On March 11, 2024, Judge Haywood S. Gilliam, Jr. of the United States District Court for the Northern District of California granted in part and denied in part a motion to dismiss a putative securities class action brought against a biopharmaceutical company (the “Company”) and its CEO. Pardi et al., v. Tricida, Inc., et al., No. 21-cv-00076-HSG (N.D. Cal. Mar. 11, 2024). Plaintiff alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated thereunder by making false and misleading statements and omissions regarding the likelihood that the Company’s new drug would receive accelerated FDA approval. The Company filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code and was voluntarily dismissed, and the CEO moved to dismiss.

Plaintiff alleges that: In May 2018, the Company completed its Phase 3 clinical trials for a new drug intended to slow the progression of chronic kidney disease. On June 5, 2018, the Company announced that Phase 3 trials were conducted at 47 sites in the United States and Europe and its CEO allegedly stated that the study met “both its primary and secondary endpoints in a statistically significant manner.” In late August 2019, the Company submitted its New Drug Application (“NDA”) to the FDA under the FDA’s Accelerated Approval Program. In a May 7, 2020 earnings call, the CEO allegedly stated that an upcoming meeting with the FDA was canceled “due in part to the logistical challenges posed by COVID-19.” Beginning in May 2020, the Company allegedly began to receive indications from the FDA that there were issues with its NDA, and in early May, executives of the Company met with FDA representatives, who purportedly shared concerns regarding “the magnitude and durability” of the effect of the drug and “the applicability of data” from the Phase 3 trials “to the U.S. population.” Plaintiff further alleged that: on July 15, 2020, the Company disclosed that it was notified by the FDA of deficiencies that precluded labeling and post-marketing of the drug; on August 24, 2020, the Company disclosed that it had received a response letter from the FDA explaining that the drug’s Phase 3 trial was inadequate on its own to demonstrate the drug’s efficacy; on October 29, 2020, the Company further disclosed that the FDA was unlikely to rely on the Company’s data and would require additional evidence of the drug’s efficacy; and on February 25, 2021, the Company disclosed that the FDA denied the appeal of its application denial.

Plaintiff, on behalf of the Company’s investors, filed suit in January 2021. In March 2023, the Company filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code and was voluntarily dismissed from the action, leaving the Company’s CEO as the only remaining defendant. The CEO moved to dismiss, arguing that plaintiff failed to sufficiently allege any false or misleading statement of a material fact and that plaintiff failed to adequately plead facts giving rise to a strong inference of scienter.

The Court first considered and rejected plaintiff’s argument that certain opinion statements were actionable. For example, plaintiff alleged that the CEO’s statement that the Phase 3 trial “met both its primary and secondary endpoints in a highly statistically significant manner” was misleading because the CEO “failed to disclose that the FDA had repeatedly indicated its disagreement that [the trial’s] endpoint was substantial enough to demonstrate the trial’s clinical effectiveness.” Plaintiff also claimed that the “optimistic statements about the NDA were false and misleading because they failed to disclose significant issues and feedback communicated by the FDA.” The Court held that such statements were inactionable opinions, because “they inherently reflect[ed] the speaker’s assessment of and judgment about the underlying circumstances” and that plaintiff failed “to plausibly allege that [the CEO] did not hold the optimistic beliefs he professed, or that these beliefs [were] objectively untrue.” Moreover, the Court agreed with the CEO that “there is no general requirement under the securities laws for a company to engage in a rolling, communication-by-communication disclosure of every detail arising from the back-and-forth dialogue with the FDA throughout its complex review and approval process, or to adopt the FDA’s position as correct and share it with the public when discussing its product.”

The Court did find, however, that plaintiff sufficiently alleged that defendants’ statement that the FDA Advisory Committee meeting with the Company was canceled due to COVID-19 logistics “was false or misleading given that the FDA never cited COVID-19 logistics as the reason for the cancellation,” and because plaintiff directly alleged that the meeting was canceled because of “the FDA’s concerns that there were too many problems with the NDA to even warrant convening an Advisory Committee,” citing documents detailing communications from the FDA to the Company in which the FDA identified “significant issues” with the Phase 3 trial. The Court found that there was a “substantial likelihood that the disclosure of the [allegedly] omitted fact . . . would have been viewed by the reasonable investor as having significantly altered the total mix of information available.” The Court, however, found that certain other alleged omissions regarding the likelihood of achieving FDA approval were not sufficiently alleged to be misleading as plaintiff did not explain how those alleged omissions “affected the ‘total mix’ of information available to a reasonable investor” or why the disclosures defendants did make gave reasonable investors a “misleading impression of the actual state of affairs.”

Turning to scienter, the Court held that plaintiff plausibly alleged scienter with respect to the CEO’s statement that the FDA Advisory Committee meeting was canceled in part due to “the logistical challenges posed by COVID-19,” finding that plaintiff plausibly alleged the CEO “intentionally or recklessly misrepresented the true reasons” for the cancellation of the meeting. However, the Court rejected plaintiff’s argument that allegations that the CEO “attended meetings at which the FDA specifically cautioned [the Company] against relying on patient data from Eastern European countries” were sufficient to allege scienter, stating that the CEO’s “literally true characterization of the trial location as ‘Europe’” did not amount to “an extreme departure from the standards of ordinary care.” The Court further noted that, in any event, the Company “specifically directed the market to information disclosing the location of the trials,” which further cut against any inference of scienter in connection with those statements.

Accordingly, the Court concluded that plaintiff adequately pled a Section 10(b) and Section 20(a) claim as to the alleged statement that FDA Advisory Committee meeting was canceled “due in part to the logistical challenges posed by COVID-19,” but granted the motion to dismiss, without leave to amend, as to all other claims, due to the failure to adequately plead falsity and scienter.

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Pardi et al., v. Tricida, Inc., et al.

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