Monday, January 07, 2008

A Closer Look at the 2007 Life Sciences Securities Lawsuits

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In prior posts (most recently here), I noted that even during the two-year lull in securities lawsuits filings that prevailed between mid-2005 and mid-2007, filings against life sciences companies – and pharmaceutical companies in particular – continued more or less unabated. More recently I noted (here) that pharmaceutical companies in the Standard Industrial Classification Code category 2834 represented one of the two most frequently sued categories of companies among the 2007 securities lawsuits. Because of this heightened lawsuit frequency involving life sciences companies, it seems worthwhile to take a closer look at the 2007 life sciences securities lawsuits.

First a word about categorization. For purposes of this post, I am including under the heading "life sciences" any company in either SIC Code series 283 (Drugs) or SIC Code series 384 (Surgical, Medical and Dental Instruments and Supplies). Reasonable minds might differ about whether additional categories should be included, but I decided to go for simplicity here.

Companies within the SIC Code series 283 were particularly hard hit in 2007, especially companies in the 2834 SIC Code (Pharmaceutical Preparations), within which 14 companies were sued in 2007. In addition, two companies in SIC Code 2836 (Biological Products) and one company in SIC Code 2833 (Medicinal Chemical and Botanical Products) were also sued, bringing the total number of companies sued in 2007 from SIC Code Series 283 to 17. These 17 lawsuits compare to eight lawsuits in the SIC Code Series 283 among the 2006 securities lawsuits.

There were four companies sued in SIC Code series 384, including two within SIC Code 3841 (Surgical and Medical Instruments) and two within SIC Code 3845 (Electromedical and Electrotherapeutic Apparatus).

The 21 total lawsuits against companies in these two SIC Code series categories means that lawsuits against life sciences companies represent roughly 12% of the 172 securities lawsuits filed in 2007. (Refer to my prior post here for a description of the data I am using in my analysis). This compares to 34, or slightly less than 20%, of the 2007 securities lawsuits related to the subprime meltdown. As I have said before, the subprime lawsuits were an important factor but by no means the only important factor in the increase of securities lawsuit filings in 2007.

The 2007 securities lawsuits against life sciences companies involved a wide variety of allegations. By far the most common contention is the allegation of unexpected or undisclosed set-backs in the regulatory or clinical trial process, which was raised against nine of the 21 life sciences companies sued. The next most prevalent type of allegation was related to disclosures surrounding product safety (five companies).

Other allegations included slowing sales or missed projections (two companies), misrepresentations regarding product efficacy (one company), disclosure of a criminal investigation (one company), failure to disclose merger-related information (one company), misrepresentations or omissions regarding sales practices (one company), and misrepresentations regarding the status of regulatory approvals (one company).

Of the 21 life sciences companies sued in securities lawsuits in 2007, five are foreign-domiciled, including two from France, and one each from Germany, Switzerland and the U.K.

As I noted in my prior posts regarding pharmaceutical company lawsuits (here), while life sciences companies have proved to be popular targets for plaintiffs’ lawyers, they have not always proved to be easy targets. Many of the past securities lawsuits against pharmaceutical companies have been dismissed. The dismissal levels may have something to do with the prevalence of allegations regarding regulatory or clinical trial setbacks. While these setbacks may indeed rock the companies’ stock prices, these kinds of setbacks are an almost inevitable attribute of the regulatory and scientific environment in which these companies operate. These risks are often comprehensively disclosed, creating a particular challenge for plaintiffs’ attorneys.

While it is far too early to tell how the 2007 securities lawsuits against life sciences companies will fare, it will be interesting to monitor these cases to see how many go forward beyond the motion to dismiss stage.

The Return of the "Club Deal" Antitrust Case: According to news reports (here), plaintiffs’ lawyers have filed an antitrust lawsuits against the leading private equity firms and investment banks, alleging that the 13 defendants conspired to fix prices in connection with seven specific private equity "club deals" between 2004 and 2007. In fall 2006, a different set of plaintiffs lawyers had originally filed a complaint in the Southern District of New York raising substantially similar allegations, but they withdrew their complaint after the U.S. Supreme Court handed down its May 2007 opinion, specifying a heightened pleading standard for antitrust cases, in Bell Atlantic v. Twombley. The new plaintiffs' counsel apparently feels they can meet the Twombley standard.

The new complaint, which can be found here, was filed in the District of Massachusetts, and alleges that the large buyout firms conspired to keep acquisition prices low by "clubbing together" rather than competing on large buyout deals. The private equity firm defendants include, for example, Bain Capital, Blackstone Group, KKR, and Thomas H. Lee Partners. The seven specific deals referenced in the complaint include Kinder Morgan, HCA and Freescale Semiconductor. The lawsuit also targets investment banks for the conflicted role they allegedly sometimes play as both advisers to the target companies and as lenders (or even co-investors) to or with the acquirers.

Special thanks to Ned Kirk of the Sedgwick Detert firm for a link to the news reports and for a copy of the Complaint.

Need for Speed: If you not yet seen it, you have to read the Wired Magazine article entitled "The Pedal-to-the-Metal, Totally Illegal, Cross-Country Spring for Glory" (here), which tells the tale of Alex Roy, who is consumed by a passion to recreate Cannonball Run and set the speed record for driving between Manhattan and Santa Monica (a feat Roy accomplished in an astonishing 31 hours and 4 minutes). You have to read it to believe it.

Special thanks to new reader Michael Barker the link to the article.

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