The COVID-19-related public health crisis ended earlier this year; the CDC declared the end of the public health emergency in May. While the pandemic may be over, many of the changes that the pandemic wrought remain. Some of these changes resulted in significant alterations to the operating environment for many businesses. The difficulties that businesses face in trying to adapt to the new environment has, in turn, and at least for some businesses, translated into securities lawsuits. The latest example of this phenomenon is the lawsuit filed last week against clinical trial company Syneos, whose business operations were not only disrupted by the pandemic, but also changed in ways that caused ongoing disruption the company’s business and financial results. The lawsuit alleges that the company and its executives misrepresented both the company’s response to the pandemic and to the changed business circumstances the company faced due to the pandemic. A copy of the July 27, 2023, complaint filed against the company can be found here.
Syneos is a clinical research organization that helps biopharmaceutical companies test and develop their products. The company was formed in 2018 through a merger of INC Research and inVentiv Health. The company’s key financial metrics are its “backlog” of business (that is, anticipated future revenue based on contact and pre-contract client commitments) and its “book-to-bill ratio” (the ratio of orders received to orders completed and billed; a ratio greater than one indicates strong demand). Syneos includes in its reported revenue reimbursable out-of-pocket expenses (costs incurred in connection with clinical trial services for clients). Reimbursable out-of-pocket expenses comprise a significant amount of Syneos’s revenue and backlog of new business. Anticipated reimbursable expenses reflected in Syneos’s backlog is a demand indicator.
Beginning in March 2020, Syneos experienced COVID-related disruptions. Clinical trials were delayed, staff was impeded from accessing investigative sites, patient enrolment was delayed. As a result, the company was unable to fulfill much of its backlog of orders and experienced a decline in reimbursable revenues in 2020. The company withdrew its fiscal year 2020 guidance and launched a series of initiatives to try to mitigate the financial fallout from the disruption, including, for example, employee furloughs. The company also instituted remote monitoring services to allow virtual access to clinical sites where physical access had been restricted by COVID-19.
The complaint alleges that “defendants claimed that the negative impacts from COVID-19 pandemic had bottomed out by the second quarter of 2020 and that Syneos had quickly entered a recovery period that was proving a boon for business.” In subsequent periods, the complaint alleges, defendants claimed that Syneos’s business was booming as health research spurred by the pandemic fueled clinical drug development.”
However, the complaint alleges, Syneos’s business development capabilities “had been critically impaired by recent workforce reductions and leadership and operational changes, as well as labor force turmoil caused by the COVID-19 pandemic.” The company also struggled to integrate the two predecessor companies. The company struggled to respond to clients’ needs. The increased prevalence of remote monitoring and decentralized clinical trials in the wake of the pandemic compounded these problems. The company’s struggles to perform effectively under existing contracts caused the company to lose new business. In addition, the company’s reimbursable revenue stream “had been fundamentally diminished by the COVID-19 pandemic,” as a result of which its backlog was inflated by millions of dollars of reimbursable expenses that the company would never receive, creating the false impression that the company was enjoying robust client demand, “when in fact the business was floundering.”
The complaint alleges that as a result of these alleged misrepresentations the company’s share price was inflated to an all-time high by December 2021, allowing the company’s two largest investors to sell more than $3 billion worth of Syneos stock, and allowing the individual defendants to sell more than $16 million worth of their personal holdings of company stock.
In February 2022, the company release its fourth quarter 2021 results, announcing was the complaint called “deeply disappointing financial results.” Syneos revealed that “reimbursable revenues would in fact likely never recover to pre-pandemic levels.” The company also set apart $3.9 billion from its backlog of expected new business. In April 2022, the company announced the departure of its CEO, Alistair Macdonald. And in November 2022, the company announced a very low book to bill ratio, less than a tenth of what the company had been expecting. The new CEO, Michelle Keefe, in a November earnings call, acknowledged that for at least 18 months the company had been disrupted by staffing challenges, leadership changes, and the inability to integrate prior mergers. The complaint alleges that as a result of these revelations, the company’s share price fell to a point77% below the prior all-time high.
On July 27, 2023, a plaintiff shareholder filed a securities class action lawsuit in the Southern District of New York against Syneos; Macdonald; Keefe; and CFO Jason Meggs. The complaint purports to be filed on behalf of a class of investors who purchased the company’s securities during the period September 9, 2020 to November 3, 2023.
The complaint alleges that during the class period, the defendants failed to disclose: “(a) that Syneos’s business development capabilities had been materially impaired by workforce reductions and leadership and operational changes, as well as labor force turmoil caused by the COVID-19 pandemic; (b) that Syneos had struggled to integrate recent acquisitions … ; (c) that Syneos was suffering from acute competitive disadvantages as clinical trials moved to remote monitoring and decentralized administration … and the Company had failed to adapt to changing business demands in the wake of the COVID-19 pandemic; (d) that Syneos’s backlog, book-to-bill ratios and net new business awards had been artificially inflated by more than $500 million through the inclusion of reimbursable expenses the company would never collect; (e) that as a result of (a)-(d) above, Syneos was struggling to execute on its existing contracts and to agilely respond to client needs, causing the Company to suffer client dissatisfaction across its client base; and (f) as a result of (a)-(e) above, Syneos was exposed to material undisclosed risk that the Company would lose customers, be unable to grow its client base or win significant contract renewals, and cede market share to its rivals.”
The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the class.
The operating difficulties this company allegedly suffered appears to have been the result of a number of different factors, only some of which have to do with the pandemic. For example, the alleged difficulties the company was experiencing in integrating the predecessor companies following the merger seems unrelated to the pandemic. But the pandemic clearly caused some of the difficulties and also seems to have exacerbated the company’s other difficulties. So for those reasons I believe this case should count as pandemic-related, even if COVID-related issues were only part of the company’s problems.
Assuming for tracking purposes that this new lawsuit should count as COVID-related, my count of COVID-related lawsuits that have been filed since the initial coronavirus outbreak in March 2020 is now up to 70, with a total of eight COVID-related lawsuits filed so far this year. (By way of comparison, there were a total of 18 COVID-related suits filed in 2022.)
This lawsuit does represent something of a variant among the various types of COVID-related suits that have been filed. This case seems to involve a company that misrepresented the extent to which it had recovered from pandemic-related disruptions as well as the extent of the opportunity that the pandemic represented in terms of new business opportunities. The framework of allegations here do not fit exactly into any of the categories of types of claims I had previously identified, although it is in part similar to other suits where the defendant companies (diagnostic testing companies and vaccine developers, for example) allegedly claimed that they would be able to profit from the pandemic. That said, the allegations in this case seem to be very company specific, and the suit could represent a category of one.
It is interesting to note that, even though this complaint was only just filed in July 2023, most of the alleged misrepresentations here were in the period from mid-2020 to early 2022, and the “revelations” the complaint alleges were during the period from April to November 2022. The allegations also seem to involve events and circumstances from an earlier phase of the pandemic, as opposed to current or even recent events and circumstances. Because the complaint relates to more distant events, it may have relatively little to tell us about the possibilities for further COVID-related cases going forward.
Even if this case is not necessarily a harbinger of further COVID-related cases to come, it does at a minimum show that the COVID-related cases continue to be filed. At this point, there does seem to be a possibility for further cases to come. At a minimum, it does seem that, even now, four years out from the initial coronavirus outbreak, that COVID-related suits will be a significant factor in the overall number of securities lawsuit filings this year.