On August 28, 2020, Judge Cynthia Rufe of the United States
District Court for the Eastern District of Pennsylvania denied
three separate motions to dismiss a putative class action asserting
claims under the Securities Exchange Act of 1934 against a
biopharmaceutical company, its CEO, and its Chief Medical
Officer. Tomaszewski v. Trevena, Inc.,
No. 18-cv-4378, slip op. (E.D. Pa. Aug. 28, 2020).
Plaintiffs alleged that the company and its executives made various
misrepresentations and omissions regarding interactions with the
FDA concerning a drug candidate. The Court denied the motions
of the company and CEO, after granting plaintiffs' motion to
strike certain documents on which those motions relied, and further
held that plaintiffs adequately alleged actionable misstatements
and scienter with respect to the Chief Medical Officer
("CMO").
Plaintiffs alleged that the company touted the success of the
drug's Phase 2 trials, as well as its planned Phase 3 trials
and the prospects for FDA approval, without disclosing that the FDA
had expressed serious concerns regarding the company's plans
for a Phase 3 trial. Slip. Op. at 2–4.
Ultimately, the FDA publicly released details regarding its prior
meetings with the company, and an FDA committee voted not to
recommend approval of the drug, citing certain of the same concerns
that the FDA had communicated in the prior meetings.
Id. at 6.
As a threshold issue, the Court granted a motion by plaintiffs to
strike certain documents the company and CEO relied on in
connection with the motion to dismiss, including minutes of FDA
meetings, which the company and CEO claimed were incorporated by
reference into the complaint. Id. at 9-11.
However, the Court determined that because those materials were
non-public they could not have been relied on by plaintiffs in
crafting their complaint; rather, the complaint referenced
different sets of minutes that the FDA had already publicly
released. Id. at 11–12. Further, the
Court concluded that the arguments by the company and CEO were so
intertwined with the various sets of minutes that it was "not
possible to excise the documents or parse the proper arguments from
the improper," and therefore denied the company's and
CEO's motions to dismiss in their entirety. Id.
at 13–14.
Turning to the separate motion to dismiss filed by the CMO, the
Court held that certain alleged misstatements were
actionable. While the CMO argued that one statement was only
about timing—that the company expected "an NDA
submission in the second half of 2017 ... [a]nd hopefully, we can
get this important new drug to patients quickly"—the
Court determined that this statement could be understood to imply
that the NDA would be approved, even though plaintiffs alleged that
portions of the Phase 3 trial design had already been rejected by
the FDA. Id. at 15-16. Similarly, a statement
that the company used a particular analysis to measure the primary
endpoint for the Phase 3 study because "it reflects the
efficacy in the cleanest way" was actionable, the Court held,
because the FDA had allegedly already disagreed with the use of
that endpoint. Id. At the very least, the
Court concluded that the CMO's statements "would have
caused a reasonable investor to believe that [the CMO] had no
reason to expect the NDA would not be approved," which was
enough to render those statements materially misleading in light of
the alleged omissions. Id. at 17. The Court
concluded, however, that other statements by the CMO relating to
the company's "goal" for drug dosage limitations and
labeling requirements were not actionable because plaintiffs did
not identify non-conclusory facts indicating that the statements
were knowingly false at the time they were made. Id.
at 17–18.
With respect to the scienter requirement, the Court determined that
plaintiffs' collective allegations—including that the
company was struggling to survive, the drug at issue was the
company's only viable drug-candidate, the company had already
substantially invested in conducting the Phase 3 trials, and that
the CMO knew about the FDA concerns but made the challenged
statements anyway—gave rise to a cogent and compelling
inference of scienter. Id. at 20. While the
CMO argued that plaintiffs had not identified any stock sales or
financial motivation for him to deceive investors, that there were
no confidential witness allegations, that he lacked a motive to
commit fraud against investors of a company he was leaving, that
the company demonstrated a belief in the success of the drug, and
that the FDA committee vote was very close, the Court concluded
that these factors were not enough to refute the "strong
inference" of scienter raised by plaintiffs.
Id. at 21. The Court observed that motive
allegations are not necessary to support an inference of scienter,
nor are allegations from a confidential witness.
Id. More broadly, the Court explained that, even
though some of the CMO's arguments supported an inference that
he subjectively believed the drug would eventually be approved,
"they do not provide a nonculpable explanation for [his]
incomplete statements omitting the FDA's
disagreements." Id. at 22.
The Court further assessed whether the CMO could be held primarily
liable under Rule 10b-5 for statements made by the CEO or the
company under the United States Supreme Court's decision in
Janus Capital Group Inc. v. First Derivative Traders,
which clarified that only the maker of a misstatement can be sued
in a private action, and that "the maker is the person or
entity with ultimate authority over the statement including its
content and whether and how to communicate it." 564 U.S.
135, 142 (2011). The Court determined that the CEO had
"ultimate authority" for her own statements and the CMO
thus could not be held primarily liable for those statements;
however, the Court also held that "at this stage"
plaintiffs sufficiently alleged that the CMO had "ultimate
authority" over the company's alleged misstatements
"pursuant to his responsibility and authority to act as an
agent" of the company. Trevena, slip
op. at 22–23.
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.