(Article from Securities Law Alert, April 2022)
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On March 21, 2022, the Southern District of New York dismissed a putative securities fraud class action alleging that a drug company and certain of its executives failed to disclose information concerning the safety of its only drug.
Rice v. Intercept Pharms., 2022 WL 837114 (S.D.N.Y. 2022) (Liman, J.). The court stated that under
Matrixx Initiatives v. Siracusano, 563 U.S. 27 (2011), the mere existence of reports of serious adverse events does not significantly alter the “total mix” of information available to investors. The court then determined that, unlike in
Matrixx, the complaint did not contain any allegations constituting the “something more” that would significantly alter the total mix of information.
After the FDA approved the company’s drug to treat a liver disease, there were reports of two serious adverse events (“SAEs”)[1] in patients using it. The company thereafter sought to have the drug approved to treat a second liver disease. The company experienced stock drops following company disclosures revealing issues the company faced seeking FDA approval and a published article indicating that the FDA was investigating whether the drug may cause liver injury. Plaintiffs alleged that defendants violated Section 10(b) of the Exchange Act by making a variety of statements about the drug without disclosing the SAEs. Plaintiffs claimed that this constituted securities fraud because the undisclosed information was material to: (i) the safety and continued use of the drug to treat the first liver disease; and (ii) the regulatory approval of the drug to treat the second liver disease. Defendants argued that the omitted SAEs were immaterial as a matter of law.
The Court Analyzes Materiality Under Matrixx
The court looked to Matrixx for the framework needed to analyze whether plaintiffs adequately pled that the allegedly undisclosed SAEs were material. In Matrixx, plaintiffs alleged that a drug company failed to disclose reports of a possible link between its leading product and patients’ loss of their sense of smell (anosmia). The Supreme Court stated that the relevant question is “whether a reasonable investor would have viewed the nondisclosed information as having significantly altered the total mix of information made available.” Matrixx, 563 U.S. at 44 (quoting Basic v. Levinson, 485 U.S. 224 (1988)). The Court held that “the mere existence of reports of adverse events—which says nothing in and of itself about whether the drug is causing the adverse events—will not satisfy this standard. Something more is needed, but that something more is not limited to statistical significance and can come from the source, content, and context of the reports.” The Court concluded that this “something more” was alleged in Matrixx because the complaint alleged that the drug company received a variety of information that plausibly indicated a reliable causal link between the drug and patients’ anosmia. The Court found that this “sufficed to raise a reasonable expectation that discovery will reveal evidence satisfying the materiality requirement.”
Plaintiffs Fall Short of Alleging the “Something More” Needed to Satisfy Matrixx
Applying Matrixx, the court determined that plaintiffs failed to adequately allege that the nondisclosure of the two SAEs was material because, in contrast to Matrixx, plaintiffs’ allegations did not constitute the “something more” needed to meet the materiality standard. The court rejected plaintiffs’ argument based on the risk odds ratio (“ROR”) scores for each SAE. The ROR is the metric that gauges the frequency of adverse events. Plaintiffs alleged that an ROR score above 1 indicates a higher than expected reporting rate, and that many in the industry assume that an ROR score above 2 warrants attention. Plaintiffs further alleged that an unbiased third party determined that the ROR for the SAEs was “staggering and warranted attention.” As to the first SAE (concerning reported cases of autoimmune hepatitis) the court found that the complaint itself undermined the significance of the ROR score because the ROR score was 1.83, below the ROR score of 2 that the complaint alleged “warrants attention” and “far below” the scores of 9 and 18 that the complaint called “staggering.” The second SAE (concerning reported cases of hepatorenal syndrome) had an ROR score of 5.08. The court noted, however, that the FDA was aware of half of those cases when it revised the drug’s label but chose not to include them on the warning label.
The court further pointed out that plaintiffs alleged no facts indicating that the two SAEs were in any way causally linked to the drug or otherwise material. The court determined that plaintiffs’ conclusory assertion—that the long-term safety of the drug was material to the drug’s approval for the second disease—could not fill this gap. The court noted that plaintiffs failed to allege anything linking the SAEs in patients with the first disease to the FDA’s drug approval considerations or to plausibly allege that the SAEs had any significance concerning the drug’s long-term safety.
[1] Information on SAEs is publicly available through an FDA database. This can prove challenging to plaintiffs alleging securities fraud claims based on omissions as generally an efficient market incorporates all publicly available information.