A panel of corporate advisors updated their 2017 survey of securities litigation involving development-stage biotech companies. The panel provided an analysis of biotech securities case motion to dismiss results from 2005 through 2022. Written for the defense bar, including insurers for directors and officers, the panel concluded that “biotech startups do not in fact pose greater securities class action risk than other companies.” The panel’s article was republished by The D&O Diary by Kevin M. LaCroix. The panel highlighted practices for investors to consider where they suffered losses on biotech investments and are considering securities claims.
The Study
In 2017, the panel researched federal decisions on motions to dismiss, focusing on companies bringing their first drug or device to market and alleging untrue statements about clinical trials or the FDA approval process. Excluded from the study were decisions where the claims concerned something other than the clinical trial or FDA approval process or otherwise involved financial improprieties or marketing, sales, or post-approval manufacturing issues. The panel concluded that of “the 70 decisions in our study set that met these criteria for 2005-2017, 68.6% resulted in complete dismissals.” For the 2022 update, covering July 11, 2017 through March 21, 2022, the panel identified 44 decisions and concluded that 68.2% of those cases resulted in complete dismissals.
Observations
The panel drew conclusions that can be helpful to mindful litigants. While the panel concluded that securities claims against biotech start-ups are “less risky” for defendants than the “average securities class action,” they excluded cases where plaintiffs alleged marketing, sales, or post-approval manufacturing issues, which present stronger cases on the merits. The panel further concluded that “statements of opinion will be protected under the U.S. Supreme Court’s” precedent, “so long as they are genuinely held and not misleading when considered in their full context.” These conclusions underscore an important factor for investors considering securities litigation: a court’s decisions on a motion to dismiss is often driven by the court’s determination about whether the defendants were “being forthright and dealing honestly.” (See Panel Report, Section IV.A.)
As the panel observed, “[w]here courts saw little indication of good faith, they rarely dismissed. As one court put it:
[N]otwithstanding the defendants’ contentions to the contrary, their allegedly misleading statements bear no hallmarks of good faith error. The defendants are sophisticated scientists running a regulated, publicly traded corporation; they are alleged to have misrepresented their regulator’s feedback, misrepresented the legal context in which they operated, heralded scientific results which they knew to be the product of empirically faulty procedures and manipulated statistical analysis, and claimed a level of external review that simply did not exist. If the defendants have good faith explanations for these misstatements… they do not emerge from the complaint.
Thus, the panel cautioned issuers to “frame the facts in a manner that demonstrates their good faith.”
The panel explained that where plaintiffs make specific, credible allegations that defendants were intentionally misrepresenting or manipulating data, courts often allow such cases to go forward. The panel also highlighted circumstances where investors may find the most success. “[C]laims concerning statements or omissions about interactions with the FDA seem to survive motions to dismiss more often than other types of statements in biotech cases, particularly where companies appear to have cherry-picked the FDA feedback they choose to disclose.” (See Panel Report, Section IV.C.)
Conclusion
For investors who are seriously considering actions against biotech issuers that disclose surprising adverse news causing losses, the panel highlighted qualities that increase the chances of success through litigation. First, claims based on allegations of financial improprieties, or marketing, sales, or post-approval manufacturing issues, are likely stronger than those without such factual allegations. Second, a stronger case may be pleaded where plaintiffs make specific, credible allegations that defendants were intentionally misrepresenting or manipulating data. Finally, the strongest cases appear to be those where defendants misrepresented facts about their interactions with the FDA, omitted adverse feedback from the regulator while disclosing only positive feedback, or presented misleading information about regulatory milestones, assessments and agreements. Thus, the panel’s report provides important practice points for the institutional investor.
The panel’s report in its original form can be found here.
Jeffrey A. Barrack is a partner at Barrack, Rodos & Bacine. He has represented plaintiffs in securities fraud, antitrust and other class actions and has also represented both plaintiff and defendant individual and corporate clients in environmental, consumer and business tort litigation in state and federal court.