Life sciences companies continue to be a prime target for alleged securities fraud class actions. We anticipate that in the second half of 2021, we will see an uptick in the number of securities litigation cases overall, including a rise in cases filed against non-U.S. issuers.
Consistent with this trend, we expect the high number of class action securities claims filed against life sciences companies in 2020 to continue into 2021.
Plaintiffs filed a total of 80 securities class action lawsuits against life sciences companies in 2020. Filings against life sciences companies in 2020 represented a 17.5% decrease from the previous year, but a 19.4% increase from five years prior.
Prudent life sciences companies should continue to take heed of the filings and decisions rendered in 2020 to be aware of the filing trends and recent developments in the law.
Unsurprisingly, and presumably due to the pandemic, slightly more claims were filed in the second half of 2020 than in the first half, with 36 complaints filed in the first and second quarters, and 44 complaints filed in the third and fourth quarters. Yet, despite the pandemic, trends emerged similar to years’ past.
For example, the majority of suits were filed in the Second, Third, and Ninth Circuits, with a 92.3% increase in suits filed in the Ninth Circuit. The District of Delaware continued to see numerous filings due, in part, to a rise in merger litigation filed in federal court. Nineteen cases were filed against non-U.S. issuers incorporated across eight countries. And continuing the trend from years’ past, a growing number of lawsuits were filed against cannabis companies, most of which were incorporated in Canada, totaling approximately 7.5% of all life sciences securities class actions filed in 2020.
An examination of the types of cases filed in 2020 also follows trends from previous years. About 33.8% of claims involved alleged misrepresentations regarding product efficacy and safety, with many of these cases involving alleged misrepresentations regarding negative side effects related to leading product candidates, which could at times impact the likelihood of FDA approval. 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.
Approximately 22.5% of the claims alleged misrepresentations regarding purported unlawful conduct in both the U.S. and abroad, including, but not limited to, illegal kickback schemes, anticompetitive conduct, tax issues, and inadequate internal controls in financial reporting.
Finally, about 46.3% of the claims involved alleged misrepresentations of material information made in connection with proposed mergers, sales, IPOs, offerings and other transactions.
In addition to the filings, courts throughout the country issued a numerous decisions in 2020, involving life sciences companies, including: (i) claims that arose in the development phase—such as cases involving products failing clinical trials that are required for FDA approval or products not approved by the FDA— where courts were more likely to grant motions to dismiss in full as they were to deny them, either in whole or in part; (ii) claims that were independent of or arose after the development process, which courts overwhelmingly dismissed; and (iii) claims based on the financial management of life sciences companies, which generally split between plaintiff and defendant-friendly outcomes.
Given the numbers from this and recent years’ filings, and accounting for the 2020 Covid-19 pandemic, there is no indication that the filings of securities claims against life sciences companies is going to slow down any time soon. The decisions Dechert reviewed this year resulted in mixed outcomes, with 25 opinions decided in favor of defendants, eight opinions denying motions to dismiss (including one reversal of dismissal on appeal), and 10 opinions in which only partial dismissal was achieved.
Steps to Reduce Litigation Risks
These numbers illustrate how life sciences companies remain attractive targets for class action securities fraud claims which can result in protracted litigation. While the best defense in a shareholder suit is making all disclosures as complete and accurate as possible, life sciences companies regardless of size should consider certain steps to reduce the risk of being targeted in a securities fraud claim.
For example, companies should work with counsel to adopt a disclosure plan that not only covers written disclosures made in press releases or SEC filings, but also any statements made by executives during analyst calls. Life sciences companies also should be prepared to make appropriate disclosures that affect companies across all industries, including those relating to transactions, internal controls, and conflicts of interest.
Indeed, companies should be aware that former employees in all departments, not just those relating to clinical trials, may become confidential witnesses and must continue to educate employees about adherence to internal policies and procedures, internal reporting of any misconduct or other concerns, not sharing confidential information with others and limiting social media posts about the company.
Life sciences companies cannot prevent shareholder suits, but they can better defend against them by working with insurers to hire experienced counsel who specialize in and defend securities class action litigation on a full-time basis.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
David H. Kistenbroker is the global co-leader of Dechert LLP’s White Collar and Securities Litigation practice and managing partner of the firm’s Chicago office. His practice focuses on the defense of publicly traded companies and their directors and officers in securities actions, directors’ and officers’ liability actions, and related matters.
Joni S. Jacobsen is a litigation partner at Dechert LLP. She defends publicly traded companies and their directors and officers in securities class action litigation, derivative litigation, SEC investigations and corporate governance disputes. She is a lecturer in law at the University of Chicago Law School.
Angela M. Liu is a litigation partner at Dechert LLP. She focuses her practice on the defense of publicly traded companies and their directors and officers in securities class action litigation, derivative litigation, and other related matters.
The authors would like to thank associates Yando Peralta and Gregory Noorigian for their invaluable assistance with the preparation of this article.