In the latest edition of its annual report, the Sidley Austin law firm takes a detailed look at important securities litigation developments in 2021 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, both with respect to motions to dismiss in the district courts and on appeal. The law firm’s report, entitled “Securities Class Actions in the Life Sciences Sector: 2021 Annual Survey” can be found here. The same site also includes a link to a short summary of the report.
The report begins with the observation that the lawsuits filed against life sciences companies “share a common feature” – that is, in each case a life sciences company has “suffered a setback that, when publicized, was followed first by a stock price decline and then by litigation initiated by shareholders seeing to recover investment losses.” While setbacks can of course occur at any stage in a company’s development, for life sciences companies – “given particular issues relating to drug development, regulatory approval, and continued regulatory oversight of manufacturing, marketing, and sales activities” – the setbacks are clustered in two “obvious stages of a company’s life cycle” the pre-approval stage (prior to regulatory approval of a company’s drug or device) and the post-approval stage (product launch and marketing). The report structures its analysis of the life sciences-related securities litigation with reference to these two life cycle categories.
2021 Securities Suit Filings Against Life Sciences Companies
According to the report, the number of securities class action lawsuits filed in federal courts in 2021 against life sciences companies was slightly higher compared to the number filed in 2020; there were 49 new class action against publicly traded life sciences companies in 2021, compared to 45 in 2020. The coronavirus outbreak was a factor in the 2021 filings. Six of the 49 new filings in 2021 related to the setbacks in the development of COVID-19-related products.
About 80% of the new cases filed against life sciences companies in 2021 (39) involved companies with developmental stage drugs or devices. Of these pre-approval cases, nearly half (18 out of 39) arose from setbacks in the final stages of the approval process, after the company had submitted applications for market clearance.
As has been the case in the past, the case filings against life sciences companies in 2021 were clustered in three regions: 13 of the 49 new cases in 2021 were filed in the Second Circuit (which includes New York); seven of the new cases were filed in the Third Circuit (which includes New Jersey); and 19 of the new cases were filed in the Ninth Circuit (which includes California).
2021 Court Rulings in Life Sciences Companies’ Securities Suits
As has been the case in prior years, the defendant life sciences companies were successful the majority of the time on motions to dismiss in 2021. Companies won dismissal on 19 out of 33 district court dismissal motion rulings (58%), which was up slightly from 2020 (20 out of 35 decisions, or 57%), but down slightly compared to 2019 (23 out of 37 decisions, or 62%) and compared to 2018 (31 out of 48 decisions, or 65%).
This year’s report notes that in prior years, the authors had observed that companies with pre-approval drugs or devices did markedly better on motions to dismiss in the district courts than those with post-approval products. The “normal trend” in the past for the success rate on motions to dismiss is that the success rate for pre-approval cases has been as much as 40% higher than in post approval-cases.
However, in 2021, by contrast, the authors noted the defendant companies in both categories were successful about the same percentage of the time. The defendant companies prevailed on motions to dismiss in 59% of the pre-approval cases (ten out of 17) and about 56% of the time in post-approval cases (nine out of 16). The diminished success rate in the pre-approval context “may be the result of stronger-than-usual confidential witness allegations in cases decided in 2021.” The increased success rate in the post approval context “appears to reflect the weakness of a series of complaints filed against companies with quarterly misses unrelated to any regulatory setback or issue.”
The report notes that the results so far in dismissal motion rulings in COVID-19-related cases have been “mixed.” There were four dismissal motion rulings in 2021 in COVID-19 cases involving life sciences companies; the dismissal motions were granted in two of the cases and denied in two of the cases. Companies won motions to dismiss in cases involving a COVID-19 rapid test (Sona) and a monoclonal antibody treatment (Sorrento, discussed here). Court denied motions to dismiss in two cases involving vaccines (Inovio, discussed here, and Vaxart, discussed here). In the two cases in which the motions were denied the courts concluded “plaintiffs had adequately alleged that statements about manufacturing partnerships were deliberately misleading in light of undisclosed obstacles facing the manufacturers.”
According to the report, the COVID-related cases, “considered collectively,” did not “break” new legal ground. The authors note that Judge Vince Chhabria’s decision in the Vaxart case was “notable for its unusually candid analysis.” (In my blog post discussing the opinion, I called the ruling “unusually blunt.”)
One lens through which the report reviews the 2021 dismissal motion rulings is with respect to the district court’s application of the Ninth Circuit’s 2020 decision in the Endologix case, in which the appellate court issued a ruling favorable to defendants on the scienter issue. 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. In the Endologix case, the Ninth Circuit endorsed this theory. The report notes that in 2021, district courts began to apply the Endologix analysis. In at least two rulings, the district courts relied on Endologix in support of granting dismissal motions. The report’s authors note that Endologix should in the future provide an “increasingly powerful argument.”
The report also notes that life sciences companies also fared well in the appellate courts in 2021, winning affirmance of dismissals in three out of four appellate cases and partial affirmance in the fourth.
The report contains a detailed analysis of the 2021 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.