NEW YORK, July 2, 2020 /PRNewswire/ — Pomerantz LLP announces that a class action lawsuit has been filed against Co-Diagnostics, Inc. (“Co-Diagnostics” or the “Company”)(NASDAQ: CODX) and certain of its officers. The class action, filed in United States District Court for the District of Utah, Central Division, and indexed under 20-cv-00481, is on behalf of a class consisting of all persons and entities other than Defendants who purchased or otherwise acquired Co-Diagnostics securities between February 25, 2020, and May 15, 2020, both dates inclusive (the “Class Period”), seeking to recover damages caused by Defendants’ violations of the federal securities laws and to pursue remedies under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, against the Company and certain of its top officials.
If you are a shareholder who purchased Co-Diagnostics securities during the class period, you have until August 17, 2020, to ask the Court to appoint you as Lead Plaintiff for the class. A copy of the Complaint can be obtained at www.pomerantzlaw.com. To discuss this action, contact Robert S. Willoughby at [email protected] or 888.476.6529 (or 888.4-POMLAW), toll-free, Ext. 7980. Those who inquire by e-mail are encouraged to include their mailing address, telephone number, and the number of shares purchased.
Co-Diagnostics, Inc., a molecular diagnostics company, intends to manufacture and sell reagents used for diagnostic tests that function via the detection and/or analysis of nucleic acid molecules. It also intends to sell diagnostic equipment from other manufacturers as self-contained lab systems.
The Complaint alleges that Defendants made continual, knowing and willful misstatements about their main product, a COVID-19 diagnostic test, to pump of the price of Co-Diagnostics’ stock while the officers and directors exercised low priced options and dumped their stock into the market. Their fraudulent misstatements, and disregard for the basic scientific principles that make the falsity of their statements clear in retrospect, cost investors to lose millions of dollars.
In the late morning and early afternoon of May 14, 2020, third parties revealed startling information about Co-Diagnostics’ allegedly 100% accurate test.
The Salt Lake Tribune (“Tribune“) reported that TestUtah.com, which used tests developed by Co-Diagnostics, “declined to join other major Utah labs in a joint experiment to confirm one another’s quality.” Moreover, the Tribune revealed that TestUtah’s tests (by Co-Diagnostics) “have a higher ‘limit of detection’ — that is, they require more of the virus to trigger a positive result — than most other coronavirus tests approved for sale in the U.S., according to an analysis by the life sciences publication BioCentury.” This meant that Co-Diagnostics’ tests were likely to have a much higher false-negative reporting rate, meaning that potentially thousands of infected people were inaccurately told that they did not have the disease, an observation that was consistent with earlier concerns about TestUtah’s lower rate of positive test results.
The Tribune article also expressed concern relating to TestNebraska.com and TestIowa.com testing services that also used Co-Diagnostics’ tests.
Also on May 14, 2020, Iowa Governor Kim Reynolds issued a public statement, stating, “I’m pleased to announce that the State Hygienic Lab completed the Test Iowa validation process yesterday, achieving high ratings of 95 percent accuracy for determining positives and 99.7 percent accuracy for determining negatives.” These results did not comport with statements previously made by Co-Diagnostics on May 1, 2020.
In fact, Defendant Brent Satterfield (“Satterfield”), Ph. D., Co-Diagnostics’ Chief Science Officer, himself has recently confessed that the lower positive rates for Co-Diagnostics’ tests “has certainly got all of us scratching our heads a bit,” and that the tests will correctly identify 95% of true positive results—a massive discrepancy from Co-Diagnostics’ representations of 100% accuracy given that the tests are intended to be administered among hundreds of thousands or even millions of people.
Based on the release of third-party information casting serious doubt as to Co-Diagnostics’ bold claims of 100% accuracy, the stock price began to fall, closing the day at $22.13 per share on May 14, 2020, after hitting an intra-day low of $18.35 per share, a greater than 38% decrease in price within hours.
At that point, Co-Diagnostics could have, but did not, revise its claims of 100% test accuracy, given that Co-Diagnostics released earnings and first-quarter 2020 financials to the public after-hours and had a scheduled investor call for the same evening.
Co-Diagnostics reported that it achieved record sales and that the start-up had finally, after nearly seven years, reached profitability. However, it did not address the testing accuracy or sensitivity allegations or correct Defendant Satterfield’s prior statements about tests being 100% accurate.
Rather, the call was described by The Gazette, a Cedar Rapids, Iowa publication covering TestIowa.com, as sounding “more like Thanksgiving with drunk uncles — dogs were barking, people were swearing, and someone was moaning.” The Gazette also noted that “[n]one of Co-Diagnostics or Nomi Health’s news releases about the Logix Smart tests have revealed how many tests have been sold, for how much, and so far all three testing initiatives in Iowa, Nebraska and Utah have been secretive about the tests and the results.”
That same day, the FDA issued a press release about testing accuracy. Another, much larger drug company had created a diagnostic test for COVID-19 that was under increasing public scrutiny for apparent inaccuracy. The FDA announced to the public that “[t]he FDA looks at a variety of sources to identify and understand potential patterns or significant issues with the use of the Abbott test. No diagnostic test will be 100% accurate due to performance characteristics, specimen handling, or user error, which is why it is important to study patterns and identify the cause of suspected false results so any significant issues can be addressed quickly.” (Emphasis added).
Based on the multiple third-party sources revealing serious problems that were known, or should have been known, in advance of May 14, 2020, the stock price further fell to close at $17.07 per share on May 15, 2020, or a decrease of 22.86% from the prior day’s closing price.
By May 20, 2020, a statistician, Zhiyuan Sun, wrote an article specifically about Co-Diagnostics’ allegedly 100% accurate COVID-19 test. Sun explained:
“In May, Co-Diagnostics announced its COVID-19 in vitro test had been found to have 100% accuracy, 100% specificity (likelihood of preventing a false-negative error), and 100% sensitivity (likelihood of preventing a false-positive error), as per independent verification in laboratories across the world.
To start off, Co-Diagnostics came to the conclusion that its test was 100% effective on all three diagnostic dimensions (specificity, accuracy, and sensitivity) based on studies with small sample sizes. For example, laboratory testing of the Logix test kit conducted in Australia involved about 100 COVID-19-positive patients and 100 COVID-19-negative patients. With a sample size that small, a low error rate, say 1% to 2%, could be really hard to detect. In fact, the study itself explicitly stated that the test could in fact be between 96% to 98% effective, rather than 100%.
In addition, the testing environment is by no means indicative of the actual prevalence of COVID-19 in the population at this point in the pandemic. Among the test samples, 50% contained SARS-CoV-2, and obviously, at this point, nowhere near half the people in the world have been exposed to the coronavirus. “But wait a minute!” the intelligent reader might say. “Nothing in the world is perfect, so who cares if a test’s results are off by 1% or 3%? Effectiveness of 97% is still nothing short of an A-plus. You’re just being a devil’s advocate, Zhiyuan!” Unfortunately, this is one of the cases where it is critical to pay attention to the devil in the details. In fact, a 1% or 3% error rate can render a in vitro test almost useless. Here’s why.
Let us assume, for the sake of argument, the true sensitivity of Logix is 98%, and its true specificity is also 98%. In other words, the probability of the test delivering a false positive is 2%, and the probability of the test returning a false negative is also 2%. Both of these values are directly stated as being probable in studies citing Logix’s range of effectiveness, and they are valid assumptions given that the test has not been fully vetted by the FDA or other regulators. It is also common knowledge that because there are not enough viral tests for the COVID-19, the number of people who have the virus is likely to be significantly higher than official figures. For example, it is estimated that up to 4.1% of the residents of Los Angeles County have COVID-19 antibodies. Let’s use that 4.1% figure in our calculations as a measure of prevalence of COVID-19 (a lower prevalence would hurt the test even more). Assuming 1 million people are given the Logix test, 41,000 should test positive for an ongoing SARS-CoV-2 infection. However, if the test provides a false negative 2% of the time, only 98% of those 41,000 — 40,180 — would show up as positives.
On the other hand, out of the 959,000 people who were actually negative for the virus, a 2% error rate would yield 19,180 cases of false positives — individuals who don’t have the disease despite the test saying they do. All told, that makes 59,360 people getting positive results, but only 40,180 of them would actually be positive. That yields a predictive value of 67.7%.
In other words, if the Logix test only works as well as it does in this scenario — and it’s right 98% of the time — there’s still a 1-in-3 chance that the test will indicate you have COVID-19 even though you don’t! As one can see, a 32.3% false-positive error rate isn’t very good at all. This problem gets worse if we assume the same prevalence, but lower Logix’s potential sensitivity and specificity estimates to 95% for both. In this scenario, the probability of getting a false positive increases to 55.2%! While the results are surprising, they nonetheless use the basics of conditional probability; here is a calculator in case you want to try it out for yourself. Furthermore, a recent New York University study on COVID-19 in vitro tests developed by Abbott Laboratories (NYSE:ABT) found them to be widely inaccurate and unacceptable for use in patients. Keep in mind, those tests were also promoted as having 100% sensitivity and 99.9% specificity in earlier investigations. Unfortunately, this just serves to highlight how difficult it is to develop an accurate test for diseases with a low rate of prevalence like COVID-19.”
Co-Diagnostics knew that even a highly accurate test—such as 96%, 98%, or even 99%—was not the same, and not remotely as valuable, as a 100% accurate test. That is because having a 100% accurate test would have significantly distinguished Co-Diagnostics from other, larger, more reputable competitors introducing COVID-19 tests into the marketplace. Additionally, the widespread administration of a COVID-19 test that is even minimally inaccurate can have highly adverse public health consequences. Co-Diagnostics knew this, and so it intentionally issued statements to the public to fend off truthful analysis and scientific skepticism about its supposed miracle test.
The Pomerantz Firm, with offices in New York, Chicago, Los Angeles, and Paris, is acknowledged as one of the premier firms in the areas of corporate, securities, and antitrust class litigation. Founded by the late Abraham L. Pomerantz, known as the dean of the class action bar, the Pomerantz Firm pioneered the field of securities class actions. Today, more than 80 years later, the Pomerantz Firm continues in the tradition he established, fighting for the rights of the victims of securities fraud, breaches of fiduciary duty, and corporate misconduct. The Firm has recovered numerous multimillion-dollar damages awards on behalf of class members. See www.pomerantzlaw.com
Robert S. Willoughby
SOURCE Pomerantz LLP