The story: Excess inventory of personal protective equipment and COVID-19 tests are cutting into profits for distributors and manufacturers as demand falls. Several companies recently recorded charges related to obsolete inventory or donated excess products.   

Those actions took place when the U.S. vaccination rates were rising, COVID-19 case numbers were falling and demand for PPE was waning. 

As the delta variant causes COVID-19 cases to rise in the U.S., there are signs that demand for PPE is increasing once again. Health care companies are keeping a close eye on case numbers and hope to shift production quickly if demand spikes.

“We are now seeing a deceleration in overall health care demand and are adjusting production, increasing supply to industrial and consumer channels,” 3M CEO Mike Roman said on a conference call. “We are prepared to rapidly increase production in response to COVID-19 related needs or future emergencies.”

The numbers: Cardinal Health recorded a charge of $197 million related to excess PPE last quarter. That charge, reflecting expected drops in demand and prices, was the main reason for a net loss in the company’s medical segment at a time when health care utilization was rebounding. 

“There’s a lot of uncertainties with the pandemic,” Cardinal Health CFO Jason Hollar said on a conference call. “We were, first and foremost, going to put our customer commitments in front of us and that resulted in a higher level of inventory.”

McKesson ran into similar issues. The company donated $155 million of PPE and related products to charitable organizations because it no longer intends to sell them.

In an earnings call, medical device maker BD noted that excess and obsolete COVID testing inventory cut about 1.5% off the company’s operating margins. Device maker Abbott Laboratories recorded $250 million in inventory costs in 2021 as it winds down some of its COVID-19 testing operations.

The threat: Since the end of the second quarter, when most of these inventory charges occurred, the number of COVID-19 cases in the U.S. has increased more than six-fold, reaching more than 100,000 cases per day.  

That’s already causing a rebound in demand for PPE and COVID-19 tests, according to executives from several companies

In the last few weeks, medical distributor Owens & Minor, which didn’t report excess PPE last quarter, saw demand for PPE spike in places like Florida with high hospitalization rates, according to CEO Edward Pesicka. 

“We are seeing that increase in demand for that PPE. But … we’re making the fabric in the United States. We’re finishing PPE all relatively speaking close to where it can be delivered by a truck,” he said on a recent conference call. “So we have been able to flex very quickly as this delta variant has hit.”

BD CFO Christopher Reidy said the company has seen a decline in elective procedures related to the delta variant in some places, but it’s hard to predict how the outbreak will evolve.

“The ability to estimate what testing is going to be next year is very volatile,” he said on a conference call. “Frankly, if you asked me two weeks ago, it would have been a different answer than it is today with the delta variant, and it will be very different in November.”  

CEO Thomas Polen estimated 16 major health systems, mostly located in the South, had significantly reduced elective procedures in recent weeks. 

What’s next? Several companies, including Cardinal Health, McKesson, BD, Abbott Laboratories and AmerisourceBergen, expect health care utilization to generally trend upward this year.

“Utilization will continue to evolve over the rest of the year, but we’re very encouraged by … the utilization that we’re seeing, the patient activity that we’re seeing,” McKesson CEO Brian Tyler said on a conference call. “ We expect that will continue.”

That would mean less demand for PPE and more demand for medical products used in elective surgeries or drugs to treat common ailments like cold and flu. But given the unpredictability of the virus, several companies are keeping the engines primed so they can respond quickly to changes.

Medical device maker 3M didn’t report excess PPE products, but it plans to wind down some of its production capacity to match falling demand. The company says it could rapidly bring that capacity back online if needed. 

“We’ll begin that process … to idle lines to be ready for the next emergency or changes in COVID-19. We can ramp up quickly,” Roman said. “I think we’re in a better position than ever before globally to be able to respond to a pandemic.”

3M expects respirator sales in the second half of 2021 to be at least $100 million lower than the previous year.

Pesicka said he sees this moment as an opportunity for Owens and Minor, which largely produces PPE in and near the U.S. His company is increasing its production of PPE. He expects demand for PPE to settle out at a new baseline level that’s below pandemic peaks, but well above pre-pandemic valleys.

However, he thinks health care providers will be looking for companies that have the most reliable supply chains.

“Our … Americas-based manufacturing footprint and supply chain will remain a distinct advantage for us, as we continue to work closely with the government and industry to help address the current and future needs for PPE requirements,” he said.

Teva expects to reach an opioid deal following distributors

(Photo: Karolina Grabowska)

The story: In July, three major drug distributors and Johnson & Johnson proposed a settlement that could end litigation accusing the companies of contributing to the opioid overdose epidemic.

AmerisourceBergen, Cardinal Health and McKesson would pay about $21 million collectively over 18 years if enough states and counties sign on to the settlement.

The original framework for that deal also included $26 billion worth of the addiction treatment drug suboxone supplied by the generic drug company Teva.

Teva wasn’t included in the recent settlement announcement, but CEO Kare Shultz said he expects to reach a separate deal soon.

“We are optimistic that we can reach a settlement in the coming years,” he said on a recent conference call. “We think that the court cases that are ongoing right now give a good incentive for all parties to reach a settlement.”

Background: Teva is facing more than 3,500 lawsuits claiming that the company contributed to the epidemic of opioid overdose deaths by selling and distributing addictive drugs.

Teva has already settled similar claims from the state of Oklahoma for $85 million. The company also settled suits from two Ohio counties for $25 million in suboxone and $20 million cash.

In general, Teva has focused on resolving these claims by offering medication rather than cash because the company has a heavy debt load. The company claims it would be difficult to pay cash.

The company currently has more than $21 billion in long term debt and about $16.7 billion in annual revenues. The company hasn’t issued a dividend since 2017 and hasn’t repurchased any shares since 2016.

The details: Since the proposed settlement in 2019, Teva has continued to negotiate with attorneys general. Shultz said he believes prosecutors focused on negotiations with distributors and Johnson & Johnson because they were more likely to be able to pay cash.

“The cash amount and therefore the immediate interest from the plaintiff lawyers has been higher in the four companies than in our offer,” he said.

Shultz argued that resolution with distributors, which was similar to the original 2019 proposal, is a sign that Teva’s original deal could come through as well.  

In addition to the suboxone, the 2019 agreement asked Teva to pay $250 million cash over 10 years. Shultz believes a final settlement could involve more cash spread out over a longer period of time.

“We have a lot less money than those four companies. I would not be surprised if we end up paying over a longer period of time, maybe over 17 years,” he said.

The impact: The company’s offer of $26 billion worth of drugs sounds enormous, but some public health experts say cash would go much further. 

“The primary barrier to getting more people into treatment is not the cost of the drug,” Andrew Kolodny, senior scientist at the Institute for Behavioral Health at Brandeis University, told Stateline in 2019, referring to the original settlement framework.

Matt Salo, director of the National Association of Medicaid Directors, also told Stateline in 2019 that cash would allow states much more flexibility in addressing their specific issues.