The First Circuit recently affirmed dismissal of claims under Section 10(b) and Rule 10b-5 as failing to meet the Private Securities Litigation Reform Act’s standard for pleading scienter. Corban v. Sarepta Thereapeutics, Inc., 868 F.3d 31, 42 (2017). The claims grew out of drug maker Sarepta’s description of its prospects for Food and Drug Administration (FDA) approval of a gene-therapy drug. In assessing the adequacy of the scienter allegations, the court looked primarily at the chronology of the drug maker’s statements and interactions with the FDA and whether it had a motive to lie, and it concluded that neither supported a strong inference of scienter. As Judge William Kayatta wrote for the three-judge panel that included Senior Judge Norman Stahl and retired Supreme Court Justice David Souter: “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.” Id.

Defendant Sarepta is a biopharmaceutical company that develops gene therapies for the treatment of rare diseases. Id. at 34. The complaint—amended four times—alleged fraudulent statements about eteplirsen, a drug Sarepta sought approval for during the class period to treat a rare childhood disease in boys called Duchenne muscular dystrophy. The disease is caused by a genetic mutation that hinders the production of an essential protein for muscle function, leading to loss of muscle strength, which eventually affects the lungs and heart, causing death. The FDA ultimately approved the drug after the lawsuit was filed.

In 2013, Sarepta sought accelerated approval for eteplirsen. Id. at 35. Accelerated approval allows the FDA to approve drugs without a showing of effectiveness against the disease itself, and is available if the disease the drug treats is serious and if there is a showing that the drug affects a marker of health reasonably likely to predict an effect against the disease. Id. at 34. This marker is called a “surrogate endpoint.” Id. Sarepta had recently completed two studies showing the drug’s effect on two surrogate endpoints. The first study was a randomized double-blind trial involving twelve boys, four of whom received a placebo. The second was an unblinded study with the same boys that did not involve use of a placebo. Buoyed by the results of the studies, Sarepta told investors in March 2013 that it would file a new drug application with the FDA. Id. at 35.

The complaint against Sarepta alleged that defendants, including Chris Garabedian, the company’s then-president and CEO, made false and misleading statements about eteplirsen’s prospects for FDA accelerated approval. In a meeting with the FDA in March 2013, prior to the start of the class period, the FDA expressed serious concerns about the way Sarepta proposed to analyze the trial results that would form the basis for its application, saying that the proposed analysis “was unreasonable even for hypothesis generation.” Id. Garabedian disclosed only certain information about this meeting on a call with investors and analysts, saying that the FDA had “not made a final decision” and that it was “still too early to draw conclusions” about the FDA’s stance on Sarepta’s proposed endpoint for accelerated approval. But Garabedian struck an optimistic tone, stating that the FDA was “approaching . . . [that endpoint] as a surrogate that is reasonably likely to predict clinical benefit in the thoughtful manner we expected and is requesting more information.” Id. In July 2013, Sarepta again met with the FDA, and the FDA stated that “it was open to considering an NDA [new drug application] based on these data for filing,” so long as a number of conditions were met. Id. Sarepta publicized the FDA statement, noting that the FDA had requested additional information and predicting that the company would submit its application in the first half of 2014. Garabedian again struck an optimistic tone, saying that the company was “very encouraged by the FDA feedback.” He described the company’s choice of endpoint surrogate marker as “viable” and its analysis of that marker as “robust,” predicting that Sarepta’s data would support a new drug application filing. Id. at 35, 38. Still, the company cautioned that it did not know exactly when it would file its new drug application, that the agency had not yet accepted its surrogate endpoint, and that a filing would only indicate that the drug merited review. Id. at 36. Investors reacted more to the cautionary statements than the optimistic ones, causing a nineteen percent drop in Sarepta’s stock price on July 24, 2013, the beginning of the plaintiffs’ alleged class period. Id.

The stock would fall again—this time, sixty-four percent—at the end of the alleged class period, November 11, 2013. During the alleged class period, plaintiffs challenged several more optimistic statements. Garabedian described progress toward approval as “a tremendous achievement,” described the data from the trials as “compelling and favorable,” and characterized the FDA’s responses as “particularly encouraging because it recognizes that our Phase IIb study data set is sufficient for the FDA to consider filing.” Id. at 36. He also remarked that the company’s analysis of the study data was not “questioned or challenged [by the FDA] in terms of [Sarepta’s method for quantifying [dystrophin].” Id. The FDA had previously requested additional muscle biopsies from study participants, partly because it was concerned that a single technician had obtained and processed all muscle biopsies, id. at 40, but Garabedian characterized this request as “not an indication of the lack of strength of [Sarepta’s] current biopsy analysis and data.” Id. at 36.

September saw the failure of competitor GlaxoSmithKline’s candidate to treat Duchenne muscular dystrophy. Investors were initially optimistic that the failure would leave Sarepta with a larger market share, but on November 12, 2013, Serepta disclosed that the FDA now viewed a new drug application filing for eteplirsen as “premature.” Id. This news caused the precipitous sixty-four percent drop in Serepta’s stock. Plaintiffs filed suit, alleging that Sarepta and other defendants had overstated the significance of the trial data and exaggerated the chances that the FDA would accept a new drug application filing. Id. at 37.

Noting the Reform Act’s heightened pleading standard for scienter, id. at 37–38, the court rejected two sets of arguments as to why plaintiffs had sufficiently pleaded scienter in their fifth version of the complaint. Id. at 38–41, 41–42.

First, the court refused to draw inferences of scienter from the timeline of Sarepta’s interactions with the FDA and the challenged statements. In doing so, the court also implied that plaintiffs failed to adequately allege a false or misleading statement. The court found Garabedian’s July 2013 statements to be “poor material for building a fraud claim” because “[t]hey convey opinion more than fact. And while opinion that implies false facts may nonetheless suffice . . . these opinions came replete with caveats.” Id. at 38 (citation omitted). The court pointed to Sarepta’s disclosures that the FDA requested additional information from it and that the FDA would not commit to accepting Sarepta’s proposed surrogate endpoint—cautionary statements that caused a nineteen percent drop in Sarepta’s stock price at the beginning of the class period. Id. at 38. The caveats also “cut against the inference of scienter.” Id. “At worst,” the court wrote, “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.” Id. Finally, with respect to the July 24 statements, the court noted that the timeline did not support an inference of fraud. Id. at 38. It was events occurring after Sarepta’s optimistic statements that presented the most important obstacles to filing a new drug application, and Sarepta could not have predicted these in July. Moreover, Sarepta ultimately proved correct in its July evaluation of the drug’s prospects for eventual approval. Id. at 39.

The court also found insufficient the allegations that Sarepta’s statements in the middle of the class period were false or misleading. The FDA’s concern about the single technician who collected all the studies’ biopsies did not render false Sarepta’s statement that the FDA had not questioned its methods. Id. at 40. “Concerns about reliability are not the same as concerns about methodology,” the court observed. Id. And even if Sarepta’s statements were misleading, plaintiffs did not sufficiently plead that they were intentionally or recklessly so. Id.

Nor did plaintiffs sufficiently plead an intentional or reckless omission, even though Sarepta failed to disclose certain details of its communications with the FDA that might have been material to investors. “[S]imply pointing [the court] to omitted details . . . and failing to explain how the omitted details rendered the particular disclosures misleading, misses the mark,” the court wrote. Id. An allegation that Sarepta failed to report specific technical factors leading the FDA to take a position, while still reporting the FDA’s position faithfully, struck the court “as more consistent with negligence than reckless or intentional concealment.” Id.

In coming to this conclusion, the court distinguished two recent cases in other circuits: Zak v. Chelsea Therapeutics International, Ltd., 780 F.3d 597 (4th Cir. 2015), and Schueneman v. Arena Pharmaceuticals, Inc., 840 F.3d 698 (9th Cir. 2016). See id. at 40–41. The defendants in Zak were alleged to have misrepresented the FDA’s position on a drug application, saying the FDA had “agreed” that the company could submit an application, when the FDA had actually told the company that its basis for submission “typically was not sufficient to support approval.” Id. at 41 (citing Zak, 780 F.3d at 611). And the defendants in Zak allegedly misrepresented an FDA briefing document recommending against approval of their drug, describing the document as presenting only “lines of inquiry.” Id. at 41 (quoting Zak, 780 F.3d at 603). Similarly, in Schueneman, defendants were alleged to have conveyed optimism and reported “favorable results on everything” from animal studies when there was an indication that the defendants’ drug caused cancer in rats. Id. (citing Schueneman, 840 F.3d at 702, 708). The circumstance surrounding the statements and omissions at issue in Zak and Schueneman more strongly suggested scienter than did the allegations in Sarepta.

Second, the court rejected inferences of scienter based on an allegation that defendants had a motive to lie. Plaintiffs alleged two motives for misstatement: (1) to support a stock offering at the beginning of the class period, and (2) to mobilize families of boys suffering from Duchenne muscular dystrophy to pressure the FDA for accelerated approval. Id. at 41–42. The court found both of these allegations insufficient. Citing circuit precedent, the court held, “The usual concern by executives to improve financial results does not support an inference of scienter.” Id. (internal quotation marks and brackets omitted). Plaintiffs needed to allege something more, such as “that the very survival of the company was on the line.” Id. (internal quotation marks and brackets omitted.) The court found the second motive to lie implausible. See id. at 42. The complaint alleged that Sarepta sought attention for its drug and that FDA officials were made aware of this public attention. But the court doubted that Sarepta had an incentive to seek such attention. Greater public attention would lead to greater scrutiny, and the pay-off to such scrutiny was uncertain because the FDA decision-making process is not easily susceptible to outside pressure. Id.

Ultimately, the court concluded that the inferences of scienter the plaintiffs sought were not as compelling as the innocent explanation that the company had sought to navigate “the uncertain terrain of accelerated approval for a gene therapy” and “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.” Id.