(Philadelphia) August 14, 2004 Legal news, law news, law firm news & research at LAWFUEL – Securities fraud class action lawsuits against life sciences companies increased by 39 percent between 2002 to 2003, rising from 23 to 32, even as the total number of securities class action lawsuits declined by 19 percent in the same time period, from 268 in 2002 to 216 in 2003, according to a study conducted by Dechert LLP, a law firm that defends life sciences companies in class action suits.
Michael Kichline and David Kotler, Dechert lawyers with extensive class action litigation experience, analyzed claims against life science companies and said that the stringent FDA approval process and drug development cycle appear to provide the ammunition that is being used by plaintiffs’ lawyers as the stated basis of the majority of claims.
“The life sciences industry is driven by R&D and, understandably, is characterized by many failures in the midst of a few home runs,” said Kotler, a partner in Dechert’s financial services and securities litigation group who advises and represents pharmaceutical clients in class actions. He noted, “the long lag time and extensive clinical trials and testing of products create a treasure trove of data that is being mined by plaintiffs’ lawyers to claim, with 20/20 hindsight, that material information had been withheld.”
Many of the suits contain more than one type of substantive claim. The most typical cause of action in securities fraud suits is related to fraudulent accounting and/or financial revenues. However, the majority of claims against life sciences companies in 2003 alleged withholding or misrepresenting information obtained at various stages of the drug development process of the product itself, such as:
– product efficacy
– product safety
– the likelihood of FDA approval
– the science behind a product candidate
– quality of the manufacturing process
– clinical trial results
– strategic partnerships with other companies
“The unpredictable nature of the drug development cycle makes companies, especially those dependent upon a small number of products, prone to unforeseen and adverse occurrences, which can result in a precipitous drop in share price. Because there is such extensive data collection and analysis, information is readily available after the fact for plaintiffs’ lawyers who will claim ‘you had the data and should have told us,'” said Mr. Kichline, a partner in the firm’s financial services and securities litigation group.
So far in 2004, fourteen more life sciences companies have been sued for securities fraud, according to the filings reported by Stanford’s Securities Class Action Clearinghouse.
The Dechert survey notes that the number of securities fraud lawsuits against life sciences companies may grow because of:
– Plaintiffs’ lawyers targeting this sector;
– The SEC and FDA pledging to work together to ferret out securities fraud; and
– Recent court decisions have lowered the bar regarding the types of claims that can be made in drug marketing campaigns
The authors advise that life sciences companies take the following steps to minimize the risks of securities class action suits:
– Recognize and report events that may negatively impact the drug development cycle, such as clinical trial failures, FDA rejection, manufacturing problems and the loss of strategic partners, among others.
– Clearly explain to management how specific issues can become the basis for securities fraud claims, e.g., the way in which clinical trials are conducted may make a company more prone to securities fraud claims.
– Ensure that all public disclosure statements contain appropriate “cautionary,” and “risk factor” language explicitly covering the gamut of risks throughout the entire drug development cycle, from development to production to commercialization.
– Recognize and maintain the distinction between positive promotional messages broadcast for marketing purposes, and statements of fact that plaintiffs could use as the basis for fraud claims.
– Monitor stock sales by insiders to avoid allegations that insiders were aware of problems and misrepresentations and unloaded their shares.