On October 26, 2018, Judge Thomas D. Schroeder of the United
States District Court for the Middle District of North Carolina
dismissed a putative class action brought against a
biopharmaceutical company (the "Company") and certain of
its officers and directors under Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. Hirtenstein v. Cempra, Inc., No.
16-cv-1303 (M.D.N.C. Oct. 26, 2018). Plaintiffs sought to
recover for alleged stock losses occurring after the Company
allegedly failed to disclose risks associated with an experimental
antibiotic used to treat pneumonia. The Court dismissed the
action, finding that the challenged statements about the drug's
safety constituted opinions and plaintiffs' allegations of
motive were insufficient to establish a strong inference of
scienter.
The Company develops antibiotics to treat infectious diseases, and
was working on developing and releasing solithromycin, a drug for
community-acquired bacterial pneumonia
("CABP"). Plaintiffs alleged the
Company's stock price declined when the Food and Drug
Administration ("FDA") published a report disclosing
patterns of liver injury connected to the drug, and an FDA advisory
committee concluded that the Company failed to adequately
characterize the risk of liver injury or toxicity. Plaintiffs
alleged, inter alia, that the Company made false and
misleading statements regarding solithromycin's safety profile
in certain clinical trials and the differentiation of solithromycin
from Ketek, another drug with adverse side effects.
The Court found that certain statements made by the Company's
then-CEO about interpretations of clinical studies and the
drug's safety were opinions and that plaintiffs failed to
sufficiently allege that the former CEO lacked sincerely held
optimistic beliefs about the trials at the time. The Court
also held that the former CEO did not lack an objective basis for
her opinions, noting that the Phase 3 trial about which the
allegedly misleading statements were made had met their primary end
points and the overall safety profile of the drug was open to
debate. The Court also held that other statements by the
former CEO were too vague to be actionable. As to other
statements, the Court held that the Company disclosed the
underlying trial data, and otherwise took a different view than the
FDA as to how that data should be interpreted.
The Court also held that plaintiffs failed to allege facts
sufficient to give rise to a strong inference of scienter.
The Court first rejected allegations of fraudulent intent based on
a desire to increase the Company's value ahead of stock sales,
observing that "[e]very for-profit company is motivated by
financial gain in our free enterprise system" and noting that
plaintiffs failed to allege anything different. The Court
also held that the former-CEO's subsequent termination failed
to support a strong inference of scienter because plaintiffs did
not allege her termination had anything to do with the FDA's
conclusions that the Company failed to adequately characterize
liver injury risks.
The Court next rejected plaintiffs' argument that scienter
could be inferred from defendants' recklessness.
According to the Court, the key inquiry was whether defendants were
sufficiently reckless with adverse information to give rise to a
strong inference of scienter. Observing that "the
'[r]eckless conduct sufficient to establish a strong inference
of scienter' must be 'severe,'" the Court
concluded that plaintiffs failed to allege plausibly that
defendants knew that certain facts would prevent the regulatory
approval or marketing of solithromycin. It also noted that
the Company made important parts of the trial results publicly
available through two scientific articles published in
peer-reviewed medical journals and made disclosures in press
releases and its Form 8-K filed with the SEC.
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