CHAPTER § 11.03 A Review of Securities Fraud Complaints Against Pharmaceutical Companies

• Jurisdiction: United States

§ 11.03 A Review of Securities Fraud Complaints Against Pharmaceutical Companies

Perhaps the best way to appreciate the risk posed to the pharmaceutical industry by securities-fraud claims is with illustrative examples from the claims that have actually been made.

Many of the cases brought against pharmaceutical companies might best be described as "general" securities cases that merely happen to have involved pharma-industry defendants. Almost as frequent as these "general" cases are cases involving claims arising out of a new drug's clinical-trial and product-development stages. These can include claims that a company misrepresented the safety or efficacy of the drug or misled investors about the likelihood of FDA approval. A small but significant line of cases involves the failure to disclose relevant information about drugs that are already in distribution. These cases tend to be high-stakes and involve widely used drugs manufactured by major pharmaceutical companies. A fourth discrete line of cases involves defects in the drug-manufacturing process.

[1] General Cases

The largest category of securities-fraud cases against pharma-industry defendants are general in nature, involving claims that could be asserted against virtually any company. In a typical case, a plaintiff might allege that the company failed to disclose material information, made false affirmative disclosures, or engaged in flawed accounting practices. Although these cases are not unique to the pharmaceutical industry, it is possible to identify some common trends of interest to pharmaceutical companies.

[a] Failure to Disclose Material Negative Information

The largest subset of general cases involves the failure to disclose material negative information. A typical complaint may allege that a company failed to disclose that a significant contract renewal was at risk,⁸⁶ that it was facing increased market competi-tion,⁸⁷ or that it risked losing an exclusivity agreement with a key supplier.⁸⁸

Another common allegation concerns the alleged failure to disclose a significant contingency related to a key product. For example, investors in CV Sciences, Inc., alleged that the company failed to disclose the U.S. Patent and Trademark Office's rejection of a product-related patent.⁸⁹ In a case against Allergan, plc, investors alleged a failure to disclose that a certification mark for the company's implant and tissue expanders was nearing expiration in Europe.⁹⁰

[b] Alleged False Disclosures

Occasionally overlapping with the non-disclosure group are cases involving the affirmative disclosure of allegedly false or misleading information. Many of these cases allege that the defendant(s) publicly projected unreasonable profit expectations. Where such claims have been leveled against pharmaceutical companies, they often have included allegations that sales and revenue projections for particular drug lines were unrealistic. For example, investors claimed that Biogen Inc. provided unrealistic revenue projections because one of its primary drugs was experiencing lower sales following the announcement of a patient death in a clinical trial.⁹¹ In another lawsuit, investors alleged that Galena Biopharma, Inc., knew that sales for one of its products were inflated and unsustainable because sales were driven by off-label promotion.⁹²

[c] Alleged Misleading Accounting Practices

A number of cases center on allegations of false or misleading accounting practices. In a typical case, the plaintiffs will allege that a company's disclosures are materially false and misleading because they were not presented in conformity with Generally Accepted Accounting Principles ("GAAP").⁹³ Of course, mere failures to comply with GAAP, standing alone, are not probative of fraud and will not support a claim under Section 10(b) and Rule 10b-5.⁹⁴ At minimum, plaintiffs seeking to assert such claims must plead facts that strongly suggest severe recklessness, such as a failure to address obvious "red flags" indicating inaccurate or deliberately manipulated accounting.⁹⁵ In a case brought against Insys Therapeutics, Inc., for example, investors alleged that the company systematically underestimated rebates and returns in order to inflate its revenue and earnings.⁹⁶

[d] Initial Public Offering, Price Fixing, and Other Claims

The remaining "general" cases are a hodge-podge that do not fit within the broad categories of non-disclosures, false disclosures, and allegedly improper accounting. For instance, investors of multiple pharmaceutical companies brought several separate securities-fraud actions alleging price collusion following the announcement of an antitrust investigation by the Department of Justice.⁹⁷ More recently, some pharmaceutical companies have faced securities class actions arising out of alleged questionable sales and marketing practices related to opioid products.⁹⁸ Yet another category of common cases among this remaining group consists of lawsuits alleging defects in the process for initial public offering.⁹⁹

[2] Clinical Trials and Product Development

Almost as frequent as general cases against pharmaceutical companies are lawsuits arising out of the clinical-trial and product-development stages of a new drug, device, or other product.

[a] False Affirmative Disclosures

Among the lawsuits alleging false affirmative disclosures relating to drug development, many center on allegations that a pharmaceutical company improperly inflated or spun the success of a clinical trial. Several such suits have arisen when companies arguably employed a looser standard for statistical significance than does FDA, and thus reported as a success a clinical trial that may not have supported approval.¹⁰⁰

Investors in Ribozyme Pharmaceuticals, Inc. (now Sirna Therapeutics, Inc.), took the company to court over a press release entitled "Colorado Pharmaceutical Co. Makes Cancer Drug History" and for announcing a press conference to unveil the "history making" results.¹⁰¹ The stock price climbed after the press release.¹⁰² Then, at the press conference, the company unveiled that one of its drugs would enter Phase I/II trials, slightly positive news that the company had already announced on two prior occasions.¹⁰³

Companies expose themselves to greater risks as their positive statements move beyond arguably innocuous "puffing" statements that are vague, opinion-based, or otherwise insufficiently verifiable to constitute "material" misrepresentations. For example, investors alleged that GeoPharma, Inc., stated that a product had been approved by the FDA as a "drug" when it in fact received approval as a less-profitable "device."¹⁰⁴ Investors in Neurotrope, Inc., alleged that the company falsely represented that its clinical...