On March 27, 2018, Judge F. Dennis Saylor IV of the United States District Court for the District of Massachusetts dismissed a putative class action alleging claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against Biogen Inc. and certain executives. Metzler Asset Management GmbH et al. v. Kingsley et al., 16 Civ. 12101 (D. Mass. Mar. 27, 2018). Plaintiffs, investors in Biogen stock, had alleged that Biogen made false and misleading statements regarding the safety and sales of Tecfidera, a leading multiple sclerosis drug. Tecfidera’s sales had declined following the death of a patient in a clinical study, causing Biogen to cut its guidance for revenue growth in half, and Biogen’s stock price subsequently declined by more than 20%. The Court held that, while several alleged misrepresentations and omissions were plausibly misleading or false, Plaintiffs had “fail[ed] to clear the relatively high hurdle” under the PSLRA to adequately allege a “strong inference” of scienter.
The complaint alleged that defendants withheld material information about Tecfidera’s safety profile and declining sales and made misleading statements about future revenue during earnings calls and conferences between July 23, 2014 and July 23, 2015. Defendants argued that plaintiffs’ claims were barred by the doctrine of claim preclusion because a prior action containing similar allegations had been dismissed. The Court, however, held that claim preclusion did not apply because a class was never certified in the prior action. Slip op. at 30.
Plaintiffs’ allegations were based on statements about Tecfidera’s risks and future sales that were “unduly optimistic” or “minimized the impact of adverse events.” Slip op. at 3. The Court noted that in the First Circuit, a showing of scienter requires either “conscious intent to defraud” or a “high degree of recklessness,” meaning “a highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care.” Id. at 42-43. The Court found plaintiffs’ allegations—heavily reliant on confidential witnesses—were too vague to give rise to the requisite “strong inference” that defendants acted with scienter. For example, confidential witnesses noted that sales of Tecfidera “dropped precipitously” and saw “sharp declines” in late 2014 and early 2015. However, the Court noted that these allegations did not set forth “specific facts about the sales” or why the sales declined, or about how the sales decline affected Biogen’s financial guidance. Id. at 46-47. Noting that Biogen had included certain risks on the Tecfidera label and warned investors about slowing sales growth throughout the class period, the Court highlighted that the complaint lacked particularized allegations about Biogen’s alleged misrepresentation of the safety profile and sales decline after the death of the patient in the clinical study. Id. at 48.
Additionally, the Court noted that the complaint did not allege that any of the confidential witnesses ever spoke with one of the named defendants, personally witnessed a fraudulent act, or created or read a false document. Id. at 47 n.29. Allegations from these confidential witnesses, therefore, did not provide clarity on the intentions and knowledge of senior executives. While plaintiffs’ asserted inference of scienter might be “plausible,” the Court held, it fell short of being “strong, cogent, or compelling.” Id. at 56. This was particularly so in light of a competing inference of a lack of scienter—supported by risk disclosures expressing caution about Tecfidera’s growth well in advance of the class period, id. at 56, a rebound in Tecfidera revenue in the following quarter, id. at 59, and timely notification about the patient’s death, id. The Court concluded that these factors supported an inference that defendants were, at worst, “overly optimistic in attempting to predict the [patient’s] death’s effect on revenues.” Id. at 59-60.
This decision serves as a helpful reminder that courts will strictly scrutinize allegations of scienter in light of the PSLRA.