According to a press release dated April 11, 2005, Cytyc Corporation, a leading women's health company, announced that United States District Judge Nathaniel M. Gorton had dismissed the consolidated federal securities class action lawsuit that had been pending against Cytyc and a current and former officer in the United States District Court for the District of Massachusetts. In dismissing the lawsuit, Judge Gorton accepted and adopted the recommendation of United States Magistrate Judge Marianne B. Bowler that the District Court dismiss the case without prejudice for reasons set forth in her comprehensive, 73-page, decision on defendants' motion to dismiss. Plaintiffs' counsel has confirmed that plaintiffs will not appeal the Court's ruling, and will not file a further amended complaint or take any other action to continue the prosecution of their claims.
The complaint charges that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by issuing a series of materially false and misleading statements to the market between July 25, 2001 to June 25, 2002. Among other things, the complaint alleges that throughout the Class Period Cytyc issued press releases representing that it was enjoying record revenue and earnings growth, increasing the market share of its primary product (ThinPrep), that its revenues would grow by 25% in 2002 over 2001, to 300 million, and that the Company was not negatively impacted, and would not be negatively impacted, by the general economic slowdown that was well underway at the time. These statements were materially false and misleading, according to the complaint, because they failed to disclose that the Company's seemingly-impressive revenue and earnings growth was attributable, in material part, to overstocking of inventory at the laboratories which purchased ThinPrep in large volumes in reaction to deep discounts offered by Cytyc (which recognizes revenue upon shipment). The complaint further alleges that defendants were motivated to commit the alleged securities laws violations in order to pump up the Company's results so that it could use its inflated stock as currency for key corporate acquisitions. On December 3, 2001, Cytyc acquired Pro-Duct Health, Inc. for $167 million in Cytyc common stock and cash and, on February 2, 2002, announced that it has entered a definitive merger agreement to acquire Digene Corporation using Cytyc common stock and cash. At the time of the announcement, the Digene acquisition was valued at $554 million. On April 24, 2002, after the close of trading, Cytyc revealed, in a conference call, that its revenues and earnings for 2002 would be materially less than the market had been led to believe. Instead of revenues between 305 million, the Company stated 2002 sales would be as low as $270 million, and reduced earnings expectations from $0.66 per share to 0.55 per share. According to the Company, the cut was due to inventory reduction by its customers (laboratories), which had overstocked ThinPrep in the first quarter of 2002 and would meet end-user demand from inventory instead of new orders. In response to the announcement, which was contrary to repeated assurances by the Company, the price of Cytyc common stock plummeted by 36.5%, falling from a $24.80 per share close on April 24 to close at $15.73 on April 25, on extremely heavy trading volume. The truth regarding the Company's business, however was still undisclosed, according to the complaint. On June 25, 2002, Cytyc shocked the market by again lowering its expected revenues for 2002 to $230- $245 million and earnings per share to $0.40- $0.44. In a conference call held later that day, Cytyc announced that it was considering switching its revenue recognition model from its current recognition-on-shipment to a system more reflective of end-user demand. In response, Cytyc's stock price plummeted again, this time by 39%, falling from a $11.46 per share close on June 24, to close at $6.88 per share on June 25, on extremely heavy trading volume.