Southern District Of New York Dismisses Securities Fraud Claims Against Biopharmaceutical Company For Failure To Adequately Allege Misstatements Or Scienter
On April 28, 2020, Judge Victor Marrero of the United States District Court for the Southern District of New York dismissed a putative class action asserting claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder against a biopharmaceutical company and certain of its executives. Schaeffer v. Nabriva Therapeutics plc, No. 19-cv-4183, slip op. (S.D.N.Y. Apr. 28, 2020), ECF No. 40. Plaintiffs alleged that the company made false or misleading statements suggesting that a drug it submitted to the FDA for marketing approval would be approved in 2019. The Court held that the alleged misstatements were either non-actionable puffery, or were protected forward-looking statements, or were not sufficiently alleged to have been made with scienter.
Plaintiffs alleged that the company’s statements suggesting that the drug would be approved in 2019 were false in light of the fact that the FDA had inspected a facility where the drug was manufactured and issued a Form 483 letter—which the company allegedly did not disclose— identifying problems for the company to address, including that certain drug batches were out of specifications, impurities were detected in certain drug batches, and various issues concerning the company’s quality control efforts. Id. at 6–7. The company ultimately was forced to resubmit the drug for approval in August 2019, triggering a new six-month review cycle that plaintiffs alleged could not be completed in 2019. Id. at 12.
The Court first explained that the alleged failure to disclose a Form 483 may be material, depending on the facts of the case. Id. at 24. Noting that courts have reached varying conclusions on that issue—ranging from holding that such an omission is always material because it bears on possible delays in FDA approval, or that such an omission can be material depending on the circumstances, to holding that such an omission is never material because a Form 483 is “not the final word”—the Court determined that under the circumstances alleged in this case, the failure to disclose the Form 483 could be material because the drug in question was one of only two drugs the company had in development and therefore represented a large share of potential revenues. Id. at 26.
With respect to the falsity of the alleged misstatements, the Court observed that the company’s failure to disclose the Form 483 could be actionable only if the disclosure was necessary to render certain statements not misleading. But the Court noted that several of the statements identified by plaintiffs in press releases, such as describing the submission of the new drug application as a “major milestone” or describing the drug as “first in class,” were “classic” examples of non-actionable puffery, and statements that data within the application were “solid” were otherwise too vague to be actionable. Id. at 27–29. The Court also concluded that various statements that the drug would likely receive FDA approval were forward-looking statements protected under the PSLRA’s safe harbor provision, as plaintiffs failed to allege that they were made with actual knowledge of falsity. Id. 30–31.
The Court then assessed several statements concerning whether the FDA had identified any issues with the drug in the course of its review, and various risk factors the company disclosed in its annual report. Id. at 28–29, 31. With respect to the risk disclosures, plaintiffs alleged they were misleading as they presented the risk of delayed approval as a possibility, even though, according to plaintiffs, it was a “certainty” due to the nature of the FDA’s concerns in the Form 483. Id. at 31. The Court concluded, however, that while the issues raised in the Form 483 were concerning, they were not sufficient to render the statements in the annual report misleading, because they were capable of being addressed, and plaintiffs did not allege that it was impossible for those issues to be addressed in a timely manner. Id. at 32–33. The Court also observed that the Form 483 could have rendered the company’s separate statement that it was in compliance with various regulations misleading if the Form 483 disclosed multiple potential violations of those regulations. Id. at 34–36. Similarly, the Court observed that a statement by an executive that the FDA found no issues in the course of its review of the drug could be potentially misleading in light of the issues identified in the Form 483. Id. at 36.
The Court then assessed whether plaintiffs sufficiently alleged scienter with respect to these two potentially actionable statements. Id. The Court noted that the company plausibly knew about the contents of the Form 483, but concluded that the complaint did not allege sufficient facts to establish that defendants knew or recklessly disregarded that their statements were misleading in light of the Form 483. Id. at 37–38. The Court explained that the complaint failed to identify any motive to mislead investors or the existence of suspect stock sales by company executives. Id. at 38. The Court also noted that the Form 483 did not clearly contradict any of the challenged statements, and that it was thus reasonable to infer that defendants did not believe the Form 483 did, in fact, contradict their statements. Id. at 39. Thus, the inference that defendants recklessly disregarded the potentially misleading nature of their statements was “not [as] cogent or at least as compelling as an inference that they made the statements either negligently or reasonably believing their accuracy.” Id. at 40.
While the Court’s dismissal was without prejudice, the Court noted it was “unclear whether an amended complaint might adequately state a claim in this case” and ordered plaintiffs to show cause within twenty days why the case should not be dismissed with prejudice. Id. at 45.