Pomerantz Defeats Defendants’ Motion to Dismiss The Complaint Against Mylan Pharmaceuticals

ATTORNEY: VERONICA V. MONTENEGRO | POMERANTZ MONITOR | MARCH/APRIL 2020

On April 6, 2020, Pomerantz scored a major victory for investors when it defeated defendants’ motion to dismiss the third amended complaint in a securities class action against Mylan Pharmaceuticals, In re Mylan N.V. Securities Litigation. This ruling now allows discovery in the case to proceed in full.

Mylan, a drug company that markets a broad range of generic drugs as well as the EpiPen, a branded device that allows the user to autoinject a measured dose of epinephrine to treat anaphylaxis, a life-threatening emergency to which one in thirteen children is susceptible. The amended complaint alleges that Mylan and its executives committed securities fraud by (1) failing to disclose that Mylan was systematically and knowingly misclassifying the EpiPen as a generic drug in order to overcharge Medicaid by hundreds of millions of dollars for its purchases of this pen for Medicaid recipients; (2) failing to disclose that it had entered into exclusive dealing arrangements with commercial insurance companies and pharmaceutical benefit managers in order to prevent competitor Sanofi-Aventis from successfully introducing a product to compete with EpiPen; and (3) failing to disclose that it had entered into, and maintained, anticompetitive agreements with other generic drug manufacturers to allocate the market and fix the prices for virtually all of its generic drugs. The third amended complaint also added James Nesta, the Vice President of Sales and National Accounts at Mylan, as a defendant and provided allegations that Nesta was a central player in Mylan’s market allocation and price-fixing scheme.

With respect to misrepresenting the EpiPen as a generic drug, defendants argued that the statute was ambiguous in describing the classification and that defendants therefore could not have acted with scienter in designating the device as generic. The Court noted that the Right Rebate Act was passed for the express purpose of preventing Mylan from misclassifying the EpiPen and other drugs, and therefore, it “begs belief” that Mylan would be able to hide behind the Act in order to defeat plaintiffs’ allegations. Second, plaintiffs pled that the Centers for Medicare & Medicaid Services, the agency that administers Medicaid, explicitly told Mylan on multiple occasions that the EpiPen was misclassified, supporting the scienter claim irrespective of any alleged ambiguities in the classification system.

With respect to the exclusive dealings claim, the Court sustained plaintiffs’ allegations that Mylan offered anticompetitive rebates to price its competitor Sanofi-Aventis out of the market for epinephrine autoinjectors. The Court held that plaintiffs had adequately pled that Mylan consciously engaged in an anticompetitive rebate scheme for the purpose of forcing Sanofi from the market, and that Mylan’s top executives were personally involved in pricing and thus would have been well aware of the rebates. The Court also held that plaintiffs had sufficiently alleged loss causation in connection with the rebates by alleging that Mylan’s stock dropped as a result of the public outcry due to the high price of EpiPen—itself a result of Mylan’s anticompetitive conduct—and continued to drop even further when the FTC announced that it was investigating Mylan. As the Court reasoned, a stock price decline following the revelation of an investigation into a particular business practice can be sufficient to support loss causation with respect to alleged misstatements regarding that practice.

With respect to claims concerning anticompetitive agreements, the Court allowed plaintiffs’ claims of failure to disclose price fixing and market allocation to proceed with respect to 21 generic drugs.

Finally, the Court permitted plaintiffs’ claim for scheme liability to proceed against Mylan Vice President Jim Nesta. Mylan argued that plaintiffs had not adequately pleaded that Nesta committed the requisite deceptive or manipulative acts necessary to allege scheme liability. However, the Court held that plaintiffs had, indeed, adequately alleged that Nesta participated in Mylan’s anticompetitive scheme by submitting cover bids that were intended to create the false impression that they were competitive. It held that “Because this Court concludes that the submission of cover bids is a deceptive act sufficient to support a scheme liability claim, Plaintiffs’ claims against Defendant James Nesta survive.” With scant precedent for scheme liability in securities litigation, this opinion sets an important precedent.