As Motley Fool analyst Charly Travers once said, "drug fails, get sued." This is the prospect facing Hidden Gems pick Flamel Technologies
The sin that started the class action lawyers flocking to Flamel was a failed study of Flamel's lead drug, Coreg CR. Coreg CR is marketed by partner GlaxoSmithKline
As any investor following the biopharma sector long enough will notice, any development-stage drugmaker with a lead compound that fails an important clinical study or experiences an unsuccessful regulatory review will find the class action shareholder lawsuits coming its way:
- Shareholder suit against Dendreon
(NASDAQ:DNDN)after an unfavorable FDA review, check.
- FDA turns down Encysive Pharmaceuticals'
(NASDAQ:ENCY)lead drug, shareholder suit, check.
- Unfavorable advisory panel review, shareholder class action suit against GPC Biotech
- Negative trial results for Northfield Laboratories'
(NASDAQ:NFLD)lead drug, shareholder lawsuits, check.
You get the picture.
Drugmakers operate in a system where data must be withheld until it can be released at a scientific meeting (if study data is revealed before a conference, the company's presentation won't be accepted). Also, drugmakers almost always keep quiet on the exact nature of the correspondence with regulators like the FDA until a marketing decision on the drugs is made.
As long as these two conditions are in place, and drugmakers operate in an environment shrouded in secrecy, there will always be class action shareholder lawsuits when something goes wrong and share prices sink. For better or worse, it's just part of doing business as a publicly traded drugmaker.
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