297 F. Supp. 3d 472
S.D. Ill.2018Background
- NewLink Genetics ran a randomized, open-label Phase 3 trial (722 resected pancreatic cancer patients) comparing HyperAcute Pancreas (treatment) plus standard chemotherapy to standard chemotherapy alone (control); primary endpoint was overall survival.
- Phase 2 (70 patients, non-randomized, no control) showed encouraging signals used to justify entering Phase 3 and to support an IPO that raised capital.
- The Phase 3 trial included three planned interim analyses; independent Data Safety Monitoring Committee (DSMC) reviewed blinded data at each milestone and twice recommended continuing the study.
- Plaintiffs allege NewLink misrepresented: (1) that Phase 3 enrolled 722 qualified patients (confidential witness says ineligible patients were enrolled due to pressure to meet enrollment targets tied to executive bonuses); (2) the expected survival of the Control Group (Defendants cited historical studies and projected low-20s months); (3) Phase 2 efficacy; and (4) readiness to commercialize.
- Company executives Link and Vahanian sold large blocks of stock during the class period; plaintiffs allege motive (bonuses tied to enrollment and insider profits) and scienter.
- The Phase 3 trial ultimately failed: final results showed no statistically significant difference and median survival was 30.4 months (control) vs. 27.3 months (treatment), triggering a ~30% stock drop and this securities suit alleging violations of §10(b), §20(a), and §20A.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Falsity of enrollment statements | NewLink falsely claimed achievement of 722 qualified enrollments; CW alleges pervasive GCP violations and enrollment of ineligible patients to meet milestone. | CW lacked access to enrollment records; even some ineligible patients would not have materially affected statistical integrity (trial had buffer). | Court found CW credible enough at pleading stage; allegations about ineligible enrollment sufficiently plead falsity for now. |
| Falsity re: Control Group survival estimates | Defendants understated control survival (expected ~18–20 months) though actual median was ~30 months, creating misleading impression of treatment benefit. | Estimates were opinions based on published historical studies; defendants were blinded to trial data and had reasonable basis for beliefs; differences are hindsight second-guessing. | Court held survival-rate statements were non-actionable opinions reasonably grounded in prior studies; plaintiffs’ hindsight argument failed. |
| Phase 2 and commercialization statements (forward-looking) | Statements touted Phase 2 and commercialization readiness as if success was likely, misleading investors. | Many statements were forward-looking, accompanied by meaningful cautionary language (PSLRA safe harbor); present-fact portions were not false when made. | Court held most commercialization/Phase 2 statements were protected as forward-looking or were puffery/opinion and not actionable. |
| Scienter and insider trading motive | Large, unusually timed stock sales plus executive bonuses tied to enrollment create strong inference of scienter. | Sales may be ordinary or covered by 10b5-1 plans; options complicate percent-sold calculations. | Court found sales, bonus structure, plan amendments, and CW allegations together sufficiently plead scienter for enrollment-related claims. |
| Loss causation | Market learned truth via May 2016 press release; plaintiffs link the stock drop to disclosure of fraud. | The May 2016 release disclosed poor trial results but did not necessarily correct prior alleged misrepresentations; risks had been previously disclosed. | Court concluded plaintiffs failed to plead loss causation adequately as to the alleged misstatements and allowed leave to amend. |
Key Cases Cited
- Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007) (standard for pleading scienter: inference must be cogent and at least as compelling as any opposing inference)
- Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005) (loss causation requires causal link between misrepresentation and economic loss)
- Ashcroft v. Iqbal, 556 U.S. 662 (2009) (plausibility standard for pleadings)
- ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co., 553 F.3d 187 (2d Cir. 2009) (PSLRA/Rule 9(b) pleading requirements for securities fraud)
- ATSI Communications, Inc. v. Shaar Fund Ltd., 493 F.3d 87 (2d Cir. 2007) (documents courts may consider on a motion to dismiss and Rule 9(b) specificity)
- Rombach v. Chang, 355 F.3d 164 (2d Cir. 2004) (requirements for pleading securities fraud and inactionable puffery)
- Kleinman v. Elan Corp., 706 F.3d 145 (2d Cir. 2013) (statements of corporate optimism/puffery non-actionable)
- Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005) (elements of a §10(b) claim)
- In re Sanofi-Aventis Securities Litigation, 774 F. Supp. 2d 549 (S.D.N.Y. 2011) (opinions vs. actionable misstatements in biotech disclosures)