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The Opioid Crisis: Pressuring Drug Distributors to Step Up

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How can investors encourage pivotal companies in the healthcare industry to help stem the opioid crisis? Engagement and divestment are two tools Parnassus employs to pressure companies held in our funds to do the right thing and ensure that our investments align with our ESG standards.

The Unique Vantage Point of Drug Distributors

Systematic failures along the entire drug supply chain—including manufacturers, distributors, pharmacies, prescribers, payors and regulators—have exacerbated the spreading opioid epidemic. Drug distributors in particular have unique visibility into drug distribution patterns. In addition, they have a legal obligation to monitor and report suspected diversion of controlled substances from legitimate medical to illicit non-medical uses as well as to prevent suspicious orders from being shipped.

Investigation and Dialog with Portfolio Companies

During 2017, Parnassus initiated a series of dialogs with McKesson and Cardinal Health, which are among the largest drug distributors in the United States. We aimed to discuss allegations that these firms had neglected their legal obligation to monitor controlled substance distribution and prevent suspicious orders from being shipped. Following these discussions, we concluded that the responses of both companies were both insufficient and too slow, given the growing scope and urgency of the problem.

Rising ESG Risks Result in Divestment

Over the past year, more than 100 lawsuits have been filed by cities, counties and states against opioid manufacturers and distributors for negligence and lack of vigorous responses to the epidemic. McKesson and Cardinal Health are among those distributors currently facing numerous lawsuits over their alleged lack of vigilance as gatekeepers for opioid distribution.

As these litigation risks and the opioid crisis are both rapidly rising, we decided to take prompt action to protect our investors. Consequently, during the fourth quarter of 2017, Parnassus sold all $750 million1 of our holdings in McKesson and Cardinal Health stocks and bonds because these firms do not currently meet our ESG standards.

Please see our Responsible Investing Notes for more information about this divestment.

1As of 9/30/17

As of 12/31/2017, MCK and CAH represented 0% of TNA of the Parnassus Funds.

Mutual fund investing involves risk, and loss of principal is possible.

The views expressed are subject to change at any time in response to changing circumstances in the markets and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally, or the Parnassus Funds. Current and future portfolio holdings are subject to risks.