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Utesch v. Lannett Co., Inc.

United States District Court, E.D. Pennsylvania

July 31, 2018

JOHN UTESCH, Plaintiff,
v.
LANNETT COMPANY, INC., ARTHUR P. BEDROSIAN AND MARTIN P. GALVAN, Defendants.

          OPINION

          Wendy Beetlestone, J.

         This is a putative securities class action centered on alleged misstatements and omissions made by Lannett Company, Inc., a pharmaceutical company, and its Chief Executive Officer Arthur P. Bedrosian and Chief Financial Officer Martin P. Galvan. Lead Plaintiff, the University of Puerto Rico Retirement System, avers that Defendants misrepresented the nature of price competition for certain generic drugs that Lannett produced. Defendants allegedly colluded with other manufacturers to price-fix certain generic drugs, all while simultaneously touting Lannett's legal compliance to investors.

         Plaintiff asserts securities fraud claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder against all Defendants, as well as individual claims under Section 20(a) against Bedrosian and Galvan. 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5; 15 U.S.C. § 78t(a). All of its securities fraud claims turn on an underlying allegation that Defendants violated antitrust laws. Defendants move to dismiss all of the claims under Rule 12(b)(6) of the Federal Rules of Civil Procedure, arguing that Plaintiff has failed to adequately plead scienter in support of its claims. For the reasons that follow, Defendants' motion is granted.

         I. FACTUAL ALLEGATIONS

         Lannett is a pharmaceutical corporation that manufactures drugs. Plaintiff alleges that Lannett colluded with other manufacturers to fix the price of several generic drugs, including Doxycycline Monohydrate (“Doxy Mono”), Digoxin, Levothyroxine Sodium (“Levothyroxine”), Acetazolamide, and Ursodiol (collectively, “Generic Drugs”). Lannett derives the majority of its revenue from the sale of the Generic Drugs. Plaintiff seeks to recover on behalf of the class for alleged damages it suffered as a result of Defendants' misstatements and omissions from May 9, 2013 to October 31, 2017 (the “Class Period”).

         a. Lannett's Alleged Participation in Generic Drug Cartel

         Before the relevant time period of this dispute, Lannett allegedly suffered financial troubles. From 2003 to 2006, its net sales never exceeded $65 million, but rose and fell by about $20 million each year. Consequently, Bedrosian developed a growth strategy in which Lannett would acquire companies and absorb their product lines. Plaintiff alleges that to finance its acquisition strategy, Lannett colluded with other generic drug manufacturers. According to Plaintiff, this collusion led to wildly successful results. In 2017, for instance, Lannett's net sales skyrocketed to $637 million.

         Plaintiff avers that Lannett entered into a cartel with other manufacturers “performing two unique but related types of anticompetitive acts.” The first, according to Plaintiff, is “market allocation, which allow[s] generic drug manufacturers to control and divide customer accounts amongst themselves.” The second is alleged price-fixing that inflated the prices of generic drugs.

         Plaintiff derives many of its allegations of anticompetitive behavior from a complaint filed by various State Attorneys General. The complaint, in turn, alleges a “common understanding” among generic drug manufacturers that they would each have a market share for a particular drug. This scheme partially relied on phone calls and text messages among the manufacturers discussing pricing strategy. Lannett and its various co-conspirators allegedly colluded to price-fix the Generic Drugs as follows.

         i. Doxy Mono

         Doxy Mono is an oral medicine used to treat bacterial infections and to prevent malaria. Heritage Pharmaceuticals, a purported co-conspirator of Lannett's, learned from a customer that the demand for Doxy Mono was going to increase. Heritage then “decided to reach out to [Lannett] for the purpose of coordinating their price hikes.” In turn, Lannett, Heritage, Mylan, and Par Pharmaceuticals - all competitors in the Doxy Mono market - colluded to fix the price of Doxy Mono. They did so by inter-firm communications, as well as discussions by employees at industry conferences and trade shows. On April 22, 2014, the president of Heritage identified various drugs that would be subject to a price increase and arranged for a phone call among its sales team. During the phone call, the president instructed the sales team to reach out to contacts at each competitor for these various drugs and agree on a price increase. After the phone call, a member of the Heritage sales team called a Lannett employee, and the two agreed to raise the price of Doxy Mono.

         ii. Digoxin

         Digoxin treats heart conditions. Plaintiff alleges that Lannett and another seller of Digoxin, Impax Pharmaceuticals, “represented a substantial portion of the generic market” of the drug. For instance, in 2013, Lannett and Impax had roughly 96% of all Digoxin sales. From October 28, 2013 to October 30, 2013, Impax, Lannett, and Par attended a conference for generic drug manufacturers and distributors. After the conference in November 2013, both Lannett and Impax increased Digoxin prices by over 700%. The increase in price was, according to Plaintiff, the “first significant price increase . . . in more than four years.” As a result of Lannett's alleged collusive behavior with Impax, “market sales of Digoxin in 2014 increased almost threefold to $577 million from $198 million in 2013.” Plaintiff claims that the increased revenue can only be attributed to the coordinated price increase by Lannett and its co-conspirator.

         iii. Levothyroxine

         Levothyroxine treats hypothyroidism and other thyroid-related conditions. Plaintiff avers that, during the Class Period, the market for Levothyroxine “was highly concentrated among four manufacturers”: AbbVie U.S. LLC, Mylan N.V., Lannett, and Sandoz. During the Class Period, Lannett controlled about 16% of the market for Levothyroxine. As a result of this “highly concentrated” market, the average price for Levothyroxine increased about 100% from August 2013 to August 2014. Plaintiff alleges that the four manufacturers colluded based on the lock-step manner in which they raised their prices.

         iv. Acetazolamide

         Acetazolamide treats glaucoma, epilepsy, altitude sickness, paralysis, and heart failure. According to Plaintiff, the only two producers during the Class Period of Acetazolamide tablets were Lannett and Taro Pharmaceuticals. Although Lannett initially dropped its price to take more market share away from Taro, during the Class Period Lannett and Taro increased the price of Acetazolamide by about 500%. Lannett and Taro made this price increase following a healthcare conference. As Plaintiff contends, the price increase “could only reasonably be explained as the result of collusive behavior.”

         v. Ursodiol

         Ursodiol treats gallbladder stone dissolution. The Ursodiol capsule market, according to Plaintiff, “is dominated by Lannett, Actavis Generics, and Epic Pharma, ” though the tablet itself is manufactured by different companies. After two generic pharmaceutical manufacturers meetings attended by Lannett, Actavis, and Epic, the price of Ursodiol increased from $2 a unit to $5 - $6 per unit. As Plaintiff claims, “[t]hese dramatic and uniform price hikes in Ursodiol have no reasonable explanation absent collusion.”

         b. Government Investigations

         Due to the increased prices, Lannett and its alleged co-conspirators “became the focus of regulatory scrutiny in connection with these drug manufacturers' pricing of generic drugs.” In particular, Lannett was investigated by the Connecticut Attorney General, Congressional Committees, and the Department of Justice (DOJ).

         In November 2016, media outlets initially reported that DOJ prosecutors contemplated filing criminal charges against Lannett and other generic pharmaceutical companies for collusion. By December 2016, various State Attorneys General filed suit against six generic drug manufacturers for anticompetitive price inflation. At the same time, the DOJ unsealed criminal charges against the CEO and President of Heritage. By January 2017, Heritage's CEO and Vice President of Commercial Operations pled guilty to price-fixing charges, though Plaintiff does not identify what entity Heritage colluded with. Plaintiff, however, does not allege that the DOJ has initiated any proceedings against Lannett besides sending one of its corporate officers a subpoena related to antitrust investigations.

         c. The Misstatements and Omissions at Issue

         Plaintiff has identified two general types of misstatements promulgated to investors: (i) assertions that drug pricing was competitive and (ii) statements that Lannett had effective internal controls over its financial reporting. For instance, in a securities filing in March 2013, Lannett stated, “Generic pharmaceutical manufacturers and distributors are constantly faced with pricing pressures in the marketplace. . . .” On this form, Bedrosian and Galvan personally certified that they “evaluated the effectiveness of Lannett's internal controls and disclosed any deficiencies or material weaknesses in them.” According to Plaintiff, this certification was misleading because it maintained a veneer of robust price competition for the Generic Drugs when, in fact, Lannett was price-fixing many of its products.

         Plaintiff's theory of loss is that it purchased Lannett common stock at ballooned prices and suffered economic losses when the truth of Lannett's alleged antitrust conspiracy was revealed. Lannett's stock prices allegedly dropped when, inter alia, a Bloomberg article reported that federal prosecutors contemplated filing criminal charges against Lannett (and other pharmaceutical companies) for antitrust violations.

         II. ...


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