Sunday, April 22, 2007

Securities Claims Against Pharmaceutical Companies: Frequent but Flawed?

Photo Sharing and Video Hosting at Photobucket Even as the number of new securities lawsuits in general fell to 10-year lows in 2006 (refer here), the number of lawsuits filed against pharmaceutical companies has remained at elevated levels. As noted in my prior analysis of the 2006 securities lawsuits filings (here), eight of the 110 securities fraud class action lawsuits filed in 2006 were brought against companies within SIC Code 2834 (Pharmaceutical Preparations) and another four were brought against companies within SIC Code 2836 (Biological Products).

These 2006 filings followed elevated levels of securities class action filings against pharmaceutical companies in 2004 and 2005. And the pace of filings has continued in 2007. Already this year, securities fraud lawsuits have been filed against Eli Lilly; Amgen, USANA Health Sciences and OrthoClear Holdings.

Plaintiffs’ claims against pharmaceutical companies proceed on diverse kinds of allegations. The most common securities fraud claims against a pharmaceutical company are based on allegations that the company misrepresented the efficacy of its product. In addition, in recent years, plaintiffs’ lawyers have targeted several drug companies in securities class action lawsuits based on alleged misrepresentations or omissions regarding product safety. Other allegations that have served as the basis of securities fraud allegations relate to clinical trial results; the quality or safety of the company’s manufacturing processes; the commercialization or marketing of the company’s product; the company’s description of its product; or the company’s revenue recognition or financial reporting practices. A good (although now slightly dated) analysis of the securities fraud lawsuits brought against life sciences companies, by Michael Kichline and David Kotler of the Dechert law firm, can be found here.

But while pharmaceutical companies have remained a favored target for plaintiffs’ lawyers , pharmaceutical have not always proven to be easy targets. In the last several weeks, a number of the securities class action lawsuits pending against pharmaceutical companies have been dismissed. For example, on April 13, 2007, Merck announced (here) that a federal judge had dismissed a class action lawsuit that had been filed against the company related to its discontinued arthritis pain reliever Vioxx. The court ruled (refer here) that investor claims should be dismissed because they were time-barred under the statute of limitations. The lawsuit was dismissed with prejudice.

The Merck suit dismissal is only the latest of several dismissals of securities fraud class action cases pending against pharmaceutical companies. On March 28, 2007, a federal judge in Boston dismissed the securities fraud lawsuit pending against Praecis Pharmaceuticals (refer here). The court held that the allegedly misleading statements lacked the requisite allegations of scienter, came within the safe harbor for forward looking statements, or were mere “puffery” that could not serve as the basis for a securities fraud lawsuits. The court held that the pleadings did not present a “strong inference” that the defendants had acted with the requisite mental state.

In addition to the Merck and Praecis cases, the cases pending against Boston Scientific and EPIX Pharmaceuticals were also recently dismissed. The court has not yet released its Memorandum Opinion in the Boston Scientific case. The EPIX Pharmaceuticals case was dismissed (without prejudice) “for failure of Plaintiff to prosecute” the action.

Though the reasons for these various dismissals are varied, collectively the dismissals provide reason to hope that plaintiffs’ firms might yet come to recognize potential disincentives to pursuing securities claims against pharmaceutical companies, and perhaps hesitate before suing them quite so quickly.

Several of the dismissals are described in further detail in an April 20, 2007 National Law Journal article entitled “Defense Wins Key Pharmaceutical Cases” (here).

More About 10b5-1 Plans: In a prior post (here), I examined the increasing regulatory scrutiny regarding 10b5-1 plans. In a recent article (here), Priya Cherian Huskins takes a closer look at this issue, and also provides useful and interesting practical suggestions about how to address the growing concerns regarding these plans. Special thanks to Priya for the link to her article.

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