Biotech Dealmaking Spree Sparks Torrent of Shareholder Lawsuits

A high volume of mergers in the biotech space is giving way to a flow of shareholder lawsuits seeking to block or rescind the tie-ups.

These securities suits are drawing willing plaintiffs despite the fact that such cases are rarely successful in preventing an announced merger from being completed or reversing an already approved deal. They’re amassing as a years-long run-up in dealmaking begins to ebb.

Among the past year’s 10 biggest biotech mergers, half of the companies involved faced lawsuits related to their M&A activity, according to data compiled by Bloomberg. The suits have included litigation against Seagen Inc. over its pending $41.2 billion acquisition by Pfizer Inc., plus at least one lawsuit against Horizon Therapeutics Plc over its $27.8 billion takeover by Amgen Inc.

“In any mergers these days of public companies, you see the cookie-cutter complaints that are filed that complain about omissions in the proxy statement,” said Mark McDonald, partner at Cleary Gottlieb Steen & Hamilton LLP. “It’s just plaintiffs’ firms trying to get a quick payout.”

“Usually those are mooted by supplemental disclosures, they go away,” he said. “Maybe the company will pay the lawyers a small nuisance fee.”

Their torrent follows a run-up in the sector’s M&A activity to all-time highs in recent years. US biotechs announced at least 430 mergers in 2021 and 370 deals in 2022, the highest volumes ever, according to data compiled by Bloomberg. They’ve announced more than 280 deals so far this year, already surpassing the full-year tallies of every year before 2020.

“Deals are happening,” BMO Capital Markets analyst Evan Seigerman said. “A lot of biotech and pharma companies need to buy, to bolster their late-stage pipelines and their commercial businesses, as a lot of them are lagging.”

Source: Bloomberg

More recently, peers including Immunome Inc., Myovant Sciences Ltd., Zynerba Pharmaceuticals Inc., and CohBar Inc. have each faced similar allegations that they misled investors around M&A. The investor who sued Immunome voluntarily dropped his allegations against the company on Oct. 5.

These suits rarely succeed in blocking or undoing merger transactions, according to Caroline Bullerjahn, partner in Goodwin Procter LLP’s securities litigation practice. Big pharmaceutical companies see a lot of potential for acquisitions, particularly distressed deals, of biotech companies facing market headwinds or struggling to fund pricey clinical trials, she said.

Investors who brought suits against Reata Pharmaceuticals Inc. and Prometheus Biosciences Inc. in the past year, for example, voluntarily dismissed their cases against the companies, which respectively sold to Biogen Inc. and Merck & Co. Inc. So too did the plaintiffs who sued Seagen over the Pfizer deal.

Regulators’ Role

These transactions typically fall into ranges between $10 billion and $20 billion, or below $1 billion, according to Seigerman said. Legal scrutiny from the US Federal Trade Commission has also done little to stem the tide of transactions in the biotech space, he said.

“The only thing that could potentially block stuff from going through would be regulators outside of the United States, but I haven’t even seen anyone as aggressive as the current FTC,” he says.

Amgen, for example, received FTC approval for its takeover of Horizon last month after settling a lawsuit with the regulator, agreeing not to bundle two blockbuster Horizon drugs together. That deal closed earlier this month.

As many industries consolidate through mergers and acquisitions, overall trends also point to an increase in antitrust activity across sectors, according to Bullerjahn and McDonald, who couldn’t comment specifically on antitrust actions in the biotech sector.

“In terms of thinking about merger execution risk, it used to be a significant part of that risk came from shareholder litigation, breach of fiduciary duty claims,” McDonald says. “To my mind that has significantly reduced, but the chance of the government stepping in and blocking on antitrust counts has gone up.”

Timing Shift

Shareholder class actions are also increasingly cropping up after a deal has closed, often highlighting the per-share price that investors received for their company stock in the buyout, McDonald said.

“Generally, as a trend, plaintiffs’ lawyers have shifted away from seeking to block mergers in favor of allowing mergers to go forward, and then attacking them after closing by seeking money damages on behalf of a class of shareholders of the target company that were cashed out,” he said.

The Myovant Sciences lawsuit, for example, also names acquirer Sumitomo Biopharma Ltd. as a defendant and seeks damages for a class of Myovant shareholders who were allegedly misled about the deal, which closed for $1.7 billion in March.

Outside the biotech sector, a quantum computing company that was sued for fraud related to its special purpose acquisition company merger avoided paying damages last month when a judge dismissed the class action with prejudice.

“We do tend to get complaints alleging omissions in the proxy that’s filed in connection with the deal, those are just kind of normal course,” Bullerjahn said. “In the deals that we have worked on, we have had none that have ultimately ended up being impeded, delayed, or blocked by litigation.”