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Questcor’s Dismissal Motion Is No Miracle Drug to Defeat Plaintiffs’ Fraud Claims

October 1, 2013

On October 1, 2013, United States District Judge Dolly M. Gee issued an order granting in part and denying in part motions to dismiss filed by defendants Questcor Pharmaceuticals, Inc. and several of the com­pany’s officers and directors. The securities class action arose out of false and misleading statements concern­ing the effectiveness of Questcor’s primary product, H.P. Acthar Gel (“Acthar”), as a treatment for certain condi­tions. Acthar is an injectable drug that was approved by the U.S. Food and Drug Administration (“FDA”) for the treatment of a number of indications, including in­fantile spasms (“IS”), multiple sclerosis, and nephrotic syndrome. Despite being available as a treatment for over 60 years, Acthar did not garner much attention until it was purchased by Questcor in 2001. Since then, Questcor has dramatically increased its price and en­gaged in an aggressive marketing campaign to accel­erate its prescription rate. For indications other than IS, however, there exists no meaningful scientific or medical basis for an increase in the drug’s use.

The consolidated action, led by lead counsel Robbins Geller and court-appointed lead plaintiffs West Virginia Investment Management Board and Plumb­ers and Pipefitters National Pension Fund, alleges that throughout the class period, Questcor and its of­ficers and directors violated the federal securities laws by disseminating false and misleading statements to the investing public about the effectiveness of Acthar as a treatment for indications other than IS, making it impos­sible for shareholders to gain a meaningful or realistic understanding of the drug’s prospects and marketing success. As a result of defendants’ false statements, Questcor’s stock traded at artificially inflated prices during the class period. Questcor insiders then seized the opportunity to capitalize on the inflated price of Questcor’s stock created by their fraud by dumping un­precedented amounts of their own Questcor shares for illicit profits of over $100 million.

Other investors who relied on defendants’ false statements were, however, not so lucky. On September 19, 2012, investors learned that Aetna, Inc., one of the nation’s largest insurers, had determined that clinical research only supported Acthar as a treatment for IS. Then, on September 24, 2012, Questcor dis­closed that the company’s promotional practices were being investigated by the U.S. government. As a result of these revelations, Questcor’s stock plummeted from a class period high of $57.64 per share on July 9, 2012 to close at $19.08 per share on September 24, 2012.

Defendants’ motions to dismiss challenged whether plaintiffs had sufficiently alleged material misrepresenta­tions, scienter and loss causation, three of the elements that a plaintiff must demonstrate to prevail on a securities fraud claim under §10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5(b). In upholding the vast majority of plaintiffs’ fraud claims, Judge Gee found that plaintiffs had adequately alleged that defendants made misleading statements about “the scientific basis for Acthar,” “the availability of insurance reimbursement,” and “the Company’s financial success arising out of Acthar’s sales.” The court rejected defendants’ argu­ment that plaintiffs had failed to sufficiently allege that defendants acted with the requisite state of mind, or scienter. Judge Gee found plaintiffs’ allegations con­cerning the trading activity of several of the defendants, which was “dramatically inconsistent to [] pre-Class Period sales and yielded substantial proceeds,” to be particularly probative of scienter, and held that these al­legations, combined with defendants’ “sizeable incentive compensation package[s]” and defendants’ “close in­volvement in the day-to-day operations of the business,” were sufficient to raise a strong inference of scienter.

Finally, Judge Gee flatly rejected defendants’ argu­ment that plaintiffs had failed to establish a causal con­nection between defendants’ misleading statements and the alleged loss. Judge Gee concluded that an Aetna bulletin and related September 19, 2012 Citron Re­search Report announcing Aetna’s findings of “no proof of efficacy to substantiate reimbursement for Acthar, except for [IS]” in addition to the company’s September 24, 2012 disclosure of an investigation by the United States Attorney’s Office into the compa­ny’s promotional practices were corrective disclosures that “together raise at least a reasonable inference that Questcor had been misleading about the clinical sup­port for its product and the stability of insurance reim­bursement rates.” Because plaintiffs also “sufficiently allege[d] that the disclosures caused the price of Quest­cor shares to decline, causing loss to shareholders who had purchased during the Class Period, . . . the Court conclude[d] that Plaintiffs [] adequately pleaded loss causation.”

The case now proceeds into discovery and towards trial. The Robbins Geller attorney litigating the case is Erik W. Luedeke.

In re Questcor Sec. Litig., No. 12-cv-01623 DMG (FMOx), 2013 U.S. Dist. LEXIS 142865 (C.D. Cal. Oct. 1, 2013).

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