A storm is brewing over the promotion of drugs for off-label uses that could fundamentally alter the pharmaceutical industry. It all started nearly 18 months ago when a conviction of a pharmaceutical sales rep named Alfred Caronia, for promoting the off-label use of the narcolepsy drug Xyrem, was overturned by the Second Circuit Court of Appeals, citing his right to free speech as a valid defense.

All told, the government was prosecuting Mr. Caronia for his words, which the court declared as protected by the First Amendment. In a 2-1 decision, the Second Circuit stated that the government "cannot prosecute pharmaceutical manufacturers and their representatives ... for speech promoting the lawful, off-label use of an FDA-approved drug."

What this decision seems to mean is that it will be more difficult for the government to prosecute pharmaceutical companies under the U.S. Food, Drug and Cosmetic Act, or FDCA, for promoting the off-label uses of their drugs. The U.S. Justice Department, by contrast, appears to disagree, stating soon after the decision came down that they will continue to aggressively pursue cases of drug misbranding.  

Implications and limitations of the Caronia case
In an interesting turn of events, the government decided not to appeal this decision to the Supreme Court -- and for good reason. If the Supreme Court upheld this decision, it would mean that the ruling would apply to the entire nation. As it stands now, the ruling only applies to New York, Connecticut, and Vermont. 

What's important to understand is that there is strong incentive for pharma companies to promote their drugs off-label. For instance, GlaxoSmithKline's (NYSE:GSK) Omega3 pill Lovaza has reportedly been able to garner blockbuster status primarily by being prescribed off-label for patients with only moderately high triglyceride levels.

When companies have run afoul of the FDCA in the past, however, they have often gotten hit with multibillion dollar fines. In 2012, GlaxoSmithKline and Abbott Laboratories both received fines soaring into the billions for promoting the off-label uses of certain drugs to doctors.  

The complications arising from the Caronia ruling are forcing the FDA to rework its regulatory policy on the matter. For instance, we learned last month at the Food and Drug Law Institute annual meeting that the FDA is making this issue a top priority. Even so, the vague comments made by FDA officials at the meeting seem to reveal that they are still unsure of how best to handle the situation. As such, major policy changes could be a ways off. 

Could we already be seeing the impact of this ruling?
Perhaps one of the biggest surprises in first-quarter earnings was the strong performance of Johnson & Johnson's (NYSE:JNJ) new hepatitis C drug Olysio, which raked in $354 million despite the record-breaking performance of Gilead's (NASDAQ:GILD) drug Sovaldi in the same quarter. When the dust settled and the numbers were crunched, we learned that a large portion of Olysio prescriptions came from off-label use as a combo therapy with Sovaldi.   

Why doctors decided to prescribe Olysio primarily off-label isn't entirely clear, although recommendations to do so from two different medical societies may have helped drive this trend.  Another possibility, however, is that pharma reps may have been more inclined to inform doctors of the potential benefits of this off-label use in the wake of the Caronia decision. 

In another highly surprising move, Mallinckrodt (NYSE:MNK) decided to acquire embattled biopharma Questcor Pharmaceuticals (UNKNOWN:QCOR.DL) last April for what amounted to a 27% premium at the time. Besides having a short interest near a whopping 40% at the time, Questcor's future has been in question ever since an investigation into the company's marketing practices for its drug Acthar gel was announced almost two years ago. Cutting to the chase, it's hard to imagine Mallinckrodt putting up $5.6 billion if it felt that Questcor was in serious legal danger. My view is that the Caronia ruling may have helped assuage any fears of massive fines or other legal ramifications. 

Foolish wrap-up
Although we can't peer behind closed doors to know exactly how this ruling is affecting the industry, we have now seen at least two notable and unexpected events take place that may have their roots in this decision. That said, the immediate beneficiary of the Caronia ruling would appear to be large pharmas that have the resources to handle a protracted legal battle, if the Justice Department stays true to its word. Looking ahead, you should thus expect smaller companies to pay close attention to how the FDA rethinks its policy on off-label marketing practices. Ultimately, the industry and government need to come to an understanding of what the term "lawful" means in the Second Circuit's decision, which might feature prominently in the FDA's revised policy moving forward.