Ninth Circuit Smells a Rat and Reinstates Claim That Pharmaceutical Company Failed to Disclose Cancers in Animal Testing

by Orrick - Securities Litigation and Regulatory Enforcement Group

The Ninth Circuit recently revived a securities class action against Arena Pharmaceuticals, issuing a decision with important guidance to pharmaceutical companies speaking publicly about future prospects for FDA approval of their advanced drug candidates. The court’s opinion reemphasizes the dangers of volunteering incomplete information, holding that a company that touts the results of trials or tests as supportive of a pending application for FDA approval must also disclose negative test results or concerns expressed by the FDA about those studies—even if the company reasonably believes the concerns are unfounded and are the product of a good faith disagreement.

The case against Arena arose out of its development of the weight-loss drug lorcaserin. When Arena tested the drug on rats, initial results indicated that it was causing cancer in the test subjects. The company hypothesized that the cancer was caused by the presence of a hormone known to cause cancer in rats rather than its drug. Arena reported its findings to the FDA. In response, the FDA asked the company to conduct further study on the potential cancer link, but allowed Arena to continue clinical trials with human subjects. In March 2009, Arena told investors that it was confident that the FDA would approve lorcaserin, and specifically represented that “all the animal studies that [had] been completed” supported approval of the drug. This is where the company, allegedly, made its mistake.

In September 2010, the FDA publicly disclosed the existence of the company’s rat study as well as the concerns about lorcaserin’s potential carcinogenity. The company’s stock price dropped 40% in a single day. Arena and the FDA continued to debate the possible cancer link, and the FDA’s Advisory Committee initially voted 9 to 5 against approval. The FDA ultimately got comfortable with the test results and approved the drug, finding that the company’s hypothesis for the incidence of rat cancer was plausible and that the FDA’s prior questions about drug safety were not substantiated.

In the federal securities lawsuit, the district court had dismissed plaintiffs’ claims, finding that plaintiffs had not adequately pled scienter. The district court found that the company and the FDA had been engaged in a good-faith scientific dispute regarding the cause of the cancer that was showing up in lab rats, that the company had a reasonable basis to believe that its hypothesis was correct, and that plaintiffs had not demonstrated that the defendants intended to mislead investors. Plaintiffs appealed.

In reversing the lower court, the Ninth Circuit focused heavily on the fact that Arena’s statements to investors touted the results of the company’s animal studies and suggested that those studies supported approval, while at the same time, the company knew that the FDA had expressed concern about the results of those very same studies. The court suggested that the company could have decided to remain silent and disclose nothing about the animal studies or the likelihood of FDA approval, in which case there would arguably have been no duty to disclose the results of the rat studies. But the court found that once the company informed investors that the animal studies supported eventual approval, it could not withhold material negative information about those studies. It made no difference that the FDA allowed clinical testing on human subjects to continue pending further review of the rat studies, given that the manner in which the FDA raised concerns about the rat studies was “highly unusual.”

Defendants argued, as the district court had held, that the case involved a good-faith scientific dispute, and that the company had a reasonable basis to believe that the rat studies did not indicate any potential risk to humans. Defendants attempted to draw an analogy to the Southern District of New York’s decision dismissing securities fraud claims in In re AstraZeneca Securities Litigation, where defendants had similarly touted the likelihood of FDA approval before the FDA disagreed with the company’s analysis and publicly raised questions about the drug’s safety profile.  But the Ninth Circuit rejected this attempted comparison to AstraZeneca, finding that “it is the failure to disclose ‘issues’ and ‘concerns’ with the Rat Study and the FDA’s interest in the outcome of those studies—not who was ultimately right about the underlying science—that matters.”

The key takeaway is that pharmaceutical companies must be judicious in discussing drug tests or clinical trials. When a company makes reference to favorable outcomes in tests and trials, it must exercise care to ensure that material but negative information about those tests and results is not withheld, even where the company has a good faith belief that the information will not ultimately defeat FDA approval. Companies should guard against the temptation to act as the arbiters of what information is true and reliable, as Arena allegedly was here. Also, the general principle that companies are not liable for future projections will not save a company that supports its projections of eventual FDA approval with historical information about tests and trials that is allegedly misleading for failure to disclose additional material information.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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Orrick - Securities Litigation and Regulatory Enforcement Group

Orrick - Securities Litigation and Regulatory Enforcement Group on:

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