I frequently received requests or questions relating to the increased risk of securities litigation that life sciences companies face. I have reviewed these issues in my own analysis of securities litigation filing trends (for example, refer here) as well as in my discussion of others’ analyses (for example, here). In another recent report, the Sidley Austin law firm has taken a detailed look at important securities litigation developments in 2018 relating to life sciences companies. This latest report includes not only a review of life sciences companies’ securities litigation class action filings trends but also takes a look at the life sciences companies’ track record in the courts, on motions to dismiss in the district courts and on appeal. The court ruling analysis suggests a number of important implications for life sciences companies’ disclosure practices. The law firm’s report, entitled “Securities Class Actions in the Life Sciences Sector: 2018 Annual Survey” can be found here. The law firm’s two-page report summary can be found here.
Securities Suit Filings Against Life Sciences Companies
According to the report, the number of securities class action lawsuits filed in federal courts was down in 2018, compared to 2016 and 2017. There were 48 new securities class action lawsuits filed against life sciences companies in 2018, compared to 54 in 2017 and 50 in 2016. However, while the number of securities suits filed against life sciences companies declined in 2018 compared to the two prior years, the 48 securities suit filings in 2018 was well above the 39 securities suit filings against life sciences companies in 2015.
The elevated level of filings in 2016-2017 did have one practical consequence during 2018; as a result of the increased number of lawsuits filed during that period, there were an increased number of district court rulings on motions to dismiss in 2018. There were 48 district court rulings in 2018 in securities suits involving life sciences companies, compared to a range of from 25-35 decisions during the period 2014-2017.
Geographically, the 2018 law suits were clustered in three federal judicial circuits: 12 of the 48 new securities lawsuits against life sciences companies were filed in the second circuit, which includes New York; 10 were filed in the Third Circuit, which includes New Jersey; and 14 new cases were filed in the Ninth Circuit, which includes California. These individual states are of course locations where there are large concentrations of companies in the life sciences industries.
The number of new lawsuits filed against life sciences companies in the pre-approval stage was down sharply in 2018. There were only 16 cases filed in 2018 against life sciences companies in the pre-approval stages, compared to 34 in 2017. By contrast, filings against post-approval companies increased to 28 in 2018 from 20 in 2017. Of the 16 cases filed in 2018 against pre-approval companies, 12 cases involved drugs or devices going through clinical trials, while four involved drugs or devices for which NDAs or other applications had been submitted but not approved. There were seven filings against life sciences companies alleging financial statement errors or internal control weaknesses in 2018.
2018 District Court Rulings in Life Sciences Companies’ Securities Suits
In district court motion to dismiss rulings in 2018, life sciences companies prevailed at a significant rate and at a rate well above 2017 levels, but below 2016 levels. In 2018, companies won 31 of 48 (65%) district court motions to dismiss rulings, compared to 13 of 26 (50 percent) in 2017 and compared to 25 out of 33 decisions (76%) in 2016. The 65% success rate on dismissal motion rulings in 2018, compared to the lower rate in 2017, “reflects a return to the rates we have seen over the past several years.”
In 2018, pre-approval companies fared better than post-approval, as has been the case in past years, although the difference was less pronounced in 2018 than was the case in the past. In 2018, there were 22 district court decisions in cases involving pre-approval, in 16 of which (or 73%) the motions to dismiss were granted and 6 of which in which the motions were denied. There were 26 district court decisions on motions to dismiss in cases involving post-approval companies, in 15 of which (or 58%) the motions to dismiss were granted and 11 of which the motions to dismiss were denied. By contrast, in 2017, companies prevailed on their motions to dismiss in 63% of pre-approval cases but only 30 percent of post-approval cases. Thus the improvement in the overall success rate noted in the preceding paragraph is “largely attributable to the post-approval cases.”
The report also notes that companies’ improved success rate on motions to dismiss in 2018 may simply be a reflection of the larger numbers of cases in the pipeline. As noted above, there was a large uptick in the number of filings against life sciences companies in 2016 and 2017. The failure of these a majority of these cases to survive motions to dismiss “may reflect a drop-off in the quality of new filings over the past several years.” The rise in the number of new filings “may have been tied to a less selective approach by certain firms on the plaintiffs’ side, and that in turn may be partially responsible for plaintiffs’ diminishing success in the post-approval cases.”
2018 Appellate Court Rulings Involving Life Sciences Companies
Life sciences companies’ success in the district courts in 2018 arguably contrasted with the results at the appellate level during the year. While defendants prevailed in four of the seven appellate decisions involving life sciences companies in 2018, defendants’ defeats were “more significant than their victories.” Three of the defendant-favorable outcomes were in unpublished, non-precedential decisions, whereas “each of the three pro-plaintiff rulings were published and each reversed a significant district court victory below.”
Of particular concern was the Ninth Circuit’s ruling in the Orexigen case. The problems for defendant life sciences companies from the Orexigen decision are two-fold. First, the decision arguable represents a significant setback for defendants in the form of restrictions on the matter that district courts may take into account in considering defendants’ motions to dismiss. Second, Orexigen adopts the principle that companies that choose to report favorable interim trial results as they become available assume a duty to report unfavorable interim results as well. The Orixigen decision is one of several 2018 decisions suggesting that companies’ statements made in the course of ongoing trials “present special risks.” My detailed analysis of the Orexigen decision can be found here. As noted here, the company’s petition for to the United States Supreme Court for a writ of certiorari remains pending.
On a more positive note, companies prevailed in multiple cases positive results in cases where they were able to characterize plaintiffs’ claims as attacks on trial design or scientific analysis. In addition, courts generally seem to recognize that even high-stakes governmental investigations do not necessarily equate to securities fraud.
The report contains a detailed analysis of all of the 2018 district court and appellate court decisions, organizing the decisions between cases involving pre-approval companies and post-approval companies. The well-organized report presents the rulings in a clear and readable way. The report is essential reading for anyone interesting in understanding the state of play regarding securities class action litigation involving life sciences companies, and in particular for anyone interested in understanding the recent decisions’ implications for life sciences companies’ disclosure practices.