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Southern District Of New York Dismisses Proposed Securities Class Action Complaint Against Drug Manufacturer For Failure To Plead Loss Causation
10/11/2023On September 25, 2023, Judge Lorna Schofield of the United States District Court for the Southern District of New York granted a motion to dismiss a proposed class action against a biopharmaceutical company alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. Gru v. Axsome Therapeutics, Inc., No. 22 CIV. 3925 (LGS), 2023 WL 6214581 (S.D.N.Y. Sept. 25, 2023). Plaintiff alleged that the Company omitted details concerning its migraine drug development in its Form 10-Q, 10-K and 8-K filings with the SEC and in statements made during conference calls with investors and analysts. Plaintiff further alleged that the Company’s statements discussing the timing and prospect of FDA approval of its new migraine drug were false or misleading as a result of these alleged omissions. The Court dismissed the complaint, finding that plaintiffs failed to plead loss causation.
Plaintiff alleged that the Company announced on November 5, 2020, that it would be delaying its submission of its migraine drug application to the FDA until the first quarter of 2021 “to allow for inclusion of supplemental manufacturing information to ensure a robust submission package.” According to plaintiff, the Company’s stock price fell about 7% on that day. Plaintiff further alleged that during the Company’s earnings call that day, the Company’s CEO told analysts that the delay was “not the result of the manufacturing or [a] stability issue or anything like that.” According to the complaint, the Company ultimately did not submit its migraine drug application to the FDA until June 2021. Plaintiff alleged that on April 25, 2022, the Company publicly disclosed manufacturing problems with its migraine drug and announced that the FDA had raised concerns about its drug application and was preparing a complete letter response to the Company on the issue. Plaintiff alleged that the Company’s stock price fell 22% that same day.
The Court first noted that plaintiff completely divested his Company shares by August 2021. Therefore, even accepting plaintiff’s allegations that the Company’s omitted details concerning manufacturing problems from its disclosures, all of plaintiff’s purchases and sales took place at an inflated market price before any corrective disclosure of the alleged fraud. As the Court noted, plaintiff did not dispute that the alleged fraud revealed by the April 2022 disclosure “caused him no loss.”
The Court next addressed plaintiff’s argument that he suffered a loss when the stock price allegedly dropped after the November 2020 disclosure because of a “materialization of the risk concealed.” Specifically, plaintiff argued that the alleged November 2020 price drop resulted from the announcement of the delayed migraine drug application submission, which in turn resulted from undisclosed manufacturing issues. The Court noted that plaintiff’s complaint did not support “the inference that, by November 5, 2020, there were significant manufacturing issues or that Defendants were aware of any.” Rather, the Court held that plaintiff’s complaint suggested that serious manufacturing problems had not emerged or were not yet understood by the Company until the second quarter of 2021. Because there were no facts suggesting the Company knew of manufacturing problems in November 2020, the Court held that the drop in share price following the November 2020 announcement was not caused by any “realization” of an intentionally hidden fact. Accordingly, the Court dismissed plaintiff’s complaint for failure to plead loss causation.
In response to plaintiff’s request for leave to amend, the Court permitted plaintiff to submit a letter motion, with a proposed amended complaint, that explained how the proposed changes would cure the deficiencies identified in the Court’s opinion.
