Drug and Device Makers are Being Hit With More Securities Fraud Lawsuits
19 March 2015
Dow Jones Institutional News
Shareholders routinely file lawsuits seeking class-action status against companies alleging securities fraud, but the life sciences industry is attracting more than its share, according to a new analysis.Last year, there were 38 such lawsuits filed against drug makers and biotechs, along with their directors, officers and key personnel, which was twice as many as the year before and significantly higher than at any time in the past six years, according to the Dechert law firm, which conducted the analysis.
Moreover, a hefty 23% of the 170 securities fraud class-action lawsuits filed last year were brought against drug and device makers, which was more than the proportion of such lawsuits filed against any other industry. And in 2013, 11% of these lawsuits were filed against life sciences companies.
“There was no regulatory change you could point to or any suggestion drug makers are doing something wrong,” says David Kotler, a Dechert partner who specializes in securities and commercial litigation. The law firm, by the way, defends drug makers, as well as other companies, facing various types of litigation.
“What we’re looking at now, though, is that the stakes in early-stage product development are so high. And any adverse news can have a material impact on stock price. So in this environment, you’re more likely to see a securities fraud case.”
Most of the litigation focused on companies with smaller market capitalizations. In 2014, 57% of the life sciences companies sued for shareholder securities fraud had market caps of less than $500 million. This is in line with previous years — 61% in 2011, 50% in 2012 and 63% in 2013. However, there were more lawsuits involving companies with market caps of $250 million or less — 15 lawsuits were filed.
The trend reflects how quickly perceptions can change of small companies with only a few products or products under development, which is especially true in a heavily regulated industry, says Kevin LaCroix, an attorney and executive vice president at RT ProExec, an insurance brokerage, who writes The D&O Diary, a blog about insurance for company directors and officers.
“So many companies depend on the success or progress of a single drug or device that if anything happens that harms its prospects or undermines its commercial potential, the stock price just plummets,” says LaCroix, who notes that life sciences have “pretty consistently” been targeted more than other companies with these types of lawsuits.
But what specifically prompted the recent litigation? Dechert tallied eight lawsuits citing financial reporting or accounting improprieties and a similar number listing product safety. Seven lawsuits cited a failure to disclose information, such as when clinical trials were completed. Also mentioned was a failure to disclose insider trading, manufacturing problems, marketing practices and prospects for FDA approval.
Despite the number of lawsuits, Kotler says drug and device makers have fared better than other industries in the early going. “The cases are generally not as successful for the plaintiffs as cases in other industries,” he says. “Over the last five years, there was a successful motion to dismiss [a lawsuit] in about 20% to 25% [of the life sciences litigation]. In other industries, it was about 10% to 15%.”