(CN) - Investors in generic drug maker KV Pharmaceutical Company scored a partial victory in the 8th Circuit Court of Appeals, paving the way for them to amend securities fraud claims against the company.
Investors brought a proposed securities fraud action lawsuit in St. Louis District Court in 2009, alleging that the company violated U.S. Food and Drug Administration regulations in relation to the manufacturing, processing, and distribution of drugs from June 15, 2004 to Jan. 23, 2009.
KV allegedly misled the FDA in compliance reports and misled investors by failing to report manufacturing deficiencies which caused the company to sell "adulterated, unapproved, and misbranded drugs in violation of FDA regulations," knowingly since 2003, including the sale of one of the company's top drugs Generic Metoprolol.
Sales of Metoprolol garnered "explosive growth" and high stock prices for KV, but investors say they lost approximately $1.8 billion when the company's stock plummeted from more than $30 to .51 cents on Jan. 26, 2009.
The initial complaint also accused KV of deficiencies regarding Hydromorphone HC1 tablets, PrimaCare One, Histinex HC Syrup, and for causing two wrongful death lawsuits to be filed against the company for the production and sale of oversized morphine tablets.
Investors further alleged that KV manufactured certain drugs with improper ingredients and blended deficient drugs with better quality drugs to cover it up, and continued to do so until a 2009 FDA investigation that led to a shut down of its manufacturing facilities.
The investors' allegations were subsequently dismissed by the district court by Judge Carol E. Jackson.
On appeal, a unanimous three-judge appellate panel reversed the district court's decision, concluding that "the district court abused its discretion in denying the motion to amend the complaint," adding that "the new allegations supported the investors' contention that KV made false and misleading statements during the class period."
Investors contended that KV went against information detailed in a FDA report, referred to as a Form 483, telling the public that the company's manufacturing procedures were in compliance with FDA regulations when they were not.
KV's argument was that the Form 483 was not a final determination of manufacturing irregularities.
In his ruling, Judge Kermit Bye surmised that "there is a substantial likelihood the presence of these factors would be viewed by a reasonable investor as significantly altering the total mix of information made available, irrespective of whether the Form 483 represents the FDA's final say on compliance issues."
In March 2010, Ethex, a former subsidiary of KV, plead guilty to two felony fraud counts and agreed to pay $27 million in fines for failing to report manufacturing problems to the FDA, and KV's former CEO Marc Hermelin later plead guilty to misbranding drugs. He was sentenced to one month in prison and a $1.9 million fine.