Pharma-Karma: $1 Billion Fines No Biggie for Illegally Promoting Off-Label Drug Use

Abbott Laboratories (ABT) copped to the second-biggest pharmaceutical settlement in history last month. Despite a lack of scientific evidence to support its claims, it had been marketing Depakote, a seizure drug, as a drug that could also control agitation and aggression in dementia patients and treat schizophrenia. Whistleblowers blew the case open, and the settlement was announced May 7. Abbott has to pay $1.5 billion -- $700 million for a fine and forfeiture, and $800 million to settle with the federal government and states.

ABT Chart

ABT data by YCharts

Abbott’s activity was blatant. From 1998 to 2006, it had a special sales force trained to market Depakote for off-label use. But here’s the thing that investors should realize: an off-label crisis will not sink a stock. Almost every major drug maker has been accused of this. Right or wrong, there’s a lot of money to be made here that appears to more than make up for the fines and other penalties involved.

For context, here are the biggest settlements involving off-label marketing, culled from a list the Department of Justice sent over of the “top settlements in fraud against the government.” The dollar amounts listed include federal and state civil recoveries as well as criminal fines.

1. Pfizer (PFE) - $2.3 billion, 2009

2. Abbott - $1.5 billion, 2012,

3. Eli Lilly (LLY) - $1.415 billion, 2009

4. Merck Sharp & Dohme - $950 million, 2011

5. TAP Pharmaceuticals - $875 million, 2001

6. Serono, S.A. - $704 million, 2005

7. Purdue Pharma - $634 million, 2007

8. Allergan (AGN) - $600 million, 2010

9. AstraZeneca (AZN) - $520 million, 2010

10. Bristol-Myers Squibb (BMY) - $515 million, 2007

Some of the best-known drugs have been the subject of off-label scandals. Take Botox, the drug at issue for Allergan in 2010. Well known for keeping foreheads as smooth and shiny as a baby’s butt, Botox has more than 100 therapeutic and cosmetic uses, according to Allergan’s statement in a 2002 10-K. It was approved in 1989 to treat crossed eyes and involuntary eyelid muscle contraction, and it was later also approved to treat involuntary neck muscle contraction, excessive underarm sweating and upper-limb spasticity. The Feds nailed Allergan for promoting Botox for pain and headache sales, among others. The company called on doctors and held workshops where it helpfully taught doctors how to bill for off-label uses.

But the $600 million crackdown makes barely a dent. Last year Botox brought in $1.6 billion in sales, $10.4 billion in the past decade. Its sales have grown 8% to 28% a year, with the exception of 2009, when they were basically flat. Allergan blamed the small decline on weakened consumer spending and the introduction of a competitive product, not on the federal subpoena received the year before.

AGN Chart

AGN data by YCharts

Perhaps the best study is Pfizer, still the reigning king of off-label marketing settlements. It agreed to pay a whopping $2.3 billion over its marketing of Bextra, a painkiller, as well as Geodon, Zyvox and Lyrica. Bextra was taken off the market in 2005. Pfizer settled the case September 2, 2009. But what weighed on the stock more than the settlement was a $68 billion acquisition of Wyeth. For the past three years, Pfizer has made more than $1 billion each year from each of Geodon, Zyvox and Lyrica. That’s $9 billion-plus in sales in three years, far more than the settlement. Might that help explain why it was reportedly Pfizer’s fourth settlement over illegal marketing since 2002?

PFE Chart

PFE data by YCharts

So what about Abbott’s Depakote? It was approved to treat seizures in 2003. It hit $1.5 billion in sales in 2007. So the fine, while steep, was essentially one good year of sales. A bigger problem for Abbott and its investors is that Depakote was exclusive until July 2008. Since then, sales have dried up. Generics are a bigger threat than the government.

Emily Lambert is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.

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