There are some shareholders you do not want to cross. Why? More shareholder lawsuits have been filed against drug and device makers for alleged securities fraud, and those with larger market capitalizations were sued for securities fraud at an increased rate, according to a recent survey by theDechert law firm, which represents life sciences companies.
Specifically, 29 different companies - and their directors and key execs - were sued for alleged securities fraud last year, up from 19 in 2009 and 23 in 2008. And more than half of the lawsuits filed last year included allegations of financial improprieties as opposed to alleged misstatements about such specifics as the safety or efficacy, or the likelihood of FDA approval. Also worth noting: cases that are not dismissed continue to result in multimillion-dollar settlements.
To be more specific, Dechert counted 29 securities fraud class action lawsuits brought against life sciences companies last year out of 176 such lawsuits brought against any and all companies during the same time period; that amounts to 16 percent of the total. That proportion compares with 10 percent in 2009 and 2008; 14 percent in 2007; 13 percent in 2006 and 16 percent in 2005.
Meanwhile, 63 percent of the life sciences companies sued for securities fraud had a market cap of less than $250 million in 2009, but only 31 percent of those sued had such a market cap last year. Lawsuits filed against those life sciences companies with market caps of between $250 million and $500 million rose to 24 percent, up from 10 percent in 2009. And 28 percent of the securities fraud lawsuits filed last year were brought against those with the biggest market caps - more than $10 billion - as opposed to just 5 percent in 2009. This is called going after those with deep pockets.
For those who may not recall, shareholder lawsuits against drug and device makers gained considerable attention just last week, when the US Supreme Court ruled Matrixx Initiatives was incorrect to insist that only statistically significant adverse events are required to be reported to shareholders, and allowed investors to proceed with a long-simmering securities fraud claim (read this). And Dechert notes that the ruling "will require life sciences companies to assess its disclosures and investor impact more holistically, and on a case-by-case basis."
Here are some examples...
One instance of a shareholder lawsuit focusing on financial impropriety was filed against St. Jude Medical, the device maker, in a federal court over allegations the company failed to disclose its true product sales and consumer demand during the economic recession and improperly recognized bulk sales revenues in order to meet sales projections in violation of Generally Accepted Accounting Principle, or GAAP, and US Securities and Exchange Commission rules, Dechert writes.
One example cited of industry-specific allegations: in March 2010, shareholders filed suit against AMAG Pharmaceuticals and some directors and execs in federal court, alleging the drugmaker failed to reveal any serious adverse events, anaphylactic reactions or fatalities experienced by patients given its Feraheme intravenous drug for treating iron deficiency anemia associated with chronic kidney disease. When an analyst disclosed a number of SAEs, several instances of anaphylactoid reactions and a possible fatality related to the drug, the stock declined more than 15 percent, Dechert relates.