Life sciences companies are an “increasingly popular target of securities fraud class action lawsuits,” a recent survey by Dechert LLP has found. Securities class actions against pharmaceutical, biotechnology, and medical companies more than doubled last year, to 39 cases compared with 19 during 2013. This represented 23 percent of the 170 total securities fraud class action lawsuits brought against all companies during 2014. Interestingly the majority of the life science defendants were smaller companies—57% had market capitalization of less than $500 million dollars according to the survey.
View the full report: Dechert Survey of Securities Fraud Class Actions Brought Against U.S. Life Sciences Companies
Nature of Securities Fraud Claims
The Dechert report notes that most securities fraud complaints made “industry-specific allegations,” including “alleged misrepresentations or omissions regarding marketing practices, prospects/timing of FDA approval, product efficacy, product safety, manufacturing and other healthcare-related allegations.” Fifty-six percent of 2014 claims “alleged misrepresentations or non-disclosures regarding product efficacy or prospects/timing of FDA approval.”
David Kotler, partner at Dechert LLP, wrote that “life sciences companies targeted by securities fraud lawsuits consistently sought to have the complaints dismissed at the pleadings stage.” Courts will not accept “vague or conclusory allegations of securities fraud against a life science company in lieu of the detailed pleading requirements of the Private Securities Litigation Reform Act (PSLRA)”
However, he cautioned that “it is equally worth noting that securities fraud lawsuits still carry a substantial risk of exposure, and even when settled can result in very large payments.”
Plaintiff-Friendly Supreme Court Cases
In 2013, the Supreme Court court ruled, 6-3, in Amgen v. Connecticut Retirement Plans & Trust Funds that plaintiffs do not have to prove at the class certification stage that a company misrepresentation was material to the stock-price change. Plaintiffs need only plausibly allege, and not prove, materiality.
Last year, in Halliburton v. Erica P. John Fund, the court upheld the “fraud-on-the-market” presumption. In securities fraud class actions under Section 10(b) of the Securities Exchange Act of 1934, plaintiffs must demonstrate: (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.
Element (4) could potentially be difficult to prove because investors would have to show that they individually relied on the company’s fraud and, as a result, lost money.
The fraud on the market theory presumes that all material public information–including any misstatements–is reflected in the price of a stock traded on the stock market, and that investors rely on the integrity of the market price to reflect all such information when determining whether to buy or sell a security. Thus, investors need not show that they relied directly on the misstatements in order to recover damages. Koller notes companies could still rebut the presumption by showing a lack of “price impact.”
SEC Enforcement
At CBI’s Pharmaceutical Compliance Conference in Washington, DC this month, Andrew Ceresney, Director of Enforcement at the Securities and Exchange Commission noted that the number of enforcement actions brought by the SEC increased by over 40 percent in 2014 compared to 2013. Ceresney spoke to the issue of appropriate disclosures made by companies on their SEC Form 8-K, the document used to alert shareholders of any material developments. “One significant type of key event that we see causing problems with disclosure in your industry is disclosures on your dealings with the FDA,” he advised.
“FDA dealings and approvals are the lifeblood of your business and are so important to investment decisions.” Indeed, SEC recently charged a medical tech company and its management with making “material misstatements and omissions in [the company’s] public filings about the timing of the company’s Food and Drug Administration application.”
“The message from these cases is that you need to be completely accurate in recounting your dealings with the FDA,” Ceresney added. “So much turns on those interactions and not being straight with investors will have significant consequences.”
Securities Fraud Best Practices Going Forward
Kotler concluded his report with useful advice to the life sciences industry.”Aside from the obvious strategy of ensuring that the companies’ statements and public filings are truthful and accurate,” he noted, “[b]e alert to events that may negatively impact the drug product lifecycle.” For example, “[s]ome potentially troubling issues are obvious, e.g., clinical trial failures and FDA rejection. Others, however, are not so obvious, such as manufacturing problems, the loss of a key commercial partner or an increased percentage of revenues being derived from off-label uses.”
He also advised companies to ensure that all public statements and filings contain appropriate “cautionary language” or “risk factors” that are “specific and meaningful, and cover the gamut of risks throughout the entire drug product life cycle — from development to production to commercialization.”