Kroger CFO: $1.4B settlement resolves ‘substantially all opioid lawsuits and claims’

Overshadowed by news of its big divestiture deal with C&S Wholesale Grocers, The Kroger Co. has reached a $1.4 billion settlement with states for most pending claims that its pharmacies overprescribed opioid painkillers.

Under the agreement in principle, Kroger is slated to pay up to $1.2 billion to states and subdivisions and $36 million to Native American tribes in funding for abatement efforts and about $177 million to cover attorney fees and costs. The abatement funds would be paid out over 11 years and the legal costs over six years, both in equal installments.

Cincinnati-based Kroger, which reported the opioid settlement on Friday with its second-quarter earnings, said the payments over an extended time period would result in an after-tax net present value of around $870 million. Plans call for initial payments to start this December.

In a Friday conference call on Q2 results, Kroger Chief Financial Officer Gary Millerchip told analysts that the nationwide opioid settlement framework will “settle substantially all opioid lawsuits and claims against Kroger.” The company took a $1.4 billion charge in the quarter, which led to a loss per share of $1.54.
 
“This settlement is not an admission of wrongdoing or liability by Kroger, and Kroger will continue to vigorously defend against any other claims and lawsuits relating to opioids that the final agreement does not resolve,” Millerchip said in the call. “We believe that resolving these claims is in the best interest of Kroger and its customers, associates and shareholders and all of those affected by the opioid crisis.” (Call transcript provided by AlphaSense.)

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States, subdivisions and Native American tribes can opt-in to participate in the settlement, and Kroger said it will have “full discretion” to determine if there’s enough participation for the settlement to become effective. The company stated that, if all conditions are satisfied, the settlement would “allow for the full resolution of all claims on behalf of participating states, subdivisions and tribes.” Pretax payments would total about $140 million per year for the first six years and $110 million per year for the ensuing five years.

“Additionally, this settlement and the payment terms will not affect Kroger’s ability to complete its proposed merger with Albertsons,” Millerchip noted in the analyst call.

CFRA Research analyst Arun Sundaram wrote in a research note on Friday that Kroger’s Q2 charge of $1.4 billion to settle all opioid-related claims is “following the likes of many other retail pharmacy chains.”

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Likewise, the $140 million and $110 million payments to be made by Kroger over the next 11 years are “manageable figures,” according analyst Carol Levenson of independent corporate bond research firm Gimme Credit LLC.

“The settlement, far smaller than those negotiated by the major drug store chains, likely reflects pharmacy sales comprising only 9% of Kroger’s annual revenues, or about $14 billion in 2022,” Levenson said in a research note on Tuesday. “Considering that Kroger never disclosed any opioid lawsuits before 2021, it has reached a relatively swift and painless settlement and can move on. Albertsons has also been sued and has only settled with two states for $22 million thus far, paid by its insurers.”

At issue in the opioid lawsuits is a dilemma faced by pharmacists when dispensing controlled-substance painkillers: Deciding whether not filling potentially illicit opioid prescriptions—those suspected of drug abuse or diversion by the patient—interferes with the medical decisions of doctors licensed the prescribe these medicines.

Retail pharmacists have helped fight the opioid crisis by informing patients about the risks of the medications and refusing to fill opioid scripts deemed problematic. Pharmacies also have worked with authorities to block questionable doctors from having their opioid prescriptions filled and aided law enforcement in cracking down on such physicians.

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Overall, Kroger operates 2,253 supermarket pharmacies. The retailer described its national settlement framework as an “important milestone” in the company’s efforts to resolve pending opioid litigation and support abatement efforts. Kroger added that it has “long served as a leader in combatting opioid abuse and remains committed to patient safety.”