Financial Times Europe - 26.08.2019

(Axel Boer) #1
8 ★ FINANCIAL TIMES Monday26 August 2019

COMPANIES


HANNAH KUCHLER— NEW YORK
The reputation ofJohnson & Johnsonis
in the dock in Oklahoma where a judge
is expected to rule today over claims
that it sowed the seeds of the US opioid
crisis.
It will be the first verdict on whether
the world’s largest healthcare com-
pany’s sales of opioids and raw materials
contributed to an epidemic described
by the Oklahoma attorney-general in
his opening remarks as the “worst man-
made public health crisis in the history
of this country and this state”.
He is seeking up to $17bn to cover the
cost of treatment, healthcare and crimi-
nal justice bills.
J&J — best known for consumer prod-
ucts such as “no more tears” baby sham-

poo — owns the Janssen pharmaceuti-
cals business that sold two prescription
opioids. Until 2016, it also owned units
that farmed poppies and supplied the
raw material to opioid makers including
Purdue Pharma.
“J&J’s whole public persona and repu-
tation is built as ‘family friendly’ and
‘we care about your health’,” said Carl
Tobias, a law professor at the Richmond
School of law. “So they couldn’t really
admit any of their products injure peo-
ple. They will appeal until they can’t
appeal any more.”
The verdict comes as negotiations are
under way that could lead to a settle-
ment which many have compared to the
$206bn deal with tobacco companies in
the 1990s. The defendants — up to 22
opioid makers, distributors and phar-
macies — are trying to establish a class
that could enter talks with the almost
2,000 municipalities pursuing them.
Even if those cases settle, the majority
of states will still fight forcompensation
from opioid makers.

If J&J loses today, it could open the
door to more cases against the company
and push others to settle sooner.
While Purdue Pharma isconsidering
bankruptcyand fellow opioid maker
Insys has alreadyfiled for Chapter 11,
J&J’s much deeper pockets make it an
attractive target for legal action.
Shares in J&J fell in May when the trial
opened. Thepotential legal billsfrom
opioid cases come as the company is
battling lawsuits that claim its talcum
powder caused cancer, which the com-
pany denies.The talc casesthat J&J have
lost have had their verdicts overturned
or are awaiting appeal.
If J&J wins, it may not be a true bell-
wether for the other cases. J&J’s opioid
products only had a small market share
in Oklahoma and the state is pursuing
them purely on a “public nuisance”
claim, whereas some other cases are
relying on claims such as fraud.
J&J — which has a reputation as a
tough litigator — was the only company
in the dock afterPurdue Pharma,

owned by certain members of the
Sackler family, settled with Oklahoma
for $270m andTeva, an Israeli drug-
maker, settled for $85m.
Elizabeth Burch, a professor at the
University of Georgia School of Law,
said: “This is the first shot so everyone is
looking at it to see how it goes — what it
tells us about future lawsuits. But it is a
pretty narrow case — it is just about J&J
now Purdue and Teva settled out.”

Legal experts are divided on the likely
success of Oklahoma’s central claim
that J&J’s sale of opioids and the raw
materials to create opioids caused a
“public nuisance”.
The claim dates back to English com-
mon law and has been used, for exam-
ple, to prosecute people who polluted a
well but it has not been used extensively
in US states.
A public nuisance claim was cited in
the tobacco settlement but it never went
to court. Recently, a North Dakotan
judge dismissed that state’s case against
Purdue using the same legal strategy but
that sets no precedent for Oklahoma’s
law.
John Sparks, Oklahoma counsel for
J&J, said the state’s case relied on “an
unprecedented expansion of public nui-
sance law” that was “misguided” and
“legally unsustainable”.
Alexandra Lahav, a law professor at
the University of Connecticut, said the
claim might be hard to prove because
J&J was a “very small piece of a very big

problem”. Its two opioids accounted for
less than 1 per cent of the opioid pre-
scriptions in the state, so even if they
were mis-marketed, they could hardly
have caused the crisis.
J&J denies they were mis-marketed.
“Not once did the state identify a single
Oklahoma doctor who was misled by a
single Janssen statement, nor did it
prove that Janssen misleadingly mar-
keted opioids or caused any harm in
Oklahoma,” Mr Sparks said.
The state argued that J&J’s previous
ownership of Noramco and Tasmanian
Alkaloids, units which produced the
active pharmaceutical ingredient in opi-
oids and supplied to Purdue and Teva,
made it a “drug kingpin”.
If the state does manage to prove
“public nuisance”, there will be a ques-
tion about how much of the $17bn plan
to abate the problem J&J should pay.
Lawyers for the state argue that
Oklahoma’s law allows it to to pursue
the company for the full bill, even if it
shares responsibility.

Pharmaceuticals.Public health


Johnson & Johnson faces court judgment over opioid crisis


FT REPORTERS

How severe is Germany’s economic
malaise?

The fourth-biggest economy is strug-
gling, with the central bankwarninglast
week that a recession in the third quar-
ter is looking likely. So far, most of the
damage has been concentrated in the
country’s large manufacturing sector,
which is heavily exposed to global trade
tensions and a Chinese slowdown.
Investors will be looking for signs that
the gloom is spreading to the German
consumer, as a raft of data lands includ-
ing snapshots on consumer confidence
on Wednesday, the labour market on
Thursday, and retail sales on Friday.
There are implications for the Euro-
pean Central Bank, which has been clear
insignallingthat an easing package is on
the way in September. The main ques-
tion for markets is the size of it. Mean-
while, any hint the dip in manufacturing
is affecting wider confidence could be
alarming for policymakers.
Analysts at BNP Paribas say they are
expecting a cut in the ECB’s deposit rate
to minus 0.5 per cent and the announce-
ment of a €60bn-a-month bond-buying
programme lasting nine months —
larger than many investors are antici-
pating. “Evidence has mounted that
persistent weakness in the manufactur-
ing sector has started to affect the rest of
the economy, especially in Germany,”
said strategist Marco Meijer. “News flow
since the meeting must only have rein-
forced the central bank’s determination
and sense of urgency for action.”
If the market’s high expectations for
the ECB ramp up further still, the sum-
mer’s massive bond rally could continue
into autumn and the euro could
weaken.Tommy Stubbington

Will Indian GDP numbers continue
a worrying trend?
India watchers are gearing up for the
country’s second-quarter gross domes-
tic product figures, due on Friday.
The numbers will indicate to inves-
tors whether what was until recently the
fastest-growing large economy contin-
ues to slow at an alarming rate. First-
quarter GDP figures, released in May,
showed the growth rate grinding to a
five-year low of 5.8 per cent, falling
behind China. India’s Nifty 50 equity
index has lost 10 per cent since those fig-
ures were released, and other data sug-
gest that the economic picture is getting
worse, not better. For example, passen-
ger vehicle sales have fallen sharply

month after month, dropping almost
one-third in July from a year earlier.
And housing projects launched in the
second half of 2019 have fallen 11 per
cent from the same time last year.
The slowdown has been caused in
part by a crisis in India’sshadow bank-
ingsector, with the high-profile default
of a major non-bank financial company
last year prompting a liquidity squeeze
that has left businesses without capital
for growth and consumers without
ready access to credit.
Ramiz Chelat, a portfolio manager at
Vontobel Asset Management, said the
economy appears to be continuing its
downward trajectory. “Credit is tighten-
ing into [small and medium-sized
enterprises], property developers and
auto dealers, to name a few,” he said.
Benjamin Parkin

Will US inflation continue to
undershoot the Fed’s target?
A little more than a year ago, the Federal
Reserve’s preferred measure of inflation
— core “personal consumption expendi-
ture index” (PCE) — hit the US central
bank’s 2 per cent target after about six

years of undershooting. It was a victory
for the Fed, which had long sought to
shore up inflation following the global
financial crisis, but a brief one. Within
three months, core PCE had slipped
below that threshold and has since
mostly trended down from there.
Amid a deteriorating global growth
backdrop and an escalation in the US-
China trade dispute in March, the infla-

tion gauge fell to a low of 1.48 per cent
from a year earlier.
While core PCE picked up to 1.6 per
cent for the month of June, Fed officials
remain transfixed by the persistent
misses.
In fact, low inflation served as fodder
for Fed chair Jay Powell’s pivot away
from tightening monetary policy — as
he did in December last year — to
authorising a quarter-point reduction in
the benchmark policy rate last month.
On Friday, the US Department of
Commerce releases core PCE for July.
Should inflation weaken further, the
Fed could have further justification to
ease monetary policy aggressively.
As theminutesfrom the Fed’s last
rate-setting committee meeting indi-
cated, officials were divided on not only
the need for a rate cut but the magni-
tude of the move. In fact, several offi-
cials argued against a cut.
Traders are pricing in a 25 per cent
chance that the Fed will slash interest
rates by 50 basis points, according to
Bloomberg data, for a total of 100 basis
pointof cuts by the end of next year.
Colby Smith

Market Questions.Global outlook


Investors sift through gloomy German numbers


while India slows and Fed eyes inflation gauge


The European
Central Bank
has signalled
that an easing
package is on
the way in
September
Alex Kraus/Bloomberg

ALICE HANCOCK— LONDON

UK anti-money laundering laws are
deterring investment in the cannabis
industry in Europe, according to law-
yers and industry executives.

“It’s like a school race. Everyone is wait-
ing to go but no one wants to cross the
line first in case they are disqualified,”
said Alison Saunders, dispute resolution
partner at Linklaters.
The Proceeds of Crime Act (POCA),
the UK’s principal anti money-launder-
ing legislation, rules that anyone mak-
ing money from illegal activities can be
prosecuted. Cannabis is only legal in the
UK as a medicinal drug on prescription
or as cannabidiol (CBD), a non-psycho-
active compound of the plant. Recrea-
tional use of the tetrahydrocannabinol
(THC) compound, which has psychoac-
tive properties, is illegal.
Investors fear that if they back busi-
nesses, such as the large cannabis pro-
ducers in Canada, where recreational
cannabis is legal, they could be prose-
cuted in the UK.
Penalties could include confiscation
of investment proceeds, such as
dividends, or fines and these worries
have also affected investment in CBD
and medical cannabis brands, say
industry executives.
Jonathan Summers,head of UKcan-
nabis company EXMceuticals, said: “In
general, there’s a big fear around POCA

but it’s misunderstood and in some
cases it’s used as an easy excuse to stop
people investing in the [sector] when it’s
probably totally legal.”
In a report published last week by
research firm Prohibition Partners, the
authors warned that offences under
POCA were “broadly drawn and often
unclear”, adding that many looking to
invest were relying on an exception for
conduct that is illegal in the UK but legal
in the country where it takes place.
Prohibition Partners estimates the
cannabis market in Europe will be
worth €123bn by 2028.
“The Home Office needs to make a
policy decision on this,” said Ms Saun-
ders, who added that she had received
“well over a dozen” inquiries about the
issue in the past three months.
The Home Office said that it “sup-
ports law enforcement when potential
criminal activity is identified that
breaches UK law”.
NickDavis, chief executive at special-
ist law firm Memery Crystal,said that
unease about POCA was also delaying
UK listings. “On the listings that we’re
working on, we are doing significantly
more due diligence than we would for an
oil or mining company in the same juris-
diction because of POCA,” he said.
Memery is working with two
companies that hope to be the first
cannabis companies to be listed on a
major UK exchange. MrDavis said that
both were “firmly on the right side of
POCA” but had been delayed by extra
paperwork.
The UK’s National Crime Agency said
it considered applications for excep-
tions to the law through its Suspicious
Activity Report process.

Tobacco


Laundering


laws in UK


hold back


cannabis


investors


Source: Bloomberg

US inflation misses the mark
Core personal consumption
expenditure index, year over year ()











   

Oklahoma judge to decide


whether healthcare group is


culpable in deadly epidemic


Johnson & Johnson, best known for
its consumer products, owns Janssen

‘We are doing significantly


more due diligence than
we would for an oil or

mining company’


DON WEINLAND AND SHERRY FEI JU
BEIJING

A significant source of easy financing for
Chinese companies is coming under
pressure, leaving in its wake a string of
corporate defaults.
Starting in 2015, China’s asset man-
agement industry became a booming
centre for “shadow finance”, lending
outside the formal banking sector.

Banks, securities houses and trust
companies were able to raise cash from
wealthy investors and structure lending
products through accounts at asset
management companies.
Loans linked to asset management
companies and structured finance
products called asset management
plans became hugely popular.
By the end of March, securities com-
panies had Rmb1.99tn ($280bn) in
funds linked to asset managers that had
been lent out through such arrange-
ments, according to the Asset Manage-
ment Association of China.
Meanwhile, global asset managers

have been allocating more money than
ever to Chinese stocks and fixed income
products. But after several years of
abundant credit and easy refinancing,
the environment has changed.
Recognising a build-up in lightly regu-
lated, high-risk lending that was occur-
ring in the industry, the government
cracked down on the asset management
lending last year. That, along with an
overall tightening in credit starting in
2018, has forced many companies to
default on the structured loans.
“At the peak time, when the asset
management companies developed the
fastest due to the high liquidity of the

market, they invested a lot of money in
high-risk companies,” said Ivan Chung,
an associate managing director at
Moody’s. “Now it has become a vicious
circle. The weaker corporates do not
have enough cash flow to repay their
debts, leading to their capital chains
being brokenand to these defaults.”
Most defaults on such products do not
require public disclosure because they
are not publicly traded securities.
However, in several severe cases, such
as a Rmb2bn default atLianchu Securi-
tiesearlier this year, investors have
become vocal about mounting losses,
with sometaking to social media.

Groups such as property developer
Zhonghong Zhuoyehave defaulted on
multiple loans from different securities
houses and trust companies. Zhong-
hong, which once owned a controlling
stake inSeaWorld Entertainment, used
the borrowings to buy assets overseas
but has since been forced to sell them off.
“This was [China’s] attempt at struc-
tured finance but it has backfired,” said
a Beijing-based investment banker
familiar with the financing structure.
Defaults on the complex products are
expected to continue this year and could
intensify if money market rates rise,
experts warned.

Financials


Defaults on China structured loans mount


Beijing’s crackdown


on asset management
lending takes toll

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RELEASED BY "What's News"


by the Oklahoma attorney-general in

RELEASED BY "What's News"


by the Oklahoma attorney-general in
his opening remarks as the “worst man-

RELEASED BY "What's News"


his opening remarks as the “worst man-
made public health crisis in the history

RELEASED BY "What's News"


made public health crisis in the history
of this country and this state”.

RELEASED BY "What's News"


of this country and this state”.
He is seeking up to $17bn to cover the

RELEASED BY "What's News"


He is seeking up to $17bn to cover the
cost of treatment, healthcare and crimi-

RELEASED BY "What's News"


cost of treatment, healthcare and crimi-
nal justice bills.

RELEASED BY "What's News"


nal justice bills.
vk.

nal justice bills.
vk.

nal justice bills.
J&J — best known for consumer prod-J&J — best known for consumer prod-vk.

com/w

He is seeking up to $17bn to cover the

com/w

He is seeking up to $17bn to cover the
cost of treatment, healthcare and crimi-
com/w

cost of treatment, healthcare and crimi-
nal justice bills.nal justice bills.com/w
J&J — best known for consumer prod-

com/w
J&J — best known for consumer prod-

snws

of this country and this state”.
snws

of this country and this state”.
He is seeking up to $17bn to cover theHe is seeking up to $17bn to cover thesnws

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his opening remarks as the “worst man-

TELEGRAM: t.me/whatsnws

his opening remarks as the “worst man-
made public health crisis in the history

TELEGRAM: t.me/whatsnws

made public health crisis in the history
of this country and this state”.

TELEGRAM: t.me/whatsnws

of this country and this state”.
He is seeking up to $17bn to cover the

TELEGRAM: t.me/whatsnws

He is seeking up to $17bn to cover the
cost of treatment, healthcare and crimi-

TELEGRAM: t.me/whatsnws

cost of treatment, healthcare and crimi-
nal justice bills.

TELEGRAM: t.me/whatsnws

nal justice bills.
J&J — best known for consumer prod-

TELEGRAM: t.me/whatsnws

J&J — best known for consumer prod-
ucts such as “no more tears” baby sham-

TELEGRAM: t.me/whatsnws

ucts such as “no more tears” baby sham-
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