In an early appellate decision applying Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, a three-judge panel of the 2d Circuit, on March 4, issued its opinion in In re Sanofi. The plaintiffs in that case had alleged that defendants’ material omissions regarding a drug candidate – failing to disclose that “the FDA had expressed concern regarding the use of single‐blind (as opposed to double-blind) clinical studies” – had misled investors. After considering how a reasonable investor would understand the statement of opinion in the full context in which it was made and heard, the Court concluded that even under SCOTUS’ Omnicare standard, the plaintiffs had failed to state a claim for relief.

Omnicare

As you might recall, in Omnicare, SCOTUS held that, with regard to whether statements of opinion were misleading, “[t]he investor must identify particular (and material) facts going to the basis for the issuer’s opinion—facts about the inquiry the issuer did or did not conduct or the knowledge it did or did not have—whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.”

However, SCOTUS’ position was a nuanced one. While recognizing that a reasonable person takes into account the difference between a statement of fact and a statement of opinion, SCOTUS maintained that a reasonable person may also understand that an opinion conveys facts about the speaker’s basis for holding that view. Accordingly, the Court held, the appropriate standard with respect to omissions in connection with statements of opinion is “if a registration statement omits material facts about the issuer’s inquiry into or knowledge concerning a statement of opinion, and if those facts conflict with what a reasonable investor would take from the statement itself, then §11’s omissions clause creates liability.” Because investors recognize that opinions often rest on weighing and balancing competing facts, this does not mean that every single fact “cutting the other way” must be disclosed. Whether an opinion is misleading also depends on the context and the surrounding language. In the context of registration statements, the Court stated that “[i]nvestors do not, and are right not to, expect opinions contained in those statements to reflect baseless, off-the-cuff judgments, of the kind that an individual might communicate in daily life. At the same time, an investor reads each statement within such a document, whether of fact or of opinion, in light of all its surrounding text, including hedges, disclaimers, and apparently conflicting information.” If companies were free to escape liability simply by adding “we believe” to any opinion, that position, the Court reasoned, “would punch a hole in the statute for half-truths in the form of opinion statements.” Rather, “Section 11’s omissions clause, as applied to statements of both opinion and fact, necessarily brings the reasonable person into the analysis, and asks what she would naturally understand a statement to convey beyond its literal meaning. And for expressions of opinion, that means considering the foundation she would expect an issuer to have before making the statement.” To bring a claim, an “investor must identify particular (and material) facts going to the basis for the issuer’s opinion—facts about the inquiry the issuer did or did not conduct or the knowledge it did or did not have—whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context….And to avoid exposure for omissions under §11, an issuer need only divulge an opinion’s basis, or else make clear the real tentativeness of its belief. Such ways of conveying opinions so that they do not mislead will keep valuable information flowing.” (See this PubCo post.)

Background of the Case

In Sanofi, plaintiffs alleged that defendants’ (Sanofi, its acquired company that had developed the drug candidate and named executives) failure to disclose FDA concerns regarding the use of single‐blind clinical studies was a material omission that was misleading to investors. Because the drug candidate being tested required only semi-annual administration (as opposed to competitive current therapies, which required daily or weekly dosing), the company conducted a single-blind study, not the typical double-blind study (because it would be apparent to the patient from the dosing schedule which drug was being administered). The FDA repeatedly expressed concern regarding potential bias in the use of a single-blind study, advocating instead that the company use “a double‐dummy placebo control” in its pivotal clinical trials. However, the FDA also indicated that, if the study results showed “an extremely large effect, then FDA may potentially accept this rater‐blinded design for the pivotal trials.” Notwithstanding its concerns, the FDA gave the company the go-ahead to enroll patients in its single-blind Phase III clinical trial. Presumably, the defendants viewed the favorable results from the clinical trial to reflect just the type of “large effect” that the FDA needed to see.

The drug candidate at issue in the case was originally owned by another company. When Sanofi proposed to acquire that company, the target argued that Sanofi was undervaluing the potential for this new drug. To address this issue, the parties agreed that part of the merger consideration would include contingent value rights (CVRs), registered on Form F-4, entitling the holder to cash payouts upon achievement of certain milestones related to the drug’s success. The first milestone payout was related to the attainment of FDA approval prior to a specified date. The offering documents contained a number of optimistic statements regarding the anticipated timing and probability of FDA approval (e.g., estimating a 90% probability that the drug candidate would receive FDA approval in time to meet the CVR milestone), and, following the acquisition, Sanofi continued this optimistic tone regarding drug efficacy and timing of submission for FDA approval (e.g., noting in an analyst call, that the trial “data are nothing short of stunning”). Following submission, however, the FDA Advisory Committee reviewing the application in advance of the approval hearing expressed concerns regarding the drug candidate and two (of three) were queasy about the impact of the failure to use double‐blind studies on the trial results. Upon public release of materials related to this review, the price of the CVRs dropped 62%. And, when the FDA’s formal rejection of the drug was later announced, the price of the CVRs sank even further. However, five months later, Sanofi announced that the FDA had accepted resubmission of its application, and the drug received FDA approval that same year – too late, however, to meet the milestone.

The Opinion

In the lower court, the complaint had been dismissed because the plaintiffs had failed to allege facts suggesting subjective falsity of the opinions. However, plaintiffs sought review in light of the subsequent Omnicare decision. On de novo review, the 2d Circuit held that “even under Omnicare’s standard, Plaintiffs have failed to allege that Defendants made materially misleading statements of opinion.”

The Court viewed two points from Omnicare to be critical to its analysis: the first was that, to be actionable, “the omitted facts must ‘conflict with what a reasonable investor would take from the statement itself.’” Analyzing the statements of opinion, the Court found “no plausible allegation that the FDA’s interim feedback conflicted with any reasonable interpretation of Defendants’ statements about FDA approval. Though the FDA had expressed concern about Defendants’ testing methodology, it had also stated that any deficiency could be overcome if the results showed an ‘extremely large effect.’ The record reflects, and the parties do not dispute, that [the drug’s] treatment effect was, in fact, large. There can be no conflict inferred from a statement of optimism consistent with the FDA’s instructions as to the treatment results necessary for approval.”

In addition, the Court examined the context of the statements, particularly in light of the sophisticated nature of investors that buy CVRs. In the Court’s view, these types of investors would be “well accustomed to the ‘customs and practices of the relevant industry,’ [and] would fully expect that Defendants and the FDA were engaged in a dialogue, as they were here, about the sufficiency of various aspects of the clinical trials and that inherent in the nature of a dialogue are differing views.” That dialogue, the Court said, should not prevent Sanofi from expressing optimism, particularly in the context of the “numerous caveats to the reliability of the projections” in the offering materials.

Sidebar: For example, the estimate of a 90% probability that the company would receive FDA approval in time to meet the CVR milestone was included in an amendment to the Schedule 14D-9 as part of a table of projections that management provided to the board and the bankers. Surrounding language stated, among other things, that the projections were “not prepared with a view toward public disclosure,” were “not being included… to influence a Company shareholder’s decision” and were subject to risks related to “the timing of regulatory approvals and introduction of new products.”

Quoting from Omnicare, the Court concluded that a reasonable investor (and especially a sophisticated one as here) “would have considered the statements ‘in light of all [the] surrounding text, including hedges, disclaimers, and apparently conflicting information.’” As the Court concluded, “fatal to Plaintiffs’ case is the absence of any serious conflict between the FDA’s interim, albeit repeated, concerns about methodology and Defendants’ optimism about FDA approval. As the Supreme Court noted, ‘a statement of opinion is not misleading just because external facts show the opinion to be incorrect.’”

The Court viewed the second critical take-away from Omnicare to be that an opinion statement “is not necessarily misleading when an issuer knows, but fails to disclose, some fact cutting the other way.” As applied by the Court, this concept meant that “Defendants need not have disclosed the FDA feedback merely because it tended to cut against their projections—Plaintiffs were not entitled to so much information as might have been desired to make their own determination about the likelihood of FDA approval by a particular date.” Of course, investors “would have been interested in knowing about the FDA feedback, and perhaps would have acted otherwise had the feedback been disclosed, but Omnicare does not impose liability merely because an issuer failed to disclose information that ran counter to an opinion expressed in the registration statement.” [Emphasis added] Rather, the defendants were “only tasked with making statements that ‘fairly align[ed] with the information in the issuer’s possession at the time.’” And the Court said, even the plaintiffs did not allege that these FDA risks were out of the ordinary: “Sophisticated investors, aware of the FDA’s strong preference for double‐blind trials, cannot claim surprise when it is revealed that the FDA meant what it said.”

The Court employed a similar analysis when considering the other groups of statements alleged to be misleading. With regard to generalized statements of subjective optimism, the Court concluded that “no reasonable investor would have inferred that mere statements of confidence suggested that the FDA had not engaged in industry standard dialogue with Defendants about potential deficiencies in either the testing methodology or the drug itself.” Analyzing the defendants’ positive statements regarding the trial results, the Court concluded that the “statements were not misleading simply because the FDA disagreed with Defendants’ interpretation of the data; an issuer is not liable merely because it ‘knows, but fails to disclose, some fact cutting the other way.’” So long as the defendants “conducted a ‘meaningful’ inquiry and in fact held that view, the statements did not mislead in a manner that is actionable.”

While plaintiffs will likely attempt to narrow application of the opinion based on the Court’s references to the sophistication of the purchasers of the CVRs, companies will certainly find a lot in In re Sanofi to give them comfort, particularly the Court’s conclusion, interpreting Omnicare, finding no claim for relief under §11 for omitted facts related to a statement of opinion – even if they would have led the plaintiffs to act otherwise had they been disclosed – so long as they do not conflict with what a reasonable investor would take from the statement itself, viewed in context.