On August 28, 2020, Judge Cynthia Rufe of the United States District Court for the Eastern District of Pennsylvania denied three separate motions to dismiss a putative class action asserting claims under the Securities Exchange Act of 1934 against a biopharmaceutical company, its CEO, and its Chief Medical Officer. Tomaszewski v. Trevena, Inc., No. 18-cv-4378, slip op. (E.D. Pa. Aug. 28, 2020). Plaintiffs alleged that the company and its executives made various misrepresentations and omissions regarding interactions with the FDA concerning a drug candidate. The Court denied the motions of the company and CEO, after granting plaintiffs’ motion to strike certain documents on which those motions relied, and further held that plaintiffs adequately alleged actionable misstatements and scienter with respect to the Chief Medical Officer (“CMO”).

Plaintiffs alleged that the company touted the success of the drug’s Phase 2 trials, as well as its planned Phase 3 trials and the prospects for FDA approval, without disclosing that the FDA had expressed serious concerns regarding the company’s plans for a Phase 3 trial. Slip. Op. at 2–4. Ultimately, the FDA publicly released details regarding its prior meetings with the company, and an FDA committee voted not to recommend approval of the drug, citing certain of the same concerns that the FDA had communicated in the prior meetings. Id. at 6.

As a threshold issue, the Court granted a motion by plaintiffs to strike certain documents the company and CEO relied on in connection with the motion to dismiss, including minutes of FDA meetings, which the company and CEO claimed were incorporated by reference into the complaint. Id. at 9‑11. However, the Court determined that because those materials were non-public they could not have been relied on by plaintiffs in crafting their complaint; rather, the complaint referenced different sets of minutes that the FDA had already publicly released. Id. at 11–12. Further, the Court concluded that the arguments by the company and CEO were so intertwined with the various sets of minutes that it was “not possible to excise the documents or parse the proper arguments from the improper,” and therefore denied the company’s and CEO’s motions to dismiss in their entirety. Id. at 13–14.

Turning to the separate motion to dismiss filed by the CMO, the Court held that certain alleged misstatements were actionable. While the CMO argued that one statement was only about timing—that the company expected “an NDA submission in the second half of 2017 … [a]nd hopefully, we can get this important new drug to patients quickly”—the Court determined that this statement could be understood to imply that the NDA would be approved, even though plaintiffs alleged that portions of the Phase 3 trial design had already been rejected by the FDA. Id. at 15-16. Similarly, a statement that the company used a particular analysis to measure the primary endpoint for the Phase 3 study because “it reflects the efficacy in the cleanest way” was actionable, the Court held, because the FDA had allegedly already disagreed with the use of that endpoint. Id. At the very least, the Court concluded that the CMO’s statements “would have caused a reasonable investor to believe that [the CMO] had no reason to expect the NDA would not be approved,” which was enough to render those statements materially misleading in light of the alleged omissions. Id. at 17. The Court concluded, however, that other statements by the CMO relating to the company’s “goal” for drug dosage limitations and labeling requirements were not actionable because plaintiffs did not identify non-conclusory facts indicating that the statements were knowingly false at the time they were made. Id. at 17–18.

With respect to the scienter requirement, the Court determined that plaintiffs’ collective allegations—including that the company was struggling to survive, the drug at issue was the company’s only viable drug-candidate, the company had already substantially invested in conducting the Phase 3 trials, and that the CMO knew about the FDA concerns but made the challenged statements anyway—gave rise to a cogent and compelling inference of scienter. Id. at 20. While the CMO argued that plaintiffs had not identified any stock sales or financial motivation for him to deceive investors, that there were no confidential witness allegations, that he lacked a motive to commit fraud against investors of a company he was leaving, that the company demonstrated a belief in the success of the drug, and that the FDA committee vote was very close, the Court concluded that these factors were not enough to refute the “strong inference” of scienter raised by plaintiffs. Id. at 21. The Court observed that motive allegations are not necessary to support an inference of scienter, nor are allegations from a confidential witness. Id. More broadly, the Court explained that, even though some of the CMO’s arguments supported an inference that he subjectively believed the drug would eventually be approved, “they do not provide a nonculpable explanation for [his] incomplete statements omitting the FDA’s disagreements.” Id. at 22.

The Court further assessed whether the CMO could be held primarily liable under Rule 10b-5 for statements made by the CEO or the company under the United States Supreme Court’s decision in Janus Capital Group Inc. v. First Derivative Traders, which clarified that only the maker of a misstatement can be sued in a private action, and that “the maker is the person or entity with ultimate authority over the statement including its content and whether and how to communicate it.” 564 U.S. 135, 142 (2011). The Court determined that the CEO had “ultimate authority” for her own statements and the CMO thus could not be held primarily liable for those statements; however, the Court also held that “at this stage” plaintiffs sufficiently alleged that the CMO had “ultimate authority” over the company’s alleged misstatements “pursuant to his responsibility and authority to act as an agent” of the company. Trevena, slip op. at 22–23.