On July 15, 2022, Judge Edward M. Chen of the United States
District Court for the Northern District of California largely
denied a motion to dismiss a securities fraud class action against
a biopharmaceutical company (the "Company") and certain
of its officers alleging violations of Sections 10(b) of the
Securities Exchange Act of 1934. In re FibroGen, Inc.
Securities Litigation, No. 21-cv-02623-EMC (N.D. Cal. July 15,
2022). Plaintiffs alleged that the Company made 96 false and
misleading statements concerning the "safety and efficacy data
of its flagship drug." Although the Court held that a handful
of the misstatements were not actionable for failure to adequately
allege falsity, the Court otherwise denied the motion to
dismiss.
The Company's flagship product is an experimental drug (the
"Drug") designed to treat anemia in patients with chronic
kidney disease. Plaintiffs alleged that a key part of the
Company's efforts to secure FDA approval for the Drug was
demonstrating, through clinical trial data, that the Drug was at
least as effective as the leading alternative and that it posed
fewer safety risks. Plaintiffs alleged that the Company and its
officers repeatedly claimed from 2018 through 2020 that the Drug
was superior to the leading alternative and safer than a placebo,
making FDA approval likely. In November 2020, the Company's
chief medical officer resigned and, three weeks later, the Company
announced that the FDA had extended review of the Drug by three
months. In April 2021, the Company issued a press release
indicating that management had become aware of "post-hoc
changes to the stratification factors" in the clinical trial
results, which Plaintiffs alleged amounted to a manipulation of the
data by the Company. After these "post-hoc changes" were
corrected, Plaintiffs alleged that the data revealed that the Drug
was significantly less effective and less safe than the placebo and
the leading alternative. In July 2021, after reviewing the
Company's application, the FDA voted against approval.
According to Plaintiffs, the FDA noted that the Company's claim
that the Drug was more effective than the leading alternative was
"inconclusive at best" and that the Drug caused
"greater rates of some important adverse events" than the
leading alternative, including a higher rate of death and other
major side effects. The Company's share price fell
precipitously after each of the April and July 2021
announcements.
The Court first held that the statements at issue did not qualify
for protection under the Private Securities Litigation Reform
Act's safe harbor provision for certain forward-looking
statements because they were not entirely forward-looking and
because Plaintiffs in any event sufficiently pleaded that the
statements were made with actual knowledge of falsity. For example,
the Court held that the Company's statements concerning the
likelihood of FDA approval also referenced explicitly past
interactions with the FDA and/or were based on already existing
data. Describing the Company's argument that plaintiffs failed
to allege "actual knowledge" as "unconvincing,"
the Court held that "the allegation that [the Company]
manipulated the clinical data to obtain more favorable analyses
implies knowledge."
The Court also held that plaintiffs adequately alleged falsity for
the vast majority of the alleged misstatements. For example, the
Court held that plaintiffs' allegations that clinical trial
data had been manipulated "imply that the data was falsified
and that [the Company] knew so" when it made statements about
the Drug's safety and efficacy. However, with respect to a
handful of alleged misstatements "about how the [meeting with
the FDA] felt to [the Company] and [the Company's] confidence
in the [FDA] submission," the Court found these to be
inactionable because they were "mere puffery."
Finally, the Court held that plaintiffs' allegations raised a
strong inference of scienter. In particular, the Court focused on
the "dubiousness of post-hoc changes" made to the
clinical trial data. The Court distinguished plaintiffs'
allegations from other cases where defendants had successfully
argued that the statements at issue reflected an "honest
disagreement over the clinical data" and thus failed to
support a strong inference of scienter. Here, Plaintiffs alleged
the Company manipulated data to conceal "safety and efficacy
issues," which, according to the Court, supported a strong
inference of scienter. Underscoring this conclusion, the Court
emphasized allegations based on statements from confidential
witnesses. According to those witnesses, the Company "became
aware that the FDA had identified issues regarding [the Drug]'s
safety data . . . as early as the fall of 2020—i.e.,
several months before [the Company was] forced to reveal the truth
and [was] telling investors the exact opposite." Finally,
while the Court held that stock sales by Defendants did not support
a strong inference of scienter, the Court held that "some
degree" of inference could be drawn by compensation
arrangements for some of the officer defendants that resulted in
bonuses based on financial performance that greatly exceeded their
salaries. Finally, the Court also held that an inference of
scienter was present as to all Defendants under the "core
operations theory, which allows a court to impute inference of
scienter when "the nature of the relevant fact is of such
prominence that it would be absurd to suggest that management was
without knowledge of the matter."
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