Life sciences companies are increasingly becoming targets of securities fraud lawsuits. After being flat from 2014 to 2015 at 39 cases filed in each year, the number of class action fraud lawsuits against life sciences companies increased more than 70 percent in 2016 to 67 cases, according to a new report from law firm Dechert LLP.

"Life sciences companies are squarely in the crosshairs," David Kistenbroker, a partner at Dechert and co-author of the report, told BioWorld Insight. "As an industry, they're considered a high value target."

Nearly half of the lawsuits claimed "misrepresentations or omissions regarding product efficacy, product safety and/or the likelihood of FDA approval," while several cases alleged that management misrepresented the regulatory hurdles or timing of approvals, according to the report. "Generally, these cases involve representations the company made to investors implying that its product would be successful in either its clinical trials or the FDA approval process, which caused the company's stock to drop when investors were disappointed with adverse news," the report explains.

"Since there's a failure, they have an automatic structure that the company must have lied," Kistenbroker said.

There were also six filings in which an alleged price fixing scheme that the Justice Department has been investigating since 2014 was the basis for the lawsuits.

Companies with smaller market caps tend to have more lawsuits against them, with 29 of the 67 lawsuits targeting companies with market capitalizations under $500 million, although Kistenbroker hypothesized that may simply be because there are more companies of that size than larger ones. The companies with smaller market capitalizations may be that size because they've had a failure, making them a target for a lawsuit.

At the other end of the spectrum, companies with market capitalizations above $10 billion saw the largest proportional increase from 2014 to 2016. For example, Jerusalem-based Teva Pharmaceutical Industries Ltd., San Diego-based Illumina Inc. and Dublin-based Allergan plc were all the subjects of lawsuits in 2016.

DEFENDANTS (GENERALLY) WINNING

The good news for companies: A majority of the lawsuits where claims dealing with facts during the development stage of a product were decided for the defendants. "Where the defendants had communicated the results of their trials accurately and the risks of failure were adequately explained, the courts showed reluctance to find fault in the defendants' optimism about the potential success of their trials," the report concluded.

"Court's aren't requiring companies to predict the future," Joni Jacobsen, a partner at Dechert and co-author of the report, told BioWorld Insight.

By contrast, the results of lawsuits involving already-approved products have been a mixed bag for defending companies.

In cases where plaintiffs claimed that market projections were inaccurate, the courts generally ruled in the defendants favor because, like product development expectations, "market projections are expectations about future events that by their nature are forward-looking and often optimistic," the report points out. "Market projections are therefore unlikely to be considered misleading unless they conflict with known information."

But in cases where companies have run into issues with quality controls and manufacturing processes, the courts refused to dismiss the cases when companies' forward-looking statements about potential issues were made after the companies had undisclosed discussions with regulators about their manufacturing issues.

Similarly, the courts remanded a lawsuit against New York-based Pfizer Inc. claiming that drugs it had acquired the rights to were linked to increased cardiovascular risks that the plaintiff claims the company failed to disclose to investors.

AN OUNCE OF PREVENTION

"In spite of the difficult time the plaintiffs are having, they're relentless and hammering at it," Kistenbroker said.

Two firms – The Rosen Law Firm and Pomerantz LLP – represented plaintiffs in more than half of the class action securities lawsuits filed against life sciences companies.

"Given the numbers from this and recent years' filings, there is no indication that the filing of securities claims against life sciences companies is going to slow down any time soon," the report concludes, noting that there were four class action securities claims filed against life sciences companies in the first week and a half of 2017.

"Given the volume of all of those cases, companies need to be careful," Jacobsen said.

The obvious way for companies to protect themselves is by disclosing risks as they're learned. "Any communication from the FDA could potentially be material for investors, as the FDA is the gateway in deciding whether the company's products receive approval," the report states. "So long as the company accurately conveys its processes and addresses potential risks head on, it is unlikely that the court will subsequently find liability."

"Where people get in trouble is when the information they have isn't completely consistent with what they're telling the public," Jacobsen said.

Companies can choose not to disclose certain information, but the report warns companies to "be aware that while incomplete statements do not create liability, such omissions must not make the actual statements misleading."

And while forward-looking disclosures can protect companies, they're useless when the risks the disclosures warn about are already happening. "When the allegedly forward-looking statements are in conflict with facts that the defendants have at the time they make the statements, however, there is a possibility that the statements will not be protected," the report concludes.