Life Sciences: Under the microscope

A single FDA question, a missed clinical endpoint, or a manufacturing snag can wipe billions off a market cap in minutes, and in life sciences that kind of volatility often comes with a second hit: a securities class action. We sit down with Kevin McRoy, Executive Vice President at RT Pro Exec and author of The D&O Diary, and John Connolly, Executive Managing Director at Howden USA, leading our North American life sciences practice, to unpack why biotech, pharma, and medical device companies remain such frequent targets, and why courts still dismiss these claims at a higher rate than in many other sectors.

We dig into what the numbers really mean for leadership teams, investors, and D&O insurance buyers: the difference between a speculative developmental stage business and an actual fraud narrative, how the Private Securities Litigation Reform Act shapes pleading standards, and why scienter is often the hill plaintiffs struggle to climb. We also explore why more filings are landing in the Third Circuit and what makes that forum distinctive, from its familiarity with FDA-related complexity to its intolerance for selective or weak disclosure.

If you work in life sciences, risk, legal, finance, or insurance, this is a clear-eyed guide to how these lawsuits form and how to reduce avoidable exposure. 

Transcript

Welcome And Topic Set-Up

SPEAKER_00 0:04

Welcome to Howden's Podcast. Fortune favours the growth We all take risks in our everyday life and business is no different. In this podcast, we're speaking to the experts about the topical challenge or issue and what business leaders can do to overcome it.

SPEAKER_01 0:19

Welcome to this episode, Life Science Under the Microscope. My name is Patricia Ramos and I'm a broker with Howden's North America's financial minds team. In this episode today, we'll be covering security transactions in life science companies. And I'm very happy to have with me two life science experts. I have with me today Kevin Lacruma, and I'm also joined by my colleague John Connolly. So you mind to quickly introduce yourselves? Can we start with you, Kevin?

SPEAKER_02 0:46

Hi, I'm Kevin McRoy. I'm executive vice president at RT Pro Exec, which is the professional liability division of RT specialty, and I'm also the author of the DNO Diary.

SPEAKER_01 0:57

John.

SPEAKER_03 0:58

I'm John Connolly. I'm Executive Managing Director at Harden USA and I lead our North American life sciences industry practice.

Career Risks That Paid Off

SPEAKER_01 1:06

So before we get started, Kevin, can you tell us about a risk you have taken in your personal or professional life and whether it paid off?

SPEAKER_02 1:15

Yeah, I knew you were going to ask this question, so I had to give it some thought, and I decided that the risk I would talk about is a business opportunity I had in the mid-90s. I was a partner in a Washington, D.C. law firm. You know, I had achieved goals that I had aspired to throughout my early adult life. But out of the blue, I got a phone call from someone I didn't know who was inviting me to join a startup insurance venture as uh insurance venture, rather, as uh head of claims. And um, to make a long story short, I accepted that offer, walking away from a Washington, D.C. law partnership and moving to Cleveland to work for a startup insurance company, by far the smartest thing I ever did in my entire life, other than marrying my beautiful wife, of course. And it worked out great. Uh and I the lesson I take from it is I encourage my kids to be open to opportunity. And don't assume you know what opportunity looks like. It can come from some strange places at some strange times.

SPEAKER_01 2:14

That's quite interesting. What about you, John?

SPEAKER_03 2:17

I think mine's a similar um story, but it is both personal and professional. But in 1994, I was working uh in the Lloyds of London market and was offered the opportunity to move to the US initially on a three-year second, but here we are 32 years later, and I'm still here. So it was a it was a challenge for me both personally because I was moving on my own and uh moving to a new country and starting again professionally because historically I was working in Lloyds of London, the home of insurance, but I was working predominantly in DNO insurance, and my view was to really understand any liability insurance practicing in the States was the best thing. So it's funny, I look back and I'm a little surprised that I that I took that risk. But it's been for reasons similar to Kevin, best thing that ever happened to me. Great from a career point of view. I met and married my wife, who's from Philadelphia, where I settled, and um have enjoyed a career that that I've been fortunate enough straddles both sides of the Atlantic. So uh so it was it was a big move, but but one I don't regret at all. And similar to Kevin, it's something I impress on anyone, friends, colleagues, my children. Don't be afraid of new opportunities.

SPEAKER_01 3:31

Yeah, I think we have that in common crossing the Atlantic for something new.

Why Life Sciences Get Sued

SPEAKER_01 3:35

So as I mentioned at the beginning, our topic today is security class actions in life science companies. So let's start at a high level, Kevin. Looking back at last year, what key trends have carried through into this year, and which of those do you expect to remain significant for the rest of the year and beyond?

SPEAKER_02 3:56

Well, just breaking it down to a statistical overview, roughly a third of the securities class action lawsuits filed in the United States in 2025 were against uh life sciences companies. Uh, the bulk of those were against companies in pharmaceutical and related classes, but there were also uh a significant number against companies that made medical devices. And the thing about that statistic that a third of the class action lawsuits were against uh life sciences companies really is a fairly consistent theme going all the way back to when I was on the underwriting side in the late 90s and early 2000s, those statistics have remained pretty steady throughout that time period. Um, we can talk later about what the reasons are why life sciences companies are more likely to be targeted than more mainstream companies. But the other statistic, which uh was important in 2025, is that uh although life sciences companies get sued more frequently than other companies, the cases filed against them are more frequently dismissed and they have a higher dismissal rate. That again is consistent really with the last two decades. Now, your question asked, will these continue into 2026? And so far, you know, we're six months in, and the statistics show that yes, life sciences companies do continue to be filed at a greater rate than than other companies. And I expect that to continue for the balance of the year. It's been such a consistent theme. The uh dismissal rate likely will also continue. And I think part of the reason for the higher dismissal rate is that many of these companies are targeting developmental stage companies. Their speculative ventures, their uh their stock price is very volatile. And um their elevated share price is trading in an elevated rate because of the promise of future uh prosperity for the company, which, if the company hits a uh regulatory roadblock, a problem in the clinical trials, um, any other type of setback, it pretty much guarantees a stack price plunge and a securities lawsuit. Uh, but that doesn't mean there was securities fraud. And I think courts are receptive to that argument, that it it was a speculative developmental stage company, and courts are loath to um hold uh the company and its executives liable for what was an unanticipated setback. So, you know, the two trends that are well established, years uh of track record to support it, that um life sciences companies will continue to be um targets of securities lawsuits, but that those lawsuits will be more likely to be dismissed than other types of suits. I think both of those trends uh will hold this year and into the the future as well.

Third Circuit Filings Explained

SPEAKER_01 6:42

Thanks, Kevin. And speaking about trends, one trend that we are watching closely is increasing number of filings landing in the third circuit. John, what's driving this trend and why are life science companies and insurance pay such close attention to what happens in the third circuit?

SPEAKER_03 7:00

Yeah, thank you. It's interesting, although it looks like a trend at first sight. I think the cases in 25 went from three to twelve files in that circuit. If you look back to years before that, it's really just moving back up to the sort of numbers that were seen before. And I'm I don't have at hand why it would have dropped in 24, but um but I think that historically the second, third, and ninth circuits have seen most of the securities litigation. So as I thought about this, I think there's a there's a legitimate point to be made, is this could be in some ways as advantageous for defendants as it could be negative. Um for context, when you look at the Third Circuit, it covers New Jersey, Pennsylvania, and Delaware. So when you look at New Jersey, it is the home to dozens, probably hundreds of life science companies, most specifically biotech and pharma, including some of the largest pharma companies. And Delaware, on the other hand, like in a lot of industries, is the state of incorporation for a number of these companies. So it means that the courts in the Third Circuit, and especially in those two states, have seen a lot of complex life science litigation outside of securities claims. So they're familiar with FDA regulatory disputes, they're familiar with IP litigation, amongst others. So for better or for worse, they are they're very familiar with this industry. They're very familiar with the complexities that go around um, like especially farmer and biotech, they go around developing new products, commercializing them, and maintaining them on the market. If you look beyond that at um at the this circuit in general for securities litigation, it has it's got a strong history of applying um the PSLRA Private Securities Litigation Reform Act standards for CENTA. Going back to some of the cases, points Kevin just made about how cases are made, this is likely to be a positive for defendants because with a need to establish strong CENTRA it's not just enough that a product fails. It's not just enough that a clinical trial fails or um or is delayed or is disappointing. The plaintiffs will have to establish knowledge of adverse events. They're gonna have to establish something that goes towards genuine fraud on the market rather than simply a bad outcome. Um I think that I think that will be harder to do. And I I think that as someone who who like Kevin represents the defendants rather than the plaintiffs, your hope is that a court will, these courts will give strong uh strength to the fact that a known outcome in the development of novel products is very, very difficult. So it can't be enough simply to say the product failed, therefore you're at fault, which I think going back is what drove the plaintiff's bar. You know, you it that the stock would run up in advance of a of a hope of a positive outcome. Anything other than a positive outcome and the stock dropped and the plaintiffs would sue. Well, that that I don't think that would be enough in the third circuit. On the other hand, when you look at the this circuit, history suggests that the courts will be very intolerant of and of selective disclosure or limited disclosure or weak disclosure. So as you get into FDA interactions, and there's any suggestion that they're that the defendants de-emphasize bad news, that they sat on bad news, that they that they pumped the stock, that they they that you had an enthusiastic entrepreneurial CFO or CEO appearing on CNBC talking about all the positives of the case, and they de-emphasize the negatives or any any potential negatives. The courts are are unlikely to take a good view of that. They're also likely to support fact-based allegations, um, which are things, and and we'll talk about this later, I think are things that are likely to develop as as plaintiffs look at things like manufacturing readiness statements, supply chain disclosures, potential, um, potential problems in developing newer biologics. So I think it's a mixed bag for for life science companies. I think they're in these cases are in a circuit that are familiar with them, that will understand the complexity and the possibility for honest mistakes, um, for failed products not being the result of fraud, but that also understand and look out for anything that they view as misleading investors.

SPEAKER_02 11:32

You know, there's one other factor, John, that I think um helps explain the fluctuating number of cases in the Third Circuit. You mentioned the fact that New Jersey is in the Third Circuit, and New Jersey is the home to many pharmaceutical companies, and that absolutely is true. One other factor is there's a segment of the plaintiff's bar that is active in New Jersey, uh, the Pond Morance Law firm, the Rosen law firm, Leviatsky. And so, for better or worse, it's a place that they're uh willing to file and and to and to maintain cases. So that is a contributing factor, just happens to be a portion of the plaintiff's bar that's active in New Jersey. And that that you're right in um alluding to the history of filings in that circuit going back years, you're right. Even though it may have fluctuated year to year recently, there's been a consistent number of lawsuits filed in that circuit because of the activity of uh certain uh plaintiff's bar, plaintiffs' law firms.

SPEAKER_03 12:33

And I think as well, when you look, so when you look at this circuit, not so much for securities claims, but Philadelphia has been uh, I think the phrase is a judicial hellhole for some of the product liability claims. So um this whole circuit probably has has the attention of plaintiffs across the life science circuit, not just in securities claims. So probably all factors into it.

Loss Causation As A Defence

SPEAKER_01 12:56

Thanks both. So let's just stay with the litigation trends for a moment. Last year, five cases were dismissed based on a failure to play loss causation. That's caught the attention of many people. Do you see this as the beginning of a broader trend, or is it more likely a function of the specific facts in those cases? And uh, what lessons should companies, investors, and insurers be taking from these decisions?

SPEAKER_02 13:25

So loss causation is an important defense for all securities class action lawsuits, and it's always gonna be one of the things that defense counsel consider when they're plotting their strategy. Um you're right, and your question is saying that sometimes it's going to be a factor of the facts involved in the pleadings and the complaint. It is a incrementally less attractive defense in the sense that it's more likely to be uh valid as a defense following discovery and therefore as a summary judgment motion rather than at the motion to dismiss phase. Although it's certainly possible to get a case dismissed at the motion to dismiss stage based on loss causation ground, it is more likely to be um at the summary judgment phase because you need to be able to make the argument that the stock price drop was attributed to factors other than the release of bad news, that there may be market factors, there may have been macroeconomic factors, there may be uh things having nothing to do with the alleged uh misrepresentation. And it you need to have a factual record in order to make that argument. Um and at the motion to dismiss phase, the traditional arguments about um failure to plead falsity or failure to plead Center are going to be stronger defenses. All of that said, I think it's it's always gonna be a defense that defense counsel will consider. Um, whether it's a trend or not, I think time will tell. I think the reality is that it will always be a defense that defense counsel will consider and in the right cases will be one that they will uh advance uh in uh preference to other arguments.

SPEAKER_03 15:06

I think the the nature of some of these claims as well, Kevin, as you lends itself to the causation defense when you get to that stage. Um if the lawsuits are are often triggered by a clinical failure, an FDA rejection, even you know, safety manufacturing issue, it is it there's an opportunity for for defendants, the defense to prove this wasn't something we didn't disclose. This this was a fact that happened and we reacted to it. Um I think it probably was taking your point that the biggest success for uh for the life science firms are at motion to dismiss. For those, I think it's probably 20, 25% of cases that get through it. There probably is the these these facts will often let lend themselves to a causation defense over fraud. So I I agree with Kevin. I think it's something that the defense will will look to use. They'll just hope never have to to never have to need it because they'll they'll want to beat it at motion to dismiss.

SPEAKER_02 16:05

It's always going to be a stronger argument, uh, in the right case, on Center, uh, because the uh you know, developmental stage company that is trading at an elevated rate because of the promise of future success, and then there's a disappointment, a setback, and the price declines. In that sequence, it's it's hard as a practical matter to sustain a CENTER argument because why would management make misrepresentations if it was always going to come out that what they were not disclosing was invalid? I I it it's it's one of the reasons why these cases are disfavored, because they depend on an argument that somehow management misled about a truth that it was eventually going to come out anyway. And it it it it isn't it isn't persuasive or logical to make that argument in many of these cases. So I think if they can make the Center argument, they always will. But they will always consider this loss causation argument as an alternative in the event that they don't succeed on the Center argument.

SPEAKER_03 17:11

I think as well, in a lot of these cases, um, especially when it's in clinical development, FJ interactions, there's an inherent predictability about the litigation. You know, when we sit down with a CFO or general counsel, we can look at the next 12 to 18 months and identify a lot of the milestone events that could give rise to a litigator to litigation. That gives these companies the opportunity to put risk risk factors in their in their filings, which specifically point to the pivotal data, the FDA interactions, the results that could give rise to a claim here. And it becomes, I think, harder for the plaintiffs to sit there and say, we weren't warned about this when they were warned in black and white in the risk factors in the in the K filings or the S1. So I think that um that that adds to the the defensibility of a lot of these litigation, a lot of this litigation is that the plaintiffs will often have to circumvent the risk factors and the the predictability of this litigation to try and find a cause to beat a motion to dismiss.

SPEAKER_02 18:19

Although you put your finger on a factor that makes these kinds of companies vulnerable to this type of litigation because almost uniquely they have in their go forward plan the recognition of milestone dates where you know the entire value of the company could ride on that milestone date. And so, you know, if it's trading at an elevated rate and they reach that milestone date and the price plunges, you know, that's gonna attract the unwanted attention of the playoffs lawyer. So those those facts I think cut both ways. Uh they both um make them more susceptible to secure litigation and make them uh better able to defend as well for the reasons you pointed out, John.

What Lawsuits Come Next

SPEAKER_01 19:03

So we're talking about the type of case. Speaking of those, what type of case are we likely to see more or less of in the next few years?

SPEAKER_03 19:13

I'll start with that, Kevin, and then and have you. I think that I mean, I think the starting point is that the the historic favorites of the plaintiff's bar are not going to go away. You know, as um whilst they'll look for ways to to improve their their batting average at motion to dismiss, they are they're doing very nicely out of identifying failed studies, safety and efficacy issues both before and after commercialization, interpretation of data for all the reasons that that Kevin and I have talked about, these nothing will change there. Um that it's a fertile ground for them. I think they'll just look for ways to to prosecute these more successfully. Um I think that also, you know, as you growth, um, as then you look at things all change. As you look at a growth in precision medications in rare disease space in biologics, I I suspect you'll see an increased focus on safety and efficacy in these products. Um as you look at cell and gene therapy as some of the complex other complex biologics, there is an increased complexity in manufacturing these in in clinical trials and clinical data and in these emerging areas of science. And so I think that I would expect the plaintiff's bar to focus on more fact-based claims such as manufacturing readiness, supply chain constraints. As you have an increased growth in the importing and exporting of APIs and CGMP compliance, I think these will become more complex in new products. And also I think give an opportunity for more, potentially more sustainable causes of action, because they'll be able to, the plaintiffs will focus the CLC entry on incomplete disclosure. I think the other the other area that that I just would mention here is is going back to July of last year when the FDA announced that it will begin to um publish more decision information denying or delaying approval of drugs. By its nature, this this creates a much greater visibility to the process, to what led to uh a failure to get approval for a drug. And I think that plaintiffs will then be able to compare what the FDA is releasing with any public disclosures that management in the company's made. And I think that will that there's a chance that will give rise to a potentially prosecutable um case for non-disclosure or incomplete or inaccurate disclosure. So I think those are the areas that that struck me as things that are likely to evolve in the coming years.

SPEAKER_02 21:45

Very comprehensive, John. And and I I listened attentively to what you were saying, and I feel like you hit on the key points and some that I hadn't even thought of myself. But one additional one I would add is uh with respect to the use. Of AI in identifying and developing molecules, substances. You know, I don't pretend to know the science of that part, but I do know that with respect to AI generally, not just in the life sciences space, there have already been significant problems and securities class action lawsuits about so-called AI washing, which is the uh statement by companies, uh, the overstatement by companies of their AI-related uh prospects or opportunities. And certainly life sciences companies are not going to be immune to that. I also worry about not overstatement, but understatement of risks. Um among other things, you can identify new molecules, but you still have to uh go through the process of proving that it's safe and efficace, it has efficacy, but you also uh want to be able to show that it's commercially viable. And so uh the the promise of using AI to help uh identify and develop new uh molecules, substances, compounds um must be offset by the risks. Um, you know, I I feel like what that's all going to mean is months, if not years, down the road, but I do think it is um emerging now because uh, you know, just based on stuff that's crossing my desk, I see a lot of companies that are sort of merging uh the industry of life sciences and the adaptation of uh artificial intelligence tools. So I I feel like that's an area that could could change uh the mix um in a number of cases uh to be to be determined. To be determined.

SPEAKER_03 23:47

And I think, you know, probably not not unique life sciences. I think with AI being so new, managing disclosure to both and either overstate or understate the risk is gonna be a big issue. And I think sp especially for a lot of our clients in how AI will be used in clinical trials, how it'll be used to instigate and proceed progress clinical trials quicker, more efficiency, and with better outcomes. And I would imagine for any public company, it's gonna be an enormous challenge to accurately disclose the opportunity and the risks when you're discovering a lot of that as you go along.

SPEAKER_02 24:25

And to compound that in the current environment, there's a big incentive for company management to emphasize their AI capabilities. You know that any stock is going to be seeking to create a buzz. Um, and AI has the power to do that, which I think can draw company management into um cheerleading when perhaps they should be more cautious.

SPEAKER_03 24:49

So probably an increased responsibility on the independent directors to oversee that and and manage manage that that the the way that those disclosures are made. And um, I think in in a lot of cases, entrepreneurial leadership will tend to, you know, and creative leadership will look too overstate. And I think there'll be a a a strong duty on the board of directors to manage, to manage that.

SPEAKER_02 25:16

I think that's always been true of the life sciences space because of the tendency to want to create a big splash. I think there's just an added element of risk because of the AI component.

AI Claims And Disclosure Traps

SPEAKER_02 25:27

Um, pharmaceutical.com becomes pharmaceuticalai.com and they want to promote that, which could have the impact of driving up the share price, which of course sets the stage for the possibility of a later drop if there's disappointing

Key Takeaways And Contact Us

SPEAKER_02 25:42

news.

SPEAKER_01 25:42

Thank you, Kevin and John, for such an insightful conversation today.

SPEAKER_03 25:47

Thank you for inviting me. I do appreciate and Kevin, it's it's always great to hear your thoughts on this, so I really appreciate it.

SPEAKER_02 25:52

Thank you for inviting me as well. It's great fun.

SPEAKER_01 25:55

Thank you to all of our listeners who have joined this podcast today. And if you have any questions at all about litigation for life science companies and any questions about directing and officers' insurance liability, please do get in touch with us.

SPEAKER_00 26:08

Thank you for listening to this episode of Fortune Favors the Brave from Howden. To hear more episodes and subscribe to our channel, search Fortune Favors the Brave on your favorite podcast app.