McKesson Board Minutes Indicate Little Oversight by Directors of Opioid Operations, Lawsuit Says

By and | December 11, 2017

McKesson Corp.’s board failed to audit the company’s system to spot suspicious shipments of opioid-based painkillers even after agreeing to do so as part of a settlement, according to a summary of board minutes unsealed Friday in a shareholder lawsuit.

The suit, filed in October, alleges that McKesson directors paid scant attention to oversight of opioid sales after a 2008 settlement centering on the company’s insufficient monitoring of such shipments. The directors also disclaimed any responsibility for the growing opioid epidemic, seeing it as a “matter of public policy to be addressed by the federal and state governments,” the investor said in another unsealed portion of the complaint.

Delaware Chancery Judge Sam Glasscock III ordered the entire complaint to be made public, including excerpts of minutes from board and audit committee meetings, after large sections were filed confidentially.

The lawsuit takes aim at 10 current and former executives and directors who were at the nation’s biggest drug distributor as the opioid epidemic intensified. Painkillers claim a life every 19 minutes, according to the U.S surgeon general, and McKesson faces dozens of suits from cities, counties and states over shipments of such drugs.

“With this new disclosure, pressure is now squarely on the special independent committee to clean house, otherwise shareholders are going to take matters into their own hands,” Ken Hall, general secretary-treasurer for the International Brotherhood of Teamsters, a McKesson investor, said in a statement. “It is patently clear this board has failed its shareholders, its employees and the American public.”

Overseeing Compliance

The defendants include Andy Bryant, Wayne Budd, Alton Irby, Marie Knowles and Jane Shaw, who have all served on the board’s audit committee, which is responsible for overseeing compliance with regulators and efforts to control and mitigate risk. Former director David Lawrence, Chief Executive Officer John Hammergren, former General Counsel Lauren Seeger, lead independent director Edward Mueller and M. Christine Jacobs, the board’s longest-serving member, are also defendants. Last month, the group filed a motion to dismiss the case.

The claims “are unproven allegations, not judicial determinations of fact,” McKesson spokeswoman Kristin Hunter Chasen said in an emailed statement. “The complaint contains numerous defects, which we will address through the legal process.”

The lawsuit, filed by lawyers for McKesson shareholder Chalie Steinberg, says otherwise. The complaint notes federal prosecutors started investigating the drug distributor in 2005 over its filling of suspicious opioid orders from illegal internet pharmacies.

Suspicious Orders

Prosecutors alleged McKesson filled orders for online pharmacies even though the firms didn’t require patients to have valid prescriptions and also sent suspiciously large shipments to regular pharmacies and clinics. Federal law requires drug distributors to report orders of unusual size or frequency, or that deviate from a buyer’s usual pattern, to the Drug Enforcement Administration.

“As a result, millions of dosage units of controlled substances were diverted from legitimate channels of distribution,” the plaintiff alleged in the complaint.

On May 2, 2008, McKesson agreed to pay $13.3 million to settle the allegations and to strengthen its controls by implementing a three-tiered system that would flag buyers who exceeded monthly thresholds for opioids, without admitting or denying wrongdoing.

Those promises weren’t kept, the plaintiff said. Five months after the 2008 settlement, the board’s audit committee was notified of “serious deficiencies” in its system to spot suspicious opioid shipments, according to the newly unsealed passages. Some customers hadn’t yet been assigned thresholds for large orders that would trigger a review, and there was insufficient documentation to back up decisions to alter such limits for existing customers, according to a summary of findings by McKesson’s internal auditors.

‘Foot Traffic’

Still, the board didn’t discuss the compliance system or request another review until 2013, the summary of meeting minutes shows. By then, inspections of some of McKesson’s distribution facilities in 2013 found the company “did not fully implement or adhere to its own” compliance program, the plaintiff has claimed.

Employees repeatedly ignored suspicious orders, even those from pharmacies that had triggered the 2008 probe, according to the complaint. McKesson would honor pharmacies’ requests for increased shipments of opioid painkillers based on rationales such as “more foot traffic” or more business on holidays.

In 2013, the DEA subpoenaed records of shipments from McKesson warehouses, regulatory filings show. By 2014, U.S. attorneys from across the country were investigating the company’s distribution of painkillers.

The findings forced McKesson to admit that it failed to report certain opioid shipments to the DEA and sign another settlement with the government this year that included tougher and verifiable compliance responsibilities, as well as a $150 million fine.

Large Quantities

The company’s $198.5 billion in annual revenue last fiscal year was fourth-highest among U.S. businesses and more than Exxon Mobil Corp.’s, data compiled by Bloomberg show. Its profit topped $5 billion. Drug distributors purchase large quantities of drugs from manufacturers and sell them to dispensers such as pharmacies and hospitals. McKesson and rivals AmerisourceBergen Corp. and Cardinal Health Inc. ship the vast majority of all drugs in the U.S.

McKesson shares climbed 1.8 percent to $152.66 at 12:10 p.m. in New York. The stock has gained 8.8 percent this year, trailing the 20 percent advance for the 62-company S&P 500 Health Care Index.

Earlier this year, McKesson said it will appoint an independent chairman whenever Hammergren steps down as CEO, after a Teamsters proposal to split the roles received 40 percent support in a shareholder vote.

The case is Steinberg v. Bryant, 2017-0736, Delaware Court of Chancery.