Mаrk A. CORBAN, individually and on behalf of all others similarly situated; Steve Fleischmann, individually and on behalf of all others similarly situated; Plaintiffs, Appellants, Daniel Baradarian, individually and on behalf of all others similarly situated; Bijesh Amin, individually and on behalf of all others similarly situated; Plaintiffs, v. SAREPTA THERAPEUTICS, INC.; Chris Garabedian; Edward Kaye, Defendants, Appellees, Sandesh Mahatme, Defendant.
Nos. 15-2135, 16-1658
United States Court of Appeals, First Circuit.
August 22, 2017
Ultimately, then, if this case does not “involve[] a question of exceptional importance,”
Before KAYATTA, Circuit Judge, SOUTER, Associate Justice,* and STAHL, Circuit Judge.
Stuart W. Emmons, with whom William B. Federman, Amanda B. Murphy, and Federman & Sherwood, Oklahoma City, OK, were on brief, for appellants.
Christopher G. Green, with whom Dalila Argaez Wendlandt, Boston, MA, Justin G. Florence, Mark D. Vaughn, Boston, MA,
* David H. Souter, Associate Justice (Ret.) of the Supreme Court of the United States, sitting by designation.
KAYATTA, Circuit Judge.
The price of the publicly traded securities issued by Sarepta Therapeutics, Inc. dropped sixty-four percent when Sarepta announced that the Food and Drug Administration deemed premature Sarepta‘s application for approval of a novel gene therapy. Prоmptly thereafter, several shareholders brought this securities fraud class action against Sarepta as well as former and current Sarepta executives on behalf of those who bought Sarepta stock during the prior four months while Sarepta was expressing conditional optimism that the FDA would accept its application. The district court found that the plaintiffs failed to allege facts creating a strong inference that the defendants intentionally or recklessly deceived the investing public. We agree and affirm.
I.
A.
The district court dismissed the complaint after this action was consolidated and the pleading was once amended. The plaintiffs then brought a motion for lеave to file another amended complaint, which the district court denied as futile. The plaintiffs thereafter brought a motion for relief under Rule 60(b)(2) of the Federal Rules of Civil Procedure proposing a fourth version of the complaint, and a motion for reconsideration under Rule 59(e) proposing yet a fifth version. The district
B.
Sarepta is a biopharmaceutical company that works to discover and develop gene therapies for the treatment of rare neuromuscular diseases, including Duchenne muscular dystrophy (“DMD“). DMD is a progressive childhood disease that affects approximately 1 in 3500 boys worldwide. Caused by genetic mutations that hinder or halt production of dystrоphin, an essential protein for muscle function, DMD leads to loss of muscle strength and ultimately to respiratory and cardiac failure. Few boys afflicted with this debilitating disease reach adulthood.
Sarepta‘s lead product candidate during the relevant time period was eteplirsen. Eteplirsen is designed to treat DMD by altering the transcription process to skip the genetic mutation. It thereby enables the body‘s production of truncated but functional dystrophin, the type of dystrophin associated with less severe forms of muscular dystrophy and longer life expectancies.
To market eteplirsen in the United States, Sarepta needed approval from the FDA. The apprоval process requires a sponsor like Sarepta to prepare and submit a new drug application (“NDA” or “application“).
Sarepta set its sights on accelerated FDA approval for eteplirsen, developing and conducting a series of clinical trials to investigate the drug‘s effect on two endpoints: (1) the percentage change in dystrophin-positive fibers in the patient‘s muscle, and (2) the distance the patient was able to walk in six minutes. The clinical trials most relevant to this litigation are Sarepta‘s Phase IIb clinical trials, Study 201 and Study 202. Study 201 enrolled twelve boys in a randomized, double-blind, placebo-controlled trial. Four boys received a placebo, another four received a lower dose of eteplirsen, and four more received a higher dose of the drug. After twenty-four weeks, Study 202 commenced. In this open-label extension, which was neither blind nor placebo-controlled, all twelve participants received the drug in one dosage or the other.
Pointing to the results of these trials, in March 2013, Sarepta informed investors that it would move toward filing an NDA. To that end, Sarepta met with FDA officials that month. During the meeting, the FDA expressed serious concerns regarding the way Sarepta proposed to analyze the results from the Phase IIb trials, cautioning that “the proposed analysis was unreasonable even for hypothesis generation.” Sarepta relayed certain information about this meeting to analysts and investors during an April 15, 2013 conference call led by Chris Garabedian, President and Chief Executive Officer of Sarepta at the time, and Edward Kaye, then the company‘s Senior Vice President and Chief Medical Officer. Garabedian explained that the FDA had “not made a final decision“—and that it was “still too еarly to draw conclusions” about the FDA‘s stance—regarding Sarepta‘s proposed dystrophin endpoint for accelerated approval. He nonetheless conveyed optimism and a sense of positive momentum on this call, stating that the FDA was “approaching the question of [d]ystrophin as a surrogate that is reasonably likely to predict clinical benefit in the thoughtful manner we expected and is requesting more information.” Garabedian struck a similar tone at a conference presentation on July 10, 2013.
Approximately two weeks later, on July 23, 2013, Sarepta again met with the FDA regarding eteplirsen. By this time, the FDA had reviewed additional information from Sarepta abоut its data. The agency told Sarepta at the July meeting that it was “open to considering an NDA based on these data for filing,” subject to a number of conditions. Sarepta quoted that language in a press release it issued the following day, which also stated that Sarepta planned to submit an NDA “in the first half of 2014 for the approval of eteplirsen.” The press release went on to say that the FDA “requested additional information related to the methodology and verification of dystrophin quantification,” and that the company believed it could address and incorporate the requests into its early 2014 submission. In calls with analysts, investors, and business reporters, Garabedian communicated “еxcite[ment],” stating that the company was “very encouraged by the FDA feedback” and hopeful that the agency “would accept [an NDA] for filing.” He emphasized Sarepta‘s “belie[f] that dystrophin is a viable surrogate marker,” characterizing the company‘s dystrophin analysis as “robust.”
Notwithstanding Garabedian‘s sanguinity, the company cautioned in its communications that the exact timing of the NDA submission was unknown, that the agency did not yet endorse the dystrophin surrogate endpoint under the accelerated approval pathway, and that in any event “[a]
During the ensuing months leading up to the November 2013 stock drop, the defendants madе several additional comments challenged by the plaintiffs. For example, Garabedian heralded Sarepta‘s progress toward approval as “a tremendous achievement,” described the company‘s data set as “compelling and favorable,” and characterized the FDA‘s feedback as “particularly encouraging because it recognizes that our Phase IIb study data set is sufficient for the FDA to consider a filing.” At another presentation, he called the FDA‘s response at the July meeting the “type of information that every company hopes for.” He subsequently described Sarepta‘s dystrophin analysis as “a very rigorous, measured approach” which “produced the most robust [dystrophin] data set of any [dystrophin]-producing technology” and was not “questioned or challenged [by the FDA] in terms of [Sarepta‘s] method for quantifying [dystrophin].” And he opined that the FDA‘s request for additional muscle biopsies of the study participants “was not an indication of the lack of strength of [Sarepta‘s] current biopsy analysis and data.”
At the end of September 2013, a competing drug candidate for the treatment of DMD “total[ly] fail[ed]” during a Phase III trial notwithstanding promising Phase II results. Drisapersen, developed by Prosensa and GlaxoSmithKline, relied on the “same mechanism of action” as eteplirsen. It had achieved “the coveted ‘Breakthrough Designation’ from [the] FDA” on account of “its preliminary efficacy and potential.” Yet in its “pivotal Phase III trial,” it “failed to meet its primary endpoint ... and all secondary endpoints.” This news initially boosted Sarepta stock, as it “essentially g[ave] the entire DMD market to eteplirsen.” Yet some investors predicted that drisapersen‘s failure spelled trouble for Sarepta. Such trouble came to pass on November 12, 2013, when Sarepta divulged the FDA‘s most recent guidance: Citing the drisapersen failure, the FDA stated that it viewed “an NDA filing for eteplirsen as premature.” This news precipitated a sixty-four percent plummet in Sarepta‘s stock price, and the plaintiffs say it revealed that the defendants’ representations since late July had been fraudulent.
After Sarepta announced the FDA‘s judgment that a filing was premature, the dialogue between Sarepta and the FDA continued. Public disclosures about their back and forth were largely one-sided: As the FDA later explained, “[b]ecause of laws governing trade secret[s], [the] FDA is generally unable to provide any information to the public about its finding regarding drugs under development and is unable to comment about information provided by the drug developer.” On a few occasions, however, FDA officials made public statements about concerns they had communicated to Sarepta (without always specifying when those communications oсcurred). Sarepta ultimately submitted its NDA in
C.
Two and a half months after the November stock drop, the plaintiffs filed this putative class action complaint in which they seek relief on behalf of all those who acquired Sarepta stock between July 24, 2013 and November 11, 2013 (the “class period“). According to the relevant complaint, Sarepta and its top executives perpetrated securities fraud under section 10(b) of the Securities Exchange Act of 1934 (Exchange Act),
II.
A.
“To successfully state a securities fraud claim under section 10(b) and Rule 10b-5, a plaintiff must adequately allege, among other things, scienter.” Local No. 8 IBEW Ret. Plan & Tr. v. Vertex Pharm., Inc., 838 F.3d 76, 80 (1st Cir. 2016). Adequately alleging this mental state, which “embrac[es] intent to deceive, manipulate, or defraud,” Aldridge v. A.T. Cross Corp., 284 F.3d 72, 82 (1st Cir. 2002) (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976)), requires the plaintiff to plead “either that the defendants consciously intеnded to defraud, or that they acted with a high degree of recklessness,”
To decide whether the complaint adequately alleges scienter, “we eschew the ordinary standards of Federal Rule of Civil Procedure 8(a)(2),” Vertex, 838 F.3d at 81, and instead apply the “[e]xacting pleading requirements” imposed by Congress in the PSLRA. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007). “Under the PSLRA‘s heightened pleading instructions, any private securities complaint alleging that the defendant made a false or misleading statement must ... ‘state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.‘”
B.
1.
The complaint focuses much on Sarepta‘s reports regarding its July 23 mеeting with the FDA, including the company‘s July 24 press release and related comments by its officers. According to the complaint, these communications constitute the opening salvos of fraud because Sarepta disclosed too little of what FDA officials said at the July and March meetings, and painted too rosy a picture of their reaction to Sarepta‘s data. The plaintiffs point to statements by Garabedian that he was “encouraged by the feedback from the FDA,” that he believed “that data from [Sarepta‘s] ongoing clinical study ... will be sufficient for an NDA filing,” and that the FDA indicated that it was “open to considering an NDA filing based on the data [Sarepta had] shared with [the FDA] to date.” These and similar statements were misleading, the plaintiffs say, because FDA officials also voiced “a number of concerns” to be addressed prior to filing, and articulated “strong reservations” about the type of data upon which Sarepta was relying.
The challenged statements that mark the beginning of the class period provide poor material for building a fraud claim. They convey opinion more than fact. And while opinion that implies false facts may nonetheless suffice, see In re Credit Suisse First Bos. Corp., 431 F.3d 36, 47 (1st Cir. 2005) (“[A] statement of opinion may be considered factual ... as a statement about the subject matter underlying the opinion.“), overruled on other grounds by Tellabs, Inc., supra, these opinions came replete with caveats. Sarepta made clear that the FDA “requested additional information related to the methodology and verification of dystrophin quantification” and “would not commit to declaring dystrophin an acceptable surrogate endpoint,” and that a decision to allow the filing of an NDA “would not indicate that [the FDA had] accepted dystrophin expression as a biomarker reasonably likely to predict clinical benefit.” Garabedian accurately reported that the FDA declined to offer “any guarantee or assurance that an NDA submission would be acceptable for filing.” After this mix of optimism and caution was communicated to investors on July 24, Sarepta‘s stock droрped nineteen percent.
Three weeks later, the company further reminded investors that it had been trying to convince the FDA that its method for quantifying dystrophin was acceptable and preferable. And Kaye acknowledged that the company‘s data set was “limited.” Even if these and other caveats could have been more fulsome, they cut against the inference of scienter. See Geffon v. Micrion Corp., 249 F.3d 29, 37 (1st Cir. 2001) (finding insufficient evidence of scienter where company “sought to provide investors with adequate warnings,” even though “[p]erhaps [the company] could have provided still more information about the specifics“). At worst, there was positive spin that put more emphasis in tone and presentation on the real signs of forward movement with the NDA than it did on causes for wondering if the journey would prove successful.
Nor did the class period end in any manner that supports an inference of fraud. Progress toward realizing an optimistic, albeit caveated, prediction markedly slowed, due at least in part to a material development that occurred well after the prediction was proffered—i.e., the failure of the GlaxoSmithKline and Prosensa prod
2.
That leaves the plaintiffs’ arguments regarding a pair of statements made by Garabedian in the middle of the class period. First, on August 15, 2013, Garabedian stated that Sarepta had shared its dystrophin data with the FDA (which is not disputed) and that the data “was not something that was questioned or challenged in terms of [Sarepta‘s] method for quantifying.” Second, on September 9, 2013, he said in reference to the FDA‘s proposal to conduct additional biopsies of the Phase IIb study participants that the proposal “was not an indication of the lack of strength of [Sarepta‘s] current biopsy analysis and data.”2 According to the plaintiffs, these statements were “objectively and knowingly false” because the FDA had communicated concerns about the data analysis to Sarepta and Garabedian had knowledge of such communications when he spoke. Specifically, the plaintiffs point to March 2013 communications from the FDA expressing the agency‘s skepticism about Sarepta‘s quantification of dystrophin.
Chronology defeats this argument. The March 2013 communications predated Garabedian‘s August and September statements by several months. In the intervening period, Sarepta submitted additional data to the FDA in compliance with FDA requests, and the agency‘s skepticism was fairly viewed as having diminished. As the complaint‘s allegations show, it was after reviewing the additional data that the FDA declared in July 2013 that it was “open to considering an NDA based on these data for filing.” There is nothing in the complaint‘s allegations to indicatе that the strength of the concerns expressed by the FDA in March 2013 persisted or that Garabedian understood the force of those concerns to have survived additional data submissions (much less the later and significantly more specific feedback provided to Sarepta at the July 2013 meeting).
Perhaps sensing this flaw in the timeline, the plaintiffs offer a second reason why Garabedian‘s statements were “objectively and knowingly false.” They claim that the FDA told Sarepta at the July 23 meeting that it doubted the validity of Sarepta‘s method for quantifying dystrophin. To support this claim, they rely on
The defendants had no legal obligation to loop the public into each detail of every communication with the FDA. “[M]ere possession of ... nonpublic information does not create a duty to disclose it,” In re Smith & Wesson Holding Corp. Sec. Litig., 669 F.3d at 74 (first alteration in original) (quoting Hill v. Gozani, 638 F.3d 40, 57 (1st Cir. 2011)), even when that information is “material“—i.e., substantially likely to be viewed by a reasonable investor as “significantly altering the total mix of informatiоn made available,” id. (citing City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Waters Corp., 632 F.3d 751, 756 (1st Cir. 2011)). Of course, a company may not intentionally or recklessly omit facts without which its statements become misleading.
In advocating otherwise, the plaintiffs point to Zak v. Chelsea Therapeutics International, Ltd., 780 F.3d 597 (4th Cir. 2015). In Zak, a split panel of the Fourth Circuit vacated the district court‘s decision that the complaint failed to adequately plead scienter. Id. at 611. The court announced a narrow holding and emphasized that “the scienter inquiry necessarily involves consideration of the facts and of the nature of the alleged omissions or misleading statements within the context of the statements that a defendant affirmatively made.” Id. The defendants in Zak had allegedly buried the lede, claiming that the FDA had “agreed” that the company‘s new drug application could be submitted based on data from a single study and would not
3.
That brings us to the plaintiffs’ argument that Sarepta had a motive to lie, and that its motive supports an inference of scienter. The plaintiffs point to allegations about the company‘s July 2013 “At the Market” offering, which allowed Sarepta to sell up to $125 million of common stock at market price, as evidence of motive. The complaint quotes the company‘s announcement that it “intend[ed] to use any proceeds from this offering for general corporate purposes,” some related to eteplirsen and some not. According to the complaint, “[h]ad the market been aware of these undisclosed facts, investоrs would not have been so willing to participate in the [at-the-market] offering, at least not at the prices they paid.” Drawing on these allegations, the plaintiffs argue that the offering provides strong evidence of motive, and therefore scienter, because the defendants “needed the offering to provide Sarepta essential funding.”
“[T]he usual concern by executives to improve financial results” does not support an inference of scienter. In re Cabletron Systems, Inc., 311 F.3d 11, 39 (1st Cir. 2002); see also Greebel, 194 F.3d at 197 (“[C]atch-all allegations that defendants stood to benefit from wrongdoing ... are [not] sufficient.” (third alteration in original) (quoting In re Advanta Corp. Sec. Litig., 180 F.3d 525, 535 (3d Cir. 1999))). We require something more than the ever-present desire to improve results, such as allegations that “the very survival of the company w[as] on the line.” In re Cabletron Systems, Inc., 311 F.3d at 39. The complaint lacks such allegations, noting only that Sarepta depended heavily on financing activities for capital. Contrary to the district court cases cited by the plaintiffs,4 where the companies’ finances were in dire straits, the complaint alleges that “Sarepta
Beyond the financial motive, the plаintiffs say, Sarepta had reason to spark false hope: It catalyzed families and advocates of boys suffering from DMD to pressure the FDA for accelerated approval. The plaintiffs point to remarks by various FDA officials regarding “[g]reat hope” and “considerable public attention” resulting from Sarepta‘s teasers about trial results. But the complaint does not allege that the defendants predicted or intended this result ex ante. After all, “considerable public attention” also means closer scrutiny. And given that outside pressure on the FDA plays no clear or generally acknowledged role in the agency‘s closely regulated process, as the complaint‘s allegations themselves reflect, it seems a stretch to infer that the defendants risked closer scrutiny simply to apply indirect pressure on a regulator‘s data-driven decisionmaking process.
When we consider the totality of the complaint‘s allegations, and measure the malicious inference against the innocent ones, we do not find “the malicious inference [to be] at least as compelling as any opposing innocent inference.” Zucco Partners, LLC v. Digimarc Corp., 552 F.3d 981, 991 (9th Cir. 2009) (citing Tellabs, Inc., 551 U.S. at 323). Sarepta, a biopharmaceutical company navigating the uncertain terrain of accelerated approval for a gene therapy, was energized by clinical trial data, which it shared with the FDA. In the ensuing dialogue between the company and the agency, the initially unwelcoming agency cracked open the door to a possible approval by stating a willingness to consider a new drug application for the therapy while cautioning the company about the importance of more and better data for accelerated approval. The company shared this obviously good news about the FDA‘s new receptiveness to possible acceptance of a filing while conveying enough caveats so that the stock price actually dropped. As the company moved toward filing for regulatory approval, a competitоr drug candidate with the same mechanism posted disappointing results, and the FDA decided that a new drug application for the company‘s therapy would be premature, causing a more substantial drop in stock price. The only plausible motive for fraud identified by the plaintiffs is revenue generation, which falls short of pleading a cogent inference of scienter that can carry the day here. More plausible is the opposing innocent inference that the defendants, perhaps negligently, waxed too optimistically about the FDA‘s expression of a willingness to consider an NDA for eteplirsen while emphasizing too little the FDA‘s reservations about such an applicаtion. This is simply a case in which the complaint focuses too much on nuance rather than false facts or material omissions to support the necessary strong inference of scienter. We therefore affirm dismissal of the section 10(b) and Rule 10b-5 claims as well as the derivative section 20(a) claims.5
Notwithstanding five tries to get it right, the plaintiffs have failed to satisfy the requisite pleading standards. We reject the plaintiffs’ appeals and affirm the district court‘s dismissal of this action.
UNITED STATES of America, Appellee, v. King BELIN, Defendant, Appellant.
No. 15-2192
United States Court of Appeals, First Circuit.
August 22, 2017