The Feds Eye Endo

• Email
• Share
• Print

Of course, the day that I nominated Endo Pharmaceuticals (Nasdaq: ENDP) as one of the best drug stocks for 2007, it had to announce that the U.S. Department of Health and Human Services had begun investigating its sales practices for its lead product.

Last week, Endo revealed that it had received a subpoena requesting documents dating back all the way to 1999, when the company began marketing its lidocaine pain patch, Lidoderm, after it was approved for sale by the FDA. The government is investigating what Endo knew about physicians' "non-indicated use" of the drug. Shares of Endo fell several percentage points immediately after the news of the investigation was announced, but recovered quickly that same day. Investors don't seem too concerned about the investigation.

Lidoderm is approved to treat nerve pain caused by the shingles virus, but at least half of Lidoderm prescriptions are for other indications. Lidoderm sales are not insignificant for Endo, since sales of the drug are expected to reach almost $540 million in 2006, which would account for more than 60% of Endo's revenues. The drug is also still experiencing torrid sales growth, with 2007 sales guidance expected to be at least 20% higher than 2006.

Pharmaceutical companies face a difficult task in marketing their products. On the one hand, their goal is to sell as many of their drugs as possible. On the other, they must do so without directly promoting drugs to doctors for non-FDA-approved uses. It's a very delicate situation, and when a drug is used off-label as much as Lidoderm, it'll always going draw regulators' attention.

It's important to remember that right now, the government is only investigating Endo, and no formal charges have been filed concerning its sales practices. Even if the Feds do file charges, these fairly common marketing disputes always get settled out of court, usually for several million dollars and a promise to correct past marketing practices. All in all, it's not a big deal one way or another. With roughly $700 million in cash and equivalents, even a multimillion-dollar settlement wouldn't be a big detriment to Endo's balance sheet.

You can check out any of the Fool's newsletters with a 30-day free trial.

Fool contributor Brian Lawler does not own shares of any company mentioned in this article. The Fool has a disclosure policy.