Developments in Securities Fraud Class Actions Against U.S. Life Sciences Companies
In 2022, the total number of securities class action complaints filed remained below the more elevated levels we saw during 2017-2020, but life sciences companies were nonetheless still popular targets among these filings.1 In this White Paper, we analyze and discuss trends identified in filings and decisions from 2022 so that prudent life sciences companies can continue to take heed of the results.
Plaintiffs filed a total of 43 securities class action lawsuits against life sciences companies in 2022, which represented almost one in four securities class action lawsuits.
Filings against life sciences companies in 2022 represented a 27.1% decrease from the previous year, and a 51.1% decrease from five years prior. Of these cases, the following trends emerged:
- Consistent with historic trends, the majority of suits were filed in the Second, Third and Ninth Circuits, with a 54.5% decrease in suits filed in the Ninth Circuit – 22 in 2021 and 10 in 2022. The Third Circuit saw a 44.4% decrease in filings from the previous year – from nine in 2021 to five in 2022. For district courts within these circuits, the Southern District of New York had the most filings, with 10 overall
- A few plaintiff law firms were associated with about three-fourths of the first filed complaints against life sciences companies: Pomerantz LLP (18 complaints), Glancy Prongay & Murray LLP (five complaints) and Bronstein, Gewirtz & Grossman, LLC and Kessler Topaz Meltzer & Check LLP (tied with four complaints each).2
- Slightly more claims were filed in the first half of 2022 than in the second half, with 24 complaints filed in the first and second quarters, and 19 complaints filed in the third and fourth quarters.
- About a quarter of the securities fraud cases brought against life sciences companies (11 cases) were filed against companies with COVID-19-related products and services.
An examination of the types of life sciences cases filed in 2022 reveals continuing securities litigation trends from previous years.
- About 48.8% of claims, or 21 of 43 claims, involved alleged misrepresentations regarding product efficacy and safety,3 with many of these cases involving alleged misrepresentations regarding certain negative side effects associated with leading product candidates, which could potentially impact the likelihood of Food and Drug Administration (“FDA”) approval.
- About 39.5% of the claims, or 17 of 43 claims, arose from alleged misrepresentations regarding the sufficiency of the applications submitted to the FDA.
- Approximately 20.9% of the claims, or nine of 43 of claims, alleged misrepresentations regarding purported unlawful conduct in both the United States and abroad, including (but not limited to) illegal kickback schemes, criminal investigations and inadequate internal controls in financial reporting.
- About 25.6% of the claims, or 11 of 43 claims, involved alleged misrepresentations of material information made in connection with proposed mergers, sales, initial public offerings (“IPOs”), offerings and other transactions.4
Courts throughout the country issued decisions in 2022 involving securities fraud actions against 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. In these development phase cases, courts were more likely to grant motions to dismiss in full than they were to deny them, either in whole or in part.
- Claims that were independent of or arose after the development process. In these post-development cases, courts were more likely to grant motions to dismiss in full than they were to deny them, either in whole or in part.
- Claims based on the financial management of life sciences companies. In these cases, courts were more likely to deny them in part.
Given the numbers from 2022 and recent years’ filings, and accounting for residual impact of the COVID-19 pandemic, there is no indication that the filings of securities claims against life sciences companies are going to slow downany time soon, and plaintiffs continue to have mixed results in surviving a motion to dismiss. The decisions in 2022 resulted in a variety of outcomes, with 21 opinions decided in favor of defendants,5 10 opinions6 denying motions to dismiss and 11 opinions in which only partial dismissal was achieved.7 These numbers illustrate how life sciences companies remain attractive targets for class action securities fraud claims. Therefore, companies should continue to stay abreast of recent developments and implement best practices to reduce their risk of being sued.
Minimizing Securities Fraud Litigation Risks
Life sciences companies continue to be a popular target for class action securities fraud claims. While many of the companies discussed above were successful in defending against these claims, companies should be cautious and take steps to reduce the risk of being targeted in a securities fraud class action. Below is a list of practices that life sciences companies should consider:
- Companies should develop a long-term response plan to potential triggering events and update their plans to respond to market conditions. Companies should strive to avoid any inconsistency in public statements and fight the urge to respond instinctively without identifying known risks or considering non-public information.
- In particular, many life sciences companies encounter regulatory setbacks, such as negative side effects in clinical trials, clinical trial failures, receipt of complete response letters, etc. When these are disclosed to the market, it may trigger a stock price drop. Companies should exercise care when making any disclosures to ensure that they disclose both the positive and negative results, including potentially negative information learned after the preliminary results are issued. Companies should ensure that internal disclosure regimens and processes are well documented and consistently followed.
- Smaller life sciences companies are susceptible to securities class actions and should work with counsel to ensure that they adopt a disclosure plan. Disclosure plans should not be limited to cover written disclosures made in press releases or SEC filings, but should also include any statements made by executives during analyst calls. Company websites should also be continually updated.
- Life sciences companies are not immune to issues that may cut across all industries, and accordingly they should be prepared to make appropriate disclosures relating to transactions, business prospects, operations, financials, etc.
- Courts often have the benefit of hindsight to determine whether a product is defective by considering what defendants could or should have done differently. For example, courts often consider the existence of safer alternatives and the ability of the defendant to eliminate a product’s dangerous characteristics. Companies should consider not only whether a given product is defective on its own, but how it compares to potential alternative designs or formulations and how its benefits balance the risks.
- Because deal litigation has been at the forefront in filings against life sciences and other companies, material disclosures to investors relating to the transaction should contain detailed explanations about the history of the transaction, alternatives to the transaction, reasons for the recommendation, the terms of the transaction, fairness opinions, conflicts of interest, among other issues.
- Even if incorporated abroad, life sciences companies that are non-U.S. issuers may be targeted in the U.S. despite events occurring that may not be U.S. specific.
- Regarding statements made in public filings, courts continue to weigh in on opinion statements and the law is continuing to evolve. Be aware that opinion statements should be reasonably held and not conflict with information that would render the statements misleading.
- Forward-looking information about a drug or device should be clearly identified as such and distinguished from historical fact. Analyst calls and webcasts should also identify certain disclosures as forward-looking statements.
- Risk disclosures that are current, relevant and upfront help to ward off securities class actions. Companies should ensure that public statements and filings contain not only general disclaimers relating to forward-looking statements but also appropriate “cautionary language” or “risk factors” that are specific and meaningful, and cover the gamut of risks throughout the entire drug product life cycle – from development to commercialization.
- Be aware that former employees in all departments, not just those relating to clinical trials, may become confidential witnesses for shareholder plaintiffs. Educate employees about 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. Class action lawyers aggressively monitor trades by insiders to develop allegations that a company’s executives knew “the truth” and unloaded their shares before it was disclosed to the public and the stock plummeted. Regulators are also cautious that corporate insiders use Rule 10b5-1 plans in ways that are not consistent with the objectives of the rule and will start monitoring 10b5-1 trading plans that are canceled or terminated based on later-obtained material nonpublic information.
- Work with insurers to hire qualified counsel with experience defending securities class action litigation on a full-time basis.
1 In 2022, 197 securities class actions were filed. Cornerstone Research, Stanford Univ., Securities Class Action Clearinghouse: Filings Database, SECURITIES CLASS ACTION CLEARING HOUSE (last visited Feb. 6, 2023). In 2020, 318 securities class actions were filed while 211 were filed in 2021. Id. Cornerstone Research reported 208 class action filings in 2022 and 218 in 2021, which included filings in both federal and state courts. Securities Class Action Filings 2022 Year in Review, Cornerstone Research, 1 (2023), https://www.cornerstone.com/wp-content/uploads/2023/01/Securities-Class-Action-Filings-2022-Year-in-Review.pdf
2 These figures are based on the first complaint filed.
3 This category also includes any issues at clinical trial. This category does not include deficiencies at the manufacturing site, nor are product deficiencies that arise from the deficiencies at the manufacturing site included in this category.
4 It should be noted that 79.1%, or 34 of 43 claims, of all 2022 filings fell in more than one category.
5 Throughout this White Paper, the terms “company” or “defendants” may be used to also include individual officers or directors.
6 This includes two cases where the motions were denied as moot because of settlements. See In re Sesen Bio, Inc. Sec. Litig.,No. 21-cv-7025 (S.D.N.Y. Aug. 31, 2022); Patrick McDermid v. Inovio Pharm.s, Inc. et al., 20-cv-1402 (E.D. Pa. Aug. 31, 2022).
7 The opinions were identified by evaluating the dockets of “Healthcare” filings from 2020 and 2021 and reviewing the docket for a disposition decision taking place in 2022. Additionally, opinions were also identified through Westlaw searches of dispositive orders involving the Private Securities Litigation Reform Act (“PSLRA”) between January 1 and December 31, 2022 and cross-referencing them against filters in the Securities Class Action Clearinghouse filings by “Healthcare.” They may not encompass all dispositive opinions. In many cases, the court dismissed the operative complaint without prejudice and amended complaints are anticipated.
We did not include decisions in which there was a partial order. See Hashem v. NMC Health PLC, et al., No. 2:20-cv-02303 (C.D. Cal. Aug. 16, 2022) (voluntarily dismissed without prejudice). In NMC Health PLC, the Partial Order certified the settlement class for settlement purposes only; awarded fees and reimbursement expenses to Co-Lead Counsel; and the Court also awarded each Lead Plaintiff a compensatory award to be paid from the settlement fund.