2019 Filings
In 2019, the number of securities class action cases filed against life sciences companies reached record levels. According to Cornerstone Research, lawsuits against pharmaceutical companies increased by 40 percent over the prior year, more than making up for the fact that cases against biotechnology and healthcare companies dipped slightly but remained at near-record levels. As was the case in 2018, and in the market generally, the sector saw an increase in lawsuits involving IPOs filed in both federal and state courts as well as an increase in the number of securities class actions challenging merger and acquisitions.1 In 2019, almost a dozen cases were filed against companies in the emerging medicinal cannabis industry, whose stocks were particularly volatile.2
Life sciences companies remain attractive targets for securities class action plaintiffs for several reasons. Clinical stage companies often need to tap the capital markets to fund expensive trials of novel and untested treatments, exposing them to potential liability under the more lenient standards applicable to securities claims challenging statements in public offering documents. Moreover, the uncertainties facing drug and medical device companies are often binary—success or failure of a trial or approval or rejection of a new drug application by the U.S. Food and Drug Administration (FDA). If the clinical hypothesis being tested is not proven or even if a demonstrated clinical benefit is not seen as sufficiently meaningful, life science companies’ stock prices often immediately drop precipitously. The decline may be particularly severe for the stock of newly-public clinical stage companies with a single product candidate. In addition, both drugs and devices in trials and those already on the market may turn out to have troubling side effects that can result in trials being stopped, products being withdrawn, or black box labeling warnings being required. Adverse events, whether they occur during clinical trials or manifest for drug and device products already in the market, also may adversely affect a life sciences company’s stock price, often triggering securities class action litigation. Finally, the intense regulation of life sciences companies by the FDA, Centers for Medicare & Medicaid Services (CMS), U.S. Department of Health and Human Services (HHS) and other agencies, as well as civil and criminal investigations relating to the opioid epidemic and allegedly anticompetitive conduct, particularly in the generics industry, has spawned a spate of securities litigation as well.
2019 Decisions
Clinical Trials
Misguided Opinions and Optimism
In 2019, several decisions confirmed that a failed clinical trial will not ordinarily support a claim for securities fraud. This is so even when after-the-fact analysis suggests that the design or conduct of a trial was flawed or that optimism based on earlier trial results or blinded top-line interim results from a pivotal trial turned out to be misguided.
Accordingly, efforts to paint optimism at the outset of an ultimately failed trial as misleading or false are routinely rejected. Even where failure of a clinical trial of a company’s only product in development results in devastating losses, courts are loath to “adopt a rule that discourage[s] free scientific inquiry in the name of shielding investors from risk of failure.” Thus, the Southern District of New York dismissed a case against Ohr Pharmaceuticals, which saw its stock price decline by 80 percent after its Phase 3 trial failed, ruling that “it cannot be the case that ex ante intent is based on ex post results.”
Moreover, opinions about how a drug will work, which patients may benefit and whether a trial is likely to succeed are generally not actionable so long as those opinions have a reasonable basis (e.g., promising data in earlier trials), and are actually believed. Thus, for example, Ohr Pharmaceutical and NewLink Genetics each expressed optimistic opinions concerning their product candidates based on prior promising Phase 2 studies and encouraging blinded top-line interim Phase 3 results. When the Phase 3 studies were unblinded, however, it turned out that the positive top-line data did not reflect efficacy but, rather, was due to the fact that patients in the control group had better-than-expected outcomes. Both courts held that the previously-unknowable and unexpected results of the Phase 3 trials did not render earlier optimism misleading or false.
Similarly, the First Circuit rejected claims against Biogen, determining that the company’s optimistic opinions, based on evidence from clinical studies, that its treatment was “on track” to become the most prescribed therapy for MS, were no more than misguided optimism. Such opinions are generally protected even where the clinical hypothesis and its underlying assumptions are not universally accepted, so long as companies are transparent about their protocols, assure that their assumptions have sufficient scientific support, and are cautious in their optimism about the likelihood of success. Thus, plaintiffs in several cases pointed to the fact that not all medical experts agreed with the clinical trial sponsors’ assumptions, e.g., New Link’s estimates of life expectancy for the overall patient population, and Bristol-Meyers Squibb’s definition of “strong” tumor expression for targeted proteins. This not-uncommon reasonable disagreement in scientific circles is almost universally held to be an insufficient basis for securities law claims. As the court held in a case against Mallinckrodt, the securities laws do not impose a duty to disclose every medical journal critique.
However, where opinions about a trial’s likely outcome are actually at odds with data from a company’s own studies, the law may not provide protection. Thus, Opthotech’s executives’ opinion that changes in enrollment criteria from Phase 2 to Phase 3 would not have a significant impact were held to be suspect where the company’s own Phase 1 data showed that patients excluded in Phase 2 and then included in Phase 3 were unlikely to benefit.
Changes in Clinical Trial Criteria and Publicly Available Protocols
In sustaining the claims against Opthotech the court was influenced by the fact that executives’ statements about the changed enrollment criteria were inconsistent: sometimes the company downplayed the significance of the changes and at other times denied there were any changes at all—assertions easily refuted by reference to the company’s trial protocols published on the FDA’s website. By contrast, publication of trial protocols evidencing different Phase 2 and Phase 3 enrollment criteria on the FDA website was a shield for NewLink, disproving the plaintiffs’ claims that NewLink failed to disclose that sicker patients excluded in Phase 2 were included in the Phase 3 pivotal trial.
Ironically, in denying that Opthotech made any (or any significant) changes, one company executive gave (but did not follow) good advice about the danger of making significant revisions to a pivotal trial’s design: “You see too many companies make a lot of changes from Phase 2 to Phase 3, and . . . get surprises. So . . . being superstitious, we changed . . . nothing.” Opthotech and NewLink both illustrate that changes in trial design are fraught and statements about such changes (or in fact anything about trial design) will be compared in hindsight with the actual protocols publicly available from the FDA.3
Successful Trials with Less-Than-Hoped-for Results
Statements concerning the results of successful trials were not immune to challenge in 2019. Roche’s trial of a combination treatment of its new and existing drugs for breast cancer met its primary endpoint but was barely statistically significant and only as a result of minimally prolonging disease progression in a single subgroup. The stock dropped because the market did not view the results as sufficiently clinically meaningful. The court nonetheless held that Roche executives’ post-trial statements that they hoped the drug combination would “move the standard of care” were merely aspirational opinions not actionable under the securities laws. The court also rejected suggestions that Roche’s alleged motive, to prolong the profitability of its existing drug (which was about to lose its patent protection), gave rise to any inference of fraud.
However, another company, Puma, which tested a drug for the same indication as Roche, saw aspects of its case go all the way to trial, resulting in a split verdict. While the company correctly stated the percentage improvement in disease-free survival between the treatment and control arms in its SEC filings and scientific presentations, the jury found that statements made at an investor conference, before the full results were published, misleadingly suggested that the absolute difference in survival rates was 5 percent, materially higher than 2.3 percent difference actually observed.
Puma, like Opthotech, thus underscores the importance of carefully preparing and scripting company spokespersons charged with discussing clinical trial design or results at investor conferences and on earnings calls. What executives say will be closely compared to what the publicly available protocols and/or published clinical trial results reveal.
Scientific Conference Presentations
Puma also demonstrates another danger related to public statements about clinical trials made before full results are presented at scientific conferences or published in medical journals. As scientific conference and publication rules generally require, Puma delayed disclosing all of the details of its completed trial until an upcoming American Society of Clinical Oncology (ASCO) conference. In denying summary judgment last year, the Puma court was sympathetic to the tension between scientific publication rules and the securities laws, but indicated that once a company decides to publicly disclose some information to market analysts it undertakes a duty to do so in a manner that is not false or misleading, even where that means disclosing details the company is required to sequester under rules imposed by scientific conferences and publications.
Immunomedics and Roche also ran afoul of disclosure rules imposed by the scientific community. ASCO cancelled Immunomedics’ presentation after the company first discussed its trial results with another scientific group; the announcement of ASCO’s cancellation resulted in a 60 percent decline in Immunomedics’ stock. Roche broke ASCO rules by failing to disclose alleged payments to its lead investigator, resulting in his resignation from prestigious oncological positions and corrections in ASCO and NEJM publications. In Roche, the motion to dismiss was granted because the disclosure concerning the investigator did not affect the company’s stock price despite the reputational injury in scientific circles. The Immunomedics court also granted the defendants’ motion to dismiss despite the market’s negative reaction, but granted the plaintiffs leave to provide more particulars concerning the defendants’ knowledge that their actions were in violation of ASCO rules and likely to cause cancellation of the presentation of their trial’s results.
Interim Trial Results
As noted, both Ohr and NewLink were dismissed despite soft optimistic statements concerning top-line, blinded interim data. In each of these cases, the plaintiffs could not establish that the companies’ executives knew or could have known that seemingly-positive blinded top-line results did not indicate that the tested drug was efficacious but, instead, that the control group’s outcomes were much better than expected.
However, life sciences companies who overplay the significance of interim trial results, or cherry-pick which results to disclose, do so at their peril. That was the case with Orexigen, which 1) touted unexpectedly positive 25 percent interim results of a cardiovascular safety study for its weight loss drug, Contrave, that suggested that cardiovascular risk was actually reduced, but then 2) later refused to disclose the 50 percent data indicating that those early benefits had reversed. A top FDA official criticized Orexigen’s decision to release the 25 percent interim trial data, stating it was “unreliable,” “misleading,” and “likely false” and could result in “fines, civil penalties, or even the withdrawal of Contrave from the market.” The trial’s lead investigator at the Cleveland Clinic later publicly excoriated the company for refusing to release the 50 percent interim data, even after they determined to discontinue the trial. Last year, the Ninth Circuit reversed the district court’s earlier decision dismissing the case, ruling that by disclosing the 25 percent results Orexigen “created its own obligation” to disclose the later, unfavorable 50 percent interim data. On remand, the district court followed the appellate court’s direction and held that the omission of the 50 percent results rendered the uncorrected statements about the 25 percent results materially misleading. The court also determined that generalized risk factors warning that results might change were insufficient to cure the continuing misimpression concerning cardiovascular benefit. However, the district court again dismissed the case in significant part, this time on loss causation grounds. Finding that the information about the misleading nature of the 25 percent data was already known to the market before the FDA official and, later, the lead investigator complained, the court held that the publication of their criticisms could not have caused the plaintiffs’ losses related to Orexigen’s cardiovascular benefit claims. The only new “news” in the allegedly corrective disclosures was the FDA official’s warning that the agency might impose fines or penalties; accordingly claims based on the alleged omission of these possible consequences were the only claims sustained.
Adverse Events
Courts granted motions to dismiss in each of the cases involving adverse events in clinical trials. Executives of both Esperion Therapeutics and Regulus Therapeutics opined that adverse events were likely due to underlying comorbidities; in each of the subsequent securities class actions, the courts determined that such opinions were reasonable and therefore not actionable. This was so even though safety concerns resulted in Regulus’ trial being put on a clinical hold and, ultimately, discontinued. Another court rejected claims that Antares had prior knowledge of, or failed to timely or adequately disclose, adverse events in a post-Phase 3 safety study which resulted in delayed approval and, ultimately, the FDA requiring a black box warning. The First Circuit also affirmed the dismissal of a case against Biogen, where 1) a death and safety concerns were disclosed, and 2) the drug’s label was updated to reflect the company’s evolving understanding of the risk of adverse effects. In light of these disclosures the appellate court agreed that statements that the treatment’s safety profile was favorable and that, despite the adverse events, the overall risk/benefit had not significantly changed were not materially misleading.
Post Approval Issues
Adverse Events and Safety
A number of cases addressed adverse events and safety issues arising with respect to products, primarily medical devices, already on the market. One court held that it was materially misleading for Restoration Robotics to represent that its hair transplant technology posed the “risk” of injury due to misuse when known product defects, not due to operator error, actually led to many injuries. Similarly, Allergan’s disclosure of a “possible association” between lymphoma and the company’s breast implants was held to be materially misleading where the actual risk of developing lymphoma was 14 times greater than with competitors’ similar products.
However, where the fact and scope of significant post-approval adverse events are accurately disclosed, courts rejected claims that investors were misled. Obalon Therapeutics avoided liability under the securities laws by forthrightly disclosing that over 90 percent of its intragastric balloon patients experienced an adverse event. Claims that Alkermes’ drug assured that opioid-addicted patients “will not” or cannot” relapse were not actionable where the FDA-approved label disclosed that the drug offered only the possibility of reducing dependence and also disclosed possible significant side effects where abuse continued during treatment. Product defect-related claims were also rejected where the plaintiffs failed to demonstrate that Avanos executives knew of alleged vulnerabilities in surgical gowns used by infectious disease personnel.
FDA Compliance
Product Modifications
Changes in labeling and instructions for use of a lead-level testing product, instituted by the company without FDA notice or approval, led to securities claims against Meridian Bioscience. The failure to file required Medical Device Reports and to timely and properly submit a new 510(k) application were deemed to render the company’s technically-true statements that its product was FDA-cleared materially misleading.
Manufacturing
Several cases involved an alleged failure to comply with FDA regulations governing manufacturing. Claims against Reddy Labs were sustained where, despite multiple inspections at multiple plants that led to multiple Form 483s addressing deficiencies over multiple years and, ultimately, to an FDA Warning Letter, the company made misleadingly reassuring statements concerning the scope of the company’s manufacturing problems and the progress and impact of its remediations. Another court refused to reconsider or certify for appeal its decision from last year which upheld similar claims against Zimmer Biomet. However, Ocular Therapeutix’s statements of optimism concerning its ability to resolve pre-approval Form 483s and issues raised in two CRLs were not actionable where the deficiencies cited by the FDA were timely, fully, and accurately disclosed.
Off-Label Marketing
Courts dismissed two cases involving alleged off-label marketing of opioids which resulted in governmental investigations against Assertio Therapeutics and Galena Biopharma. In each of these cases, the courts held that the complaints failed to demonstrate that company executives were aware of the allegedly improper marketing practices.
Insurance Regulation and Reimbursement
Alleged failures to comply with billing requirements imposed by CMS were challenged in two separate cases with divergent results. Claims that Mylan intentionally misclassified its EpiPen to increase reimbursement rates were allowed to proceed past the motion to dismiss stage. By contrast, claims that Myriad Genetics failed to comply with changed billing codes for BRAC1 and BRAC2 genetic testing were dismissed where the plaintiffs failed to establish that the company’s billing practices were in fact fraudulent or illegal.
Non-Regulatory Issues
The majority of decisions in securities class actions filed against life sciences companies in 2019 involved financial and business operations issues, not the conduct of clinical trials or compliance with FDA regulations. Those decisions are briefly described below.
Reliance on Limited Manufacturers/Suppliers
Courts rejected claims based on alleged failure adequately to disclose reliance on a single manufacturer or supplier where 1) the company actually disclosed such reliance (Keryx Biopharmaceuticals); 2) the company’s risk factors concerning dependence on third parties generally were held to be sufficient (Mallinckrodt); and 3) because companies have no duty to predict that negotiations with a supplier would not have a positive outcome (Lannett).
Sales and Revenue and Anticompetitive Conduct
Disappointing sales, including the failure to meet projections, are generally held to be non-actionable forward-looking statements (Tesaro). Cases characterizing the mix of life sciences companies’ sales, however, had mixed results. (Compare Invuity with Obalon Therapeutics and Alkermes). Finally, where increased revenue from sales was due to undisclosed price-fixing or other collusive agreements, courts generally held the failure to disclose that prices were inflated due to anticompetitive conduct as well as simultaneous statements characterizing the industry as competitive were materially misleading, including in a spate of decisions arising from ongoing antitrust investigations relating to price-fixing in the generics industry.4
2019 Life Sciences Offerings and What to Look for in 2020
According to Wilson Sonsini’s Technology and Life Science 2019 IPO Report, 60 life sciences companies priced IPOs in 2019, down just slightly from the 64 IPOs in the sector in 2018. More than half of the life sciences IPOs in 2019 (and 2018) were offerings by biotech companies; roughly a quarter of the IPOs in each of the past two years were by medical device manufacturers.5 Many newly-public life sciences companies’ stocks have been battered by the COVID-19 related market turmoil. Companies that have run through cash raised in offerings over the past few years to fund expensive clinical trials may find themselves unable to tap the capital markets at previous prices or at all, potentially causing disruption to clinical efforts. For non-terminal diseases or COVID-related therapies or testing devices, the virus itself may disrupt human trials of new product candidates because of shelter-in-place rules.
COVID-19-related market volatility has also caused many small-cap newly-public life sciences companies’ stock to fall below their initial public offering prices, making them potentially even more susceptible to claims under the Securities Act of 1933 should their clinical trials or products encounter problems or disappointments. One bright note is that all but two of 2019’s 60 new public life sciences companies (and most that went public in 2018) adopted exclusive forum provisions, stipulating that any ’33 Act claims must be brought in federal court. As a result of our recent success in Sciabacucchi,6 where the Delaware Supreme Court upheld such federal forum selection provisions, at least any’33 Act claims filed against fledgling life sciences companies will likely be tested under the more stringent pleading standards that apply in more sophisticated and experienced federal courts.
Life sciences companies should learn from the lessons of last year’s cases to limit their exposure to securities class actions. Carefully crafted cautionary risk factors, including forthright assessments of the impact of COVID-19 and other risks and uncertainties, should accompany any positive statements. Care should be taken about overstating early positive results and life sciences executives should be particularly careful to not to spin potential or actual setbacks and to stick to their well-crafted scripts.
1 In 2019 the Supreme Court dismissed a writ of certiorari in Emulex Corp. v. Varjabedian, 587 U.S. __ (2019) allowing the negligence standard the Ninth Circuit applied in the context of a tender offer to stand, continuing a Circuit split. Merger and tender offer claims were also the subject of decisions in 2019 in cases against Endo, PharMerica, AbbVie, Perrigo, Jaguar Animal Health, and Impax Labs, among other companies.
2 There was only one cannabis-related decision in 2019, which arose out of the PTO determining that the company’s product was “obvious” and therefore not entitled to patent protection. In re CV Sciences, Inc. Sec. Litig., 2019 WL 6718086 (D. Nev. Dec.10, 2019) (denying motion to dismiss).
3 Although there were no cases addressing the issue of FDA interim commentary in 2019, past cases, including those summarized in Wilson Sonsini’s 2018 Life Sciences Securities Litigation Roundup, reflect that minutes of official FDA meetings are also posted on the agency’s website and statements at odds with those minutes can form the basis of a securities claim.
4 Securities claims against generics manufacturers Mylan, Lannett, Perrigo, Allergan, and Teva allegedly involved in collusive price fixing were sustained by the Southern District of New York and the Districts of Connecticut and New Jersey. California federal courts split with respect to similar cases against Impax Labs and McKesson, respectively. Other anticompetitive conduct allegations were upheld in cases against Mallinckrodt and Patterson.
5 https://www.wsgr.com/images/content/2/0/v2/20573/IPO-Report-YE-2019.pdf.
6 Salzberg et al. v. Sciabacucchi, No. 346, 2019 (Del. Mar. 18, 2020), https://www.wsgr.com/en/insights/delaware-supreme-court-rules-federal-forum-selection-charter-provisions-are-valid.html.
