As I have previously observed (most recently here), life sciences companies remain favored targets of the plaintiffs’ class action securities bar. Even during the two-year securities lawsuit filing lull between mid-2005 and mid-2007, lawsuit filings against life sciences companies continued more or less unabated. Indeed, as I noted here, during 2007, a year in which subprime-related securities lawsuits predominated, pharmaceutical companies were nevertheless among the most frequent sued.
But while life sciences companies may be frequent securities lawsuit targets, that does not mean that all or even most of those lawsuits are meritorious. The recent dismissals of two securities lawsuits pending against two high-profile life sciences companies underscores the hurdles these lawsuits face.
Guidant: In an Order dated February 27, 2008 (here), Judge Sarah Evans Barker of the United States District Court for the Southern District of Indiana granted defendants’ motion to dismiss the securities class action lawsuit filed against Guidant Corporation and certain of its former directors and officers. Background on the consolidated Guidant securities lawsuit can be found here.
In their consolidated complaint (here), the plaintiffs allege that the defendants knew and intentionally concealed material information including the fact that there were defects in certain Guidant implantable defibrillators and pacemaker devices; that some patients were experiencing serious health issues (and in one instance, death) resulting from those defects; and that disclosure of those defects would have negatively affected both revenue and the company’s then-pending merger with Johnson & Johnson. (The company ultimately merged not with J & J, but with Boston Scientific.) The plaintiffs allege that defendants made false and misleading public statements about the defective devices and the planned J & J merger to keep Guidant’s stock at artificially inflated levels, in violation of Section 10(b) of the ’34 Act and Rule 10b-5 thereunder.
The defendants sought to have the complaint dismissed first on the ground that the complaint failed to satisfy the PSLRA’s heightened pleading requirements for alleging misleading statements, and second, on the grounds that the plaintiffs had not pled particularized facts giving rise to a strong inference of scienter.
The plaintiffs urged that the defendants’ statements were misleading because they “failed to disclose material information about known product defects (and in some cases, because the statements were intended to enhance then-pending merger negotiations with J & J, which would have been jeopardized had Defendants disclosed the defects).” In rejecting this argument, Judge Barker said “there is no affirmative independent duty for a company to disclose all information that could potentially affect its stock price, unless such silence renders an affirmative statement misleading.” She observed that the plaintiffs “have not demonstrated with the requisite particularity how omission of product defect information rendered any affirmative statements misleading.” Judge Barker then went on to note that several of the statements on which the plaintiffs attempt to rely “can be understood as immaterial, non-actionable corporate puffery.”
The plaintiffs also sought to rely on the Guidant’s ultimate product defect disclosures, arguing that the disclosures were partial and contained “half-truths” intended to minimize the impact. Judge Barker found, however, that “it is unclear precisely what facts were omitted from these disclosures that – in Plaintiffs’ opinion – would have more fully and truthfully informed the investing public about Guidant product defects.” Judge Barker went on to note that the plaintiffs “appear to argue” that the company was required “to ‘ring an alarm bell’ of sorts,” but, Judge Barker said, the relevant law “does not require a company to make such a statement – nor does omission of such a statement constitute fraud.”
Judge Barker also found that the plaintiffs had failed to allege sufficient facts to support a strong inference of scienter. The plaintiffs largely relied on the defendants’ stock sales, but Judge Barker found that the plaintiffs “have not demonstrated – as they are required to do – that such sales were dramatically out of line with prior trading practices at times calculated to maximize the personal benefit from undisclosed inside information.”
Judge Barker further rejected plaintiffs’ arguments that defendants, as a result of their positions within the company, had knowledge of falsity of the company’s statements. Judge Barker found that plaintiffs’ arguments “are entirely conclusory and do not demonstrate with any particularity that any Individual Defendant had knowledge of product defects.” She concluded by noting that “attribution of scienter to Defendants, without particularized allegations indicating how or when Defendants came to possess information about product defaults, constitutes impermissible pleading of ‘fraud by hindsight’.”
Special thanks to a loyal reader for a copy of the Guidant opinion.
Pfizer: In an order dated February 28. 2008 (here), Judge Lewis Kaplan granted the defendants’ motion to dismiss the plaintiffs’ complaint in the consolidated securities class action lawsuit pending against Pfizer and certain of its current and former directors and officers. The complaint alleges that prior to the company’s December 2, 2006 announcement (here) that it was terminating its Phase III trials on torcetrapib, a developmental drug intended to reduce heart disease by raising “good” cholesterol, the company failed to disclose facts that lessened the likelihood that torcetrapib ultimately would prove safe and effective.
The plaintiffs allege that the misleading statements were designed to avoid Pfizer’s erosion of market share due to its impending loss of patent protection by principal Pfizer drugs, and in order to maximize the severance package for Henry McKinnell, the company’s then-Chairman and CEO. Further background regarding the case can be found here. A copy of the consolidated amended complaint can be found here.
In support of their allegations that the defendants’ statements about torcetrapib’s efficacy were misleading, the plaintiffs relied on a variety of sources (including as noted further below, an anonymous blog post). Judge Kaplan found that at most these statements support only an inference that the evidence available during the class period concerning torcetrapib’s efficacy was inconclusive – which the court found would not support an inference that the defendants’ statements were materially misleading. Judge Kaplan found that defendants were “entitled to take an optimistic view” and “need not present an overly gloomy or cautious picture” as long as the public statements “are consistent with reasonably available data.” Judge Kaplan further found that in any event “the conflicting evidence of torcetrapib’s efficacy were part of the total mix of information available to the marketplace.”
In attempting to establish that the defendants’ statements about torcetrapib were misleading, the plaintiffs also cited concerns about the blood pressure side-effects. Judge Kaplan found that the plaintiffs had failed to plead facts supporting the view that the defendants did not believe these side effects were manageable. Judge Kaplan said that “torcetrapib’s ultimate failure is not evidence that the side effects were thought to be unmanageable at the time the alleged miststaments were made. Fraud by hindsight is not sufficient to establish liability under Rule 10b-5.”
Judge Kaplan also found that plaintiffs had failed to establish scienter. The plaintiffs had argued that the defendants had a motive to mislead because Pfizer had a “desperate need to assure the financial community of the existence of a new blockbuster drug.” Judge Kaplan observed that “this is not a unique motive” and “it is a way of saying, in a manner tailored to a pharmaceutical company, something that is true for all profit enterprises – each has an incentive to portray the likelihood that it will continue to prosper.”
Judge Kaplan further noted that with respect to the alleged motive to maximize McKinnell’s severance package that “if scienter could be pleaded on that basis alone, virtually every company in the United States that experiences a downturn in stock prices could be forced to defend securities fraud actions.”
Judge Kaplan granted the motion to dismiss and denied the plaintiffs’ motion for leave to amend, but without prejudice to a renewed motion for leave to amend supported by a proposed amended complaint.
Hat tip to the Courthouse News Service (here) for a copy of the Pfizer decision.
Analysis: On the one hand, it is hard to generalize based only on two case dispositions. But on the other hand, these two high-profile cases in many ways embody the kinds of securities lawsuit allegations that life sciences companies all too frequently are required to confront. The fact is that publicly traded life sciences companies often face significant and unanticipated challenges, of both a regulatory and clinical nature, in the drug development process. And even drugs or devices that have been introduced into commercial distribution can experience unexpected adverse developments. Either kind of setbacks can trigger significant stock price declines.
Even though these kinds of obstacles are fundamental and arguably unavoidable parts of the business and regulatory environment for life sciences companies, all too often these reverses result in securities lawsuits, supported only by allegations that the reverses occurred and therefore company management must have known about the problems from which the reverses arose.
Each of the district court judges in these two cases implicitly recognized these considerations in their rejection of the “fraud by hindsight” allegations. In each case, the courts effectively said that it is not enough to state a claim under the federal securities laws to allege that problems arose and that the defendants must have known about the problems. The courts’ unwillingness to accept fraud by hindsight allegations is significant, as without this recognition, life sciences companies could face significant liability exposures based on the uncertainties and unpredictabilties inherent in their business.
However, because of the stock price volatility that inevitably follows these kinds of adverse developments, life sciences companies likely will continue to attract the unwanted attention of plaintiffs’ securities’ attorneys. The more interesting question is whether these kinds of lawsuits will succeed. The district courts’ recent decisions in the Guidant and Pfizer cases suggest that these kinds of cases may face substantial hurdles in order to survive a motion to dismiss.
A Blog Too Far: One of the interesting twists in the Pfizer lawsuit is the plaintiffs’ unsuccessful attempt to rely on the scribblings of an anonymous blogger to establish the alleged falsity of the defendants’ statements. Judge Kaplan found that “there is no reason to believe that the author of this blog, identified only as RADmanZulu, is likely to have known the relevant facts.” The plaintiffs contended that RADmanZulu was a former Pfizer vice president, but Judge Kaplan said that “the blog post, plaintiffs’ purported source, does not contain any information about RADmanZulu’s identity, and plaintiffs do not articulate any other basis for their belief.” (Some of RADmanZulu’s postings appear in the comments on this blog post, here.)
Moreover, with respect to the specific factual allegations drawn from the blog post, Judge Kaplan noted that “RADmanZulu’s allegation does not claim to be based on personal knowledge and lacks detail that might suggest personal knowledge.” Ultimately, in reaching his conclusion that the plaintiffs had “not pleaded with particular facts sufficient to support their allegation that defendants’ statements were materially misleading,” Judge Kaplan found that the plaintiffs’ factual allegations “are not based on an adequate source or are unsupported by the purported source.”
We here at The D & O Diary choose to believe that Judge Kaplan was not saying that RADmanZulu’s statements were inadequate merely because they appeared on a blog. Rather, it appears that Judge Kaplan found RADmanZulu’s factual allegations inadequate because they were anonymous and unsupported. That is why everyone here at The D & O Diary eschews anonymity and wherever possible tries to provide factual support for our statements.
Bloggers everywhere have a mutual interest in maintaining the credibility of the blogging medium, and while some bloggers will choose anonymity for their own purposes, overall blogging credibility depends on a fundamental sense of personal responsibility with which anonymity may be inconsistent. (We should also add that maintaining anonymity on the Internet is a lot less feasible than some Internet users may casually assume.)