News surfaced on February 11, 2013 that AMAG Pharmaceuticals (NASDAQ: AMAG) could be in trouble, following an announcement by Branham Law, LLP that it is investigating AMAG and certain of its officers and directors for potential breaches of fiduciary duties. This is in connection with AMAG’s apparent failure to disclose that users of the Company’s primary drug, Feraheme, have suffered adverse reactions, including hospitalizations and one possible death. This development is the outcome of the US First Circuit Court of Appeals reversing the district court’s dismissal of the claims above, which means the suit has been reinstated. We’ll briefly examine how this suit could affect AMAG’s stock.
The drug in question, Feraheme, is the company’s primary drug, so it cannot be overstressed that this drug contributes the largest revenue of all its products. Expect sales of this drug to drop significantly since this issue has surfaced again. This means that company revenue is bound to drop. In addition, look for sales of other products of AMAG to drop. This is because customers’ trust will decrease. The reasoning will be; if Feraheme has side effects that could lead to death, this one could have, too. That’s the first effect that this suit will have on AMAG. There is no report yet to confirm this, but it is next to certain that this will reflect in its next earnings report.
Lawsuits are never friendly to stocks. So investors should expect that this suit will bear weight on AMAG stock. Here is an illustration so you can understand better. When these claims were first made public in 2010, AMAG stock plummeted significantly. Around that period, AMAG was trading in the range of $40 per share. This issue is one of the reasons the company’s stock is where it is today. While AMAG may have to deal with the potential fallout that the suit brings, it may also need to deal with plummeting stock. At the time of writing this piece, stock price seems to be stable at about $16 per share. I find it difficult to believe that it will remain this stable when hearings begin on this suit.
One company that has suffered as a result of litigation is Chevron Corporation (NYSE: CVX) in its case with Ecuador. The suit started in 1993 and is still ongoing. Lawyers representing Ecuador filed a case against Texaco, now a subsidiary of Chevron, which sought to force Texaco to clean up Lago Agrio oil field in the Ecuadorean province of Sucumbíos. Chevron has since been ordered to make reparation of over $18 billion. Odds are not in the company’s favor and Chevron will likely end up losing major assets. The lawsuit is weighing heavily on the long-term value of Chevron.
The only way that AMAG can survive this is by settling out of court. More revelations will only cause more damage. There is little hope that AMAG will be able to silence the case. It has done so once and it may not be able to do so again. Litigation is never pretty for any of the parties involved. It will be interesting to see how this turns out.