Score one huge courtroom win for pharma companies. The Court of Appeals for the Second Circuit overturned the conviction of Alfred Caronia for promoting the drug Xyrem for off-label uses. Caronia was a sales representative for Orphan Medical, which was later acquired by Jazz Pharmaceutical (NASDAQ:JAZZ). Two of the three appellate judges determined that the First Amendment's protection of free speech applies to discussions about off-label uses of products by pharmaceutical company employees.
What it means
The ruling only applies to the Second Circuit, which includes New York, Connecticut, and Vermont. Pharmaceutical companies probably won't change any promotional practices because of the limited geographical area covered by the court's decision. However, it certainly wouldn't be surprising if individual sales reps in those states feel more confident now in discussing potential off-label uses of their companies' drugs with physicians.
This probably isn't the end of the story. If the federal government appeals, which some think is likely, the case could eventually end up reaching the Supreme Court.
What it could mean
Should the Supreme Court hear the case and uphold the Second Circuit court's decision, the impact would be enormous. A survey of recent litigation involving off-label marketing gives a glimpse of how significant such a decision could be.
In October, a federal court in Virginia fined Abbott Laboratories (NYSE:ABT) $700 million for marketing Depakote for off-label uses. Depakote is approved for treating seizures, but Abbott admitted to promoting usage of the drug for dementia and schizophrenia. The $700 million fine was part of an overall $1.6 billion settlement agreement.
GlaxoSmithKline (NYSE:GSK) settled in July for $3 billion over allegations that the company promoted Paxil and Wellbutrin for unapproved purposes. The case also involved accusations that Glaxo didn't report safety information on its diabetes drug Avandia.
Another recent settlement involved Merck (NYSE:MRK). The company was fined $322 million in April for marketing Vioxx years ago for rheumatoid arthritis before the drug received Food and Drug Administration approval for the condition. The overall settlement in this case totaled near $1 billion.
These are just three recent cases that combine for nearly $5 billion. Investigations and potential settlement discussions are under way for other companies, also.
For example, Johnson & Johnson (NYSE:JNJ) is accused of marketing antipsychotic drug Risperdal for unapproved indications. The company set aside $1.7 billion to cover potential legal settlements. The company has been in talks with the Justice Department to try to settle the case.
The possibility that off-label marketing could be protected as free speech could mean that pharma companies keep these billions of dollars for investment or returning to shareholders. It also could result in increased sales for drugs for off-label uses.
Judging the judges
Not everyone agrees with the appellate court decision. Even one of the judges on the court disagreed. In her dissenting opinion, Judge Debra Ann Livingston made the case that that drug companies "would have little incentive to seek FDA approval" for non-approved uses if they could legally market for those uses.
I'm not sure that Judge Livingston's argument is totally convincing. FDA approval definitely helps pharmaceutical companies with convincing payers that reimbursement should be provided for drugs. The approval also makes a difference in persuading physicians to prescribe one drug over another. Regardless, the U.S. Constitution protects free speech, but as far as I can tell it doesn't protect the FDA anywhere.
However, it's also possible that the decision could have negative consequences, such as higher spending on drugs that really aren't effective for treating a condition. Freedom of speech might come at a cost.
Fool contributor Keith Speights has no positions in the stocks mentioned above. The Motley Fool owns shares of GlaxoSmithKline and Johnson & Johnson. Motley Fool newsletter services recommend GlaxoSmithKline and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.