On March 2, 2023, the United States Court of Appeals for the Fourth Circuit affirmed the dismissal of a putative securities class action against a company that manufactures cancer drugs (the “Company”), its president and CEO, and its senior vice president and CFO, for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder, and Sections 11, 12(a), and 15 of the Securities Act of 1933 (the “Securities Act”).  Employees’ Retirement System of the City of Baton v. Macrogenics, Inc., No. 21-2238 (4th Cir. Mar. 2, 2023).  Plaintiffs alleged that defendants made materially misleading statements or omissions concerning a clinical trial drug, which negatively affected the Company’s stock price.  The Court affirmed the district court’s order granting defendants’ motion to dismiss, finding that plaintiffs failed to sufficiently allege any actionable misrepresentations or omissions that would give rise to a duty to disclose, and that most of defendants’ alleged statements also were immunized from suit.

The Company is a public, clinical-stage biopharmaceutical company that developed an antibody treatment for patients with metastatic breast cancer.  The drug was the Company’s first treatment to progress to a Phase 3 clinical trial involving 536 patients intended to compare how the drug performed against the current standard-of-care therapeutic antigen.  The clinical trial required two primary “endpoints,” which are pre-determined key measures of the study’s success:  (1) prolongation of the progression free survival (“PFS”) and (2) prolongation of the overall survival (“OS”) of patients.  The first measured how many months during and after the treatment of breast cancer that a patient survives with the disease without the disease getting worse, and the second measured how long such patients survive for any reason and without regard to whether they experienced any post-enrollment progression of their disease.

Plaintiffs alleged that the Company, its CEO, and its CFO misled investors regarding the performance of the Phase 3 trial in statements made between February 6 and May 15, 2019, and that when the Company presented a detailed visual depiction of the interim OS data for the first time in a presentation at a conference on June 4, 2019, the data was “unfavorable,” and indicated “that the OS data is not on track to generate a meaningful or statistically significant OS result when the data is fully matured and a red flag for investors.”  Following that conference, the Company’s stock allegedly dropped nearly 22%.  Plaintiffs brought a putative class action against defendants on September 13, 2019, and the amended complaint asserted the above-referenced Securities Act and Exchange Act claims.

The district court granted defendants’ motion to dismiss, finding that plaintiffs failed to allege any materially false or misleading statements or omissions, which they analyzed in four groups:  (1) alleged statements about PFS results (2) alleged statements of “superior outcome” or “positive results” (3) alleged cautionary statements and Risk Factors, and (4) alleged statements about the interim OS data.  On appeal, plaintiffs argued that their pleaded claims were sufficient first because defendants’ written statements put the study’s interim OS results “in play,” and their subsequent oral and written statements that positively characterized the OS data triggered a duty to disclose, and second because defendants’ statements were not inactionable puffery, opinion, or risk warnings.

The Fourth Circuit first addressed the Exchange Act claims.  With respect to the alleged statements about the PFS results, the Court found that defendants did not have a duty to disclose the interim OS results because their written and oral statements prior to the May 15 press release did not “speak” about the OS data.  The Court noted that defendants’ statements primarily focused on the clinical trial’s success in reaching its first PFS endpoint, and any language concerning the OS endpoint primarily concerned the ongoing nature of the OS data’s accumulation.  The Court therefore reasoned that defendants’ statements “clearly indicated to all reasonable investors that, although the PFS results experienced success, one could not (and should not) draw a conclusion on the OS data’s performance as [the Company] continued to track OS performance.”  The Court also rejected plaintiffs’ argument that a February 6 press release’s title, along with the CEO’s statement that defendants were “pleased” with the trial’s results, put all of the trial’s results in play.  The Court agreed that although the title of the February 6 press release did not qualify that the positive results were specifically related to PFS, the press release was clear that it was referring to the PFS endpoint.  According to the Fourth Circuit, “a company’s mere reference to full trial data in a discussion of top-line results ‘does not trigger a duty to disclose the full results of a study.’”

With respect to plaintiffs’ allegations that defendants’ oral statements put the OS data in play by characterizing it positively, thereby triggering a duty to disclose the “material adverse facts,” the Court held that defendants did not have a duty to disclose the OS interim data because they orally communicated about it prior to the conference at issue.  The Court noted that “[i]t would be a stretch for us to find the existence of false or misleading statements where ‘a defendant’s competing analysis or interpretation of data is itself reasonable,’ regardless of Plaintiffs’ disagreement with the study’s ‘researchers and scientists.’”

The Court also agreed with the district court that certain alleged misstatements were “nothing more than expressions of optimism.”  The Court asserted that defendants’ use of the words “positive,” “excited,” and “promising” were textbook examples of puffing statements that reasonable investors cannot rely upon.  The Court noted that plaintiffs also failed to demonstrate how these positive statements misrepresented the interim OS data.  Specifically, plaintiffs failed to sufficiently allege when the curves graph was created and known to defendants, and that defendants consistently qualified their expressions of optimism with warnings that the OS endpoint could still fail.

Similarly, the Court found that defendants’ alleged positive statements about the interim OS data could be classified as inactionable opinion.  The Court found that plaintiffs’ negative interpretation of the curves graph was merely a difference of opinion and noted that “[j]ust because Plaintiffs looked to and relied upon research disparaging the crossing curves … it does not follow that Defendants’ statements were materially misleading or contained omissions.”  The Court observed that “a significant portion of [biopharmaceutical clinical drug trial companies’] success turns on the amount of capital raised to explore [] unchartered waters, making investors an integral part of the equation,” and the Court could not “admonish these companies for issuing positive and accurate opinions while ‘weighing … competing facts.’”  The Court also held that defendants’ May 15 press release statement was shielded from liability as a forward-looking statement under the PSLRA’s “Safe Harbor” provision as a projection-of-future-performance, because it articulated the Company’s expectation that the OS data would continue to show longevity.  Regarding plaintiffs’ argument that defendants’ warnings were independently actionable misstatements that also omitted material information concerning the interim OS data, the Court agreed with the district court’s holding that defendants’ statements were immune from liability because they contained sufficient cautionary statements and risk warnings.  In so affirming, the Court found that each of defendants’ statements “included a breadth of cautionary statements and risk warnings,” including, for example, risk factors which stated that “results and related findings and conclusions are subject to change following a more comprehensive review of the data related to the particular study or trial.”

Turning to plaintiffs’ Securities Act claims the Court affirmed the district court’s holding that these claims were deficient because plaintiffs failed to plead sufficient facts showing that defendants made materially false or misleading statements or omissions.  The Court also rejected plaintiffs’ argument on appeal that defendants violated Items 303 and 105 of SEC Regulation S-K because no “uncertainty” surrounded the results of the interim OS data, and the offering documents clearly asserted the risk factors associated with the clinical trial, particularly the OS data and its related secondary endpoint.  Therefore, the Court affirmed the district court’s dismissal of the amended complaint.

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