(Article from Securities Law Alert, April 2023)
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On March 2, 2023, the Fourth Circuit affirmed the dismissal of a putative securities fraud class action alleging that a drug company, its president/CEO and its CFO made material misrepresentations or omissions concerning a new drug, in violation of Section 10(b) of the Exchange Act and Rule 10b-5. Emps. Ret. Sys. v. MacroGenics, 61 F.4th 369 (4th Cir. 2023) (Gregory, J.). The court held that plaintiffs failed to sufficiently allege any actionable misrepresentations or omissions that would give rise to a duty to disclose.
Background and Procedural History
Prior to this litigation, the company developed a new drug and began a Phase 3 clinical trial. The trial required two primary “endpoints” (or pre-determined key measures of the study’s success). The first endpoint was prolongation of the progression free survival (“PFS”), which measures the length of time after a patient receives a particular trial treatment where the disease does not progress. The second endpoint was prolongation of trial patients’ overall survival (“OS”), which measures how long a patient survives regardless of whether their disease progresses.
In February 2019, the company issued a press release announcing that in October 2018 the clinical trial reached its first PFS-related endpoint and included the CEO’s statement that the new drug had “demonstrated a superior outcome in a head-to-head study” against the standard-of-care drug. In May 2019, the company issued a press release disclosing a preliminary positive trend for OS and that the company expected such positive trend would continue, but also that subsequent results could fluctuate as additional events accrue.
In June 2019, the company presented data from the October 2018 period at a scientific conference, including a graph that provided a visual depiction of the interim OS data. The company’s stock price fell nearly 22% after the June 2019 conference and after an analyst described the OS data as “underwhelming.”
Plaintiffs commenced a suit, asserting violations of Section 10(b) and Rule 10b-5 and Sections 11 and 12(a)(2) of the Securities Act. Plaintiffs alleged that the graph presented at the June 2019 conference was available to, and should have been disclosed by, the company earlier and showed that the OS data was not on track to generate a statistically significant OS result when the data fully matured.
Defendants Had No Duty to Disclose the Interim OS Results
Plaintiffs argued that defendants’ prior statements concerning the PFS results put the trial’s interim OS results “in play” and triggered an ongoing duty of the company to disclose at an earlier time the data the company eventually disclosed at the June 2019 scientific conference. The Fourth Circuit determined that, while a company must disclose information when “necessary to make statements made, in light of the circumstances under which they were made, not misleading,” Matrixx Initiatives v. Siracusano, 563 U.S. 27 (2011), defendants “did not have a duty to disclose the interim OS results because their written and oral statements prior to the May [2019] Press Release, did not ‘speak’ about the OS data.” Instead, the company’s statements had “primarily focused” on the clinical trial’s success in reaching the PFS endpoint and “[a]ny language concerning the OS endpoint was preliminary and focused on the ongoing nature of the OS data’s accumulation.” The court further noted that the February 2019 press release “explicitly stated” that follow-up to determine the impact of OS was “ongoing.” Reading this statement as a whole, “clearly indicated to all reasonable investors that, although the PFS results experienced success, one could not (and should not) draw a conclusion on the OS data’s performance as [the company] continued to track OS performance.”
The court also rejected plaintiffs’ contention that defendants had a duty to disclose the graph as a result of their oral communication of the OS interim data earlier than the June 2019 conference. The court explained that plaintiffs did not challenge the OS interim data itself, but rather defendants’ interpretation of it. While plaintiffs asserted that the graph was inconsistent with defendants’ positive statements, the court found that defendants accurately interpreted the OS interim data and that the graph was not in fact contrary to defendants’ prior positive statements. The court further determined that “[b]ecause Defendants’ positive OS-related statements were not false or misleading, or an omission of the interim OS data, we cannot conclude that they had a duty to disclose the graph itself” prior to June 2019.