Will Big Pharma have to pay sales reps overtime?
If the Supreme Court says yes, it could cost the industry billions.
Labor disputes are common in the auto and airline industries but not so much in the pharmaceutical sector. Yet a dispute between pharmaceutical companies and their drug reps could have such serious implications for the entire industry that both sides petitioned the Supreme Court to take on a current case. On Monday the petition was granted.
The court is now set to decide whether GlaxoSmithKline (GSK) has to pay overtime benefits to its sales representatives. What the court decides will have ramifications for similar cases against other Big Pharmas, including Merck (MRK), Novartis (NVS), Johnson & Johnson (JNJ) and Bristol-Myers Squibb (BMY) to name a few.
So far, opinions vary. The Department of Labor sides with the drug reps, saying they shouldn't be counted among the exemptions that allow companies not to pay certain types of employees overtime. Lower courts have ruled in favor of both sides over the years.
If the Supreme Court decides that drug reps are not counted among the exemptions, pharmaceuticals will have to pay up -- a lot.
"The potential amount of retrospective liability from these cases is staggering," the industry's trade group, PhRMA, claims, according to court documents. There are more than 90,000 drug reps. Classifying them as eligible for overtime could cost companies billions of dollars in retroactive liabilities. And of course those jobs would have to be restructured in the future.
According to The Wall Street Journal, citing Cegedim Strategic Data, drug companies spent $14.5 billion promoting their drugs to doctors in the U.S. in 2010. Drug companies have also laid off tens of thousands of sales reps in recent years.
The pharmaceutical industry has been going through turbulent years. As companies have prepared for the so-called patent cliff -- the years when many major drugs lose patent protection -- they've also encountered several other hurdles. Governments, imposing austerity measures and dealing with a prolonged difficult economic climate, have cut down on health care expenses.
Meanwhile, the pipeline of new drugs has been generally lackluster, without promising blockbuster drugs to replace the old ones.
The Supreme Court is expected to make a decision by the end of June. Should this worry investors? No doubt the potential liability could be damaging, but this is also probably not the final battle. If the court sides with the reps, drug companies have more legal options in their arsenal and could try for other exemptions -- suits that again could take years to settle.
However, the issue is certainly one investors in the sector should keep an eye on.
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