On October 11, 2023, the United States Court of Appeals for the First Circuit affirmed in part and reversed in part the dismissal of a putative class action asserting claims under the Securities Exchange Act of 1934 against a pharmaceutical company and certain of its former executives. Shash v. Biogen, Inc., —F.4th—, 2023 WL 6617278 (1st Cir. 2023). Plaintiffs alleged that the company made misstatements and omissions regarding the clinical trial results of the company's drug to treat Alzheimer's. The district court granted defendants' motion to dismiss, but the First Circuit reversed the dismissal in part, holding that plaintiffs' allegations were sufficient with respect to one challenged statement, while affirming that plaintiffs failed to adequately allege scienter with respect to other challenged statements.
Plaintiffs' allegations relate to the Company's two Phase III clinical trials. While the aggregated results from these clinical trials suggested that the drug was not effective, the company analyzed subgroups of patients within these clinical trials and concluded that the drug had efficacy at a higher dosage. Id. at *2. In particular, the Company's Chief Medical Officer stated during an earnings call that "you really need to get to that higher dose" and "I think our data are all consistent with that." Id. at *3. After the company applied for FDA approval for the drug, the FDA convened an Advisory Committee to review the drug. Id. at *4. Plaintiffs allege that the Company's stock fell when an FDA statistical reviewer suggested that the clinical trial data did not demonstrate the drug's efficacy at a higher dose, and that the stock fell further when the Advisory Committee concluded that the clinical trials had not demonstrated the drug's efficacy. Id. Ultimately, however, the drug did receive FDA approval. Id.
The Court first explained that the "all data" statement plausibly conveyed three facts: that the Chief Medical Officer believed all the company's data was consistent with needing to get to a high dose of the drug to provide a clinical benefit; that this opinion fairly aligned with the facts known to him when he made the statement; and that this opinion was informed by the type of inquiry that a reasonable investor would expect given the circumstances. Id. at *6. The Court noted that plaintiffs alleged other Company data suggested that certain patients who received a high dose of the drug did not achieve better clinical outcomes when compared to those who received the placebo, that certain patients who initially received a higher dose of the drug did not experience better clinical outcomes after a dosing protocol was changed in the trials, and, in fact, only a limited subgroup of patients had results that suggested a higher dose demonstrated the drug's efficacy. Id. The Court found that these allegations plausibly suggested that "all" the Company's data did not support that a higher dose contributed to the drug's efficacy, and that this statement was material. Id.
The Court further held that plaintiffs adequately alleged scienter with respect to this statement. Id. at *8. The Court determined that because the Company allegedly invested significant resources into analyzing subgroups and repeatedly discussed certain aspects of the results of those subgroups, the alleged failure to disclose the subgroup data that did not support the challenged statement was "a highly unreasonable omission," giving rise to a "strong inference of scienter." Id.
The Court, however, held that plaintiffs' allegations of scienter were insufficient with respect to other challenged statements. Id. at *9. For these other statements, the Court generally found that no factual allegations suggested that the Company (i) knew the clinical trial data was inconsistent with the challenged statements, (ii) had otherwise been warned that data did not support the challenged statements, or (iii) subjectively believed the FDA's statistical reviewer's conclusions over the Company's conclusions. Id. at *9–10. The Court noted that, other than the one statistical reviewer, the FDA had generally supported the Company's conclusions, which undercut any suggestion that the Company did not believe in its drug's efficacy. Id. at *10. The Court also concluded that the Company had stated clearly what data it was withholding from the public, that the company disclosed it was examining its data following the completion of clinical trials that had otherwise failed to show the drug's efficacy, and that the Company acknowledged it was being deliberate about its data releases while the drug was undergoing FDA review, all of which undermined a strong inference of scienter. Id. at *10–11. The Court also concluded that, while plaintiffs alleged irregularities in the FDA's review process, those were irregularities by the FDA, not by the company. Id. at *12. And the Court rejected the suggestion that the Company's executives knew that subgroup data undercut certain statements regarding the drug's efficacy or were reckless in not investigating the subgroup data, since the alleged inconsistencies were "not obvious" and "scienter requires more than 'simple, or even excusable, negligence.'" Id.
The Court went on to conclude that plaintiffs had sufficiently alleged loss causation, even though the company's stock price did not appear to fall immediately after the FDA's statistical reviewer's report was released. Id. at *13. Because defendants focused their arguments on the timing of when the Company's stock fell relative to the report—which was the basis of the lower court's holding that loss causation was lacking—the Court determined that, for purposes of the appeal, defendants had waived any argument as to whether the report met the definition of a corrective disclosure. Id. The Court explained that many courts had held that a stock drop does not need to immediately follow a corrective disclosure in order to plead loss causation, and some courts had found loss causation adequately alleged even where a company's stock price initially increased following an alleged corrective disclosure. Id. at *14. The Court concluded that defendants' arguments regarding the timing of the Company's stock's price movements in relation to the release of the report raised questions of fact not properly resolved on a motion to dismiss, and therefore did not suffice to demonstrate that plaintiffs had failed to plead loss causation at this stage. Id.
Originally published November 01, 2023.
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