Emerson v. Genocea Biosciences, Inc.

Citation: 353 F. Supp. 3d 28Docket: Civil Action No. 17-12137-PBS

Court: District Court, District of Columbia; December 5, 2018; Federal District Court

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Plaintiffs have initiated a class action lawsuit against Genocea Biosciences, Inc. and three corporate officers for alleged violations of Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, claiming that Defendants made materially misleading statements regarding clinical test results of the genital herpes immunotherapy GEN-003. Additionally, derivative claims were filed against the officers under Section 20(a) of the Exchange Act. The Court is currently considering two motions: Defendants' request to dismiss all counts for failure to state a claim and Plaintiffs' motion to strike certain documents submitted by Defendants. Following a hearing, the Court has granted Defendants' motion to dismiss, noting that it relied solely on uncontested documents, thereby rendering the motion to strike unnecessary.

Genocea, based in Cambridge, Massachusetts, is an early-stage biopharmaceutical company focused on developing T cell vaccines for infectious diseases. During the class period from March 31, 2016, to September 25, 2017, its only candidate in active development was GEN-003, aimed at treating genital herpes simplex virus (HSV-2), an incurable disease that causes intermittent outbreaks and can be transmitted even when asymptomatic. Existing treatments include daily pills to reduce transmission and pain during outbreaks, such as acyclovir, which is noted for its effectiveness and low cost. In contrast, GEN-003 is being developed as a therapeutic vaccine, requiring administration every six to twelve months.

In 2012, Genocea initiated a series of clinical trials to assess the efficacy of GEN-003, including Phase 1/2a, Phase 2, and Phase 2b trials. Participants were randomly assigned to receive either the vaccine or a placebo, with a baseline viral shedding rate established through twice-daily genital swabbing for 28 days prior to treatment. Following three injections at 21-day intervals, participants continued swabbing for 28 days immediately post-dosing, as well as at six and twelve months post-dosing. Swabs were analyzed for viral shedding, and participants reported lesion recurrences.

Genocea announced the Phase 2b trial to test a modified formulation of GEN-003, produced through a scalable manufacturing process. The primary endpoint was to evaluate the reduction in viral shedding rates immediately post-dosing, with secondary endpoints including reductions at six and twelve months and in genital lesion recurrence. The trial involved two dose groups (60/50 and 60/75) and a placebo control group.

On September 29, 2016, results showed that the 60/50 dose achieved a statistically significant 40% reduction in viral shedding compared to baseline and placebo, while the 60/75 dose showed a 27% decrease that was not statistically significant. CMO Hetherington highlighted the consistency of these results with prior trials, boosting confidence in the findings. CEO Clark indicated that six-month post-dosing viral shedding results would be released in early 2017 but noted a change in reporting for the genital lesion results. On January 5, 2017, Genocea announced statistically significant reductions in genital lesion rates for both doses at six months post-dosing but did not disclose the corresponding viral shedding results.

Following the announcement of six-month genital lesion results, Clark indicated at a company meeting that there was "no interest" from potential funding partners for Phase 3 trials of GEN-003, prompting a shift in focus to oncology. Layoffs occurred post-meeting. SEC filings in February reiterated expectations for viral shedding rate reduction data to be available in the first half of 2017. In Genocea's May 5, 2017, 10-Q filing, the genital lesion data was described as "positive," yet the Phase 2b six-month viral shedding results remained undisclosed. The filing reassured investors of GEN-003's readiness for Phase 3 trials by Q4 2017.

At a July 2017 internal meeting, Clark revealed that while GEN-003 showed significant reductions in genital lesions at twelve months, the viral shedding results were not favorable—participants receiving the 60/50 dose experienced a 42% reduction, which was statistically significant against baseline but not when compared to a placebo group that had a 52% decrease. This outcome led to dissatisfaction among scientists, who questioned Clark about the undisclosed six-month results. Clark deferred answers to Hetherington, who noted that similar results had occurred in other trials.

On July 24, 2017, the company publicly announced the twelve-month results, highlighting significant reductions in genital lesions but omitting mention of the negative viral shedding findings in the press release, although a chart disclosed this data. During an analyst call, Clark expressed enthusiasm for the trial's results, while Hetherington addressed the observed placebo effect, attributing variability in shedding data to the sporadic nature of shedding in the limited sample size, asserting that this would not affect Phase 3 outcomes due to a larger sample size expected in future studies.

On July 24, 2017, following the Phase 2b twelve-month results announcement, Genocea's stock price rose above $6.00 per share. During the class period, Clark and Hetherington retained their shares, while Poole sold shares on May 8 and July 24, 2017, the latter coinciding with the Phase 2b results release. Prior to these sales, Poole had not sold any shares since joining the company in April 2014. On May 8, he sold 6,213 shares and subsequently entered a 10b5-1 plan on May 10, allowing sales when the stock hit $6.00. On September 25, 2017, Genocea announced the cancellation of the Phase 3 trial for GEN-003 and a 40% workforce reduction, resulting in a 76.5% drop in share price the following day. The Phase 2b six-month post-dosing results remain undisclosed.

In response to a motion to dismiss filed by Defendants, Plaintiffs sought to strike thirty-three out of over fifty submitted documents. Normally, a court under Rule 12(b)(6) cannot consider documents outside the complaint unless certain exceptions apply, such as undisputed authenticity or documents central to the claims. Plaintiffs did not contest thirty of the documents, which included press releases, SEC filings, and other relevant materials. The Court considered these uncontested documents for the motion to dismiss but did not rule on the contested exhibits, thus negating the need to address the motion to strike.

Plaintiffs claiming violations of Section 10(b) must establish six elements: a material misrepresentation or omission, scienter, a connection to a security transaction, reliance, economic loss, and loss causation. Under Rule 9(b), allegations of fraud must be stated with particularity, and the PSLRA mandates that plaintiffs specify misleading statements and the reasons they are misleading, as well as facts indicating a strong inference of scienter. Defendants filed a motion to dismiss, arguing that Plaintiffs failed to adequately allege material misstatements or omissions, a strong inference of scienter, and sufficient loss causation. Plaintiffs contend that Defendants' omission of the Phase 2b six-month post-dosing viral shedding results was material, as it would have significantly affected the total mix of information available to investors, especially given Defendants' positive statements about other results and the importance of viral shedding data. They identified three specific misleading statements. An omission is deemed materially misleading if it is likely to alter the reasonable investor's perception of information. However, there is no duty to disclose all material information, only what is necessary to avoid making existing statements misleading. Furthermore, a statement is not considered intentionally misleading if the defendant lacked sufficient information at the time to recognize the need for disclosure.

Plaintiffs assert that Genocea likely possessed negative six-month viral shedding results as early as January 2017, based on a pattern of simultaneous data releases and a statement from Clark regarding a lack of interest from potential funding partners. However, the document highlights that this inference is unsupported. Defendants had previously informed investors that the timing of the viral shedding results would differ from the genital lesion results. Specifically, during a September 2016 investor call, it was noted that the viral shedding results might not be available simultaneously, with an expectation set for the first quarter of 2017. Clark had also indicated in November 2016 that these results would be released in the first half of 2017. SEC filings from February and May 2017 reiterated this timeline. Thus, the Court cannot reasonably conclude that Defendants had the viral shedding results by January 2017, as the only plausible inference is that they were available by July 2017 when the twelve-month results were released. Additionally, Clark's January statement about the lack of interest from funders is argued by Plaintiffs as evidence of negative results scaring off potential sponsors. However, this reasoning is deemed speculative and unsupported by any factual basis indicating that Defendants communicated the six-month results to potential funders. Consequently, the Court cannot infer the existence of the results based solely on speculation.

The Court concludes that, assuming the Plaintiffs' claims are true, Defendants had access to negative six-month post-dosing viral shedding results for the Phase 2b trial in July 2017 but chose not to disclose them. On July 24, 2017, Defendants announced positive twelve-month post-dosing results for genital lesions and viral shedding, stating that the 60/50 dose of GEN-003 showed statistically significant improvements in genital lesion rates. However, the press release failed to mention that GEN-003 did not achieve statistically significant reductions in viral shedding compared to the placebo group and did not address the undisclosed six-month results. During an analyst call, Defendants emphasized the twelve-month results' importance and downplayed the variability observed in the viral shedding data, attributing it to the sporadic nature of the data from a small sample size. Plaintiffs argue that these omissions rendered the statements materially misleading, as the six-month results were essential for investors to accurately assess the twelve-month data. The Court questions whether the negative six-month results would significantly alter the information available to investors, as they already had the negative twelve-month results. Plaintiffs do not provide sufficient evidence to support their claims that the six-month results were misleading or that the statements regarding the twelve-month results were inaccurate.

Plaintiffs claim that Defendants' disclosures regarding the Phase 2b trial results were materially misleading, referencing *In re Delcath Systems, Inc. Securities Litigation* where incomplete disclosures misled investors. By July 2017, Defendants had provided results showing positive outcomes for genital lesions at six and twelve months but did not disclose the six-month viral shedding results. Defendants argue that the market's positive reaction to the negative twelve-month viral shedding results, which did not impact stock price, indicates that the omission of the six-month results was not material to investors. Plaintiffs contend that the omission suggests scienter, asserting that Defendants either knew or were reckless in failing to disclose this information, thereby misleading investors about GEN-003's prospects. The legal standard for scienter requires a "strong inference" of intent to defraud or reckless disregard for the truth, necessitating particularized facts that demonstrate the defendants’ awareness of the misleading nature of their omissions. The determination of scienter is inherently case-specific, with the burden on Plaintiffs to show that their alleged facts create a compelling inference of wrongdoing, rather than a mere reasonable one. The First Circuit has indicated that a strong inference of scienter can be established through clear allegations of admissions or internal communications indicating that the defendants were aware of critical information they failed to disclose.

A plaintiff can demonstrate fraudulent intent by presenting various facts and circumstances, including evidence of "motive and opportunity," to meet the scienter requirement. Genocea's disclosure of negative twelve-month viral shedding results undermines claims of scienter, as prior case law indicates that partial disclosures can lead to a competing inference that defendants acted in good faith by sharing what they deemed relevant. Plaintiffs assert that defendants intentionally concealed the Phase 2b six-month viral shedding results because GEN-003 was critical to the company's survival; however, this theory is weakened by the release of the twelve-month results in July 2017, suggesting that the defendants had no motive to withhold the earlier results. 

While plaintiffs reference stock sales by Poole as indicative of scienter, such sales alone do not suffice, although they may contribute to the overall evidence. Poole's stock sales occurred under a 10b5-1 plan, which, by its nature, generally negates inferences of wrongdoing as it indicates pre-scheduled trading. Notably, Clark and Hetherington did not sell stock during the class period, and Poole's May sale lacks context to support claims of scienter, as it occurred before the defendants allegedly had the six-month results. Consequently, insider trading evidence does not robustly support any inference of scienter regarding the six-month data.

As for Section 20(a) claims, since the plaintiffs failed to establish a primary violation of Section 10(b), their control person claims under Section 20(a) are also dismissed as a matter of law.

The motion to dismiss (Docket No. 59) is granted, rendering the motion to strike (Docket No. 69) moot. Plaintiffs concede to fifteen documents referenced in their complaint, which include various exhibits and specific Form 10-Q reports dated May 5, 2017, and August 9, 2017. Additional unchallenged documents comprise a medical dictionary definition, Genocea's stock price chart, and Form 4 filings for certain defendants from April 12, 2014, to July 24, 2017. A list of these documents is provided in Appendix A of Defendants' response to the motion to strike. The Court does not consider three additional exhibits submitted by Defendants in their reply brief, as Plaintiffs did not have the chance to contest them. The complaint identifies misstatements about clinical trial results described as "statistically significant," "consistent," and "positive." During a hearing on September 25, 2018, Plaintiffs’ counsel indicated that allegations about swabbing protocol and statistical models were not central misstatements. The primary allegations focus on three dates—January 5, 2017, May 5, 2017, and July 24, 2017—where Defendants allegedly failed to disclose crucial Phase 2b viral shedding results. The Court’s ruling on the motion to dismiss centers on this material omission, without addressing the issue of loss causation, as Plaintiffs did not adequately plead essential elements of a claim under Section 10(b) of the Exchange Act.