As I noted in my survey of 2016 securities class action litigation (here), one of the factors contributing to the rise in securities litigation last year was the volume of litigation filed against companies in the life sciences sector. According to an analysis of life sciences-related securities suits by the Dechert law firm, the annual number of securities suits filed against companies in the sector rose by over 70% between 2014 and 2016. The law firm’s February 17, 2017 report, entitled “Developments in Securities Fraud Class Actions Against U.S. Life Sciences Companies,” can be found here.
According to the report, there were a total of 67 securities class action lawsuits filed in 2016 against life sciences companies, representing about 25% of all securities suit filings during the year. The report notes that securities suit filings generally were up during the year; indeed, the overall number of securities suits has increased 80 percent since 2012. At the same time, the number of lawsuits against life sciences companies has also been increasing. The 67 suit filed against life sciences companies in 2016 represents an increase of over 70% over the 39 lawsuits filed against life sciences companies in both 2015 and 2014.
As the number of securities suit against life sciences companies has increased, some trends have emerged. First, more claims are being filed against smaller companies. In 2016, roughly half of the securities suits targeting life sciences companies were filed against companies with smaller market caps (i.e., with a market capitalization under $500 million). The report notes that the market cap distribution of the life sciences companies hit with securities suits during 2016 is in line with previous years.
Second, two smaller plaintiffs’ law firms filed over half of the life sciences-sector securities class action lawsuits. This observation about the role of these smaller law firms is entirely consistent with the observations noted by Michael Klausner and Jason Hegland in a guest post on this blog about the increasingly important role that “emerging law firms” has played in the recent rise in the number of securities class action lawsuit filings.
In trying to understand what is attracting this volume of litigation to the life sciences sector, the report notes that “it appears that the inherent risks involved with developing products makes these companies in the life sciences targets for plaintiff’s firms that have found companies involved in the FDA approval process ripe for securities fraud lawsuits.”
The 2016 lawsuit filings involve a range of characteristics. First, nearly 50% of all of the class action securities fraud cases filed against life sciences companies in 2016 complained of misrepresentations or omissions regarding product efficacy, product safety, and/or the likelihood of FDA approval. Second, several cases focused on alleged misrepresentations regarding regulatory hurdles and the timing and prospects of FDA approval. Finally, a third group of cases arose from allegations not specifically related to the life sciences field; for example, six of the suits filed during 2016 involve allegations that the defendants companies had engaged in a scheme of generic drug price fixing stemming from an ongoing Justice Department investigation that began in 2014.
The report notes that these cases underscore the challenges that life sciences companies face. The filings show that “unfavorable results of clinical trials are a common vehicle for plaintiffs to claim securities fraud violations.” The filings also show that prospective claimants “take negative communication from the FDA seriously when deciding whether to file a claim, particularly when that communication has not been conveyed to the investors.” These filings also indicate that life sciences companies can also be targeted for claims arising under more securities fraud complaints based on factors not specifically linked to the life sciences sector, such as claims involving inaccurate financial reports and allegations of violating fiduciary duties.
In looking at court decisions involving life sciences companies during the year, the report notes a number of trends. First, the report notes that “courts more often sided with the company’s judgment when evaluating whether the positive and optimistic statements the company communicated to investors constituted securities fraud.” Although many defendants were successful in getting the cases against them dismissed, not all were successful. The report notes that “where the defendants had communicated the results of their trials accurately and the risks of failure were adequately explained, the courts showed reluctance to find fault in the defendants’ optimism about the potential success of their trials. These cases show the deference courts give to defendant companies in the design of their trials.”
With respect to cases involving companies that experienced stock price drops following the disclosure of communications with the FDA, the report notes that any communication from the FDA is potentially material for investors. In generalizing about case decisions based on FDA communications, the report notes that “so long as the company accurately conveys its processes and addresses potential risks head on, it is unlikely that the court will subsequently find liability” relating to unexpected FDA communications.
With respect to cases involving disclosures surrounding product development, the report makes a number of observations. First, with respect to cases involving projections, “courts look carefully at how defendants construct statements about their projections, particularly with regard to the discussion of possible risks, to determine if the projections were possibly misleading.” Second, with respect to cases involving product promotion and statements about product efficacy, “When the allegedly forward-looking statements are in conflict with facts that the defendants have at the time they make the statements … there is a possibility that the statements will not be protected.”
The report concludes with the observation that given the volume of litigation against life sciences companies in recent years, “there is no indication that the filing of securities claims against life sciences companies is going to slow down any time soon.” The report also notes that “although the majority of the cases decided this last year were decided in the defendant company’s favor, life sciences companies remain attractive targets for class action securities fraud claims.” In light of this likelihood of claims, the report includes a series of securities litigation loss prevention steps that companies can take to try to minimize the risk of securities class action litigation.