On July 15, 2022, Judge Edward M. Chen of the United States District Court for the Northern District of California largely denied a motion to dismiss a securities fraud class action against a biopharmaceutical company (the “Company”) and certain of its officers alleging violations of Sections 10(b) of the Securities Exchange Act of 1934. In re FibroGen, Inc. Securities Litigation, No. 21-cv-02623-EMC (N.D. Cal. July 15, 2022). Plaintiffs alleged that the Company made 96 false and misleading statements concerning the “safety and efficacy data of its flagship drug.” Although the Court held that a handful of the misstatements were not actionable for failure to adequately allege falsity, the Court otherwise denied the motion to dismiss.

The Company’s flagship product is an experimental drug (the “Drug”) designed to treat anemia in patients with chronic kidney disease. Plaintiffs alleged that a key part of the Company’s efforts to secure FDA approval for the Drug was demonstrating, through clinical trial data, that the Drug was at least as effective as the leading alternative and that it posed fewer safety risks. Plaintiffs alleged that the Company and its officers repeatedly claimed from 2018 through 2020 that the Drug was superior to the leading alternative and safer than a placebo, making FDA approval likely. In November 2020, the Company’s chief medical officer resigned and, three weeks later, the Company announced that the FDA had extended review of the Drug by three months. In April 2021, the Company issued a press release indicating that management had become aware of “post-hoc changes to the stratification factors” in the clinical trial results, which Plaintiffs alleged amounted to a manipulation of the data by the Company. After these “post-hoc changes” were corrected, Plaintiffs alleged that the data revealed that the Drug was significantly less effective and less safe than the placebo and the leading alternative. In July 2021, after reviewing the Company’s application, the FDA voted against approval. According to Plaintiffs, the FDA noted that the Company’s claim that the Drug was more effective than the leading alternative was “inconclusive at best” and that the Drug caused “greater rates of some important adverse events” than the leading alternative, including a higher rate of death and other major side effects. The Company’s share price fell precipitously after each of the April and July 2021 announcements.

The Court first held that the statements at issue did not qualify for protection under the Private Securities Litigation Reform Act’s safe harbor provision for certain forward-looking statements because they were not entirely forward-looking and because Plaintiffs in any event sufficiently pleaded that the statements were made with actual knowledge of falsity. For example, the Court held that the Company’s statements concerning the likelihood of FDA approval also referenced explicitly past interactions with the FDA and/or were based on already existing data. Describing the Company’s argument that plaintiffs failed to allege “actual knowledge” as “unconvincing,” the Court held that “the allegation that [the Company] manipulated the clinical data to obtain more favorable analyses implies knowledge.”

The Court also held that plaintiffs adequately alleged falsity for the vast majority of the alleged misstatements. For example, the Court held that plaintiffs’ allegations that clinical trial data had been manipulated “imply that the data was falsified and that [the Company] knew so” when it made statements about the Drug’s safety and efficacy. However, with respect to a handful of alleged misstatements “about how the [meeting with the FDA] felt to [the Company] and [the Company’s] confidence in the [FDA] submission,” the Court found these to be inactionable because they were “mere puffery.”

Finally, the Court held that plaintiffs’ allegations raised a strong inference of scienter. In particular, the Court focused on the “dubiousness of post-hoc changes” made to the clinical trial data. The Court distinguished plaintiffs’ allegations from other cases where defendants had successfully argued that the statements at issue reflected an “honest disagreement over the clinical data” and thus failed to support a strong inference of scienter. Here, Plaintiffs alleged the Company manipulated data to conceal “safety and efficacy issues,” which, according to the Court, supported a strong inference of scienter. Underscoring this conclusion, the Court emphasized allegations based on statements from confidential witnesses. According to those witnesses, the Company “became aware that the FDA had identified issues regarding [the Drug]’s safety data . . . as early as the fall of 2020—i.e., several months before [the Company was] forced to reveal the truth and [was] telling investors the exact opposite.” Finally, while the Court held that stock sales by Defendants did not support a strong inference of scienter, the Court held that “some degree” of inference could be drawn by compensation arrangements for some of the officer defendants that resulted in bonuses based on financial performance that greatly exceeded their salaries. Finally, the Court also held that an inference of scienter was present as to all Defendants under the “core operations theory, which allows a court to impute inference of scienter when “the nature of the relevant fact is of such prominence that it would be absurd to suggest that management was without knowledge of the matter.”