If the FDA allows Allergan (AGN) to promote Botox for headaches it will essentially be rewarding the company for behaving illegally: Allergan will be able to say that its $600 million settlement with the Department of Justice for its illegal pre-approval marketing of Botox for migraines was simply a new-product launch expense.
Pharmaceutical companies are prohibited by law from "off-label" marketing, or promoting drugs for uses not approved by the FDA. Allergan was caught doing by the DOJ exactly that on Botox, which it wants to be accepted as a headache treatment. Allergan pled guilty to civil and criminal charges.
The DOJ settlement -- and the fact that Allergan was touting Botox off-label -- was not a surprise. The company announced in 2009 that it was suing the FDA for the right to make off-label claims about Botox. That announcement came about a year after the company released results of its Botox-for-headaches studies.
The $600 million deal is less than the amount that Allergan expects to make from the drug if it is approved for migraines. The shots will cost up to $2,000 per treatment; as many as 3.6 million Americans suffer from migraines; and Wall Street estimates that Botox headache treatments could thus generate up to $1 billion a year in revenue.
We cannot say that Allergan deliberately priced-in the risk of tangling with the feds as part of a Botox/headache marketing expense. But we can say that this type of phenomenon isn't unique:
AstraZeneca (AZN) has similarly earned more in revenues than it has paid in legal expenses on its antipsychotic Seroquel, and those revenues have only been increased by AZ's over-the-line promotion of the product.
These perverse incentives -- where the deterrent is merely the cost of the reward for the prohibited behavior -- raises an interesting question for the investors who are suing Allergan over its payment of the $600 million. They argue that the deal has lowered Allergan's stock because it was obvious that management should not have taken the risk; they want Allergan's board members to reimburse the company. The company can argue that the suit is flawed because the extra $1 billion in recurring annual revenue -- if the FDA grants Allergan's application -- will more than offset the cost of dealing with the DOJ. Even if the FDA rejects Allergan's application, there has been so much talk about Botox for headaches that Allergan will still gain extra revenues from doctors using the drug on patients whose problems don't respond to conventional treatment.
As for the FDA, it must consider only two factors in Allergan's headache application: safety and efficacy. It cannot reject Allergan's bid because it does not want to reward a bad actor.