Securities fraud class actions against life sciences companies increased by 65 percent in 2012 compared to 2011, reversing a previous dip, according to a new Dechert report.
The report, Dechert Survey of Securities Fraud Class Actions Brought Against U.S. Life Sciences Companies, which was released on March 20, tallied 28 cases in 2012, 17 in 2011 and 29 in 2010.
Life sciences securities cases constituted 18 percent of the 152 securities fraud class actions in 2012, compared with 9 percent of the 188 such cases filed in 2011.
"In a year when there wasn’t some other big economic factor, there was no credit crisis, there was no [Ponzi scheme scandal like that involving Bernie] Madoff, the plaintiffs’ bar was really focused on the industry, and it shows in the number of lawsuits," said survey author David Kotler, a white-collar and securities litigation partner who practices in New York and Princeton, N.J.
But 2012 mirrored 2011 in one key respect: the high percentage of new cases targeting smaller companies and making claims of industry-specific wrongdoing.
Half of last year’s new cases are against companies with less than a $250 million market capitalization, which measures a public company’s value by multiplying the stock price by the number of outstanding shares.
In 2011, 58 percent of new securities cases against life sciences companies were against companies in that market capitalization category. Smaller companies are often vulnerable to securities fraud suits because they’re raising money and trying to commercialize their first product, Kotler said.
"If there are difficulties in the development of that product, that makes the company especially susceptible to a securities fraud lawsuit," he said.
Also last year, 43 percent of new cases involved industry-specific claims, compared with 35 percent in 2011. Those claims include alleged misstatements about marketing, likelihood and timing of U.S. Food and Drug Administration approval, product safety, product effectiveness and manufacturing issues.
Life sciences companies are under intense pressure to roll out successful products "in an environment where the plaintiffs bar is picking and choosing their cases with a little more care," Kotler said. Stock price fluctuations based on a product’s success or failure "can make them prime targets for securities fraud class action lawsuits."
This year, Kotler expects life sciences companies to face even more pressure in the wake of the U.S. Supreme Court ruling last month in Amgen Inc. v. Connecticut Retirement Plans & Trust Funds.
The 6-3 majority decision, written by Justice Ruth Bader Ginsburg, held that plaintiffs need not prove that a company’s misrepresentations materially affected its stock price before a class can be certified.
The Dechert report noted that the high court ruling is particularly important in the First, Second and Fifth circuits, where it overturns higher class- certification thresholds for plaintiffs.
When defendants in those circuits fail to get cases dismissed on the pleadings, "the pressures that they’re going to have to settle are going to be escalated," Kotler said.
Sheri Qualters can be contacted at email@example.com.