Sanofi's weight-loss drug hits legal snag

The search for an effective weight-loss drug free of side effects has eluded many pharma firms, including Sanofi-Aventis.

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(Fortune) -- The world's third largest drug company, Sanofi-Aventis (Charts), is facing a shareholder lawsuit for allegedly hyping a weight-loss pill that eventually failed to pass FDA muster.

The class action, filed by law firm Coughlin Stoia Geller Rudman & Robbins, charges that Sanofi's statements regarding anti-obesity drug, Zumulti, "were materially false and misleading" because they "concealed data concerning Zumulti's propensity to cause depression."

But in many ways, Zumulti created its own hype. Financial analysts, business journalists, and science writers were all taken with Zumulti's story, because it seemed like a possible antidote to the dicey history of slimming pills. Although GlaxoSmithKline has reported selling more than two million starter packages of its over-the-counter drug Alli this year, it shares with many prescription drugs a long list of unglamorous side effects. (Anal leakage, anyone?) And the most famous diet drug of all, Fen-Phen, caused heart valve failures, and cost its maker, Wyeth, billions in settlement costs.

Zumulti would have been the first elegant pharmaceutical solution to obesity. Unlike other diet pills, it works in the brain rather than in the gut. As almost everyone knows by now, the diet drug's chief ingredient is a cannabinoid (yes, derived from "cannabis" plants), which has the effect of giving patients the "reverse munchies," thereby reducing appetite.

Yet since its discovery in the early '90s, the drug has been plagued by claims that it causes depression. Even so, Zumulti was projected to take the U. S. health care market by storm. Wall Street analysts projected the drug's peak annual sales of over $7 billion. The excitement came to a halt last June, when a panel of experts sighted suicidal thoughts and depression as a reason for unanimously recommending that the FDA should reject Zumulti.

The rejection was somewhat of a surprise, since Zumulti had been approved for sale in Europe by the generally tougher E.U. authorities in 2006. For the Europeans, the benefits of Zumulti (known as Acomplia in Europe) outweighed the depression risks. Still, the diet pill has garnered lower than expected sales in Europe since its regulatory denial in the United States.

The shareholder lawsuit against Sanofi calls into question the expectations investors have regarding any yet-to-be-approved drug. Since 2004's Vioxx withdrawal, the FDA has been under pressure to be more safety-minded. A go-ahead is never guaranteed. And companies try hard, through internal audits and FDA counseling, to submit only those applications that seem destined for approval, lest the company develop a reputation for shoddy submissions.

Legal experts contend that cases such as the one filed against Sanofi are difficult to prove. "This is not a particularly successful kind of securities litigation," John Coffee, professor of law at Columbia Law School. "If Sanofi's management had predicted FDA approval, they might be in trouble. There's a safe harbor in which companies can make all kinds of wrong statements about a product. But plaintiffs need to prove there was an intent to defraud, not just woeful misjudgment."

Adds Coffee: "In general, [FDA] rejection cases have produced some favorable settlements but they are far harder to win or settle favorably than accounting irregularity cases." The plaintiff's counsel, Samuel Rudman, did not return phone calls.

In the last decade, an average of 200 federal securities class actions are filed each year. In all that time, just 17 have gone to trial. The majority of cases are settled, according to Adam Savett, director of Securities Class Action Services, a firm that tracks such suits. In early 2006, for instance, Bristol-Myers Squibb set aside $185 million to settle charges that executives praised a potential high blood pressure treatment, known as Vanlev, despite concerns that the drug carried serious side effects. In 2000, Bristol had withdrawn its FDA application over safety concerns.

It's hard to say whether investors took the lawsuit seriously, but Sanofi's shares fell 3% on Wednesday. But don't shed too many tears for Sanofi shareholders. The biggest losers here are the 63% of American adults who are overweight or obese. They're still waiting for an elegant weight loss treatment that doesn't carry a distasteful list of side effects.