As I have noted in prior posts (most recently here), in recent months, allegations of price fixing have given rise to follow-on securities class action lawsuit filings against generic drug companies alleged to have participated in the price-fixing. All of these kinds of cases are examples of a securities litigation trend in which securities suit filings following in the wake of underlying antitrust allegations. In the latest example of this type of lawsuit, a plaintiff shareholder has now filed a securities class action lawsuit against McKesson Corporation, asserting securities claims based on the company’s alleged involvement in a scheme to fix prices for generic drugs. As discussed below, this new lawsuit has a number of interesting features.
Background
Antitrust regulators have been investigating alleged price-fixing in the generic drug industry. In November 2016, news began to circulate the U.S. Department of Justice was looking into whether to filed criminal charges against several of the key players in the generic drug industry. The investigation continued and earlier this year widened to include additional companies.
In addition, over two dozen states attorneys general jointly brought an action against a number of generic drug companies alleging price collusion. In October 2017, the state AGs filed an amended complaint widening the scope of their allegations and increasing the number of company defendants. A copy of the state AGs’ amended complaint can be found here.
As I noted in a prior post (here), the price-fixing allegations led to a number of securities class action lawsuits against generic drug companies, asserting alleged misrepresentations with respect to the company’s pricing practices and policies.
The Lawsuit
On October 25, 2018, the Evanston Police Pension Fund, a McKesson shareholder, filed a securities class action lawsuit in the Northern District of California against McKesson, its CEO, and its CFO. The complaint, a copy of which can be found here, purports to be filed on behalf of investors who purchased their McKesson securities between October 24, 2013 and January 25, 2017.
McKesson is a pharmaceutical wholesaler that purchases drugs in bulk from manufacturers and then sells the drugs to pharmacies and hospitals. The complaint alleges that during the class period, the defendants “participated in a price-fixing scheme in the sale and distribution of generic pharmaceutical drugs with manufacturers and other wholesalers.” The complaint also quotes from the press release the State AGs released when the filed their amended complaints in October 2017. The complaint alleges that McKesson’s reported financial results during the class period were “false and misleading” because “they failed to disclose that they were unsustainable and premised on illegal activity.”
The complaint alleges further that by 2017 McKesson was “no longer able to fix prices with drug manufacturers and other wholesalers,” and on January 25, 2017, the last day of the class period, McKesson announced disappointing financial results. The complaint quotes the company’s CEO as having said in connection with the earnings release that the poor results in the quarter were “a result of the generic pricing actions we began to implement late in the second quarter,” as prices “were ultimately set at a lower level than our initial expectation that were included in our prior guidance.” The complaint alleges the company’s share price declined 8.3% on the news.
The complaint alleges that during the class period, the defendants made misrepresentations or failed to disclose that “(i)McKesson and several of its industry peers colluded to fix the price of certain generic drugs; (ii) the collusive conduct constituted a violation of federal antitrust laws; (iii) consequently, McKesson’s revenues during the Class Period, were, in part, the result of illegal conduct and were therefore unsustainable; (iv) McKesson lacked effective internal controls over financial reporting; and (v) as a result, McKesson’s public statements were materially false and misleading at all relevant times.” The complaint alleges that the defendants’ misrepresentations violated Sections 10(b) and 20(a) of the Securities and Exchange Act, and seeks to recover alleged damages on behalf of the class.
Discussion
There is something very strange about the plaintiff’s complaint. That is, while the complaint asserts that the company not only was investigated for participating in a price fixing conspiracy but in fact actually engaged in price fixing, allegations connecting McKesson to price-fixing or even to the investigation of price-fixing are entirely absent from the complaint.
Thus, for example, while the complaint refers to the State AGs’ October 2017 amended complaint and press release, the complaint fails to note that McKesson was not named as a defendant in the amended complaint. As far as I can tell McKesson itself was not referred to in the amended complaint or the press release. Or to put it another way, if McKesson is referred to either in the amended complaint or the press release, the securities lawsuit complaint fails to identify those references. There is nothing in the securities complaint to show that the state AGs’ amended complaint or press release had anything to do with McKesson in any way.
When I first made this observation about the complaint, I thought, that can’t be right, and I went back and re-read the complaint a couple more times.
As far as I can tell, the only allegations in the complaint even remotely close to an assertion that McKesson was a subject of the investigation and engaged in price-fixing are (i) an allegation that the press release accompanying the State AGs’ amended complaint that “[T]he states’ investigation involves allegations of conspiracy and collusion with the entirety of the generic drug industry, and wholesalers, distributors and other customers are certainly players within the industry” and (ii) an allegation that December 18, 2017, McKesson announced that the company’s CFO would leave the Company “to pursue a new opportunity.” The complaint does not allege either that the State AGs’ statement referred to McKesson specifically or that the CFO’s departure had anything to do in any way with the investigation, the alleged price fixing, or the January 2017 earnings miss.
There are stranger things still about this complaint. The key to this complaint is that when the company announced its earnings miss in January 2017, its share price dropped more than 8%, and that the earnings miss was due to the fact that the company was no longer able to fix prices for generic drugs. As the complaint put it, “The poor financial results were due to the materialization of the risk that the price fixing scheme would unravel and lead to materially lower revenues and profits.”
The only allegations in the complaint suggesting that McKesson engaged in price fixing at any time are the two items noted above about the state AGs press release and the CFOs departure. Both of these items took place well AFTER the January 2017 earnings miss. There are no allegations in the complaint supporting the securities lawsuit plaintiffs’ assertion either that McKesson specifically engaged in price fixing before the January 2017 earnings release or that the reason for the disappointing numbers was because the company could no longer fix prices. To be sure the complaint does quote the CEOs statement that the earnings disappointment was due to changes in pricing for generic drugs, but there is nothing in the statement or alleged in the complaint to suggest that the change had anything to do with price fixing or the company’s inability to fix prices.
It may well be that McKesson has been the subject of an investigation – but there is nothing in the complaint to substantiate that. It may well be that McKesson engaged in price fixing, who knows, but there is nothing to substantiate that. It may well be that the January 2017 earnings miss was due to McKesson’s inability to fix prices, but since there is nothing in the complaint to support the allegation that McKesson was fixing prices, there is nothing to suggest that the January 2017 earnings miss was due to the fact that the company could no longer fix prices. The complaint’s scienter allegations – consisting exclusive of allegations that the defendants knowingly made false and misleading statements – are arguably non-existent.
I am not trying to argue that McKesson is beyond reproach here. For all I know, they may well have engaged in the alleged price fixing, who knows, I certainly don’t. All I am saying is that if you are going to accuse a company and its executives of securities fraud, you have an obligation to marshal all of the facts supporting the allegations of fraud. The plaintiff here has not done that.
In any event, the McKesson complaint joins a list of other securities lawsuits that have been filed against other companies caught up in the generic drug price fixing investigation. As I noted here, Allergan, Teva Pharmaceuticals, and Endo International (whose Par Pharmaceuticals unit is caught up in the investigation) – all three companies that have been identified by name in connection with the alleged generic drug price-fixing conspiracy – previously were hit with securities class action lawsuit related to the price-fixing investigation.
Nor is the generic drug industry the only industry group to get hit with a series of securities class action lawsuits following allegations of a price-fixing conspiracy. As discussed here, a number of companies in the poultry production industry were hit with securities suits following a series of private antitrust lawsuits alleging price-fixing.
Over the years, I have noted a number of securities lawsuits (refer for example here) that have been filed against companies in a number of different industries after it was disclosed that the company was the target of an antitrust enforcement action or regulatory action. These securities suit following the disclosure of antitrust litigation or antitrust enforcement activity fit a larger pattern (which I discussed here) in which follow-on corporate or securities litigation follows after the announcement of regulatory enforcement litigation or private civil litigation based on alleged regulatory violations.
As the cases discussed above, when a pattern of regulatory or legal violations is alleged against a specific industry sector or segment, a wave of follow-on securities class action litigation can quickly follow. Of course, it remains to be seen whether the securities lawsuits will be successful. But at a minimum, this lawsuit filing patterns represents a significant component in securities class action lawsuit frequency.