Allergan and other drug companies allegedly conspired to jack up the price of essential generic drugs by up to 7,000 percent, then lied to conceal the scheme.
A securities fraud case in the District of New Jersey will proceed against pharmaceutical company Allergan. Investors adequately made the case that company executives conspired with their counterparts to rig prices in certain generic drug markets, then falsely attributed revenue growth to benign factors, thereby misleading investors (In Re Allergan Generic Drug Pricing Securities Litigation, August 6, 2019, Hayden, K.).
Alleged price-fixing conspiracy. The plaintiffs, led by a Swedish state pension fund and German investment group, alleged that beginning in 2013, the prices for several commonly prescribed generic drugs skyrocketed due to an illicit price-fixing conspiracy. During the class period, Allergan and other drug companies allegedly acted in concert to increase the prices of propranolol, ursodiol, doxycycline, and desonide between 470 percent and 7,000 percent. According to the plaintiffs, the increases followed years of stable pricing and did not have any commercial justification. Several of the drugs are included in the Core List in the World Health Organization’s (WHO) Model List of Essential Medicines.
The court found that the plaintiffs adequately pleaded the existence of a price-fixing conspiracy. The complaint alleged both direct and circumstantial evidence of an agreement. First, executives exchanged emails and text messages confirming price-fixing agreements and at least two executives subsequently pleaded guilty to violating antitrust laws. Second, the markets were highly susceptible to collusion due to several factors, including high concentration and lack of possible substitutes. Third, executives had regular opportunities to meet at conferences, meetings, pharmaceutical trade shows, and industry dinners. Drug prices increased in parallel shortly after and/or in conjunction with these trade meetings.
Material misrepresentations. Applying a Basic analysis, the court found that plaintiffs adequately pleaded that certain Allergan statements were misrepresentations because they omitted that Allergan was participating in anticompetitive conduct in the generic drug market.
First, Allergan made statements in SEC filings emphasizing the competitive nature of the generic drug market and Allergan’s active competition in that market. Executives credited Allergan’s revenue growth to factors other than price-fixing, including a "strong supply chain" and "diverse portfolio." An executive also claimed that "we have never been aggressive price takers" because the company’s products, business model, and philosophy did not lend themselves to that strategy. Considered within context, the statements fell outside the bounds of mere puffery and were actionable, said the court.
The court also found that statements by an executive in a CNBC interview that a DOJ investigation into price-fixing was "really a red herring" and "not that significant" were materially misleading. Further, statements of income, Sarbanes-Oxley certifications, and statements in the Code of Conduct were natural corollaries to the alleged conduct, and "surgical removal risks confusion and is not required at this pleading stage."
Scienter. Examining the complaint holistically, the court concluded that the plaintiffs had adequately pleaded scienter. Being a named defendant and co-conspirator in state and federal drug price-fixing investigations was a "significant piece of the puzzle," and Allergan’s minimization of the investigations ignored their scope and the particularized facts and evidence already derived from them. The complaint also alleged that there was no reasonable explanation for the price hikes, like supply shortages or increase in demand, yet Allergan’s officers repeatedly represented that the price increases were attributable to benign market explanations like supply and demand issues.
In addition, a "core operations" inference could be drawn, as this was supported by allegations that Allergan’s generic drug sales comprised a substantial portion of its revenues and operations during the class period, and that Allergan had designated three of the six drugs identified in the complaint as among its 25 "key products."
Loss causation. The court found that the plaintiffs adequately pleaded loss causation. An August 2015 disclosure that Allergan had received a DOJ subpoena relating to drug pricing and a November 2016 disclosure that the DOJ might press criminal charges against drug manufacturers were both followed by significant declines in the price of Allergan securities. Numerous courts have upheld corrective disclosures based on announcements of regulatory investigations. Here, the disclosures of Allergan’s involvement in the antitrust investigation by the Justice Department revealed the truth regarding the alleged false statements Allergan made in press releases and caused a drop in stock price, forming the basis for loss causation, said the court.
Timeliness. Finally, the court declined to dismiss on the basis of timeliness claims under Section 14(a) of the Exchange Act and Rule 14a-9 against the 2014 and 2015 boards of directors. The plaintiffs alleged multiple partial corrective disclosures that leaked out the misconduct over time. The court agreed that the clock should not start to run with the August 6, 2015 subpoena announcement because it did not reveal information sufficient for a reasonable investor to conclude there was fraud. Rather, the statute of limitations only began to run when the facts constituting every element could have been discovered.
Accordingly, the court denied the defendants’ motion to dismiss.
The case is No. 16-9449 (KSH) (CLW).
Attorneys: James E. Cecchi (Carella Byrne Cecchi Olstein Brody & Agnello, P.C.) for Timothy M. Forden. Julia Alejandra Lopez (Reed Smith LLP) for Allergan PLC and Brenton L. Saunders.
Companies: Allergan PLC
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