On September 7, 2018, Judge Haywood S. Gilliam, Jr. of the United States District Court for the Northern District of California dismissed a putative class action against Impax Laboratories and certain of its officers under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder alleging that the company made material misstatements regarding (1) the cause of substantial price increases for two generic drugs and (2) trends associated with other drugs. Fleming v. Impax Labs. Inc., No. 16 Civ. 6577 (N.D. Cal. Sept. 7, 2018). The Court held that (a) the allegations regarding drug price increases adequately pleaded a material misstatement, but insufficiently alleged scienter or loss causation, and (b) the allegations regarding trends failed to plead either a material misstatement or scienter. Plaintiff was, however, granted leave to replead.
Plaintiff alleged that the company had misrepresented that price increases for certain drugs were due to natural market forces when, in fact, they were the result of illegal price fixing. In support, plaintiff alleged that on two separate occasions Impax raised prices for the drugs “in perfect lock-step” with a competitor—by more than 700% for the first drug and 116% for the second drug. Slip op. at 5-6. The Court held that plaintiff had set forth in sufficient detail why these drug markets were “structurally susceptible to collusion,” including the high level of market concentration, inelastic demand, barriers to entry, and easy information sharing among competitors. The Court also found sufficient at the pleading stage plaintiff’s allegations that Impax’s explanations for the price increases were internally inconsistent and objectively false with respect to the number of competitors for these drugs. The Court concluded that the omission of collusive activity is material, as reasonable investors would likely view collusive price fixing as altering the “total mix of information available.” Id.
The Court held, however, that plaintiff’s price-fixing allegations did not adequately plead scienter or loss causation. As to scienter, the Court held that plaintiff failed to plausibly suggest that defendants engaged in unlawful price fixing or approved collusive activity, given that the complaint failed to specifically allege that any individual defendant engaged in collusive activity or had access to or control over the pricing. To the contrary, the complaint attributed the pricing activity to Impax’s “generics team”—not to senior officials. Id. at 6-7. The Court also rejected plaintiff’s invocation of a “core operations theory” predicated on allegations that the individual defendants must have known about the pricing issues given the timing and severity of the increases, holding that timing and severity alone were not sufficient to presume knowledge. Id. at 7.
The Court further held that plaintiff’s price-fixing allegations insufficiently pleaded loss causation because they failed to identify a corrective disclosure linked to both the alleged misstatements and omissions and a decrease in Impax’s stock price. Id. at 8. Instead, plaintiff relied on losses suffered when disclosures revealed Impax’s poor financial condition and that federal prosecutors might file criminal charges against Impax for unlawful collusion to fix generic drug prices. The Court concluded, however, that the mere existence of a regulatory investigation is insufficient to show fraud, and the negative market reaction merely reflected reported financial losses relating to the entrance of new market competitors. Id. at 8-9.
The Court then considered plaintiff’s allegations that Impax concealed adverse revenue trends and market share erosion in one drug and misrepresented that certain other drugs it had purchased had a positive outlook and could be easily integrated with its existing portfolio. Id. at 9-10. The Court held that these alleged statements were not materially false or misleading because they were either objectively verifiable statements regarding drug pricing or optimistic forward-looking price projections. Id. at 10. Further, the Court found scienter was not adequately pleaded because the complaint lacked precision as to which individual defendant allegedly made opinion statements with objective and subjective falsity. Id.