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Forward-Looking Statement Disclosures Have Never Been More Important for Medtech Companies

How can public medical device and diagnostics companies protect themselves in an environment that is ripe for securities fraud claims and class action lawsuits?

The U.S. Securities and Exchange Commission's Division of Corporation Finance said it is monitoring how companies are reporting the effects and risks of COVID-19 on their businesses, financial condition, and results of operations. The division also provided guidance for companies that addresses forward-looking statement disclosures.

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Executives at public medtech companies won't soon forget the current earnings season. At a time of year when companies typically offer investors insight regarding annual revenue projections, the global pandemic has made such forecasting all but impossible to do.

A lot of medtech companies – including Boston Scientific, Zimmer Biomet, NuVasive, and Endologix – have opted to withdraw revenue guidance this year, while other companies have tried to adjust their earnings forecast as conservatively as possible based on current knowledge and expectations. Unfortunately, this may be a "damned if you do, damned if you don't" situation when plaintiffs' firms go fishing for stock-drop cases.

Theresa Bevilacqua, a partner at the international law firm Dorsey & Whitney and chair of its Minneapolis Trial Group, told MD+DI that she hasn't seen a lot of lawsuits yet on the securities front as it would relate to COVID-specific claims, but she is anticipating a rise in those types of cases based on what has happened during past economic downturns like 2008, 9-11, and the dot-com bubble. Securities laws are set up to provide right of action for fraud in connection with the purchase or sale of a security, she said, and usually that's based on material misinformation given by publicly traded company with respect to its quarterly financial statements and earnings calls.

"Anytime you have widespread market volatility like you have now, it puts publicly traded companies and investors at a risk for those types of claims," Bevilacqua said.

One thing that could potentially play a role in future securities litigation is how well companies follow new guidance that the U.S. Securities and Exchange Commission (SEC) released March 25. The guidance addresses disclosure and other securities law obligations that companies should consider with respect to COVID-19 and related business/market disruptions. What the guidance makes clear, Bevilacqua says, is that the SEC does not want it to be business as usual during these earnings calls.

"They want these calls and these statements to be different from what you would normally do," she said.

So, normally companies would compare their first-quarter 2019 results with first-quarter 2020 results and use both of those as a basis for projecting second-quarter results and beyond. But for most companies, that formula just isn't relevant in the current environment.

"So, the historical information that you would normally convey and use as a basis to project out into the future isn't relevant or helpful," Bevilacqua said. "What companies should focus on, and what I think companies are doing, is conveying as accurately as possible a snapshot of the current operating status, the current financial picture of the company, and the company's existing plans for mitigating COVID risk going forward."

According to the SEC's Division of Corporation Finance, companies should tailor their disclosure and provide material information about the impact of COVID-19 to investors and market participants.

"We also encourage companies to provide disclosures that allow investors to evaluate the current and expected impact of COVID-19 through the eyes of management, and that companies proactively revise and update disclosures as facts and circumstances change," the guidance states.

The agency stressed the importance of providing robust disclosures regarding forward-looking statements, which isn't necessarily new. Forward-looking statements are and always have been protected from fraud claims so long as they meet certain requirements, Bevilacqua said.

"But where I think there's at least a potential for additional litigation is companies who are trying to apply the guidance given by the SEC, but also trying to balance all of the other risks that they have, like their employee base, public health, employee health, and also shareholder value," she said.

Her advice for public companies is to do what is most prudent and accurate for their specific company, because that can mean different things to different companies. The most prudent approach for a young medtech company in the public sector isn't necessarily the best approach for a more established medical device company. If financial projections are shared publicly, Bevilacqua said, it makes sense to be as conservative as possible with those projections.

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