The stories are consistent. Biotech company officials tout a new product, the drug stumbles in a Phase III trial, fails to win FDA approval or in some other fashion does not live up to shareholder hopes, then the stock nosedives and class-action lawsuits ensue.
This year, it's happened to Genta Inc., Allos Therapeutics Inc., Vicuron Pharmaceuticals Inc., IntraBiotics Pharmaceuticals Inc., and the list goes on.
While the lawsuits themselves are nothing new, an interesting trend is - one that shows that securities fraud class-action lawsuits against life sciences companies increased by 39 percent from 2002 to 2003, compared to a 19 percent decrease for public companies from all industries.
That trend piqued the interest of Michael Kichline and David Kotler, attorneys with Dechert LLP who defend corporations that are named in class-action suits. They crunched the numbers to come up with that statistic, and they put together a survey, released this month.
"These kinds of lawsuits are distracting," said Kichline, who works out of a Philadelphia office. "A lot of smaller companies are getting hit with this, and they're naturally very lean on resources."
In fact, the Dechert survey found that of all pharmaceutical and biotechnology companies that were sued for securities fraud in 2003, nearly half had a market capitalization of $500 million or less. The explanation is that companies with small market caps have fewer product candidates, and so bad news dramatically impacts the stock price.
There were 32 securities fraud lawsuits against life sciences companies in 2003, compared with 23 the previous year. So far this year, there have been 14.
"It's especially telling," said Kotler, who works in Princeton, N.J., "that in , when the overall securities fraud lawsuits went down dramatically, that there was such an upswing in the lawsuits against life science companies."
Kichline and Kotler said that a common allegation against companies is that officials provided false or misleading statements, or they withheld information. Complaints against Palo Alto, Calif.-based IntraBiotics, for example, alleged that officers failed to disclose and misrepresented adverse facts concerning iseganan, a product for ventilator-associated pneumonia. Drug safety issues caused the company to halt its late-stage program, resulting in the stock losing two-thirds of its value. King of Prussia, Pa.-based Vicuron saw its stock fall when the FDA rejected its antifungal drug Anidulafungin, and Westminster, Colo.-based Allos' stock fell 45 percent in May when an FDA committee voted against RSR13 to treat brain cancer metastasized from the breast.
Furthermore, a complaint against Genta, of Berkeley Heights, N.J., alleges the company issued false and misleading statements concerning the safety of Genasense, inflating the market price. An FDA panel said the drug failed to demonstrate a survival benefit in advanced melanoma and showed signs of increased toxicity. The company's stock dropped more than 40 percent the day that news hit.
"The motivation for the allegedly misleading information," Kotler told BioWorld Today, "was to keep the stock price up so that insiders could sell their shares."
That appeared to be the plan when New York-based ImClone Systems Inc. spread negative news on the cancer drug Erbitux among insiders before releasing it to the public. The move landed the company's CEO, Samuel Waksal, and stockholder Martha Stewart in jail. Erbitux since has been approved. (See BioWorld Today, Feb. 13, 2004.)
Kichline said attorneys for shareholders focus on life sciences companies because they are particularly susceptible to releasing negative news. With so much money going into research and development and only a few breakthrough drugs coming to market, biotech companies are easy targets. Even when they have a safe and efficacious drug, the FDA is not an easy hurdle to jump. Attorneys know this, and some of the suits might be frivolous.
But that's not always the case, and biotech officials need to be cautious about what they say.
"Obviously truth and accuracy has to be the guiding principle," Kichline said. "Companies need to understand that everything they do and say can be second-guessed and judged in hindsight by plaintiffs' lawyers that are looking to put together claims."
There's a fine line between "puffery," in which an official conveys a positive image for the product, and statements of fact, which later can haunt the company. Officials want to talk about their products, but things they say in the interest of full disclosure often provide fodder for lawsuits, Kichline said. For example, in May 2003, Regeneron Pharmaceuticals Inc., of Tarrytown, N.Y., was accused of issuing false and misleading statements regarding the efficacy of its diet drug, Axokine.
In addition to being truthful, companies need to add "cautionary language" to all public statements and filings, covering the gamut of risks throughout a product's developmental life. And they need to be aware that while some lawsuits might have no merit, most of them end in settlement - granting shareholders, for instance, $50 million, for a suit that could have brought them a $300 million verdict.
"Not surprisingly, these cases are not cheap to defend," Kichline said. "There's time costs, there's monetary costs, there's potentially an impact on individuals. We even see where researchers and scientists are named in these lawsuits. I think it really makes people wary and it does have an impact."
Researchers need to understand that how they conduct clinical trials and tests can expose the company to the risk of a lawsuit, the Dechert survey explains.
The increase in lawsuits might reflect more developmental activity occurring in recent years among life sciences companies. Many companies choose to settle, not as an admission of guilt, but to bow out of the spotlight and concentrate on the business of making effective drugs.
"It's a combination of the expense and inconvenience in terms of witness time and company time in defending the lawsuits," Kotler said. "And it's company exposure."