IN RE NEKTAR THERAPEUTICS SECURITIES LITIGATION,
No. 21-15170
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT
May 19, 2022
D.C. No. 4:18-cv-06607-HSG
Opinion by Judge Lee
FOR PUBLICATION
OKLAHOMA FIREFIGHTERS PENSION AND RETIREMENT SYSTEM; EL PASO FIREMEN & POLICEMENS PENSION FUND, Lead Plaintiffs, Plaintiffs-Appellants, v. NEKTAR THERAPEUTICS; HOWARD W. ROBIN; STEPHEN K. DOBERSTEIN; JONATHAN ZALEVSKY, Defendants-Appellees.
Appeal from the United States District Court for the Northern District of California
Haywood S. Gilliam, Jr., District Judge, Presiding
Argued and Submitted December 10, 2021
Pasadena, California
Filed May 19, 2022
Before: Milan D. Smith, Jr., Kenneth K. Lee, and Danielle J. Forrest, Circuit Judges.
Opinion by Judge Lee
IN RE NEKTAR THERAPEUTICS SECURITIES LITIG.
SUMMARY*
Securities Fraud
The panel affirmed the district court‘s dismissal of a Second Amended Complaint in which two public pensions sued Nektar Therapeutics for securities fraud, alleging that Nektar misleadingly relied on outlier data from a single patient during the Phase 1 clinical trial of its anti-cancer drug, NKTR-214.
The panel affirmed for two reasons.
First, Plaintiffs have not adequately alleged falsity under
Second, Plaintiffs did not plausibly allege loss causatiоn. The panel wrote that nothing in the operative complaint suggests that Nektar‘s disclosure of its later Phase 1/2
clinical trial results uncovered the “falsity” of the earlier Phase 1 trial, thus causing the drop in stock price. Rather, Plaintiffs’ factual allegations suggest a more mundane explanation: the different and more robust Phase 1/2 clinical trial merely showed that the drug may not be as effective as the initial – and limited – Phase 1 clinical trial had suggested. Further, Plaintiffs’ reliance on an anonymous and self-interested short-seller‘s internet musings about Nektar‘s Phase 1 EXCEL clinical trial doеs not show loss causation.
COUNSEL
Alec T. Coquin (argued), Michael P. Canty, and Thomas G. Hoffman Jr., Labaton Sucharow LLP, New York, New York; James M. Wagstaffe, Wagstaffe von Loewenfeldt Busch & Radwick LLP, San Francisco, California; for Plaintiffs-Appellants.
Robin Wechkin (argued), Sidley Austin LLP, Issaquah, Washington; Sara B. Brody and Zarine S. Alam, Sidley Austin LLP, San Francisco, California; Matthew J. Dolan, Sidley Austin LLP, Palo Alto, California; for Defendants-Appellees.
LEE, Circuit Judge:
Experimental drug candidates do not always live up to their potential, even if initial clinical trials yield highly promising results. But, as this case illustrates, that does not mean that a phаrmaceutical company has defrauded the investing public.
In 2017, Nektar Therapeutics touted the results from a Phase 1 clinical trial (dubbed “EXCEL“) of its anti-cancer drug. The next year, however, a different and more comprehensive Phase 1/2 clinical trial (called “PIVOT“) showed that the drug was not as effective as the initial trial had suggested. Nektar‘s share price plunged over 40 percent. Two public pensions then sued Nektar for securities fraud, alleging that Nektar misleadingly
We affirm for two reasons. First, Plaintiffs have not adequately alleged falsity under
Second, Plaintiffs have not plausibly alleged loss causation. Nothing in the operative complaint suggests that Nektar‘s disclosure of its later Phase 1/2 PIVOT clinical trial results uncovered the “falsity” of the earlier Phase 1 EXCEL trial, thus causing the drop in stock price. Rather, Plaintiffs’ factual allegations suggest a more mundane explanation: the different and more robust Phase 1/2 PIVOT clinicаl trial
merely showed that the drug may not be as effective as the initial and limited—Phase 1 EXCEL clinical trial had suggested. Further, Plaintiffs’ reliance on an anonymous and self-interested short-seller‘s internet musings about Nektar‘s Phase 1 EXCEL clinical trial does not show loss causation.
BACKGROUND
I. Nektar‘s NKTR-214 anti-cancer drug does not replicate the results from the first Phase 1 EXCEL clinical trial in its later Phase 1/2 PIVOT trial.
Nektar researches and develops new drugs for cancer, autoimmune disease, and chronic pain.1 Its flagship drug candidate is NKTR-214, a modified version of a human protein that activates the body‘s production of cancer-fighting cells. NKTR-214 stimulates the production of CD8+ T cells, which kill infected or malignant cells.
As part of NKTR-214‘s development, Nektar carried out a Phase 1 clinical trial dubbed EXCEL. During the EXCEL trial, 28 cancer patients received dosages of NKTR-214 every two or three weeks, and then tissue samples were collected, divided, and analyzed to assess the drug‘s effectiveness.
As the EXCEL trial progressed, Nektar reported interim results at various points. At a healthcare conference in 2017, Nektar‘s CEO Howard Robin presented a chart that displayed data from EXCEL shоwing that “cancer-fighting cells increased by an average of 30-fold in tumors of
purportedly ten patients dosed with NKTR-214.” This so-called “30-fold chart” undergirds this securities fraud lawsuit.
Because the 30-fold chart underpins this case, we will describe it in some detail. As alleged in the complaint, the chart first appeared under the title “Analysis of T cell Populations in Tumor“:
After the promising results from the Phase 1 EXCEL trial, Nektar launched a second clinical trial called PIVOT. PIVOT evaluated the effectiveness of NKTR-214 when dosed along with another drug called Opdivo. Nektar released Phase 1/2 data from PIVOT on Saturday, June 2, 2018. The reported data showed that “the overall response rate for NKTR-214 in treating melanoma had declined from the 85% rate presented the previous November to 50%.” When the markets opened on Monday, Nektar‘s stock price plummeted from $90.35 to $52.57, a dip of about 42%.
II. Anonymous short-sellers accuse Nektar of relying on outlier data in its first Phase 1 EXCEL clinical trial.
About four months later, anonymous short-sellers released a report, dubbed the
why its authors believed NKTR-214 to be less effective than Nektar claimed. The Plainview Report claimed that a different chart displayed by Nektar—“Figure 6“—demonstrated the falsity of the 30-fold chart. Figure 6 presented data on CD8+ T Cell changes in 7 of the 28 patients in the EXCEL trial.
Figure 6 showed that one patient in the EXCEL trial, Patient 14, saw an increase in CD8+ T cells of roughly 300-fold, while the other six patients saw more modest increases. The Plainview Report claimed that Patient 14 was among the 10 patients reflected in the 30-fold chart, thus skewing the data in that chart. The Plainview Report also contained a disclaimer that its authors “make no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information” in the report. On the same day that the Plainview Report was published, Nektar‘s stock price declined by seven percent.
III. Two public pensions sue Nektar for securities fraud.
The Oklahoma Firefighters Pension and Retirement System, along with the El Paso Firemen & Policemen‘s
Pension Fund (collectively, “the Pensions“) sued Nektar and some of its current and former employees in October 2018. They then filed an amended complaint after being appointed lead plaintiffs. The district court, however, granted Nektar‘s motion to dismiss the first amended complaint without prejudice.
The Pensions then filed a second amended cоmplaint. The complaint alleged that Nektar made materially misleading statements or omissions by touting its 30-fold chart without disclosing that Patient 14‘s outlier data was included in the average. To support that allegation, the complaint cited the Plainview Report and its analysis linking Figure 6 to the 30-fold chart.
The complaint also included statements by Confidential Witness #2 (“CW #2“), who worked in Clinical Development Operations at Nektar throughout the Class Period and “closely monitored the incoming data” for NKTR-214. CW #2 stated that Patient 14 was the sole outlier included in the EXCEL trial, and that the 30-fold increase would have been “nowhere near” as large without Patient 14‘s data. CW #2 also described how Nektar changed trial reporting deadlines for the PIVOT trial so that positive results would make their way into presentations while negative results would be left out. Further, CW #2 stated that scientists working at Nektar disagreed with these practices and with the inclusion of outlier data in presentations on trial results.
STANDARD OF REVIEW
We review de novo the district court‘s dismissal of the complaint. Levi v. Atossa Genetics, Inc. (In re Atossa Genetics Inc. Sec. Litig.), 868 F.3d 784, 793 (9th Cir. 2017). The court must accept all well-pleaded allegations as true. Lloyd v. CVB Fin. Corp., 811 F.3d 1200, 1205 (9th Cir. 2016). We also consider the complaint as a whole. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322 (2007).
To survive a Rule 12(b)(6) motion, a plaintiff must plead “enough facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). A claim is facially plausible when a plaintiff pleads “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
Securities fraud complaints face heightened pleading requirements. “At the pleading stage, a complaint stating claims under section 10(b) and Rule 10b-5 must satisfy the dual pleading requirements of
of deception unaccompanied by a particularized explanation stating why the defendant‘s alleged statements or omissions are deceitful.” Metzler Inv. GMBH v. Corinthian Colls., Inc., 540 F.3d 1049, 1061 (9th Cir. 2008).
ANALYSIS
To plead a claim under § 10(b) and Rule 10b-5, a plaintiff must allege “(1) a material misrepresentation or omission [falsity]; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation.” Nguyen, 962 F.3d at 413 (quoting Or. Pub. Emps. Ret. Fund v. Apollo Grp. Inc., 774 F.3d 598, 603 (9th Cir. 2014)). Each of these elements must be independently satisfied. See Or. Pub. Emps. Ret. Fund, 774 F.3d at 607 (explaining that failure to adequately plead an element “is an independent basis” on which to affirm dismissal of the complaint).
As explained below, we hold that Plaintiffs have failed to establish falsity and loss causation under the applicable pleading standards. For that reason, we need not address the remaining elements.
I. The Complaint Does Not Adequately Allege Why Nektar‘s Statements About Phase 1 EXCEL Trial Results Are False or Misleading.
To satisfy the falsity element, the Pensions point to Nektar‘s use of the 30-fold
A. The complaint fails to explain why the alleged outlier data in the Phase 1 EXCEL clinical trial constituted a material misrepresentation.
The parties dispute whether Patient 14‘s outlier data was in fact included in the 30-fold chart‘s calculations. But even assuming it was, the complaint fails to explain why its inclusion was materially misleading. Simply put, the complaint does not allеge with specificity what the Phase 1 EXCEL results would have been without outlier data. Nor does it provide context about why investors would have felt misled had they received Phase 1 EXCEL results without the outlier data.
The Pensions say that the 30-fold chart was misleading because Nektar failed to inform investors that it included outlier data. An omission is materially misleading if “there is ‘a substantial likelihood that [it] would have been viewed by the reasonable investor as having significantly altered the “total mix” of information made available’ for the purpose of decisionmaking by stockholders concеrning their investments.” Retail Wholesale & Dep‘t Store Union Loc. 338 Ret. Fund v. Hewlett-Packard Co., 845 F.3d 1268, 1274 (9th Cir. 2017) (quoting Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988)); accord Atossa, 868 F.3d at 795 (quoting same). So, “once defendants [choose] to tout positive information to the market, they [are] bound to do so in a manner that wouldn‘t mislead investors, including disclosing adverse information that cuts against the positive information.” Khoja v. Orexigen Therapeutics, Inc., 899 F.3d 988, 1009 (9th Cir. 2018) (quoting Schueneman v. Arena Pharm., Inc., 840 F.3d 698, 705–06 (9th Cir. 2016)).
Here, the Pensions have not pleaded specific facts articulating why Nektar‘s 30-fold chart about the Phase 1 EXEL clinical results was materially misleading. See
Metzler, 540 F.3d at 1061. The complaint merely alleges that outlier data drove the 30-fold change claim without providing any meaningful context or information about why an investor‘s assessment of Nektar would have changed if Patient 14‘s alleged outlier data had been excluded.4 Put another way, we simply do not know what the results would have been without the outlier data or what those results would mean as a medical matter.
The Pensions take three stabs at what the fold change would have been without Patient 14‘s outlier data, but they all fall short of the heightened pleading standard imposed by
First, the Pensions rely on the Plainview Report to allege that the result “would look very different” if one calculated the fold change based on only three patients found in Figure 6 who wеre dosed every three weeks. The complaint claims that the fold change for that calculation would be “~1.8 fold.” But cherry-picking data from only three patients does not plausibly show the falsity of the 30-fold claim. Indeed, the complaint never explains or justifies why it excluded the other remaining patients (at least six more in the 30-fold chart). And it is not even apparent from the complaint
Second, the complaint states that CW #2 contended that the results would have been “nowhere near” the 30-fold
result without Patient 14‘s data, but it does not specify any further details. Instead, CW #2 relies on vague and hyperbolic assertions, describing the 30-fold chart as “misleading,” “deceitful,” and “lacking scientific integrity.” But conclusory adjectives do not meet the PSLRA‘s heightened pleading requirements. Metzler, 540 F.3d at 1061. In the highly technical task of evaluating scientific studies and their impact on investment decisions, plaintiffs must provide some specificity to anchor their contentions that investors would find one study outcome to be meaningfully different from another. The Pensions’ complaint fails to do that.
Third, the Pensions rely on a statistical analysis by an expert who estimates, after making many assumptions, that the fold change experienced by the other patients in the 30-fold chart could not have topped 5.55. Yet again, we are provided no plausible justification for the assumptions underlying how this expert precisely derived that 5.55-fold estimate.5 Plaintiffs cannot evade the PSLRA‘s exacting pleading standards by merely citing an expert who makes assertions about falsity based on questionable assumptions and unexplained reasoning.
Even assuming the Pensions had adequately alleged what the fold change would have been without Patient 14‘s data, they have failed to explain why that difference would be material to a reasonable investor. See Retail Wholesale, 845 F.3d at 1274; Atossa, 868 F.3d at 795. Consider this analogy on why context matters in determining the falsity of statements based on highly technical information: Suppose a smartphone maker touts that the microchip in its newest phone is 300 times faster than its predecessor chip based on multiple technical tests. But if we take out one outlier test, it turns out that the new microchip is 200 times fastеr. It may well be that consumers cannot tell the difference between 200 times and 300 times faster in real-life because 200 times is blazingly fast for any conceivable task on a smartphone. And in such a scenario, the average investor may not care whether the new microchip is 200 times or 300 times faster because it makes no material difference to consumers.
Likewise, we do not know from the complaint whether a somewhat lower fold-change would have been material to investors. For example, without Patient 14‘s data, perhaps the number of cancer-fighting cells would have increased 15-fold. Is that an excellent result from a medical perspective? Is there any material difference between a 15-fold increase and a 30-fold increase? And how would an average investor assess such a difference? Perhaps investors would not care about such a difference if it turned out that a 30-fold increase
B. The purported inclusion of patients with different dosing schedules does not render the 30-fold chart materially misleading.
The Pensions also allege that Nektar “falsely claimed that the patients in the trial were dosed with NKTR-214 every three weeks when, in fact, two of the patients used to support the 30-fold increase claim—including the outlier patient—were dosed every two weeks.” But the Pensions plead no facts suggesting why the one-week difference in dosing “would have been viеwed by the reasonable investor as having significantly altered the ‘total mix’ of information made available.” Atossa, 868 F.3d at 795 (quoting Basic, 485 U.S. at 231-32). It might be inferred that needing a higher frequency of dosing suggests a lower potency of the drug, but it is unclear how that relates to the viability of NKTR-214 on the market or, as a result, Nektar‘s attractiveness as an investment. The Pensions thus have not plausibly alleged a materially false statement about dosing frequency.
II. The Complaint Does Not Plausibly Establish Loss Causation.
The Pensions have also failed to allege loss causation. When considering loss causation, “the ultimate issue is whether the defendant‘s misstatement, as opposed to some other fact, foreseeably caused the plaintiff‘s loss.” Lloyd, 811 F.3d at 1210. The “burden of pleading loss causation is typically satisfied by allegations that the defendant revealed the truth through ‘corrective disclosures’ which ‘caused the company‘s stock price to drop and investors to lose money.‘” Id. at 1209 (quoting Halliburton Co. v. Erica P. John Fund, Inc., 573 U.S. 258, 264 (2014)). Plaintiffs thus must show a “causal connection between the fraud and the loss by tracing the loss back to the very facts about which the defendant
lied.” Mineworkers’ Pension Scheme v. First Solar Inc., 881 F.3d 750, 753 (9th Cir. 2018) (internal quotation marks and citations omitted).6
A. The later Phase 1/2 PIVOT trial result was not a corrective disclosure that exposed the alleged falsity of the earlier Phase 1 EXCEL trial data.
As discussed above, after earlier reporting on the highly promising data from the Phase 1 EXCEL clinical trial, Nektar later revealed results from the Phase 1/2 PIVOT trial that somewhat took the shine off the initial trial data. Nektar reported that the overall response rate in patients was 50%, down from 85% reported in data collected in the year before. The next business day on June 4, Nektar‘s stock dropped over 40%. The Pensions argue that the inclusion of misleading outlier
This claim fails because only a tenuous causal connection exists between the alleged falsehoods from the Phase 1 EXCEL trial and the Phase 1/2 PIVOT trial data announcement that preceded the June 4 stock drop. The use
of outlier data alleged in the complaint relates to the Phase 1 EXCEL trial, which focused only on NKTR-214. In contrast, the Phase 1/2 PIVOT trial tested patients who received both NKTR-214 and Opdivo, another anti-cancer drug. The Phase 1/2 PIVOT trial thus testеd a different treatment and used a different diagnostic measure than the Phase 1 EXCEL trial (tumor shrinkage rather than biomarker data).
Of course, the two trials are related in that they both involved NKTR-214. But the inquiry is whether the Pensions have traced their losses “back to the very facts about which the defendant lied.” Mineworkers, 881 F.3d at 753 (quotation omitted). The Pensions’ allegations focus on data from the earlier Phase 1 EXCEL trial, rather than the later Phase 1/2 PIVOT data. The announcement of the Phase 1/2 results did not suggest that the EXCEL data were improperly manipulated, or that the methodology for collecting and analyzing that data was flawed. Indeed, Nektar‘s announcement merely integrated newly collected data from the Phase 1/2 PIVOT trial into its reporting. It did not correct or revise previous patient data.
The Phase 1/2 PIVOT result was not a corrective disclosure that exposed the alleged falsity in the Phase 1 EXCEL trial data, causing the drop in stock price. Rather, it merely showed that results from a different and more comprehensive test were not as promising as those from the more limited Phase 1 EXCEL data. Thus, the Pensions’ factual allegations most plausibly suggest that relatively disappointing test results, not any revelation of earlier falsehoods, caused Nektar‘s share price to plunge.
B. The Plainview Report Does Not Establish Loss Causation.
The Pensions also argue that the Plainview Report—in which anonymous short-sellers claimed that Patient 14‘s outlier data from Figure 6 were incorporated into the 30-fold chart—served as a corrective disclosure that caused Nektar‘s stock to drop by seven percent on October 1. That argument fails.
Our court recently analyzed when a short-seller‘s report can satisfy the loss causation element in Houston Mun. Employees Pension System v. Bofl Hоlding, Inc. (In re Bofl Holding, Inc. Securities Litigation), 977 F.3d 781 (9th Cir. 2020). The inquiry begins with whether the court can “plausibly infer that the alleged corrective disclosure provided new information to the market that was not yet reflected in the company‘s stock price.” Id. at 795. This is normally difficult with a short-seller report that uses publicly available information because a corrective disclosure “must by definition reveal new information to the market that has not yet been incorporated into the [stock] price.” Id. at 794. But if the report “required extensive and tedious research involving the analysis of far-flung bits and рieces of data,” then “[t]he time and effort it took to compile this information make it plausible that the posts provided new information to the market, even though all of the underlying data was publicly available.” Id. at 797.
Bofl underscored the high bar that plaintiffs must meet in relying on self-interested and anonymous short-sellers.
plausible that thе market reasonably perceived these posts as revealing the falsity of [the defendant‘s] prior misstatements” because:
The posts were authored by anonymous short-sellers who had a financial incentive to convince others to sell, and the posts included disclaimers from the authors stating that they made “no representation as to the accuracy or completeness of the information set forth in this article.” A reasonable investor reading these posts would likely have taken their contents with a healthy grain of salt.
We hold that the same reаsoning applies to the Plainview Report. Perhaps the Plainview Report did provide new information to the market. Its analysis pulled together disparate sources and connected data in ways that were not plainly obvious. For example, it compared statements made by Nektar at different conferences and it cross-checked sources provided by Nektar. Yet the Plainview Report was “authored by anonymous short-sellers who had a financial incentive to convince others to sell, and the posts included disclaimers from the authors stating that they made ‘no representation as to the accuracy or completeness of the information set forth in this article.‘” Bofl, 977 F.3d at 797. As a result, it is not plausible that the market would perceive the Plainview Report as revealing false statements because the nature of the report means that investors would have taken its “contents with a healthy grain of salt.” Id.
The Pensions attempt to distinguish Bofl by arguing that the reports in that case had only a tangential relationship to the false statements at issue, while here the Plainview Report
relates directly to the alleged false statements. It is true that information‘s “relationship to the alleged misstatements” was a factor considered in Bofl. Id. at 795. But the central holding in the case was that the character of the report—anonymous and self-interested short-sellers who disavowed any accuracy—rendered it inadequate. Whether a report is tangential or direct in relation to the misstatements does not change that fact.
In sum, the Plainview Report does not establish loss causation for the October 1 stock drop.
CONCLUSION
Pharmaceutical companies often suffer setbacks in their clinical trials after earlier tеsting offered highly promising results. That is the nature of the industry, and—without more—it does not necessarily mean that a pharmaceutical company committed securities fraud. The Pensions’ operative complaint does not provide anything “more” here under the applicable legal standards, and so the Pensions have failed to state a claim for securities fraud. As a result, we AFFIRM the district court‘s dismissal of the Second Amended Complaint.