Last year, securities fraud lawsuits filed against pharmaceutical, biotechnology and other life science companies reached their highest level in a couple of years, but accounted for a greater portion of the 152 securities fraud complaints filed last year than the category had in previous years, according to an annual survey by Dechert law firm. What’s driving that trend?
More suits alleging that companies are making false claims that their products are better than what’s currently available in the market. According to the survey, the two top reasons behind these these lawsuits were alleged misrepresentations or non-disclosure of product efficacy and allegations of financial impropriety, each of which accounted for 12 complaints. Off-market labeling spurred 43 percent of the suits. Many of these cases (14) were filed against life sciences companies with relatively small market capitalization — under $250 million, the report noted.
Alleged misrepresentations and/or non disclosures for:
- Product efficacy: 12
- Financial reports/accounting improprieties: 12
- Product safety: 7
- Marketing practices: 6
- Prospects/timing of FDA approval: 6
- Insider trading: 4
- CMO’s continued employment with company ad timing of completion of clinical: 2
- Manufacturing process: 2
In an example of one recently settled product efficacy suit, Merck settled a $688 million suits over allegedly misleading investors by delaying the release of an unfavorable study against it cholesterol drug Vytorin that it was better than statins available on the market.
The report highlighted a couple of issues that could influence the outcome or volume of securities fraud class actions in the future — off-label promotion that’s truthful and a US Supreme Court decision earlier this year affecting the class certification barrier.
The US Court of Appeals for the Second Circuit’s decision for United States vs. Caronia, described here in detail by Pharmalot, concluded that off-label promotion, when truthful, may be protected speech under the First Amendment. But it’s also an issue that has proved controversial when you consider the settlements made in connection with off-label promotion. After all, off-label promotion figured into GlaxoSmithKline’s historic $3 billion settlement last year.
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
As the survey points out “The promotion of off-label uses for drugs has proved problematic throughout the life sciences industry, and in addition to numerous products liability lawsuits, also has resulted in securities fraud lawsuits where the alleged promotion of an off-label use caused the company’s stock to trade at an artificially inflated rate.” It drove home that point with reference to an $85 million settlement against Medtronic last year as well as a new lawsuit against Abiomed Inc. filed in the US District Court of Massachusetts. Still it’s definitely an area to watch “Life science companies certainly should not treat Caronia as providing carte blanche for truthful off-label marketing, but the door has now been opened for the possibility that such speech may be constitutionally protected.”
Even more significantly, a 6-3 decision by the US Supreme Court in a suit filed by Connecticut Retirement Plans and Trust Funds against Amgen lowered the threshold for shareholders to overcome the class certification barrier when filing fraud on the market cases. The Supreme ruled that investors could sue a company without initially being required to show that misinformation had inflated the company’s stock price. The decision could lead to more cases surviving class certification and life science companies being forced into larger settlements.
