Southern District Of New York Grants In Part And Denies In Part Motion To Dismiss A Securities Class Action Alleging A Biotech Company Mislead Shareholders About Likelihood Of FDA Approval For Drug Intended To Treat Rare Disease
On June 16, 2020, Judge Gregory H. Woods of the United States District Court for the Southern District of New York granted in part and denied in part a motion to dismiss a putative securities fraud class action asserting violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 against a biotech company (the “Company”) as well as certain of its officers (collectively, “Defendants”). Skiadas v. Acer Therapeutics Inc. et al., Civ. No. 1:19-cv-6137, 2020 WL 3268495 (S.D.N.Y. June 16, 2020). Plaintiffs alleged that Defendants falsely stated that the Food and Drug Administration (“FDA”) agreed that it would approve the Company’s New Drug Application for EDSIVO, a drug for the treatment of Vascular Ehlers-Danolos Syndrome (“vEDS”), a rare genetic connective tissue disorder. The Court denied Defendants’ motion to dismiss as to most of the alleged misstatements, because plaintiffs adequately alleged falsity and scienter.
No drug has been approved in the United States or internationally for the treatment of vEDS, but doctors prescribe “beta-blockers” off-label to manage the disease. Around 2013, the Company began seeking the FDA’s approval of a beta-blocker for the treatment of vEDS under the brand-name EDSIVO. If approved, EDSIVO would qualify for Orphan Drug Exclusivity in the United States, enabling the Company to charge significantly more for the drug than the low-cost generic beta-blockers currently prescribed to vEDS patients in the United States. In December 2017 and 2018, the Company performed two secondary offerings. In the 2017 and 2018 offering documents, the Company stated that it met with the FDA regarding EDSIVO and the Company’s forthcoming New Drug Application. Significantly, while the 2017 offering documents stated that the FDA “agreed” that “additional clinical development” was “not needed,” the 2018 offering documents indicated that the FDA “agreed” that “an additional clinical trial” was “not likely needed.” Ultimately, in June 2019, the FDA rejected the New Drug Application for EDSIVO on the ground that a clinical trial was necessary to support existing clinical data on the drug’s efficacy for vEDS patients. Plaintiffs alleged that these statements about the FDA meeting misrepresented what the FDA had “agreed” to.
First, the Court held that plaintiffs sufficiently alleged that statements regarding the meeting with the FDA were false or misleading. Plaintiffs alleged that Defendants’ statements created the impression that the FDA “agreed” that it would approve the New Drug Application and that no further clinical testing was required, whereas Defendants argued that these statements merely conveyed that the FDA “agreed” that the Company could submit its New Drug Application for approval. The Court concluded that the Company’s statements were ambiguous and held that alleged misstatements that are ambiguous should be construed in favor of plaintiff at the motion to dismiss stage, without prejudice to revisiting that conclusion later on summary judgment or trial. The Court found that plaintiffs had not sufficiently alleged how other alleged statements that the FDA provided the Company with “guidance” on how to present its clinical data were false or misleading and dismissed claims based on those statements.
Second, the Court held that plaintiffs adequately alleged scienter. The Court found it significant that the 2017 statement that the FDA agreed that “additional clinical development is not needed” was unqualified whereas the 2018 statement was “hedged” by the phrase “likely.” The Court concluded that the Company’s decision to “alter the wording of their public statements suggests that the first statement was inaccurate.” Finally, the Court rejected Defendants’ argument that the absence of stock sales by the Company’s insiders was inconsistent with an intent to defraud. The Court acknowledged that this often is true, but observed that in cases where the Company’s survival depends on additional fundraising, officers and senior executives have “an incentive to bet the farm in a reckless gamble because the alternative is certain failure.” Combined with the other factual allegations in the complaint, the Court held that scienter was alleged sufficiently.