In Re: Ocular Therapeutix Inc v. ( 2020 )

United States Court of Appeals
For the First Circuit
No. 19-1557
KAVITA MEHTA; WILLIAM L. STEPHENS;
KHALED RAMADAN; OLEG TKALYCH,
Plaintiffs-Appellants,
THOMAS GALLAGHER, individually and on behalf of all others
similarly situated; DYLAN CARAKER, individually and on behalf of
all others similarly situated; SHAWNA KIM, individually and on
behalf of all others similarly situated,
Plaintiffs,
v.
OCULAR THERAPEUTIX, INC.; AMARPREET SAWHNEY;
ANDREW HURLEY; GEORGE MIGAUSKY; ERIC ANKERUD,
Defendants-Appellants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. George A. O'Toole, Jr., U.S. District Judge]
Before
Thompson, Stahl, and Barron,
Circuit Judges.
Jeremy A. Lieberman, with whom Austin P. Van, Pomerantz LLP,
Robert V. Prongay, Kara M. Wolke, Glancy Prongay & Murray LLP,
Glen DeValerio, Daryl Andrews, and Andrews DeValerio LLP were on
brief, for plaintiffs-appellants.
Michael G. Bongiorno, with whom Peter J. Kolovos and Wilmer
Cutler Pickering Hale and Dorr LLP were on brief, for defendants-
appellants.
April 9, 2020
STAHL, Circuit Judge. In September 2015, Ocular
Therapeutix, Inc. ("Ocular" or the "company"), a public,
Massachusetts-based biopharmaceutical company, submitted a New
Drug Application ("NDA") to the United States Food and Drug
Administration ("FDA") for approval of its drug product, Dextenza,1
for treatment of ocular pain following ophthalmic surgery. After
publication in July 2017 of the FDA's inspectional observations of
issues at Ocular's manufacturing facility and a resultant drop in
the company's stock price, several shareholders ("plaintiffs")
initiated this securities fraud action against Ocular, its Chief
Executive Officer, Amarpreet Sawhney, and its Executive Vice
President of Regulatory, Quality, and Compliance, Eric Ankerud
(collectively "defendants"), on behalf of themselves and a
putative class of all other investors who had purchased or
otherwise acquired the company's stock between March 10, 2016 and
July 11, 2017 (the "class period"). 2 Plaintiffs' two-count
1
This opinion refers to the drug product at issue as
"Dextenza" except where the name appears in cited materials as
"DEXTENZA."
2
The district court consolidated four related actions
and appointed Kavita Mehta, William L. Stephens, Khaled Ramadan,
and Oleg Tkalych as lead plaintiffs. Plaintiffs initially named
Ocular's Chief Financial Officer, George Migausky, and its Chief
Commercial Officer, Andrew Hurley, as additional defendants.
However, plaintiffs subsequently did not contest defendants'
assertion that the claims against Migausky and Hurley should be
dismissed, and the district court dismissed all claims against
them. Plaintiffs do not challenge the dismissal of those claims
on appeal.
- 3 -
complaint alleged: first, that all defendants had on multiple
occasions intentionally or recklessly misled investors about
Ocular's manufacturing problems in violation of Section 10(b) of
the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C.
§ 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R.
§ 240.10b–5; and second, that Sawhney and Ankerud, as control
persons for Ocular, were liable under Section 20(a) of the Exchange
Act, 15 U.S.C. § 78t(a).
Defendants moved to dismiss the complaint for failure to
state a claim pursuant to Federal Rules of Civil Procedure 12(b)(6)
and 9(b), the Exchange Act, and the Private Securities Litigation
Reform Act ("PSLRA"), 15 U.S.C. §§ 78u-4, 78u-5. The district
court granted the motion and dismissed the complaint with
prejudice. Plaintiffs timely appealed. We affirm, holding, on
de novo review, that plaintiffs have not alleged facts giving rise
to a strong inference of scienter as required by the PSLRA.
I. Background
A. Factual History
"We recite the facts as alleged in the complaint,
supplemented by certain 'materials [the] defendants filed in the
district court in support of their motion to dismiss.'" Brennan
v. Zafgen, Inc., 853 F.3d 606, 609-10 (1st Cir. 2017) (alteration
in original) (quoting Fire & Police Pension Ass'n of Colo. v.
Abiomed, Inc., 778 F.3d 228, 232 (1st Cir. 2015)). We also draw
- 4 -
from "documents the authenticity of which are not disputed by the
parties," as well as "official public records; . . . documents
central to plaintiffs' claim[s]; [and] documents sufficiently
referred to in the complaint." Id. at 610 (alterations in
original) (quoting Watterson v. Page, 987 F.2d 1, 3 (1st Cir.
1993)).
Ocular, whose stock trades on the NASDAQ stock exchange,
was founded in 2006. At its headquarters and multiproduct
manufacturing facility in Bedford, Massachusetts, the company
develops and commercializes therapies for diseases and conditions
of the eye using its proprietary bioresorbable hydrogel
technology.3 Dextenza is a drug-eluting medical implant, or plug,
designed to be inserted into the tear duct of the eye, the
canaliculus, through a natural opening, the punctum, located in
the inner portion of the eyelid near the nose. Following
insertion, Dextenza uses Ocular's proprietary hydrogel to provide
sustained delivery of FDA-approved corticosteroid dexamethasone as
an active pharmaceutical ingredient to the surface of the eye and
to act as an ocular tissue sealant. The production of Dextenza,
like the other drug products manufactured at Ocular's multiproduct
facility in Bedford,4 is subject to, inter alia, the current Good
3 Ocular is incorporated in Delaware.
4
Ocular manufactured several drug products at its
multiproduct facility in Bedford during the class period. Among
- 5 -
Manufacturing Practice ("cGMP") regulations regarding finished
pharmaceuticals found in Part 211 of Title 21 of the Code of
Federal Regulations. See generally 21 C.F.R. Part 211.
1. Ocular's 2015 NDA
In September 2015, Ocular submitted an NDA to the FDA
seeking approval for the sale and marketing of Dextenza for
treatment of ocular pain following ophthalmic surgery.5 The FDA
accepted the NDA for filing and established July 24, 2016 as the
target date for action on the application under the Prescription
Drug User Fee Act ("PDUFA"), 21 U.S.C. § 355.
In February 2016, as part of its reviewal of the NDA for
Dextenza, the FDA inspected Ocular's manufacturing facility in
Bedford for cGMP compliance. On February 11, the FDA delivered
them were its drug product candidate OTX-TP, another hydrogel-
based drug-eluting intracanalicular plug but with FDA-approved
prostaglandin analogue travoprost as an active ingredient,
developed as a treatment for glaucoma and ocular hypertension, and
ReSure Sealant, a hydrogel-based post-surgical ophthalmic wound
sealant approved by the FDA for commercial sale in 2014.
5 According to the FDA, "[t]he NDA application [sic] is
the vehicle through which drug sponsors formally propose that the
FDA approve a new pharmaceutical for sale and marketing in the
U.S. The data gathered during the animal studies and human
clinical trials of an Investigational New Drug (IND) become part
of the NDA." FDA, New Drug Application (NDA),
https://www.fda.gov/drugs/types-applications/new-drug-
application-nda (last updated June 10, 2019). During the class
period, Dextenza was in a Phase III clinical trial for the
treatment of post-surgical ocular pain and inflammation, in a Phase
III clinical trial for the treatment of allergic conjunctivitis,
and in a Phase II clinical trial for the treatment of inflammatory
dry eye disease.
- 6 -
its inspectional observations to Ocular's management on the
agency's Form 483 ("February 2016 Form 483").6 The February 2016
Form 483 provided ten observations detailing issues with Ocular's
manufacturing facility, noting that they were "inspectional
observations [that] do not represent a final agency determination
regarding [Ocular's] compliance." The relevant portions of the
FDA's observations were as follows:
Observation 1 stated that "[l]aboratory records do not
include a complete record of all data secured in the course of
each test, including all spectra from laboratory instrumentation,
properly identified to show the lot tested and drug product
tested."7 See 21 C.F.R. §§ 211.180, 211.194(a).
6
FDA investigators issue a Form 483 to a company's
management at the conclusion of an inspection when they have
"observed any conditions that in their judgment may constitute
violations of the Food Drug and Cosmetic Act (FD&C) and related
Acts." FDA, FDA Form 483 Frequently Asked Questions,
https://www.fda.gov/inspections-compliance-enforcement-and-
criminal-investigations/inspection-references/fda-form-483-
frequently-asked-questions (last updated Jan. 9, 2020).
7
Observation 1.A specified that "[r]eview of [Ocular's]
source documentation for analytical data submitted in [the] NDA
. . . found that printed [high-performance liquid chromatography]
chromatograms and integration results for dose content uniformity
and purity were discarded . . . and only the reprocessed data was
printed and retained." Review of that reprocessed data, per
Observation 1.B.1, "revealed a failure to include the area of a
typical peak of unknown impurity" at a given retention time "in
the total area and content of unknown impurities." Observation
1.D noted that Ocular lacked "written procedures to clearly specify
how manual integration of chromatograms is performed."
- 7 -
Observation 2 stated that "[s]amples taken of drug
products for determination of conformance to written
specifications are not representative," and that Ocular's
"sampling plan supporting product release and stability testing
. . . is not designed to assure that samples are representative of
the entire subject lot or unit to be tested." See id.§ 211.160(b)(1).
Observation 3 stated that "[c]ontrol procedures are not
established which monitor the output and validate the performance
of those manufacturing processes that may be responsible for
causing variability in the characteristics of in-process material
and the drug product."8 See id. § 211.100.
Observation 4 stated that "[a]ctual yield and
percentages of theoretical yield are not determined at the
conclusion of each appropriate phase of manufacturing of the drug
product." See id. § 211.103. Observation 5 stated that
"[w]ritten production and control procedures include batches
formulated with the intent to provide [a certain] percent of the
labeled or established amount of active ingredient." See id.
§ 211.101(a). Observation 6 stated that "[l]aboratory controls
do not include the establishment of scientifically sound and
8
As specified in Observation 3.D, Ocular "d[id] not
characterize and trend rejects produced during inspection of drug
product." See 21 C.F.R. § 211.180(e).
- 8 -
appropriate test procedures designed to assure that drug products
conform to appropriate standards of identity, strength, quality
and purity." See id. §§ 211.160(b), 211.165.
Observation 7 stated that "[e]quipment for adequate
control over air pressure, micro-organisms, humidity, and
temperature is not provided when appropriate for the manufacture,
processing, packing or holding of a drug product." See id.
§ 211.46. Observation 8 stated that "[t]ime limits are not
established when appropriate for the completion of each production
phase to assure the quality of the drug product." See id.
§ 211.111. Observation 9 stated that "[u]nauthorized personnel
have access to enter areas of the buildings and facilities
designated as limited access areas," see id. § 211.28(c), while
Observation 10 stated that "[b]uildings used in the manufacturing
of a drug product are not maintained in a good state of repair,"
see id. § 211.58.
On March 10, 2016 -- the first day of the class period
-- Ocular filed its Annual Report on Form 10-K ("2016 Form 10-K")
for the year 2015 with the Securities and Exchange Commission
("SEC"). The company stated therein that it "fabricate[s] devices
and drug depot products for use in our clinical trials, research
and development and commercial efforts for all of our therapeutic
product candidates using current [G]ood [M]anufacturing
[P]ractices, or cGMP, at our multi-product facility located in
- 9 -
Bedford, Massachusetts." Ocular additionally disclosed its
receipt of the February 2016 Form 483:
[I]n February 2016, as part of the ongoing review of our
NDA for DEXTENZA, the FDA conducted a pre-NDA approval
inspection of our manufacturing operations. As a result
of this inspection, we received an FDA Form 483
containing inspectional observations focused on process
controls, analytical testing and physical security
procedures related to manufacture of our drug product
for stability and commercial production purposes. We
addressed some observations before the inspection was
closed and have responded to the FDA with a corrective
action plan to complete the inspection process. . . .
Any failure to comply with applicable regulations may
result in fines and civil penalties, suspension of
production, product seizure or recall, imposition of a
consent decree, or withdrawal of product approval, and
would limit the availability of [our product] and our
product candidates that we manufacture. The failure to
resolve the Form 483 inspectional observations from the
February 2016 inspection could result in a delay in the
PDUFA date and potential approval for the NDA we have
filed for DEXTENZA for the treatment of post-surgical
ocular pain.
In July 2016, the FDA sent Ocular a Complete Response
Letter ("CRL") rejecting the NDA for Dextenza.9 On July 25, Ocular
issued a press release disclosing its receipt of the CRL and
stating that "[t]he concerns raised by the FDA pertain to
deficiencies in manufacturing process and controls identified
9The "FDA will send the applicant a [C]omplete
[R]esponse [L]etter if the agency determines that [it] will not
approve the application or abbreviated application in its present
form for one or more of the reasons given in [21 C.F.R.] § 314.125
or § 314.127," which provide bases upon which the agency may refuse
to approve an NDA. 21 C.F.R. § 314.110. The CRL rejecting the
NDA for Dextenza was neither publicly released nor entered into
the record of this proceeding.
- 10 -
during a pre-NDA approval inspection of the Ocular Therapeutix
manufacturing facility." That day, Ocular's share price fell
$0.75, or 14.51%, closing at $4.42.
On November 9, 2016, Ocular held an earnings conference
call with investors, during which defendant Sawhney stated in part:
I am pleased to report that we have had productive
discussions with the FDA over the past several months.
We believe we have taken the appropriate steps to address
the manufacturing related items raised by the FDA,
although the FDA will make its determination after we
resubmit our NDA. As a reminder, in July we received a
CRL, or complete response letter, relating to certain
manufacturing processes on control deficiencies, and
subsequently received a letter from the New England
district office providing additional details as to the
outstanding deficiencies related to their pre-NDA
approval inspection of the Ocular Therapeutix
manufacturing facility. Among these was an observation
related to the proposed process for identifying identity
testing of an incoming inert gas component used in the
Dextenza manufacturing process. The district office
letter also requested that we submit a formal report
providing evidence that migration to automatic
integration of analytical testing has been completed.
Sawhney also stated:
[W]hether or not re-inspection is required, is a
determination that [the FDA] will make. And they just
said that we'll get back to you in 30 days after your
resubmission to inform you. That's so -- we really
can't get more guidance or can't give more guidance on
that. I think it's important to realize that this is a
matter of when not if type of a thing, we've adequately
we think addressed the issues that they've raised. And
communicated our plans to them and they seem in broad
agreement with the plans that we have communicated. But
until they kind of review the resubmission, they will
not be in a position of giving any further guidance.
So, when we do that, let's say that that were by the end
of the year December we submit. In January they would
- 11 -
let us know whether it's one more month left or five
more months left.
2. Ocular's 2017 NDA
On January 23, 2017, Ocular announced that it had
resubmitted its NDA for Dextenza for the treatment of post-surgical
ocular pain. On February 22, 2017, the company disclosed that the
FDA had accepted the resubmitted NDA for filing and had designated
July 19, 2017 as the target date for action on the application
under the PDUFA.
On March 10, 2017, Ocular filed its Annual Report on
Form 10-K ("2017 Form 10-K") for the year 2016 with the SEC. The
2017 Form 10-K essentially repeated the statement included in the
2016 Form 10-K that Ocular "fabricate[s] devices and drug insert
and depot products for use in our clinical trials, research and
development and commercial efforts for all of our therapeutic
product candidates using current Good Manufacturing Practices, or
cGMP, at our multi-product facility located in Bedford,
Massachusetts." The 2017 Form 10-K also noted that in the CRL
Ocular had received in July 2016, "the concerns raised by the FDA
pertain to deficiencies in manufacturing process and controls
identified during a pre-NDA approval inspection of our
manufacturing facility . . . in February 2016 that were documented
on FDA Form 483."
- 12 -
The FDA reinspected Ocular's manufacturing facility from
April 24 to May 4, 2017 as part of its reviewal of the resubmitted
NDA for Dextenza. Following the reinspection, on May 4, the FDA
issued to Ocular's management another Form 483 that identified six
inspectional observations ("May 2017 Form 483").10 In relevant
part, the May 2017 Form 483 identified the following issues:
Observation 1 stated that "[w]ritten records are not
always made of investigations into unexplained discrepancies," and
specifically, that Ocular had "failed to investigate the nature of
particulate matter that has been found in manufactured drug
product." See 21 C.F.R. § 211.22(a). Further, "[p]articulate
matter has been noted in 10/23 lots . . . manufactured from
[February 2016] to [May 4, 2017]." As plaintiffs alleged, Ocular
had determined sometime prior to April 28, 2017 that the
particulate matter in the lots appeared to be inclusive of
aluminum, which is toxic to humans if absorbed or consumed.
Observation 2 stated that "[w]ritten production and
process control procedures are not followed in the execution of
production and process control functions and documented at the
time of performance." See id. §§ 211.22(d), 211.100(b).
Specifically, Ocular had "not set critical parameters for defect
10
Like its predecessor, the May 2017 Form 483 stated
that it contained "inspectional observations [that] do not
represent a final Agency determination regarding [Ocular's]
compliance."
- 13 -
action limits, including but not limited to defects such as
particulate matter, found within the drug product."11
Observation 3 stated that "[t]here are no written
procedures for production and process controls designed to assure
that the drug products have the identity, strength, quality, and
purity they purport or are represented to possess." See id.
§ 211.100(a). Observation 4 stated that "[t]he responsibilities
and procedures applicable to the quality control unit are not in
writing." See id. §§ 211.22, 211.188. Observation 5 stated that
"[l]aboratory controls do not include the establishment of
scientifically sound and appropriate specifications and test
procedures designed to assure that drug products conform to
appropriate standards of identity, strength, quality and purity."
See id. §§ 211.160(b), 211.165. Observation 6 stated that
"[e]mployees engaged in the manufacture, processing, packing and
holding of a drug product lack the training required to perform
their assigned functions." See id. § 211.25(a).
On the following day, May 5, 2017, Ocular released its
financial results for the first quarter of 2017 in its Quarterly
Report on Form 10-Q to the SEC. That morning, Ocular conducted a
11
The FDA noted that three Dextenza batches -- from
which 224 plugs, 45 plugs, and 37 plugs, respectively, had been
rejected due to unknown particulate matter -- "were released for
intended commercial use on [January 12, 2017] without critical
defect limits established."
- 14 -
conference call with investors to discuss its disclosures and
operations.12 At the outset, Ocular's Chief Financial Officer,
George Migausky, stated that "during today's call, we will be
making certain forward-looking statements," and that "[a]ctual
results may differ materially from those indicated by these
forward-looking statements as a result of various important
factors." Migausky also said that "any forward-looking statements
represent our views only as of today and should not be relied upon
as representing our views as of any subsequent date." During the
call, defendant Sawhney disclosed that Ocular "received the Form
483 containing inspectional observations focusing on procedures
for manufacturing processes and analytical testing related to
manufacture of drug product for commercial production." Sawhney
related the company's "plan to evaluate these observations and
respond to the FDA in 15 days with corrective action plans to
complete the inspection process," and noted that "[a] timely
resolution of the 483 observations is a prerequisite to keep the
PDUFA date on track." Subsequently, defendant Ankerud stated:
FDA completed the re-inspection of our facility as part
of the NDA review late yesterday afternoon. As Amar
[Sawhney] mentioned, 483 was issued. We were pleased
during the re-inspection that the FDA investigator was
able to confirm our corrective action plan from prior
observations, and indicated that there was no further
12
Beyond plaintiffs' allegations, we draw quotations
from the full transcript of the May 5, 2017 conference call that
defendants provided as an exhibit to their motion to dismiss the
complaint. See Brennan, 853 F.3d at 609-10.
- 15 -
follow-up necessary to close out those issues. This was
a new investigator not the same investigator from prior
inspections, and their primary focus in the 483 relates
to a particula[te] matter issue as part of our
manufacturing process. The issue relates primarily to
completion of an investigation that we have underway in
regard to the particula[te] matter solidifying
specifications for in process, 100% visual inspection of
our inserts, as well as enhancing our operator training.
We feel quite comfortable that we have the situation
under control and we are preparing responses to the 483
as of this morning in anticipation of responding within
15 calendar days to the agency. In addition to the
particula[te] matter issue, FDA raised a couple of
observations in regard to analytical method, testing to
be completed, as well as some other issue related to
quality oversight of batch records. So in summary, we
believe that each of the observations raised by FDA
during this continuous improvement review of our fully
developed manufacturing process are handled well and
will be resolved in our response to FDA.
Ankerud also stated:
I think there is two important issues to recognize. The
first is that from the prior preapproval inspection, FDA
issued a 483. We resolve those issues, close those
issues with the district office and during this re-
inspection the new investigator is responsible for
confirming that we have implemented what was said in our
responses. And the investigator went through each of
our responses and confirm [sic] that we had properly and
appropriately implemented those actions. So I think
that's a strong sign that the manufacturing process has
moved forward significantly, and is in a fully developed
mode.
Further, in response to an analyst's question of whether there was
"anything in [the FDA's] observations that you think could delay
the action date specifically," Sawhney replied:
Nothing that we can currently see. I think these -- as
you know, probably 90% plus inspections have 483. The
question, what are the nature of the issues in the 483?
We think these are resolvable issues, and we have
- 16 -
responses. Some are already prepared and some being
prepared to address them in a timely fashion.
Also on May 5, 2017, Ocular issued a press release that
disclosed: "Following a re-inspection of manufacturing operations
by the FDA . . . Ocular Therapeutix received an FDA Form 483
containing inspectional observations focused on procedures for
manufacturing processes and analytical testing, related to
manufacture of drug product for commercial production." Following
the press release, the company's share price fell $1.47, or 16.15%,
closing that day at $7.63.
On July 6, 2017, the website Seeking Alpha published an
article titled "Ocular: A Poke in the Eye," which included links
to the February 2016 and May 2017 Forms 483, making them public
for the first time.13 On the same day, STAT, a healthcare media
outlet, published an article about Ocular suggesting that the FDA
might reject the resubmitted NDA for Dextenza due to product
13 The article described the content of the Forms 483
and opined:
Even a layperson reading [the May 2017 Form 483] can
tell that the company is having serious manufacturing
issues, and their whole approach to manufacturing and
patient safety is highly questionable. What's more
troubling is that either management doesn't fully
understand the letter, or they have been misleading
investors. Both are bad.
The article further stated that observations in the February 2016
Form 483 were repeated in the May 2017 Form 483 and that
observations in the second were worse than those in the first.
- 17 -
contamination, including aluminum, found during an agency
inspection of the company's manufacturing facility. After the
publication of the articles, Ocular's share price fell $3.06, or
30.06%, over the next two trading days, closing at $7.12 on July
7, 2017.
On July 12, 2017, Ocular received another CRL from the
FDA rejecting the resubmitted NDA for Dextenza. That day, Ocular
announced its receipt of the CRL in a press release, which stated
that the FDA's rejection was based on "deficiencies in
manufacturing processes and analytical testing related to
manufacture of drug product for commercial production identified
during a pre-NDA approval inspection of the Ocular Therapeutix
manufacturing facility that was completed in May 2017." Following
this press release, Ocular's share price fell $0.93, or 12.24%,
closing at $6.67 on July 12.14
14
Plaintiffs alleged that the class period ended on July
11, 2017, one day before the loss that plaintiffs alleged was
caused by Ocular's July 12, 2017 press release. Plaintiffs
further alleged that on December 22, 2017 -- well after the class
period ended -- Ocular issued a press release stating that it had
received an SEC subpoena requesting "documents and information
concerning DEXTENZATM (dexamethasone insert) 0.4mg, including
related communications with the FDA, investors and others."
Further, plaintiffs alleged that Ocular had stated its intention
to resubmit the NDA for Dextenza in the first half of 2018, and
that the NDA had not been approved as of the date of the amended
complaint, May 7, 2018. Counsel for defendants later represented
that the FDA ultimately approved the NDA in late 2018.
- 18 -
B. Procedural Background
In July and August 2017, several plaintiffs filed
putative class action lawsuits against defendants in the United
States District Court for the District of New Jersey. Defendants
successfully moved to transfer those actions to the District of
Massachusetts. The district court consolidated the actions and
appointed lead plaintiffs in March 2018. Plaintiffs filed their
consolidated amended class action complaint on May 7, 2018. The
complaint alleged two counts: first, that during the class period
all defendants had on multiple occasions intentionally or
recklessly misled investors by making false statements and
omitting material facts about Ocular's manufacturing problems and
the impact those problems were likely to have on the FDA's approval
of Dextenza in violation of Section 10(b) of the Exchange Act, 15
U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder by the SEC,
17 C.F.R. § 240.10b–5; and second, that Sawhney and Ankerud, as
control persons for Ocular, were liable for the company's
violations pursuant to Section 20(a) of the Exchange Act, 15 U.S.C.
§ 78t(a).
On July 6, 2018, defendants moved to dismiss the
complaint pursuant to Federal Rules of Civil Procedure 9(b) and
12(b)(6), the Exchange Act, and the PSLRA. On April 30, 2019, the
district court granted defendants' motion and dismissed the
complaint with prejudice. See In re Ocular Therapeutix, Inc. Sec.
- 19 -
Litig., No. 17-12146, 2019 WL 1950399 (D. Mass. Apr. 30, 2019)
("Ocular I"). The district court determined that plaintiffs
failed to allege an actionable misstatement or omission under
Section 10(b) and Rule 10b-5 and that plaintiffs' allegations did
not give rise to a strong inference of scienter in satisfaction of
the PSLRA, 15 U.S.C. § 78u-4(b)(2)(A). Id. at *6-10. The
district court also determined that plaintiffs' derivative Section
20(a) claim failed in the absence of an underlying securities
violation. Id. at *10. Plaintiffs timely appealed the dismissal
of both counts.
II. Discussion
On appeal, plaintiffs more narrowly argue that
defendants' affirmative statements in the 2016 and 2017 Forms 10-K
that Ocular manufactured Dextenza "using current Good
Manufacturing Practices," and defendant Ankerud's two affirmative
statements during the May 5, 2017 conference call that Ocular's
manufacturing was "fully developed," were materially false and
misleading. Plaintiffs further contend that a strong inference
of scienter can be drawn from those alleged misstatements because
defendants made them despite having received the February 2016 and
May 2017 Forms 483 that apprised defendants of Ocular's
manufacturing problems.
- 20 -
A. Standard of Review
We review de novo the district court's dismissal of a
securities fraud complaint for failure to state a claim under Rule
12(b)(6). Kader v. Sarepta Therapeutics, Inc., 887 F.3d 48, 56
(1st Cir. 2018). "To survive a motion to dismiss, a complaint
must contain sufficient factual matter, accepted as true, to 'state
a claim to relief that is plausible on its face.'" Aschroft v.
Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007)). In determining whether the
complaint has done so, "we accept well-pleaded factual allegations
in the complaint as true and view all reasonable inferences in the
plaintiffs' favor." Kader, 887 F.3d at 56 (quoting ACA Fin. Guar.
Corp. v. Advest, Inc., 512 F.3d 46, 58 (1st Cir. 2008)). We may
affirm the district court's dismissal of the complaint on any
grounds supported by the record. Abiomed, 778 F.3d at 241 (citing
Aldridge v. A.T. Cross Corp., 284 F.3d 72, 84 (1st Cir. 2002)).
B. Plaintiffs' Section 10(b) and Rule 10b-5 Claim Against All
Defendants
Section 10(b) of the Exchange Act renders unlawful the
"use or employ, in connection with the purchase or sale of any
security registered . . . [of] any manipulative or deceptive
device." 15 U.S.C. § 78j(b). Pursuant to the statute, Rule
10b-5 forbids any person "[t]o make any untrue statement of a
material fact or to omit to state a material fact necessary in
- 21 -
order to make the statements made, in the light of the
circumstances under which they were made, not misleading . . . in
connection with the purchase or sale of any security." 17 C.F.R.
§ 240.10b-5. Therefore, to state a claim for securities fraud
under Section 10(b) and Rule 10b-5, plaintiffs must allege: 1) a
material misrepresentation or omission; 2) scienter; 3) a
connection with the purchase or sale of a security; 4) reliance;
5) economic loss; and 6) loss causation. Brennan, 853 F.3d at
613. The first and second elements are at issue in this appeal.
The heightened pleading standard of the PSLRA requires
that complaints alleging securities fraud "specify each statement
alleged to have been misleading" and "the reason or reasons why
the statement is misleading." 15 U.S.C. § 78u-4(b)(1); see also
ACA Fin., 512 F.3d at 58 n.7 ("The PSLRA is consistent with this
circuit's prior application of Federal Rule of Civil Procedure
9(b) to securities fraud actions, a standard which is 'notably
strict and rigorous.'" (quoting Greebel v. FTP Software, Inc., 194
F.3d 185, 193 (1st Cir. 1999))).
As for scienter, which is "a mental state embracing
intent to deceive, manipulate, or defraud," Tellabs, Inc. v. Makor
Issues & Rights, Ltd., 551 U.S. 308, 319 (2007) (quoting Ernst &
Ernst v. Hochfelder, 425 U.S. 185, 193-94 & n.12 (1976)), the PSLRA
requires that complaints "state with particularity facts giving
rise to a strong inference that the defendant acted with the
- 22 -
required state of mind," 15 U.S.C. § 78u–4(b)(2)(A). Here,
plaintiffs must "show either that the defendants consciously
intended to defraud, or that they acted with a high degree of
recklessness." Kader, 887 F.3d at 57 (quoting Aldridge, 284 F.3d
at 82). Recklessness involves "a highly unreasonable omission"
constituting "not merely simple, or even inexcusable, negligence,
but an extreme departure from the standards of ordinary care, and
which presents a danger of misleading buyers and sellers that is
either known to the defendant or is so obvious that the actor must
have been aware of it." Brennan, 853 F.3d at 613 (quoting Greebel,
194 F.3d at 198).
"To qualify as 'strong'" within the meaning of the PSLRA,
"an inference of scienter must be more than merely plausible or
reasonable—it must be cogent and at least as compelling as any
opposing inference of nonfraudulent intent.” Tellabs, 551 U.S.
at 314. This Court "must consider the complaint in its entirety"
and ask "whether all of the facts alleged, taken collectively,
give rise to a strong inference of scienter, not whether any
individual allegation, scrutinized in isolation, meets that
standard." Id. at 322-23. We have found this demanding standard
met where a complaint "contains clear allegations of admissions,
internal records or witnessed discussions suggesting that at the
time they made the statements claimed to be misleading, the
defendant[s] were aware that they were withholding vital
- 23 -
information or at least were warned by others that this was so."
Brennan, 853 F.3d at 614 (alteration in original) (quoting In re
Bos. Sci. Corp. Sec. Litig., 686 F.3d 21, 31 (1st Cir. 2012)).
Further, in undertaking this analysis, this Court "must
consider, not only inferences urged by the plaintiff[s], . . . but
also competing inferences rationally drawn from the facts
alleged." Tellabs, 551 U.S. at 314. "When there are equally
strong inferences for and against scienter, the draw is awarded to
the plaintiff." Abiomed, 778 F.3d at 241 (quoting City of Dearborn
Heights Act 345 Pol. & Fire Ret. Sys. v. Waters Corp., 632 F.3d
751, 757 (1st Cir. 2011)).
We need not determine whether the allegedly misleading
statements identified by plaintiffs constitute material
misrepresentations because we find that the complaint, viewed
holistically, failed to allege facts giving rise to a strong
inference of scienter with respect to those alleged misstatements.
See In re Ariad Pharm., Inc. Sec. Litig., 842 F.3d 744, 750 (1st
Cir. 2016).
1. Ocular's 2016 and 2017 Forms 10-K
We first assess plaintiffs' allegations that defendants
intentionally or recklessly misstated in Ocular's 2016 and 2017
Forms 10-K that they "fabricate devices and drug . . . products
for use in our clinical trials, research and development and
commercial efforts for all of our therapeutic product candidates
- 24 -
using current Good Manufacturing Practices, or cGMP" despite the
receipt of the February 2016 Form 483.15 Read in the context of
the complaint as a whole, these allegations do not give rise to a
strong inference that defendants intentionally or recklessly
misled investors.
As an initial matter, and as all parties acknowledge,
the February 2016 Form 483 is not a final agency determination,
and its inspectional observations did not affirmatively establish
that Ocular was incapable of complying with cGMP regulations.
Plaintiffs nevertheless contend that the February 2016 Form 483
placed defendants on notice of Ocular's manufacturing
difficulties, compelling a strong inference that defendants
intentionally or recklessly misled investors by subsequently
stating in the Forms 10-K that they were "using current Good
Manufacturing Practices" at their manufacturing facility. This
argument is unpersuasive. In the two Forms 10-K, defendants
disclosed receipt of the February 2016 Form 483, described its
relevance to Ocular's manufacturing capabilities, and warned of
15
Ocular's Forms 10-K were submitted in March 2016 and
March 2017, after the company received the February 2016 Form 483
and before it received the May 2017 Form 483. Thus, plaintiffs'
argument implicates only the February 2016 Form 483. See ACA
Fin., 512 F.3d at 62 ("A plaintiff may not plead 'fraud by
hindsight'; i.e., a complaint 'may not simply contrast a
defendant's past optimism with less favorable actual results' in
support of a claim of securities fraud." (quoting Shaw v. Dig.
Equip. Corp., 82 F.3d 1194, 1223 (1st Cir. 1996))).
- 25 -
its implications. Defendants stated in both Forms 10-K, under
Item 1A, "Risk Factors," and the subheading "Risks Related to
Manufacturing," that the February 2016 Form 483 contained
"inspectional observations focused on process controls, analytical
testing and physical security procedures related to manufacture of
our drug product for stability and commercial production
purposes." (Emphasis added). Defendants also stated that they
"addressed some observations before the inspection was closed and
[had] responded to the FDA with a corrective action plan to
complete the inspection process." (Emphasis added). Among these
statements, defendants cautioned that "[a]ny failure to comply
with applicable regulations may result in fines and civil
penalties, suspension of production, product seizure or recall,
imposition of a consent decree, or withdrawal of product approval,
and would limit the availability of . . . our product candidates
that we manufacture."
More specifically, in the 2016 Form 10-K, defendants
clarified that "[t]he failure to resolve the Form 483 inspectional
observations from the February 2016 inspection could result in a
delay in the PDUFA date and potential approval for the NDA we have
filed for DEXTENZA for the treatment of post-surgical ocular pain."
(Emphasis added). In the 2017 Form 10-K, submitted months after
the FDA rejected Ocular's September 2015 NDA, defendants
specifically noted that "the concerns raised by the FDA" in the
- 26 -
CRL rejecting the NDA "pertain to deficiencies in manufacturing
process and controls identified during a pre-NDA approval
inspection of our manufacturing facility . . . in February 2016
that were documented on FDA Form 483." (Emphasis added).
Defendants further stated that "[a]dequate resolution of Form 483
manufacturing deficiencies with the [FDA] is a prerequisite to the
approval of the NDA for DEXTENZA." (Emphasis added).
These informative disclosures about the nature and
consequences of the February 2016 Form 483 undercut any inference
that defendants intentionally or recklessly misled investors by
stating, in the same Forms 10-K containing those disclosures, that
they were "using current Good Manufacturing Practices" at their
manufacturing facility. See Abiomed, 778 F.3d at 243-44 (holding
that scienter argument was undercut by a company's disclosure to
investors of correspondences with the FDA and potential
consequences of the agency's negative determination); In re
Genzyme Corp. Sec. Litig., 754 F.3d 31, 42-43 (1st Cir. 2014)
(holding that company's informative disclosures, including of a
Form 483 and other FDA communications, "undercut any inference of
fraudulent intent on the part of defendants"); Waters Corp., 632
F.3d at 760 ("[A]ttempts to provide investors with warnings of
risks generally weaken the inference of scienter." (alteration in
original) (quoting Ezra Charitable Trust v. Tyco Intern., Ltd.,
466 F.3d 1, 8 (1st Cir. 2006))).
- 27 -
Assuming arguendo that any inference of scienter could
be drawn from the complaint's allegations regarding defendants'
statements in the Forms 10-K, that inference is not "at least as
compelling as any opposing inference of nonfraudulent intent" such
that it is sufficiently "strong" under the PSLRA. Tellabs, 551
U.S. at 314. Here, given defendants' statements in the two Forms
10-K that they produce multiple products at their Bedford
manufacturing facility "using" cGMP, and in light of the
informative disclosures regarding the February 2016 Form 483, the
more reasonable inference of nonfraudulent intent is that
defendants were stating their intention to comply with cGMP
regulations as the governing standards for their drug product
manufacturing operations. See Abiomed, 778 F.3d at 240 (holding
that materiality and scienter inquiries are linked and that a fact
is material where there is a "substantial likelihood" that a
reasonable investor would view it as "significantly alter[ing] the
total mix of information made available" (alteration in original)
(quoting Waters Corp., 632 F.3d at 756)); see also Singh v. Cigna
Corp., 918 F.3d 57, 60-64 (2d Cir. 2019) (holding that a reasonable
investor would not rely on statements in two Forms 10-K that a
company "expect[s] to continue to allocate significant resources"
to various compliance efforts as representations of satisfactory
compliance without more detail (alteration in original)). Thus,
- 28 -
reading the complaint as a whole, we determine that these
allegations do not give rise to a strong inference of scienter.16
2. The May 5, 2017 Conference Call
We turn to plaintiffs' allegations that defendant
Ankerud intentionally or recklessly misled investors during the
May 5, 2017 conference call by twice stating that Ocular's
manufacturing process was "fully developed" despite the receipt of
the May 2017 Form 483 one day before and the earlier receipt of
the February 2016 Form 483 showing that Ocular had manufacturing
problems. Read in the context of the entire complaint, these
allegations also do not give rise to a strong inference of
scienter.
16
Plaintiffs alleged that a confidential witness had a
direct conversation with Ankerud in late 2016 or early 2017, prior
to Ocular's NDA resubmission, in which "Ankerud expressly
acknowledged that he and the Company knew Ocular would be including
batch records in the NDA resubmission that would not meet FDA
standards." Plaintiffs also alleged that the witness's statements
"make clear that Ocular and the Individual Defendants were aware
of the severity of the problems Ocular faced in manufacturing
DEXTENZA using cGMP." Before the district court, plaintiffs
specified that these allegations concerned only their contention
regarding the 2017 Form 10-K. Plaintiffs now reference those
allegations in support of their scienter argument. This
contention is unpersuasive. Plaintiffs do not now challenge the
district court's finding that the complaint "failed to allege a
sufficient link between Ankerud's purported isolated admission
about unspecified 'batch records' months before the challenged
cGMP statement on the 2017 Form 10-K to render the cGMP statement
false." Ocular I, 2019 WL 1950399 at *7 n.9. Thus, these
confidential witness allegations do not disrupt our determination
that the complaint, read as a whole, does not allege facts giving
rise to a strong inference of scienter.
- 29 -
On the conference call, after defendant Sawhney's
disclosure that Ocular had "received the [May 2017] Form 483
containing inspectional observations focusing on procedures for
manufacturing processes . . . of drug product for commercial
production," Ankerud spoke about the Form 483's contents and
implications as well as the company's need to pursue remediation.
(Emphasis added). Ankerud specified that the FDA's "primary focus
in the 483 relates to a particula[te] matter issue as part of our
manufacturing process" and that it also contained observations
regarding "analytical method, testing to be completed, as well as
some other issue related to quality oversight of batch records."
(Emphasis added). Following this disclosure, Ankerud stated that
defendants "believe that each of the observations raised by the
FDA during this continuous improvement review of our fully
developed manufacturing process are handled well and will be
resolved in our response to FDA. . . . and we're marching toward
that PDUFA date and expect that we can resolve the 483 issues in
a timely manner." (Emphasis added). Ankerud subsequently stated
that "the 483 is something that we have to respond to . . . . [W]e
understand where [the FDA is] coming from and what needs to be
done to address their concern." Afterwards, in response to an
analyst's request for "something you can tell us or say to us in
terms of how things have evolved at the company overall and
oversight of manufacturing," Ankerud stated that "the
- 30 -
manufacturing process has moved forward significantly, and is in
a fully developed mode," and that "the new investigator was
experienced in the pharmaceutical industry and we had good dialog
and good discussion and that's why we felt confident that we can
address these 483 issues in a timely manner." (Emphasis added).
Ankerud's disclosures regarding the May 2017 Form 483
made pellucid that Ocular's manufacturing process was considered
deficient by the FDA and thus undercut any inference that he
intentionally or recklessly misled investors by stating that
Ocular's manufacturing process was "fully developed." See
Abiomed, 778 F.3d at 243-44; Genzyme Corp., 754 F.3d at 42-43;
Waters Corp., 632 F.3d at 760.17 Defendants submit that according
to the FDA, a "fully developed" process is one that has surpassed
the concept or piloting stage but must still be tested and
validated to determine whether the process works as intended and
meets the necessary standards. See FDA, Guide to Inspections of
Medical Device Manufacturers at § 7 (2014) ("The process must be
developed before it can be validated. . . . It is impossible to
17We reject plaintiffs' argument that defendants'
disclosures of the February 2016 and May 2017 Forms 483 in the
Forms 10-K and the May 5, 2017 conference call did not sufficiently
inform investors that the Forms 483 documented "major" rather than
"minor" problems in Ocular's manufacturing operations.
Plaintiffs provide no legal support for their speculative
assertion that the issues observed by the FDA and recorded in the
Forms 483 were so major that they rendered nugatory defendants'
disclosures and ultimately compel a strong inference of scienter.
- 31 -
validate a process (i.e. show that it consistently operates within
established parameters and produces results or products that meet
specifications) until the process is fully developed."), available
at https://www.fda.gov/inspections-compliance-enforcement-and-
criminal-investigations/inspection-guides/page-9. We may
consider that fact. See Brennan, 853 F.3d at 609-10; Tellabs, 551
U.S. at 322 ("[C]ourts must consider the complaint in its entirety,
as well as other sources courts ordinarily examine when ruling on
Rule 12(b)(6) motions to dismiss, in particular . . . matters of
which a court may take judicial notice."). In light of that term
of art and Ankerud's disclosures during the conference call that
contravene plaintiffs' characterization of his statements, the
more reasonable and compelling inference drawn from the
complaint's allegations is that Ankerud spoke with nonfraudulent
intent in describing Ocular's manufacturing process as "fully
developed." See Tellabs, 551 U.S. at 314.
Overall, reading the complaint as a whole, we determine
that plaintiffs have not alleged facts giving rise to a strong
inference of scienter as required by the PSLRA. 18 Thus,
18
The district court correctly determined that defendant
Sawhney's purchase of Ocular shares during the class period
somewhat "[f]uther negat[es] an inference of scienter," at least
as to Sawhney and Ocular. Ocular I, 2019 WL 1950399 at *10 n.12;
see Abiomed, 778 F.3d at 246 (holding that an individual
defendant's purchase of company stock during the class period
"negates any inference that he had a motive to artificially inflate
[the company's] stock during that period"); cf. Tellabs, 551 U.S.
- 32 -
plaintiffs' securities fraud claim brought under Section 10(b) and
Rule 10b-5 fails.
C. Plaintiffs' Section 20(a) Claim Against Individual Defendants
Section 20(a) of the Exchange Act imposes joint and
several liability on persons in control of entities that are liable
for violations of securities laws "unless the controlling
person[s] acted in good faith and did not directly or indirectly
induce the act or acts constituting the violation." 15 U.S.C.
§ 78t(a). A claim brought under Section 20(a) is thus derivative
of a claim alleging an underlying securities law violation. See
Abiomed, 778 F.3d at 246. Accordingly, because the complaint does
not state a securities fraud claim under Section 10(b) and Rule
10b-5, plaintiffs' derivative claim under Section 20(a) too must
fail. See id.
III. Conclusion
The district court properly dismissed plaintiffs'
primary Section 10(b) and Rule 10b-5 claim and derivative Section
20(a) claim. We therefore AFFIRM the judgment of the district
court.
at 325 ("While it is true that motive can be a relevant
consideration, and personal financial gain may weigh heavily in
favor of a scienter inference, . . . the absence of a motive
allegation is not fatal."). Viewed in the context of the complaint
as a whole, this fact is consistent with our conclusion that
plaintiffs have not alleged facts giving rise to a strong inference
of scienter.
- 33 -