On August 4, 2021, Judge Marilyn L. Huff of the United States
District Court for the Southern District of California denied a
motion to dismiss a putative class action lawsuit against a
biopharmaceutical company (the "Company") and certain of
its officers for alleged violations of Sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder. Kendall v. Odonate Therapeutics, Inc.,
et al., No. 3:20-cv-01828-H-LL (S.D. Cal. Aug. 4,
2021). The Court held that plaintiff's Second Amended
Complaint (the "SAC") adequately alleged material
misstatements and omissions by defendants concerning the efficacy
and safety of the Company's flagship cancer drug (tesetaxel)
during the course of a Phase 3 clinical trial, and further held
that plaintiff adequately alleged scienter.
According to the SAC, in December 2017, the Company announced the
initiation of a Phase 3 clinical trial of tesetaxel, an orally
administered chemotherapy agent to treat patients with locally
advanced or metastatic breast cancer. The Company filed for
its initial public offering later that month and allegedly
represented in its registration statement that the Phase 3 trial
was designed to evaluate whether tesetaxel plus a reduced dose of
an existing approved cancer drug resulted in improved outcomes with
manageable toxicity and favorable quality-of-life compared to the
approved dose of the existing drug alone.
Plaintiff—relying on alleged statements of five confidential
witnesses—alleged that defendants became aware of adverse
reactions by participants during the course of the trial but failed
to publicly disclose that information. Specifically,
plaintiff alleged that in August 2018, the Phase 3 trial clinical
sites were reporting to the Company that they were experiencing a
higher-than-expected rate of neutropenia, an abnormally low number
of white blood cells in the blood in patients, and that as a result
"many patients" were withdrawing from the trial. In
response to that development, the Company's chief medical
officer along with its VP of site management allegedly held a call
with the clinical site management team to initiate an "urgent
'all-hands-on-deck'" program whereby trial sites would
receive a presentation on how to manage and handle the incidences
of neutropenia. According to the SAC, while many trial sites
implemented the new recommended protocol, approximately 10% of all
clinical sites dropped out of the Phase 3 trial in the first few
months. Plaintiff further alleged that the "directive to
initiate the presentation and change in protocol came from [the
CEO, CFO, and CMO] and that [Company] leadership regularly received
communications" about the trial.
According to the SAC, defendants allegedly failed to disclose these
events, while at the same time they continued to make positive
statements about tesetaxel's potential and initiated a
secondary offering in June 2019. The Company announced
top-line trial results in August 2020, reporting that "the
trial met its primary endpoint" and provided information about
the occurrence of adverse events and treatment discontinuation
rate. As a result of this disclosure, the Company's stock
price allegedly declined by 45%. After the Company held an
additional secondary offering shortly thereafter in September 2020,
the Company announced in March 2021 that it was "discontinuing
tesetaxel's development" after feedback from the FDA that
the "clinical data package . . . was unlikely to support FDA
approval." Plaintiff alleges that the Company's
stock price declined by 79% on news of this disclosure.
As an initial matter, the Court held that plaintiff adequately
alleged material misstatements and omissions by defendants, finding
that it is "plausible that a reasonable investor would have
considered the omitted information regarding the alleged August
2018 emergency program to be material, given the unexpectedly high
rates of neutropenia and patient withdrawals were at odds with the
value proposition and hypothesis of [the trial]."
Defendants, citing Rigel, argued that the Ninth
Circuit's holding was controlling and they had no affirmative
duty to disclose information. In re Rigel
Pharmaceuticals, Inc. Sec. Litig., 697 F.3d 869 (9th Cir.
2012). However, the Court disagreed, noting that the
Rigel decision was not "factually
analogous," finding that the Ninth Circuit had held that
the "subsequent release of more extensive information . . .
was not inconsistent with the results that [were] originally
reported" nor did it contradict the original statements.
Further, the Court noted that once defendants spoke on certain
topics—such as Phase 3 enrollment and top-line
results—they were required to do so in a way that would not
be misleading. In the instant case, the Court found that
plaintiff alleged defendants "never disclosed the August 2018
emergency change in protocol . . . [and instead] continued to make
public statements regarding [trial] enrollment, value proposition,
and top-line results" which may have "rendered
[defendants'] public statements misleading."
The Court similarly rejected defendants' argument that the
alleged misstatements were not actionable because they were either
true statements or opinions. Although defendants disclosed in
August 2020 the "exact percentages" of patients who
experienced side effects, the Court held that defendants'
opinion that the side effects were "manageable" was
misleading by omission because defendants allegedly never disclosed
the August 2018 "emergency" change in protocol that was
allegedly implemented to manage side effects and patient
withdrawals.
Turning to the issue of scienter, the Court held that the SAC
adequately alleged scienter, noting that "[p]laintiff has met
his burden in creating a 'cogent inference'" that
defendants acted with "at least" deliberate
recklessness. Addressing defendants' contention that the
Court should disregard plaintiff's allegations relying on the
statements of five confidential witnesses, the Court disagreed,
noting that the SAC "identifie[d] the job title, tenue,
supervisors, and responsibilities for each of the five confidential
witnesses," and the witnesses were "described with
sufficient particularity to support the probability that someone in
a position occupied by the sources would possess the information
alleged . . . their statements are cross-corroborating, and they
were employed" by the Company during the relevant time
periods. According to the allegations in the SAC, defendants
"were informed of the elevated rates of neutropenia and
patient withdrawals as early as May 2018, and as late as August
2018," when the Company's "leadership allegedly gave
the directive to initiate the emergency protocol
change." Highlighting that the Company went forward with
secondary public offerings in June 2019 and in September 2020
without disclosing the change in protocol, the Court found that
such allegation was "sufficient to plead a strong
inference" that defendants made misleading statements with
"intentional" or "deliberate
recklessness." Likewise, the Court rejected
defendants' contention that a more compelling opposing
inference is that by initiating the change in study protocol, the
Company was working to protect the health of patients in the trial
by ensuring study sites could respond effectively to observe
neutropenia, finding that "it is plausible" that
defendants were "ensuring the health" of their trial
patients while "simultaneously misleading their investors by
failing to disclose that material information."
Having found that plaintiff had sufficiently pled a violation of
Section 10(b), the Court denied plaintiff's Section 20(a)
claim.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.