On 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.
Rice v. Intercept Pharmaceuticals, Inc.
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