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Allergan Says Judge Erred in Allowing Investor Suit

Allergan Inc. (AGN) investors should be barred from seeking to hold directors responsible for a $600 million penalty the maker of the wrinkle smoother Botox had to pay over illegal marketing of the drug, the company’s lawyers told Delaware’s high court.

A judge erred in allowing Allergan shareholders to proceed with a lawsuit that accuses the company’s board of failing to properly oversee executives who marketed Botox for ailments that hadn’t been approved by regulators, Allergan’s attorneys argued before the Delaware Supreme Court today. The company pleaded guilty to a criminal charge over the marketing in 2010.

Delaware Chancery Court Judge Travis Laster concluded in June that investors had amassed enough evidence about directors’ knowledge of the illegal sales effort to press ahead with their claims. Allergan’s attorneys contend Laster should have followed a federal judge’s lead and thrown out the case.

“This is a case that should only be decided once,” Mark Perry, a Washington-based lawyer for Allergan, argued today. “There’s no reason to allow re-litigation.” The court said it would rule later on the case.

Wrinkle Treatment

The arguments before the Delaware Supreme Court come as Irvine, California-based Allergan reported fourth-quarter earnings today. Botox, Allergan’s best-selling product, generated more than $1.7 billion in sales last year, about equally divided between uses for medical purposes and wrinkle treatment, according to the company’s earnings release. The company is projecting as much as $2 billion in 2013 sales.

Last month, the U.S. Food and Drug Administration approved Botox for use in adult patients suffering from overactive bladders. It was the eighth condition for which Botox, based on a purified form of the botulinum toxin, has been approved.

The drugmaker has launched an acquisition push over the last four months. It bought Map Pharmaceuticals (MAPP) Inc. in January for $958 million to gain an experiment inhalable migraine treatment and paid $350 million in November to acquire a unit from SkinMedica Inc.

Carlsbad, California-based SkinMedica’s products include a prescription treatment for reducing female facial hair and lotions to reduce the appearance of wrinkles.

Botox Sales

The company also is planning to sell its obesity-treatment unit early this year, Chief Executive Officer David Pyott said today.

Allergan’s marketing efforts came under scrutiny in 2007, when federal prosecutors began reviewing Botox sales. They started the probe after whistle-blowers claimed the company was using illegal marketing tactics to turn the medication into a blockbuster drug.

Allergan officials agreed in September 2010 to plead guilty to a charge of misbranding Botox by promoting it for unapproved uses and to pay a total of $600 million in fines and damages.

The drugmaker agreed to pay $375 million in criminal fines and $225 million to resolve civil claims filed by the U.S. Justice Department over Botox’s marketing campaign.

Prosecutors alleged Allergan executives pushed its sales force to market the anti-wrinkle drug for headaches, pain, muscle stiffness and juvenile cerebral palsy. At the time of those sales, the FDA hadn’t approved Botox as a treatment for those ailments.

Marketing Missteps

Although doctors may prescribe drugs for uses not approved as safe and effective by government regulators, companies are forbidden to market them for off-label uses.

In the wake of the company’s guilty plea, two pension funds who invested in the drugmaker sued in Delaware seeking to hold directors accountable for the company’s marketing missteps. The funds’ derivative suit would return any recovery from insurance covering board members to the company.

A separate set of Allergan shareholders sued the company’s board in federal court in California over similar claims about the illegal marketing campaign. A judge later threw that case out.

Allergan’s lawyers told the appeals court today that Laster should have considered himself bound by his federal colleague’s ruling since the two derivative suits were “materially identical,” according to court filings.

Sister States

Under the U.S. Constitution, state courts are required to give “full faith and credit” to final judgments from sister states or federal courts to promote judicial economy, Perry said today. “This is a case about federalism, about the respect that must be offered to other courts,” the company’s lawyer added.

The company’s position drew support from the U.S. Chamber of Commerce and the Washington Legal Foundation, which filed briefs supporting arguments that Laster should have deferred to his federal colleague.

A lawyer for the pension funds countered in her argument that Laster correctly found the California shareholders didn’t adequately represent all Allergan investors in the case that got thrown out and the suit fell into an exception to the legal rule requiring judges to defer to earlier rulings.

“I don’t believe there’s an absolute ban because another court rendered a decision,” Pam Tikellis, a Wilmington, Delaware-based lawyer for investors.

Tikellis noted in court filings that because the Botox off- label marketing plan was part of the company’s “strategic plan,” directors knowingly approved the illegal sales and facilitated them by providing staff and funding for the program.

Allergan’s lawyers countered in their court filings that board members never approved unlawful sales tactics for Botox and enacted policies to “prevent inappropriate marketing.”

The case is Pyott v. Louisiana Municipal Police Employees Retirement System, No. 380, 2012, Delaware Supreme Court (Dover).

To contact the reporters on this story: Jef Feeley in Wilmington, Delaware, at jfeeley@bloomberg.net; Dawn McCarty in Wilmington at dmccarty@bloomberg.net

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net

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