Securities Class Action Trends for Life Sciences, 2021: REPORT

While the life sciences sector has experienced a slowdown in IPO activity in 2022, the litigation environment for this sector remains unchanged.

According to Sidley’s Securities Class Actions in the Life Sciences Sector, it has been business as usual on the litigation front:

• 2021: 49 new complaints
• 2020: 45 new complaints
• 2019: 44 new complaints
• 2018: 48 new complaints

The classic securities class action story goes something like this for life sciences companies: A company suffers a setback, lets the public know, and then sees a stock price drop.

These setbacks typically fall into one of two categories:

1. During the pre-approval stage including clinical trials and the preclinical studies
2. During the post-approval stage, including launch and marketing of the product

The plaintiffs’ bar then steps in, looks at inconsistencies between past positive statements and the current reality, and then claims fraud on behalf of shareholders who want to recover investment losses.

These securities class action lawsuits typically are brought pursuant to Section 10(b) of the Securities Exchange Act of 1934. In most cases, defendants will try to win a motion to dismiss by stating that the plaintiffs failed to show the company deliberately made false statements. This is often a successful strategy.

To illustrate that point, the following is a breakdown of defendant wins from 2018 to 2021 in district court, according to the Sidley report:

• 2018: Companies won dismissal in 31 of the 48 decisions (65%)
• 2019: Companies won dismissal in 23 of the 37 decisions (62%)
• 2020: Companies won dismissal in 20 of the 35 decisions (57%)
• 2021: Companies won dismissal in 19 of the 33 decisions (58%)

The Sidley report is comprehensive and could be considered “required reading” for life sciences companies interested in mitigating their risk of litigation. Below are some particularly interesting litigation trends for life sciences companies from the report.

Cases Involving Pre-Approval Stage Drugs or Devices

In 2021, the courts issued 17 securities class action decisions related to pre-approval stage drugs or devices.

Litigation trends in the pre-approval stage included:

• Cases involving products related to COVID-19
• Cases involving scienter (in light of the Ninth’s Circuit’s 2020 decision in Endologix)
• Cases involving timing issues where companies released clinical trial results in stages and reported top-line, interim, or selected results months before publishing complete trial data

COVID-19 Cases

In 2020, Sidley research showed that 15% of class action filings targeted companies developing COVID-19-related products. In 2021, district courts issued decisions in four of those cases.

The defendants won their motion to dismiss in two of the cases, and plaintiffs successfully prevailed against the defendants’ motion to dismiss efforts in the other two.
From the Sidley report:

Some common background features of cases are notable. The cases arise from statements companies made in the early months of the pandemic, and several involve very large stock swings—some in excess of 200%.

Motion to Dismiss Wins for Defendants

One of the COVID-19 cases that defendants won on a motion to dismiss involved a COVID-19 rapid test (Sona¹). The other involved a monoclonal antibody treatment (Sorrento).

Even though both companies made hugely optimistic statements about their products, including Sorrento's statement that it had a solution “that works 100%” and Sona’s “100% confident” statement, the Sidley report highlighted why the court ruled in their favor.

In Sorrento², the court found that it “is well-established that generalized, vague and unspecific assertions of corporate optimism or statements of mere puffery cannot state actionable material misstatements of fact under federal securities law.”

In Sona, the court stated that its 100% confident disclosure was “just a hopeful optimistic statement” that did not come true.

Motion to Dismiss Losses for Defendants

Invovio³ and Vaxart⁴ were two COVID-19-related securities class action suits where defendants did not win their motions to dismiss. In both cases, the courts found that the companies made misleading statements about participating in a program within Operation Warp Speed.

According to the Sidley report, the court found that Vaxart’s statements were misleading because “Vaxart issued a series of statements with the intent to mislead the investing public into believing that the company was—like Pfizer and Moderna—on the precipice of mass producing a successful coronavirus vaccine.”

Inovio, on the other hand, did not win a motion to dismiss on several categories of statements, but did win a motion to dismiss when it came to the Operation Warp Speed involvement.

Scienter

In Section 10(b) securities class action lawsuits, scienter (intent or knowledge of wrongdoing) is always a concern since plaintiffs must establish intentional misconduct to prevail. In a piece of good news for defendants, 2021 saw courts apply the Ninth Circuit’s rational in Endologix.

As noted in the Sidley report:

When a company devotes massive resources to the development of a product, the most cogent inference will generally be that the company believed in its prospects—not that the company intended to deceive investors by discussing those prospects in optimistic terms.

The natural conclusion should be that it makes little sense for executives to attempt to commit fraud relating to their aspirations for their drug or device during the pre-approval phase of development, given that the viability of a drug or device must be revealed at some point.

One hopes that plaintiffs take note and stop bringing cases based on inherently implausible bases for liability.

Timing

Another issue that besets pre-approval stage companies is the timing of when to report trial results of incomplete clinical trials. The Sidley report does a nice job of illustrating which cases fall on different sides of this discussion.

Cases Involving Post-Approval Stage Drugs or Devices

In 2021, the courts issued 16 securities class action decisions related to post-approval stage drugs or devices. Defendants won nine of the 16 cases on a motion to dismiss.

Many complaints in the post-approval stage included poor sales performance and improper activity related to sales and marketing.

Improper Sales & Marketing Activity

Six of the cases in the post-approval stage emerged from government investigations and regulatory actions.

As the Sidley report points out, this is common:

This piggybacking technique is common in Section 10(b) cases, and it illustrates the second-order nature of much securities litigation. After a company experiences a setback, securities plaintiffs’ attorneys will claim that the company defrauded investors by failing to disclose the underlying facts earlier, and by making public statements that masked the risk that eventually materialized.

The Sidley report details what happens when the setback involves potential or actual regulatory violations. At issue for securities class action litigation is whether and when to disclose governmental allegations of misconduct, and how courts determine whether it can serve as the basis of a fraud claim.

Confidential Witnesses

Cases with confidential witnesses that purport to have a first-person account of corporate misconduct tend to make a plaintiff’s case stronger, of course. The Sidley report adds to the texture of this observation when it comes to improper marketing.

Specifically, the Sidley report notes that in litigation, confidential witnesses are particularly problematic for very small companies, because in such cases the witness may have personally witnessed senior executives promoting off-label drug use.

D&O Insurance Implications for Life Sciences Companies

Life sciences companies are among the most sued of all industries, and the price that they pay for D&O insurance reflects this reality.

Having said that, and as the Sidley report illustrates, more than a majority of these cases brought against life sciences companies go away on a motion to dismiss.

While no one wants to be sued, winning on a motion to dismiss is certainly a win. And while it is true that the company still must pay its own lawyers, it is not paying a settlement to plaintiffs to make the case go away.

Given the numerosity of disclosure claims brought against life science companies, disclosure control and procedures are a key element of D&O risk management for life sciences companies.

Those companies that are able to credibly express the maturity of their disclosure controls and procedures will, unsurprisingly, do better when it comes to pricing their D&O insurance compared to less mature companies.

¹In re Sona Nanotech, Inc. Sec. Litig., – F. Supp. 3d –, 2021 WL 5504758 (C.D. Cal. Oct. 28, 2021)
²In re Sorrento Therapeutics, Inc. Sec. Litig., 2021 WL 6062943 (S.D. Cal. Nov. 18, 2021)
³McDermid v. Inovio Pharms., Inc., 520 F. Supp. 3d 652 (E.D. Pa. 2021)
⁴In re Vaxart, Inc. Sec. Litig., 2021 WL 6061518 (N.D. Cal. Dec. 22, 2021)