United States: Northern District Of California Grants Motion To Dismiss Putative Class Action Against Biotech Company And Executives

On March 30, 2024, Judge Araceli Martínez-Olguín of the Northern District of California granted a motion to dismiss a putative class action against a biotechnology company that develops and sells skin treatment drugs and certain of its officers. Aramic LLC, et al. v. Revance Therapeutics, Inc., No. 21-cv-0985-AMO (N.D. Cal. Mar. 30, 2024). Plaintiff, on behalf of a putative class of investors in the Company, alleged that defendants made false or misleading statements about the timing and likelihood of FDA approval of the Company's drug in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The Court dismissed the amended complaint, finding that plaintiff failed to allege that most of the challenged statements were false or misleading and that plaintiff in any event failed to allege adequately scienter.

According to the amended complaint, in November 2019 the Company announced its submission of an FDA license application—which included an evaluation of the Company's manufacturing practices—for its frown line drug, which the Company had been manufacturing since 2010. Plaintiff alleged that the FDA delayed its pre-approval inspection of the Company's manufacturing facility until July 2021 due to the COVID-19 pandemic. Plaintiff further alleged that after completing its inspection of the manufacturing facility, the FDA provided the Company with five "inspectional observations" regarding issues with the manufacturing facility. Plaintiff further alleged that at the same time the Company engaged with the FDA on its license application, it issued a press release stating that the FDA initiated its pre-approval inspection in June 2021 and that the Company anticipated that its drug would receive FDA approval in 2021. Plaintiff alleged that in October 2021, the FDA issued a response letter to the Company denying its license application for the drug, and that in March 2022, the Company resubmitted its application, which was approved in September 2022.

Plaintiff alleged that defendants made 29 false or misleading statements about the timing and likelihood of FDA approval of the Company's drug in violation of Sections 10(b) and 20(a) of the Exchange Act, in the following general categories: (i) defendants failed to disclose significant quality control and manufacturing deficiencies that made FDA approval unlikely; (ii)defendants' alleged statements about readiness for FDA inspection and confidence in FDA approval were false and misleading given the deficiencies that existed; and (iii) defendants' alleged continued statements expressing confidence in FDA approval after it received the "inspectional observations" were false and misleading.

The Court first considered whether certain alleged misstatements were forward-looking and protected by the PSLRA safe harbor. The Court held that certain alleged statements—such as, for example, that the Company "anticipates potential product approval in the second half of 2020"—were forward-looking and accompanied by meaningfully cautionary language—such as warnings regarding the Company's "ability to obtain and maintain regulatory approval of our drug product candidates"—and therefore were protected under the PSLRA safe harbor. The Court further held that even if certain alleged statements were not accompanied by meaningfully cautionary language, they still fell under the PSLRA safe harbor because plaintiff failed to allege with requisite particularity facts supporting a strong inference that the Company actually knew such statements were false or misleading when made. For example, although plaintiff alleged that defendants knew the "inspectional observations" decreased the likelihood of FDA approval, the Court stated that plaintiff failed to allege that defendants knew the projected timeline for approval was not possible at the time they were made, even if "in hindsight, the projections may have been overly optimistic."

The Court next considered defendants' argument that several of the challenged statements amounted to "vague statements of optimism and opinion statements that are not actionable." In particular, the Court agreed that several of the statements—such as that filing the license application was a "monumental achievement," that the year will be full of "excitement and execution," and that this is an "exciting," "pivotal," and "transformational" year for the Company—were nothing more than "'feel good monikers' that are not actionable." The Court, however, did find that the Company's alleged statements that it felt good about its preparedness for approval "were misleading given the FDA inspector's explanation" that the Company's assumption that the manufacturing changes it made were consistent with the licensing application was "incorrect." As to those statements, the Court found that they may be actionable if plaintiff alleged adequately scienter.

The Court then addressed whether certain challenged statements were not actionable by virtue of being immaterial. As to challenged statements made prior to the FDA inspection, the Court held that such statements were not actionable because plaintiff failed to specifically allege that the statements in 2019 and 2020 about the Company's readiness and timeline for approval were false when made, relying instead on a July 2021 form from the FDA setting forth additional requirements for approval. However, the Court found that certain challenged statements made about the FDA approval process after the FDA inspection occurred were misleading because the FDA provided feedback that would undermine the statements by defendants that "tout[ed] . . . confidence" in receiving licensing approval. The Court thus found that these statements may be actionable if plaintiff could demonstrate scienter.

The Court next considered plaintiff's three theories of scienter: (i) defendants' knowledge and access to the deficiencies identified by the FDA during the initial application process; (ii) the core operations doctrine; and (iii) defendants' motive to artificially inflate its stock. The Court held that plaintiff's allegations failed for several reasons. First, the Court rejected plaintiff's theory of knowledge and access, finding that plaintiff's failure to provide detailed allegations about defendants' actual exposure to information fell short of the PSLRA's particularity standard. Second, the Court rejected plaintiff's core operations theory, because plaintiff did not make "detailed and specific allegations" that defendants were "intimately involved in the minutiae" of the licensing process, and the fact that defendants had "some" meeting about the process "does not plausibly allege that specific information was conveyed" to defendants. Finally, the Court rejected plaintiff's motive theory, noting that such allegations are insufficient to raise a strong inference of scienter and that the lack of allegations regarding stock sales by the individual defendants further undermined any such motive theory.

Accordingly, because the Court found that plaintiff failed to plead adequately a primary Section 10(b) violation, the Court dismissed plaintiff's Section 20(a) claims against the individual defendants, but permitted plaintiff leave to further amend.

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• Aramic LLC, et al. v. Revance Therapeutics, Inc.

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