Putative Securities Class Action Dismissed Against Biopharmaceutical Company Where Statements Regarding Clinical Trials Were Not Actionable And Plaintiffs Failed To Plead Scienter
On October 26, 2018, Judge Thomas D. Schroeder of the United States District Court for the Middle District of North Carolina dismissed a putative class action brought against a biopharmaceutical company (the “Company”) and certain of its officers and directors under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Hirtenstein v. Cempra, Inc., No. 16-cv-1303 (M.D.N.C. Oct. 26, 2018). Plaintiffs sought to recover for alleged stock losses occurring after the Company allegedly failed to disclose risks associated with an experimental antibiotic used to treat pneumonia. The Court dismissed the action, finding that the challenged statements about the drug’s safety constituted opinions and plaintiffs’ allegations of motive were insufficient to establish a strong inference of scienter.
The Company develops antibiotics to treat infectious diseases, and was working on developing and releasing solithromycin, a drug for community-acquired bacterial pneumonia (“CABP”). Plaintiffs alleged the Company’s stock price declined when the Food and Drug Administration (“FDA”) published a report disclosing patterns of liver injury connected to the drug, and an FDA advisory committee concluded that the Company failed to adequately characterize the risk of liver injury or toxicity. Plaintiffs alleged, inter alia, that the Company made false and misleading statements regarding solithromycin’s safety profile in certain clinical trials and the differentiation of solithromycin from Ketek, another drug with adverse side effects.
The Court found that certain statements made by the Company’s then-CEO about interpretations of clinical studies and the drug’s safety were opinions and that plaintiffs failed to sufficiently allege that the former CEO lacked sincerely held optimistic beliefs about the trials at the time. The Court also held that the former CEO did not lack an objective basis for her opinions, noting that the Phase 3 trial about which the allegedly misleading statements were made had met their primary end points and the overall safety profile of the drug was open to debate. The Court also held that other statements by the former CEO were too vague to be actionable. As to other statements, the Court held that the Company disclosed the underlying trial data, and otherwise took a different view than the FDA as to how that data should be interpreted.
The Court also held that plaintiffs failed to allege facts sufficient to give rise to a strong inference of scienter. The Court first rejected allegations of fraudulent intent based on a desire to increase the Company’s value ahead of stock sales, observing that “[e]very for-profit company is motivated by financial gain in our free enterprise system” and noting that plaintiffs failed to allege anything different. The Court also held that the former-CEO’s subsequent termination failed to support a strong inference of scienter because plaintiffs did not allege her termination had anything to do with the FDA’s conclusions that the Company failed to adequately characterize liver injury risks.
The Court next rejected plaintiffs’ argument that scienter could be inferred from defendants’ recklessness. According to the Court, the key inquiry was whether defendants were sufficiently reckless with adverse information to give rise to a strong inference of scienter. Observing that “the ‘[r]eckless conduct sufficient to establish a strong inference of scienter’ must be ‘severe,’” the Court concluded that plaintiffs failed to allege plausibly that defendants knew that certain facts would prevent the regulatory approval or marketing of solithromycin. It also noted that the Company made important parts of the trial results publicly available through two scientific articles published in peer-reviewed medical journals and made disclosures in press releases and its Form 8-K filed with the SEC.