In the latest edition of its annual report, the Sidley Austin law firm takes a detailed look at important securities litigation developments in 2022 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: 2022 Annual Survey” can be found here. A May 17, 2023 blog post summarizing the report can be found here.

2022 Securities Suit Filings Against Life Sciences Companies

According to the report, the number of securities class action lawsuits filed in federal courts in 2022 against life sciences companies “fell noticeably” compared to the number filed in 2020 and 2021; there were 37 new class action against publicly traded life sciences companies in 2022, compared to 49 in 2021 and 45 in 2020.  

Roughly 60% of the new case filings in 2022 involved pre-approval drugs or devices. Of the pre-approval cases, nearly 40% (9 out of 23) arise from setbacks at the final stages of the approval process, after a company has submitted a New Drug Application, Biologics License Application, or premarket clearance application.

As in prior years, the case filings against life sciences companies in 2022 were clustered in three regions: 11 of the 37 new cases in 2022 were filed in the Second Circuit (which includes New York); five of the new cases were filed in the Third Circuit (which includes New Jersey); and 10 of the new cases were filed in the Ninth Circuit (which includes California).

2022 Court Rulings in Life Sciences Companies’ Securities Suits 

As has been the case in recent years, the defendant life sciences companies were successful the majority of the time on motions to dismiss in 2022, though the district court dismissal rate in 2022 in cases against life sciences companies was down compared to the dismissal rate in 2021. Companies won dismissal on 15 out of 29 district court dismissal motion rulings (52%) in 2022, which was down compared to the dismissal rate in 2021 (19 out of 33 decisions, or 58%), and also down compared to 2020 (20 out of 35 decisions, or 57%) and compared to 2019 (23 out of 37 decisions, or 62%).

The report’s substantive discussion of court rulings begins with the observation that the lawsuits filed against life sciences companies arise when 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.

This year’s report notes that in prior years companies with pre-approval drugs or devices did markedly better on motions to dismiss in the district courts than those with post-approval products. In 2021, by contrast, the authors noted the defendant companies in both categories were successful about the same percentage of the time. However, in 2022, there was a return to the more normal division between success rates in pre-approval and post-approval cases. In 2022, companies prevailed in 11 out of 19 cases (about 60%), but in only four out of ten post approval cases (40%).

The report notes further that in the second year of COVID-19 related decisions, the results were “largely favorable.” Out of the five COVID-19-related cases in which the courts ruled on motions to dismiss, the companies prevailed on motions to dismiss in three out of four of the cases, which the motion to dismiss was denied in the fourth case. In the fifth case, the court granted the company’s motion to dismiss but allowed the plaintiffs’ section 11 claims against the company’s offering underwriters to proceed. The one case in which the motion to dismiss was denied in full was the Novavax case (discussed here).

Post-approval companies with products in commercial distribution may face regulatory scrutiny of sales, marketing, pricing, or billing practices. Plaintiffs’ lawyers often try to “piggyback” onto underlying regulatory activity to try to support a securities class action lawsuit. While courts continue to struggle with these kinds of issues, courts often agree that companies need not accuse themselves of uncharged or unadjudicated wrongdoing; however, courts often agree with plaintiffs that by discussing the reasons for their economic performance, the companies may have put their underlying conduct “at issue,” and “thereby assume a duty to disclose questionable practices.”

The report also notes that life sciences companies also fared well in the appellate courts in 2022, winning affirmance of dismissals in all six appeals. Five of the six appellate decisions addressed setbacks in the drug development process. Three of the five pre-approval appeals involved companies involved with oncology drugs; the report notes that in these cases the appellate courts demonstrated a “sophisticated understanding of challenges in designing and conducting clinical trials.

The report contains a detailed analysis of the 2022 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 interested 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.