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From Securities Regulation Daily, September 25, 2018

Investors adequately plead pharmaceutical company’s involvement in $1.5B price-fixing conspiracy

By Rebecca Kahn, J.D.

Investors adequately pleaded that Taro Pharmaceutical Industry, Ltd and two of its former executives violated Exchange Act Sections 10(b) and 20(a) by entering into anticompetitive agreements with its competitors to inflate drug prices. Confidential witnesses corroborated that Taro pricing committee members met with reps from other companies at industry trade conferences. Directly thereafter, Taro hiked up the prices of certain drugs and other companies followed suit within months. Investors alleged that during the class period, the companyreaped over $1.5 billion in collusive revenues from price-fixing agreements regarding these drugs. Therefore, the allegations largely survived defendants’ motion to dismiss (Speakes v. Taro Pharmaceutical Industries, Ltd., Sept. 24, 2018, Carter, A.).

Defendants. Defendant Taro produces and markets pharmaceutical products, principally generic dermatological drugs and is publicly traded on the NYSE. Named defendant Kalyanasundaram Subramanian (a.k.a. Kal Sundaram) was Taro's former CEO and Michael Kalb was Taro’s former CFO. In the summer of 2016, Taro announced that each of these officers would be stepping down.

Confidential witnesses. Two confidential witnesses corroborated that, at various trade conferences in 2013 and 2014, two members of Taro’s pricing committee met with representatives from other pharmaceutical companies. Right after these meetings, the prices of the generic drugs at issue in this case drastically increased, with Taro's competitors increasing prices months later. Taro reaped over $1.5 billion in collusive revenues from this alleged price-fixing, constituting 47 percent of its revenues between mid-2013 and 2016. This conspiracy was possible, the court noted, because the markets for these drugs were dominated by only a few companies that shared price information, there were no viable substitutes for the drugs, and demand was highly inelastic.

One confidential witness who worked in prescription sales had meetings with Kalb about pricing approvals. A second confidential witness was a pricing and contracts analyst "responsible for internal pricing, bids and contracts functionality..." He allegedly attended bi-weekly pricing meetings that Kalb also attended and was instructed to change the drug's prices.

DOJ action. Dramatic price changes in generic drugs caused industry leaders to seek congressional oversight. Consequent wide-ranging investigations and litigation were launched by the DOJ, and numerous grand jury subpoenas were issued to generic drug manufacturers. On September 8, 2016, Taro and two senior officers received subpoenas seeking information about generic pharmaceutical pricing. Taro publicly disclosed these subpoenas in a Form 6-K the next day and its stock price fell over $4 as a result. On November 3, 2016, Bloomberg reported that the first criminal antitrust charges would likely be filed by year-end, heightening concerns that Taro, which was mentioned in the article, had been fixing prices. Taro's stock price then declined another seven percent.

Fraud action and motion to dismiss. The plaintiffs sued on behalf of a putative class of individuals who purchased Taro securities between July 2, 2014 and November 3, 2016, asserting Exchange Act violations for failing to disclose Taro’s price-fixing conspiracy. Taro allegedly misstated the competitiveness of the pharmaceutical industry, the attribution of Taro's revenue growth to pricing adjustments, and Taro's sales and revenue figures. Taro and the individual defendants moved to dismiss for failing to adequately allege any actionable misstatements, scienter, or loss causation.

Material misstatements. The complaint alleged three categories of misstatements and omissions during the relevant period: (1) Taro's disclosures of sales and revenue figures without a corresponding disclosure of the price fixing that enabled the company's financial successes; (2) Taro's attribution of revenue growth to pricing adjustments, rather than anticompetitive conduct; and (3) Taro’s statements regarding competitiveness in the generics industry when, in fact, the atmosphere was collusive.

The plaintiff alleged that, due to the price-fixing conspiracy, the defendants’ statements about the competitiveness of the generics industry in annual reports or other filings and during conference calls were materially false and misleading. The defendants contended that the plaintiff failed to make out a price-fixing conspiracy, and even if it did, a price-fixing conspiracy did not mean that Taro does not compete with the same companies, or otherwise render the industry non-competitive.

"Plus factors." The complaint contained no direct evidence of a price-fixing conspiracy. The allegations were premised upon parallel price movements for the subject drugs over a short period of time, combined with additional, "plus" factors. When viewed with the parallel price movement, these factors could allow a fact-finder to infer a price-fixing conspiracy, the court ruled. Such circumstantial evidence may include "a common motive to conspire, evidence that shows that the parallel acts were against the apparent individual economic self-interest of the alleged conspirators, and evidence of a high level of interfirm communications."

In Mylan NV Sec. Litig., the court upheld a complaint alleging Section l0(b) violations for a price-fixing arrangement regarding the generic drug at issue in this case. The Mylan plaintiffs alleged no direct evidence of conspiracy, but rather certain "plus factors" demonstrating "features of the generic drug market that gave Mylan a motive to conspire to fix prices". As with Mylan, such factors elevated the Plaintiffs' allegations in this case.As such, the plaintiffs here had adequately pleaded conspiracy to withstand a motion to dismiss.

Revenue figures. The defendants argued that because Taro's sales and revenue figures were not alleged tohave been materially incorrect, they were not actionable. The plaintiffs countered that accurate financial reporting may be actionable if any revenue was derived from illicit activity, e.g., a price-fixing conspiracy. While many of the alleged misstatements merely restated accurate financial reporting, other statements, placing the reasons for Taro’s growth at issue, made further disclosure necessary, the court ruled. The underlying price-fixing conspiracy allegedly "known to management" at the time, and "reasonably likely to have material effects on [Taro's] financial conditions or results of operations." For these reasons, the bulk of the alleged misrepresentations and omissions had been adequately pleaded.

Scienter. The confidential witnesses attested to the individual defendants' involvement in pricing decisions, including attendance at pricing meetings, direct communications with the confidential witnesses regarding pricing, and speaking specifically to pricing issues on earnings calls. As such, the court found that the inference of each defendant's scienter was "cogent and at least as compelling as any opposing inference one could draw." The court refused to require allegations that price-fixing was discussed in the pricing meetings, as such a standard would be tantamount to requiring direct evidence of conspiracy.

The plaintiff alleged that two high-level managers knew about the conspiracy because they attended trade meetings close in time to the price increases, participated in pricing discussions at Taro, and spoke to one of the confidential witnesses about pricing on a daily basis. The defendants argued that neither of these individuals were named defendants nor were they alleged to have made any misstatements. But because scienter of management-level employees can be attributed to the corporation, these allegations gave rise to a strong inference of scienter at least as compelling as any opposing inference.

Loss causation. The defendants argued that the plaintiffs failed to adequately allege loss causation because,among other things, despite the losses to shareholders that followed two corrective disclosuresregarding the frauds at issue, those disclosures pertained to information that had already been publicly available for some time. The court disagreed, concluding that the plaintiffs adequately alleged loss causation at this stage. After Taro disclosed on September 9, 2016, that it had received DOJ subpoenas, share prices fell from $123.45 to $119.36 on September 12. A November 3, 2016 Bloomberg article mentioning Taro (among other companies), reported that criminal charges on the suspected price fixing would likely be filed by the end of the calendar year. Taro's stock price fell from $101.05 on November 2, 2016 to $93.68 on November 3, 2016. These allegations of loss causation sufficed, at the pleading stage, to withstand dismissal.

Section 20(a) claim. The court found that the plaintiffs adequately alleged Section 20(a) claims against the individual defendants. Among other things, confidential witnesses observed that Kalb knew of the pricing scheme, since Kalb had attended regular pricing meetings and sat on a pricing committee with a non-defendant manager who attended trade meetings with co-conspirators.

The case is No. 1:16-cv-08318-ALC-OTW

Attorneys: Phillip C. Kim (The Rosen Law Firm, P.A.) for Christopher Speakes. Jerome Steven Fortinsky (Shearman & Sterling) for Taro Pharmaceutical Industries, Ltd.

Companies: Taro Pharmaceutical Industries, Ltd.

MainStory: TopStory FraudManipulation PublicCompanyReportingDisclosure NewYorkNews

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