A securities class action alleging wrongdoing by Puma Biotechnology Inc. is headed for trial early next year after a judge postponed proceedings, originally scheduled for Nov. 6.
The suit seeks more than $1.3 billion from the company over stock price inflation that plaintiffs allege was caused by misleading public statements from company executives.
The West Los Angeles-based biopharmaceutical company denies any wrongdoing and has tried to downplay the potential impact of the case in corporate filings. Puma claims in documents filed with the Securities and Exchange Commission that an adverse outcome at trial – set to begin Jan. 15 in federal court in L.A. – would have no “material adverse effect” on operations or finances.
But a court motion filed by Puma last month suggests otherwise, going so far as to claim an adverse outcome could jeopardize the company’s ability to deliver the breast cancer drug Nerlynx.
Lawyers for the company argue in the motion that a large jury award could have “significant implications for Puma’s ability to continue offering Nerlynx to breast cancer patients going forward.”
The 3-year-old case – with a mountain of documents and dozens of motions by each side – represents a rare securities class action filed against a biotech company that might actually go to trial, industry watchers and attorneys said.
“I’ve been investing in this space for more than 20 years. It’s incredibly rare to go to trial,” said Paul Yook, a general partner of New York-based LifeSci Venture Partners, and the founder of two biotech funds. “The majority are nuisance lawsuits.”
The law firm representing the plaintiff, San Diego-based Robbins Geller Rudman & Dowd, declined to comment as did Puma’s attorneys at downtown-based Latham & Watkins.
Contested claims
Puma Biotechnology was founded eight years ago by Puma Chief Executive Alan Auerbach. The biopharma firm won federal approval in July 2017 to sell its neratinib breast cancer drug, Nerlynx.
The company has been vociferous in its denial of wrongdoing throughout the litigation, repeatedly claiming plaintiffs’ allegations are baseless.
“After full development of the facts in discovery,” Puma attorneys said in a motion filed last fall, “… plaintiff’s securities fraud allegations fail at every level.”
A Puma filing this month to the SEC said the volatility of its common stock has opened the company up to securities lawsuits that could cause the company to incur substantial costs and resources.
The company expects to recoup $11.2 million in insurance reimbursements for legal expenses related to the class-action complaint, according to SEC filings.
Puma reported $52.6 million in revenue from the sale of Nerlynx during the third quarter, compared to $6.1 million in sales during the same period last year.
Despite strong sales reports, the company’s stock price has slid nearly 80 percent in the past year to $22.61 at the close of trading on Nov. 15. Puma’s market capitalization is hovering around $850 million.
Taking stock
At the heart of the case, filed in June 2015, is whether Puma and its executives misrepresented the drug’s safety and effectiveness prior to approval by the Food and Drug Administration.
Plaintiffs, led by the administrator of a pension fund for school teachers and government workers in the United Kingdom, allege Auerbach misrepresented results from a clinical drug trial during a July 2014 investor call.
They allege he made the drug sound “twice as good and half as bad” as it really was in order to inflate Puma’s stock price for a pending stock offering, according to court filings.
In the three months after the call, Puma’s stock rose dramatically, with prices climbing above $270 a share from below $60 a share.
Clinical trial results revealed a year later raised questions about the drug’s long-term effectiveness and showed a side effect of serious diarrhea. The trial revelations caused Puma stock to plunge to $147 from $210 over two days of trading.
The investor lawsuit – which also alleges document manipulations and forgeries by the firm – hinges on company performance reports about its Nerlynx drug and its impact on the company’s stock price.
Plaintiffs claim damages of $87.20 a share, according to court filings, which could award class members some $1.3 billion if they prevail.
Rash of lawsuits
Yook, whose biotechnology exchange-traded funds include shares of Puma, believes the class-action lawsuit to be meritless.
“I think it’s a disgruntled investor whining over spilled milk,” he said. “We own the stock and are not complaining.”
He said a flood of such class-action lawsuits against biotechnology companies have caused a four-fold spike in the cost of directors and officers’ liability insurance since 2016, which indemnifies executives.
Such policies can now cost companies $1.5 million a year, he said, with many insurance carriers dropping out.
Yook said he can still recall the investor conference call with Auerbach in 2014 that would boost Puma stock to a high of $270 a share.
“Every investor remembers the amazing day,” he said. “But to say Puma was misleading is ridiculous.”
