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On July 2, 2015, the Eighth Circuit affirmed dismissal of a securities-fraud action against K-V Pharmaceutical Company based on alleged misstatements concerning, in part, the likelihood that the Food & Drug Administration (FDA) would enforce a period of exclusive sales rights once K-V launched Makena, a prescription drug for the prevention of preterm labor. Julianello v. K-V Pharm. Co., 2015 WL 4032102 (8th Cir. 2015) (Shepherd, J.). The court found that the challenged statements fell within the safe-harbor provision for forward-looking statements under the Private Securities Litigation Reform Act of 1995 (“PSLRA”) because they were “tied to a future event: the launch of Makena,” and therefore the veracity of K-V’s statements could not be determined until this future event took place.

Background

Under the Orphan Drug Act, “manufacturers of drugs designed to treat diseases or disorders that affect fewer than 200,000 people may obtain seven years of exclusive sales rights,” subject to FDA approval. On February 3, 2011, the FDA granted K-V exclusive sales rights to Makena.

Two weeks later, during an investor conference call on February 14, 2011, K-V expressed its expectation that the FDA would enforce a period of exclusivity for Makena. K-V stated that it “believe[d] that the regulations and laws are very clear” and “that FDA regulations . . . generally prohibit the distribution of compounded products that are the same or essentially the same as FDA-approved products.” K-V further stated that it “believe[d] that compounded pharmacies are aware of these laws and regulations,” and that it anticipated that compounding pharmacies would “adhere to them.” At the beginning of the call, K-V warned that certain statements made during the call might be “forward-looking statements” subject to “various risks and uncertainties,” including “the possibility that any period of exclusivity may not be realized.”

In March 2011, K-V released Makena at a high price point. Later that month, the FDA announced that “it did not intend to take enforcement action against compounding pharmacies that compounded the equivalent of Makena.” Plaintiffs subsequently brought suit, alleging, inter alia, “that K-V [had] made both false statements and omissions about the risk of the FDA not enforcing exclusive sales rights” to Makena. The district court dismissed plaintiffs’ complaint in its entirety. Plaintiffs appealed, contending in part that the district court had “erred . . . in holding [that] K-V’s statements regarding the FDA’s likelihood of enforcing exclusivity were protected by the PSLRA’s safe-harbor provision.”

Eighth Circuit Finds K-V’s Statements Concerning Whether the FDA Would Enforce Exclusivity Were Forward-Looking Because the Statements Were Tied to a Future Event: the Launch of Makena

On appeal, the Eighth Circuit explained that, “[u]nder the PSLRA, protected forward-looking statements include, among others: (1) projections of revenues or other financial items, (2) statements of plans and objectives for future operations, and (3) statements of the assumptions underlying the previous two categories.” The court underscored that, “[i]n determining whether a statement is truly forward-looking, the determinative factor is not the tense of the statement; instead, the key is whether its ‘truth or falsity is discernible only after it is made.’”

Applying these standards, the Eighth Circuit found that K-V’s statements on the likelihood that the FDA would enforce a period of exclusivity for Makena “were forward-looking” under the PSLRA. First, the court found that K-V’s statements fell “within the category of statements regarding plans and objectives for further operations because they detailed K-V’s future launch of Makena and the anticipated results.” Second, the court explained that “the veracity of the statements could only be determined after they were made” because they were “tied to a future event: the launch of Makena.” The court reasoned that, “[u]ntil this future event occurred, it could not be determined whether the FDA would vary from its usual practice of enforcing exclusivity.” Notably, the court observed that “there was no evidence at the time K-V made the statement that the FDA would not enforce exclusivity.”

The Eighth Circuit further found that “the use of the present tense in the challenged statements [did] not undermine [its] determination that they were forward-looking.” The court held that “[t]he critical inquiry in determining whether a statement is forward-looking is whether its veracity can be determined at the time the statement is made, not the tense of the statement.”

Finally, the court found that “K-V’s forward-looking statements were accompanied by meaningful cautionary language” that “explicitly identified the risks associated with the FDA’s presumed enforcement of exclusivity.” The court therefore held that “K-V’s statements [fell] within the PSLRA’s safe-harbor provision . . . and [were] not actionable as a basis for a securities fraud action.”