Does the Supreme Court Control Your Investment?

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There's a pretty big decision being made in Washington D.C. right now that could affect many investors. No, it's not who will be the next resident of the White House -- the decision is being made down the street at the Supreme Court.

Wyeth (NYSE: WYE) was sued by a woman whose arm had to be amputated after a known side effect of Wyeth's anti-nausea drug Phenergan caused her to get gangrene. She won, and Wyeth appealed. Now the case has made its way to the U.S. Supreme Court. But the case is much bigger than one woman, a drug company, and a relatively small $6.7 million verdict that Wyeth wants overturned.

A Vermont jury decided that Wyeth needed to provide a stricter warning to medical providers to avoid the side effect, but Wyeth doesn't really have any control over the drug label; it's all up to the Food and Drug Administration.

The FDA is in full control of the label. The agency can force companies to add warnings to labels as it's done recently for the TNF inhibitors -- Amgen (Nasdaq: AMGN) and Wyeth's Enbrel, Abbott Labs' (NYSE: ABT) Humira, and Johnson & Johnson's (NYSE: JNJ) Remicade. Companies can't even add things to their drug label without FDA approval; Onyx Pharmaceuticals would have loved to point out to doctors that Nexavar works in patients with liver cancer as well, but it had to wait for approval from the FDA.

You can see where this is going, right? If the Supreme Court doesn't overturn this decision, every known side effect would become grounds for suing drug companies at the state level and there wouldn't be a thing drug companies could do about it, since the FDA is ultimately in control of the warning label.

The good news for investors is that the Supreme Court appears to be on the side of the drug companies. In a case involving one of Medtronic's (NYSE: MDT) devices earlier this year, the court decided that federal law -- the FDA -- trumped state law.

Assuming the Supreme Court goes in a similar direction here, would this provide blanket immunity to drug companies as long as the warning is on the label? Depends on the wording of the ruling, but it doesn't sound like such a bad thing to me. Doctors and patients need to decide if a drug's advantages outweigh its known side effects -- Biogen Idec's (Nasdaq: BIIB) and Elan's (NYSE: ELN) Tysabri is a good example -- and drugmakers and investors shouldn't be punished if patients choose to use the drug.

This case, probably more than who becomes president, will affect the drug companies' bottom lines over the next few years. Investors would be smart to pay attention when the verdict is handed down in the first half of next year.

More Foolish analysis on politics:

• Could the election ruin your investments?
• Amazon.com is cashing in on politics.