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Washtenaw County Employees' Retirement System v. Walgreen Co.

United States District Court, N.D. Illinois, Eastern Division

September 23, 2019

WASHTENAW COUNTY EMPLOYEES’ RETIREMENT SYSTEM, Individually and on Behalf of All Others Similarly Situated, Plaintiffs,
v.
WALGREEN CO., GREGORY D. WASSON, and WADE MIQUELON, Defendants.

          MEMORANDUM OPINION AND ORDER

          SHARON JOHNSON COLEMAN, UNITED STATES DISTRICT COURT JUDGE

         Industriens Pensionforsikring, A/S, as lead plaintiff, [1] brings this shareholder class action lawsuit against defendants Walgreen Co. (“Walgreens”), former Walgreens Chief Executive Officer (“CEO”) Gregory D. Wasson, and former Walgreens Chief Financial Officer (“CFO”) Wade Miquelon for violations of the Securities Exchange Act of 1934. Defendants have moved to dismiss plaintiff’s first amended class action complaint under Federal Rule of Civil Procedure 12(b)(6). For the following reasons, the Court grants in part and denies in part defendants’ motion.

         Background

         Walgreens is a retail drugstore chain, which sells prescription and non-prescription drugs. Prescription drugs represent Walgreens’ largest class of products and are the lead driver of its revenue and profit. The majority of prescription drugs sold by Walgreens are generic drugs. Generic drugs generate a higher profit margin than branded drugs due to their lower production costs. That profit margin is dependent on the difference between the cost to procure the generic drug and the reimbursement rate Walgreens receives for supplying a customer with the drug. Historically, generic drug prices have followed a deflationary trend, but starting in 2014 that trend reversed. At that time, Walgreens had contracted with several major Pharmacy Benefit Managers (“PBMs”) to provide fixed maximum rates of reimbursement for each drug over the term of the contract based on the assumption that generic drug prices would continue to decline. If those prices rose, Walgreens would be forced to absorb the additional cost of those drugs beyond the contractually-capped rate of reimbursement.

         To give context to plaintiff’s securities fraud claims, Walgreens announced that it was entering into a merger with Alliance Boots GmbH (“Alliance”) in June 2012. As part of this transaction, Walgreens set forth long-range goals for fiscal year 2016 (“FY16”) reflecting the expected benefits of the new partnership, including generating $1 billion in combined synergies and between $9 and $9.5 billion in adjusted earnings before interest and taxes (“EBIT”). In late 2013, Walgreens’ internal long-range planning process revealed that the FY16 EBIT goal was tracking under $8.5 billion. Miquelon, in a state court complaint filed in a separate lawsuit, admitted that by the end of 2013, Walgreens had identified the sources of that deficit as: (1) the unprecedented level of generic drug price inflation; and (2) reimbursement contracts that failed to provide meaningful inflationary relief. Walgreens nonetheless restated the FY16 EBIT goal of $9 to $9.5 billion when it reported its first quarter results in 2014. By March 2014, defendants determined that Walgreens had a FY16 earnings shortfall of well over $1 billion. This additional shortfall, along with the $500 to $600 million shortfall the company knew about in late 2013, increased the aggregate shortfall to $2 billion less than the high end of the FY16 EBIT goal.

         The class period, which runs from March to August 2014, encompasses the announcement of Walgreens second quarter and third quarter results, as well as public statements made in the interim. At that time, defendants continued to make statements that downplayed the risk of not achieving the FY16 EBIT goal. Miquelon’s state court complaint, however, states that by March 2014 when Walgreens issued its second quarter results, the company was well aware of the systematic inflation of generic drug prices.

         In April 2014, Miquelon shared an interim long-range planning update with Walgreens’ Board of Directors that stated Walgreens would realize $7.5 billion in EBIT in 2016. Also in April, activist investors began to push aggressively for Walgreens to execute a tax inversion (by moving the company overseas) and expressed a desire that the Alliance management team take on a greater leadership role in the combined companies leading to speculation that Wasson was losing control of the company. In May 2014, Wasson told Miquelon that if Walgreens did not proceed with the tax inversion, he believed that the activist investors would force him out of his position.

         Miquelon finalized his estimate by June 2014 and determined that the FY16 EBIT goal was tracking at $7.2 to $7.5 billion. Miquelon informed Wasson of the scope of the shortfall in mid-June and advocated for publicly withdrawing the FY16 EBIT goal during the next quarterly call on June 24. Wasson wanted to delay the scheduled earnings announcement so that the withdrawal of the EBIT goal could be bundled with the favorable news concerning the merger with Alliance, including that Walgreens might complete a tax inversion resulting in a significantly lower corporate tax rate.

         Walgreens held an earnings conference call on June 24 withdrawing its FY16 earnings target attributing the decision to “Step 2 considerations” and “current business performance.” Although Walgreens withdrew its FY16 earnings target, it did not disclose that the shortfall would be $1.8 to $2.3 billion less than the original target. Walgreens also mentioned generic drug price inflation and reimbursement pressures at the conference call, although its statements could be taken as downplaying the actual significance of those trends.

         On August 6, 2014, Walgreens held an investor call regarding the merger with Alliance. During the call, Walgreens disclosed the actual extent of the resulting earnings shortfall announcing the new FY16 EBIT target as $7.2 billion-well below the original estimated $9 to $9.5 billion goal. Walgreens attributed this shortfall to “rapid and pronounced generic drug cost inflation” and unfavorable contract terms with PBMs. After this August 6 disclosure, Walgreens stock dropped 14.3% in a single day. This litigation followed.

         Plaintiff initially sought to pursue a number of claims, which the Court narrowed in its September 2016 motion to dismiss ruling. Although the Court presumes familiarity with its ruling, a short recap is in order. The alleged misrepresentations that survived Walgreens’ initial motion to dismiss concern statements where defendants purportedly concealed or failed to fully disclose the impact of generic drug price inflation and reimbursement pressures. More specifically, plaintiff sufficiently alleged the following non-forward looking statements under Rule 9(b)’s particularity requirements: (1) Miquelon’s statement during a March 25, 2014, investor conference call about the second quarter report that “the most significant factor affecting the pharmacy margin was dramatically slower rate of new generic introductions year over year;” (2) Walgreens statement made in its March 27, 2014 Form 10-Q filed with the Securities and Exchange Commission (“SEC”) that “[r]etail pharmacy margins were negatively impacted by a significant reduction in the number of brand to generic drug conversions and lower market driven reimbursements;” and (3) Wasson’s April 17, 2014 conference call with J.P. Morgan in which the resulting report stated “management noted that it is seeing nothing unusual at this point” with respect to reimbursement pressures. Plaintiff’s allegations concerning the forward-looking statements related to the FY16 EBIT goal of $9.0 to $9.5 million did not survive defendants’ initial motion to dismiss.

         On September 28, 2018, the SEC issued an administrative cease-and-desist order against Walgreens, Wasson, and Miquelon under § 17(a)(2) of the Securities Act of 1933. The SEC found defendants “acted negligently in failing to adequately disclose to investors the material increase in risk to the company’s ability to achieve the FY16 EBIT Goal.” Without admitting or denying the findings, Walgreens, Wasson, and Miquelon consented to the entry of the SEC cease-and-desist order. The SEC also required Walgreens to pay a $34.5 million penalty, and Wasson and Miquelon to each pay a $160, 000 penalty.

         Legal Standard

         A motion to dismiss pursuant to Rule 12(b)(6) for failure to state a claim tests the sufficiency of the complaint, not its merits. See Camasta v. Jos. A. Bank Clothiers, Inc., 761 F.3d 732, 736 (7th Cir. 2014). When considering dismissal of a complaint, the Court accepts all well pleaded factual allegations as true and draws all reasonable inferences in favor of the plaintiff. Erickson v. Pardus, 551 U.S. 89, 94, 127 S.Ct. 2197, 167 L.Ed.2d 1081 (2007) (per curiam); Trujillo v. Rockledge Furniture LLC, 926 F.3d 395, 397 (7th Cir. 2019). To survive a motion to dismiss, plaintiff must “state a claim for relief that is plausible on its face.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007).

         Rule 9(b) requires plaintiffs to plead with particularity the circumstances constituting fraud. Cornielsen v. Infinium Capital Mgmt., LLC, 916 F.3d 589, 598 (7th Cir. 2019); Fed.R.Civ.P. 9(b). Particularity in pleading fraud, including securities fraud, means describing the who, what, when, where, and how of the fraud. Cornielsen, 916 F.3d at 598; DiLeo v. Ernst & Young, 901 F.2d 624, 627 (7th Cir. 1990).

         Discussion

         To adequately plead defendants made material misrepresentations or omissions in violation of § 10(b) and Rule 10b-5 of the ’34 Act, plaintiff must allege “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Stoneridge Inv. Partners, LLC v. Scientific-Atlanta,552 U.S. 148, 157, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008). Information is material if there is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” Basic Inc. v. Levinson, 485 U.S. 224, 231-32, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988) (citation omitted). Scienter is defined ...


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