In the latest edition of the law firm’s annual report, Sidley Austin takes a detailed look at important securities litigation developments in 2020 relating to life sciences companies. The report includes not only a review of life sciences companies’ securities litigation class action filings trends but also examines life sciences companies’ track record in the courts, on motions to dismiss in the district courts and on appeal. The law firm’s report, entitled “Securities Class Actions in the Life Sciences Sector: 2020 Annual Survey” can be found here. The law firm’s two-page report summary can be found here.
2020 Securities Suit Filings Against Life Sciences Companies
According to the report, the number of securities class action lawsuits filed in federal courts against life sciences companies stayed roughly level in 2020 compared to the prior year; there were 45 new class action against publicly traded life sciences companies in 2020, and 44 in 2019. Roughly two-thirds of the new cases filed against life sciences companies in 2020 (29) involved companies with developmental stage drugs or devices (“pre-approval” companies).
The coronavirus outbreak was a factor in the 2020 filing. Seven of the 45 new filings in 2020 related to the development of COVID-19 products, including both tests and vaccines. The report notes as a general matter that “the pandemic does not appear to have slowed either the pace of new filings or the progress of securities litigation through the courts.” The report also notes that the “more profound effects” of the pandemic “have been — and will likely continue to be — on clinical trials and the FDA approval process rather than directly on securities litigation.”
As has been the case in the past, the 2020 securities lawsuits against life sciences companies were clustered in three federal judicial circuits: the Second, Third and Ninth. 19 of the 45 new securities lawsuits against life sciences companies were filed in the Ninth Circuit, which includes California; 11 were filed in the Second Circuit, which includes New York; and eight new cases were filed in the Third Circuit, which includes New Jersey. These individual states are of course locations where there are large concentrations of companies in the life sciences industries.
Of the new actions filed against life sciences companies in 2020, 29 were filed against companies with development-stage drugs or devices. The remaining 16 actions “involve a broad spectrum of regulatory and nonregulatory issues with mature products, ranging from alleged regulatory violations in sales and marketing, to financial statement issues, to issues concerning revenue forecasting and performance.”
2020 Court Rulings in Life Sciences Companies’ Securities Suits
In district court motion to dismiss rulings in 2020, life sciences companies prevailed at a significant rate but slightly below 2019 levels. In 2020, companies won 20 of 35 (57%) district court motions to dismiss rulings, compared to 23 of 37 (62%) in 2019 and compared to 31 out of 48 decisions (65%) in 2018. The 57% success rate on dismissal motion rulings in 2020 reflects “a slight decrease from the past two years but still above the recent low (50%) in 2017.”
There was a “marked” difference in the dismissal rates between cases filed against pre-approval companies and cases filed against post-approval companies. As has been the case in the past, the dismissal rate for pre-approval companies was better than for post-approval companies. Companies prevailed in motions to dismiss in 67 percent of cases involving pre-approval companies, but in only 43 percent of the post-approval cases.
Life sciences companies also “fared well” in the appellate courts in 2020. Life sciences companies prevailed in seven of eight appellate rulings.
One particular appellate ruling that the report highlights is the June 10, 2020 decision in the Endologix case (here), in which the Ninth Circuit issued a favorable ruling on scienter issues. Defendants often argue in cases involving life sciences companies that it makes little sense for claimants to contend that a company would expend significant resources on a clinical trial of a drug or device that the company believes will fail or on an application that it knows will not be approved. The Ninth Circuit “embraced this principle in strong terms” in Endologix, concluding that the claimants’ theory “does not make a whole lot of sense.”
However, “on the other side of the ledger,” several courts have adopted plaintiffs’ theory that “a cash-strapped company may ‘gamble’ on approval when it has few other options, particularly if the company or its executives may realize short-term gains form doing so.”
In a development that is less favorable for life sciences companies, the Second Circuit in the Nguyen v. NewLink Genetics case (here) “delivered a setback” on opinion statements and on disputes over trial design and other scientific matters. The appellate court held that the distinction between opinion and statements of fact is “unimportant” in determining whether plaintiffs have sufficiently plead falsity. The appellate court also held plaintiffs’ allegations based on statements concerning what “major studies” showed was sufficient for plaintiffs to avoid a dismissal. The NewLink decision, the report notes, “may complicate” the analysis of cases based on statements of opinion, at least in the Second Circuit.
The report contains a detailed analysis of the 2020 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, particularly for anyone interested in understanding the recent decisions’ implications for life sciences companies’ disclosure practices.