Pharmaceutical drugs are a booming business for the United States economy. In 2016, Pfizer alone recorded over $52 billion in sales, making it the largest pharma company in the world. But investment money hasn’t only been piling into the large-cap healthcare stocks, there has actually been a higher percentage of new investment going into small-cap healthcare equities in 2017.
Many investors in this field simply buy industry sector stocks like healthcare ETFs, but those who are buying large amounts of equity in individual healthcare companies need to be aware of the growing trend of securities-litigation, also termed “shareholder suits.” If you hold equity in a company and they knowingly withhold information or provide statements that misrepresent the true nature of their medical trials or financial documents, you, as an investor, can sue to recoup losses.
The rise of shareholder suits
This type of class-action lawsuit is becoming increasingly common as the value held by pharmaceutical companies continues to grow. Through the first six months of 2017, there were 131 shareholder suits filed, which is a record for that period of time. Pharmaceutical companies involve a large percentage of those suits, due to the secretive and often unethical process of getting drugs approved.
Most people aren’t aware of the exorbitant costs of the research and development (R&D) process involved with approving new drug treatments. Cancer drugs require over $600 million on average to get approved, as an example. With so much money on the line, there is an unfortunate economic incentive for the drug manufacturers to alter the testing data in a way that improves the results of their drug trials, and thus improves the chance that it’s approved by the Food and Drug Administration (FDA).
Another trend fueling the rise of securities suits is the opioid crisis in the U.S. Many opioid manufacturers are now being sued for deceptive marketing practices that kept shareholders in the dark about the underlying risks of the business model. The first of these suits came in August of this year, when Depomed (which manufactures and markets two opioids) was sued for false/and or misleading statements to shareholders. Since then, multiple other companies such as Endo International and PetMed Express have been charged with similar suits by shareholders.
As an investor, this is important because you need to be aware of ongoing and prospective legal issues involving pharmaceutical companies you’re invested in. Stanford has a Securities Filings Clearinghouse database which is an incredible free resource for investors. You can bookmark this site and search it daily or at least weekly for companies you have equity in. Of course, in the ideal world, you as an investor would be notified of any filings by the company itself. But since that doesn’t usually happen, using a third-party source like this is recommended.
Beyond lawsuits: your investment’s returns
Unfortunately, it’s not enough to be aware of current lawsuits, because at the stage of a filing the share price is likely already negatively impacted. Even rumors of impending lawsuits against pharma companies can send stock prices tumbling. This is why it’s imperative to perform due diligence on companies you hold in your portfolio and consider taking preemptive action if you notice signs of future legal trouble. There might be a class-action lawsuit that negatively impacts share price if it is costly for the pharmaceutical company to fight in court. Class action lawsuits can also damage the reputation of a brand.
Take for example the Xarelto lawsuits against Johnson & Johnson and Bayer. This drug, which is marketed for blood clots, has been associated with increased bleeding risk and many hospitalizations for adverse effects. While the drug companies have won the first three major cases against them, there are still tens of thousands of outstanding lawsuits. If you are an investor in either Bayer or Johnson & Johnson, this means you should be weighing the risk of these impending lawsuits against the current share price. It also means you should consider all of the available information and file a shareholder suit if you believe your investment has been negatively impacted by withheld information about the drug.
Pharmaceutical companies have definitely generated substantial returns for investors in the last few years, and with the advent of shareholder suits there is even more investor protection in this space. If you’re an investor and unable to perform due diligence on class-action lawsuits against companies you hold, at least use free resources to check for shareholder suits that you can join and recoup losses from. Settlements can be significant because drug companies are eager to avoid lengthy and expensive court cases.
Regardless, the general investing advice of sector investing still applies to investing in pharma stocks: if you’re not an expert in the field it’s probably best to not try to pick individual stocks. But those who are knowledgeable about the pharma companies and the regulatory atmosphere can definitely utilize the relative protection of shareholder suits to their advantage.