On December 30, 2020, Judge Haywood S. Gilliam of the United States District Court for the Northern District of California granted a motion to dismiss a putative class action against a biopharmaceutical company (the "Company") and certain of its officers for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. Malquin v. Nektar Therapeutics, No. 18-cv-06607 (N.D. Cal. Dec. 30, 2020). Plaintiffs alleged that the Company made false and misleading statements and omissions about the efficacy of its flagship cancer drug in development. The Court dismissed the amended complaint with prejudice, confirming that securities claims cannot be based on allegations that a company failed to use the best or preferred statistical methods for evaluating the effectiveness of a new drug and that short seller reports will not constitute corrective disclosures sufficient to allege loss causation unless the reports can be characterized plausibly as revealing new information to the market.
Plaintiffs' claims were based primarily on the Company's announcement of the results of early stage clinical trials for its flagship cancer drug at an investor conference that was coupled with a chart showing that cancer-fighting cells increased by an average of 30-fold in ten patients dosed with the drug every three weeks ("30-Fold Increase Chart"). Subsequently, an anonymous short seller report (the "Short Seller Report") claimed that those results were misleading and based on distorted data because they were based on a study that (a) included one patient who experienced a 300-fold increase in cancer-fighting cells without experiencing any clinical benefit, whereas the other patients experienced such small increases that they could not be considered statistically significant, and (b) indicated that the outlier patient, along with one other patient, in fact received dosages every two weeks rather than three. Plaintiffs' complaint also contained allegations based on confidential witnesses who claimed they were instructed to include the outlier patient data in the 30-Fold Increase Chart.
The Court previously dismissed plaintiffs' complaint. Plaintiffs subsequently amended their complaint to include additional allegations that the outlier patient's results were unique, that many individuals in the Company had expressed concerns to management about including the outlier patient in the results, and expert opinions that inclusion of the outlier patient results in the 30-Fold Increase Chart violated industry and scientific standards that caution against presenting data when it is "outlier driven." The Court held that these amended allegations were still insufficient to state a claim.
The Court first held that the amended allegations boiled down to a disagreement about the statistical methodology used by the Company. Under the Ninth Circuit's decision in In re Rigel Pharms., Inc. Sec. Litig., however, "merely alleging that defendants should have used different statistical methodology in their drug trials is not sufficient to allege falsity." The Court rejected plaintiffs' argument that their claim was different because it was based on allegations that the Company presented data in a way that would "mislead anyone versed in industry and scientific standards." According to the Court, plaintiffs' claim was based on contentions regarding "unspecified standards that purportedly are 'customarily followed in such trials' and that 'individuals familiar with pharmaceutical research typically assume are followed.'" The Court held this was not different than the claims in Rigel because plaintiffs did not "allege that Defendants misrepresented their own statistical methodology, analysis, and conclusions, but instead criticize only the [Company's] statistical methodology." With respect to scienter, the Court held that the confidential witness allegations about disagreements over the use of outlier data lacked specificity and that such disagreement in any event was insufficient to establish scienter.
Finally, the Court also held that the Short Seller Report was not a corrective disclosure. Applying the Ninth Circuit's recent decision in In re BofI Holding, Inc. Securities Litigation dealing with anonymous blog posts, covered here, the Court noted that "[a] disclosure based on publicly available information can, in certain circumstances, constitute a corrective disclosure." However, the question was whether the Court could "plausibly infer that the alleged corrective disclosure provided new information to the market that was not yet reflected in the company's stock price." Here, the Court held that although it was plausible that the Report provided new information to the market (giving credence to plaintiffs' allegation that the Short Seller Report "was the first market participant . . . to grasp the misleading nature" of the announced results), "it [was] not plausible that the market reasonably perceived the [Short Seller Report] as revealing the falsity of the challenged statements" because it (i) "was published by an 'anonymous short-seller who had a financial interest in driving [Company] stock price down incentive to convince others to sell,'" and (ii) "disclaimed any 'representation, express or implied, as to the accuracy, timeliness, or completeness'" of the information. According to the Court, "a reasonable investor reading" an anonymous short seller report "disclaiming the accuracy or completeness of its analysis 'would likely have taken [its] contents with a healthy grain of salt.'"
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