On November 13, 2019, Judge Leo T. Sorokin of the United States District Court for the District of Massachusetts dismissed a putative securities class action involving claims brought under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), and Rule 10b-5 promulgated thereunder, against a biopharmaceutical company (the "Company") and two of its senior officers. LSI Design and Integration Corp. v. Tesaro Inc. et al., 18-cv-12352 (D. Ma. Nov. 13, 2019). Plaintiff alleged that the Company and its CEO and CFO made materially misleading statements in violation of the Exchange Act concerning the Company's financial condition and drug sales. The Court dismissed the amended complaint finding that plaintiff failed to sufficiently plead falsity or scienter.
The Company was an "oncology-focused biopharmaceutical company that identified, acquired, developed, and commercialized cancer therapies." Its sole market-ready product was a drug called Varubi, designed to address symptoms of nausea and vomiting resulting from chemotherapy. Plaintiff alleged, based on two confidential witnesses that the Company had failed to meet its North American sales goals for Varubi in the second and third quarters of 2016 by substantial margins. Plaintiff alleged that this, in turn, rendered materially false three statements allegedly made by the Company and the individual defendants during the eleven-day putative class period. First, the Company's statement in a Form 10-Q filed on November 4, 2016, that it expected its current cash position along with revenue from the sales of Varubi to be sufficient to "fund . . . existing operations at their currently planned levels through at least" the following twelve months. Second, a statement by the CEO at a healthcare conference on November 8, 2016, that the Company "finished up the third quarter with almost $650 million in cash . . . [and was] well positioned" to fund its operations over the next year. Third, a statement at the same conference by the CEO in reference to expanding the Company's business in Europe that "[Varubi] itself though can pretty much cover over time all of [the Company's] expenses." Shortly after these three statements were made, the Company announced on November 14, 2016, that it would issue additional stock in a secondary offering. The next day, after a news report that there was "light demand" for the Company's secondary offering, the Company announced that it had priced the secondary offering approximately 9% lower than the closing price of the Company's stock on the previous day. Plaintiff alleged that this had the effect of driving the stock price further below the offering price, causing significant losses to investors.
The Court first assessed whether plaintiff had sufficiently alleged a false or misleading statement. As to the first alleged misrepresentation, plaintiff contended that the Company "falsely insured investors that [it] had adequate cash" which plaintiff alleged falsely represented to investors "there would not be another [stock] offering in the near term." The Court rejected this argument, finding that the Form 10-Q did not make this representation "on its face" and in fact "explicitly emphasize[d] that [the Company would] require additional capital . . . ." Further, the Court determined that plaintiff's "two confidential witnesses provide[d] no meaningful assistance" as plaintiff "failed to explain the connection between [the internal sales targets]," the Company's plans to raise capital through an additional public offering, and its financial condition. In particular, the Court noted that the confidential witnesses failed to allege that missing the sales target "caused an unexpected shortage in cash, thus necessitating an additional infusion of capital by way of a public stock offering" nor did plaintiff allege the Company's existing funds and revenue from Varubi "would be insufficient to fund the company's operations."
As to the second alleged misrepresentation, the Court found that the CEO's statement that the Company was "well positioned to [fund operations over the next twelve months]" was "precisely the type of statement of corporate optimism that courts routinely deem immaterial as a matter of law." As to the third alleged misstatement—made by the CEO in response to a question about expanding the Company's business in Europe—that "Varubi itself can pretty much cover, over time all of [the Company's] expenses," the Court found that it fell squarely within the PSLRA's statutory safe harbor for forward-looking statements for two reasons. First, it was immaterial because the statement concerned Varubi's prospects in Europe, while plaintiff's allegations related solely to the Company's sales in North America. Second, plaintiff failed to plead facts that the CEO made this statement "with actual knowledge . . . that the statement was false or misleading." The Court noted in particular that plaintiff failed to adequately allege that the Company's officers were put on notice that statements about its business prospects in Europe would be untrue as a result of the missed internal sales goals in North America.
After finding that plaintiff had failed to plead a material misstatement, the Court, "in an abundance of caution," proceeded to assess whether their allegations raised a strong inference of scienter—finding that they did not. While acknowledging that plaintiff had pleaded that the Company's management "had actual knowledge that the [C]ompany missed internal sales goals," the Court found that this did not raise an inference of an intent to deceive shareholders in the context of the three misstatements at issue. Rather, the Court found that the more compelling, countervailing inference was that the Company had believed its statements were correct and that those statements "were not intended to foreclose the possibility of an imminent second public offering."
Finding that the amended complaint failed to plead falsity or scienter, the Court dismissed the Section 20(a) control person claim as there was no predicate violation of the Exchange Act as required to state such a claim. Accordingly, the Court granted defendants' motion to dismiss the amended complaint in its entirety.
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