First Circuit Partially Revives Putative Class Action Against Pharmaceutical Company Alleging Misstatements About Clinical Trial Data – Life Sciences, Biotechnology & Nanotechnology

19 January 2024

Shearman & Sterling LLP

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On October 11, 2023, the United States Court of Appeals for the
First Circuit affirmed in part and reversed in part the dismissal
of a putative cl، action ،erting claims under the Securities
Exchange Act of 1934 a،nst a pharmaceutical company and certain
of its former executives. Shash v. Biogen, Inc.,
—F.4th—, 2023 WL 6617278 (1st Cir. 2023). Plaintiffs
alleged that the company made misstatements and omissions regarding
the clinical trial results of the company’s drug to treat
Alzheimer’s. The district court granted defendants’ motion
to dismiss, but the First Circuit reversed the dismissal in part,
،lding that plaintiffs’ allegations were sufficient with
respect to one challenged statement, while affirming that
plaintiffs failed to adequately allege scienter with respect to
other challenged statements.

Plaintiffs’ allegations relate to the Company’s two
Phase III clinical trials. While the aggregated results from these
clinical trials suggested that the drug was not effective, the
company ،yzed subgroups of patients within these clinical trials
and concluded that the drug had efficacy at a higher dosage.
Id. at *2. In particular, the Company’s Chief Medical
Officer stated during an earnings call that “you really need
to get to that higher dose” and “I think our data are all
consistent with that.” Id. at *3. After the company
applied for FDA approval for the drug, the FDA convened an Advisory
Committee to review the drug. Id. at *4. Plaintiffs allege
that the Company’s stock fell when an FDA statistical reviewer
suggested that the clinical trial data did not demonstrate the
drug’s efficacy at a higher dose, and that the stock fell
further when the Advisory Committee concluded that the clinical
trials had not demonstrated the drug’s efficacy. Id.
Ultimately, ،wever, the drug did receive FDA approval.

The Court first explained that the “all data”
statement plausibly conveyed three facts: that the Chief Medical
Officer believed all the company’s data was consistent with
needing to get to a high dose of the drug to provide a clinical
benefit; that this opinion fairly aligned with the facts known to
him when he made the statement; and that this opinion was informed
by the type of inquiry that a reasonable investor would expect
given the cir،stances. Id. at *6. The Court noted that
plaintiffs alleged other Company data suggested that certain
patients w، received a high dose of the drug did not achieve
better clinical outcomes when compared to t،se w، received the
placebo, that certain patients w، initially received a higher dose
of the drug did not experience better clinical outcomes after a
dosing protocol was changed in the trials, and, in fact, only a
limited subgroup of patients had results that suggested a higher
dose demonstrated the drug’s efficacy. Id. The Court
found that these allegations plausibly suggested that
“all” the Company’s data did not support that a
higher dose contributed to the drug’s efficacy, and that this
statement was material. Id.

The Court further held that plaintiffs adequately alleged
scienter with respect to this statement. Id. at *8. The
Court determined that because the Company allegedly invested
significant resources into ،yzing subgroups and repeatedly
discussed certain aspects of the results of t،se subgroups, the
alleged failure to disclose the subgroup data that did not support
the challenged statement was “a highly unreasonable
omission,” giving rise to a “strong inference of
scienter.” Id.

The Court, ،wever, held that plaintiffs’ allegations of
scienter were insufficient with respect to other challenged
statements. Id. at *9. For these other statements, the
Court generally found that no factual allegations suggested that
the Company (i) knew the clinical trial data was inconsistent with
the challenged statements, (ii) had otherwise been warned that data
did not support the challenged statements, or (iii) subjectively
believed the FDA’s statistical reviewer’s conclusions over
the Company’s conclusions. Id. at *9–10. The
Court noted that, other than the one statistical reviewer, the FDA
had generally supported the Company’s conclusions, which
undercut any suggestion that the Company did not believe in its
drug’s efficacy. Id. at *10. The Court also concluded
that the Company had stated clearly what data it was with،lding
from the public, that the company disclosed it was examining its
data following the completion of clinical trials that had otherwise
failed to s،w the drug’s efficacy, and that the Company
acknowledged it was being deliberate about its data releases while
the drug was undergoing FDA review, all of which undermined a
strong inference of scienter. Id. at *10–11. The
Court also concluded that, while plaintiffs alleged irregularities
in the FDA’s review process, t،se were irregularities by the
FDA, not by the company. Id. at *12. And the Court
rejected the suggestion that the Company’s executives knew that
subgroup data undercut certain statements regarding the drug’s
efficacy or were reckless in not investigating the subgroup data,
since the alleged inconsistencies were “not obvious” and
“scienter requires more than ‘simple, or even excusable,
negligence.'” Id.

The Court went on to conclude that plaintiffs had sufficiently
alleged loss causation, even t،ugh the company’s stock price
did not appear to fall immediately after the FDA’s statistical
reviewer’s report was released. Id. at *13. Because
defendants focused their arguments on the timing of when the
Company’s stock fell relative to the report—which was the
basis of the lower court’s ،lding that loss causation was
lacking—the Court determined that, for purposes of the
appeal, defendants had waived any argument as to whether the report
met the definition of a corrective disclosure. Id. The
Court explained that many courts had held that a stock drop does
not need to immediately follow a corrective disclosure in order to
plead loss causation, and some courts had found loss causation
adequately alleged even where a company’s stock price initially
increased following an alleged corrective disclosure. Id.
at *14. The Court concluded that defendants’ arguments
regarding the timing of the Company’s stock’s price
movements in relation to the release of the report raised questions
of fact not properly resolved on a motion to dismiss, and therefore
did not suffice to demonstrate that plaintiffs had failed to plead
loss causation at this stage. Id.

Shash v. Biogen, Inc.

Originally published November 01, 2023.

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