Securities Regulation Daily Securities complaint about drug pricing partially upheld
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Tuesday, January 12, 2021

Securities complaint about drug pricing partially upheld

By Mark S. Nelson, J.D.

Although the lower court erred in finding no loss causation and no falsity of statements in some instances, the plaintiffs still have work to do regarding the pleading of scienter.

Lead plaintiff New York Hotel Trades Council & Hotel Association of New York City, Inc. Pension Fund won a partial victory in the Ninth Circuit in the case it brought against Impax Laboratories, Inc. for securities fraud related to Impax’s alleged participation in price-fixing schemes for generic drugs. The Ninth Circuit, in an unpublished opinion, concluded that the district court erred regarding its findings that the complaint failed to plead loss causation and the falsity of statements in some, but not all, instances. The Ninth Circuit also concluded that the district court correctly found scienter was not adequately pleaded regarding the complaint’s allegations about Impax’s acquisition of a drug. As a result, the district court’s order dismissing the plaintiffs’ second amended complaint was partially affirmed, partially reversed, and remanded for further proceedings (New York Hotel Trades Council & Hotel Association of New York City, Inc. Pension Fund v. Impax Laboratories, Inc., January 11, 2021, per curiam).

Loss causation. The Ninth Circuit began its discussion of loss causation by explaining that a complaint must allege that the defendant’s conduct caused the plaintiffs’ claimed losses. The complaint alleged that Impax had engaged in price-fixing related to generic drugs and that Impax’s earnings losses were due to market concessions and not what Impax asserted were pricing pressures. The Ninth Circuit said the district court had erred in finding no loss causation in this instance.

But the district court erred in finding loss causation in two other instances. First, the lower court mistakenly found loss causation where there were only speculative media reports that Impax executives could be indicted under a DOJ investigation into drug industry pricing practices. Second, the lower court erred in finding loss causation where Impax losses arose after speculation about industry-wide price fixing of generic drugs. Here, the speculation arose from DOJ’s intervention in a civil case that involved Impax and from guilty pleas entered by executive from another drug company.

Falsity. The Ninth Circuit found two instances in which the district court erroneously found the amended complaint had failed to allege the falsity of statements made by an Impax executive. For one, the amended complaint’s allegations that an Impax executive understated the extent of price declines (10 percent according to the executive versus 21 percent according to the plaintiffs) satisfied the heightened pleading requirements under the PSLRA. Second, the district court erred in finding that an Impax executive’s forward-looking revenue guidance statements were non-actionable. Specifically, the Ninth Circuit said the amended complaint had sufficiently alleged that the statements were made with actual knowledge of falsity.

In other instances, however, the Ninth Circuit said the district court did not err in finding numerous statements to be non-actionable. For example, a statement by an Impax executive that the company had "defended share but had to give up a bit of price" failed both the FRCP 9(b) and PSLRA particularity requirements because the extent of the market share decline materialized only after the executive had spoken.

Scienter. The Ninth Circuit upheld the district court’s finding that the complaint failed to plead scienter. The plaintiffs had alleged that revenue for the acquired drug was declining before the acquisition, competition was increasing, and the acquired drug accounted for a significant percentage-by-revenue of the acquisition. The Ninth Circuit concluded that the stronger inference was akin to Impax mismanagement than scienter. Specifically, the Ninth Circuit said Impax appeared to have overvalued the acquisition while also underestimating the looming competition.

The case is No. 19-16744.

Attorneys: Susan Katina Alexander (Robbins Geller Rudman & Dowd LLP) for New York Hotel Trades Council & Hotel Association of New York City, Inc. Pension Fund. Marcy Christina Priedeman (Latham & Watkins) for Impax Laboratories, Inc. and George Frederick Wilkinson.

Companies: New York Hotel Trades Council & Hotel Association of New York City, Inc. Pension Fund; Impax Laboratories, Inc.

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