On April 30, 2019, the United States District Court for the District of Massachusetts granted a motion to dismiss a putative class action asserting claims under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder against a biopharmaceutical company (the “Company”) and certain of its executives, and claims under Section 20(a) of the Exchange Act against the executives. In re Ocular Therapeutix, Inc. Securities Litigation, No. 17-CV-12288 (D. Mass. Apr. 30, 2019). Plaintiffs alleged that defendants made misstatements regarding manufacturing issues with respect to an ocular pain drug developed by the Company. The Court held that plaintiffs failed to adequately allege actionable misstatements or omissions and scienter, and granted the motion to dismiss.
Plaintiffs alleged that: The Company submitted a New Drug Application (“NDA”) to the Food and Drug Administration (“FDA”) in September 2015 in hopes of receiving approval to market a new drug. In an inspection of the Company’s manufacturing process in February 2016, the FDA issued a “Form 483” to the Company noting that it observed various issues, including concerns about inspection record keeping, control procedures, and laboratory controls. The Company subsequently filed its 2016 Form 10-K, in which the Company stated that it followed “current good manufacturing practices” in developing their products. Plaintiffs alleged those statements were misleading and also alleged that, while the 10-K disclosed receipt of the FDA’s Form 483, the Company “downplayed” its significance. In July 2016, the FDA issued a letter rejecting the Company’s NDA, which the Company disclosed in a press release. Later that year, the Company’s CEO made statements in an earnings call indicating that the Company thought it had taken adequate steps to address the issues raised in the Form 483. In January 2017, the Company resubmitted a NDA for the same drug, and shortly after filed its 2017 Form 10-K. In the 2017 10-K, the Company reiterated statements from its 2016 10-K indicating that the Company used “current good manufacturing practices” in its facilities. In May 2017, the FDA issued another Form 483 after another inspection, which raised additional issues including observations about “particulate matter” found in the drug, and other issues related to process controls, laboratory controls, and training. The Company disclosed the new Form 483 in a press release the following day, and the Company’s Executive Vice President of Regulatory, Quality, and Compliance made statements in an earnings call expressing confidence regarding how the Company was addressing the issues raised by the FDA and his view that those issues would be resolved in a timely manner. In July 2017, the Company received another letter from the FDA rejecting the NDA application. In December 2017, the U.S. Securities and Exchange Commission (“SEC”) initiated an investigation into the Company’s manufacturing process for the ocular drug.
The Court found that plaintiffs had not adequately pled actionable misstatements or omissions. The Court found that the statements in the 2016 and 2017 10-Ks about the Company following “current good manufacturing processes” were too general to be actionable. The Court explained that the statements merely indicated the standards that the Company was guided by and were not a warranty that the Company had never deviated from those standards. The Court rejected plaintiffs’ arguments that the FDA’s Forms 483 issued prior to those 10-Ks established falsity, reasoning that the FDA itself acknowledged that Forms 483 “reflect only inspectional observations” and are not determinations about compliance. The Court also noted that the Company made efforts to promptly publicize receipt of the Forms 483.
Turning to the executives’ alleged statements in the 2016 and 2017 earnings calls, the Court found that they were similarly not actionable. The Court noted that the executive’s statements from the 2016 earnings call were “protected statement[s] of opinion” (as the CEO prefaced the statement with “we think”) and that plaintiffs failed to allege that the CEO did not truthfully hold such beliefs. Similarly, the Court found that the other executive’s statements in the 2017 earnings call—that the Company expected to be able to resolve the issues identified on the May 2017 Form 483 in a “timely manner”—were protected by the PSLRA’s safe harbor provision for forward-looking statements, and were accordingly not actionable.
Separately, the Court found plaintiffs failed to allege scienter. The Court rejected plaintiffs’ contention that defendants recklessly disregarded the issues raised by the Forms 483 and that the related SEC investigation further supported an inference of scienter. The Court noted that defendants disclosed and openly discussed the observations from the Forms 483, and that an SEC investigation following the statements at issue “proves nothing about scienter at the time of the statements.”
Having found that plaintiffs failed to adequately plead a primary violation under Section 10(b), the District Court held that plaintiffs’ allegations under Section 20(a) against the executives of the Company similarly failed.