Texas police, firefighters lose legal battle against Triangle-based biopharmaceutical firm

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  • The 4th U.S. Circuit Court of Appeals has affirmed a lower court ruling against investors in a Triangle-based biopharmaceutical company. Pension funds for police and firefighers in San Antonio and El Paso served as lead plaintiffs in the case.
  • Investors claimed leaders of the company now known as Syneos Health misled them prior to a 2017 merger vote.
  • Appellate Judge Julius Richardson wrote that plaintiffs failed to prove a case that could lead to a win in court.

The 4th U.S. Circuit Court of Appeals has upheld a ruling against investors who took a Triangle-based biopharmaceutical company to court. The investors had accused company leaders of illegally misleading them about a corporate merger.

Pension funds for police and firefighters in San Antonio and El Paso served as lead plaintiffs in the federal class-action lawsuit against Morrisville-based Syneos Health, formerly known as INC Research.

“A company’s investors voted for a merger, but now feel that they were misled in violation of federal securities law,” wrote Judge Julius Richardson for the unanimous Appeals Court panel. “Before the vote, the company and its executives gave the investors high hopes by espousing optimistic projections for the merged entity. A few months later — with the merger cemented — the investors’ hopes were dashed as the company’s economic outlook darkened.”

“Yet not every financial disappointment is actionable under federal law,” Richardson wrote. “Here, as is often the case, the optimistic projections proved wrong but no one is liable. So the district court was right to dismiss Plaintiffs’ class-action lawsuit.”

The case stems from the 2017 merger of INC Research and inVentiv Health. INC Research specialized in helping other biopharmaceutical companies conduct federally mandated clinical trials. Meanwhile, inVentiv provided “commercialization services” for approved drugs.

“In other words, INC Research helped pharmaceutical companies get their drugs approved, while inVentiv helped companies sell their drugs after approval,” Richardson wrote. “Wanting to break into the approved-drug-commercialization market, INC Research sought to merge with inVentiv in 2017.”

Plaintiffs argued that INC Research and its executives made misleading statements in a May 2017 press release announcing the merger and in earnings calls made during the same month and in July 2017. After those statements, INC Research shareholders approved the merger. It took effect in August 2017. The company changed its name to Syneos Health in January 2018.

Documents provided to shareholders before the merger vote “contained detailed cautionary language, warning investors that this was a risky undertaking and success was not guaranteed,” Richardson wrote.

“These warnings proved prescient. Things soured quickly and the rest of the year was painful for the shareholders,” the 4th Circuit opinion explained. “Starting in September, the company’s stock price plummeted. The fall followed comments from INC Research’s CFO that inVentiv’s commercial business was a ‘wild card’ that would experience ‘roughly flat’ revenue growth in 2018 and lead to only single-digit revenue growth for the overall company post-merger.”

An INC Research shareholder filed suit on behalf of investors who bought stock in the company between May 2017 and November 2017. A U.S. District judge later appointed the two Texas cities’ police and fire pension funds as lead plaintiffs.

A key piece of the plaintiffs’ case “boils down to whether they can raise a strong inference that Defendants: (1) knew when they spoke in May and July that inVentiv had not secured any large sales contracts; (2) knew that failing to secure those types of contracts was a predictor of future poor performance; and (3) knew at that time, or were at least reckless to the risk, that investors would be materially misled if they were not told this information — i.e., that failing to secure those contracts by that point in the year was such a strong negative predictor that Defendants’ projections must be misleading without disclosing it,” Richardson wrore.

The plaintiffs didn’t convince a trial judge or the 4th Circuit panel. “[W]e may not infer, from the mere fact that Defendants conducted due diligence on inVentiv, that Defendants learned about inVentiv’s failure to sign any large sales contracts, nor about any supposed centrality of those contracts to inVentiv’s business model,” Richardson wrote. “And, even if we could infer that Defendants learned those facts in their due diligence meetings, we could not thereby infer that Defendants also learned that those facts foreclosed their sunny projections.”

Richardson offered another possible scenario: “Defendants made optimistic projections that didn’t pan out.”

“INC Research’s investors have a right to be disappointed that their company’s performance did not meet its optimistic projections,” the 4th Circuit opinion concluded. “But that does not mean that they also have a right to civil remedies under federal securities law. Securities fraud liability cannot be ‘predicated solely on an overly optimistic view of a future which may, in fact, encounter harsh economic realities down the road.’ Yet that is precisely what Plaintiffs seek to do here.”

Appellate Judge Pamela Harris and U.S. District Judge Patricia Tolliver Giles of Virginia joined Richardson’s opinion.