Pharmaceutical innovations are receiving significant attention and funding, especially in areas that address COVID-19. This windfall of cash has paid off with speedy vaccines and treatment, but is also leading to an uptick in litigation, particularly in securities. While governments and corporations around the globe push forward with vaccine development and potential cures, therapeutics litigation is now receiving attention. Rapid developments in this area are leading to securities and derivatives violations. While COVID-19 isn’t the only driver of this litigation, it is putting similar cases in the spotlight as the world looks to the life science for leadership during these trying times.
A clear trend has emerged from plaintiff’s firms as an influx of securities litigation cases arising from COVID-19 are filed. Many of these claims assert violations of the Securities and Exchange Act of 1934, specifically Sections 10(b) and 20(a). These claims allege omissions and false statements relating to known risks and embellishments regarding the company’s ability to succeed given the unique circumstances.
Uncertain markets call for more conscious and forward-thinking disclosure strategies, as investors expect transparency and clarity of approach. COVID-19 has resulted in extreme market uncertainty, thus the influx of claims. A few specific suits have already been developing around liquidity disclosures, solvency, supply-chain disruptions and more.
In the Eastern District of Pennsylvania, a suit was filed against Inovio Pharmaceuticals, Inc that asserts violations of the Exchange Act. More specifically, these claims allege that Inovio knowingly provided false information regarding the vaccine that it has been developing. The SEC was called on to investigate these claims, as the CEO was purported to state that their vaccine was developed within only three hours. Once the allegations of false claims were made, a significant drop in stock price occurred and plaintiffs filed suit.
In late spring of 2020, a securities class action suit was brought against Sorrento Therapeutics. This suit alleged similar violations of the Exchange Act, as the defendants were said to have failed to disclose information regarding the discovery of an antibody that exhibited “100% inhibition of SARS-CoV-2 virus infection.” The CEO described this discovery as a “cure,” which quickly led to a rise in stock price by over 280%. Once it was made known that the company had begun to distance itself from these claims, the stock price rapidly dropped.
Charges of conspiracy to commit wire fraud were brought against Elizabeth Holmes and her company Theranos. While these charges are not stemming from the COVID-19 pandemic, this case shares many attributes as those previously mentioned. The charges claim that Holmes and her business partner Ramesh “Sunny” Balwani executed a multi-million-dollar scheme meant to defraud their investors, and a second scheme targeting doctors and patients.
Despite the defendant’s alleged knowledge of the lack of accuracy of their blood testing services, they continued to advertise and solicit their use by doctors and patients. Given this information, the indictment claims that the defendants defrauded both doctors and patients by claiming accurate, fast, and inexpensive blood tests. Holmes and Balwani are alleged to have omitted critical information about the known limitations and concerns regarding their technology, and persuaded plaintiffs to choose Theranos blood tests over other proven laboratories.
Furthermore, the indictment asserts that the defendants made similarly false statements and misrepresentations to potential investors. They claimed to be using their own proprietary blood analyzers when they were actually using third party testing services. Theranos made statements to investors that estimated the generation of over $100 million in revenues in 2014 and $1 billion in 2015. In reality, the plaintiffs believe that Holmes knew that these estimates were unfounded and that they could only expect negligible revenues during these periods.
This trend in Therapeutics litigation, especially focused on COVID-19, is expected to continue. The pandemic has placed humanity into uncharted waters, and society has higher expectations regarding pharmaceutical development and collaboration in the life sciences sector. This is mostly driven by the unresolved threat that COVID-19 presents to lives around the world as well as the large financial incentives offered to these companies by public entities and the significant future revenue expected from successful products.
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