On January 11, 2021, the Ninth Circuit in an unpublished decision affirmed in part and reversed in part the dismissal at the pleading stage of Section 10(b) claims under the Exchange Act of 1934 against a pharmaceutical manufacturer (the “Company”) and several of its officers for alleged misstatements regarding an alleged price fixing scheme and the performance of one of its generic drugs. N.Y. Hotels Trades Council & Hotel Association of NYC Inc. Pension Fund et al. v. Impax Laboratories, Inc., et al., No. 19-16744 (9th Cir. Jan. 11, 2021). The Court held that plaintiffs’ Second Amended Complaint (the “SAC”) adequately alleged falsity with respect to statements allegedly made by defendants concerning the performance of one of the Company’s drugs (diclofenac) as well forward-looking statements regarding earnings projections and revenue guidance, and further held that plaintiffs adequately alleged loss causation. Our prior analysis of the district court’s decision can be found here.

The Ninth Circuit first addressed the district court’s ruling that plaintiffs failed to allege loss causation. According to the SAC, defendants agreed with co-conspirators to price-fix generic drugs, resulting in the Company’s May and August 2015 earnings misses and decreased gross margins, even though defendants maintained that that increased competition from generic drugs was responsible for the financial difficulty. The Court held that the district court erred in finding the price-fixing theory insufficient as a theory of loss causation, observing that plaintiffs “need only satisfy the familiar test for proximate cause . . . [and loss causation] may be shown even where the alleged fraud is not necessarily revealed prior to the economic loss.” The Court further found that the allegations were sufficient to “trace [the loss] back to the very facts about which the defendant lied.” The Court, however, affirmed the district court’s holding that plaintiffs’ two other theories of loss causation were insufficient, agreeing with the district court’s conclusion that plaintiffs’ theory of loss causation premised on the Department of Justice’s investigation into the alleged price-fixing scheme was insufficient, first noted that “the market [could not] possibly know” whether defendants would be indicted on that basis alone and the stock price drop “could be attributed only to market speculation about the accuracy of the medial speculation concerning potential criminal liability.” The Court also affirmed the district court’s holding that the Company’s share price decrease that followed the DOJ’s intervention in a civil action concerning alleged price-fixing in the industry was too speculative and inadequate as a basis to establish loss causation.

Turning to the issue of alleged misstatements, the Court reversed the district court’s ruling that plaintiffs failed to allege (1) falsity with respect to alleged statements about diclofenac’s past performance, (2) falsity concerning forward-looking earnings projections, and (3) that defendants made statements about forward-looking revenue guidance “with actual knowledge of falsity.” With respect to the first category of alleged misstatements, the Court held that plaintiffs adequately alleged that one of the officer defendants falsely stated on an earnings call that the Company’s overall price decline in Q1 2016 was around 10%, while the decline was allegedly 21%. Moreover, although defendants suggested that the Company’s drug and another generic formulation “accounted for about fifty percent of the overall price decline,” the Court found that plaintiffs sufficiently alleged that “because the overall price decline was more than double the amount defendants stated, the price decline of diclofenac was also more than double the amount defendants stated.” According to the Court, such allegations satisfy the heightened pleading standards of the PSLRA. The Court also held that plaintiffs adequately alleged that defendants’ “forward-looking revenue guidance issued in February and May 2016 was premised in part upon false and misleading statements about diclofenac’s past performance,” which included alleged misstatements made by an officer defendant who had “intimate knowledge” about the Company’s pricing strategy and forecast such that the alleged misstatements were made “with actual knowledge of its falsity.”

The Court did, however, affirm the district court’s holding that plaintiffs failed to allege falsity with respect to the remaining alleged misstatements—alleged statements made by an officer defendant that the Company managed its portfolio efficiently, and the Company “defended share” despite the share price having fallen when defendant made such statement. In so holding, the Court noted that at the time of defendant’s statement, the Company’s market share had only decreased 7% “and the full extent of the market share decline was not apparent until after [defendant] spoke.” The Court further found that the statement “is not rendered false or misleading by a decrease in revenue during one quarter of that two-year period.”

Finally, the Court affirmed the district court’s holding that plaintiffs failed to plead scienter with respect to the SAC’s alleged misstatements concerning the Company’s acquisition of another drug, budesonide, and the positive financial impact it would have. While plaintiffs alleged that defendants “knew [the drug’s] revenues were decreasing prior to the acquisition” and would face increased competition, the Court held that a more plausible opposing inference was that “defendants simply overvalued the acquisition and underestimated the impacts of future competition.”