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Southern District Of New York Grants Motion To Dismiss Exchange Act Claims Against Pharmaceutical Company For Alleged Omissions About Drug’s Safety
04/05/2022On March 21, 2022, Judge Lewis J. Liman of the Southern District of New York granted a motion to dismiss a claim under Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 thereunder, as well as Section 20(a) of the Exchange Act against a pharmaceutical company (the “Company”) and certain of its executives. Rice v. Intercept Pharmaceuticals, Inc., No. 1:21-cv-00036 (S.D.N.Y. Mar. 21, 2022). Plaintiffs alleged that defendants omitted material information concerning the safety of the Company’s liver disease drug that resulted in a stock drop once alleged corrective disclosures were made. The Court granted defendants’ motion to dismiss plaintiffs’ first amended complaint (the “FAC”), holding that plaintiffs failed to sufficiently allege material omissions, scienter, or loss causation, but granted plaintiffs leave to replead.
According to the FAC, the Company did not disclose adverse information regarding its liver disease drug, for which it secured prior FDA approval to treat one type of liver disease (“Disease A”). The Company was seeking FDA approval for the drug to be used for a different liver disease (“Disease B”) throughout the putative class period. Plaintiffs alleged that defendants made material omissions across two different issues during the putative class period: (1) two serious adverse events (“SAEs”) that allegedly were not properly disclosed on the drug’s FDA label; and (2) the drug’s Newly Identified Safety Signal (“NISS”), which plaintiffs defined as “SAEs, medication errors or adverse events that suggest therapeutic inequivalence or quality issues that warrant further investigation.”
The Court first addressed alleged statements made by defendants prior to May 2020 regarding the drug’s SAEs. Plaintiffs alleged that defendants misleadingly omitted information regarding SAEs that were listed on the FDA’s adverse event database but were not provided on the drug’s FDA label. The Court rejected plaintiffs’ theory of misrepresentation, noting that adverse event reports are “daily events in the pharmaceutical industry.” Instead, the Court found the “relevant question” is “whether a reasonable investor would have viewed the nondisclosed information as having significantly altered the total mix of information made available,” which demands “something more” than the mere existence of SAE reports. The Court determined that plaintiffs failed to allege how either SAE event was “causally linked to [the drug] or otherwise material,” and therefore failed to allege that the existence of these events significantly altered the total mix of information made available.
Next, the Court addressed alleged statements made by defendants in and after May 2020 in which the Company allegedly did not disclose that the FDA had identified the drug’s NISS when used to treat a subset of patients for Disease A and that the FDA intended to investigate it. Plaintiffs alleged that such investigation “created a substantial, undisclosed risk” to both the Company’s future profits from the drug’s sales for Disease A and the pending new drug application for the drug’s treatment of Disease B. The Court found that the NISS was not material information, noting that the FDA classified the NISS as a “potential risk” and that the “bare fact of a NISS itself does not create a [causal] relationship” between the drug and SAEs.
The Court then turned to plaintiffs’ allegation that the Company’s statements “gave rise to a duty to disclose the NISS” in its statements regarding the new drug application for Disease B and held that plaintiffs’ allegations were insufficient as it related to each purported misstatement. With regards to the alleged statements made on May 11, 2020 in an earnings call and press release, the Court held that plaintiffs failed to allege any facts suggesting the Company was aware of the NISS at that point in time. Regarding the Company’s May 22 and June 29, 2020 press releases concerning the FDA’s review of pending new drug application for Disease B, the Court held that the FAC did not adequately allege how the FDA’s review of the new drug application was sufficiently connected to the drug’s NISS for a subset of Disease A patients so as to make those public statements misleading. The Court noted that the alleged statements made during a June 29, 2020 earnings call “present a closer question,” because they seemingly referred to the drug’s overall safety in treatment of any disease. However, the Court ultimately found plaintiffs’ allegations lacking, noting that “statements to investors are not read by isolating the part that is most supportive of the plaintiff’s claim.” The Court further found that the statements were ultimately made in the context of the new drug application for Disease B.
After holding that plaintiffs failed to adequately allege any misleading omissions, the Court considered whether the FAC sufficiently pled scienter and loss causation, holding that it did not. Plaintiffs alleged two primary theories of scienter—that an individual defendant profited from sales of the inflated stock, and that defendants knew of the SAEs and NISS at the time of the alleged misstatements. The Court dismissed the first theory, finding that the FAC did not contain facts supporting a conclusion that the Company’s stock prices were artificially inflated at the time of the individual defendant’s alleged sales. Additionally, the Court found that those alleged sales were made in accordance with a Rule 10b5-1 trading plan and were otherwise not indicative of someone seeking to profit off of the purported material omissions, including because the individual’s total holdings actually increased over the putative class period. Regarding defendants’ alleged knowledge of the SAEs and NISS, the Court found that the FAC alleged facts sufficient to show that defendants knew about the NISS at the time of the Company’s June 29, 2020 statements, but not before or during May 2020, and accordingly noted that the June 29, 2020 statements would not have been dismissed for lack of scienter alone. The Court similarly rejected plaintiffs’ loss causation allegations, finding that plaintiffs “allege no facts from which a plausible inference can be drawn” tying the purported “corrective disclosures” to the alleged material omissions.
Having dismissed the Section 10(b) claims, the Court similarly dismissed plaintiffs’ control-person liability claims under Section 20(a), finding no predicate violations of the Exchange Act under which such claims could be established. The Court granted plaintiffs leave to amend.
