(Article from Securities Law Alert, April 2018)
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On April 4, 2018, the First Circuit affirmed dismissal of a securities fraud action alleging that a pharmaceutical company misled investors about the timing of its expedited application for approval of a new pharmaceutical. Kader v. Sarepta Therapeutics, 887 F.3d 48 (1st Cir. 2018) (Torruella, J.). The court held that plaintiffs failed to allege scienter because defendants broadly disclosed the FDA’s concerns, and there were no particularized facts supporting plaintiffs’ allegation that the company was dependent on offerings to fund its operations.
To plead scienter, plaintiffs pointed to the company’s alleged failure to disclose the FDA’s request that the company obtain an independent review of its pharmaceutical data. The First Circuit found the statements at issue “severely weaken[ed] any inference of scienter” because the CEO both “reminded investors that the FDA was looking for further review” while offering “no assurance that [the company] would accede to the type of review that the FDA sought.” The First Circuit explained that “providing warnings to investors, or otherwise disclosing potential risks, erodes inferences of scienter.”
The First Circuit further held that it could not “reasonably infer scienter from [the CEO’s] failure to elaborate … on any difference between a review by the FDA and” an independent review. The court reasoned that “an arguable misrepresentation provides by itself less support for an inference of scienter than does a clear falsehood.”
The First Circuit also rejected plaintiffs’ effort to plead scienter based on the CEO’s failure to disclose that the company was not complying with the FDA’s request for independent review. The court observed that the FDA did not inform the company that independent review was “a mandatory prerequisite” for expedited filing. Moreover, the First Circuit emphasized that defendants’ failure to “divulge the details of interim ‘regulatory back-and-forth’ with the FDA … alone cannot support an inference of scienter … when the defendants do provide warnings in broader terms.” The court reasoned that “[t]here must be some room for give and take between a regulated entity and its regulator.”
Finally, the First Circuit found meritless plaintiffs’ contention that the company was “dependent upon offerings to fund its operations” because it was “in a race for FDA approval” and was “generating no significant revenue.” The court explained that it has “set a high bar for arguments of this sort.” To plead scienter based on a motive to boost the company’s stock price, plaintiffs must allege “something more than the ever-present desire to improve results, such as allegations that the very survival of the company was on the line.”
In the case before it, the First Circuit found the complaint “bereft of allegations that [the company] was financially on the ropes, or that it would shutter its doors unless it padded earnings by deceiving investors.” The court recognized that the company’s initial public offering may have “generated revenue that proved useful to [the company] in its race for FDA approval, so as to secure the first-mover advantage.” However, the First Circuit held that this “alone cannot bear the weight of an inference of scienter that is at least as compelling as any other.”