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From Securities Regulation Daily, July 2, 2015

Pharmaceutical company’s pregnancy drug statements carry weight on appeal

By Jay Fishman, J.D.

The United States Court of Appeals for the Eighth Circuit affirmed the Missouri Eastern District Court’s decision granting the defendant K-V Pharmaceutical Company’s (K-V) motion to dismiss the plaintiff’s class-action fraud complaint involving the prescription pregnancy drug Makena (Julianello v. K-V Pharmaceutical Company, July 2, 2015, Shepherd, B.).

Case history. The complaint, which alleged that K-V and three of its officers should have known that Makena could not be commercially viable due to its high list price and inadequate financial assistance program, took issue with protected forward-looking statements that the plaintiffs alleged failed to meet PSLRA pleading standards. The court, determining that the majority of the challenged statements were forward-looking and accompanied by meaningful cautionary language, dismissed the complaint but without prejudice to permit one amendment on certain statements of financial assistance (In re K-V Pharmaceutical Company Securities Litigation, March 28, 2014, Fleissig, A.).

Specifically, while the district court granted K-V’s motion to dismiss on the PSLRA safe-harbor provision and on the plaintiffs’ failure to adequately plead scienter, it granted the plaintiffs leave to amend the complaint in connection with the financial assistance program but denied their motion on the FDA’s likelihood of enforcing exclusivity. But the plaintiffs, instead of amending the complaint on the financial assistance program issue, filed a motion for reconsideration. The district court denied this motion, determining that it already considered the plaintiffs’ legal arguments on this matter.

Appellate contentions. The plaintiffs appealed, asserting that the district court erred: (1) in holding that K-V’s statements about the FDA’s likelihood of enforcing exclusivity were protected by the PSLRA’s safe-harbor provision; (2) in holding that the complaint failed to allege a strong inference of scienter about the likelihood of FDA exclusivity; and (3) in denying the motion for reconsideration of the scope of leave to amend the complaint.

PSLRA safe-harbor provision. The plaintiffs contended that the PSLRA safe-harbor provision did not protect K-V’s statements because the statements were not forward-looking or accompanied by meaningful cautionary language. The plaintiffs, furthermore, argued that they adequately pled scienter by providing detailed allegations from four confidential witnesses who demonstrated that K-V knew or should have known the FDA would not enforce exclusivity.

The appellate court, however, deemed the statements “forward-looking,” by relying on the 2010 Eastern District of Missouri W. Wash. Laborers-Emp’rs Pension Trust v. Panera Bread Co. case which held a forward-looking statement to be one whose “truth or falsity is discernible only after it is made.” Applying this holding, the court declared that the truth or falsity of K-V’s statements could only be determined after they were made, with the launch of Makena. Also, whether the FDA would vary from its usual enforcement of exclusivity could only be determined after this future event occurred.

The court next disagreed with the plaintiffs’ assertion that the cautionary language accompanying the statements was unmeaningful by virtue of being boilerplate. The court, relying on the 2010 Third Circuit In re Aetna Inc. Sec. Litig case, which considered meaningful cautions to be substantive company-specific warnings based on realistic risk descriptions, found K-V’s Form 10-K cautionary language to be specifically related to the circumstances surrounding Makena’s planned launch.

Scienter. The court proclaimed that by finding K-V’s challenged statements to fall within PSLRA’s safe-harbor provision, it did not have to consider whether the plaintiffs adequately pled scienter. The court, at this point, affirmed the district court’s complaint dismissal.

Reconsidering the scope of leave to amend complaint. The plaintiffs contended that the district court should have granted them leave to amend the complaint because they had identified new facts about the confidential witnesses, showing that K-V’s statements regarding the FDA’s likelihood of enforcing exclusivity were materially false and misleading. But the court stated that it would only overturn a district court decision if that court abused its discretion.

The court then noted that the district court was very specific about granting the plaintiffs leave to file an amendment on the financial assistance program issue (which the plaintiffs did not file) while simultaneously denying the plaintiffs leave to amend on the confidential witnesses issue. The court affirmed the district court’s decision, declaring that the plaintiffs’ allegedly new information about the confidential witnesses was, from the trial record, available for the plaintiffs to bring at the trial, and that it would not disturb the district court’s similar finding.

The case is No. 14-2592.

Attorneys: David A. P. Brower (Brower & Piven) for Lori Anderson. Robert P. Berry (Berry & Silberberg) and Jason E. Morrow (Gibson & Dunn) for K-V Pharmaceutical Company.

Companies: K-V Pharmaceutical Company.

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