Inotiv facing shareholder lawsuit over stock drop

Inotiv Inc., a West Lafayette-based pharmaceutical testing company, has seen its stock price soar—and later plunge—following its announcement last fall that it planned to acquire Indianapolis-based Envigo RMS LLC, which breeds and sells animals used in lab testing.

Now, Inotiv is the target of a shareholder lawsuit alleging that the company failed to promptly disclose information about animal welfare concerns at an Envigo dog-breeding facility in Cumberland, Virginia—information that, after its public release, was followed by further drops in Inotiv’s share price.

Inotiv’s share price had been trading in the mid $30s in September. The stock hit an all-time high of $60.66 on Nov. 19, just two weeks after its previously announced acquisition of Envigo was finalized. The stock’s price has dropped precipitously since then, and its closing price has remained below $15 for the past month.

The lawsuit was filed June 23 in U.S. District Court in the Northern District of Indiana. New York City-based The Rosen Law Firm PA is listed as lead counsel for plaintiff Sergio Grobler, an Inotiv shareholder whose place of residence is not identified.

The defendants in the shareholder lawsuit include Inotiv; its president and CEO, Robert Leasure; and its chief financial officer, Beth Taylor.

Neither Leasure nor Taylor responded to emails from IBJ, nor was IBJ able to reach them by phone. IBJ was also unsuccessful in an attempt to reach a spokesperson for the company. As of Tuesday, the case docket did not identify who is representing each of the three defendants.

The plaintiff is asking the court to grant class-action status to the case on behalf of individuals who purchased Inotiv shares from Sept. 21, 2021, to June 13. The first date is when Inotiv announced its plans to acquire Envigo—an announcement that caused Inotiv’s share price to jump. The latter date is when Inotiv announced it planned to close the dog-breeding facility and a separate rodent-breeding facility elsewhere in Virginia. Inotiv’s stock price dropped again following that announcement.

The lawsuit accuses the company of acting “with reckless disregard for the truth” by failing to promptly disclose animal-welfare problems at the dog-breeding facility—problems that arose months before Inotiv announced its acquisition plans.

“Had Plaintiff and the other members of the Class been aware that the market price of Inotiv securities had been artificially and falsely inflated by Defendants’ misleading statements and by the material adverse information which Defendants did not disclose, they would not have purchased Company securities at the artificially inflated prices that they did, or at all,” the lawsuit alleges.

Mark Maddox, a securities attorney and founder of Fishers law firm Maddox Hargett & Caruso PC, said it’s not uncommon for a drop in a stock’s price to trigger shareholder lawsuits. Maddox is not involved with the Inotiv suit.

But based on the broad outlines of this case, he said the shareholder seems to have a viable argument. “If I was going to bet, I’d bet on the side that the plaintiffs are going to win that thing.”

Often, Maddox said, that win takes the form of a settlement. “Usually, these kinds of cases get settled if they’re good cases and the company has the ability to pay money.”

Stock on the rise

Inotiv’s stock, which for decades had been trading below $10 per share, had seen its price climb into the mid-$30s by last September.

On Sept. 21, the day it announced its plans to acquire Envigo in a $545 million cash-and-stock deal, Inotiv’s share price closed at a record $49.93—up from $36.81 the day before.

The spike lasted only a day, but the price then climbed again throughout the fall. On Nov. 5, the day Inotiv announced that the acquisition was complete, the company’s share price closed at $54.72. Inotiv’s share price remained high for two weeks, hitting a new record closing price of $57.88 in mid-November.

Inotiv’s share price sharply declined in the months to follow. During this period, the company announced several other corporate acquisitions, disclosed that it was restating its earnings for its previous three quarters because it had failed to properly account for taxes related to a previous acquisition, and released multiple earnings reports. None of these other events is mentioned in the lawsuit.

Inotiv, which has about 2,100 employees, operated as Bioanalytical Systems Inc. until changing its name in March 2021. Founded in 1974, the company went public in 1997 and has gone through some bumpy times over the years.

For the fiscal year ending Sept. 30, 2021, Inotiv reported profit of $10.9 million on revenue of $89.6 million. But the company posted annual losses for three straight years before that, including a $4.7 million loss on revenue of $60.5 million in 2020. The company went into default with Huntington Bank on its loans and credit facilities in 2016, later hiring Leasure—a turnaround specialist—as CEO in 2019.

Animal welfare concerns

The problems at the Virginia dog-breeding facility are related to alleged violations of the Animal Welfare Act, a federal law that includes regulating the treatment of animals in research and testing.

During a routine inspection of the Virginia facility last July, inspectors found 18 violations of the Animal Welfare Act, including 15 beagles with untreated eye, ear and skin conditions and severe dental disease. Other violations were documented in subsequent inspections, according to a lawsuit the U.S. government filed against Envigo in federal court in the Western District of Virginia on May 19. Envigo is the licensed operator of the facility, even though it is now owned by Inotiv.

“In less than a year, the company has amassed over 60 citations for non-compliance with the AWA, which have affected thousands of beagles,” that lawsuit says. The suit also says the federal government seized from the facility 145 puppies and dogs that veterinarians had determined were “in acute distress.”

The suit also accuses Envigo of employing “a paltry number of employees” at the Virginia facility, and of choosing “to euthanize beagles or allow[ing] beagles to die from malnutrition, treatable and preventable conditions, and injuries resulting from beagles being housed in overcrowded and unsanitary enclosures or enclosures that contain incompatible animals.”

Last week, the federal government and Envigo notified the court that they had reached an agreement in which the Humane Society of the United States would take ownership of the 4,000 beagles at the facility. At its own expense, the Humane Society plans to transport the dogs to animal rescue groups and shelters, which will place the animals for adoption. Envigo is to pay $100 per dog, or $150 per nursing female plus litter, that will be passed along to those animal shelters to help defray the cost of preparing the dogs for adoption.

The shareholder lawsuit alleges that Inotiv did not do enough to publicly disclose the problems at Envigo’s Virginia canine breeding facility.

In its 2021 annual financial report, issued on Dec. 21, Inotiv disclosed that one of Envigo’s U.S. facilities had been inspected by the USDA on multiple occasions since July, and that the USDA had found “noncompliance with certain USDA laws and regulations.” Inotiv also said it was appealing some of the USDA’s findings and that the USDA planned to conduct a formal investigation that could lead to civil and/or criminal penalties, a license suspension or revocation, and other repercussions.

Inotiv included a similar disclosure in its first-quarter 2022 financial report, which was issued May 16. In that disclosure, Inotiv added that it had made “multiple remediations and improvements at the facility.”

In its December and May disclosures, Inotiv did not identify the location of the facility, nor did it detail what the USDA’s reports said.

On May 20, just a few days after issuing its quarterly report, Inotiv made two public disclosures about the Virginia facility: that investigators had raided it on May 18, and that, on the following day, the federal government had filed a civil complaint against Envigo for alleged violations of the Animal Welfare Act. By the end of the following trading day, Inotiv’s stock had dropped to $13.14 per share, down 28% from its previous closing price.

On June 13, Inotiv announced it would close the dog-breeding facility, plus a separate rodent-breeding facility elsewhere in Virginia. The company’s stock price dropped 2% the following day, to close at $12.78 per share.

It closed at $10.39 on Tuesday.•