As has been well-documented on this site, 2017 was an extraordinary year for securities class action lawsuit filings, with a record number of new lawsuits filed at a record rate. Among the important contributing factors to the significant volume of securities suit filings during the year was the volume of lawsuits filed against life sciences companies. The significance of the litigation activity against biopharma companies, a subset of the overall life sciences sector, was the subject of a detailed and precise analysis in a guest post earlier this week.
There is still the question of the meaning of large volume of litigation involving life sciences companies generally. According to the latest annual analysis from the Dechert law firm, the number of securities lawsuits filed against life sciences companies in 2017 increased 30% from the previous year, and increased more than 225% from only five years earlier. The law firm’s February 8, 2018 report entitled “Developments in Securities Fraud Class Actions Against U.S. Life Sciences Companies: 2017 Edition” can be found here.
Plaintiffs filed a total of 88 securities class action lawsuits against companies in the life sciences sector during 2017, representing a 31.3% increase from 2016’s 67 actions against life sciences companies and a 225.9% increase from 2012’s 27 actions. Indeed, during 2017, more than one out of every five securities fraud class action lawsuit filed was brought against a life sciences company.
The 2017 lawsuits against life sciences companies were not dispersed evenly throughout the year. Rather, the majority (56) were filed in the year’s first six months, with 18 filed in January alone.
One particularly interesting aspect of the 2018 securities suit filings against life sciences companies is the extent to which the suits increasingly targeted smaller companies. More than half of the life sciences companies targeted in 2017 had market capitalization of $500 million or less. Perhaps even more notably, almost half of the 2017 securities suits against life sciences targeted companies with market caps of $250 million or less; of these complaints, roughly half were filed against companies with a market cap of $50 million or less, making up nearly a quarter of all securities suits filed against life sciences companies. As the report notes, “companies with very small market capitalization became a popular target for class action lawsuits in 2018.”
The majority of the securities suits filed against life sciences companies were filed in federal district courts in three of federal circuits; 23 were filed in the Third Circuit, 19 were filed in the Ninth Circuit, and 17 were filed in the Second Circuit. District courts in California had the most filings with 18 overall (including 13 in the Northern District of California). District Courts in New York had the second most filings with 17 overall, including 15 in the Southern District of New York. While the filings just in California and New York represented 39.8% of all life sciences suits in 2017, this actually represents a
“noticeable decrease” from 2016, when 53.7% of all filings against life sciences companies were in New York or California.
Consistent with observations elsewhere about the role of the so-called “emerging law firms” in the increase in securities class action lawsuit filings, the Dechert report notes that just three law firms were associated with more than half of the 2017 filings against life sciences companies. The three firms were Levi & Korinsky LLP (21 complaints); Pomerantz LLP (14 complaints); and The Rosen Law Firm (11 complaints).
In terms of the allegations in the complaints, nearly one-third of complaints involved alleged misrepresentations regarding product efficacy and safety, especially with respect to negative side effects of leading product candidates. Nearly 15% of claims arose from misrepresentations regarding regulatory hurdles or the timing of FDA approvals. 21.6% of claims alleged unlawful conduct in both the United States and abroad, including illegal kickback schemes and anticompetitive conduct.
In commenting on the various theories alleged against life sciences companies during the year, the report notes that the complaints do show that life sciences companies do face “unique challenges.” At the same, however, the report notes further that “While these filings do show that life sciences companies face unique challenges when it comes to securities fraud, they also reveal how these companies are still at risk for more common forms of securities fraud, like those involving inaccurate or incomplete financial information.”
In addition to the securities lawsuit filings during the year, the report also analyzes court decisions reached during the year in lawsuits involving life sciences companies. The authors identified 35 decisions during 2017, involving three broad categories of cases: (i) cases involving claims that arose in the development phase, before the company’s product had gone into commercial distribution; (ii) cases that arose independent of or after the developmental stage; and (ii) cases involving financial management of life sciences companies.
15 of the 35 decisions involved developmental stage claims. In those decisions, a majority of defendants secured dismissal. In particular, in cases involving stock drops following failed clinical trials, the courts tended to favor defendants, with eight of the 15 such cases resulting in dismissal.
Of the seven of the 35 cases involving post-developmental stage fraud claims, six turned in favor of the plaintiffs (at least in part). In these kinds of cases, the report notes, “plaintiffs tended to have more success in surviving dispositive motions.”
In 2017, out of the 35 court decisions involving life sciences companies, 13 arose in cases involving allegations of financial misstatements, including with respect to bribery issues, improper accounting and insider trading. The results in these cases were “mixed,” as the courts dismissed six such cases but allowed seven others to proceed past the motion to dismiss.
The one thing that is clear is that life sciences companies are “a popular target for class action securities fraud claims.” In light of the likelihood of future 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.
The report is very detailed and interesting and warrants reading at length and in full. However, in attempting to assess what to make of the statistical information about life sciences- related securities litigation, I urge readers to also read the guest post I published earlier this week which examines in detail the question of whether or not biopharma companies face a disproportionate risk from securities litigation.