Federal court securities class action litigation filings against life sciences companies declined slightly in 2020 relative to 2019 but remained above long-term historical levels, and remained a significant portion of overall securities class action lawsuit filings during the year, according to a new report from the Dechert law firm. The January 28, 2021 report, entitled “Dechert Survey: Developments in Securities Fraud Class Actions Against Life Sciences Companies 2020 Edition,” can be found here.
According to the report, there were a total of 80 federal court securities class action lawsuits filed against life sciences companies in 2020, compared with 97 in 2019, and representing a 17.5% decrease. While the number of lawsuits against life sciences companies declined in 2020 relative to 2019, the 2020 filings representing a “19.4% increase from five years prior.”
In addition, while the overall number of lawsuits against life sciences companies declined in 2020, the life sciences-related lawsuits as a proportion of all lawsuits filed during the year remained steady. Thus, the 80 securities suits against life sciences companies represented about 24.7% of the 324 federal court securities lawsuits filed in 2020, while the 97 lawsuits against life sciences companies in 2019 represented 24% of the federal court securities class action lawsuits filed during the year.
Many of the 2020 securities lawsuits against life sciences companies involved larger companies. Thus, for example, about 59.9% of the life sciences companies named as securities suit defendants in 2020 had market capitalizations of $500 million or greater, while in 2019 about 51% of the life sciences companies sued had market capitalizations over $500 million. About 42.5% of the 2020 lawsuits against life sciences companies involved companies with market capitalizations of $1 billion or greater; in 2019, the equivalent percentage was 38.5%.
A very small number of plaintiffs’ law firms were involved with the vast majority of securities suits filed in 2020 against life sciences companies. Rigrodsky & Long, P.A. field 23 complaints (of which RM Law P.C. joined as co-counsel on 22); Pomerantz LLP was involved in 17 complaints; and the Rosen law firm was involved in 11 complaints. Collectively these three firms were associated with about two thirds of the 2020 federal court securities suit filings against life sciences companies in 2020.
Consistent with filing patterns in recent years, the majority of the federal court securities class action lawsuits filed against life sciences companies in 2020 were filed in courts in three circuits: the Third Circuit (inclusive of Delaware) with 29; the Ninth Circuit with 25; and the Second Circuit with 16.
The legal issues alleged in the 2020 securities suits against life sciences companies “remained consistent with past years.” (The percentages of lawsuits described below as involving these various patterns may add up to more than 100% because certain complaints reflected more than one pattern.)
The factual pattern involved in the largest percentage of cases relating to life sciences companies were allegations involving corporate transactions. About 46.3% of the claims involved alleged misrepresentations of material information made in connection with proposed mergers, sales, IPOs, offerings, and other transactions.
Another common factual pattern were allegations relating to product safety and efficacy. About 33.8% of the claims involved alleged misrepresentations regarding product safety and efficacy, with many of the cases involving alleged misrepresentations regarding negative side effects related to leading product candidates.
In addition, a significant percentage of cases involved allegations pertaining to the regulatory process. About 21.3% of the claims arose from alleged misrepresentations regarding regulatory hurdles, the timing of FDA approval or the sufficiency of applications submitted to the FDA.
Another significant category of cases involved alleged misrepresentations relating to purported unlawful conduct. About 22.5% of the claims involved unlawful conduct allegations. The alleged unlawful conduct included, among other things, illegal kickback schemes, anticompetitive conduct, tax issues, and inadequate internal controls in financial reporting.
There were other noteworthy trends in the 2020 federal court securities suits involving life sciences companies. Among other things, at least seven of the 2020 complaints alleged issues with the defendant company’s COVID-19 antibody or vaccine development.
In addition, many of the 2020 securities suits against life sciences companies involved companies incorporated outside the U.S. 19 of the 80 (or about 24%) federal court securities suit filings in 2020 involved life sciences companies incorporated outside the U.S, compared to 22 out of 97 (or about 22.7%) in 2019.
According to the report, court rulings during 2020 in securities lawsuits involving life sciences companies “resulting in mixed outcomes.” Of the 43 rulings during the year, 25 decisions were in favor of defendants, eight opinions resulted in denials of motions to dismiss (inclusive of one appellate decision resulting in the reversal of a dismissal), and 10 opinions that resulted in only a partial dismissal. Thus, 18 of the 43 2020 decisions involved a ruling by the court allowing the plaintiff to proceed, at least in part.
In summarizing the 2020 suits against life sciences companies, the report notes that “filings 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 company’s risk disclosures are robust, and, as important that executives statements regarding the likelihood of approval are measured and in no way misleading.” The report also notes that life sciences companies can also face challenges similar to companies in other industries, particularly concerning mergers or other transactions.
The report concludes that life sciences companies “remain attractive targets for securities fraud claims,” adding that in light of these risks companies should take steps to try to minimize the securities litigation risks. The recommended steps are detailed in the final section of the report and include, among other things, managing disclosures pertaining to clinical trial results; the adoption of 10b5-1 trading plans; and including appropriate cautionary disclosure in company statements.