Addressing the Opioid Crisis: Board Engagement and Governance

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• Opioid Lawsuit Settlements »
• Board Engagement and Governance »
• Ad Hoc Committee »
• Anti-Diversion and Regulatory Compliance Programs »
• Product Integrity and Security »
• Special Committee Investigation »
• Other matters »

Our Board of Directors and the entire Cardinal Health team care deeply about the devastation this epidemic of opioid misuse has caused families and communities. We are proud of our work alongside others across the pharmaceutical supply chain to help solve this complex national public health crisis. (See Combatting Opioid Misuse, which can be accessed here.)

Like so many others across this nation, we have family members, friends, and colleagues who have been impacted by the devastating consequences of opioid overuse and abuse. We also have family members, friends and colleagues who rely on these medications to address suffering associated with terminal illnesses, painful neurological conditions, severe injuries, and recovery from surgeries.

As a pharmaceutical wholesale distributor and an intermediary in the supply chain, we provide a secure channel to deliver all kinds of medications from the hundreds of manufacturers that make them to the thousands of our hospital and pharmacy customers licensed to dispense them to their patients, processing more than 350 million orders each year. We work diligently to identify, stop and report to regulators any suspicious orders of controlled substances, and we understand and take seriously our responsibility to maintain a rigorous anti-diversion program while ensuring that prescription medications are available for patients who need them. Of course, we do not have any involvement with the serious problem of dangerous illegal “street” drugs obtained without a prescription.

Our pharmaceutical wholesale distribution business has a critical role in the pharmaceutical supply chain, and our objective is simple: to enable the healthcare providers we serve to use pharmaceutical products to bring health and healing to their patients. The overwhelming majority of medications we distribute are non-opiate medicines such as antibiotics, or treatments for cancer, heart disease, diabetes, and other chronic conditions.

The opioid epidemic is a serious, complex, and multi-faceted problem that involves prescribing healthcare providers, federal and state regulators, manufacturers, pharmacists, patients, and law enforcement, particularly with respect to the ever-changing methods of drug diversion and abuse. We believe all participants must be active in combating this epidemic, and as discussed below, we are industry leaders in implementing state-of-the-art controls to combat the diversion of pain medications from legitimate uses. Working together with our dedicated team of anti-diversion specialists, our Board and management have been and remain actively engaged on this issue.

Below is information about the Board’s engagement with and oversight of these important issues, including:

• The Board’s governance structure and history of engagement with respect to these issues, including specific governance actions undertaken over the last several years.
• The independent Ad Hoc Committee of the Board that was formed in February 2018 to assist the Board in its oversight of opioid issues.
• Our anti-diversion program, which is constantly evolving to address new challenges.
• The reviews, in response to a shareholder demand, conducted by an independent committee of the Board with advice of independent counsel between 2012 and 2014 of our opioid anti- diversion program, and the committee’s findings, among other things, that we had implemented and maintained a robust system of controls to detect and report suspicious orders and that the Board was well informed of those controls.
  
  

Opioid Lawsuit Settlements

In October 2019, with the involvement and support of both the Ad Hoc Committee and the full Board, we agreed in principle with a leadership group of state attorneys general to a global settlement framework that is designed to resolve all pending and future opioid lawsuits and claims by states and political subdivisions (the "Settlement Framework"). This Settlement Framework is the basis for the ongoing negotiation of definitive terms and documentation. Negotiations under the Settlement Framework continue and have centered on the amount and timing for payment of a cash component as well as standards for distributors’ controlled substance anti-diversion programs.

The Settlement Framework would provide immediate resources to the communities and families that need them most. As a pharmaceutical wholesale distributor, our role in the pharmaceutical supply chain is to ship medications approved by the U.S. Food and Drug Administration (“FDA”) from manufacturers to fill orders from our licensed pharmacy customers, who dispense the medications as prescribed by doctors. We take that role and the responsibility that comes with it seriously and we remain committed to being part of the solution to this epidemic. That is why we continue to be actively involved in ongoing discussions relating to the Settlement Framework.

In connection with these matters, we recorded total pre-tax litigation charges of $1.02 billion and $5.63 billion in the three months ended September 30, 2020 and 2019, respectively. In total, we had $6.59 billion accrued at September 30, 2020. (The total accrued at September 30, 2020 does not include $66 million that we paid in January 2020 as our portion of a settlement that we had agreed to with other national distributors and two Ohio counties.) Definitive terms for a settlement under the Settlement Framework continue to be negotiated, and there is no assurance that the necessary parties will agree to a definitive settlement agreement or that the contingencies to any agreement will be satisfied.

Board Engagement and Governance

The Board is committed to ensuring that we are a positive force in solving the opioid epidemic and has supported our active efforts in that regard.

The Board and its Committees regularly review anti-diversion and controlled substance reporting programs, as well as our ethics and compliance program. (A “controlled substance” is a drug or chemical whose possession and use are regulated under the U.S. Controlled Substances Act.) Members of management with responsibility for these programs attend Board and Committee meetings as appropriate.

Within the Board, the Audit Committee has responsibility for overseeing our ethics and compliance program. Among other things, the Audit Committee receives quarterly updates from the Chief Legal and Compliance Officer regarding the ethics and compliance program, and the full Board receives an annual report regarding the ethics and compliance program. In addition, the Chief Legal and Compliance Officer provides quarterly reports to the Audit Committee about litigation and investigations, including reports about matters relating to opioids. Finally, the Audit Committee receives an annual report from the EVP, Quality and Regulatory regarding quality and regulatory affairs. The SVP, Ethics and Compliance and other members of senior management participate in these reports to the Audit Committee and the Board, as appropriate. The Audit Committee reports regularly to the full Board.

With respect to oversight of our anti-diversion program, before the formation of the Ad Hoc Committee, the Audit Committee received updates regarding our anti-diversion program through ethics and compliance reports as well as through occasional interim reports. In February 2018, the Board formed an Ad Hoc Committee of independent directors to assist the Board in its oversight of opioid-related matters. As discussed in greater detail here, the Ad Hoc Committee is responsible for assisting the Board in engaging with management regarding our multifaceted response to the opioid epidemic and providing advice, regular reports, and recommendations to the full Board on these issues. In addition to the Committee discussions, the full Board receives updates regarding the anti- diversion program through Committee reports and through reports from management.

In addition, as discussed here, a Special Committee of the Board was formed in 2012 to conduct an investigation into, and in 2013 produced a report regarding, our anti-diversion systems and controls, with the advice of independent counsel. The Special Committee was reconvened in 2014 and produced two supplemental reports at that time.

The Board and its Committees also have taken other governance actions in recent years, including:

• In August 2017, as a result of discussions with shareholders, the Human Resources and Compensation Committee amended our incentive plan to provide that cash awards paid to executive officers are subject to repayment if the officer commits a material violation of law or of Cardinal Health’s Standards of Business Conduct that causes material financial harm to Cardinal Health.
  
  
• In November 2018, independent Lead Director Greg Kenny became independent Chairman of the Board.
  
  
• In May 2019, the Board expanded the Nominating and Governance Committee’s oversight to include our environmental sustainability and other corporate citizenship activities.
  
  
• In July 2019, as a result of discussions with shareholders and following consultation with the Human Resources and Compensation Committee, the Company adopted a policy to explain the exclusion of certain legal and compliance costs related to drug distribution from our incentive performance metrics and give a breakdown of any such excluded costs.
  
  
• In November 2019, the Human Resources and Compensation Committee amended our incentive plan to provide that cash awards paid to all participants are subject to repayment if the participant breaches Cardinal Health’s Standards of Business Conduct, commits other misconduct or engages in competitive actions while employed by Cardinal Health or during 12 months after termination of employment.
  
  
• In January 2020, the Board established the Surgical Gown Recall Oversight Committee comprised of Board members Akhil Johri, Gregory B. Kenny, Nancy Killefer and John H. Weiland (chair) to assist the Board in overseeing and engaging with the Company’s senior executives and management regarding a surgical gown recall. For more information regarding the surgical gown recall and the committee, see the company’s proxy statement.
  
  
• In February 2020, the Board expanded the Human Resources and Compensation Committee’s responsibilities to act on behalf of the Board in administering equity-based and incentive compensation plans to include determining whether to recoup equity-based and incentive compensation.
  
  
• In August 2020, the Board expanded the Nominating and Governance Committee’s oversight to include policies and practices regarding lobbying expenditures, including an annual review of the company’s lobbying activities.
  
  
• In August 2020, the Board revised our Corporate Governance Guidelines to provide that non- management directors should not serve on more than three public company boards in addition to the company’s Board, and non-management directors who serve as executive officer of a public company should not serve on a public company board other than the board of their own company.
  
  
• In August 2020, the Board authorized and in November 2020, shareholders approved an amendment to our Restated Code of Regulations to lower the share ownership threshold for shareholders to request that the company call a special meeting to 15% from 25%.
  
  

Ad Hoc Committee

In February 2018, the Board of Directors formed an Ad Hoc Committee of independent directors of the Board to assist the Board in its oversight of opioid matters. The Committee is responsible for assisting the Board in its duty to engage with senior management and to oversee our response to the nationwide problem of prescription opioid abuse by (1) engaging with executives and management regarding our response to the nationwide problem of prescription opioid abuse, and (2) providing advice, regular reports, and recommendations to the Board in connection with those issues.

The members of the Committee are:

The Committee continues to meet twice per quarter. During its meetings, the Committee reviews reports from management and our external advisors (as appropriate) and provides input and direction. For example, the Committee receives updates and engages in discussion regarding:

• progress of the global settlement framework designed to resolve all pending and future opioid lawsuits by states and political subdivisions;
• anti-diversion and controlled substance reporting programs;
• risks posed to the company by the opioid epidemic and related investigations and litigation from a legal, financial and reputational perspective; 
• changes in the regulatory and legislative environment;
• the company’s support of solutions to help address the opioid epidemic; and
• engagement with shareholders, such as the Investors for Opioid and Pharmaceutical Accountability, employees, and other key stakeholders.

The Committee then assists the Board with its oversight by providing reports, advice, and recommendations on opioid-related topics. The Committee has updated the full Board regarding these issues at each quarterly Board meeting, and the Board and Committee engage in robust discussion. As part of its mandate, the Committee will provide recommendations, where appropriate, and assist the Board in its determinations about any actions it should take. In recent months, for example—as discussed above—the Committee has advised management and the Board with respect to settlement discussions designed to resolve pending and future opioid lawsuits and claims by states and political subdivisions.

Anti-Diversion and Regulatory Compliance Programs

Our specialized team includes nearly 100 individuals, including trained investigators, data analysts, former law enforcement officers, pharmacists, and compliance officers — deployed on site at our pharmaceutical distribution facilities, in the field, and at our corporate headquarters.

Anti-Diversion and Controlled Substances Monitoring and Regulatory Reporting. Our anti- diversion program includes a state-of-the-art, constantly adaptive, rigorous system supported by program specialists who monitor and investigate suspicious orders using advanced analytics and other tools. We operate a strict and uncompromising system to spot, stop, and report to regulators suspicious orders of prescription controlled substances, including opioids. As threats evolve, we are constantly adapting our system to prevent the diversion and misuse of medications. We operate in good faith and our goal is to get it right. Through our program to date, Cardinal Health representatives have conducted hundreds of thousands of site inspections of our pharmacy customers nationwide and thousands of pharmacies have been identified that do not meet our anti- diversion standards, and we refuse to do business with them.

The anti-diversion program involves three main components — “Know Your Customer,” electronic monitoring, and site visits. We use a multi-factor process to evaluate pharmacies before they become customers, including taking steps to understand their business and historical prescription drug ordering patterns. Controlled substance orders pass through our order monitoring system, which tracks orders against statistical benchmarks for signs of potential diversion. If an order is deemed suspicious by our anti-diversion analysts, it is canceled and reported to the U.S. Drug Enforcement Administration (“DEA”) and applicable state regulators. We also have a team of experienced investigators who regularly conduct customer site visits.

The SVP, Supply Chain Integrity oversees these operations, which are organized in reporting groups for investigations, analytics, and customer management (including due diligence and licensing). In addition, the EVP, Quality and Regulatory oversees regular reporting of transaction data to the DEA via the Automation of Reports and Consolidated Orders System (“ARCOS”) and the Controlled Substance Ordering System (“CSOS”) as well as to state regulatory bodies. Both the SVP, Supply Chain Integrity and the EVP, Quality and Regulatory report to the Chief Legal and Compliance Officer.

Policies and Procedures at Pharmaceutical Distribution Centers. We deploy compliance officers at every pharmaceutical distribution center. These individuals provide independent oversight of our distribution operations to ensure adherence to regulations and guidance issued by the DEA, the FDA, the U.S. Department of Transportation, and State Boards of Pharmacy and Departments of Health.

We maintain rigorous policies pertaining to accessing restricted and secured areas; protecting secured data and assets; and overseeing visitor access to our facilities. Among other things, we have thorough policies and procedures designed to cover the storage and handling of controlled substances, including the discovery, investigation, and reporting requirements for controlled substance theft and loss. The compliance officers in our pharmaceutical distribution centers conduct investigations of controlled substance theft and loss, cooperate with law enforcement, and timely report losses to the DEA, as required. The EVP, Quality and Regulatory oversees these operations.

Product Integrity and Security

In addition to the policies and procedures discussed above, we visually inspect products for signs of tampering or any indications that the products are suspect. If our compliance officers discover suspect product, we notify our immediate trading partners, the FDA, and other regulatory bodies as required.

In 2018, as a requirement of the U.S. Drug Supply Chain Security Act, manufacturers began placing a unique product identifier on every pharmaceutical package and case. Beginning in 2023, we will electronically track product at the individual package level with this product identifier. Transaction data will be exchanged through a secure, interoperable, and electronic system to further minimize the threat of counterfeit product entering the supply chain.

Beyond our compliance procedures, security measures designed to ensure the safety of our deliveries and of the people involved in the deliveries include:

• Strategically implementing GPS units on routes to customer delivery locations in the U.S.;
• Hiring regional couriers to make deliveries in unmarked vehicles with tinted windows;
• Auditing courier depots and deliveries to customers;
• Regularly reviewing crime data to determine our highest risk areas; and 
• Varying delivery times, per customer requests, to avoid a predictable daily delivery.
  
  

Special Committee Investigation

In 2012, the Board appointed a Special Committee of independent directors of the Board to conduct investigations into our anti-diversion systems and controls and the Board’s oversight of those systems and controls. The Special Committee, advised by independent counsel, produced reports on these matters in 2013 and 2014.

In late 2012, the Board of Directors received a letter from a shareholder asserting that we had failed to implement effective systems to detect and prevent the diversion of controlled substances. In response, the Board appointed a Special Committee of independent directors to investigate the demands and allegations set forth in the letter. The Special Committee was composed of:

The Special Committee retained independent legal counsel, Milbank, Tweed, Hadley & McCloy LLP, to assist with its investigation, which included collecting and reviewing thousands of documents and conducting interviews with numerous employees.

The investigation led the Special Committee to conclude that we had implemented a robust system of internal controls to detect and report suspicious orders, that the Board was well informed of those controls, and that the directors did not fail to act in the face of any red flags that our anti-diversion controls were inadequate.

In support of this conclusion, the Special Committee noted many factors, among them the following:

• We brought in new management with extensive leadership, regulatory, and pharmaceutical experience;
• We assigned “threshold” ordering volumes for each customer based on statistical analysis of ordering data and created an electronic monitoring system to trace customers’ orders against their pre-assigned threshold limits; and
• The Board was fully informed of the implementation of the anti-diversion measures and received regular and detailed progress reports along the way.

In April 2013, the Special Committee produced an Investigation Report that was accepted by the Board. The Investigation Report addresses a number of topics, including: the allegations in the demand letter and formation of the Special Committee; relevant legal standards; steps taken in the investigation; our anti-diversion policies and procedures from 2007 to 2012; communications with the Board and Audit Committee regarding anti-diversion measures; the 2012 Immediate Suspension Order and our reactions; and recommendations on the merits of the allegations and other factors to be considered.

The Investigation Report can be accessed here.

The Special Committee conducted supplemental investigations and generated supplemental reports in February and October 2014 in response to additional, related shareholder demand letters. Those reports can be accessed here and here.

Note: During its investigation, the Special Committee considered evidence, communications, and other information that might be subject to attorney-client privilege, the attorney work product doctrine, and/or other privileges and protections. In making these reports publicly available, Cardinal Health and its Board do not intend to waive any applicable privileges or protections. Additionally, the names of non-executive employees have been redacted to protect the privacy of those individuals.

Other matters

Company-Owned and Operated Pharmacies. In recent years, Cardinal Health began to own or operate a limited number of pharmacies in federally qualified community health centers. We also have a legacy business that operates hospital-owned pharmacies. At the approximately 45 pharmacies that we currently own or operate in federally qualified community health centers, we employ rigorous policies with respect to dispensing, inventory management, and theft and loss reporting. These policies require pharmacists to screen for “red flags” prior to filling prescriptions for controlled substances and incorporate extensive employee training and auditing procedures. At the approximately 170 hospital-owned pharmacies that we operate, we follow the hospital owners’ directed policies and procedures that address both the internal and external security of controlled substances.

GenerationRx and Other Solutions. In addition to our anti-diversion program and efforts to protect supply chain integrity, we have had a leading role for more than a decade in pioneering and supporting an impactful prevention and education program to combat opioid misuse and diversion under the umbrella of the Generation Rx program, which we developed in partnership with the Ohio State University School of Pharmacy. We also support organizations that work to reduce opioid prescribing and raise awareness about opioid misuse, and we support drug take-back events. We remain committed to supporting these and other efforts.

Date: December 2020