Would you hold a pharmaceutical product presentation in Hooters? That's just one of many alleged instances that the U.S. government lists as reasons to sue pharmaceutical giant Novartis . The Justice Department announced last week that it filed a lawsuit against the company for allegedly paying kickbacks to physicians to prescribe its drugs.
Actually, this latest legal challenge is the second for Novartis in a four-day period. And the federal government is late to the party. The cities of Chicago and New York, along with the District of Columbia and 27 states, already were included as plaintiffs in the lawsuit.
Novartis is accused of paying kickbacks to doctors to write more prescriptions of its drugs, a violation of the Anti-Kickback Act, and charging government programs for those drugs, which is prohibited under the False Claims Act. This isn't the first time Novartis came under scrutiny. In 2010, the company was accused of illegally promoting epilepsy drug Trileptal. As a result, Novartis agreed to avoid questionable marketing practices -- including kickbacks to physicians.
However, the federal government says that the big pharmaceutical company broke that corporate integrity agreement. The current lawsuit details many examples where Novartis allegedly reimbursed physicians by wining and dining to encourage them to prescribe more of its products.
It is allowable for pharmaceutical companies to pay physicians who make presentations about the companies' products as part of "speaker programs." Novartis, though, allegedly paid physicians even when they made no presentations. The government also accuses the company of holding events in locales where it would have been virtually impossible for a presentation to be made -- including Hooters restaurants and on fishing trips in Florida.
Some of the examples listed in the government's case against Novartis certainly raise eyebrows. One physician was allegedly paid a $1,000 honorarium to make a presentation to only two other doctors at an expensive Washington, D.C., restaurant. The cost of the meal: $672 per person. And one of those doctors attended a similar presentation not long before then, according to the Justice Department.
From January 2002 through November 2011, Novartis held more than 38,000 speaker programs for just three drugs at a total cost of almost $65 million. The plaintiffs in the case maintain that Novartis got its money's worth. They say that the company's own internal analyses show that physicians who attended these presentations -- and especially those paid to speak -- prescribed Novartis' drugs more frequently.
Novartis disputes the allegations made against it. Company President Andre Wyss said, "We disagree with the way the government is characterizing our conduct in both of these matters and we stand behind our Compliance program." Wyss added that his company "invests significant time and resources to help ensure we conduct our business in an ethical and responsible manner."
Price to pay
What could happen if the charges against Novartis are found to be true? At minimum, the company would probably pay steep penalties.
As part of its 2010 agreement, Novartis paid $422 million. That penalty pales in comparison with the $2.3 billion Pfizer paid in 2009. Pfizer had been accused of illegally marketing its painkiller drug Bextra. The company's settlement came just a few years after it signed a corporate integrity agreement and paid a $430 million fine for allegedly marketing epilepsy drug Neurocontin.
GlaxoSmithKline , though, paid an even higher amount -- $3 billion -- to settle a Department of Justice lawsuit in 2012. Of that amount, $2 billion addressed civil damages for Medicare and Medicaid, including resolution of kickback allegations for several drugs. Glaxo also paid $1 billion in criminal fines related primarily to misbranding two drugs.
Should Novartis ultimately be forced into a settlement over the current lawsuits, the amount would quite likely run into the billions of dollars. It could be worse than that, though. The federal government could ban the company from Medicare, Medicaid, and other federal health care programs. It seems much more likely that Novartis would agree to a settlement than allow that scenario to unfold, however.
Judging from the experience of Pfizer and Glaxo, pharma stocks recover pretty quickly from large settlements. Shares of Pfizer actually closed the year higher after it settled the lawsuit with the government in September 2009. Likewise, Glaxo's stock is nearly 20% higher than it traded after its legal settlement in July 2012.
The charges against Novartis still must be proved in a court of law. Even if the allegations stick, investors probably don't have to worry too much over the long run. Certain restaurants might be less profitable, though.
What macro trend was Warren Buffett referring to when he said "this is the tapeworm that's eating at American competitiveness"? Find out in our free report: "What's Really Eating at America's Competitiveness." You'll also discover an idea to profit as companies work to eradicate this efficiency-sucking tapeworm. Just click here for free, immediate access.
The article Why America Is Suing This Pharmaceutical Behemoth originally appeared on Fool.com.
Fool contributor Keith Speights and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.