On February 4, 2024, Judge Arun Subramanian of the United States District Court for the Southern District of New York dismissed a proposed securities class action against a biopharmaceutical company (the "Company") alleging violations under Sections 11 and 15 of the Securities Exchange Act of 1934 (the "Exchange Act"). Merritt v. Molecular Partners AG, 22-CV-5925 (AS) (S.D.N.Y. Feb. 4, 2024). Plaintiff alleged that the Company's registration statement misled investors by discussing its partnership with another biopharmaceutical company (the "Partner Company") to develop a cancer treatment without disclosing that a competitor had a similar treatment that was further along in its development. The Court dismissed plaintiff's complaint on grounds that the alleged omission did not render the Company's disclosures misleading.
The Company's initial public offering launched in 2021. At the time, the Company was conducting a Phase 1 clinical drug trial for the treatment of certain cancers in partnership with the Partner Company under a licensing agreement (the "Partnership Agreement"). The registration statement disclosed information about the drug trial and the Partnership Agreement. Although the Company disclosed that "[c]ompetition in the oncology space [wa]s intense," plaintiff alleged it did not also disclose (i) that certain of the Company's patents were about to expire, and (ii) that a competitor was further along in its development of a similar drug treatment. According to plaintiff, these two things made the Partnership Agreement less valuable to the Partner Company and thus made it more likely that the Partner Company would terminate the Partnership Agreement. Ultimately, the Partnership Agreement was terminated in April 2022. According to plaintiff, this was followed by a fall in the Company's share price.
The Court held that the impending expiration of the Company's patents was repeatedly disclosed in the registration statement. The Court next addressed the Company's argument that information about its competitor's drug trials "didn't require disclosure" because "information on the . . . trials was available at clinicaltrials.gov and in public analyst reports." The Court held that it was "unable to determine" at the motion to dismiss phase "whether information on the . . . trials was 'widely known' rather than 'merely available,'" making dismissal on this basis improper. The Court nevertheless held that the lack of a specific disclosure about the competitor drug trial did not render any part of the registration statement misleading.
First, the Court addressed plaintiff's claim that the Company made two misleading opinion statements when it stated (i) that its partnership "allow[ed] for a meaningful investigation of combination therapies, given [the Partner Company's] expertise in the field of oncology" and (ii) that the Company's new drug "could be particularly relevant as a combination agent with potential combination studies in collaboration with [the Partner Company]." The Court rejected plaintiff's claims. While the first opinion statement might "imply certain facts about [the Partner Company's] experience in oncology," the Court held that it did "not imply any fact about the risk that the [Partnership Agreement] would one day end." The Court noted that the registration statement warned that the Partnership Agreement could be terminated for any reason. With respect to the second statement, the Court held that the opinions related to the drug's "potential as a combination agent" and "impl[ied] nothing" about the progress of the Company's drug "relative to other candidates."
Next, the Court rejected claims that statements about the Partnership Agreement and planned trials were misleading because the registration statement did not warn about the risk of termination because of the competitor's trial. The Court held that the complaint failed "to plausibly allege that the [Partnership Agreement] was in fact in jeopardy at the time the registration statement became effective," whether because of the competitor's trial or otherwise. The Court further noted that the complaint did "not allege that the [Partnership Agreement] was terminated because of the [competitor]'s trials," nor did "timing alone support such an inference." The Court emphasized that "once it allegedly became clear that [the competitor] was ahead, [the Partner Company] did not terminate the [Partnership Agreement] for another year." Moreover, the registration statement disclosed that the Company faced "significant competition," which the Court held sufficiently captured the risks to the Company.
Finally, the Court addressed Plaintiff's claim that the Company made two misleading forward-looking statements when it stated that (i) the "ongoing Phase 1 clinical trial" may "inform potential combination studies" to be conducted by the Partner Company "should it demonstrate sustained activity" of an immune response; and (ii) the Company "currently expect[s] to use the net proceeds from this offering" to fund the clinical trial for a second drug. With respect to the first statement, the Court rejected plaintiff's claim because the complaint failed to allege that "sustained activity" of an immune response—a condition embedded in the statement—was ever achieved and because "the registration statement [contained] sufficient cautionary language, warning both of competition and the fact that [Partner Company] could terminate the agreement for convenience." With respect to the second statement, plaintiff argued that the statement was misleading because, "with the [Partnership Agreement] in jeopardy, there was a material likelihood that [the Company] would be forced to instead use IPO proceeds for the development of [the first drug]" rather than the second drug referenced in the registration statement. The Court held that this statement was not misleading because the complaint alleged, no facts suggesting "that [the Company] used the IPO proceeds differently from how the registration statement suggest[ed]" and "no facts suggesting that [the Company] knew that it would do so at the time of the registration statement." The Court again noted that the Company disclosed that it faced significant competition, that the Partnership Agreement could be terminated for any reason, and that the Company would have to assume responsibility for developing drug candidates if the Partnership Agreement was terminated.
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