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Law360 (May 21, 2020, 5:57 PM EDT ) An investor in Indiana-based Elanco Animal Health Inc. filed suit against the company Wednesday alleging it warned that the COVID-19 pandemic could cause revenue declines but said nothing of inventory backlogs caused by a distributor consolidation.
The proposed class action in Indiana federal court takes issue with a 13% price drop in Elanco shares on May 7 that came after the company said that revenue had declined 9% in the first quarter of 2020 "due to a reduction of approximately $60 million in channel inventory driven by factors resulting from the COVID-19 pandemic."
According to plaintiff Sandra Hunter, Elanco hadn't disclosed until that point that after consolidating its distributors from eight to four earlier in 2020, it had to increase the amount of inventory each distributor held. And when those distributors didn't experience enough demand for their greater inventory, Elanco had to cut its channel inventory, the suit claims.
"As a result of the foregoing, defendants' positive statements about the company's business, operations, and prospects, were materially misleading and/or lacked a reasonable basis," the suit says. "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."
The suit proposes a class period that starts on Jan. 10, when the animal health company announced its financial guidance for the upcoming year and reported an expected revenue range of $3.05 billion and $3.11 billion with earnings per share of $0.04 to $0.16.
Hunter's complaint asserts that in late February, Elanco filed its annual report for 2019 and noted that the market share for its line of companion animal products could be hindered by "changes within existing distribution channels." Then on March 24, the company said it would withdraw its previously announced revenue and earnings per share guidance in light of the COVID-19 pandemic.
"The manufacturing plants and R&D labs are operational, and the company is closely monitoring distribution logistics," the March statement said. "At this time, Elanco has not experienced any supply disruption and critical projects in the pipeline continue to advance."
According to Hunter, those statements were all materially false or misleading because they failed to disclose that Elanco's consolidation from eight distributors to four had led it to increase the amount of inventory — including companion animal products, the suit emphasizes — each distributor held. Those statements also failed to disclose that the distributors were not experiencing enough demand to sell through their inventory, that Elanco's revenue was thus likely to decline and that it would have to reduce its channel inventory for companion animal products, Hunter said.
On May 7, the company announced its first-quarter 2020 sales and reported revenue of $657.7 million and earnings per share of minus $0.12, attributing a 9% decline in revenue to a $60 million reduction in channel inventory resulting from the pandemic and disappointing "distributor performance." The company's share price fell $3.05, or 13%, by the close of trading that day, the complaint says.
"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," Hunter alleges.
Elanco did not immediately respond to a request for comment Thursday, and counsel for Hunter declined to comment.
Hunter is represented by Offer Korin of Katz Korin Cunningham, Robert V. Prongay, Charles H. Linehan and Pavithra Rajesh of Glancy Prongay & Murray LLP and Frank R. Cruz of the Law Offices of Frank R. Cruz.
Counsel information for Elanco was not immediately available.
The case is Hunter v. Elanco Animal Health Inc. et al., case number 1:20-cv-01460, in the U.S. District Court for the Southern District of Indiana.
--Editing by Daniel King.
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