Addressing the Opioid Crisis: Board Engagement and Governance

ON THIS PAGE

• Cardinal Health Board of Directors' Engagement and Governance
• Ad Hoc Committee of the Cardinal Health Board of Directors
• George Barrett’s Congressional Testimony
• Cardinal Health Board of Directors' Special Committee Investigation

Our Board of Directors and the entire Cardinal Health team care deeply about the devastating impact on our communities of the over-prescribing of opioid pain medications and the abuse of pain medications and illegal “street” narcotics. We are working to solve this complex national public health crisis. See Cardinal Health Opioid Action Program, 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.

Our nation is in the midst of a serious opioid epidemic. And one of the key public policy issues that must be solved is the challenge posed by the over-prescribing of opioids. As a pharmaceutical wholesale distributor, we do not control either the supply of, or the demand for, opioids, since we do not manufacture medications or write prescriptions. We understand and take seriously our responsibility to maintain a rigorous anti-diversion program, while ensuring that medications are available for patients who need them. And, 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. We deliver thousands of products from hundreds of manufacturers and suppliers, processing over 400 million orders each year. 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.

We are industry leaders in implementing state-of-the-art controls to combat the diversion of pain medications from legitimate uses. The opioid epidemic is a serious, multi-faceted problem that involves prescribing physicians, regulators, manufacturers, pharmacists, and 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. Working together with our dedicated team of anti-diversion specialists, our Board and management have been and remain actively engaged on this issue. Our opioid anti-diversion program includes state-of-the-art, constantly adaptive, rigorous systems supported by program specialists who monitor and investigate suspicious orders using advanced analytics and other tools. In addition, we have had a leading role for nearly a decade in pioneering and supporting an impactful prevention and education program to combat opioid abuse and diversion under the umbrella of the Generation Rx program, which we developed in partnership with the Ohio State University School of Pharmacy.

Our Board has been active in its oversight and review of the effectiveness of our opioid anti-diversion program, including through regular briefings by management, as well as other important opioid-related issues.

Below is information about the history of 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.
• The testimony of Chairman of the Board and former Chief Executive Officer George Barrett at a hearing of the U.S. House of Representatives Committee on Energy and Commerce entitled “Combating the Opioid Epidemic: Examining Concerns About Distribution and Diversion.”
• 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.

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 through the Opioid Action Program and other initiatives.

The Board and its Committees regularly review anti-diversion and controlled substances monitoring systems and ethics and compliance programs generally, with members of management with responsibility for these programs attending 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. The Audit Committee and Board receive updates, as appropriate, regarding our anti-diversion program through these ethics and compliance reports as well as through occasional interim reports. In addition, the Deputy General Counsel provides quarterly reports to the Audit Committee about litigation and investigations, including reports about regulatory matters relating to opioids. Finally, the Audit Committee receives an annual report from the Chief Quality and Regulatory Officer regarding quality and regulatory affairs. The Senior Vice President- 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.

In addition to its ongoing oversight and engagement with management regarding anti-diversion and opioid-related matters, the Board has taken the following governance actions relating to the opioid epidemic:

• As discussed below, 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.
• In February 2018, the Board formed an Ad Hoc Committee of independent directors to assist the Board in its oversight of opioid-related risks. As discussed in greater detail below, 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.

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

• In 2015, as a result of shareholder discussions, the Board expanded the Nominating and Governance Committee’s oversight of our policies and practices regarding political expenditures to include an annual review of our corporate political contributions and trade association dues and payments. We also began posting an annual Political Activities and Contributions Report. The reports can be found at https://www.cardinalhealth.com/en/about-us/corporate-citizenship/ethics-and-governance.html
• 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 the Company.
• In November 2017, when Mike Kaufmann was named our Chief Executive Officer, we announced that Lead Independent Director Greg Kenny would become Chairman of the Board in November 2018. In making this change, the Board considered a wide range of factors, including current market practice and the views of shareholders, and selected the leadership structure that the Board determined most appropriate at the present time.

Ad Hoc Committee of the Cardinal Health Board of Directors

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 issues. 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 met seven times from February through September 2018 and will continue to meet regularly. 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:

• anti-diversion and controlled substances monitoring programs;
• potential solutions to alleviate the opioid epidemic;
• risks posed by the opioid epidemic to the Company from a legal, financial, and reputational perspective;
• litigation, including the Multi-District Litigation before Judge Polster in Ohio and related settlement discussions;
• the investigations and negotiations led by the State Attorneys General “Multistate” Group;
• changes in the regulatory and legislative environment;
• our Opioid Action Program; and
• corporate governance and engagement with key stakeholder groups, including shareholders, customers, employees and others.

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 every Board meeting since the Committee was formed, 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 we should take.

George Barrett’s Congressional Testimony

On May 8, 2018, Chairman of the Board and former Chief Executive Officer George Barrett testified together with the current and former CEOs of four other distributors at a hearing before the U.S. House of Representatives Committee on Energy and Commerce, Subcommittee on Oversight and Investigations, entitled “Combating the Opioid Epidemic: Examining Concerns About Distribution and Diversion.”

Mr. Barrett’s written testimony is available here.

Cardinal Health Board of Directors’ 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 conduct an investigation into 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.

More information about our anti-diversion program can be found here here.

Note: During the course of 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.

Date: October 2018