On March 25, 2022, the United States District Court for the
Eastern District of Pennsylvania largely denied a motion to dismiss
a putative class action asserting claims under the Securities
Exchange Act of 1934 against a pharmaceutical company and certain
of its executives. Halman Aldubi Provident &
Pension Funds Ltd. v. Teva Pharm. Indus. Ltd., No.
20-cv-4660-KSM (E.D. Pa. Mar. 25, 2022). Plaintiff alleged
that the company made misrepresentations with respect to the
reasons one of its drugs was commercially successful. The
Court held that except for allegations against the company's
CFO, plaintiff adequately alleged misrepresentations, scienter, and
loss causation.
Plaintiff alleged that the company donated more than a hundred
million dollars to patient assistance programs as part of an
alleged scheme through which those programs would use the funds to
pay patients' co-pays for the company's drug, in violation
of an anti-kickback statute. Slip op. at 2-4.
Plaintiff further alleged that the company made various statements
regarding the drug's success which were rendered false or
misleading because they did not mention the alleged
scheme. Id. at 5-9. Plaintiff
further alleged that the company continued to make such
misrepresentations even after it disclosed having received a
subpoena from the Department of Justice ("DOJ")
concerning the company's charitable donations, which ultimately
led to the DOJ filing a complaint alleging that the company's
practices violated the False Claims
Act. Id. at 9-12.
The Court first assessed alleged misstatements regarding the
drug's market share. While the company argued that it had
no obligation to disclose illegal activity, the Court observed that
the company contended that the donations were, in fact,
legal. The Court, in any event, determined that whether the
donations were legal was "largely immaterial" because
plaintiff sufficiently alleged that, whereas the company
"attributed [the drug's] success to legitimate business
factors, such as the quality of the product and physician and
patient loyalty," the "driving reason for this
success" was actually the alleged
scheme. Id. at 20-21. Further, the
Court determined that while the company's statements
"expressing optimism about [the drug's] market share and
revenue forecasts would ordinarily constitute nothing more than
puffery," they were actionable because they were made "in
the context of" other statements ascribing reasons to the
drug's success. Id. at 21.
Similarly, the Court noted that while statements of opinion are
"generally not actionable," they were actionable in this
context because plaintiff alleged that "the speakers omitted
material facts supporting their understanding of [the drug's]
success." Id. at 22.
For similar reasons, the Court held that the challenged statements
concerning the company's program that facilitated patient
access to the company's drugs were adequately alleged to be
false or misleading because they placed at issue the true reasons
for the program and the drug's success without disclosing the
alleged scheme. Id. at 23-24.
However, the Court held that the company's statements regarding
compliance with applicable laws and regulations were not actionable
because they did not put the source of the drug's success at
issue and the Court noted that there was "no duty to disclose
uncharged, unadjudicated
wrongdoing." Id. at
24–25. In addition, the Court dismissed plaintiff's
claims against the company's CFO, as the Court noted that he
was not alleged to have made any of the challenged misstatements
that put the drug's success at
issue. Id. at 25 n.7.
The Court next evaluated whether the challenged statements were
made with scienter. The Court first determined that the drug
was one of the company's "'core operations,'
supporting an inference of scienter," because the drug
allegedly made up a large share of the company's overall
revenue and the company "repeatedly underscored the drug's
importance to the company." Id. at
27. However, the company noted that the "core
operations" theory of scienter "does not establish a
strong inference of scienter" without additional allegations
regarding "specific information conveyed to
management." Id. at 28. Thus,
the Court turned to individual defendants and observed that, for
example, certain executives held themselves out as an expert on the
drug, regularly spoke about the drug with confidence, and/or
approved the challenged donations, which strongly suggested that
they were aware of the alleged scheme, which the Court emphasized
involved "incredibly large" donations that were labeled
with the drug's name and made at the direction of the team
responsible for marketing the drug. Id. at
28–35. Because the Court found that scienter had been
adequately pleaded as to the individual defendants, the Court
imputed their scienter to the
company. Id. at 35.
The Court also held that plaintiff adequately alleged loss
causation by identifying a corrective disclosure—namely, the
stock price decline after the alleged truth was
revealed. Id. at 36. Specifically,
the Court held that the filing of the DOJ's complaint was
sufficiently alleged to be a corrective disclosure because the
company's stock fell after it was filed and it plausibly
revealed the truth of the alleged misrepresentations, even though
the DOJ's complaint contained allegations rather than proven
facts. Id. at 39. However, the Court
determined that the disclosure of the DOJ subpoena was not a
corrective disclosure because the company's stock price did not
fall when the subpoena was disclosed and the company's revision
of its earnings forecasts was not a corrective disclosure because
it did not "specifically relate to—or correct—the
alleged misrepresentations." Id. at
37.
Halman Aldubi Provident & Pension Funds Ltd. v. Teva Pharm. Indus. Ltd.
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