Pennsylvania Record

Wednesday, February 19, 2020

Federal judge determines Lannett Co. statements to investors were not inherently misleading


By Tomas Kassahun | Mar 25, 2019

Stock market

PHILADELPHIA — The U.S. District Court for the Eastern District of Pennsylvania has partially dismissed a lawsuit against a drug manufacturer accused of making misleading statements to its investors.

According to the court’s ruling on March 13, branded and generic pharmaceutical drug maker Lannett Co. Inc. made some misleading statements to its investors before ending its contract with a business partner, but the investors failed to prove that Lannett misstated the true status of its negotiations with the business partner.

The court said Lannett share prices fell after it ended its relationship with partner Jerome Stevens Pharmaceuticals, causing the shareholders to file a lawsuit because they felt the company didn’t disclose any information about the possibility of a breakup.

“Robert Strougo sued Lannett Co. Inc., Lannett CEO Timothy C. Crew and Lannett Chief Financial Officer/Treasurer Marty P. Galvan on behalf of a putative class of shareholders under the Securities Exchange Act of 1934,” the opinion stated. The court then granted Soe Wong and Michael Hoeltzel’s motion to serve as lead plaintiffs.

According to the lawsuit, Wong and Hoeltzel focus their claims on statements Lannett made in its 2018 quarterly reports, as well as statements Crew made during Lannett’s 2018 quarterly earnings calls and statements Crew made during the Deutsche Bank Health Care Conference Call in  2018. 

“Wong and Hoeltzel argue Lannett materially misled investors by failing to accurately disclose the substantial likelihood Lannett would not renew the JSP Agreement, leading investors instead to believe renewal constituted a ‘sure thing,’” the opinion stated.

According to the opinion, Wong and Hoeltzel argue that Crew’s statements of optimism regarding renewal of the JSP Agreement materially misled investors because they “created the false impression that the relationship would continue.” According to the court, Crew’s statements reflect general optimism about Lannett and JSP renewing their agreement, but it didn’t portray renewal as a “sure thing” or provide a definitive time when the parties would renew the JSP Agreement.

Wong and Hoeltzel also allege that Crew’s description of the JSP Agreement’s expiration date as “technical” misled investors, the opinion stated.

According to the opinion, Crew’s use of the term “technical” simply expressed his “continuing comfort” with the state of Lannett’s negotiations.

“He believed the parties would renew the contract, so he found the expiration date only technical,” the opinion stated. “CEO Crew did not assert an actual fact by using the term.”

Wong and Hoeltzel also argue that Lannett failed to disclose facts related to the JSP Agreement needed to make its statements non-misleading, according to the opinion. “Wong and Hoeltzel fail to plead material facts Lannett did not disclose to make their statements not misleading,” the opinion stated.

The court said Wong and Hoeltzel repeatedly argued that Lannett failed to disclose the “imminent risk” or any risk of the non-renewal of the JSP Agreement, but Lannett repeatedly cautioned about the risks of the deal in its SEC filings.

The court, however, said Crew’s statements based on JSP’s shareholder status may proceed into discovery.

“Wong and Hoeltzel plausibly allege CEO Crew’s statements describing JSP’s ‘significant’ and ‘large’ shareholder status inaccurately represented JSP’s investment in Lannett,” the opinion stated.

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