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Second Circuit Affirms In Part Dismissal Of Securities Claims Against Cancer Drug Developer, Holding Certain Alleged Misstatements Inactionable As Corporate Puffery, But Allows Claims Concerning Other Alleged Misstatements To Proceed
07/21/2020On July 13, 2020, the Second Circuit affirmed in part and vacated in part the dismissal of Exchange Act claims against a pharmaceutical company (the “Company”) and certain individual defendants in connection with alleged misstatements regarding the efficacy of its pancreatic cancer drug, the design of the Company’s clinical trial, and the scientific literature concerning pancreatic cancer. Nguyen v. NewLink, No. 19-642 (2d Cir. July 13, 2020). The Second Circuit held that while some alleged misstatements were inactionable puffery, others were statements of opinion as to which, under the United States Supreme Court’s decision in Omnicare, plaintiffs adequately pled falsity. The Second Circuit also held that plaintiff sufficiently pled loss causation.
Plaintiffs alleged that defendants made material misstatements regarding the efficacy and trial design of the Company’s pancreatic cancer treatment, leading to a stock drop when the Phase 3 clinical trial of the drug failed. The drug had a successful Phase 2 trial, which studied the survival rate or median life expectancy of patients with Stage I or Stage II pancreatic cancer who received the drug as treatment after undergoing a resection to remove pancreatic tumors. The Company followed up with patients for at least 24 months before ending the Phase 2 trial and concluded that those treated with its drug had a survival rate of 24.1 months. In September 2013, when the Company was in the process of enrolling patients in its Phase 3 trial of the drug, the Chief Medical Officer (“CMO”) allegedly made statements (the “September Statement”) at an industry conference referring to the Phase 2 results showing a 24.1-month survival rate as “remarkable.” The CMO further allegedly reported that scientific literature indicated resected pancreatic cancer patients “live 15 months, 19 months,” and that the major U.S.-based studies within the last 30 years indicate that survival rates were “between 15 to 19, 20 months. That’s it.” Plaintiffs alleged that the paper the CMO referenced had also presented survival rates of 24.1 months and 20.6 months. Plaintiffs alleged that defendants made statements during the following three years “that expressed confidence in the Phase 2 trial results,” noting that the data was “encouraging” and that the Phase 2 results “really exceeded any expectation that experts in the field had” and further showed a “very strong efficacy signal” (the “2013-2016 Assessments”).
Plaintiffs further alleged that defendants made misstatements during the Phase 3 clinical trial in responding to the interim publication of results that failed to meet the threshold for FDA approval, allegedly leading to stock drops. The CMO stated that the Company believed that the control arm of their Phase 3 study would not have a median survival rate of “more than low 20s,” adding that, although the survival rate expectations were 18 or 19 months, the study was designed based on an assumed survival rate for the control group in the low 20s (the “March Statement”). The stock prices rebounded after this statement and certain individual defendants sold millions of their holdings. Additional results were released in March 2015 which again did not satisfy the FDA approval threshold, showing a median survival rate of 28.5 months for both the control and test groups blended together. In a July 2015 earnings call, the CMO allegedly reiterated the Company’s belief that the control arm’s survival rate was in the low-20s. Prior to the release of the third wave of interim results, the Company disclosed that a clinical site had not been compliant with Good Clinical Practice requirements in enrollment of patients, but noted that it was a minor issue involving only one clinician (the “Enrollment Statement”). The last of the Phase 3 clinical trial results were released in March 2016, and the Company announced that the trial failed as it showed “a median survival rate of 27.3 months for the test group, which was below the 30.4-month survival rate for the control group.” Plaintiffs then filed an action.
The Second Circuit first considered plaintiffs’ claims that falsity was adequately alleged with respect to the alleged misstatements, including the 2013-2016 Assessments, the September Statement, the March Statement, and the Enrollment Statement. The Court agreed with the district court’s holding that falsity was inadequately pled with respect to the 2013-2016 Assessments, finding that plaintiffs’ theory was “untenable.” The Court noted that such statements constituted “puffery” and as such are “actionable only when the speaker ‘knew that the contrary was true,’” which plaintiffs here failed to sufficiently plead. Furthermore, the Court observed that the fact that the individual defendants sold their stock “reasonably could have been . . . to hedge against the risk of the Phase 3 trial failing, despite their belief that [the drug] showed promise.”
The Court next considered the September Statement. In doing so, the Court discussed its understanding of Omnicare at some length, noting that it established “two principal ways of challenging statements of opinion that do not require plaintiffs to show that the speaker subjectively disbelieved the statement,” including: (i) “plaintiffs can allege that a statement of opinion contained one or more embedded factual statements that can be proven false,” or (ii) “plaintiffs can allege that a statement of opinion, without providing critical context, implied facts that can be proven false,” such that “when a statement of opinion implies facts or the absence of contrary facts, and the speaker knows or reasonably should know of different material facts that were omitted, liability under Rule 10b-5 may follow.” The Court added that “Omnicare held that the appropriate perspective for identifying whether a statement of opinion implies facts is that of the reasonable investor.” Applying these principles to the September Statement, the Court noted that it need not “decide whether the district court’s classification” of that statement as one of opinion, rather than fact, “ran afoul of” the Supreme Court’s Omnicare decision, because the result would be the same either way. The Court determined that a jury could find that the CMO’s statement, “whether characterized as one of fact or opinion, would, absent clarification, lead a reasonable investor to the falsifiable conclusion that no study any knowledgeable person would find credible has shown the median survival rates of resected pancreatic cancer patients to be longer than 20 months.” The Court further held that plaintiffs plausibly alleged falsity based on the major American studies published before the September Statement submitted by plaintiffs that showed survival rates ranging from 25 months to 43 months for resected pancreatic cancer patients. The Court concluded that plaintiffs sufficiently pled that contrary facts omitted by defendants substantially undermined the conclusion that a reasonable investor would reach from the September Statement, which was accordingly misleading and actionable.
The Court next considered the March Statement and similarly concluded that plaintiffs plausibly pled falsity as to part of the statement. The Court found that the statement regarding the Company’s beliefs as to the median survival rate of the control arm was a statement of opinion whereas the statement regarding trial design was a statement of fact. As to the statement of opinion, the Court held that a “jury could find that, by saying [the Company] did not have ‘any reason’ to believe that the control group could be living” at greater than 20 months, the CMO “implied that there were no competing facts on survival rates.” The Court further noted that a reasonable jury could have concluded that “the sheer volume of competing facts required [the CMO] to either speak less confidently about the control group’s survival rate or to disclose the existence of studies showing survival rates above 20 months.” However, with respect to the statement of fact regarding the trial design, the Court held that it was not actionable as plaintiffs’ allegations did not “rebut” the statement that the Company “designed the Phase 3 trial in anticipation of the trial’s control group living ‘in the low 20s,’” adding that plaintiffs’ disagreement with defendants’ methodology for the trial “does not mean the methodology was not in fact selected” as disclosed.
Turning finally to the Enrollment Statement, the Court held that plaintiffs adequately pled both falsity and loss causation. Plaintiffs relied on a confidential witness—a researcher with the Company—who “claimed to have witnessed the enrollment of ineligible individuals and to have raised concerns about the ‘design’ of the Phase 3 trial with [the CMO].” The witness further allegedly stated that the CMO dismissed these concerns and was more focused on meeting enrollment numbers. The Court held that these allegations were “sufficiently particular and plausible” to proceed past the pleading stage. The Court disagreed with the district court’s conclusion that loss causation was not sufficiently pled, finding persuasive plaintiffs’ theory that the Phase 3 failure was attributable to the concealed improper design of the trial and that the failure of the trial therefore constructively disclosed the fraud, leading to a stock drop. The Court agreed with plaintiffs that loss causation was sufficiently pled because “a sufficient number of improper enrollments would naturally and predictably affect a trial’s statistical integrity.”
Accordingly, the Court affirmed the dismissal of plaintiffs’ claims regarding the 2013-2016 Assessments, vacated the dismissal of claims regarding the remaining statements and remanded for further proceedings.
