On September 25, 2023, Judge Lorna Schofield of the United
States District Court for the Southern District of New York granted
a motion to dismiss a proposed class action against a
biopharmaceutical company (the "Company") alleging
violations of Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934. Gru v. Axsome Therapeutics, Inc., No. 22 CIV.
3925 (LGS), 2023 WL 6214581 (S.D.N.Y. Sept. 25, 2023). Plaintiff
alleged that the Company omitted details concerning its migraine
drug development in its Form 10-Q, 10-K and 8-K filings with the
SEC and in statements made during conference calls with investors
and analysts. Plaintiff further alleged that the Company's
statements discussing the timing and prospect of FDA approval of
its new migraine drug were false or misleading as a result of these
alleged omissions. The Court dismissed the complaint, finding that
plaintiffs failed to plead loss causation.
Plaintiff alleged that the Company announced on November 5, 2020,
that it would be delaying its submission of its migraine drug
application to the FDA until the first quarter of 2021 "to
allow for inclusion of supplemental manufacturing information to
ensure a robust submission package." According to plaintiff,
the Company's stock price fell about 7% on that day. Plaintiff
further alleged that during the Company's earnings call that
day, the Company's CEO told analysts that the delay was
"not the result of the manufacturing or [a] stability issue or
anything like that." According to the complaint, the Company
ultimately did not submit its migraine drug application to the FDA
until June 2021. Plaintiff alleged that on April 25, 2022, the
Company publicly disclosed manufacturing problems with its migraine
drug and announced that the FDA had raised concerns about its drug
application and was preparing a complete letter response to the
Company on the issue. Plaintiff alleged that the Company's
stock price fell 22% that same day.
The Court first noted that plaintiff completely divested his
Company shares by August 2021. Therefore, even accepting
plaintiff's allegations that the Company's omitted details
concerning manufacturing problems from its disclosures, all of
plaintiff's purchases and sales took place at an inflated
market price before any corrective disclosure of the alleged fraud.
As the Court noted, plaintiff did not dispute that the alleged
fraud revealed by the April 2022 disclosure "caused him no
loss."
The Court next addressed plaintiff's argument that he suffered
a loss when the stock price allegedly dropped after the November
2020 disclosure because of a "materialization of the risk
concealed." Specifically, plaintiff argued that the alleged
November 2020 price drop resulted from the announcement of the
delayed migraine drug application submission, which in turn
resulted from undisclosed manufacturing issues. The Court noted
that plaintiff's complaint did not support "the inference
that, by November 5, 2020, there were significant manufacturing
issues or that Defendants were aware of any." Rather, the
Court held that plaintiff's complaint suggested that serious
manufacturing problems had not emerged or were not yet understood
by the Company until the second quarter of 2021. Because there were
no facts suggesting the Company knew of manufacturing problems in
November 2020, the Court held that the drop in share price
following the November 2020 announcement was not caused by any
"realization" of an intentionally hidden fact.
Accordingly, the Court dismissed plaintiff's complaint for
failure to plead loss causation.
In response to plaintiff's request for leave to amend, the
Court permitted plaintiff to submit a letter motion, with a
proposed amended complaint, that explained how the proposed changes
would cure the deficiencies identified in the Court's
opinion.
Gru v. Axsome Therapeutics, Inc.
Originally published October 11, 2023.
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.
