Court: Court of Appeals for the Second Circuit; March 4, 2016; Federal Appellate Court
Plaintiffs allege that Sanofi and its executives made false or misleading statements about Lemtrada, a drug for multiple sclerosis, particularly during its Phase III clinical trials prior to FDA approval. They claim that Sanofi misled investors by not disclosing the FDA's concerns regarding the use of single-blind studies instead of the recommended double-blind studies, which artificially inflated the value of Plaintiffs’ contingent value rights (CVRs). The legal basis for the allegations includes sections 10(b), 18, and 20(a) of the Securities Exchange Act of 1934 and sections 11 and 12 of the Securities Act of 1933, along with state blue sky laws. The district court dismissed the case under Fed. R. Civ. P. 12(b)(6), and Plaintiffs are appealing this decision. The court's analysis also considers the Supreme Court's ruling in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund (2015), which may impact the case.
Background details reveal that Genzyme Corporation owned Lemtrada, which required only two annual treatment courses compared to traditional MS drugs. This unique regimen led to the use of single-blind studies, despite the FDA expressing concerns about this study design as early as 2002. The FDA communicated that single-blind studies would not provide substantial support for a Biologics License Application (BLA) and emphasized the preference for double-blind studies for pivotal trials, although it indicated some flexibility based on the size of the effect observed in the studies.
The FDA allowed Genzyme to proceed with Phase III clinical trials for Lemtrada, despite ongoing concerns about the use of single-blind studies, citing potential bias due to the absence of blinding for patients and physicians. In meetings throughout 2010 and 2011, the FDA emphasized its apprehensions regarding bias affecting trial result interpretation and noted a lack of discussion on the trials' unblinded design in their communications with Genzyme.
In 2010, Sanofi, a global pharmaceutical company, sought to acquire Genzyme, which was initially resistant due to disagreements over the valuation of Lemtrada, estimated at $14 billion. Eventually, Genzyme and Sanofi negotiated an acquisition deal, where shareholders would receive $74 cash per share plus contingent value rights (CVRs) tied to Lemtrada's success. The Merger Agreement was executed on February 16, 2011, detailing that CVR holders would receive cash upon achieving specific milestones, including an Approval Milestone contingent on FDA approval by March 31, 2014, and several Product Sales Milestones based on global sales performance.
Sanofi launched a tender offer on April 1, 2011, followed by a short-form merger on April 8, 2011, as part of a Form F-4 Registration Statement and a 424B3 Prospectus that included references to Genzyme's prior SEC filings. These filings indicated a 90% probability of meeting the Approval Milestone and highlighted ongoing development of Lemtrada for Relapsing-Remitting MS, with expectations for U.S. product approval in the latter half of 2012.
Form 8-K filings by Genzyme indicated expectations for three product approvals, including alemtuzumab for multiple sclerosis, by the end of 2013. A February 2011 filing highlighted the potential of alemtuzumab to establish a new standard of care for multiple sclerosis, with the market projected to reach $13 billion by 2012. By March 2012, Sanofi, following its acquisition of Genzyme, reported positive outcomes from Phase III trials of alemtuzumab, stating it showed a significant reduction in relapse rates compared to Rebif, with manageable safety results. Sanofi's CEO expressed high confidence in the drug's prospects, noting the completion of the necessary studies and the submission of an application for FDA review. However, on October 16, 2013, the FDA announced a hearing regarding Lemtrada's application, with concerns raised by reviewing physicians about the lack of double-blind studies in the trials, which could affect the validity of the results.
Dr. Marler and Dr. Yan concluded that the applicant did not provide adequate evidence from well-controlled studies to demonstrate alemtuzumab's effectiveness for treating multiple sclerosis (MS). They identified design flaws and bias in existing trials, which hindered reliable conclusions on the drug's impact on relapse rates and disability accumulation. Following the release of Briefing Materials on November 8, the value of contingent value rights (CVRs) plummeted over 62%. Sanofi’s subsequent announcement on December 30, 2013, of the FDA's formal rejection of Lemtrada further decreased CVR value to $0.32 per share. Sanofi's CEO acknowledged the drug's approval in 30 countries but emphasized the FDA's rejection was not entirely unexpected. In April 2014, Sanofi began discussions with the FDA regarding Lemtrada, leading to its acceptance for resubmission on May 30, 2014, and eventual approval on November 14, 2014, after the Approval Milestone deadline.
Two class action complaints were filed against the defendants in December 2013, consolidated in February 2014, leading to a Consolidated Amended Complaint (CAC) on April 28, 2014. The CAC alleged violations of sections 10(b) and 20(a) of the Exchange Act, focusing on misrepresentations regarding FDA feedback on clinical trial designs, which purportedly misled investors about the CVRs' value. A separate complaint, the AG Funds Complaint (AGC), was also filed, alleging broader securities law violations. The district court accepted both cases as related and subsequently dismissed them on January 28, 2015, concluding that the plaintiffs failed to adequately allege materially false or misleading statements.
Plaintiffs' claims of false or misleading statements of opinion were dismissed by the court, which referenced the standard from Fait v. Regions Financial Corp. It found that Plaintiffs did not allege sufficient facts to suggest that Defendants lacked genuine belief in their statements or that those statements were objectively false. The court also stated that Plaintiffs failed to adequately plead scienter, emphasizing that Sanofi had no reason to know that its public statements were misleading at the relevant times. Furthermore, the court determined that Defendants' forward-looking statements were protected under the Private Securities Litigation Reform Act Safe Harbor because they included cautionary language and were not made with actual knowledge of falsity. After dismissing federal claims, the court opted not to exercise jurisdiction over remaining state law claims and denied Plaintiffs’ motion to amend the complaint, citing substantive deficiencies. A judgment against Plaintiffs was entered on January 30, 2015, followed by an appeal.
In reviewing the district court’s dismissal under Fed. R.Civ. P. 12(b)(6), the appellate court accepted the complaint's factual allegations as true and assessed whether they allowed for a reasonable inference of Defendants' liability. The court noted that while claims under section 10(b) of the Exchange Act require a showing of scienter, those under sections 11 and 12(a)(2) of the Securities Act do not. Despite the Supreme Court's decision in Omnicare, which established a refined standard for determining whether a statement of opinion is misleading, the appellate court concluded that Plaintiffs still failed to allege materially misleading statements of opinion. Under Omnicare, an investor must identify specific material facts that, if omitted, would render the opinion misleading, which Plaintiffs did not accomplish.
The holding in this case modifies the standard established in Fait regarding liability for false statements of opinion. Under the new interpretation affirmed by Omnicare, liability can arise if the speaker either did not genuinely hold the professed belief or if the supporting facts provided were false. Furthermore, a statement of opinion can also be deemed actionable if it omits critical information that renders the statement misleading to a reasonable investor.
The Supreme Court highlighted the challenges faced by investors in meeting this standard, clarifying that a reasonable investor expects the issuer’s opinion to align with the issuer’s knowledge at the time of the statement. For example, if an issuer asserts, “We believe our conduct is lawful,” investors expect this belief to be based on a meaningful inquiry rather than mere intuition.
The key consideration is whether omitted facts would contradict a reasonable investor's understanding of the statement. However, the Court cautioned against an overly broad interpretation of this standard, noting that reasonable investors recognize that opinions may be based on weighing various facts and do not expect every known fact to support the opinion.
Statements of opinion are not misleading solely because some contrary facts are known but not disclosed. The context of securities claims is unique, with significant weight given to documents filed with the SEC, and investors do not anticipate that opinions in these filings are arbitrary. Instead, investors interpret statements in light of the entire document, including any hedges, disclaimers, and conflicting information, while also considering industry customs and practices.
The district court identified three categories of statements of opinion under review: 1) statements regarding Sanofi’s expectations about FDA approval for Lemtrada, 2) statements about Lemtrada's launch following a tender offer, and 3) statements concerning Lemtrada's clinical trial results. Each group of statements will be analyzed in detail.
The plaintiffs argue that the defendants' statements regarding the likelihood of FDA approval for Lemtrada, which projected a 90% chance of success and anticipated approval by late 2012, were misleading due to the omission of the FDA's concerns about single-blind study methodologies. However, it is established that the FDA's interim feedback did not conflict with the defendants' optimistic projections, as the FDA indicated that any methodological deficiencies could be addressed if the treatment demonstrated a significant effect, which Lemtrada did. The context of the statements is crucial; sophisticated investors, aware of the complexities of drug approval processes and ongoing FDA dialogues, would not be misled by the defendants’ optimism. The offering materials included disclaimers about the reliability of projections, which reasonable investors would consider alongside the information provided. The plaintiffs failed to demonstrate a serious conflict between the FDA's concerns and the defendants' statements. Additionally, the Supreme Court's rulings clarify that an opinion is not misleading merely due to external facts contradicting it, and issuers are not required to disclose every potentially contrary fact. Thus, the defendants met their obligation to align their statements with the information available at the time, and the plaintiffs' claims lack merit.
Defendants were not required to disclose FDA feedback that contradicted their projections, as Plaintiffs were not entitled to all information that could influence their assessment of FDA approval likelihood. While Plaintiffs expressed a desire for this information, the Omnicare standard does not impose liability for failing to disclose unfavorable information unless it misleads investors. Plaintiffs' assertion that Defendants should have disclosed risks beyond typical drug approval challenges lacks support in the Omnicare interpretation. Furthermore, Plaintiffs did not allege that the risks from FDA feedback were extraordinary or unique to their situation, particularly given the FDA's established preference for double-blind trials, which Defendants acknowledged they were not using. Investors should be aware of the FDA's public stance on testing methods, which mitigates claims of surprise when outcomes align with established preferences.
Regarding statements about the anticipated launch of Lemtrada, the district court found these claims similarly unsubstantiated. Defendants' expressions of feeling "relaxed" or "satisfied" did not conflict with the FDA’s critiques, which would not lead reasonable investors to interpret such optimism as a lack of dialogue about deficiencies. Additionally, Defendants' expectation of a decision by year-end was accurate, as the FDA indeed rejected Lemtrada on December 30, 2013. Consequently, Defendants' statements regarding timing did not mislead investors, and their optimism was consistent with the FDA's comments that approval was possible with significant efficacy. Therefore, Plaintiffs' claims about the statements related to Lemtrada's launch were also deemed insufficient.
Plaintiffs claim that Defendants' statements regarding Lemtrada's "strong and robust treatment effect" and "stunning" data were misleading. However, they fail to establish a connection between the FDA's critical feedback and the Defendants’ assertions about trial results. Sanofi, as a global pharmaceutical company, sought to generate worldwide interest in Lemtrada, which had already received approval in multiple countries by early 2014. The Plaintiffs' argument that Sanofi's comments were only aimed at investor anticipation for FDA approval lacks merit, as the statements reflect a broader global strategy rather than a single country's regulatory outlook.
The lack of a rational link between Defendants’ statements and FDA feedback undermines the Plaintiffs’ claims. Furthermore, the Supreme Court’s precedent indicates that expressing a belief in lawful conduct, even if later disputed, does not constitute misleading conduct if there was a reasonable basis for that belief. Defendants’ interpretations of Lemtrada’s effectiveness are not actionable simply because the FDA disagreed. The Court highlights that the Plaintiffs do not argue that Defendants' interpretation was unreasonable, which is significant given that the FDA ultimately accepted Lemtrada without requiring further trials.
Consistent with Omnicare, investors are expected to understand industry norms, including the nature of FDA interactions. There are no credible allegations of conflict between Defendants’ statements and FDA feedback, leading to the conclusion that Plaintiffs’ claims lack basis. While issuers must be transparent, they are not obligated to disclose every unfavorable fact. Given the sophistication of the investors involved, the FDA's preference for double-blind studies, and the absence of conflict, the Court finds that no reasonable investor would have been misled by the optimistic statements regarding Lemtrada’s approval and launch.
The District Court's judgment is affirmed regarding the Biologics License Application (BLA) for Lemtrada (alemtuzumab), which is a request to introduce a biologic product into interstate commerce. The FDA's comments concerning the use of single-blind trials were included in the original Briefing Materials, contradicting the plaintiffs’ claims about a separate "Background Package." The court noted that where a document is referenced in a complaint, it takes precedence over the allegations, thus not requiring acceptance of the amended complaint's claims. The third physician's concerns focused on drug safety, not clinical trial reliability, and plaintiffs abandoned safety claims on appeal. No new Phase III trials were conducted for Lemtrada, and the court found that the omission of FDA feedback was not materially misleading, as it would not have significantly altered investors' decisions. The court concluded that plaintiffs failed to demonstrate materially misleading omissions, negating the need to address concerns about a potential bright-line test for interim FDA feedback disclosure obligations. Additionally, for claims under § 20(a) of the Exchange Act, which imposes liability on controlling persons for violations, the plaintiffs must prove scienter. The court also acknowledged that the clinical trial's design prevented double-blinding, and measures were taken to mitigate bias in data integrity.
