On June 9, 2022, Judge David O. Carter of the United States District Court for the Central District of California granted a motion to dismiss a putative class action lawsuit alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act (the “Exchange Act”) and Rule 10b-5 thereunder, and Sections 11 and 15 of the Securities Act of 1933 (the “Securities Act”) against a healthcare company (the “Company”), its directors, and the underwriters of the Company’s initial public offering. R. Brian Terenzini v. GoodRx Holdings, Inc. et al., No. 2:20-cv-11444, (C.D. Cal. June 9, 2022). Plaintiffs alleged in their amended complaint that at the time of the Company’s IPO it failed to disclose in its Registration Statement and subsequent investor communications the significant risk of competition from a large online retailer. The Court held that—as with the original complaint—plaintiffs failed to allege actionable misstatements or omissions as well as scienter and granted defendants’ motion to dismiss with prejudice.
According to the amended complaint, the Company is a healthcare technology platform that provides consumers with direct price information and discounts on prescription drugs. Plaintiffs alleged that the Company generates revenue primarily from fees it receives from Pharmacy Benefit Managers (“PBMs”) who negotiate drug discounts. According to plaintiffs, the Company conducted its IPO on August 28, 2020, which launched above its share offering price and raised $1 billion in gross proceeds. The Company also filed a Registration Statement and Prospectus with the SEC in connection with the IPO which, according to plaintiffs, included representations that the Company was a “market leader,” was the only “significant direct-to-consumer channel” for PBMs, and that it had contract provisions in place restricting PBMs from “circumventing our platform [or] redirecting volumes outside of our platform.” Plaintiffs further alleged that shortly after the Company’s IPO, a competitor launched its own prescription drug discount program, which involved partnering with a third company for which the Company allegedly was a founding partner. According to the amended complaint, the Company’s stock price dropped to below its initial IPO price after the competitor’s service launched. Plaintiffs brought suit alleging that defendants knew about the upcoming launch of the competitor’s service at the time of the IPO and did not disclose that information to investors either in the offering documents or in subsequent investor conference calls. The Court granted defendants’ motion to dismiss with leave to amend, and plaintiffs filed the amended complaint.
The Court first considered plaintiffs’ allegations that defendants violated Section 10(b) of the Exchange Act by failing to disclose the likelihood of the competitor launching its service. In dismissing the original complaint, the Court held that the complaint lacked specific factual allegations establishing that defendants were aware of the competitor’s plans to launch its service when the Company announced its IPO. In considering the amended complaint, the Court noted that plaintiffs relied on the same deficient allegations from their original complaint and merely “emphasize[d] claims made in their first complaint about the business relationship between [the Company] and [the competitor] as circumstantial evidence that defendants knew that [the Company] intended to enter the online pharmaceutical market.” Accordingly, the Court once again dismissed plaintiffs’ Section 10(b) claims. While the Court noted that it need not consider plaintiffs’ allegations of scienter after dismissing their Section 10(b) claims, it nonetheless noted that it agreed with defendants that plaintiffs’ allegations of scienter “suffered from the same lack of facts as their 10(b) claims.”
The Court next dismissed plaintiffs’ claims under Regulation S-K. Regarding Item 303 of Regulation S-K, the Court found that plaintiffs failed to allege any facts showing defendants knew of an adverse trend, the material impact of that trend, and that the future material impacts are reasonably likely to occur from the present-day perspective. In particular, the Court referred back to its initial order dismissing the complaint, finding again that plaintiffs failed to allege facts sufficient to demonstrate that defendants had knowledge of the competitor’s plans to launch its service, and that any lack of disclosure here would be akin to failing to “disclose the future.” For similar reasons the Court also found that the complaint failed to allege a claim under Item 105 of Regulation S-K, which requires a “discussion of the material factors that make an investment in the registrant or offering speculative or risky.”
Addressing plaintiffs’ claims that the Company’s IPO stock price did not represent its true value as a basis for damages under Section 11 of the Securities Act, the Court noted that it dismissed the claims in plaintiffs’ initial complaint because “the statute’s language is clear that the starting point for damages is the price that plaintiffs actually paid for the stocks, capped at the IPO price, meaning $33/share.” The Court held that plaintiffs’ amended complaint failed to plead any new legal arguments or facts, and therefore dismissed on the same grounds.
Finally, the Court dismissed plaintiffs’ control person claims under Section 20(a) of the Exchange Act and Section 15 of the Securities Act, as plaintiffs failed to sufficiently allege any predicate primary violations of the Exchange Act or the Securities Act. The Court dismissed all claims with prejudice, finding that plaintiffs were given leave to amend, but they failed to include sufficient facts in their amended complaint and that further opportunity to amend would be “an exercise in futility.”
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R. Brian Terenzini v. GoodRx Holdings, Inc. et al.