Corban v. Sarepta Therapeutics, Inc. , 868 F.3d 31 ( 2017 )

United States Court of Appeals
For the First Circuit
Nos. 15-2135, 16-1658
MARK A. CORBAN, individually and on behalf of all others
similarly situated; STEVE FLEISCHMANN, individually and on
behalf of all others similarly situated;
Plaintiffs, Appellants,
DANIEL BARADARIAN, individually and on behalf of all others
similarly situated; BIJESH AMIN, individually and on behalf of
all others similarly situated;
Plaintiffs,
v.
SAREPTA THERAPEUTICS, INC.; CHRIS GARABEDIAN; EDWARD KAYE,
Defendants, Appellees,
SANDESH MAHATME,
Defendant.
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Indira Talwani, U.S. District Judge]
Before
Kayatta, Circuit Judge,
Souter, Associate Justice,*
and Stahl, Circuit Judge.
* David H. Souter, Associate Justice (Ret.) of the Supreme
Court of the United States, sitting by designation.
Stuart W. Emmons, with whom William B. Federman, Amanda B.
Murphy, and Federman & Sherwood were on brief, for appellants.
Christopher G. Green, with whom Dalila Argaez Wendlandt,
Justin G. Florence, Mark D. Vaughn, Alexia R. De Vincentis, and
Ropes & Gray LLP were on brief, for appellees.
August 22, 2017
KAYATTA, Circuit Judge. The price of the publicly traded
securities issued by Sarepta Therapeutics, Inc. dropped sixty-four
percent when Sarepta announced that the Food and Drug
Administration deemed premature Sarepta's application for approval
of a novel gene therapy. Promptly thereafter, several shareholders
brought this securities fraud class action against Sarepta as well
as former and current Sarepta executives on behalf of those who
bought Sarepta stock during the prior four months while Sarepta
was expressing conditional optimism that the FDA would accept its
application. The district court found that the plaintiffs failed
to allege facts creating a strong inference that the defendants
intentionally or recklessly deceived the investing public. We
agree and affirm.
I.
A.
The district court dismissed the complaint after this
action was consolidated and the pleading was once amended. The
plaintiffs then brought a motion for leave to file another amended
complaint, which the district court denied as futile. The
plaintiffs thereafter brought a motion for relief under
Rule 60(b)(2) of the Federal Rules of Civil Procedure proposing a
fourth version of the complaint, and a motion for reconsideration
under Rule 59(e) proposing yet a fifth version. The district court
denied all of these motions for the sole reason that it found them
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futile because none of the proposed pleadings sufficiently stated
a claim under the Private Securities Litigation Reform Act of 1995
(PSLRA), 15 U.S.C. § 78u–4(b).1 Normally we apply a deferential
standard of review to decisions denying amendment, relief from
judgment, and reconsideration. Here, though, each ruling hinged
on a single issue: the sufficiency of the pleading as a matter of
law. Hence, our review is de novo. See Mills v. U.S. Bank, NA,
753 F.3d 47, 54 (1st Cir. 2014); Roger Edwards, LLC v. Fiddes &
Son Ltd., 427 F.3d 129, 132 (1st Cir. 2005). Because the fifth
version of the complaint is the most recent and most complete
version of the pleading, we focus our analysis on that iteration
and draw the following facts and reasonable inferences from it.
B.
Sarepta is a biopharmaceutical company that works to
discover and develop gene therapies for the treatment of rare
neuromuscular diseases, including Duchenne muscular dystrophy
("DMD"). DMD is a progressive childhood disease that affects
1The district court actually denied the motion for
reconsideration through an electronic order that does not furnish
the basis for the decision. Although "a short recitation of [the
district court's] reasoning" would have been preferable, "this
omission alone is not a basis for reversal" because "its reasons
are apparent from the record." United States ex rel. Kelly v.
Novartis Pharm. Corp., 827 F.3d 5, 10 (1st Cir. 2016). In any
event, deeming the denial to have been for futility favors the
plaintiffs, who not surprisingly urge us to so regard the order
and to resolve the question of the complaint's sufficiency rather
than vacating and remanding to the district court for a statement
of reasons.
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approximately 1 in 3500 boys worldwide. Caused by genetic
mutations that hinder or halt production of dystrophin, an
essential protein for muscle function, DMD leads to loss of muscle
strength and ultimately to respiratory and cardiac failure. Few
boys afflicted with this debilitating disease reach adulthood.
Sarepta's lead product candidate during the relevant
time period was eteplirsen. Eteplirsen is designed to treat DMD
by altering the transcription process to skip the genetic mutation.
It thereby enables the body's production of truncated but
functional dystrophin, the type of dystrophin associated with less
severe forms of muscular dystrophy and longer life expectancies.
To market eteplirsen in the United States, Sarepta
needed approval from the FDA. The approval process requires a
sponsor like Sarepta to prepare and submit a new drug application
("NDA" or "application"). See 21 U.S.C. § 355(a). When the FDA
receives an NDA, it "ma[kes] a threshold determination [whether]
the NDA is sufficiently complete to permit a substantive review."
21 C.F.R. § 314.101(a)(1). If so, the FDA accepts the application
for filing. Id. The agency then assesses the merits of the
application, deciding whether to approve the drug. Id.§ 314.101(f). Approval generally requires the application's
sponsor to demonstrate the drug's clinical benefit. See 21 U.S.C.
§ 355(d). In certain instances, though, an accelerated approval
program permits the FDA to review and approve "a product for a
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serious or life-threatening disease or condition . . . upon a
determination that the product has an effect on a surrogate
endpoint that is reasonably likely to predict clinical benefit."
Id. § 356(c)(1)(A). For example, even if a sponsor has not yet
shown that a drug reduces the occurrence of stroke, the FDA might
fast-track the drug upon a showing that it has a measurable effect
on blood pressure. See U.S. Food & Drug Admin., FDA Facts:
Biomarkers and Surrogate Endpoints, https://www.fda.gov/aboutfda/
innovation/ucm512503.htm (last updated July 22, 2016).
Sarepta set its sights on accelerated FDA approval for
eteplirsen, developing and conducting a series of clinical trials
to investigate the drug's effect on two endpoints: (1) the
percentage change in dystrophin-positive fibers in the patient's
muscle, and (2) the distance the patient was able to walk in six
minutes. The clinical trials most relevant to this litigation are
Sarepta's Phase IIb clinical trials, Study 201 and Study 202.
Study 201 enrolled twelve boys in a randomized, double-blind,
placebo-controlled trial. Four boys received a placebo, another
four received a lower dose of eteplirsen, and four more received
a higher dose of the drug. After twenty-four weeks, Study 202
commenced. In this open-label extension, which was neither blind
nor placebo-controlled, all twelve participants received the drug
in one dosage or the other.
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Pointing to the results of these trials, in March 2013,
Sarepta informed investors that it would move toward filing an
NDA. To that end, Sarepta met with FDA officials that month.
During the meeting, the FDA expressed serious concerns regarding
the way Sarepta proposed to analyze the results from the Phase IIb
trials, cautioning that "the proposed analysis was unreasonable
even for hypothesis generation." Sarepta relayed certain
information about this meeting to analysts and investors during an
April 15, 2013 conference call led by Chris Garabedian, President
and Chief Executive Officer of Sarepta at the time, and Edward
Kaye, then the company's Senior Vice President and Chief Medical
Officer. Garabedian explained that the FDA had "not made a final
decision"--and that it was "still too early to draw conclusions"
about the FDA's stance--regarding Sarepta's proposed dystrophin
endpoint for accelerated approval. He nonetheless conveyed
optimism and a sense of positive momentum on this call, stating
that the FDA was "approaching the question of [d]ystrophin as a
surrogate that is reasonably likely to predict clinical benefit in
the thoughtful manner we expected and is requesting more
information." Garabedian struck a similar tone at a conference
presentation on July 10, 2013.
Approximately two weeks later, on July 23, 2013, Sarepta
again met with the FDA regarding eteplirsen. By this time, the
FDA had reviewed additional information from Sarepta about its
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data. The agency told Sarepta at the July meeting that it was
"open to considering an NDA based on these data for filing,"
subject to a number of conditions. Sarepta quoted that language
in a press release it issued the following day, which also stated
that Sarepta planned to submit an NDA "in the first half of 2014
for the approval of eteplirsen." The press release went on to say
that the FDA "requested additional information related to the
methodology and verification of dystrophin quantification," and
that the company believed it could address and incorporate the
requests into its early 2014 submission. In calls with analysts,
investors, and business reporters, Garabedian communicated
"excite[ment]," stating that the company was "very encouraged by
the FDA feedback" and hopeful that the agency "would accept [an
NDA] for filing." He emphasized Sarepta's "belie[f] that
dystrophin is a viable surrogate marker," characterizing the
company's dystrophin analysis as "robust."
Notwithstanding Garabedian's sanguinity, the company
cautioned in its communications that the exact timing of the NDA
submission was unknown, that the agency did not yet endorse the
dystrophin surrogate endpoint under the accelerated approval
pathway, and that in any event "[a] filing would only indicate
that the question [of the propriety of Sarepta's dystrophin
surrogate endpoint] merits review." Investors apparently paid
more attention to those caveats than to the news that the FDA was
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open to considering an NDA based on Sarepta's Phase IIb trial data,
as Sarepta's stock price dropped nineteen percent on July 24 from
its closing price the day before. Nevertheless, as we will
describe in greater detail, the plaintiffs contend that Sarepta's
July 24 communications were misleadingly rosy and selectively
omitted further detail that would have better conveyed a picture
of a highly dubious FDA. The plaintiffs therefore point to
July 24, 2013, as the beginning of the time period during which
class members were defrauded.
During the ensuing months leading up to the November
2013 stock drop, the defendants made several additional comments
challenged by the plaintiffs. For example, Garabedian heralded
Sarepta's progress toward approval as "a tremendous achievement,"
described the company's data set as "compelling and favorable,"
and characterized the FDA's feedback as "particularly encouraging
because it recognizes that our Phase IIb study data set is
sufficient for the FDA to consider a filing." At another
presentation, he called the FDA's response at the July meeting the
"type of information that every company hopes for." He
subsequently described Sarepta's dystrophin analysis as "a very
rigorous, measured approach" which "produced the most robust
[dystrophin] data set of any [dystrophin]-producing technology"
and was not "questioned or challenged [by the FDA] in terms of
[Sarepta's] method for quantifying [dystrophin]." And he opined
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that the FDA's request for additional muscle biopsies of the study
participants "was not an indication of the lack of strength of
[Sarepta's] current biopsy analysis and data."
At the end of September 2013, a competing drug candidate
for the treatment of DMD "total[ly] fail[ed]" during a Phase III
trial notwithstanding promising Phase II results. Drisapersen,
developed by Prosena and GlaxoSmithKline, relied on the "same
mechanism of action" as eteplirsen. It had achieved "the coveted
'Breakthrough Designation' from [the] FDA" on account of "its
preliminary efficacy and potential." Yet in its "pivotal Phase III
trial," it "failed to meet its primary endpoint . . . and all
secondary endpoints." This news initially boosted Sarepta stock,
as it "essentially g[ave] the entire DMD market to eteplirsen."
Yet some investors predicted that drisapersen's failure spelled
trouble for Sarepta. Such trouble came to pass on November 12,
2013, when Sarepta divulged the FDA's most recent guidance: Citing
the drisapersen failure, the FDA stated that it viewed "an NDA
filing for eteplirsen as premature." This news precipitated a
sixty-four percent plummet in Sarepta's stock price, and the
plaintiffs say it revealed that the defendants' representations
since late July had been fraudulent.
After Sarepta announced the FDA's judgment that a filing
was premature, the dialogue between Sarepta and the FDA continued.
Public disclosures about their back and forth were largely one-
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sided: As the FDA later explained, "[b]ecause of laws governing
trade secret[s], [the] FDA is generally unable to provide any
information to the public about its finding regarding drugs under
development and is unable to comment about information provided by
the drug developer." On a few occasions, however, FDA officials
made public statements about concerns they had communicated to
Sarepta (without always specifying when those communications
occurred). Sarepta ultimately submitted its NDA in June 2015.
The FDA accepted the NDA for filing on August 25, 2015, and it
granted accelerated approval for eteplirsen on September 19, 2016.
By that time, this litigation was well underway.
C.
Two and a half months after the November stock drop, the
plaintiffs filed this putative class action complaint in which
they seek relief on behalf of all those who acquired Sarepta stock
between July 24, 2013 and November 11, 2013 (the "class period").
According to the relevant complaint, Sarepta and its top executives
perpetrated securities fraud under section 10(b) of the Securities
Exchange Act of 1934 (Exchange Act), 15 U.S.C. § 78j(b), and the
Securities and Exchange Commission's Rule 10b–5, 17 C.F.R.
§ 240.10b–5. The complaint also charges the individual defendants
with liability for the alleged securities fraud under section 20(a)
of the Exchange Act, 15 U.S.C. § 78t(a). The complaint avers that
the defendants overstated the significance of Sarepta's eteplirsen
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data and exaggerated the likelihood that the FDA would accept an
NDA for filing, thereby deceiving the investing public and causing
the purchase of Sarepta securities at inflated prices.
II.
A.
"To successfully state a securities fraud claim under
section 10(b) and Rule 10b-5, a plaintiff must adequately allege,
among other things, scienter." Local No. 8 IBEW Ret. Plan & Tr.
v. Vertex Pharm., Inc., 838 F.3d 76, 80 (1st Cir. 2016).
Adequately alleging this mental state, which "embrac[es] intent to
deceive, manipulate, or defraud," Aldridge v. A.T. Cross Corp.,
284 F.3d 72, 82 (1st Cir. 2002) (quoting Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 193 n.12 (1976)), requires the plaintiff
to plead "either that the defendants consciously intended to
defraud, or that they acted with a high degree of recklessness,"
id. (citing Greebel v. FTP Software, Inc., 194 F.3d 185, 198-201
(1st Cir. 1999)). That degree of recklessness demands "a highly
unreasonable omission," one that not only involves "an extreme
departure from the standards of ordinary care," but also "presents
a danger of misleading buyers or sellers that is either known to
the defendant or is so obvious the actor must have been aware of
it." In re Smith & Wesson Holding Corp. Sec. Litig., 669 F.3d 68,
77 (1st Cir. 2012) (quoting Miss. Pub. Emps.' Ret. Sys. v. Bos.
Sci. Corp., 649 F.3d 5, 20 (1st Cir. 2011)). Under this strict
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recklessness standard, "simple, or even inexcusable negligence"
does not suffice. Id. (quoting Miss. Pub. Emps.' Ret. Sys., 649
F.3d at 20).
To decide whether the complaint adequately alleges
scienter, "we eschew the ordinary standards of Federal Rule of
Civil Procedure 8(a)(2)," Vertex, 838 F.3d at 81, and instead apply
the "[e]xacting pleading requirements" imposed by Congress in the
PSLRA. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S.
308, 313 (2007). "Under the PSLRA's heightened pleading
instructions, any private securities complaint alleging that the
defendant made a false or misleading statement must . . . 'state
with particularity facts giving rise to a strong inference that
the defendant acted with the required state of mind.'" Id. at 321(quoting 15 U.S.C. § 78u–4(b)(2)). Although "Congress left the
key term 'strong inference' undefined," id. at 314, the Supreme
Court has explained that our inquiry is comparative: We must
determine whether "a reasonable person would deem the inference of
scienter cogent and at least as compelling as any opposing
inference one could draw from the facts alleged." Id. at 324.
B.
1.
The complaint focuses much on Sarepta's reports
regarding its July 23 meeting with the FDA, including the company's
July 24 press release and related comments by its officers.
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According to the complaint, these communications constitute the
opening salvos of fraud because Sarepta disclosed too little of
what FDA officials said at the July and March meetings, and painted
too rosy a picture of their reaction to Sarepta's data. The
plaintiffs point to statements by Garabedian that he was
"encouraged by the feedback from the FDA," that he believed "that
data from [Sarepta's] ongoing clinical study . . . will be
sufficient for an NDA filing," and that the FDA indicated that it
was "open to considering an NDA filing based on the data [Sarepta
had] shared with [the FDA] to date." These and similar statements
were misleading, the plaintiffs say, because FDA officials also
voiced "a number of concerns" to be addressed prior to filing, and
articulated "strong reservations" about the type of data upon which
Sarepta was relying.
The challenged statements that mark the beginning of the
class period provide poor material for building a fraud claim.
They convey opinion more than fact. And while opinion that implies
false facts may nonetheless suffice, see In re Credit Suisse First
Bos. Corp., 431 F.3d 36, 47 (1st Cir. 2005) ("[A] statement of
opinion may be considered factual . . . as a statement about the
subject matter underlying the opinion."), overruled on other
grounds by Tellabs, Inc., 551 U.S. 308, these opinions came replete
with caveats. Sarepta made clear that the FDA "requested
additional information related to the methodology and verification
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of dystrophin quantification" and "would not commit to declaring
dystrophin an acceptable surrogate endpoint," and that a decision
to allow the filing of an NDA "would not indicate that [the FDA
had] accepted dystrophin expression as a biomarker reasonably
likely to predict clinical benefit." Garabedian accurately
reported that the FDA declined to offer "any guarantee or assurance
that an NDA submission would be acceptable for filing." After
this mix of optimism and caution was communicated to investors on
July 24, Sarepta's stock dropped nineteen percent.
Three weeks later, the company further reminded
investors that it had been trying to convince the FDA that its
method for quantifying dystrophin was acceptable and preferable.
And Kaye acknowledged that the company's data set was "limited."
Even if these and other caveats could have been more fulsome, they
cut against the inference of scienter. See Geffon v. Micrion
Corp., 249 F.3d 29, 37 (1st Cir. 2001) (finding insufficient
evidence of scienter where company "sought to provide investors
with adequate warnings," even though "[p]erhaps [the company]
could have provided still more information about the specifics").
At worst, there was positive spin that put more emphasis in tone
and presentation on the real signs of forward movement with the
NDA than it did on causes for wondering if the journey would prove
successful.
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Nor did the class period end in any manner that supports
an inference of fraud. Progress toward realizing an optimistic,
albeit caveated, prediction markedly slowed, due at least in part
to a material development that occurred well after the prediction
was proffered--i.e., the failure of the GlaxoSmithKline and
Prosena product, drisapersen. While the November announcement
demonstrated that the caveated hopes voiced in the time since the
July meeting had proven overly optimistic, there is nothing in
this chronology to suggest that Sarepta knew prior to November
that its efforts would suffer a setback at that time. See Suna v.
Bailey Corp., 107 F.3d 64, 68 (1st Cir. 1997) ("[O]ptimistic
predictions about the future that prove to be off the mark . . .
are immunized unless plaintiffs meet their burden of demonstrating
intentional deception." (quoting Serabian v. Amoskeag Bank Shares,
Inc., 24 F.3d 357, 361 (1st Cir. 1994), abrogated on other grounds
by Greebel, 194 F.3d at 196-97)). Sarepta's hopes, moreover,
ultimately proved correct, although on a much slower schedule.
The company submitted its NDA in June 2015, and the FDA accepted
the NDA for filing in August 2015. In summary, the plaintiffs
mine little more than opinions, predictions, caveats, and cramped
disclosures in the events bookending the class period.
2.
That leaves the plaintiffs' arguments regarding a pair
of statements made by Garabedian in the middle of the class period.
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First, on August 15, 2013, Garabedian stated that Sarepta had
shared its dystrophin data with the FDA (which is not disputed)
and that the data "was not something that was questioned or
challenged in terms of [Sarepta's] method for quantifying."
Second, on September 9, 2013, he said in reference to the FDA's
proposal to conduct additional biopsies of the Phase IIb study
participants that the proposal "was not an indication of the lack
of strength of [Sarepta's] current biopsy analysis and data."2
According to the plaintiffs, these statements were "objectively
and knowingly false" because the FDA had communicated concerns
about the data analysis to Sarepta and Garabedian had knowledge of
such communications when he spoke. Specifically, the plaintiffs
point to March 2013 communications from the FDA expressing the
agency's skepticism about Sarepta's quantification of dystrophin.
Chronology defeats this argument. The March 2013
communications predated Garabedian's August and September
statements by several months. In the intervening period, Sarepta
submitted additional data to the FDA in compliance with FDA
requests, and the agency's skepticism was fairly viewed as having
2 These are the only two alleged misstatements after the
beginning and before the end of the class period that the
plaintiffs discuss in support of their argument that the defendants
could not have acted negligently and must have acted intentionally
or recklessly. They are, accordingly, the only two we consider.
See Rodríguez v. Municipality of San Juan, 659 F.3d 168, 175 (1st
Cir. 2011).
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diminished. As the complaint's allegations show, it was after
reviewing the additional data that the FDA declared in July 2013
that it was "open to considering an NDA based on these data for
filing." There is nothing in the complaint's allegations to
indicate that the strength of the concerns expressed by the FDA in
March 2013 persisted or that Garabedian understood the force of
those concerns to have survived additional data submissions (much
less the later and significantly more specific feedback provided
to Sarepta at the July 2013 meeting).
Perhaps sensing this flaw in the timeline, the
plaintiffs offer a second reason why Garabedian's statements were
"objectively and knowingly false." They claim that the FDA told
Sarepta at the July 23 meeting that it doubted the validity of
Sarepta's method for quantifying dystrophin. To support this
claim, they rely on the FDA's expression of concern that there was
possible bias in the dystrophin analysis. This perception of
possible bias was based not on any specific indication or
allegation of bias, but rather on the general observation that
"all muscle biopsies were obtained and processed by a single
technician at a single study center." Hence, the FDA felt that
another analysis by an independent laboratory was advisable.3 This
3 The FDA's suggestion had to do with confirming existing
data, rather than generating additional data. For that reason, we
see no logical connection between it and Garabedian's September 9,
2013 statement about the FDA's proposal to conduct additional
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is far from evidence that the FDA "questioned or challenged"
Sarepta's data due to the company's "method for quantifying." At
most, it demonstrates that an undifferentiated fear about the
latent risk of bias led the FDA to suggest a cautious approach:
confirming the results at an independent laboratory. Concerns
about reliability are not the same as concerns about methodology,
and the plaintiffs' efforts to collapse these concepts in order to
demonstrate scienter fall flat. Finally, even if Garabedian's
statements may have been misleading (an issue we need not decide),
the allegations cited by the plaintiffs do not adequately plead
that he intentionally or recklessly misled.
The defendants had no legal obligation to loop the public
into each detail of every communication with the FDA. "[M]ere
possession of . . . nonpublic information does not create a duty
to disclose it," In re Smith & Wesson Holding Corp. Sec. Litig.,
669 F.3d at 74 (first alteration in original) (quoting Hill v.
Gozani, 638 F.3d 40, 57 (1st Cir. 2011)), even when that
information is "material"--i.e., substantially likely to be viewed
by a reasonable investor as "significantly altering the total mix
of information made available," id. (citing City of Dearborn
Heights Act 345 Police & Fire Ret. Sys. v. Waters Corp., 632 F.3d
biopsies of the Phase IIb study participants. We therefore
understand the plaintiffs to offer the FDA's July 2013 concerns
about bias only as evidence that Garabedian's August 15, 2013
statement was knowingly false.
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751, 756 (1st Cir. 2011)). Of course, a company may not
intentionally or recklessly omit facts without which its
statements become misleading. Id.; see also 17 C.F.R. § 240.10b-5
(making it unlawful to "omit to state a material fact necessary in
order to make the statements made, in the light of the
circumstances under which they were made, not misleading"). But
simply pointing us to omitted details, as the plaintiffs have done,
and failing to explain how the omitted details rendered the
particular disclosures misleading, misses the mark. That the
defendants neglected to mention specific factors (many of them
intricate and technical) contributing to the FDA's position, while
nonetheless faithfully representing that position (indeed quoting
directly from FDA sources at times), strikes us as more consistent
with negligence than reckless or intentional concealment.
In advocating otherwise, the plaintiffs point to Zak v.
Chelsea Therapeutics International, Ltd., 780 F.3d 597 (4th Cir.
2015). In Zak, a split panel of the Fourth Circuit vacated the
district court's decision that the complaint failed to adequately
plead scienter. Id. at 611. The court announced a narrow holding
and emphasized that "the scienter inquiry necessarily involves
consideration of the facts and of the nature of the alleged
omissions or misleading statements within the context of the
statements that a defendant affirmatively made." Id. The
defendants in Zak had allegedly buried the lede, claiming that the
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FDA had "agreed" that the company's new drug application could be
submitted based on data from a single study and would not require
additional efficacy studies, when in fact FDA officials had told
the company "that a single successful study typically was not
sufficient to support approval of a new drug." Id. at 602. Even
more egregiously, the defendants--while they possessed, but before
they made public, an FDA briefing document including
recommendations against approval--issued a press release that
failed to disclose those recommendations and instead falsely
represented the briefing document as surfacing only "lines of
inquiry." Id. at 603. In these respects, Zak is less like this
case and more like Schueneman v. Arena Pharmaceuticals, Inc.,
another out-of-circuit decision cited by the plaintiffs in their
briefing that is readily distinguishable. See 840 F.3d 698, 702,
708 (9th Cir. 2016) (finding that plaintiff adequately pled
scienter where company reported "favorable results on everything"
from animal studies and conveyed optimism about FDA approval while
concealing strong indications that drug caused cancer in rats).
3.
That brings us to the plaintiffs' argument that Sarepta
had a motive to lie, and that its motive supports an inference of
scienter. The plaintiffs point to allegations about the company's
July 2013 "At the Market" offering, which allowed Sarepta to sell
up to $125 million of common stock at market price, as evidence of
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motive. The complaint quotes the company's announcement that it
"intend[ed] to use any proceeds from this offering for general
corporate purposes," some related to eteplirsen and some not.
According to the complaint, "[h]ad the market been aware of these
undisclosed facts, investors would not have been so willing to
participate in the [at-the-market] offering, at least not at the
prices they paid." Drawing on these allegations, the plaintiffs
argue that the offering provides strong evidence of motive, and
therefore scienter, because the defendants "needed the offering to
provide Sarepta essential funding."
"[T]he usual concern by executives to improve financial
results" does not support an inference of scienter. In re
Cabletron Sys., Inc., 311 F.3d 11, 39 (1st Cir. 2002); see also
Greebel, 194 F.3d at 197 ("[C]atch-all allegations that defendants
stood to benefit from wrongdoing . . . are [not] sufficient."
(third alteration in original) (quoting In re Advanta Corp. Sec.
Litig., 180 F.3d 525, 535 (3d Cir. 1999))). We require something
more than the ever-present desire to improve results, such as
allegations that "the very survival of the company w[as] on the
line." In re Cabletron Sys., Inc., 311 F.3d at 39. The complaint
lacks such allegations, noting only that Sarepta depended heavily
on financing activities for capital. Contrary to the district
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court cases cited by the plaintiffs,4 where the companies' finances
were in dire straits, the complaint alleges that "Sarepta had
$156.2 million in cash and cash equivalents on its balance sheet,"
and "$80 million in working capital," when it launched the July
2013 at-the-market offering. Lacking are any allegations
suggesting that such capital was insufficient for continued
operations, much less that Sarepta would shutter its doors unless
it padded earnings by deceiving investors.
Beyond the financial motive, the plaintiffs say, Sarepta
had reason to spark false hope: It catalyzed families and
advocates of boys suffering from DMD to pressure the FDA for
accelerated approval. The plaintiffs point to remarks by various
FDA officials regarding "[g]reat hope" and "considerable public
attention" resulting from Sarepta's teasers about trial results.
4
In In re Ibis Technology Securities Litigation, the district
court found sufficient allegations of scienter in part because the
complaint averred that a contemporaneous stock offering "was
necessary to ensure that [the company] would not run out of cash
and could fund ongoing operations." 422 F. Supp. 2d 294, 317
(D. Mass. 2006). And in Frater v. Hemispherx Biopharma, Inc., the
district court held that scienter was adequately pleaded in part
because the complaint alleged that the company "was . . .
sufficiently short on cash at the time of the alleged
misrepresentations that it could not afford to finance an
additional clinical trial as the FDA had recommended." 996 F.
Supp. 2d 335, 350 (E.D. Pa. 2014). Although the complaint in this
case includes allegations that Sarepta limited the size of its
Phase IIb trials because it could not afford larger trials, the
complaint lacks allegations that the company's financial condition
at the time of the alleged misrepresentations was the same as, or
worse than, the company's financial condition when it undertook
the Phase IIb trials.
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But the complaint does not allege that the defendants predicted or
intended this result ex ante. After all, "considerable public
attention" also means closer scrutiny. And given that outside
pressure on the FDA plays no clear or generally acknowledged role
in the agency's closely regulated process, as the complaint's
allegations themselves reflect, it seems a stretch to infer that
the defendants risked closer scrutiny simply to apply indirect
pressure on a regulator's data-driven decisionmaking process.
When we consider the totality of the complaint's
allegations, and measure the malicious inference against the
innocent ones, we do not find "the malicious inference [to be] at
least as compelling as any opposing innocent inference." Zucco
Partners, LLC v. Digimarc Corp., 552 F.3d 981, 991 (9th Cir. 2009)
(citing Tellabs, Inc., 551 U.S. at 323)). Sarepta, a
biopharmaceutical company navigating the uncertain terrain of
accelerated approval for a gene therapy, was energized by clinical
trial data, which it shared with the FDA. In the ensuing dialogue
between the company and the agency, the initially unwelcoming
agency cracked open the door to a possible approval by stating a
willingness to consider a new drug application for the therapy
while cautioning the company about the importance of more and
better data for accelerated approval. The company shared this
obviously good news about the FDA's new receptiveness to possible
acceptance of a filing while conveying enough caveats so that the
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stock price actually dropped. As the company moved toward filing
for regulatory approval, a competitor drug candidate with the same
mechanism posted disappointing results, and the FDA decided that
a new drug application for the company's therapy would be
premature, causing a more substantial drop in stock price. The
only plausible motive for fraud identified by the plaintiffs is
revenue generation, which falls short of pleading a cogent
inference of scienter that can carry the day here. More plausible
is the opposing innocent inference that the defendants, perhaps
negligently, waxed too optimistically about the FDA's expression
of a willingness to consider an NDA for eteplirsen while
emphasizing too little the FDA's reservations about such an
application. This is simply a case in which the complaint focuses
too much on nuance rather than false facts or material omissions
to support the necessary strong inference of scienter. We
therefore affirm dismissal of the section 10(b) and Rule 10b–5
claims as well as the derivative section 20(a) claims.5
5
The plaintiffs have filed two separate appeals from rulings
of the district court. The first appeal challenges a ruling that
amendment would be futile due to insufficient allegations in the
proposed second amended complaint of falsity and materiality. We
need not address the sufficiency of allegations as to those
elements. The second amended complaint contained even fewer
allegations of scienter than its successors, and so our decision
today that the most recent and most complete version of the
complaint lacks sufficient allegations of scienter resolves both
appeals.
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III.
Notwithstanding five tries to get it right, the
plaintiffs have failed to satisfy the requisite pleading
standards. We reject the plaintiffs' appeals and affirm the
district court's dismissal of this action.
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