June 11 (Bloomberg) -- Allergan Inc. investors can seek to hold directors responsible for criminal sanctions and a $600 million penalty that the maker of the wrinkle smoother Botox was ordered to pay for marketing the drug for unapproved uses, a judge ruled.
Two pension funds who contend that Allergan’s board failed to properly oversee executives who marketed Botox for ailments that hadn’t been approved by regulators have amassed enough evidence about the illegal sales effort to proceed with their claims, Delaware Chancery Court Judge Travis Laster concluded today.
The funds’ allegations “support a reasonable inference that the board consciously approved a business plan predicated on violating the federal statutory prohibition against off-label marketing,” Laster said in his 82-page ruling.
Botox, Allergan’s best-selling product, had $1.59 billion in sales last year, about half for cosmetic uses and half for migraine treatment, incontinence and other conditions. The Irvine, California-based drugmaker said this year that it’s seeking to expand the medical use of Botox for patients with overactive bladders after two studies highlighted its effectiveness as a treatment.
David Pyott, Allergan’s chief executive officer, told Bloomberg News in an interview that analysts estimate the new indication, for more-severe bladder problems, may generate about $400 million a year in sales.
Bonnie Jacobs, a spokeswoman for Allergan, declined to comment on Laster’s ruling. “At this point, we haven’t fully reviewed the ruling,” she said in an e-mailed statement.
Allergan’s marketing efforts have been the focus of scrutiny since 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 U.S. Food and Drug Administration hadn’t approved Botox as a treatment for those ailments, government officials said.
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.
Allergan officials “held workshops to teach doctors and their office staffs how to bill for off-label uses” and set up a Botox reimbursement hotline so doctors could get advice on how to use the drug for unapproved uses, prosecutors said in a Justice Department statement about the settlement.
In 2010, the Louisiana Municipal Police Employees Retirement System, which invested in Allergan’s shares, filed a so-called derivative suit against the company’s board over the Botox marketing campaign. It later was joined in the suit by a Pennsylvania-based pension fund for restaurant workers.
Under such suits, any recovery from individual directors or insurance covering them would go to the company’s coffers rather than to individual shareholders.
The pension funds argued that because the Botox off-label marketing plan was part of the company’s “strategic plan,” directors knowingly approved of the illegal sales and facilitated them by providing more staff and funding, according to court filings.
Allergan’s lawyers countered in their court filings that board members never approved illegal sales tactics for Botox and enacted policies to “prevent inappropriate marketing.”
The drugmaker’s lawyers argued the Delaware suit couldn’t go forward after a federal judge in California threw out similar claims filed by other Allergan shareholders over the Botox marketing campaign.
Laster concluded the Delaware case could move forward because the shareholders who had filed in Chancery Court were bringing slightly different claims from the California case.
He also found the California investors “did not adequately represent Allergan” in their derivative suit. Shareholders who file such cases are suing in the company’s name since the recovery would go back to the firm.
Laster also said that shareholders seeking to hold directors liable for wrongdoing don’t have to “point to actual confessions of illegality by defendant directors to survive” motions to dismiss their cases.
Allergan investors who brought the Delaware cases have gathered evidence that they contend shows Allergan directors repeatedly approved strategic plans for Botox that relied on off-label marketing to generate sales, Laster said.
The board then closely monitored Allergan’s “dramatic success in increasing sales at rates far exceeding what the market for existing on-label uses could support,” the judge said.
The case is Louisiana Municipal Police Employees Retirement System and UFCW Local 1776 & Participating Employers Pension Fund v. Pyott, 5795, Delaware Chancery Court (Wilmington).
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