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Biotech Industry Considers Shareholder Lawsuits Nuisances

Neurocrine Biosciences Inc. Chief Executive Officer Gary Lyons says he’s not surprised that the company’s shareholders have sued, but that it took them so long.

“These suits are fairly common when share prices drop,” Lyons said, adding that his lawyer at Cooley Godward Kronish LLP, a national law firm with a San Diego office, wouldn’t want him to say much more than that. “We don’t expect any material effects. We will expeditiously fight it.”

The lawsuit filed in June is one in a long line of such suits shareholders file when drug development firms report disappointing results from clinical trials or regulatory news, and the stock drops.

“The claims are often that executives knew all along that the trials weren’t going to work , hence they should have said something a long time ago,” said Jordan Eth, a partner at Morrison & Foerster LLP in San Francisco who has represented several biotech companies that have faced such suits. “Biotech is so highly regulated as it is, in terms of the FDA, that you’d have to have scientists and executives rigging results and going ahead with trials they knew weren’t valid. It would be a pretty fantastic set of allegations.”

The Neurocrine suit was filed by Lerach Coughlin Stoia Geller Rudman & Robbins LLP, a national firm with a large presence in San Diego, on behalf of investors who bought stock from June 20, 2002, to June 23, 2006.

Neurocrine stock lost 86 percent of its value in three months in 2006 after the Food and Drug Administration rejected the larger of two doses of a sleeping pill, Indiplon.

Neurocrine stock, listed as NBIX on the Nasdaq, traded at $11.91 midmorning July 12, down 15 cents, or 1.24 percent. After two rounds of layoffs last year, the firm operates with 300 employees.

Neurocrine shareholders claim that the company has violated federal law that requires public companies to disclose information to them.

The suit, filed in the Southern District of California, accuses the sleeping pill company of disseminating false and misleading statements to the public, concealing negative information and “making it impossible for shareholders to gain a meaningful or realistic understanding of the progress toward FDA approval.”

Such lawsuits have been under scrutiny by federal prosecutors for six years. Last week, one of Lerach’s former partners at his old firm, Milberg Weiss, pleaded guilty to a conspiracy count in federal court in Los Angeles. David Bershad said he and others agreed to conceal from judges secret payments the firm arranged with plaintiffs in class actions. He will forfeit nearly $8 million, pay a $250,000 fine and could face up to five years in prison.

Lerach rejected an offer to plead guilty and is now in settlement talks with the government, according to The Wall Street Journal. Lerach issued a statement last month that he would consider retiring to keep his firm out of the Milberg case shadows.

Lerach Coughlin’s Darren Robbins, the lead attorney for the Neurocrine shareholders case, did not return phone calls for this story.


Making A Bad Situation Worse

Phil Nadeau, managing director at Cowen and Co. LLC in New York, said he’s seen at least 20 biotech shareholder suits in the past year. Nadeau, who covers Neurocrine, said the suits typically don’t have a strong influence on companies’ future, but can make a bad situation worse.

“A number of things happen all at the same time, and you can’t be sure which are the key drivers,” Nadeau said, adding that he believes Neurocrine will get approval for the lower dose of Indiplon the company recently resubmitted to the FDA.

Other local companies that have faced shareholder lawsuits in recent years include Ligand Pharmaceuticals Inc., the former Maxim Pharmaceuticals Inc. and Alliance Pharmaceutical Corp.

Ligand settled suits with shareholders in 2006 for $12.2 million. But the company’s demise was also related largely to investigations of its accounting practices by the Securities and Exchange Commission, and a delisting from the Nasdaq stock exchange. The company has slashed its work force from more than 350 to 85 and sold painkiller Avinza to Tennessee’s King Pharmaceuticals Inc.

Maxim’s suit lasted a year and a half and was settled by New York-based EpiCept Corp. after it acquired Maxim in early 2006.

Lerach Coughlin sued Alliance in the early 1990s following a stock drop after a delayed clinical trial, said the company’s CEO, Duane Roth, late last week. Roth said Alliance fought for two years and refused to pay even the legal fees of its opponents.

“We won on summary judgment, he then appealed the case, and three days prior to the appeal being heard, he dropped the suit,” Roth said of Lerach.

Once one of the largest biotechs in San Diego with hundreds of workers, a failed clinical trial led to layoffs for Alliance. The company faced another shareholder lawsuit, which alleged misrepresentations during an acquisition. The suit lasted six years, and Alliance settled it in early 2006 for $400,000. Today, the company operates with just a few employees and its stock trades for under 10 cents on the Over the Counter Bulletin Board. It is testing its blood substitute in France.

Roth said companies often settle shareholder suits to avoid long litigation battles, even when they know they did nothing wrong.

“This is just a game,” Roth said. “Many companies will just say, ‘What’s it (going to) take to make you guys go away?’ Everything you do with technology is volatile. Everything in hindsight looks different, and (firms that specialize in class action suits) exploit that.”

The risky nature of drug development means clinical trial results are often more negative than they are positive, so while shareholder lawsuits can’t be prevented, their impact can be minimized, Eth said.

He said biotech companies can protect themselves by making sure that filings with the SEC are accurate; avoiding even the appearance of suspicious patterns in stock sales among executives; and holding director and officer insurance.

Nadeau said in his experience covering Neurocrine, the company seems to have been forthright.

“Neurocrine is very explicit in saying what the FDA wanted in order for the drugs to get approved,” Nadeau said. “It’s hard to know. After the FDA decision (to deny Indiplon), Neurocrine was very open and discussed what happened. But prior to May, I know very little about what they knew when.”


Editor’s Note: This article has been modified from its original form.

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