For a pharmaceutical company, obtaining approval from the U.S. Food and Drug Administration (“FDA”) for a new drug product is critical to the company’s success, and accordingly, of intense interest to the investing community. In certain circumstances, the company risks exposing itself to substantial liability under federal securities laws when publicly stating optimistic opinions about pending FDA approval of its products, particularly when those opinions turn out to be wrong.
In a recent decision, Gen. Partner Glenn Tongue V. Sanofi, 2016 U.S. App. LEXIS 4107 (2d Cir. March 4, 2016), the United States Court of Appeals for the Second Circuit provided some clarity and a certain degree of comfort to pharmaceutical companies when federal securities claims are asserted in these circumstances. The decision in Sanofi imposes a fairly stringent test on plaintiffs who allege that pharmaceutical companies failed to disclose certain facts that might contradict or place in question their otherwise optimistic opinions. However, Sanofi also places the onus on the pharmaceutical company to determine what facts concerning FDA approval are important enough, and distinct enough, so as to render its statements of opinions misleading to a reasonable investor in the event those facts are not disclosed.
A company’s material misrepresentation of fact may subject it to potential liability under the federal securities laws (as well as other law and statutes). Statements of opinion, subsequently proven erroneous, give rise to a more complex analysis. Generally, an opinion is just that, and will not be deemed an actionable misrepresentation unless the plaintiff can show that the speaker knew the opinion to be false at the time it was made. This principle however, only goes so far: even a speaker who believes its opinion to be true when it was expressed may be subject to liability if it fails to disclose material facts that, from the perspective of a reasonable investor, render that opinion misleading.
In Sanofi, the Court held that a class action complaint and an additional complaint, both filed on behalf of investors who purchased certain financial instruments in connection with the drug company Sanofi’s acquisition of Genzyme Corporation, failed to state a cause of action against defendants Sanofi, Genzyme and three company executives. Plaintiffs had asserted, among other claims, securities fraud under Section 10(b) of the Securities Exchange of Act of 1934, and a violation of Section 11 of the Securities Act of 1933 (the “Securities Act”). These claims were based on defendants’ optimistic statements of opinion about FDA approval of, and the product launch for, their multiple sclerosis drug Lemtrada. In affirming the district court’s grant of defendants’ motion to dismiss, the Court in Sanofi held that plaintiffs had not adequately alleged that defendants failed to disclose facts relating to its optimistic statements of opinion such that a reasonable investor would have been misled by those statements.
In reaching its conclusion, the Court in Sanofi relied on the March 24, 2015, U.S. Supreme Court decision in Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 135 S. Ct. 1318 (2015). In Omnicare, the Supreme Court held that an issuer may be liable for its statement of opinion under Section 11 of the Securities Act if “the speaker did not hold the belief she professed” or “the supporting facts she supplied were untrue.” 135 S. Ct. at 1327. Notably, the Supreme Court also held in Omnicare that an issuer’s statement of opinion, though sincerely held and otherwise true as a matter of fact, may still be actionable if the speaker omits facts or information that make the statement misleading to a reasonable investor. Id. at 1332.
The Sanofi case involved the breakthrough multiple sclerosis drug Lemtrada, which had been owned by defendant Genzyme, a company subsequently acquired by Sanofi. Unlike traditional MS treatments, Lemtrada would require only two annual treatment courses. Due in part to this unique treatment design, the drug did not lend itself to “double-blind” studies (where neither patient nor investigator knows which drug was administered); instead, both Genzyme and Sanofi conducted less reliable “single-blind” trials (where either the researcher or the patient knows which drug was administered). Throughout Phase III clinical trials, the FDA expressed concern to defendants about the adequacy of these single-blind trials. On around December 30, 2013, the FDA formerly rejected Lemtrada, although following discussions between Sanofi and the FDA, the FDA later approved the drug in November 2014. Among the alleged statements at issue in Sanofi were: (1) statements contained in Offering Materials in connection with Sanofi’s acquisition of Genzyme relating to defendants’ expectations that the FDA would approve Lemtrada prior to a specified date; and, (2) statements made after Sanofi’s tender offer for Genzyme concerning the launch of Lemtrada, such as that defendants were “very satisfied with where the process is going“ and they were “feeling pretty, pretty relaxed.” 2016 U.S. App, LEXIS 4107, at *24.
Plaintiffs’ claims rested largely on defendants’ failure to disclose the FDA’s repeated concerns about the absence of double-blind studies during the trial process. The Court, however, was not persuaded that these alleged omissions were enough to render defendants’ statements misleading, and therefore enough to state a claim. The Court emphasized that the standard under Omnicare is that omitted facts must “conflict with what a reasonable investor would take from the statement itself.” The Court then held that there was “no plausible allegation in the complaints that the FDA’s interim feedback about single-blind tests conflicted with any reasonable interpretation of defendants’ statements about FDA approval.” The Court noted that, while the FDA had expressed concern, it had also stated that any deficiency could be overcome if the study results showed an “extremely large effect.” Id. at *25. Notably, and consistent with Omnicare, the Court stressed the importance of a statement’s context in determining whether the statement is misleading:
Plaintiffs are sophisticated investors, no doubt aware that projections provided by issuers are synthesized from a wide variety of information… These sophisticated investors, well accustomed to the “customs and practices of the relevant industry,” would fully expect that Defendants and the FDA were engaged in a dialogue, as they were here about the sufficiency of the various aspects of the clinical trials and that inherent in the nature of a dialogue are differing views. [Id. at * 27.]
Accordingly, the Court held that the fact of an ongoing dialogue between defendants and the FDA about the adequacy of testing methodology did not foreclose defendants from expressing optimism about the approval process. The Court noted the numerous caveats contained in defendant’s Offering Materials, and “the absence of any serious conflict between the FDA’s interim, albeit, repeated concerns about methodology and defendants’ optimism about FDA’s approval.” Id. Relying on the Supreme Court’s decision in Omnicare, the Court held that defendants “need not have disclosed the FDA feedback merely because it tended to cut against their projections Plaintiffs were not entitled to so much information as might have been desired to make their own determination about the likelihood of FDA approval by a particular date.” Id.
The Sanofi decision provides some comfort to a pharmaceutical company opining on the ongoing FDA review of its product. Underlying the Court’s discussion is the understanding that issuers, when making public statements of opinion about the FDA approval process, are not obliged under the federal securities laws to disclose “ordinary information” about the risks of FDA review or information “of the kind normally confronted by pharmaceutical companies seeking FDA approval for their drugs.” Id. at *28 – *29. This would include certain concerns expressed by the FDA in the usual course of its review. However, uncertainties in this area remain, and companies may still find themselves in treacherous circumstances as they consider the need to disclose discrete facts concerning a particular FDA review. The burden rests with the company, to the extent it expresses confidence in a forthcoming FDA approval, to determine when countervailing information constitutes more than “ordinary information” and, in the absence of disclosure, would render the opinion misleading to the reasonable investor.