On October 18, 2017, Judge Ricardo S. Martinez of the United States District Court for the Western District of Washington dismissed with leave to amend a consolidated amended complaint asserting violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 against Seattle Genetics, Inc. (the “Company”) and certain of its current and former executives (the “Individual Defendants”).  Patel v. Seattle Genetics Inc., No. C17-41RSM (W.D. Wash. Oct. 18, 2017).  Based largely on information obtained from a confidential witness, the complaint alleged that defendants misled investors by claiming that the Company’s cancer treatment drug did not cause a toxic side effect on a patient’s liver, while failing to disclose that certain patients in a clinical trial had already experienced liver toxicity (hepatotoxicity).  Although the Court found that plaintiff adequately alleged a material omission, it dismissed the complaint for failure to plead scienter because, in the Court’s opinion, the Individual Defendants’ general knowledge of the Company’s day-to-day business was insufficient to impute to them knowledge about potential problems with hepatotoxicity in a clinical trial. 

Seattle Genetics is a development stage biopharmaceutical company that is in the process of developing a type of cancer treatment known as an antibody-drug conjugate, which uses antibodies to target specific antigens on the surface of cancerous cells and to locally deliver strong anticancer agents that would otherwise be too toxic to administer.  The drug at issue in the litigation was designed to replace an earlier version of the drug, which had been withdrawn from the market after a clinical trial demonstrated that the fatal rate of treatment-related toxicity was significantly higher than standard chemotherapy with no corresponding benefit to cancer patients.  Plaintiff alleged that, throughout the class period, defendants repeatedly claimed that the new drug had superior design to the original drug, allowing it to effectively kill cancerous cells without the toxicity that doomed the earlier drug, while omitting that the new drug had known risks of liver toxicity, and that a number of patients exposed to the drug in clinical trials were experiencing adverse hepatotoxic events.  After the FDA placed a clinical hold on the drug’s clinical trial, Seattle Genetics issued a press release stating, in part, that six patients had been identified with liver toxicity, with “four fatal events.”  Following the press release, the Company’s stock price dropped by over 15% that day.

The Court first found that plaintiff had adequately alleged a material omission.  According to the Court, given the positive statements made during the class period, defendants had a duty to disclose the hepatotoxicity events at issue, and plaintiff “specified each statement alleged to have been misleading, the reason why the statement is misleading, and when and how the statements were made.”  Further, the Court noted that, “even if the risk of hepatotoxicity was known to investors, the disclosure of an actual death could be viewable by the reasonable investor as having significantly altered the ‘total mix’ of information.” 

The Court held, however, that plaintiff failed to plead scienter with sufficient particularity because the complaint lacked allegations that showed “intent or deliberate recklessness,” and plaintiff “failed to point to cogent possible motivations for the [d]efendants to make the alleged misleading statements and omissions.”  The Court explained that the complaint failed to present allegations connecting knowledge of the alleged risks of hepatotoxicity to the Individual Defendants who made the allegedly misleading statements.  Plaintiff argued that knowledge of the hepatotoxic events were “core facts” that could be fairly attributed to the Individual Defendants because of their high positions in the Company, but the Court held that, “[a]s a general matter, corporate management’s general awareness of the day-to-day working of the company’s business does not establish scienter—at least absent some additional allegation of specific information conveyed to management and related to the fraud or other allegations supporting scienter.”  Finding that plaintiff could cure the complaint’s deficiencies, the Court granted leave to amend. 

This decision serves as a reminder that plaintiffs will have a difficult time alleging scienter unless they can identify specific factual allegations connecting knowledge of an alleged risk to the defendants that allegedly made the material misstatement or omission.