The Wall Street Journal, April 26, 2011, p.A1
U.S. Effort to Remove Drug CEO Jolts Firms
By ALICIA MUNDYA government attempt to oust a longtime drug-company chief executive over his company's marketing violations is raising alarms in that industry and beyond about a potential expansion of federal involvement in the business world.
The Department of Health and Human Services this month notified Howard Solomon of Forest Laboratories Inc. that it intends to exclude him from doing business with the federal government. This, in turn, could prevent Forest from selling its drugs to Medicare, Medicaid and the Veterans Administration. If the government implements its ban, Forest would have to dump Mr. Solomon, now 83 years old, in order to protect its corporate revenue. No drug company, large or small, can afford to lose out on sales to the federal government, a major customer.
The Health and Human Services department startled drug makers last year when the agency said it would start invoking a little-used administrative policy under the Social Security Act against pharmaceutical executives. This policy allows officials to bar corporate leaders from health-industry companies doing business with the government, if a drug company is guilty of criminal misconduct. The agency said a chief executive or other leader can be banned even if he or she had no knowledge of a company's criminal actions. Retaining a banned executive can trigger a company's exclusion from government business.
The campaign against drug-company CEOs is part of a larger Obama administration effort to pursue individual executives blamed for wrongdoing rather than simply punishing companies. The government has tried to prosecute Wall Street executives in connection with the 2008 financial crisis, but with limited success.
The "action against the CEO of Forest Labs is a game changer," said Richard Westling, a corporate defense attorney in Nashville who has represented executives in different industries against the government.
According to Mr. Westling, "It would be a mistake to see this as solely a health-care industry issue. The use of sanctions such as exclusion and debarment to punish individuals where the government is unable to prove a direct legal or regulatory violation could have wide-ranging impact." An exclusion penalty could be more costly than a Justice Department prosecution.
He said that the Defense Department and the Environmental Protection Agency, for example, have debarment powers similar to the HHS exclusion authority.
The Forest case has its origins in an investigation into the company's marketing of its big-selling antidepressants Celexa and Lexapro. Last September, Forest made a plea agreement with the government, under which it is paying $313 million in criminal and civil penalties over sales-related misconduct.
A federal court made the deal final in March. Forest Labs representatives said they were shocked when the intent-to-ban notice was received a few weeks later, because Mr. Solomon wasn't accused by the government of misconduct.
Forest is sticking by its chief. "No one has ever alleged that Mr. Solomon did anything wrong, and excluding him [from the industry] is unjustified," said general counsel Herschel Weinstein. "It would also set an extremely troubling precedent that would create uncertainty throughout the industry and discourage regulatory settlements."
The pharmaceutical industry has paid billions of dollars in civil and criminal penalties over the past decade, but the government believes they no longer have much deterrent effect.
The new use of exclusion is meant to "alter the cost-benefit calculus of the corporate executives," said Lew Morris, chief counsel for the Department of Health and Human Services's inspector general, in congressional testimony last month.
The move against Forest's Mr. Solomon—its CEO, president and chairman—brings the campaign to a new level. Lawyers not involved in the Forest case said the attempt to punish an executive who isn't accused of misconduct could tie up the industry's day-to-day work in legal knots.
"This 'gotcha' approach to enforcement runs the risk of creating a climate within organizations that is inconsistent with the spirit of innovation that is critical to the industry," said Allen Waxman of Kaye Scholer LLP in New York, who was formerly an in-house counsel at a drug maker.
Mr. Solomon became chief executive in 1977 and built Forest from a maker of vitamin tablets into a global company with more than $4 billion in annual sales.
His son is writer Andrew Solomon, who won a National Book Award in 2001 for his book about struggling with depression. Inspired by his son, Howard Solomon pushed Forest into the antidepressant market and turned Celexa and Lexapro into successes. In the year ending March 2004, the two drugs accounted for about 82% of the company's sales.
In October 2010, HHS outlined how it could use the exclusion tool on individuals without proof of personal misconduct. The first application involved the CEO of a smaller pharmaceutical maker in St. Louis. The executive stepped down. He has since pleaded guilty to a misdemeanor marketing violation and was sentenced to prison and fined.
Forest pleaded guilty to a misdemeanor in connection with its marketing of Celexa as a treatment for children and adolescents before the drug won approval for pediatric use from the Food and Drug Administration. The company also paid fines over civil accusations.
Forest assumed it had put the matter behind it after the plea hearing in March. But on April 8, the Health and Human Services inspector general sent the letter declaring its intent to exclude Mr. Solomon from his roles at Forest. Mr. Solomon has 30 days to ask the inspector general to revoke the move, but if he loses and has to take his case to federal court, he may temporarily step down from his job, according to the company. The inspector general's office declined to comment; Mr. Solomon's personal attorney couldn't be reached.
The push to target executives comes in the wake of complaints in Congress that few executives bear the cost for bad corporate behavior. The U.S. has prosecuted only a handful of individuals in the Wall Street meltdown of 2008.
In November 2010, the government indicted a former attorney for GlaxoSmithKline PLC related to allegations of improper marketing of the antidepressant Wellbutrin for weight loss. The lawyer has pleaded not guilty, and her defense counsel has said her actions were based on advice from Glaxo's outside counsel. The company has said it is cooperating with the government.
—Scott L. Greenberg contributed to this article. Write to Alicia Mundy at email@example.com