On April 9, 2020, the United States Court of Appeals for the First Circuit affirmed the dismissal of a putative class action asserting claims under the Securities Exchange Act of 1934 against a pharmaceutical company and certain of its executives.  Gallagher v. Ocular Therapeutix, Inc., No. 19-1557 (1st Cir. Apr. 9, 2020).  Plaintiffs alleged that the company made misrepresentations regarding manufacturing processes that served as the basis for the FDA's rejection of the company's New Drug Application ("NDA").  The lower court dismissed the action for failure to allege an actionable misstatement or omission or to sufficiently allege scienter.  The First Circuit affirmed, holding that plaintiffs failed to allege sufficient facts to support a strong inference of scienter. 

Plaintiffs argued that defendants' affirmative statements in SEC filings that the drug was manufactured using the FDA's current Good Manufacturing Practices, and an executive's statements on an investor conference call that the company's manufacturing was "fully developed," were materially false and misleading.  Slip op. at 20.  In addition, plaintiffs argued that a strong inference of scienter could be drawn because, prior to the dates of the statements, defendants had received Forms 483 from the FDA apprising the company of manufacturing problems revealed during FDA inspections.  Id. at 20.  The Court declined to address whether the alleged misstatements were material and instead confined its analysis to scienter.  Id. at 24.

With respect to the company's statements regarding current Good Manufacturing Practices, the Court first observed that a Form 483 is not a final agency determination and, thus, did not establish that the company was incapable of complying with the FDA's regulations.  Id. at 25.  The Court rejected plaintiffs' argument that scienter could nevertheless be inferred because defendants subsequently stated that they were using current Good Manufacturing Practices; rather, the Court emphasized, the SEC filings containing those statements also disclosed the receipt of the Forms 483 and warned of the risk to approval of the NDA if the issues raised in the Forms 483 could not be resolved.  Id. at 25-26.  The Court concluded that such disclosures "undercut any inference that defendants intentionally or recklessly misled investors."  Id. at 27.  Moreover, even if any inference of scienter could be drawn from the statements in the SEC filings, the Court held that such an inference was not "at least as compelling as any opposing inference of nonfraudulent intent"—such as that defendants may have merely been stating their intention to comply with FDA regulations.  Id. at 28.

Similarly, the Court rejected plaintiffs' argument that an executive acted with scienter in stating on a conference call that the company's manufacturing process was "fully developed" despite having already received two Forms 483—including one the day prior to the call—allegedly showing that the company had manufacturing problems.  Id. at 29.  The Court observed that the executive discussed the newly received Form 483 on the same call and expressed confidence that the company could "resolve the 483 issues in a timely manner."  Id. at 30.  Moreover, the Court noted defendants' argument that the term "fully developed" was a term of art that, according to FDA guidelines, refers to a process that "has surpassed the concept or piloting stage but must still be tested and validated to determine whether the process works as intended and meets the necessary standards."  Id. at 31.  Accepting that interpretation of the term "fully developed" and reading the complaint as a whole, the Court concluded that the more reasonable and compelling inference was that the executive's use of the term "fully developed" was made with nonfraudulent intent.  Id. at 32.

Gallagher v. Ocular Therapeutix, Inc.

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