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Shareholders Just Might Support Pharma's Fight to Curtail Their Rights

Penalty flag on biotech lawsuitsThe Washington Legal Foundation is aiming to give drug companies a quicker way out of abusive shareholder lawsuits by allowing judges to kick frivolous cases out of court before they reach the expensive discovery stage. Odd as it sounds, shareholders might welcome such an outcome.

My BNET colleague Jim Edwards explains the situation here. In brief, drug companies often choose to settle even meritless lawsuits rather than spend millions of dollars gathering documents for the plaintiffs' lawyers in the discovery phase. The WLF is sick of it and has filed an amicus brief in a current shareholder suit against Amgen (AMGN). In the case, shareholders are claiming Amgen misled the market about the safety of anemia drugs Epogen and Aranesp, which were slapped with safety-related label restrictions that caused Amgen's stock to plummet. WLF says there is no evidence the market was misled, since the safety issues regarding Amgen's drugs were widely known and discussed.

Edwards worries that the WLF's recommendation would "essentially strip investors of their few remaining rights to hold drug companies accountable for hiding damaging information about their products." He said it could let companies off the hook for concealing drug problem as long as someone, somewhere had raised the issue.

On the flip side, shareholder lawsuits in the industry I'm most familiar with, biotech, have gotten completely out of hand. Here are just a few of the situations that seem to automatically trigger a shareholder lawsuit:

  • A drug fails. This recently happened to Medivation (MDVN) when Alzheimer's drug Dimebon failed a Phase III trial. Just about every time a biotech drug fails, the class-action lawsuits pop up claiming the company made false and misleading statements. This is biotech, folks. It's high-risk, high-reward. The hit rate is one in 10 on a good day. If you can't take the heat, get out of the kitchen.
  • A biotech agrees to be acquired. This just happened to Facet Biotech (FACT). The company fought off a $438 million hostile takeover attempt by Biogen Idec (BIIB) and landed a $722 million deal with Abbott (ABT). Nobody expected that kind of premium. Were investors pleased? Nope, they sued.
  • A biotech refuses to be acquired. Oh by the way, some of Facet's shareholders sued when the company turned down Biogen's original low-ball offer, too.
  • Someone makes an unsubstantiated negative claim about a company. This happened to AMAG Pharmaceuticals (AMAG). Their launch of iron replacement drug Feraheme (ferumoxytol) has been beating expectations, but an analyst report about adverse event concerns sent the stock into a tailspin. The company tried to explain that the adverse events have been well within the expected range, but there's already a lawsuit.
Money spent fighting or even settling these suits is money not going into the development of new drugs and not creating shareholder value. Investors should have a right to sue when laws have been broken, but not just because they bet on the losing horse. If the courts can cut down on what has clearly become a cash cow for unscrupulous lawyers by ruling that the market wasn't misled, then I'm all for it.

Penalty flag photo by Flickr user compujeramey, CC 2.0.