On August 4, 2022, the United States District Court for the District of New Jersey dismissed a putative securities class action asserting claims under the Securities Exchange Act of 1934 against a pharmaceutical company and certain of its executives. Paxton v. Provention Bio, Inc., No. 3:21-cv-11613, slip op. (D.N.J. Aug. 4, 2022), ECF No. 57. Plaintiffs alleged the company made misrepresentations in connection with the company’s candidate drug intended to delay or prevent the progression of Type One Diabetes. The Court held that plaintiffs failed to adequately allege actionable misrepresentations, scienter, or loss causation.

Plaintiffs’ allegations concerned the company’s efforts to obtain FDA approval of the drug after the company acquired the drug from another company that had manufactured the drug in Ireland and had positive initial results in a clinical trial. Because the company wanted to manufacture the drug in Seattle, it conducted a “bridging study” in an attempt to demonstrate that the formulation manufactured in Seattle would be “biocomparable” — i.e., that it would have “a similar lasting impact on a patient’s body in both time and effect.” Id. at 4-5. Ultimately, the FDA concluded that the new formulation was not biocomparable and observed “deficiencies” in the company’s manufacturing facility. Id. at 17‑18. Plaintiffs alleged that the company made statements that were misleading because they omitted information regarding (1) the comparability results of the bridging study; (2) the enrollment size of the Stage 2 clinical trial; (3) ongoing safety data from the Stage 2 clinical trial; and (4) manufacturing progress.

With respect to the comparability study, the Court rejected plaintiffs’ argument that omitting the risk that the study might produce negative results made the company’s statements misleading. Id. at 22. The Court explained that, while speaking on an issue can give rise to a duty to disclose additional material facts, the company “did not speak on the issue” of the comparability results in the statements challenged in this regard, and in fact, made clear that the FDA was the ultimate decision-maker. Id. at 22-23. The Court further concluded that plaintiffs failed to demonstrate that the company was aware of the comparability results or believed that there was a significant risk that FDA approval would be negatively impacted by those results. Id. at 23. Moreover, the Court determined that the company’s statements regarding “its alternative view of the results” — after it chose to speak on the issue — were not actionable because “[i]nterpretations of clinical trial data” were nonactionable opinions, and plaintiffs did not allege that the company did not honestly believe its interpretation. Id. at 24-27. The Court also explained that the company had no duty to provide updates regarding interim discussions with the FDA about the comparability study because the FDA’s feedback did not express a binding decision and was subject to change. Id. at 28.

With respect to the enrollment size of the clinical trial, the Court rejected plaintiffs’ contention that the company failed to disclose that the trial “did not meet the enrollment specified in the original protocol.” Id. at 31. To the contrary, the Court observed that both the company and the entity conducting the clinical trial had disclosed the enrollment size. Id. The Court further rejected the allegation that the safety data from the trial was insufficient due to a design flaw, noting that these allegations were based solely on comments from FDA Advisory Committee members — who ultimately voted in favor of the drug — and that there was no allegation that plaintiffs did not honestly believe that the drug was safe. Id. at 32. And with respect to plaintiffs’ allegations regarding the company’s manufacturing facilities, the Court observed that the company had disclosed “the FDA’s perceived manufacturing deficiency” within days and that plaintiffs failed to allege any facts indicating that the company learned of such deficiencies previously, the severity of those deficiencies, or whether these deficiencies caused a delay in FDA approval. Id. at 33.

The Court then assessed plaintiffs’ allegations regarding scienter and concluded that they did not give rise to a strong inference of scienter as to any defendant. Id. at 35. Plaintiffs asserted that the drug was “centrally important” to the company, that the CEO and CFO held themselves out as knowledgeable about the FDA, that the CEO and CFO had extensive experience in the pharmaceutical industry, that the company had a common stock offering while these events unfolded, and that the CEO and CFO are senior executives who signed the company’s annual reports. Id. But the Court explained that none of these allegations were sufficient to support a strong inference of scienter in the absence of other particularized allegations. Id. at 36–38. The Court further rejected that scienter should be imputed from the allegation that the FDA had previously communicated that it had found “certain deficiencies” at a company facility, as plaintiffs failed to allege facts linking any such deficiencies to the challenged statements. Id. at 39-40. Moreover, while plaintiffs argued that scienter was supported by the fact that the company spoke about the bridging study, the Court concluded that “the content and context cut the other way” because the company also “discussed purported issues” with the study that plaintiffs alleged were concealed. Id. at 39-40.

The Court also considered motive and opportunity as “relevant to a court’s holistic analysis,” but held that plaintiffs’ allegations regarding defendants’ supposed desire to raise capital and ensure the survival of the company was too generic to be actionable and is shared by all executives. Id. at 42. The Court further emphasized that the company had, in fact, disclosed “a crucial fact that [p]laintiffs allege [d]efendants were concealing” regarding a potential negative interpretation of the comparability data and that “[t]he FDA could disagree with [the company’s] analysis and interpretation.” Id. at 43. Thus, the Court concluded that the opposing inference was more compelling — that the company “thought and hoped” it would obtain FDA approval, disclosed obstacles when they arose, and disclosed that the company’s initial views on the timeline and the comparability data were ultimately incorrect. Id. at 43-44.

Finally, the Court concluded that, because plaintiffs failed to adequately allege any actionable misrepresentations, plaintiffs also failed to allege that defendants caused plaintiffs’ alleged losses. Id. at 45.