprised to hear, many other studies show similar results.

Harnessing broader diversity of experience, knowledge and skills leads to greater innovation and better decision-making.

Yet despite the benefits being widely heralded, many companies (including the asset management sector) have been slow off the mark in implementing meaningful policies and changing recruitment practices. In the UK, this has led to a variety of regulatory measures to deal with gender diversity.

But what about the companies that Kames invests in? And what about diversity in the broader sense?

At Kames we believe wider diversity is the goal that all companies should be aiming for, but, it can be difficult to measure how truly diverse a company is (due to lack of data). However, in our experience, companies that have good gender-diversity policies in place are generally cognisant of the need for greater diversity as well.

During 2018, we undertook an engagement programme with UK-listed companies that we identified as having poor female representation at board level. Specifically, we wanted to know whether there was a plan to address this issue at board and management level, and how they ensure all forms of diversity throughout the business. We had some very interesting discussions… including conversations with many company Chairmen who are enthusiastically seeking to improve matters.

Certain sectors e.g. technology, engineering and telecoms, suffer with a severe shortage of diverse job applicants at all levels. To address this, companies are reaching out to schools and universities to attract people into their industry at an early age with offers of internships and apprenticeships to a diverse mix of students. Other innovative solutions involved maternity return mentoring and targeted recruitment to attract women back into the workforce (this is a particularly difficult task for companies with employees in places like India for cultural reasons). Sponsorship of training opportunities for people with disabilities and mental health support to ensure good retention rates are other solutions.

The issue of diversity in our investee companies is by no means resolved. However, we were mostly reassured that there is progress being made. It is going to take time to have workforces that are more reflective of the overall population but most of the companies we spoke to had plans in place to get there. And for those who don’t? We will continue to try and push them along.

About the author

Miranda Beacham is Corporate Governance Manager in the ESG Research team. She is responsible for monitoring, engaging and voting of investee companies in line with our Responsible Investment Policy. She joined us in 1994 as a research assistant in the UK equity team and has 24 years’ industry experience*. Miranda studied Chemistry at Napier University and has the IMC professional qualification.

*As at 30 November 2018.

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