On April 6, 2020, Judge J. Paul Oetken of the United States District Court for the Southern District of New York partially granted a motion to dismiss claims under the Securities Exchange Act of 1934 against a pharmaceutical company and certain of its executives, and then granted plaintiffs’ unopposed motion for class certification. In re Mylan N.V. Sec. Litig.
, No. 16-CV-7926 (JPO), 2020 WL 1673811 (S.D.N.Y. Apr. 6, 2020). As noted in our prior posts regarding the company’s motions to dismiss the first
amended complaints, plaintiffs alleged that defendants made misleading statements regarding, among other things, an alleged rebate scheme involving the company’s EpiPen, and that defendants engaged in an illegal conspiracy to inflate the prices for various of the company’s generic drugs. After plaintiffs filed a third amended complaint attempting to address deficiencies identified by the Court in its prior opinions, the Court held that plaintiffs had met their burden to plead scienter with respect to some, but not all, of the alleged misstatements.
The Court previously had held that plaintiffs adequately alleged that the EpiPen was misclassified as a generic drug, and that the company knew it was misclassified, and as such the company’s statement that there was a “risk of error” in its Medicaid rebate calculations was actionable because the error was known. Id.
at *2. The company argued, however, that intervening law—the Right Rebate Act (“RRA”) of 2019—had recognized an ambiguity in the prior statute, thereby undermining the inference that the company knew the EpiPen was misclassified. Id.
at *2. The Court rejected this argument, concluding that the RRA was expressly intended to provide enforcement authority to prevent the company from misclassifying such drugs, and as such it “beggars belief” that the company could use the RRA to defeat claims that had already survived a prior motion to dismiss. Id.
at *3. Moreover, the Court observed that the existence of the statute was unpersuasive in negating scienter, particularly where the complaint alleged that a government agency “directly and repeatedly” informed the company that its EpiPen was misclassified. Id.
With respect to allegations that the company made misrepresentations regarding alleged anticompetitive rebate payments to pharmacies designed to force a competitor from the market, the Court concluded that plaintiffs adequately pleaded scienter. Having previously held that plaintiffs adequately alleged that these payments were anticompetitive, the Court determined that plaintiffs established an inference of scienter based on allegations that the company consciously engaged in an anticompetitive scheme and that its top executives were personally involved in pricing decisions and so would have been aware of the rebates. Id.
Moreover, the Court held that plaintiffs adequately pleaded loss causation given that, as a result of public protest respecting the high cost of the company’s EpiPen, the company’s stock fell by 12.5%, and declined further after the FTC announced an investigation. Id.
While defendants argued that these losses were too attenuated because the primary competitor at whom the company’s conduct was directed withdrew its product from the market due to alleged defects, not because of the company’s rebate payments, the Court determined that this was irrelevant to the issue of loss causation. Indeed, the Court observed that the reasons why the competitor withdrew its product did not change that plaintiffs alleged that anticompetitive conduct occurred and was subject to government investigation. Id.
In addition, the Court rejected the company’s argument that an analyst report discussing antitrust suits by state attorneys general did not contain any truly new information and so could not be a corrective disclosure. Rather, the Court held that an analysis of how and why a company’s business was “weaker than most people realized” could potentially qualify as a corrective disclosure, and in any event the Court would defer further rulings on such alleged corrective disclosures until after discovery. Id.
The Court dismissed allegations that a number of the company’s generic drugs were affected by anticompetitive activity, explaining that plaintiffs still failed to make factual allegations supporting the existence of an unlawful agreement or conspiracy, as required under Section 1 of the Sherman Act to plead an unlawful market allocation or price-fixing agreement. Id.
at *4. While plaintiffs argued that allegations about generic drugs should be assessed as a whole, the Court reiterated that allegations about individual drugs fell short of establishing that “virtually all” of the company’s generic drugs were affected by anticompetitive conduct. Id.
However, the Court held that such claims could proceed for one drug where plaintiffs alleged that the drug was subject to a sudden price increase which was unexplained by any external event, supporting the inference that the increase was the result of collusion. Id.
Although the company argued that the price increase was explained by import restrictions placed on a major supplier, the Court determined that this argument would be more appropriately addressed after discovery. Id.
With respect to allegations of scienter regarding the company’s executives, the Court held that plaintiffs adequately alleged scienter for one executive who allegedly submitted bids intended to produce the false impression that they were competitive. For several other executives, however, the Court emphasized that plaintiffs failed to plead facts connecting those executives to market allocation allegations, which the Court emphasized were necessary notwithstanding that scienter had been pleaded respecting price-fixing activity. Id.