By Becky Yerak 

Exposure to drug companies with potential liabilities stemming from widespread opioid addiction is damaging investment returns at several money managers as pain from the national drug crisis spreads.

So far this month, at least five mutual-fund companies have told investors that their holdings in businesses with connections to opioid painkillers have detracted from overall returns, making money managers one of the latest sectors to feel the effects of growing attention on the addiction problem.

The number of annual shareholder reports mentioning opioids as business risks has more than tripled since 2011 and now appear beyond health-care companies, said Nick Mazing, research director at investment research platform Sentieo Inc. Walmart Inc., which operates pharmacies, began disclosing exposure to opioid-related litigation as a risk in early 2018, and insurance company Travelers Cos. Inc. began doing so earlier this year.

So far this year, 55 companies mention opioids in the risk-factor section of their annual shareholder reports filed with the Securities and Exchange Commission, Mr. Mazing said, up from 41 last year and 37 in 2017.

More than 2,000 lawsuits have been brought by U.S. states, municipalities, Native American tribes and others accusing major players in the pharmaceutical industry of driving addiction, making them targets for negative bets on Wall Street. Drugmakers Purdue Pharma LP, Mallinckrodt PLC and Endo International PLC are among those named in many of the lawsuits, which seek to recover past profits to cover communities' costs in treating addicts.

Purdue and its owners, the Sackler family, have been negotiating settlement terms with state and local governments that have accused the company of misrepresenting addictive risks of its OxyContin painkiller and aggressively marketing the drug to doctors. Purdue has gotten support from 23 states and thousands of local governments for a multibillion-dollar deal to resolve much of the opioid litigation through a bankruptcy filing, though the situation is still fluid.

While some investors see the risks of big settlement payouts from these companies as manageable, others have been burned.

Miller Value Partners LLC said last week that its Miller Opportunity Trust fund had a "lackluster" performance in a recent six-month period, mainly because of one mistake -- "too much exposure" to Endo, Mallinckrodt and Israeli drugmaker Teva Pharmaceutical Industries Ltd.

Miller Value said it invested in those shares for different reasons, including the quality of management or promising new strategies, though all of the stocks were considered cheap.

"We considered the prospective opioid liabilities but judged them manageable," Miller Value said in its semiannual report for the period ending June 30. "We didn't anticipate just how myopically focused the market would become on this point, which was our main error."

Miller Value said it hopes the stocks perform similarly to Bank of America Corp.'s shares after the financial crisis. The bank's stock sank below $5 in 2011, even after Warren Buffett became a major investor. The following year, Bank of America turned out to be one of Miller Value's best performers.

In an interview Wednesday, Samantha McLemore, a Miller Value portfolio manager, noted that Endo stock over the past week has gone from the $2 range to the $4 range. It had also ended June in the $4 range.

Ohio National Fund said last week that Teva had detracted from a foreign-stock portfolio's returns, saying the shares slumped after the settlement of an opioid-related lawsuit.

Penn Series Funds Inc., an affiliate of Penn Mutual Life Insurance Co., also said its Teva stockholdings in a midcap value fund were "decimated" by a renewed focus on opioid litigation.

Teva shares are currently trading around $29. Its year-to-date high was about $73 in January, and its low was about $22 last month.

Other investment firms that said their portfolios got dinged because of their holdings in opioid-related companies in the period ended June 30 include American Funds Insurance Series, which is affiliated with Capital Research & Management Co., and Franklin Templeton Investments, according to regulatory filings.

Write to Becky Yerak at becky.yerak@wsj.com

 

(END) Dow Jones Newswires

September 13, 2019 08:14 ET (12:14 GMT)

Copyright (c) 2019 Dow Jones & Company, Inc.
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