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District Of New Jersey Dismisses Putative Securities Fraud Class Action Against Pharmaceutical Company For Failure To Allege Falsity Or Scienter
03/28/2023On March 14, 2023, Judge Zahid N. Quraishi of the United States District Court for the District of New Jersey dismissed a putative class action suit against a pharmaceutical company (the “Company”) and its executives alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act. Lewakowski v. Aquestive Therapeutics, Inc. et al., No. 3:21-cv-03751, 2023 WL 2496504 (D.N.J. Mar. 14, 2023). Plaintiffs alleged that defendants misled investors regarding the efficacy of a new drug and the likelihood of approval by the Food and Drug Administration. The Court dismissed the action without prejudice, holding that the complaint “cherry-pick[ed] out-of-context quotes from the Company’s disclosures” and failed to allege falsity or scienter.
The Company developed a new drug that uses an active pharmaceutical ingredient diazepam to treat epileptic cluster seizures. It planned to seek FDA approval through a process of showing that the new drug was equivalent to an existing diazepam-based treatment, and the FDA requested that the Company conduct a “crossover study” (the “Crossover Study”) to compare the absorption of diazepam in patients in real life settings between the existing drug and the new drug prior to filing a new drug application (the “NDA”). The FDA ultimately rejected the NDA after the Crossover Study. Plaintiffs claim that, despite the “troubling” results of the Crossover Study in which 18% of patients reached peak bloodstream diazepam concentrations (half of those who received that result under the existing drug), defendants misled investors through statements reporting on the results of the Crossover Study (such as “[t]he Company reported positive topline data,” and “there were no instances of low or non-responders” to the new drug), and on the likelihood of FDA approval on the new drug (such as “We believe that we’ve met the specific requirements for approval communicated to us by the FDA.”).
The Court held that the complaint failed to allege falsity or scienter with respect to either category. First, the Court held that plaintiffs’ argument regarding the Company’s statements on the Crossover Study results ignored their full context. For example, the statement that “there were no instances of low or non-responders” did not relate to “some undefined ‘low’ concentration of diazepam as compared to” the existing drug, as plaintiffs claimed, but rather a specifically defined term with a measurable blood concentration of diazepam. The Court similarly rejected arguments based on other statements interpreting the Crossover Study topline results because “[i]nterpretations of clinical trial data are considered opinions [and o]pinions are only actionable under the securities laws if they are not believed and lack a reasonable basis.” Because the FDA found that the new drug “achieved comparable absorption rates when compared to” the existing drug, there was nothing to suggest that the announcement of the topline results were not honestly believed and lacked a reasonable basis.
Second, the Court held that statements regarding the future prospects of FDA approval were inactionable forward-looking statements. The Court noted that the Third Circuit had interpreted “forward-looking statements” to include statements that “express the likelihood of approval by a regulatory agency such as the FDA,” and held here that the challenged statements were accompanied by meaningful cautionary language. Specifically, the Court found that defendants disclosed specific risks and warnings that “[e]ven after successful completion of clinical testing . . . there is a risk that the FDA may . . . disagree with our findings,” and that the statements could be characterized as mere puffery. Furthermore, the Court held that “[a]lthough the FDA ultimately determined that [metrics] for certain weight groups were ‘too low,’ the FDA’s difference of opinion in interpreting the data cannot support a securities fraud claim.”
The Court also held that plaintiffs failed to plead facts giving rise to a strong inference of scienter. First, the Court held that there were no motive-and-opportunity allegations. To the contrary, the complaint’s blanket assertions that the Company wanted to maintain an illusion of positive results was improbable under the facts alleged and that the motive allegations of raising capital were “common to every company.” The Court further noted that plaintiffs had not alleged that any of the defendants received a personal benefit through sale of personally held Company stock during the putative class period. Second, the Court held that plaintiffs failed to allege conscious misbehavior or recklessness. The Court specifically noted the lack of any particularized allegations such as internal reports, memoranda, or communications, or any allegations by a confidential witness, to support an inference that defendants were aware that the FDA would reject their application.
Finally, the Court denied defendants’ motion to strike allegations related to two unrelated lawsuits involving the Company and its other drugs that plaintiffs claimed supported their allegation that the Company was motivated by a need to find new growth opportunities. The Court held that the allegations were not so “immaterial as to warrant their being struck” including as to motive for actions for conduct alleged in this action. Accordingly, the Court granted the Company’s motion to dismiss without prejudice and permitted plaintiff to file a Second Amended Complaint within thirty days.
