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Southern District Of California Denies Motion To Dismiss Securities Fraud Claims Against Pharmaceutical Company, Holding Plaintiff Adequately Pled Material Misstatements And Scienter
08/19/2021On August 4, 2021, Judge Marilyn L. Huff of the United States District Court for the Southern District of California denied a motion to dismiss a putative class action lawsuit against a biopharmaceutical company (the “Company”) and certain of its officers for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Kendall v. Odonate Therapeutics, Inc., et al., No. 3:20-cv-01828-H-LL (S.D. Cal. Aug. 4, 2021). The Court held that plaintiff’s Second Amended Complaint (the “SAC”) adequately alleged material misstatements and omissions by defendants concerning the efficacy and safety of the Company’s flagship cancer drug (tesetaxel) during the course of a Phase 3 clinical trial, and further held that plaintiff adequately alleged scienter.
According to the SAC, in December 2017, the Company announced the initiation of a Phase 3 clinical trial of tesetaxel, an orally administered chemotherapy agent to treat patients with locally advanced or metastatic breast cancer. The Company filed for its initial public offering later that month and allegedly represented in its registration statement that the Phase 3 trial was designed to evaluate whether tesetaxel plus a reduced dose of an existing approved cancer drug resulted in improved outcomes with manageable toxicity and favorable quality-of-life compared to the approved dose of the existing drug alone. Plaintiff—relying on alleged statements of five confidential witnesses—alleged that defendants became aware of adverse reactions by participants during the course of the trial but failed to publicly disclose that information. Specifically, plaintiff alleged that in August 2018, the Phase 3 trial clinical sites were reporting to the Company that they were experiencing a higher-than-expected rate of neutropenia, an abnormally low number of white blood cells in the blood in patients, and that as a result “many patients” were withdrawing from the trial. In response to that development, the Company’s chief medical officer along with its VP of site management allegedly held a call with the clinical site management team to initiate an “urgent ‘all-hands-on-deck’” program whereby trial sites would receive a presentation on how to manage and handle the incidences of neutropenia. According to the SAC, while many trial sites implemented the new recommended protocol, approximately 10% of all clinical sites dropped out of the Phase 3 trial in the first few months. Plaintiff further alleged that the “directive to initiate the presentation and change in protocol came from [the CEO, CFO, and CMO] and that [Company] leadership regularly received communications” about the trial.
According to the SAC, defendants allegedly failed to disclose these events, while at the same time they continued to make positive statements about tesetaxel’s potential and initiated a secondary offering in June 2019. The Company announced top-line trial results in August 2020, reporting that “the trial met its primary endpoint” and provided information about the occurrence of adverse events and treatment discontinuation rate. As a result of this disclosure, the Company’s stock price allegedly declined by 45%. After the Company held an additional secondary offering shortly thereafter in September 2020, the Company announced in March 2021 that it was “discontinuing tesetaxel’s development” after feedback from the FDA that the “clinical data package . . . was unlikely to support FDA approval.” Plaintiff alleges that the Company’s stock price declined by 79% on news of this disclosure.
As an initial matter, the Court held that plaintiff adequately alleged material misstatements and omissions by defendants, finding that it is “plausible that a reasonable investor would have considered the omitted information regarding the alleged August 2018 emergency program to be material, given the unexpectedly high rates of neutropenia and patient withdrawals were at odds with the value proposition and hypothesis of [the trial].” Defendants, citing Rigel, argued that the Ninth Circuit’s holding was controlling and they had no affirmative duty to disclose information. In re Rigel Pharmaceuticals, Inc. Sec. Litig., 697 F.3d 869 (9th Cir. 2012). However, the Court disagreed, noting that the Rigel decision was not “factually analogous,” finding that the Ninth Circuit had held that the “subsequent release of more extensive information . . . was not inconsistent with the results that [were] originally reported” nor did it contradict the original statements. Further, the Court noted that once defendants spoke on certain topics—such as Phase 3 enrollment and top-line results—they were required to do so in a way that would not be misleading. In the instant case, the Court found that plaintiff alleged defendants “never disclosed the August 2018 emergency change in protocol . . . [and instead] continued to make public statements regarding [trial] enrollment, value proposition, and top-line results” which may have “rendered [defendants’] public statements misleading.”
The Court similarly rejected defendants’ argument that the alleged misstatements were not actionable because they were either true statements or opinions. Although defendants disclosed in August 2020 the “exact percentages” of patients who experienced side effects, the Court held that defendants’ opinion that the side effects were “manageable” was misleading by omission because defendants allegedly never disclosed the August 2018 “emergency” change in protocol that was allegedly implemented to manage side effects and patient withdrawals.
Turning to the issue of scienter, the Court held that the SAC adequately alleged scienter, noting that “[p]laintiff has met his burden in creating a ‘cogent inference’” that defendants acted with “at least” deliberate recklessness. Addressing defendants’ contention that the Court should disregard plaintiff’s allegations relying on the statements of five confidential witnesses, the Court disagreed, noting that the SAC “identifie[d] the job title, tenue, supervisors, and responsibilities for each of the five confidential witnesses,” and the witnesses were “described with sufficient particularity to support the probability that someone in a position occupied by the sources would possess the information alleged . . . their statements are cross-corroborating, and they were employed” by the Company during the relevant time periods. According to the allegations in the SAC, defendants “were informed of the elevated rates of neutropenia and patient withdrawals as early as May 2018, and as late as August 2018,” when the Company’s “leadership allegedly gave the directive to initiate the emergency protocol change.” Highlighting that the Company went forward with secondary public offerings in June 2019 and in September 2020 without disclosing the change in protocol, the Court found that such allegation was “sufficient to plead a strong inference” that defendants made misleading statements with “intentional” or “deliberate recklessness.” Likewise, the Court rejected defendants’ contention that a more compelling opposing inference is that by initiating the change in study protocol, the Company was working to protect the health of patients in the trial by ensuring study sites could respond effectively to observe neutropenia, finding that “it is plausible” that defendants were “ensuring the health” of their trial patients while “simultaneously misleading their investors by failing to disclose that material information.”
Having found that plaintiff had sufficiently pled a violation of Section 10(b), the Court denied plaintiff’s Section 20(a) claim.
