As I have previously noted, 2018 was another extraordinary year for U.S. securities class action litigation, as filings overall remained at near-historical rates. One of the significant contribution factors to this development was the substantial number of securities suits filed against life sciences companies. The number and significance of the securities suits filed against life sciences companies is detailed in a February 6, 2019 report from the Dechert law firm entitled “Dechert Survey: Developments in U.S. Securities Fraud Class Actions Against Life Sciences Companies: 2018 Edition” (here).
According to the Dechert report, there were a total of 86 securities class action lawsuits filed against life sciences companies in 2018, slightly below the 88 filed in 2017, but more 350% greater than the 19 filed just five years ago in 2013. The number of suits against life sciences companies during 2018 was so great that life science-related lawsuits represented one out of every five securities fraud class action suits during the year.
One interesting trend during 2018 was the increase in the number of securities suits filed against larger companies (as measured by market capitalization). In 2018, about 60% of life sciences companies hit with securities suits had market capitalizations over $500 million; by comparison in 2017, only about 44.3% had market caps over $500 million. During 2018, about 48% of the life sciences suits involved companies with a market cap over $1 billion, while in 2017 the figure was 30.4%. In 2018, there were 17 securities suits filed against companies with market capitalizations over $5 billion.
While the report emphasizes the numbers of suits filed against larger life sciences companies, a graphic in the report does show that 25 of the 86 securities suits against life sciences companies in 2018 were filed against companies with market capitalizations under $250 million, so smaller companies are still getting hit in significant numbers, consistent with prior years’ experience.
A majority of the life sciences lawsuits were filed in just three federal judicial circuits: the Ninth Circuit (24), the Third Circuit (18), and the Second Circuit (18). The federal district courts with the highest number of securities suits were the Northern District of California (15) and the Southern District of New York (11).
Three “emerging” law firms accounted for a majority of the filings against life sciences companies, with the Glancy, Prongay & Murray law firm accounting for 17, the Pomerantz law firm also accounting for 17, and the Rosen Law Firm accounting for 16.
As far as the allegations against life sciences companies, there are a number of recurring kinds of allegations that arguably are unique to the industry (or at a minimum reflect characteristics specific to the industry). For example, one recurring category of claims are allegations regarding product efficacy and safety, especially with respect to negative side effects of leading product candidates. These kinds of claims represented about 20% of the 2018 securities suits. About 14% of claims arose from alleged misrepresentations regarding regulatory hurdles.
About 30% of the claims arose out of underlying allegations of misconduct, both in the U.S. and overseas, including, for example, anticompetitive conduct, kickback schemes and inadequate internal controls, and other forms of financial misfeasance.
As was the case with respect to securities litigation overall in 2018, were the overall total number securities class action lawsuit filings were increased significantly by the number of federal court merger objection lawsuits, these types of merger-related lawsuits were also a significant factor in the number of securities suits filed against life sciences companies. About one third of the claims filed in 2018 against life sciences companies involved alleged misrepresentations made in connection with proposed mergers, sales and other transaction.
The report notes that some “common themes” emerge from these categories of allegations, some of which are unique to life sciences companies, and some of which reflect the “commonalities with securities litigation filings on the whole.” For example, the cases continue to show that negative side effects in clinical trials “can create a claim for securities fraud when management attempts to conceal or downplay these effects.” The filings also show that companies “cannot inflate investors’ expectations of FDA approval,” and must ensure that the companies’ risk disclosures are robust.” Many of the filings also show that life sciences companies “face challenges similar to those faced by other issuers, particularly the challenges relating to disclosures in the sale or merger of life sciences companies.”
The report also analyzes the 65 court decisions during 2018 in cases involving life sciences companies. The report found that of these 65, 25 related to alleged misrepresentations made while a drug was in development. Of the 25 development stage-related cases, ten involved alleged misrepresentations following clinical trials; of these ten motions to dismiss were granted in seven cases and three appellate cases affirmed prior district court dismissals. The report notes that “courts tend to reject these claims.”
The report also noted that there were 15 opinions involving alleged overly optimistic statements regarding FDA approval. Of these, there were nine cases where the motions to dismiss were granted; five where the dismissal motion was denied at least in part; and one appellate opinion reversing a district court dismissal.
There were at least 13 decisions during 2018 involving allegations where allegations of fraud arose after the development process. Of these 13, at least seven dismal rulings were in the plaintiffs’ favor (at least in part). There were also 26 decisions during the year involving allegations of financial mismanagement; the dismissal motion rulings for these kinds of cases were “varied,” was court granted dismissals in 14 of these cases (with or without leave to amend), but allowed 12 others to proceed past the motion to dismiss phase.
The report’s overall conclusion is that life sciences companies “remain attractive targets” for securities class action plaintiffs. 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’s findings overall are consistent with my own observations about litigation involving the life sciences sector. I do have one comment about the report’s observations about the litigation against larger market cap life sciences companies. As a general matter, there was more litigation overall against larger companies, as was detailed in the recent report from NERA Economic Consulting.
The other thing about the increase in suits against larger cap life sciences companies is that the companies themselves have not stayed the same size over time. The fact is that after several years of rising market capitalizations, the market caps of many biotech and other life sciences companies were greater during 2018 than in the past. I know from my own portfolio of companies that I had a number of life sciences companies that during 2018 had market capitalizations that for the first time exceeded $1 billion and others that for the first time exceeded $500 million. Thus, it could be argued that the reason there were more lawsuits against larger life sciences companies in 2018 (say, above the $500 million or $1 billion thresholds) is that there were more larger companies.