The Latest on Securities Class Actions in Life Sciences [Report]

This isn’t surprising given that life science companies like pharmaceutical companies and medical device companies are subject to intense scrutiny and often have binary outcomes, particularly for younger public companies. 

Either the drug/device is approved, or not.

As a result, it’s no surprise that biotechnology is an industry that is consistently in the top three sectors that experience the most securities class actions filings each year, according to Woodruff Sawyer’s proprietary Databox^TM.

Credit: Woodruff Sawyer's Databox 2023 Year-End Report

Based on our research here at Woodruff Sawyer, and as captured in our proprietary data set from the Databox, we know that 72% of securities class action suits have settled for $20 million or less over the last decade.

Having said that, we’ve seen some large settlements in the life sciences industry. 
Here are the top five for the industry:

Life science/biotechnology suits often start the same way as any other securities class action suit: A company suffers a setback, discloses the bad news, the stock prices drop, and shareholders sue.

But there is nuance as well. To provide insight into these nuances, each year, Sidley Austin LLP publishes a deep dive into the securities class action landscape for the life sciences sector. 

Now in its 10th year, the report offers valuable data points for life sciences companies to understand what types of lawsuits are trending and court decisions to better help assess current risks.

2023 Litigation Trends

Litigation trends in life sciences tend to be cyclical. The good news for now is that life sciences seem to be experiencing a downward trend in the number of complaints filed yearly. 

The report provides this data: 

One helpful element here may be the waning of COVID-related cases. 

Also, life sciences companies caught in class actions are often winning motions to dismiss. In 2023, companies won their motions to dismiss 68% of the time. Indeed, since 2020, this percentage has never dropped below 52%.

Pre-Approval vs. Post-Approval Cases 

In the life sciences sector, securities class actions can occur at any stage in product development. Sidley’s analysis focuses on two distinct phases: 

1. Litigation around the pre-approval stages, including clinical trials and pre-clinical studies. In 2023, 16 class actions were filed regarding products in this stage.
2. Litigation around the post-approval stages, including the launch and marketing of a product. In 2023, 18 class actions were filed regarding products in this stage.

Pre-approval cases. Data show a higher success rate for companies winning their motions to dismiss in the pre-approval category. As the Sidley report points out, the success rate in 2023 was 80% for pre-approval cases and 50% in post-approval cases. 

Why are defendants so successful in pre-approval cases? Surely some credit has to be given to the many lawyers representing life sciences companies who have, over the years, provided excellent disclosure counsel, disclosure that has made it difficult for plaintiffs to prevail. 

Credit also must be given to judges who are not naïve enough to automatically believe the dramatic outrage of an investor plaintiff who pretends that failing to obtain regulatory approval is a shocking outcome for any given company seeking approval.

There may be another element at play here: The Sidley report notes that in most years, well over half of the cases filed are in the pre-approval space (note that this was not in the case in 2023).  

A lot of cases filed and dismissed seem like the classic description of a situation in which plaintiffs are filing first (on bad news and a stock drop) without necessarily first checking to see if the case is frivolous. In other words, plaintiffs seem to have adopted a ready-fire-aim strategy.

Post-approval cases. Defendants were less successful in these cases, winning their motions to dismiss only 50% of the time.

Of the cases filed in the post-approval category in 2023, litigation trends centered on sales performance and financial reporting issues.

As the Sidley report points out, these are issues not unique to the life sciences sector. In contrast, in previous years, there was a “greater concentration of cases arising from regulatory issues, particularly alleged improprieties in regulated areas of marketing and billing.” 

Given the trickiness of regulations in this area for life sciences companies, we will certainly continue to see cases in the future that focus on these issues. 

Trends in Securities Class Actions for Life Sciences

The Sidley report highlights a wealth of detail on trends in securities class action litigation against both pre-approval and post-approval stage claims. 

I will detail just a few here.

COVID-19

The report highlights that where companies prevailed, the courts anticipate that investors should understand the risks associated with rapid vaccine development and therefore must disregard overly optimistic forecasts of success.

The report also notes, however, that it remains to be seen if this defendant-friendly view will be applied outside the context of the pandemic.

Alzheimer’s Disease Treatment Litigation

In 2023, courts decided on three major cases involving failed Alzheimer’s treatments. In a pivotal case involving Biogen, the court applied the Omnicare standard to scrutinize statements as opinions.

The takeaway warns against definitive language about drug efficacy, even when statements are couched as opinions.

Claims within Claims

Many securities lawsuits stem from the announcement of government investigations or regulatory actions. In these cases, plaintiffs claim that defendants violated securities law by failing to disclose ongoing violations of underlying regulations or laws. 

The timing of these cases can be very challenging, with the securities law court needing to make a decision before a parallel proceeding in an underlying regulatory matter has been resolved. 

The court handling the recent Mylan case (one of the companies sued by a group of state attorneys general concerning generic drug price fixing in violation of antitrust laws) has referred to this situation as “claims within claims.”

Antitrust allegations have been hot in the life sciences space, and courts varied in their handling of antitrust-based securities claims.

Some have accepted the antitrust allegations outright, while others conducted independent and detailed antitrust analyses before addressing the securities aspects.

This will continue to be an area to watch.

Takeaways

Directors and officers of the vast majority of life sciences companies are surely mission-driven people trying to engage in societal good. And even the best among us can find ourselves on the wrong side of a securities class action suit. 

But such a situation doesn’t have to be a catastrophe for the company or for individual directors and officers. 

The following steps will help:

1. It all starts with good disclosure. Stay close to in-house and outside counsel when it comes to public statements. Feel like your lawyers are being too conservative and not letting you express your opinions? You’ll thank them.
2. Make sure you have a personal indemnification agreement between yourself and your company that specifies how and when the corporation will advance legal fees to you.
3. Purchase adequate D&O Insurance. Defending these cases is expensive, as is settling claims where needed. Skimping on this type of insurance is a mistake.

How do you know how much insurance will be enough? Merely relying on peer data-benchmarking can lead you astray. 

This is where working with a skilled insurance broker can make a big difference. As a starting point, look for someone who can provide you with detailed analytics about past settlements as well as future trends. 

For more detailed information on the state of securities class actions in life sciences, download your copy of the Sidley report, here.