Walgreens appears likely to withstand potential billion-dollar hit from DOJ complaint
On 17 January, the US Department of Justice (DOJ) sued Walgreens Boots Alliance, Inc and related entities, alleging that the pharmacy giant illegally filled “millions” of invalid prescriptions for controlled substances and unlawfully sought reimbursement from the federal government. The monetary penalties for these violations are severe, and the government is seeking a recovery from Walgreens that potentially could reach into the billions of dollars. In this article, Debtwire’s legal and financial analyst teams provide an overview of the lawsuit, which is similar to one brought by the DOJ in 2022 against Rite Aid Corp and another filed this past December against CVS Pharmacy Inc. We also discuss how to potentially value the claims and, assuming the parties reach a settlement, Walgreens’ ability to pay.
DOJ alleges Controlled Substances Act and False Claims Act violations but does not quantify penalties
On 16 January, the DOJ filed a complaint in intervention in several qui tam lawsuits[1] against Walgreens Co and several affiliates, alleging that from August 2012 to the present Walgreens violated federal law by filling “millions” of invalid controlled substance prescriptions and by unlawfully seeking reimbursement for them from four federal healthcare programs: (i) Medicare, which offers health insurance coverage for people aged 65 or older and provides prescription drugs through Medicare Part D; (ii) TRICARE, which is part of the military’s health care system; (iii) the Federal Employees Health Benefits Program (FEHBP); and (iv) the Federal Employees’ Compensation Act (FECA) program, which covers worker’s compensation for federal employees.
The DOJ further asserted that Walgreens violated the Comprehensive Drug Abuse Prevention and Control Act of 1970 (Controlled Substances Act or CSA) and the False Claims Act (FCA). The CSA created a category of drugs called “controlled substances” that are strictly monitored. The drugs are categorized into different “schedules” based on their potential for abuse and include opioid-based painkillers such as oxycodone and fentanyl, benzodiazepines such as Xanax and Valium, and muscle relaxants. The CSA and related federal regulations mandate that pharmacists dispense controlled substances only pursuant to valid prescriptions issued “for a legitimate medical purpose” and “by an individual practitioner acting in the usual course of his professional practice.”[2] Under the CSA, anyone who “knowingly” “distribute[s] or dispense[s] a controlled substance” in violation of these requirements is liable for civil penalties.[3] In turn, the FCA provides that any person who “knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval” or “knowingly makes, uses, or causes to be made or used, a false record or statement material to a false or fraudulent claim” is liable for damages and penalties.[4] A person acts “knowingly” for purposes of the FCA if they have actual knowledge or act in “deliberate ignorance” or “reckless disregard” of the truth or falsity of the information.[5]
The DOJ said that Walgreens “violated the CSA and FCA . . . by knowingly dispensing invalid controlled substance prescriptions and submitting claims for reimbursement for those prescriptions to Federal Healthcare Programs.” More particularly, it alleged that Walgreens knew about its obligations to comply under the CSA, as evidenced by a compliance program that Walgreens had instituted pursuant to a memorandum agreement with the federal Drug Enforcement Administration (DEA). At the same time, said the DOJ, Walgreens implemented other policies that disincentivized adherence to those compliance policies and legal obligations. According to the DOJ, this included imposing a 15-minute limit for verifying and filling prescriptions and a practice of filling prescriptions to avoid customer complaints. The DOJ alleged that pressure to fill invalid controlled substance prescriptions also was applied by managers, who often overrode pharmacists’ refusal to fill them. Furthermore, according to the DOJ, Walgreens’ pharmacists filled prescriptions from doctors identified as “problem prescribers,” as well as prescriptions that presented “red flags” because they were (i) for high opioid doses, (ii) for combined prescriptions for opioids, benzodiazepines and muscle relaxants (referred to as the “trinity”), or (iii) filled early. The DOJ asserted that Walgreens was aware that its compliance policies were ineffective and were being ignored by pharmacists from internal compliance audits, which were in any event “rarely conducted.” Finally, the DOJ accused Walgreens of illegally submitting millions of reimbursement claims for the invalid subscriptions to federal health agencies.
To remedy these alleged violations, the DOJ has asserted a cause of action to address Walgreens’ dispensing of medication in violation of the CSA, with the exact number of violations and the penalty for each violation to be established at trial. It also asserts two claims under the FCA; one for the presentation of false claims that were ineligible for reimbursement and the other for making and using false records. The DOJ also seeks recoveries under the common law claims of payment by mistake of fact and unjust enrichment. However, the DOJ has not reduced its claims to a specified dollar amount.
Walgreens’ history of opioid lawsuits
Walgreens is no stranger to opioid lawsuits, as the DOJ lawsuit is not its first. In 2022, the company entered into a multistate settlement agreement that resolved opioid-related lawsuits filed by state attorneys general and certain tribes. Specifically, Walgreens agreed to make respective payments to the states and tribes of USD 4.8bn and USD 155m, and agreed to pay USD 754m in attorneys’ fees and costs. The payments are to be made over a 15-year period. The company said in its 2024 10K that as of 31 August 2024, it had accrued a USD 6.6bn liability in connection with the multistate agreement and other opioid-related claims and settlements. It remains a defendant in multiple opioid-related lawsuits that have been consolidated in federal court and various state court actions.[6]
Estimating Walgreens’ potential opioid liability under the CSA and FCA
The principal questions in relation to the DOJ lawsuit are – what is Walgreens’ potential liability, and can the company afford to absorb that liability? In terms of liability the sky is the limit, theoretically. The DOJ seeks up to USD 80,850 for each violation of the CSA and between USD 13,946 and USD 27,894 for each violation of the FCA committed after 2 November 2014. The DOJ also seeks treble damages under the FCA. Because the DOJ has alleged that there are “millions” of violations, the sought-after damages could run into the scores of billions of dollars. However, assuming that the case does not go to trial and the parties settle, as most cases do, the settlement likely will be at a discount to the highest possible penalties.
One rough way to reasonably estimate Walgreens’ potential liability is by making a comparison to another national pharmacy chain that settled a similar lawsuit – Rite Aid. Like Walgreens, Rite Aid was sued by the DOJ in 2022 for violations of the CSA and FCA in connection with the dispensing of opioids.[7] In part due to its opioid litigation, Rite Aid filed for Chapter 11 the following year. During the pendency of its bankruptcy case, in July 2024, Rite Aid entered into a settlement with the DOJ and agreed to make a USD 7.5m upfront settlement payment within ten days of the plan effective date and granted the US an allowed general unsecured claim of USD 401,868.524.
Compared to Rite Aid, Walgreens has a much larger store footprint and holds a larger share of the prescription drug market. Whereas Rite Aid had 2,111 stores at the time of its bankruptcy filing, as of 31 August 2024 Walgreens operated 8,560 US stores. [8] According to Statista, in 2023 Walgreens possessed approximately 14.7% of the market share for prescription drugs while Rite Aid had only 2.2%. To the extent that the pharmacies’ store footprints and market share correlate significantly with their controlled substance liability, a Walgreens settlement could be four to almost seven times larger than Rite Aid’s.
However, focusing solely on the store footprint or market share ignores other variables that could impact Walgreens’ opioid liability. Outcomes could diverge to the extent that Walgreens’ and Rite Aid had different compliance policies and differing levels of adherence to them. The pharmacies’ ratios of controlled substance prescriptions to total prescriptions may also have differed significantly. In addition, the amount for which the DOJ was willing to settle with Rite Aid may have been influenced by the fact that the company was in Chapter 11, where its allowed general unsecured claim would be paid in bankruptcy dollars at a fraction of its nominal amount. In contrast, in determining the amount of a Walgreens’ settlement, the DOJ likely would take into consideration Walgreens’ anticipated cash flow and what it could afford to pay year-to-year.
Another way to estimate Walgreens’ potential opioid liability is to focus on market value. Debtwire has analyzed the decline in Walgreens’ equity market value following the DOJ’s announcement. When the news was released on 17 January 2025, its stock price stood at USD 12.81, for a market capitalization of USD 11.07bn. By the close of the next trading day, on 21 January 2025, the stock had declined 11.2% to USD 11.37bn, for a market capitalization of USD 9.83bn, reflecting a total market value loss of USD 1.25bn.
As shown in the capital structure chart below, based on a market value estimate, and after applying a 25% tax adjustment, Walgreen’s estimated opioid liability could amount to approximately USD 1.67bn.
Walgreens’ ability to pay any eventual settlement
To evaluate Walgreens’ ability to cover its potential opioid liability, Debtwire analyzed its liquidity position and debt obligations based on the following assumptions:
- Settlement Payment Period: Payments would be spread over 15 years, similar to the multistate settlement agreement;
- Cash and Marketable Securities: As of 30 November 2024, Walgreens held USD 1.2bn in unrestricted cash and marketable securities;
- Committed Credit Facilities: Walgreens has two undrawn revolvers totaling USD 5.75bn, maturing in August 2026 and June 2027; and
- Debt Maturity Assumptions: We assume all debt maturing in 2025-2027 (USD 4.6bn) will be refinanced, though at higher interest rates:
- 2025: USD 376m GBP notes; and
- 2026: USD 2bn in DDTLs, USD 1.45bn in US notes, and EUR 750m Euro notes.
- Dividend Reduction Flexibility: Walgreens has suspended its dividend that would have paid out USD 864m annually. The suspension will allow management to evaluate and refine its capital allocation policy and provide additional liquidity for litigation and debt refinancing.
Given these factors, Walgreens appears to have the liquidity and credit capacity to absorb its estimated liability.
Walgreens bankruptcy risk analysis
It does not appear that Walgreens should be at risk of a Chapter 11 filing due to the following factors:
- Equity Market Value: Walgreens’ current market capitalization stands at USD 8.4bn;
- Leverage Position: Walgreens’ net leverage ratio (based on next twelve months’ adjusted EBITDA of USD 3.2bn) is 2.7x;
- Credit Ratings: Moody’s has assigned Walgreens a Corporate Family Rating of Ba3, while S&P recently downgraded Walgreens’ Issuer Credit Rating to BB- from BB.
Although Walgreens’ credit profile has weakened as a result of the DOJ lawsuit, the company’s ability to manage debt maturities and leverage credit facilities suggests that its bankruptcy risk should remain low. However, challenges in refinancing at higher rates or additional legal liabilities could alter this outlook.
Walgreens should be able to weather the DOJ storm
Based on our analysis, Walgreens possesses the financial flexibility to manage its estimated opioid liability over a prolonged period. While refinancing costs and potential regulatory penalties should be monitored, the company’s liquidity and credit access should provide a buffer against immediate financial distress.
Paul Gunther is a former practicing restructuring and litigation attorney. Prior to joining Debtwire as a Legal Analyst, Paul practiced in the New York offices of Dentons US LLP, Salans LLP and Mayer Brown LLP. He has represented various constituencies in high-profile restructurings.
Any opinion, analysis or information provided in this article is not intended, nor should be construed, as legal advice, including, but not limited to, investment advice as defined by the Investment Company Act of 1940. Debtwire does not provide any legal advice and subscribers should consult with their own legal counsel for matters requiring legal advice.
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Endnotes
[1] A qui tam action is an action that allows private plaintiffs, called “relators,” to file suit on behalf of the government for violations of the False Claims Act.
[2] 21 U.S.C. § 829(a)-(c); 21 C.F.R. § 1306.04(a).
[3] 21 U.S.C. § 842(a)(1).
[4] 31 U.S.C. § 3279(a)(1)(A)-(B).
[5] 31 U.S.C. § 3279(b)(1).
[6] In re National Prescription Opiate Litigation, MDL No. 2804, Case No. 17-MD-2804 (N.D. Ohio).
[7] United States ex. Rel. White v. Rite Aid Corp., Case No. 1:21-CV-1239 (N.D. Ohio).
[8] In March 2018, Rite Aid sold 1,932 stores to Walgreens.
Photo: Walgreens