UNITED STATES DISTRICT COURT EASTERN DISTRICT OF PENNSYLVANIA

Transcription

1 GLANCY BINKOW & GOLDBERG LLP Lionel Z. Glancy Michael Goldberg Robert V. Prongay Elaine Chang 1925 Century Park East, Suite 2100 Los Angeles, California Telephone: (310) Facsimile: (310) LAW OFFICES OF HOWARD G. SMITH Howard G. Smith 3070 Bristol Pike, Suite 112 Bensalem, PA Telephone: (215) Facsimile: (215) Attorneys for Plaintiff UNITED STATES DISTRICT COURT EASTERN DISTRICT OF PENNSYLVANIA PLAINTIFF, Individually and on Behalf of All Others Similarly Situated, Case No. DRAFT v. Plaintiff, FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS LANNETT COMPANY, INC., ARTHUR P. BEDROSIAN, and MARTIN P. GALVAN JURY TRIAL DEMANDED Defendants.

2 Plaintiff ( Plaintiff ), by and through his attorneys, alleges the following upon information and belief, except as to those allegations concerning Plaintiff, which are alleged upon personal knowledge. Plaintiff s information and belief is based upon, among other things, his counsel s investigation, which includes without limitation: (a) review and analysis of regulatory filings made by LANNETT COMPANY, INC. ( Lannett or the Company ), with the United States Securities and Exchange Commission ( SEC ); (b) review and analysis of press releases and media reports issued by and disseminated by Lannett; and (c) review of other publicly available information concerning Lannett. NATURE OF THE ACTION AND OVERVIEW 1. This is a class action on behalf of purchasers of Lannett securities between July 11, 2012 and July 16, 2014, inclusive (the Class Period ), seeking to pursue remedies under the Securities Exchange Act of 1934 (the Exchange Act ). 2. Lannett develops, manufactures, packages, markets, and distributes solid oral (tablets and capsules), extended release, topical, and oral solution finished dosage forms of drugs, that address a wide range of therapeutic areas. The Company also manufactures active pharmaceutical ingredients through its Cody Laboratories, Inc. ( Cody Labs ) subsidiary. 3. One of the Company s key products are digoxin tablets, a generic drug. Digoxin tablets are used to treat congestive heart failure in patients of various ages and demographics. 4. On July 16, 2014, the Company revealed that it had received interrogatories and a subpoena from the State of Connecticut Office of the Attorney General regarding an investigation into the pricing of digoxin. According to the subpoena, the Connecticut Attorney General was investigating whether anyone engaged in any activities that resulted in (a) fixing, 1

3 maintaining or controlling prices of digoxin; or (b) allocating and dividing customers or territories relating to the sale of digoxin in violation of Connecticut antitrust law. 5. On this news, shares of Lannett declined $8.05 per share, over 17%, to close on July 16, 2014, at $39.04 per share, on unusually heavy volume. 6. Throughout the Class Period, Defendants made false and/or misleading statements, as well as failed to disclose material adverse facts about the Company s business, operations, and prospects. Specifically, Defendants made false and/or misleading statements and/or failed to disclose: (1) that the Company engaged in improper conduct related to the pricing and sale of digoxin; (2) that anticompetitive pricing tactics could lead to regulatory scrutiny; and (3) that, as a result of the foregoing, the Company s statements were materially false and misleading and/or lacked a reasonable basis at all relevant times. 7. As a result of Defendants wrongful acts and omissions, and the precipitous decline in the market value of the Company s securities, Plaintiff and other Class members have suffered significant losses and damages. JURISDICTION AND VENUE 8. The claims asserted herein arise under Sections 10(b) and 20(a) of the Exchange Act (15 U.S.C. 78j(b) and 78t(a)) and Rule 10b-5 promulgated thereunder by the SEC (17 C.F.R b-5). 9. This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C and Section 27 of the Exchange Act (15 U.S.C. 78aa). 10. Venue is proper in this Judicial District pursuant to 28 U.S.C. 1391(b) and Section 27 of the Exchange Act (15 U.S.C. 78aa(c)). Substantial acts in furtherance of the alleged fraud or the effects of the fraud have occurred in this Judicial District. Many of the acts 2

4 charged herein, including the preparation and dissemination of materially false and/or misleading information, occurred in substantial part in this Judicial District. Additionally, Lannett s principal executive offices are located within this Judicial District. 11. In connection with the acts, transactions, and conduct alleged herein, Defendants directly and indirectly used the means and instrumentalities of interstate commerce, including the United States mail, interstate telephone communications, and the facilities of a national securities exchange. PARTIES 12. Plaintiff, as set forth in the accompanying certification, incorporated by reference herein, purchased Lannett common stock during the Class Period, and suffered damages as a result of the federal securities law violations and false and/or misleading statements and/or material omissions alleged herein. 13. Defendant Lannet is a Delaware corporation with its principal executive offices located at 9000 State Road, Philadelphia, Pennsylvania Defendant Arthur P. Bedrosian ( Bedrosian ) was, at all relevant times, Chief Executive Officer ( CEO ) and a director of Lannett. 15. Defendant Martin P. Galvan ( Galvan ) was, at all relevant times, Chief Financial Officer ( CFO ) of Lannett. 16. Defendants Bedrosian and Galvan are collectively referred to hereinafter as the Individual Defendants. The Individual Defendants, because of their positions with the Company, possessed the power and authority to control the contents of Lannett s reports to the SEC, press releases and presentations to securities analysts, money and portfolio managers and institutional investors, i.e., the market. Each defendant was provided with copies of the 3

5 Company s reports and press releases alleged herein to be misleading prior to, or shortly after, their issuance and had the ability and opportunity to prevent their issuance or cause them to be corrected. Because of their positions and access to material non-public information available to them, each of these defendants knew that the adverse facts specified herein had not been disclosed to, and were being concealed from, the public, and that the positive representations which were being made were then materially false and/or misleading. The Individual Defendants are liable for the false statements pleaded herein, as those statements were each group-published information, the result of the collective actions of the Individual Defendants. SUBSTANTIVE ALLEGATIONS Background 17. Lannett develops, manufactures, packages, markets, and distributes solid oral (tablets and capsules), extended release, topical, and oral solution finished dosage forms of drugs, that address a wide range of therapeutic areas. The Company also manufactures active pharmaceutical ingredients through its Cody Laboratories, Inc. ( Cody Labs ) subsidiary. Materially False and Misleading Statements Issued During the Class Period 18. The Class Period begins on May 8, On this day, the Company issued a press release entitled, Lannett Reports Record Fiscal 2013 Third Quarter Financial Results. Therein, the Company, in relevant part, stated: Lannett Company, Inc. (NYSE MKT: LCI) today reported continued strong momentum, with sharply improved financial results for its fiscal 2013 third quarter ended March 31, 2013, compared with the prior year period. For the fiscal 2013 third quarter, net sales rose significantly to $39.0 million, up 27% from $30.7 million for last year s third quarter. Gross profit increased to $15.2 million from $10.9 million for the fiscal 2012 third quarter. As a percentage of net sales, gross margin increased to 39% from 35% last year. Research and development (R&D) expenses were $5.2 million, compared with 4

6 $2.9 million for the fiscal 2012 third quarter. Selling, general and administrative (SG&A) expenses decreased to $5.2 million, from $5.6 million in the same quarter of the prior year. Operating income nearly doubled to $4.7 million from $2.4 million for the third quarter of fiscal Net income attributable to Lannett Company rose to $3.9 million, or $0.14 per diluted share, from $1.7 million, or $0.06 per diluted share, for the same period last year. Our fiscal 2013 third quarter net sales and net income were the highest in the company s history, said Arthur Bedrosian, president and chief executive officer of Lannett. Our performance reflected continued solid sales from our base products, combined with strong sales of recently approved products. Gross margin percentage increased due to favorable sales mix and price increases, as well as enhanced manufacturing efficiencies related to higher sales volume. With 15 product applications currently pending at the FDA and our ramped up investment in product development, we believe we are well-positioned for continued positive results. For the first nine months of fiscal 2013, net sales increased to $110.9 million from $87.3 million for the corresponding prior year period. Gross profit rose to $42.2 million from $26.9 million last year. R&D expenses were $12.6 million, compared with $7.9 million for the first nine months of fiscal SG&A expenses amounted to $16.6 million, versus $14.8 million for the first nine months of fiscal Operating income more than tripled to $13.1 million from $4.3 million a year ago. Net income attributable to Lannett Company increased to $9.8 million, equal to $0.34 per diluted share, from $2.5 million, or $0.09 per diluted share, for the first nine months of fiscal Net income for the most recent year-to-date period included a favorable litigation settlement of $1.3 million, equal to $0.03 per diluted share. Upward Revised Guidance for Fiscal 2013 Based on Lannett s current outlook, the company revised its financial guidance upward for the full 2013 fiscal year as follows: Net sales of $147 million to $149 million, up from the previous guidance of $140 million to $142 million; Gross margin as a percentage of net sales of approximately 38%, up from 36% to 37%; R&D expense in the range of $16 million to $17 million, down from $17 million to $18 million; SG&A expense ranging from $22 million to $23 million, versus $24 million to $25 million; 5

7 Other income of approximately $2.0 million, essentially equal to the litigation settlement the company reported in the first quarter, and year-todate gains on investments; The full year effective tax rate in the range of 35% to 37%; and Capital expenditures in the range of $7 million to $9 million, versus $10 million to $12 million in the previous guidance. 19. On May 9, 2013, Lannett filed its Quarterly Report with the SEC on Form 10-Q for the 2013 fiscal third quarter. The Company s Form 10-Q was signed by Defendants Bedrosian and Galvan, and reaffirmed the Company s financial results previously announced on May 8, On September 10, 2013, the Company issued a press release entitled, Lannett Reports Record Full Year Net Income For Fiscal Therein, the Company, in relevant part, stated: Lannett Company, Inc. (NYSE MKT: LCI) today reported financial results for its fiscal 2013 fourth quarter and full year ended June 30, For the fiscal 2013 fourth quarter, net sales rose significantly to $40.2 million, up 13% from $35.7 million for last year s fourth quarter. Gross profit increased to $15.2 million from $12.0 million for the fiscal 2012 fourth quarter. As a percentage of net sales, gross margin increased to 38% from 34% last year. Research and development (R&D) expenses decreased to $3.7 million, compared with $4.0 million for the fiscal 2012 fourth quarter. Selling, general and administrative (SG&A) expenses increased to $5.8 million, compared with $5.4 million in the same quarter of the prior year. Operating income more than doubled to $5.7 million from $2.6 million for the fourth quarter of fiscal Net income attributable to Lannett Company rose to $3.6 million, or $0.12 per diluted share, from $1.4 million, or $0.05 per diluted share, for the same period last year. Our full year net income for fiscal 2013 was our highest in the company s history, said Arthur Bedrosian, president and chief executive officer of Lannett. In addition, we reported record net sales for the fourth quarter and full year fiscal Our excellent financial performance was driven by sales growth across all of our key product categories, as well as a higher gross margin percentage due to favorable sales mix, price increases and enhanced manufacturing efficiencies. 6

8 For the fiscal 2013 full year, net sales increased to $151.1 million from $123.0 million for the corresponding prior year. Gross profit rose to $57.4 million from $38.9 million last year. R&D expenses were $16.3 million, compared with $11.8 million for fiscal SG&A expenses amounted to $22.4 million, versus $20.2 million for fiscal Operating income nearly tripled to $18.8 million from $6.9 million a year ago. Net income attributable to Lannett Company increased to $13.3 million, equal to $0.46 per diluted share, which included a favorable litigation settlement of $1.3 million, equal to $0.03 per diluted share. This compares with $3.9 million, or $0.14 per diluted share, for fiscal Bedrosian added, In addition to our record financial performance, we recently completed an important contract extension with Jerome Stevens Pharmaceuticals (JSP). Under the amended agreement, Lannett will continue to be the exclusive distributor of substantially all JSP products for an additional five years, through March This, combined with 15 product applications currently pending at the FDA and our increased investment in product development, will fuel our positive momentum going forward. Guidance for Fiscal 2014 Based on Lannett s current outlook, the company provided financial guidance for the fiscal 2014 full year as follows: Net sales in the range of $181 million to $186 million; Gross margin as a percentage of net sales of approximately 43% to 44%; R&D expense in the range of $24 million to $26 million; SG&A expense ranging from $28 million to $30 million; The full year effective tax rate in the range of 34% to 36%; and, Capital expenditures are expected to be in the range of $28 million to $32 million, which includes the purchase and partial fit-out of a new facility. The company noted that its guidance for fiscal 2014 does not include the impact of shares issued in connection with the JSP contract extension. The Company intends to expense the value of the shares issued, which approximates $20 million, in the fiscal 2014 first quarter. The impact of this transaction would also reduce the effective tax rate by approximately two percentage points. 21. On September 12, 2013, Lannett filed its Annual Report with the SEC on Form 10-K for the 2013 fiscal year. The Company s Form 10-K was signed by Defendants Bedrosian 7

9 and Galvan, and reaffirmed the Company s financial results previously announced on September 10, On November 7, 2013, the Company issued a press release entitled, Lannett Reports Record Net Sales For Fiscal 2014 First Quarter. Therein, the Company, in relevant part, stated: Adjusted EPS of $0.22 Exceeds Expectations; Company Revises Fiscal 2014 Guidance Upward Lannett Company, Inc. (NYSE MKT: LCI) today reported financial results for its fiscal 2014 first quarter ended September 30, For the fiscal 2014 first quarter, net sales rose 30% to $45.8 million from $35.3 million for last year s first quarter. Cost of sales for the fiscal 2014 first quarter included a non-recurring, pre-tax charge of $20.1 million related to the previously announced contract extension with Jerome Stevens Pharmaceuticals, Inc. (JSP) to continue as the exclusive distributor in the United States of three JSP products. Accordingly, gross profit was $1.3 million, or 3% of net sales. Excluding the JSP contract renewal charge, gross profit was $21.4 million, or 47% of net sales, compared with $13.6 million, or 39% of net sales, for the fiscal 2013 first quarter. Research and development (R&D) expenses increased to $4.7 million, compared with $3.8 million for the fiscal 2013 first quarter. Selling, general and administrative (SG&A) expenses increased to $7.2 million, compared with $6.2 million in the same quarter of the prior year. Operating loss for the fiscal 2014 first quarter was $10.6 million. Excluding the JSP contract renewal charge, operating income more than doubled to $9.5 million from $3.7 million in the first quarter of fiscal For the fiscal 2014 first quarter, net loss attributable to Lannett Company was $6.0 million, or $0.20 per share. Adjusted net income, which excludes the impact of the non-recurring JSP contract renewal charge equal to $12.7 million after-tax, was $6.7 million, or $0.22 per diluted share, compared to fiscal 2013 first quarter net income attributable to Lannett Company of $2.9 million, or $0.10 per diluted share. The fiscal 2013 first quarter included a favorable pre-tax litigation settlement of $1.3 million, equal to $0.02 per diluted share. We continued our positive momentum in the fiscal 2014 first quarter with record net sales, said Arthur Bedrosian, president and chief executive officer of Lannett. In addition, excluding the impact of the non-recurring JSP contract renewal charge, our gross profit and bottom-line were the highest in the company s history. Our excellent financial performance was driven by strong sales of existing products, price increases and favorable product mix. 8

10 Bedrosian added, The recently completed contract extension with Jerome Stevens will allow us to continue to market several important medications that have been key drivers of our positive financial performance. Moreover, last month we successfully closed on a stock offering in which we received net proceeds of approximately $71.5 million. We intend to use the net proceeds from this offering for potential acquisitions, strategic partnerships and general corporate purposes. Guidance for Fiscal 2014 Based on Lannett s current outlook, the company revised upward its financial guidance for the fiscal 2014 full year as follows: Net sales in the range of $245 million to $255 million, up approximately 35% from previous guidance of $181 million to $186 million; Gross margin as a percentage of net sales of approximately 57% to 59%, up 15 percentage points from 43% to 44%; R&D expense in the range of $27 million to $29 million, up from $24 million to $26 million; SG&A expense ranging from $35 million to $37 million, up from $28 million to $30 million; The full year effective tax rate to be in the range of 36% to 38%, up from 34% to 36%; Weighted average common shares outstanding for fiscal 2014 to be approximately 35.4 million, the increase reflecting the impact of the recently completed public offering of 4.3 million shares; and, Capital expenditures in fiscal 2014 are expected to be in the range of $28 million to $32 million, unchanged from previous guidance, which includes the purchase and partial fit-out of a new facility. The company noted that its guidance for fiscal 2014 does not include the impact of the JSP contract extension, which resulted in the non-recurring pre-tax charge of $20.1 million recorded in the first quarter of fiscal On November 8, 2013, Lannett filed its Quarterly Report with the SEC on Form 10-Q for the 2014 fiscal first quarter. The Company s Form 10-Q was signed by Defendants 9

11 Bedrosian and Galvan, and reaffirmed the Company s financial results previously announced on November 7, On February 6, 2014, the Company issued a press release entitled, Lannett Reports Record Financial Results For Fiscal 2014 Second Quarter. Therein, the Company, in relevant part, stated: Net Sales of $67 Million, Gross Margin of 61%, EPS of $ All the Highest in Company History; Fiscal 2014 Guidance Revised Upward Lannett Company, Inc. (NYSE: LCI) today reported financial results for its fiscal 2014 second quarter and six months ended December 31, For the fiscal 2014 second quarter, net sales rose 84% to $67.3 million from $36.6 million in last year s second quarter. Gross profit more than tripled to $41.0 million, or 61% of net sales, from $13.4 million, or 37% of net sales, for the fiscal 2013 second quarter. Research and development (R&D) expenses increased to $5.8 million from $3.6 million for the fiscal 2013 second quarter. Selling, general and administrative (SG&A) expenses were $9.9 million, compared with $5.2 million in the same quarter of the prior year. Operating income grew substantially to $25.4 million from $4.7 million for the second quarter of fiscal Net income attributable to Lannett Company grew nearly six-fold to $16.6 million, or $0.46 per diluted share, from $2.9 million, or $0.10 per diluted share. For the fiscal 2014 second quarter, we recorded the highest net sales, gross margin and net income in our company s history, said Arthur Bedrosian, president and chief executive officer of Lannett. Our excellent financial performance was driven by price increases, strong sales of existing products and favorable product mix. The successful recent stock offering and newly established $50 million credit facility provide liquidity to fund our future growth, which includes the development of our deep pipeline as well as potential acquisitions. We continue to believe our company s future is very bright. Bedrosian added, We have now recorded five consecutive quarters of record sales, crossed the billion dollar market cap threshold and, in December, began trading on the New York Stock Exchange. For the first six months of fiscal 2014, net sales rose 57% to $113.2 million from $71.9 million for the first six months of fiscal Cost of sales for the first six months of fiscal 2014 included a non-recurring, pre-tax charge of $20.1 million related to the previously announced contract extension with Jerome Stevens Pharmaceuticals, Inc. (JSP) to continue as the exclusive distributor in the United States of three JSP products. Accordingly, gross profit was $42.3 million, or 37% 10

12 of net sales. Excluding the JSP contract renewal charge, gross profit was $62.4 million, or 55% of net sales, compared with $27.0 million, or 38% of net sales, for the first six months of fiscal R&D expenses increased to $10.5 million, compared with $7.3 million for the fiscal 2013 period. SG&A expenses increased to $17.1 million, compared with $11.3 million in the same period of the prior year. Operating income was $14.7 million. Excluding the JSP contract renewal charge, operating income grew to $34.8 million from $8.4 million in the first half of fiscal For the first six months of fiscal 2014, net income attributable to Lannett Company grew to $10.6 million, or $0.31 per diluted share. Adjusted net income, which excludes the impact of the non-recurring JSP contract renewal charge equal to $12.6 million after-tax, was $23.2 million, or $0.69 per diluted share, compared to net income attributable to Lannett Company of $5.8 million, or $0.20 per diluted share, for the first six months of the prior year. The first six months of fiscal 2013 included a favorable pre-tax litigation settlement of $1.3 million, equal to $0.03 per diluted share. Guidance for Fiscal 2014 Based on Lannett s current outlook, the company revised upward its financial guidance for the fiscal 2014 full year as follows: Net sales in the range of $275 million to $285 million, up approximately 12% from previous guidance of $245 million to $255 million; Gross margin as a percentage of net sales of approximately 61% to 63%, up 4 percentage points from 57% to 59%; R&D expense in the range of $30 million to $32 million, up from $27 million to $29 million; SG&A expense ranging from $39 million to $41 million, up from $35 million to $37 million; The full year effective tax rate to be in the range of 36% to 38%, unchanged from previous guidance; and Capital expenditures in fiscal 2014 in the range of $28 million to $32 million, unchanged from previous guidance, which includes $15 million for the purchase and partial fit-out of two buildings recently acquired by the company. The company noted that its guidance for fiscal 2014 does not include the impact of the JSP contract extension, which resulted in the non-recurring pre-tax charge of $20.1 million recorded in the first quarter of fiscal

13 25. On February 7, 2014, Lannett filed its Quarterly Report with the SEC on Form 10-Q for the 2014 fiscal second quarter. The Company s Form 10-Q was signed by Defendants Bedrosian and Galvan, and reaffirmed the Company s financial results previously announced on February 6, On May 7, 2014, the Company issued a press release entitled, Lannett Reports Record Financial Results For Fiscal 2014 Third Quarter. Therein, the Company, in relevant part, stated: Company Reports Sixth Consecutive Quarter of Record Net Sales Totaling $80 Million; Gross Margin of 70%; EPS of $0.63; Fiscal 2014 Guidance Lowered Lannett Company, Inc. (NYSE: LCI) today reported financial results for its fiscal 2014 third quarter and nine months ended March 31, For the fiscal 2014 third quarter, net sales doubled to $80.0 million from $39.0 million in last year s third quarter. Gross profit more than tripled to $56.1 million, or 70% of net sales, from $15.2 million, or 39% of net sales, for the fiscal 2013 third quarter. Research and development (R&D) expenses increased to $10.6 million from $5.2 million for the fiscal 2013 third quarter. Selling, general and administrative (SG&A) expenses were $9.6 million, compared with $5.2 million in the same quarter of the prior year. Operating income rose substantially to $36.0 million from $4.7 million for the third quarter of fiscal Net income attributable to Lannett Company grew nearly six-fold to $23.0 million, or $0.63 per diluted share, from $3.9 million, or $0.14 per diluted share. The fiscal 2014 third quarter represents the sixth consecutive quarter of record net sales, as well as the ninth consecutive quarter in which net sales and adjusted EPS exceeded the comparable prior-year period, said Arthur Bedrosian, president and chief executive officer of Lannett. Our excellent financial performance was largely driven by price increases across multiple product categories and strong sales of existing products. We are pleased to have recently received approval for Diazepam Oral Solution (Concentrate) and expect our 19 product applications pending at FDA combined with an additional five ANDAs planned for submission by June 30, 2014 to position us well for continued longterm growth. For the first nine months of fiscal 2014, net sales rose 74% to $193.2 million from $110.9 million for the first nine months of fiscal Cost of sales for the first 12

14 nine months of fiscal 2014 included a non-recurring, pre-tax charge of $20.1 million related to the previously announced contract extension with Jerome Stevens Pharmaceuticals, Inc. (JSP) to continue as the exclusive distributor in the United States of three JSP products. Accordingly, gross profit was $98.5 million, or 51% of net sales. Excluding the JSP contract renewal charge, gross profit was $118.6 million, or 61% of net sales, compared with $42.2 million, or 38% of net sales, for the first nine months of fiscal R&D expenses increased to $21.1 million, compared with $12.6 million for the fiscal 2013 period. SG&A expenses increased to $26.6 million, compared with $16.6 million in the same period of the prior year. Operating income was $50.7 million. Excluding the JSP contract renewal charge, operating income grew to $70.8 million from $13.1 million in the first nine months of fiscal For the first nine months of fiscal 2014, net income attributable to Lannett Company grew to $33.6 million, or $0.97 per diluted share. Adjusted net income, which excludes the impact of the non-recurring JSP contract renewal charge equal to $12.6 million after-tax, was $46.2 million, or $1.34 per diluted share, compared to net income attributable to Lannett Company of $9.8 million, or $0.34 per diluted share, for the first nine months of the prior year. The first nine months of fiscal 2013 included a favorable pre-tax litigation settlement of $1.3 million, equal to $0.03 per diluted share. Guidance for Fiscal 2014 The company recently increased prices for certain products. These increases are expected to have the effect of lowering net sales in the fiscal 2014 fourth quarter due to related upfront credits, but result in a significant benefit in fiscal Accordingly, the company revised its fiscal 2014 guidance as follows: Net sales in the range of $261 million to $267 million, down from previous guidance of $275 million to $285 million; Gross margin as a percentage of net sales of approximately 61.5% to 62.5%, revised from 61% to 63%; R&D expense in the range of $30 million to $31 million, revised from $30 million to $32 million; SG&A expense ranging from $38 million to $39 million, revised from $39 million to $41 million; The full year effective tax rate to be in the range of 36% to 38%, unchanged from previous guidance; and Capital expenditures in fiscal 2014 in the range of $24 million to $26 million, down from $28 million to $32 million, which includes $10 13

15 million for the purchase and partial fit-out of two buildings recently acquired by the company. The company noted that its guidance for fiscal 2014 does not include the impact of the JSP contract extension, which resulted in the non-recurring pre-tax charge of $20.1 million recorded in the first quarter of fiscal On May 9, 2014, Lannett filed its Quarterly Report with the SEC on Form 10-Q for the 2014 fiscal third quarter. The Company s Form 10-Q was signed by Defendants Bedrosian and Galvan, and reaffirmed the Company s financial results previously announced on May 7, The statements contained in - were materially false and/or misleading when made because defendants failed to disclose or indicate the following: (1) that the Company engaged in improper conduct related to the pricing and sale of digoxin; (2) that anticompetitive pricing tactics could lead to regulatory scrutiny; and (3) that, as a result of the foregoing, the Company s statements were materially false and misleading and/or lacked a reasonable basis at all relevant times. Disclosures at the End of the Class Period 29. On July 16, 2014, the Company issued a press release entitled, Lannett Receives Inquiry From Connecticut Attorney General. Therein, the Company, in relevant part, stated: Lannett Company, Inc. (NYSE: LCI) today announced that it has received interrogatories and subpoena from the State of Connecticut Office of the Attorney General concerning its investigation into pricing of digoxin. According to the subpoena, the Connecticut Attorney General is investigating whether anyone engaged in any activities that resulted in (a) fixing, maintaining or controlling prices of digoxin or (b) allocating and dividing customers or territories relating to the sale of digoxin in violation of Connecticut antitrust law. The Company maintains that it acted in compliance with all applicable laws and regulations and intends to cooperate with the Connecticut Attorney General s investigation. 30. On this news, shares of Lannett declined $8.05 per share, over 17%, to close on July 16, 2014, at $39.04 per share, on unusually heavy volume. 14

16 CLASS ACTION ALLEGATIONS 31. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil Procedure 23(a) and (b)(3) on behalf of a class, consisting of all those who purchased Lannett s securities between May 8, 2013 and July 16, 2014, inclusive (the Class Period ) and who were damaged thereby (the Class ). Excluded from the Class are Defendants, the officers and directors of the Company, at all relevant times, members of their immediate families and their legal representatives, heirs, successors or assigns and any entity in which Defendants have or had a controlling interest. 32. The members of the Class are so numerous that joinder of all members is impracticable. Throughout the Class Period, Lannett s securities were actively traded on the New York Stock Exchange (the NYSE ). While the exact number of Class members is unknown to Plaintiff at this time and can only be ascertained through appropriate discovery, Plaintiff believes that there are hundreds or thousands of members in the proposed Class. Millions of Lannett shares were traded publicly during the Class Period on the NYSE. As of April 30, 2014, Lannett had 35,570,221 shares of common stock outstanding. Record owners and other members of the Class may be identified from records maintained by Lannett or its transfer agent and may be notified of the pendency of this action by mail, using the form of notice similar to that customarily used in securities class actions. 33. Plaintiff s claims are typical of the claims of the members of the Class as all members of the Class are similarly affected by Defendants wrongful conduct in violation of federal law that is complained of herein. 34. Plaintiff will fairly and adequately protect the interests of the members of the Class and has retained counsel competent and experienced in class and securities litigation. 15

17 35. Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class. Among the questions of law and fact common to the Class are: (a) whether the federal securities laws were violated by Defendants acts as alleged herein; (b) whether statements made by Defendants to the investing public during the Class Period omitted and/or misrepresented material facts about the business, operations, and prospects of Lannett; and (c) to what extent the members of the Class have sustained damages and the proper measure of damages. 36. A class action is superior to all other available methods for the fair and efficient adjudication of this controversy since joinder of all members is impracticable. Furthermore, as the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation makes it impossible for members of the Class to individually redress the wrongs done to them. There will be no difficulty in the management of this action as a class action. UNDISCLOSED ADVERSE FACTS 37. The market for Lannett s securities was open, well-developed and efficient at all relevant times. As a result of these materially false and/or misleading statements, and/or failures to disclose, Lannett s securities traded at artificially inflated prices during the Class Period. Plaintiff and other members of the Class purchased or otherwise acquired Lannett s securities relying upon the integrity of the market price of the Company s securities and market information relating to Lannett, and have been damaged thereby. 16

18 38. During the Class Period, Defendants materially misled the investing public, thereby inflating the price of Lannett s securities, by publicly issuing false and/or misleading statements and/or omitting to disclose material facts necessary to make Defendants statements, as set forth herein, not false and/or misleading. Said statements and omissions were materially false and/or misleading in that they failed to disclose material adverse information and/or misrepresented the truth about Lannett s business, operations, and prospects as alleged herein. 39. At all relevant times, the material misrepresentations and omissions particularized in this Complaint directly or proximately caused or were a substantial contributing cause of the damages sustained by Plaintiff and other members of the Class. As described herein, during the Class Period, Defendants made or caused to be made a series of materially false and/or misleading statements about Lannett s financial well-being and prospects. These material misstatements and/or omissions had the cause and effect of creating in the market an unrealistically positive assessment of the Company and its financial well-being and prospects, thus causing the Company s securities to be overvalued and artificially inflated at all relevant times. Defendants materially false and/or misleading statements during the Class Period resulted in Plaintiff and other members of the Class purchasing the Company s securities at artificially inflated prices, thus causing the damages complained of herein. LOSS CAUSATION 40. Defendants wrongful conduct, as alleged herein, directly and proximately caused the economic loss suffered by Plaintiff and the Class. 41. During the Class Period, Plaintiff and the Class purchased Lannett s securities at artificially inflated prices and were damaged thereby. The price of the Company s securities significantly declined when the misrepresentations made to the market, and/or the information 17

19 alleged herein to have been concealed from the market, and/or the effects thereof, were revealed, causing investors losses. SCIENTER ALLEGATIONS 42. As alleged herein, Defendants acted with scienter in that Defendants knew that the public documents and statements issued or disseminated in the name of the Company were materially false and/or misleading; knew that such statements or documents would be issued or disseminated to the investing public; and knowingly and substantially participated or acquiesced in the issuance or dissemination of such statements or documents as primary violations of the federal securities laws. As set forth elsewhere herein in detail, Defendants, by virtue of their receipt of information reflecting the true facts regarding Lannett, his/her control over, and/or receipt and/or modification of Lannett s allegedly materially misleading misstatements and/or their associations with the Company which made them privy to confidential proprietary information concerning Lannett, participated in the fraudulent scheme alleged herein. APPLICABILITY OF PRESUMPTION OF RELIANCE (FRAUD-ON-THE-MARKET DOCTRINE) 43. The market for Lannett s securities was open, well-developed and efficient at all relevant times. As a result of the materially false and/or misleading statements and/or failures to disclose, Lannett s securities traded at artificially inflated prices during the Class Period. On July 2, 2014, the Company s stock closed at a Class Period high of $51.19 per share. Plaintiff and other members of the Class purchased or otherwise acquired the Company s securities relying upon the integrity of the market price of Lannett s securities and market information relating to Lannett, and have been damaged thereby. 44. During the Class Period, the artificial inflation of Lannett s stock was caused by the material misrepresentations and/or omissions particularized in this Complaint causing the 18

20 damages sustained by Plaintiff and other members of the Class. As described herein, during the Class Period, Defendants made or caused to be made a series of materially false and/or misleading statements about Lannett s business, prospects, and operations. These material misstatements and/or omissions created an unrealistically positive assessment of Lannett and its business, operations, and prospects, thus causing the price of the Company s securities to be artificially inflated at all relevant times, and when disclosed, negatively affected the value of the Company stock. Defendants materially false and/or misleading statements during the Class Period resulted in Plaintiff and other members of the Class purchasing the Company s securities at such artificially inflated prices, and each of them has been damaged as a result. 45. At all relevant times, the market for Lannett s securities was an efficient market for the following reasons, among others: (a) Lannett stock met the requirements for listing, and was listed and actively traded on the NYSE, a highly efficient and automated market; (b) As a regulated issuer, Lannett filed periodic public reports with the SEC and/or the NYSE; (c) Lannett regularly communicated with public investors via established market communication mechanisms, including through regular dissemination of press releases on the national circuits of major newswire services and through other wide-ranging public disclosures, such as communications with the financial press and other similar reporting services; and/or (d) Lannett was followed by securities analysts employed by brokerage firms who wrote reports about the Company, and these reports were distributed to the sales force and 19

21 certain customers of their respective brokerage firms. Each of these reports was publicly available and entered the public marketplace. 46. As a result of the foregoing, the market for Lannett s securities promptly digested current information regarding Lannett from all publicly available sources and reflected such information in Lannett s stock price. Under these circumstances, all purchasers of Lannett s securities during the Class Period suffered similar injury through their purchase of Lannett s securities at artificially inflated prices and a presumption of reliance applies. NO SAFE HARBOR 47. The statutory safe harbor provided for forward-looking statements under certain circumstances does not apply to any of the allegedly false statements pleaded in this Complaint. The statements alleged to be false and misleading herein all relate to then-existing facts and conditions. In addition, to the extent certain of the statements alleged to be false may be characterized as forward looking, they were not identified as forward-looking statements when made and there were no meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the purportedly forward-looking statements. In the alternative, to the extent that the statutory safe harbor is determined to apply to any forward-looking statements pleaded herein, Defendants are liable for those false forwardlooking statements because at the time each of those forward-looking statements was made, the speaker had actual knowledge that the forward-looking statement was materially false or misleading, and/or the forward-looking statement was authorized or approved by an executive officer of Lannett who knew that the statement was false when made. FIRST CLAIM Violation of Section 10(b) of The Exchange Act and Rule 10b-5 Promulgated Thereunder Against All Defendants 20

22 48. Plaintiff repeats and realleges each and every allegation contained above as if fully set forth herein. 49. During the Class Period, Defendants carried out a plan, scheme and course of conduct which was intended to and, throughout the Class Period, did: (i) deceive the investing public, including Plaintiff and other Class members, as alleged herein; and (ii) cause Plaintiff and other members of the Class to purchase Lannett s securities at artificially inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, defendants, and each of them, took the actions set forth herein. 50. Defendants (i) employed devices, schemes, and artifices to defraud; (ii) made untrue statements of material fact and/or omitted to state material facts necessary to make the statements not misleading; and (iii) engaged in acts, practices, and a course of business which operated as a fraud and deceit upon the purchasers of the Company s securities in an effort to maintain artificially high market prices for Lannett s securities in violation of Section 10(b) of the Exchange Act and Rule 10b-5. All Defendants are sued either as primary participants in the wrongful and illegal conduct charged herein or as controlling persons as alleged below. 51. Defendants, individually and in concert, directly and indirectly, by the use, means or instrumentalities of interstate commerce and/or of the mails, engaged and participated in a continuous course of conduct to conceal adverse material information about Lannett s financial well-being and prospects, as specified herein. 52. These defendants employed devices, schemes and artifices to defraud, while in possession of material adverse non-public information and engaged in acts, practices, and a course of conduct as alleged herein in an effort to assure investors of Lannett s value and performance and continued substantial growth, which included the making of, or the 21

23 participation in the making of, untrue statements of material facts and/or omitting to state material facts necessary in order to make the statements made about Lannett and its business operations and future prospects in light of the circumstances under which they were made, not misleading, as set forth more particularly herein, and engaged in transactions, practices and a course of business which operated as a fraud and deceit upon the purchasers of the Company s securities during the Class Period. 53. Each of the Individual Defendants primary liability, and controlling person liability, arises from the following facts: (i) the Individual Defendants were high-level executives and/or directors at the Company during the Class Period and members of the Company s management team or had control thereof; (ii) each of these defendants, by virtue of their responsibilities and activities as a senior officer and/or director of the Company, was privy to and participated in the creation, development and reporting of the Company s internal budgets, plans, projections and/or reports; (iii) each of these defendants enjoyed significant personal contact and familiarity with the other defendants and was advised of, and had access to, other members of the Company s management team, internal reports and other data and information about the Company s finances, operations, and sales at all relevant times; and (iv) each of these defendants was aware of the Company s dissemination of information to the investing public which they knew and/or recklessly disregarded was materially false and misleading. 54. The defendants had actual knowledge of the misrepresentations and/or omissions of material facts set forth herein, or acted with reckless disregard for the truth in that they failed to ascertain and to disclose such facts, even though such facts were available to them. Such defendants material misrepresentations and/or omissions were done knowingly or recklessly and for the purpose and effect of concealing Lannett s financial well-being and prospects from the 22

24 investing public and supporting the artificially inflated price of its securities. As demonstrated by Defendants overstatements and/or misstatements of the Company s business, operations, financial well-being, and prospects throughout the Class Period, Defendants, if they did not have actual knowledge of the misrepresentations and/or omissions alleged, were reckless in failing to obtain such knowledge by deliberately refraining from taking those steps necessary to discover whether those statements were false or misleading. 55. As a result of the dissemination of the materially false and/or misleading information and/or failure to disclose material facts, as set forth above, the market price of Lannett s securities was artificially inflated during the Class Period. In ignorance of the fact that market prices of the Company s securities were artificially inflated, and relying directly or indirectly on the false and misleading statements made by Defendants, or upon the integrity of the market in which the securities trades, and/or in the absence of material adverse information that was known to or recklessly disregarded by Defendants, but not disclosed in public statements by Defendants during the Class Period, Plaintiff and the other members of the Class acquired Lannett s securities during the Class Period at artificially high prices and were damaged thereby. 56. At the time of said misrepresentations and/or omissions, Plaintiff and other members of the Class were ignorant of their falsity, and believed them to be true. Had Plaintiff and the other members of the Class and the marketplace known the truth regarding the problems that Lannett was experiencing, which were not disclosed by Defendants, Plaintiff and other members of the Class would not have purchased or otherwise acquired their Lannett securities, or, if they had acquired such securities during the Class Period, they would not have done so at the artificially inflated prices which they paid. 23

25 57. By virtue of the foregoing, Defendants have violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder. 58. As a direct and proximate result of Defendants wrongful conduct, Plaintiff and the other members of the Class suffered damages in connection with their respective purchases and sales of the Company s securities during the Class Period. SECOND CLAIM Violation of Section 20(a) of The Exchange Act Against the Individual Defendants 59. Plaintiff repeats and realleges each and every allegation contained above as if fully set forth herein. 60. The Individual Defendants acted as controlling persons of Lannett within the meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level positions, and their ownership and contractual rights, participation in and/or awareness of the Company s operations and/or intimate knowledge of the false financial statements filed by the Company with the SEC and disseminated to the investing public, the Individual Defendants had the power to influence and control and did influence and control, directly or indirectly, the decision-making of the Company, including the content and dissemination of the various statements which Plaintiff contends are false and misleading. The Individual Defendants were provided with or had unlimited access to copies of the Company s reports, press releases, public filings and other statements alleged by Plaintiff to be misleading prior to and/or shortly after these statements were issued and had the ability to prevent the issuance of the statements or cause the statements to be corrected. 61. In particular, each of these Defendants had direct and supervisory involvement in the day-to-day operations of the Company and, therefore, is presumed to have had the power to 24