On September 29, 2021, Judge George J. Hazel of the District of Maryland dismissed a putative class action asserting claims under the Securities Act of 1933 and Securities Exchange Act of 1934 against a pharmaceutical company and certain of its executives.  Employees' Retirement System of the City of Baton Rouge and Parish of East Baton Rouge v. Macrogenics, Inc., No. GJH-19-2713, slip op. (D. Md. Sept. 29, 2021).  Plaintiff alleged that defendants made misrepresentations regarding clinical trials for a drug that was "critically important" to the company.  The Court dismissed the action for failure to adequately allege misrepresentations or scienter.

The crux of plaintiff's allegations was that the company allegedly released favorable preliminary data from a clinical trial regarding how long enrolled patients survived without progression of the disease, while withholding less favorable results about how long the patients survived overall regardless of disease progression.

The Court rejected plaintiff's argument that the company, by disclosing preliminary data regarding disease progression, left a misleading impression that the overall survival data would also be positive.  The Court noted that the company had repeatedly stated that the overall survival data would not be released until months later, and that statements about the disease progression data did not imply that the overall survival results would be statistically significant or commercially successful.  Id. at 19.  The Court concluded, based on the "total mix of information" available to investors, that a reasonable investor would not be left with the mistaken impression that the overall survival results were "on track" or that the drug was assured to be successful.  Id. at 20.

The Court further held that challenged statements that the preliminary results provided "clinical validation," were "promising," showed "positive results," and had "demonstrated a superior outcome" were all non-actionable puffery.  Id. at 20-21.  The Court noted that it was not clear that these statements were factual or inconsistent with "reasonably available data," and that the statements were also accompanied by caveats that the determination of the overall survival data was still ongoing.  Id. at 21.

The Court next addressed plaintiff's assertion that the company's cautionary statements and risk factor warnings were misleading because they warned in generic terms about a risk that had already come to pass—that the survivor data was not on track.  Id. at 22.  First, the Court explained that the detailed risk warnings "warned investors of the very risks [p]laintiff claims were not disclosed," and that repeated cautionary statements would not cause a reasonable investor to conclude that "the preliminary positive results would continue."  Id. (internal quotations omitted).  Further, the Court emphasized that while merely warning of a future risk that has already actually "transpired" or become a "near certainly" could be misleading, it was not clear in this case that at the time of defendants' challenged statements failure had become a near certainty.  Id. at 23.

The Court also rejected plaintiff's remaining arguments for why the overall survival data should have been disclosed.  While plaintiff asserted that the data was "vitally important" to investors, the Court observed that information was not required to be disclosed simply because it would be relevant to investors, and that "[i]nvestors were well-aware that they did not have a clear picture" of the data.  Id. at 22-23.  Moreover, while plaintiff argued that the company should have been required to disclose the overall survival data after characterizing it as having a "positive trend," the Court noted that there was no allegation that these characterizations were false at the time they were made, and the statements were also accompanied by cautionary language.  Id. at 24.  Finally, the Court rejected plaintiff's assertion that the company should have released data in the form of a particular type of chart, holding that "investors are not entitled to several forms of data or data in a preferred form."  Id. at 24-25.

With respect to the Exchange Act claims, plaintiff attempted to establish an inference of scienter by pointing to an increase in the company's stock price and proceeds to the company from a stock offering, but the Court explained that intent to defraud cannot be inferred from "financial motivations common to every company."  Id. at 26.  Plaintiff also argued that the company's executives, by virtue of their positions, had "actual knowledge" that their statements were misleading and that it "defies credulity" that they would not have been aware of "basic and materially adverse information."  Id. at 26-27.  The Court concluded, however, that executives' access to information is not enough to establish scienter without additional detailed allegations showing that those individuals actually were exposed to the information in question.  Overall, the Court concluded that an inference of scienter was not more cogent and compelling than the competing inference that the overall survival data was not disclosed simply because the study was ongoing.  Id.

Plaintiff also alleged that two executives had made misstatements about the product with actual knowledge of negative results.  But the Court held that it was equally plausible, if not more so, that defendant executives had not had such knowledge and pointed to statements the executives had made promising to provide results at a specified later date.  Id. at 27.

In addition, the Court rejected plaintiff's allegations under the Securities Act.  While plaintiff argued that a lesser pleading standard ought to apply because plaintiff disclaimed fraudulent intent with respect to the Securities Act claims, the Court applied the same heightened pleading as for the Exchange Act, noting that the same challenged statements underlay both sets of claims. Id. at 29-30.  Finally, the Court rejected plaintiff's claims under Items 303 and 503 of SEC Regulation S-K with respect to undisclosed uncertainty or risk factors.  The Court observed that the company's risk factors were far from "generic or boilerplate," and covered "precisely the uncertainties and risks that [p]laintiff complains of."  Id. at 31-32.

Noting that there were "fundamental deficiencies" in plaintiff's theory of liability, the Court concluded that further amendment would be futile and denied plaintiff's request for leave to amend.

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.