Securities class actions against life sciences companies are almost always second-order problems. The first-order problem is a business or regulatory setback that, when disclosed by the company or a third party, triggers a stock price decline. Following the decline, plaintiffs' class-action attorneys will search the company's previous public statements and seek to identify inconsistencies between past positive comments and the current negative development. In most cases, plaintiffs' attorneys will seek to show that any arguable inconsistency amounts to fraud -- that is, they will claim that the earlier statement was knowingly or recklessly false or misleading. Where a company makes the challenged statement in a public offering documents -- that is, a registration statement or prospectus -- plaintiffs need only show that the statement was materially false or misleading, not that it was made with scienter.
Under the Private Securities Litigation Reform Act of 1995, securities fraud plaintiffs must meet heightened pleading standards to survive a motion to dismiss, and they are not entitled to discovery while the motion is pending. As a result, securities defendants file motions to dismiss in virtually every case. These motions are generally lengthy and complex. For the most part, federal courts scrutinize the motions carefully and hold plaintiffs to the demanding statutory pleading requirements. In 2017, life sciences companies succeeded in winning dismissal in 50% of the cases in which they filed motions to dismiss.
Five Takeaways From New Complaints Filed In 2017
1. Securities plaintiffs filed 54 new class actions against publicly traded life sciences companies in 2017. This was an increase over the 50 new cases filed in 2016 and the 39 new cases filed in 2015.
2. Geographically, the cases are concentrated in four regions, corresponding to four federal appellate circuits:
- 7 new cases in the First Circuit, which includes Massachusetts
- 14 new cases in the Second Circuit, which includes New York
- 15 new cases in the Third Circuit, which includes New Jersey
- 10 new cases in the Ninth Circuit, which includes California
3. Substantively, the cases are weighted toward issues involving drugs and devices at the pre-approval stage. There are 34 new cases at the pre-approval stage, consisting of:
- 10 new cases with product candidates in Phase 1 or Phase 2 trials (or earlier)
- 16 new cases with product candidates in Phase 3 trials
- 8 new cases with product candidates for which NDAs or other applications have been submitted but not approved
4. 20 new cases were filed against companies with approved products. 5. C ases involving opioids are on the rise, with 7 new complaints filed against companies developing ormarketing opioids. These include both pre-approval cases, in which companies seek but fail to obtain "abuse resistant" labeling, and post-approval cases, in which companies are accused of engaging in unlawful sales or marketing practices.
Eight Takeaways From New Decisions Issued In 2017
The Numbers: Four Takeaways
1. Success rate in the district courts is down. District courts issued 26 new decisions on motions to dismiss filed by life sciences. Companies were successful in 13. This 50% success rate reflects a decrease from 2015 (69% success rate) and 2016 (76% success rate).
2. Companies with pre-approval products have done much better in the district courts than companies with postapproval products. Companies prevailed on motions to dismiss in more than 60% of the pre-approval cases but in only 30% of the post-approval cases.
3. Risk disclosures are important. One reason for this difference in success rates may be that companies are adept at identifying and communicating about risks in the pre-approval context--principally, the risks that trials will not succeed or that products will not be approved. Identifying and meaningfully disclosing risks in the post-approval context may be more challenging--particularly where those risks relate to catastrophic regulatory or legal setbacks (recalls, high-stakes government investigations, indictments).
4. Success rate in the appellate courts is high. Companies prevailed in seven of the nine cases in the appellate courts.
The Substance: Four Takeaways
1. Mixed results in cases involving disputes over science. Courts generally reject cases in which plaintiffs attack the science underlying drug development programs or clinical trials. The 2017 cases, however, include some outliers.
2. Statements made in the course of ongoing trials present special risks. A common pattern in pre-approval cases in which companies did not prevail involves commentary on preliminary or interim results in the context of ongoing trials. This is a high-risk area. Companies that report interim results may inadvertently take on a duty to update when they learn of subsequent, less positive results--even if those negative results are also preliminary.
3. Opinion statements: examining processes v. weighing the evidence. Courts are continuing to refine the analysis of opinion statements after the Supreme Court's 2015 Omnicare decision. Where courts focus on a company's processes in arriving at an opinion, companies have fared well. On the other hand, where courts are willing to weigh competing data points to determine whether a stated opinion "fairly aligns" with omitted negative information, companies are less likely to prevail at an early stage in litigation.
4. Regulatory violations do not equate to securities fraud--but the line between the two areas can be thin. Courts generally recognize that even high-stakes government investigations--such as those that lead to criminal charges--do not necessarily equate to securities fraud. An investor asserting a securities fraud claim must identify a materially false or misleading statement. But while courts generally hold the line between securities fraud and "mere" unlawful conduct or mismanagement, in practice that line can sometimes blur. This distinction between securities fraud and other allegedly unlawful conduct may be important as the courts work through the new wave of cases arising from the opioid crisis.