Allergan Files Federal Lawsuit

Allergan Inc. (AGN - Analyst Report) recently filed a lawsuit seeking a ruling that the company should be allowed to share truthful and relevant information on Botox with physicians so as to help them evaluate the risks and benefits associated with certain off-label therapeutic uses of the treatment. The lawsuit does not relate to the cosmetic use of Botox.

The declaratory relief action has been filed by the company in the United States District Court for the District of Columbia . The company is contending that the government's ban on off-label drug marketing to doctors violates the First Amendment and is inconsistent with the Federal Food, Drug & Cosmetic Act.

Botox is approved for several uses by the FDA. In addition to its use as a wrinkle treatment, it is approved for ophthalmic movement disorders and severe underarm sweating. Allergan is currently studying Botox for several additional indications including migraine/headache, neurogenic overactive bladder, idiopathic overactive bladder, prostatic hypertrophy and post herpetic neuralgia.

However, Botox is often used by physicians for unapproved, or off-label, indications including muscle-spasm conditions. Although physicians are allowed to prescribe drugs for unapproved indications, companies are not allowed to market their products for off-label usage. This poses a problem for Allergan as effective Sept. 2009, the FDA is requiring all botulinum toxin products approved in the U.S. to carry safety updates on their labels. Moreover, the FDA has asked the companies to implement Risk Evaluation and Mitigation Strategies (REMS) for these products.

The safety updates and REMS program require the company to speak in general terms about certain off-label uses of Botox. However, the company contends that in order to ensure that physicians are equipped to treat patients as safely and successfully as possible, it is important to proactively provide comprehensive information regarding the off-label uses, such as dosing guidelines, patient selection criteria and proper injection technique. But Allergan will not be in a position to do so as the off-label marketing of any drug will attract prosecution and penalties from the Government.

We note that Pfizer, Inc. (PFE - Analyst Report) recently had to pay $2.3 billion to settle civil and criminal allegations that it had illegally marketed four of its drugs. Another company, Eli Lilly (LLY - Analyst Report) agreed to pay $1.4 billion for promoting its drug Zyprexa for uses not approved by the FDA. Allergan could find itself in a similar situation if the company is found promoting Botox for off-label uses.

We have a Neutral rating on Allergan. Even though the company is facing significant challenges in the form of slowing sales due to the global economic weakness, safety issues surrounding the use of Botox and foreign currency headwinds, we think Allergan will be able to face these challenges well and will be back on its historical mid-to-high teens earnings growth trajectory from 2011.

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