We expect the high number of class action securities claims filed against life sciences companies in 2019 to continue in 2020. Prudent life sciences companies should continue to take heed of the filings and decisions rendered in 2019 to be aware of filing trends and recent developments in the law.
Last year, plaintiffs filed a total of 97 class action securities lawsuits against life sciences companies. In 2017 and 2018, approximately one out of every five securities fraud class action suits was brought against a life sciences company; in 2019 that number increased to one in every four.
Of these cases, the following trends emerged:
- Consistent with historic trends, the majority of suits were filed in the Second, Third, and Ninth Circuits. The Third Circuit saw an increase in filings from previous years, in part, due to a rise in merger litigation filed in federal court.
- A few law firms were associated with about two-thirds of the filings against life sciences companies: RM Law P.C. together with Rigrodsky & Long P.A., Pomerantz LLP, and the Rosen Law Firm.
- Slightly more claims were filed in the second half of 2019 than in the first half.
- 22 cases were filed against non-U.S. issuers incorporated across eight countries. Approximately 9.3% of life sciences securities class actions were filed against cannabis companies in 2019, most of which were incorporated in Canada.
- Approximately 51% of the companies with available market capitalization data had a market capitalization of $500 million or more.
An examination of the types of cases filed in 2019 reveals continuing trends from previous years, with some additional developments:
- Approximately 17.5% of claims involved alleged misrepresentations regarding product efficacy and safety, with many of these cases involving alleged misrepresentations regarding negative side effects, which purportedly could impact the likelihood of FDA approval;
- Approximately 15.5% 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 26.8% of the claims alleged misrepresentations regarding purported unlawful conduct in both the U.S. and abroad, including, but not limited to, illegal kickback schemes, anti-competitive conduct, tax issues and inadequate internal controls in financial reporting; and
- Approximately 46.4% of the claims involved alleged misrepresentations of material information made in connection with proposed mergers, sales, IPOs, offerings and other transactions.
In addition to an increase in filings, courts throughout the country issued a significant number of decisions in 2019 involving life sciences companies, including:
- 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 about as likely to grant motions to dismiss in full as they were to deny them, either in whole or in part;
- Claims that were independent of or arose after the development process, where courts were also about evenly split on outcomes; and
- Claims based on the financial management of life sciences companies, which also generally split between plaintiff and defendant-friendly outcomes.
Given the numbers from 2019, there is no indication that the filing of securities claims against life sciences companies is going to slow down.
Further, the decisions in 2019 resulted in mixed outcomes. Of the 46 decisions rendered in 2019 that Dechert reviewed, 24 opinions decided in favor of defendants, while in 22 of the 46 decisions, the plaintiffs’ claims were allowed to proceed.
Reduce Risks of Being Targeted
These numbers illustrate how life sciences companies remain attractive targets for class action securities fraud claims which can result in protracted litigation. As such, the following is a list of practices that life sciences companies should consider to reduce the risk of being targeted in a securities fraud claim.
- Speak truthfully. Be cognizant when making disclosures or statements to disclose both positive and negative results, including after preliminary results are issued.
- Both large cap and smaller life sciences companies are susceptible to securities class actions. All 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 should be prepared to make appropriate disclosures that affect companies across all industries, including those relating to transactions, internal controls, and conflicts of interest.
- Life sciences companies should be aware that former employees in all departments, not just those relating to clinical trials, may become confidential witnesses. Life sciences companies 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 about the company.
- Develop and publish an insider trading policy to minimize the risk of inside trades, including 10b5-1 trading plans and trading windows.
- Work 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-chair 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 in Chicago. She focuses her practice on the defense of publicly traded companies and their directors and officers in securities actions, derivative actions, merger litigation, investigations, and corporate governance disputes.
Angela Liu is a litigation partner at Dechert LLP in Chicago. She focuses her practice on the defense of publicly traded companies and their directors and officers in securities actions, derivative actions and related matters.
The authors would like to thank associates James Kilduff, Tamer Mallat, and Steven Pellechi for their invaluable assistance in the preparation of this article.