MCKESSON CORPORATION General 39 Overview of Our Business 39 Executive Summary 40 Trends and Uncertainties 42 Overview of Consolidated Results 47 Overview of Segment Results 52 New Accounting Pronouncements 56 Financial Condition, Liquidity, and Capital Resources 56 Cautionary Notice About Forward-Looking Statements 60
GENERAL
Management's discussion and analysis of financial condition and results of operations, referred to as the "Financial Review," is intended to assist the reader in the understanding and assessment of significant changes and trends related to the results of operations and financial position ofMcKesson Corporation together with its subsidiaries (collectively, the "Company," "McKesson," "we," "our," or "us" and other similar pronouns). This discussion and analysis should be read in conjunction with the condensed consolidated financial statements and accompanying financial notes in Item 1 of Part I of this Quarterly Report on Form 10-Q and in Item 8 of Part II of our Annual Report on Form 10-K for the fiscal year endedMarch 31, 2021 previously filed withthe United States ("U.S.")Securities and Exchange Commission onMay 12, 2021 ("2021 Annual Report"). Our fiscal year begins onApril 1 and ends onMarch 31 . Unless otherwise noted, all references to a particular year shall mean our fiscal year. Certain statements in this report constitute forward-looking statements. See "Cautionary Notice About Forward-Looking Statements" included in this Quarterly Report on Form 10-Q. Overview of Our Business: We are a global leader in healthcare supply chain management solutions, retail pharmacy, community oncology and specialty care, and healthcare information solutions. We partner with pharmaceutical manufacturers, providers, pharmacies, governments, and other organizations in healthcare to help provide the right medicines, medical products, and healthcare services to the right patients at the right time, safely, and cost-effectively. We report our results in four reportable segments:U.S. Pharmaceutical, Prescription Technology Solutions ("RxTS"), Medical-Surgical Solutions, and International. Our organizational structure also includes Corporate, which consists of income and expenses associated with administrative functions and projects, and the results of certain investments. The factors for determining the reportable segments include the manner in which management evaluates the performance of the Company combined with the nature of individual business activities. We evaluate the performance of our operating segments on a number of measures, including revenues and operating profit before interest expense and income taxes. The following summarizes our four reportable segments. Refer to Financial Note 14, "Segments of Business," to the accompanying condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further information regarding our reportable segments. 39
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•U.S. Pharmaceutical distributes branded, generic, specialty, biosimilar, and
over-the-counter pharmaceutical drugs and other healthcare-related products.
This segment also provides practice management, technology, clinical support,
and business solutions to community-based oncology and other specialty
practices. In addition, the segment sells financial, operational, and clinical
solutions to pharmacies (retail, hospital, alternate site) and provides
consulting, outsourcing, technological, and other services.
•RxTS is a reportable segment that unifies the solutions and services of
CoverMyMeds , RelayHealth, RxCrossroads, and McKesson Prescription Automation to
serve our biopharma and life sciences partners and patients. By combining
automation and expert navigation of the healthcare ecosystem, RxTS connects
pharmacies, providers, payers, and biopharma to address patients' medication
access, adherence, and affordability challenges to help people get the medicine
they need to live healthier lives.
•Medical-Surgical Solutions provides medical-surgical supply distribution,
logistics, and other services to healthcare providers in the U.S.
•International is a reportable segment that includes our operations in Europe
and Canada , bringing together non-U.S. -based drug distribution services,
specialty pharmacy, retail, and infusion care services. In the second quarter of
2022, we entered into an agreement to sell certain of our businesses in the
European Union , primarily located in France , Italy , Ireland , Portugal , Belgium ,
and Slovenia . The sale also includes our German headquarters and wound-care
business, part of a shared services center in Lithuania , and our ownership stake
in a joint venture in the Netherlands ("E.U. disposal group"). Additionally, on
November 1, 2021 , we announced an agreement to sell our retail and distribution
businesses in the United Kingdom ("U.K.").
Executive Summary:
The following summary provides highlights and key factors that impacted our
business, operating results, financial condition, and liquidity for the three
and six months ended September 30, 2021 .
•Coronavirus disease 2019 ("COVID-19") continues to impact our year over year
results. As previously disclosed in our 2021 Annual Report, pharmaceutical
distribution volumes decreased across the enterprise during the first quarter of
2021 as a result of the weakened and uncertain global economic environment and
COVID-19 restrictions following the onset of the pandemic. We remain in a
dynamic environment and volume trends continue to be non-linear. However, the
recovery from the pandemic is favorably reflected in our results when comparing
2022 versus 2021. We also had favorable contributions from our COVID-19 vaccine
and related ancillary supply kit distribution programs during the first half of
2022 and a year over year increase in sales of COVID-19 tests;
•In response to the global pandemic, McKesson plans to donate certain personal
protective equipment ("PPE") to charitable organizations to assist with COVID-19
recovery efforts. During the six months ended September 30, 2021 , we recorded
inventory charges totaling $164 million on certain PPE and other related
products in our Medical-Surgical Solutions segment. The majority of these
charges are driven by the intent of management not to sell certain excess PPE
inventory and instead direct it to charitable organizations. Refer to the
"Trends and Uncertainties" section included below for further information on
COVID-19 and related impacts;
•Revenues of $66.6 billion for the three months ended September 30, 2021
increased 9% from the prior year, and revenues of $129.3 billion for the six
months ended September 30, 2021 increased 11% from the prior year. The increase
in revenues is primarily driven by market growth in our U.S. Pharmaceutical
segment;
•Gross profit increased 12% for both the three and six months ended September
30, 2021 compared to the prior year primarily driven by improvements in primary
care patient visits, higher sales of COVID-19 tests, and the contribution from
kitting and distribution of ancillary supplies for COVID-19 vaccines in our
Medical-Surgical Solutions segment as well as the contribution from our COVID-19
vaccination distribution program and growth of specialty pharmaceuticals in our
U.S. Pharmaceutical segment. Gross profit for the six months ended September 30,
2021 also included favorable effects of foreign currency exchange fluctuations
in our International segment;
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•On July 5, 2021 , we entered into an agreement to sell our E.U. disposal group
to the PHOENIX Group for a purchase price of €1.2 billion (or, approximately
$1.4 billion ), subject to certain adjustments under the agreement. Beginning in
the second quarter of 2022, the E.U. disposal group was reflected in our
condensed consolidated financial statements as held for sale, at which point we
discontinued recording depreciation and amortization expense on related assets.
As a result of the transaction, we recorded charges totaling $491 million during
the second quarter of 2022 in total operating expenses to remeasure assets and
liabilities held for sale to fair value less costs to sell and to impair certain
internal-use software that will not be utilized in the future. The remeasurement
adjustment includes a $226 million loss related to the accumulated other
comprehensive income balances associated with the E.U. disposal group. The
transaction is anticipated to close within the next twelve months, pursuant to
customary closing conditions, including receipt of required regulatory
approvals. Refer to Financial Note 2, "Held for Sale," to the accompanying
condensed consolidated financial statements included in this Quarterly Report on
Form 10-Q for more information;
•Total operating expenses for the three and six months ended September 30, 2021
includes charges of $112 million and $186 million , respectively, related to our
estimated liability for opioid-related claims as further described in the
"Trends and Uncertainties" section included below;
•Total operating expenses for the three and six months ended September 30, 2021
includes a gain of $59 million related to the sale of our Canadian health
benefit claims management and plan administrative services business;
•Other income, net for the three and six months ended September 30, 2021
includes net gains of $97 million and $104 million , respectively, related to our
equity investments;
•On July 23, 2021 , we completed a cash tender offer and paid an aggregate
consideration of $1.1 billion to redeem certain notes with a principal amount of
$922 million . As a result of the redemption, we incurred a loss on debt
extinguishment in the second quarter of 2022 of $191 million , consisting of the
premiums paid and a portion of the write-off of unamortized debt issuance costs
in an amount proportional to the principal amount of debt retired. Refer to
Financial Note 8, "Debt and Financing Activities," to the accompanying condensed
consolidated financial statements included in this Quarterly Report on Form 10-Q
for more information;
•Diluted earnings per common share from continuing operations attributable to
McKesson Corporation for the three and six months ended September 30, 2021 of
$1.71 and $4.82 , respectively, reflects the aforementioned items, net of any
respective tax impacts, discrete tax items recognized, and a lower share count
compared to the prior year due to the cumulative effect of share repurchases;
•We paid $1.0 billion to purchase 34.5 million shares of McKesson Europe AG
("McKesson Europe") during the six months ended September 30, 2021 through
exercises of a put right by the noncontrolling shareholders pursuant to the
December 2014 domination and profit and loss transfer agreement (the "Domination
Agreement");
•On July 17, 2021 , we redeemed our 0.63% Euro-denominated notes with a principal
amount of €600 million (or, approximately $709 million ) prior to the maturity
date of August 17, 2021 . The notes were redeemed using cash on hand. On August
12, 2021 , we also completed a public offering of 1.30% notes due August 15, 2026
with a principal amount of $500 million for proceeds received, net of discounts
and offering expenses, of $495 million . The Company utilized the net proceeds
from this note for general corporate purposes;
•We returned $1.4 billion of cash to shareholders during the six months ended
September 30, 2021 through $1.3 billion of share repurchases under an
accelerated share repurchase ("ASR") program entered into in May 2021 , and $134
million of dividend payments. On July 23, 2021 , we raised our quarterly dividend
from $0.42 to $0.47 per common share; and
•On November 1, 2021 , we announced an agreement to sell our retail and
distribution businesses in the U.K. ("U.K. disposal group") to Aurelius Elephant
Limited for purchase consideration of £325 million (or, approximately
$438 million ). Beginning in the third quarter of 2022, the U.K. disposal group
will be reflected in our condensed consolidated financial statements as held for
sale and will be remeasured to the lower of its carrying amount or fair value
less costs to sell, which we estimate will result in a charge between
$700 million and $900 million , primarily related to the inclusion of the
accumulated other comprehensive income balances into the carrying amount of the
U.K. disposal group. Actual charges could differ based on operating results,
changes in foreign exchange rates, and other factors prior to closing of the
transaction. The transaction is anticipated to close during the fourth quarter
of 2022, pursuant to customary closing conditions, including receipt of
regulatory approvals.
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Trends and Uncertainties:
COVID-19
The novel strain of coronavirus, which causes the infectious disease known as
COVID-19, continues to evolve since it was declared a global pandemic on March
11, 2020 by the World Health Organization . We continue to evaluate the nature
and extent of the ongoing impacts COVID-19 has on our business, operations, and
financial results. Refer to Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations in Part II of our 2021 Annual
Report for a full disclosure of trends and uncertainties due to COVID-19 since
the onset of the pandemic. The disclosures below include significant updates
that occurred during the first half of 2022. The full extent to which COVID-19
will impact us depends on many factors and future developments, which are
described at the end of this COVID-19 section.
Our Response to COVID-19 in the Workplace
We are committed in continuing to supply our customers and protect the safety of
our employees. The various responses we put in place initially at the onset of
the pandemic to mitigate the impact of COVID-19 on our business operations
include telecommuting and work-from-home policies, restricted travel, employee
support programs, and enhanced safety measures. During the first quarter of
2022, we approved changes to our real estate strategy to increase efficiencies
and support flexibility for our employees, including a transition to a partial
remote work model for certain employees on a go-forward basis as further
discussed in this Financial Review and in Financial Note 3, "Restructuring,
Impairment, and Related Charges," to the accompanying condensed consolidated
financial statements included in this Quarterly Report on Form 10-Q. In July
2021 , we also lifted certain travel restrictions across the enterprise. We
continue to enforce the safety measures in the workplace as recommended by the
Centers for Disease Control and Prevention ("CDC"). During the second quarter of
2022, we implemented new COVID-19 vaccination protocols designed to be
consistent with customer requirements for our U.S. and Canada employees and to
protect the safety of our employees, customers, patients, and communities while
also safeguarding the healthcare supply chain. In Europe , we are following
applicable government guidelines in local countries. We will continue to monitor
all of these changing requirements. We have not observed a material increase in
employee turnover as a result of our policies related to the COVID-19
vaccination mandates; however, we are unable to predict whether such policies or
mandates will have a material impact on our workforce in the future.
Our Role in the Distribution of COVID-19 Vaccines and Ancillary Supply Kits
As a global leader in healthcare supply chain management solutions, retail
pharmacy, community oncology and specialty care, and healthcare information
solutions, we remain well positioned to respond to the COVID-19 pandemic in the
U.S. , Canada , and Europe . We have worked and continue to work closely with
national and local governments, agencies, and industry partners to ensure that
available supplies, including PPE, and medicine reach our customers and
patients.
We continue to support the U.S. government as a centralized distributor of
COVID-19 vaccines and ancillary supplies needed to administer vaccines through a
contract with the CDC . We have been distributing COVID-19 vaccines that are
refrigerated or frozen since December 2020 , when the Emergency Use Authorization
was issued by the U.S. Food and Drug Administration for the Moderna COVID-19
vaccine manufactured by ModernaTX, Inc. In the first quarter of 2022, McKesson
began supporting the U.S. government's commitment to donate COVID-19 vaccines
worldwide. For this initiative, we are responsible for picking and packing the
COVID-19 vaccines into temperature-controlled coolers and preparing them for
pickup by an international partner. We do not manage the actual shipments of the
vaccines to other countries. The results of operations related to our vaccine
distribution are reflected in our U.S. Pharmaceutical segment. We also continue
to manage the assembly, storage, and distribution of ancillary supply kits
needed to administer COVID-19 vaccines, including sourcing some of those
supplies, through agreements with both the Department of Health and Human
Services ("HHS") and Pfizer, Inc. The results of operations for the kitting and
distribution of ancillary supplies are reflected in our Medical-Surgical
Solutions segment. The future financial impact of the arrangements with the CDC
and HHS depend on numerous uncertainties, which are described at the end of this
COVID-19 section.
McKesson Canada and McKesson Europe are also playing a role in helping support
governments and public health entities in not only distributing COVID-19
vaccines, but administering them in pharmacies as well. McKesson Europe is also
distributing COVID-19 tests and certain PPE.
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Trends in our Business
At the onset of the COVID-19 pandemic late in our fourth quarter of 2020, we
experienced higher pharmaceutical distribution volumes and increased retail
pharmacy foot traffic as our customers increased supplies on hand in March.
Subsequently, during the first half of 2021, pharmaceutical distribution volumes
decreased as a result of the weakened and uncertain global economic environment
and COVID-19 restrictions, including government shutdowns and shelter-in-place
orders. We also experienced decreased demand for primary care medical-surgical
supplies due to deferrals in elective procedures in hospitals and surgery
centers as well as decreased traffic and closures of doctors' offices, which was
partially offset by demand for PPE and COVID-19 tests. Additionally, the
decreased traffic in doctors' offices and general shelter-in-place guidance by
governmental authorities negatively impacted retail pharmacy foot traffic in
both Europe and Canada . This drove favorability in our results when comparing
the first half of 2022 versus 2021, particularly during the first quarter.
We have experienced significant improvements in prescription volumes and primary
care patient visits during our first half of 2022 compared to the same prior
year period; however, the recovery of COVID-19 continues to be non-linear and
tracked with patient mobility. During the first half of 2022, the COVID-19
vaccine and related ancillary kit distribution in the U.S. favorably impacted
our results. During the first half of 2022, sales for PPE remained relatively
flat year over year and we saw higher sales for COVID-19 tests primarily due to
limited product availability in the first quarter of 2021 and increased demand
during the second quarter of 2022 corresponding with the spike in positive
COVID-19 cases as a result of the Delta variant.
Impact to our Supply Chain
We also continue to monitor and address the COVID-19 pandemic impacts on our
supply chain. Although the availability of various products is dependent on our
suppliers, their locations, and the extent to which they are impacted by the
COVID-19 pandemic, we are proactively working with manufacturers, industry
partners, and government agencies to meet the needs of our customers during the
pandemic. Overall, during 2022 we have experienced an increase in supply chain
costs primarily related to transportation and labor; however, this did not
materially impact our results of operations for the three or six months ended
September 30, 2021 . Additionally, in our Medical-Surgical Solutions segment, we
have experienced certain supply chain disruptions for COVID-19 tests, which
poses a potential risk for supply availability to meet the future demand. As
potential shortages or disruptions of any products are identified we are acting
to address supply continuity, which includes securing additional products when
available, sourcing back-up products when needed, and following allocation
procedures to maintain and protect supply as much as possible. We are also
initiating business continuity action planning to maintain and protect
operations across all locations and facilities.
Impact to our Results of Operations, Financial Condition, and Liquidity
For the three months ended September 30, 2021 , COVID-19 tests and the kitting
and distribution of ancillary supplies for COVID-19 vaccines in our
Medical-Surgical Solutions segment contributed approximately $545 million , or
17%, to segment revenues, and contributed approximately $93 million , or 31% to
segment operating profit. For the six months ended September 30, 2021 , these
contributions were approximately $868 million , or 15%, to segment revenues, and
including total inventory charges as further described below, increased our
segment operating profit by approximately 1%.
The distribution of COVID-19 vaccines in our U.S. Pharmaceutical segment
contributed less than 10% to segment operating profit for both the three and six
months ended September 30, 2021 . The financial impact from our COVID-19 response
efforts in the International segment during the three and six months ended
September 30, 2021 was not material to our consolidated results, but contributed
to year over year favorability in segment operating results. During the six
months ended September 30, 2020 , particularly during the first quarter, we had
lower pharmaceutical volumes, specialty drug volumes, and patient care visits
that negatively impacted our consolidated revenues and income from continuing
operations before income taxes. The recovery of prescription volume trends and
patient care visits, which are also described in more detail above in the Trends
in our Business section, had a favorable impact year over year across our
businesses when comparing 2022 versus 2021.
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(UNAUDITED)
Additionally, certain PPE items held for resale were valued in our inventory at
costs that were inflated by earlier COVID-19 pandemic demand levels. That
inventory valuation, if not supported by market resale prices, may be written
down to net realizable value. We may also write-off inventory due to decreased
customer demand and excess inventory. During the six months ended September 30,
2021 , we recorded inventory charges totaling $164 million on certain PPE and
other related products in our Medical-Surgical Solutions segment. Of this
amount, we recorded $147 million in cost of sales driven by the intent of
management not to sell certain excess PPE inventory, which required an inventory
write-down to zero, and instead direct it to charitable organizations. We
recorded $8 million in total operating expenses for excess inventory which has
already been committed for donation during our first half of 2022. In addition,
$9 million of inventory charges were recorded in cost of sales for PPE and other
related products that management intends to sell. Although market price
volatility and changes to anticipated customer demand may require additional
write-downs in future periods of other PPE and related product categories, we
are taking measures to mitigate such risk.
Overall, these COVID-19 related items had a net favorable impact on consolidated
income from continuing operations before income taxes for the three and six
months ended September 30, 2021 compared to the same prior year periods. Impacts
to future periods due to COVID-19 may differ based on future developments, which
is described at the end of this COVID-19 section.
During the six months ended September 30, 2021 , we maintained appropriate labor
and overall vendor supply levels and experienced no material impacts to our
liquidity or net working capital due to the COVID-19 pandemic. We continue to
monitor the COVID-19 situation closely and engage with manufacturers, industry
partners, and government agencies to anticipate shortages and respond to demand
for certain medications and therapies. We are monitoring our customers closely
for changes to their timing of payments or ability to pay amounts owed to us as
a result of COVID-19 pandemic impacts to their businesses. We remain
well-capitalized with access to liquidity from our revolving credit facility.
Long-term debt markets and commercial paper markets, our primary sources of
capital after cash flow from operations, have remained open and accessible to us
during the COVID-19 pandemic. At September 30, 2021 , we were in compliance with
all debt covenants, and believe we have the ability to continue to meet our debt
covenants in the future.
Risks and Forward-Looking Information
The COVID-19 pandemic has disrupted the global economy and exacerbated
uncertainties inherent in estimates, judgments, and assumptions used in our
forecasts. We still face numerous uncertainties in estimating the direct and
indirect effects of COVID-19 on our future business operations, financial
condition, results of operations, and liquidity. The full extent to which
COVID-19 will impact us depends on many factors and future developments,
including: the duration and spread of the COVID-19 pandemic; potential
seasonality of viral outbreaks; potential new variants of the original virus;
the amount of COVID-19 vaccines authorized, manufactured, distributed, and
administered; the amount of ancillary supply kits assembled and distributed; the
effectiveness of COVID-19 vaccines and governmental measures in controlling the
spread of the virus; and the effectiveness of treatments of infected
individuals. Due to several rapidly changing variables related to the COVID-19
pandemic, estimations of future economic trends and the timing of when COVID-19
may no longer significantly impact our ability to forecast future financial
performance remains challenging. Additionally, we periodically review our
intangible and other long-lived assets for impairment when events or changes in
circumstances indicate the carrying value may not be recoverable. Key
assumptions and estimates about future values in our impairment assessments can
be affected by a variety of factors, including the impacts of the global
pandemic on industry and economic trends as well as on our business strategy and
internal forecasts. Material changes to key assumptions and estimates can
decrease the projected cash flows or increase the discount rates and have
resulted in impairment charges of certain long-lived assets and could
potentially result in future impairment charges. Refer to Item 1A - Risk Factors
in Part I of our 2021 Annual Report for a disclosure of risk factors related to
COVID-19.
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Opioid-Related Litigation and Claims
We are a defendant in a number of legal proceedings asserting claims related to
the distribution of controlled substances (opioids) in federal and state courts
throughout the U.S. , and in Puerto Rico and Canada . Those proceedings include
approximately 2,800 federal cases and approximately 350 state court cases
throughout the U.S. , and cases in Puerto Rico and Canada .
On July 21, 2021 , we and the two other national pharmaceutical distributors
announced that we had negotiated a comprehensive proposed settlement agreement
which, if all conditions are satisfied, would result in the settlement of a
substantial majority of opioid lawsuits filed by state and local governmental
entities. Under the proposed agreement, the three distributors would pay up to
approximately $21 billion over a period of 18 years, with up to approximately
$7.9 billion to be paid by us for our 38.1% portion if all eligible entities
participate. In addition, the proposed agreement would require the three
distributors, including the Company, to establish a clearinghouse for controlled
substances distribution data and adopt changes to anti-diversion programs.
On September 4, 2021 , we and the two other national distributors announced that
42 of 49 eligible states, all 5 U.S. territories, and Washington, DC , had
affirmatively signed on to the proposed agreement. The attorneys general of
Alabama , Georgia , Nevada , New Mexico , Oklahoma , Rhode Island , and Washington
have not joined the proposed settlement. We further announced that we and the
other two distributors had determined that enough states had signed on to the
settlement for the proposed agreement to proceed to the next phase. During this
phase, which is expected to end on January 2, 2022 , each participating state
will offer its political subdivisions, including those that have not sued, the
opportunity to participate in the settlement. After the conclusion of this
period, we will have 30 days to determine whether a sufficient number of states
and political subdivisions have joined for the settlement to proceed to
implementation.
The proposed agreement only addresses the claims of U.S. state attorneys general
and political subdivisions in participating states. The West Virginia
subdivisions and Native American tribes are not part of this settlement process.
The exact amount that would be due under the proposed agreement depends on
several factors, including the participation rate of states and political
subdivisions, the extent to which states take action to foreclose opioid
lawsuits by political subdivisions, and the extent to which political
subdivisions in settling states file additional opioid lawsuits against us after
the proposed agreement becomes effective. The proposed agreement contemplates
that if certain governmental entities do not agree to a settlement under the
framework, but the distributors nonetheless conclude that there is sufficient
participation to warrant the settlement, there would be a corresponding
reduction in the amount due to account for the unresolved claims of the
governmental entities that do not participate. Those non-participating
governmental entities would be entitled to pursue their claims.
We believe that a broad settlement of opioid claims by governmental entities is
probable, and that the loss related thereto can be reasonably estimated. We
recorded a charge of $8.1 billion during the year ended March 31, 2021 related
to our share of the global settlement as well as claims of West Virginia
municipalities and the Native American tribes. In connection with the proposed
settlement agreement and other opioid-related settlement accruals described
above, we recorded additional charges of $112 million and $186 million during
the three and six months ended September 30, 2021 , respectively, within "Claims
and litigation charges, net" in our Condensed Consolidated Statements of
Operations. Our total estimated liability for opioid-related claims was $8.2
billion as of September 30, 2021 , of which $1.1 billion was included in "Other
accrued liabilities" for the amount estimated to be paid prior to September 30,
2022 , and the remaining liability was included in "Long-term litigation
liabilities" in our Condensed Consolidated Balance Sheet.
Consistent with the terms of the proposed agreement, we placed approximately
$354 million into escrow on September 30, 2021 . This amount excludes the
proportionate allocation under the proposed settlement for each
non-participating state and would be disbursed when and if the proposed
agreement becomes effective. Subsequent annual payments would be due on July 15
of each year. The escrow payment was presented as restricted cash within
"Prepaid expenses and other" in the Company's Condensed Consolidated Balance
Sheet as of September 30, 2021 . Because of the many uncertainties associated
with any potential settlement arrangement or other resolution of opioid-related
litigation, including the uncertainty of the scope of participation by
plaintiffs in any potential settlement, we are not able to reasonably estimate
the upper or lower ends of the range of ultimate possible loss for all
opioid-related litigation matters. In light of the uncertainty, the amount of
any ultimate loss may differ materially from the amount accrued.
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Notwithstanding the progress toward a broad settlement, we also continue to
prepare for trial in these pending matters. We believe that we have valid
defenses to the claims pending against us and, absent an acceptable settlement,
intend to vigorously defend against all such claims. An adverse judgment or
negotiated resolution in any of these matters could have a material adverse
impact on our financial position, cash flows or liquidity, or results of
operations. Refer to Financial Note 12, "Commitments and Contingent
Liabilities," to the accompanying condensed consolidated financial statements
included in this Quarterly Report on Form 10Q for more information.
State Opioid Statutes
Legislative, regulatory, or industry measures to address the misuse of
prescription opioid medications could affect our business in ways that we may
not be able to predict. In April 2018 , the State of New York adopted the Opioid
Stewardship Act ("OSA") which required the imposition of an annual surcharge on
all manufacturers and distributors licensed to sell or distribute opioids in New
York . On December 19, 2018 , the U.S. District Court for the Southern District of
New York found the law unconstitutional and issued an injunction preventing the
State of New York from enforcing the law. The State of New York appealed to the
U.S. Court of Appeals for the Second Circuit . The State of New York has
subsequently adopted an excise tax on sales of opioids in the State, which
became effective July 1, 2019 . The law adopting the excise tax made clear that
the OSA would apply only to opioid sales on or before December 31, 2018 . The
excise tax applies only to the first sale occurring in New York , and thus may
not apply to sales from our distribution centers in New York to New York
customers.
On September 14, 2020 , a panel of the U.S. Court of Appeals for the Second
Circuit reversed the district court's decision striking down the OSA on
procedural grounds. On October 4, 2021 , the U.S. Supreme Court declined to hear
a petition challenging the Second Circuit's Decision. Thus, we expect that the
OSA will be reinstated for calendar years 2017 and 2018 (but not beyond those
years), and, subject to any further legal challenge, we will have to pay our
ratable share of the annual surcharge for those two years. During the second
quarter of 2021, we reflected an estimated liability of $50 million for the OSA
surcharge in our consolidated financial statements on the assumption that the
appellate court's decision will stand. Refer to Note 12, "Commitments and
Contingent Liabilities," to the accompanying condensed consolidated financial
statements included in this Quarterly Report on Form 10Q for more information.
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