Using A Company’s “Intrinsic” Value In Defending Securities Fraud Suits

A recent securities class action lawsuit filed in a Connecticut federal court charges that Achillion Pharmaceuticals, Inc., and its CEO and CFO misled investors by failing in an adequate and timely fashion to disclose clinical information and FDA actions related to sovaprevir, an Achillion drug under study for the treatment of hepatitis infections.  If the Connecticut-based pharmaceutical company’s ability to fend off the allegations of the Complaint turns on the relationship between the Company’s “disclosures” and drops in its stock price (as the plaintiff and his lawyers would like), the Company may have a problem.  However, as M&A lawyers are learning in the context of garden variety shareholder litigation and appraisal rights litigation, one available defense may lie in the Company’s ability to demonstrate the long-term “fair” or “intrinsic” value of its stock.

Background

According to the Complaint filed by Joseph Sniezak and his lawyers, Achillion had issued a number of false and misleading press releases and SEC filings, touting positive clinical study results for sovaprevir, while failing to disclose information related to elevated liver enzymes.  The Complaint draws extensively from Company reports filed from April 2012, through September, 2013, describing in technical detail the progress of sovaprevir’s clinical trials, including the positive interaction between sovaprevir and other anti-viral drugs.  For example, investor expectations were allegedly first elevated when Achillion issued an April 21, 2012 press release reporting promising drug trial results:

“…in the second segment of its Phase 2a trial of ACH-1625, 94 to 100 percent of patients with treatment naïve genotype 1 chronic hepatitis C virus (HCV) achieved a complete early virologic response (cEVR) after 12 weeks of treatment with ACH-1625 in combination with pegylated interferon alfa-2a and ribavirin (P/R).   ACH-1625 in combination with P/R for up to 12 weeks was safe and well tolerated and produced high viral response rates regardless of dose level or IL28B genotype status.”

The Company essentially recycled these and similar statements in its website and in subsequent press releases (on April 23, 2012; May 9, 2012; August 7, 2012) and SEC filings (Forms 10-Qs and 10-K on May 9, 2012; August 8, 2012; November 8, 2012; February 20, 2013; and May 7, 2013).  However, in two press releases this past Summer, Achillion revealed that the FDA had placed a clinical hold on sovaprevir.  On July 1, 2013, the Company announced it had

“… received notice from the U.S. Food and Drug Administration (FDA) that a clinical hold has been placed on sovaprevir after elevations in liver enzymes associated with significantly higher than anticipated exposures to atazanivir and sovaprevir were noted in a Phase 1 healthy subject drug-drug interaction (DDI) study evaluating the effects of concomitant administration of sovaprevir with ritonavir-boosted atazanavir.”

Notwithstanding this disclosure, the Complaint charges that the Company’s 10-Q for the quarter ending June 30, 2013, filed with the SEC on August 7, 2013, continued to represent that “sovaprevir was a safe product, and that the product had been granted a ‘Fast Track’ status by the FDA.”  Unfortunately, for Achillion, a few weeks later, on September 27, 2013, the Company announced that the FDA had declined to lift the savoprevir clinical hold.  When management was questioned by analysts in a call the following week, the Plaintiff alleges that management was not forthcoming with sufficient details describing the regulatory review status.  As the Complaint recounts, Achillion’s stock price tanked following the July 1st and September 27th disclosures, dropping $2.10 per share on July 2nd (from $8.36 to $6.26 per share) and $4.22 per share on September 30th (from $7.24 to $3.02 per share).   Approximately one week later, the Plaintiff filed his Complaint on behalf of all shareholders who had purchased Achillion stock between April 21, 2012 and September 27, 2013.

Observations

Although Plaintiff Sniezak and his attorneys do an interesting job of stringing together press releases and SEC filings to make the argument that Achillion and its CEO and CFO intentionally inflated the price of the Company’s stock, and of crafting a class of “injured” investors who purchased Achillion stock at artificially inflated prices, it is clear that the Plaintiff’s designated class period was tailored to match his own purchasing record — he began buying Achillion stock in April, 2012 when the stock was priced at more than $10 per share.  It is equally clear that the Plaintiff makes little mention that he began selling Achillion stock in May, 2013, when Achillion’s stock price dropped below $6 per share — well before the Company’s July 1st and September 27th clinical hold announcements.  Thus, it is painfully evident that Achillion’s stock price has not only been volatile during the purported class period, but that its volatility was not as strictly pegged to the results and progress of sovaprevir’s clinical studies as the Plaintiff would like us to believe.

Nonetheless, like most plaintiff’s lawyers, Mr. Sniezak’s counsel is hoping to get the purported class certified and deal with the “facts” at a later point in the litigation, where they hope a good settlement is likely.  While this case may never get around to a trial on the merits  — most class action suits don’t — one weapon that Achillion and other companies in this kind of litigation should consider is to frame the argument over “damages” not on whether a stock’s price drops following the announcement of “bad” news,  but on whether the bad news affected the company’s “fair” or “intrinsic” value, which is what should matter to anyone who can be termed an “investor.” Although “Discounted Cash Flow” (“DCF”) and other share valuation methodologies are typically employed in shareholder litigation or appraisal actions initiated by dissenting shareholders opposed to a proposed merger, companies accused of securities fraud, such as Achillion, should make the case that investors are only entitled to damages if the alleged misrepresentations and omissions have harmed the intrinsic value of the company.  My colleague, Jeremy Anderson, and I recently wrote an article describing the value of seeking appraisal under Delaware law in the context of “going private” transactions (click “Unlocking Intrinsic Value Through Appraisal Rights” to read the article) and, though written for a different audience in a different context, one lesson to be drawn from the article is that companies accused of securities fraud (like Achillion) should take the position that if the plaintiffs are truly “investors” as they claim (and not short-term “speculators” trading on daily news reports), then even if a company issues a statement that hurts its stock price in the short-term, a plaintiff would only be entitled to relief if the statement hurt the company’s long term intrinsic value.  Such a defense may not always be successful, but it’s one that you can bet the plaintiff’s bar is neither prepared nor willing to take on.

 

About Jose Sierra

José P. Sierra is a Principal in the Boston and Delaware offices of Fish & Richardson. Prior to joining the firm, Mr. Sierra was Senior Vice President, Chief Compliance and Ethics Officer for Sepracor Inc., a specialty pharmaceutical company. Earlier in his career he held positions as Vice President, Chief Compliance and Ethics Officer for Kos Pharmaceuticals, Inc., Legal Director at Schering-Plough Corporation, and Assistant U.S. Attorney in the U.S. Attorney’s Office in Newark, New Jersey.

Mr. Sierra works in the firm’s pharmaceutical and medical device industry practices focusing on litigation, government investigations, qui tam/whistleblower defense, compliance, and risk management. Contact him at 617-956-5926 or via .

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