A Plaintiff’s Law Firm Hits a Hot Biotech That Has a New Drug

Gerneth v. Chiasma Inc.

Case #1:16-cv-11082

① The Prologue

(Bloomberg Businessweek) -- There once was firm called Lerach Coughlin Stoia Geller Rudman & Robbins. Its leader, Bill Lerach, terrorized corporations by suing them whenever their stock suddenly dropped, and then extracting a settlement from them to make him go away. In 2008, Lerach went to prison for paying kickbacks to people who agreed to be plaintiffs in his suits, and the firm was renamed Robbins Geller Rudman & Dowd. If the recent case Gerneth v. Chiasma is any indication, it hasn’t changed its ways.

② The Origin

Biotech company Chiasma has been developing Mycapssa, a niche drug for a terrible disease, acromegaly, that results from excessive growth hormone. On June 15, 2015, the company filed a new drug application for the oral treatment with the U.S. Food and Drug Administration. The next month, Chiasma went public at $16 a share, raising $100 million. By early September of that year, the stock had reached $28. But in April 2016 the FDA concluded that the Phase III trial for Mycapssa was faulty; it hadn’t compared the results from patients taking the drug to those on a placebo. The stock fell. Robbins Geller rustled up a lead plaintiff and sued.

③ The Case

Robbins Geller argued that early shareholders bought Chiasma stock believing the Mycapssa application was strong enough to gain approval. The company said its IPO prospectus was full of cautions, noting how few drugs the FDA approves and raising the possibility that Mycapssa could be rejected entirely. When a federal judge refused to toss the case in February 2018, a settlement became inevitable. (Neither party responded to requests for comment.)

④ The Settlement

On Feb. 27, Chiasma agreed to pay an $18.75 million settlement. The agreement stipulated that it had done nothing wrong and just wanted to put the litigation behind it. Sound familiar? It also says the lawyers will be paid out of the $18.75 million. That’s good news for Chiasma, which doesn’t have to pay the plaintiffs’ legal fees, but not so good for the plaintiffs themselves.
 
—Nocera is a business columnist for Bloomberg Opinion.

To contact the editor responsible for this story: Jillian Goodman at jgoodman74@bloomberg.net

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