By Joseph Arshawsky, J.D.
Upon a de novo review, a shareholder class action alleging fraud regarding Biogen Inc.’s sales of the multiple sclerosis (MS) drug, Tecfidera, was properly dismissed with prejudice because the complaint failed to plead particularized facts giving rise to a strong inference of scienter as required by the PSLRA, the U.S. Court of Appeals for the First Circuit ruled. In affirming the district court, the court also found no error or abuse of discretion in the denial of a motion to vacate the judgment and for leave to file a second amended complaint (In re Biogen Inc. Securities Litigation, May 12, 2017, Lynch, S.).
This shareholder class action involved allegations that Biogen and corporate officials misled the public about the effect of one patient’s death on sales of Tecfidera, the company’s leading source of revenue. Biogen began selling Tecfidera during 2013. During an earnings call on October 22, 2014, Biogen announced, for the first time, that an MS patient had died of progressive multifocal leukoencephalopathy (the "PML death"). The patient had taken Tecfidera for more than four years in a clinical study. The FDA issued a warning to the public about the PML death on November 25, 2014, and Tecfidera’s label in the United States was updated to describe the risk of PML death on December 3, 2014, one day after the beginning of the class period.
On the day after the end of the class period, July 24, 2015, the company lowered its 2015 revenue guidance, stating that the decrease in guidance was "based largely on revised expectations for the growth of Tecfidera." Biogen’s stock fell over 20 percent in one day, and the plaintiff filed suit. The company and officers moved to dismiss and the district court granted the dismissal with prejudice for failure to adequately allege scienter. The shareholder class then filed a motion to vacate the judgment and for leave to file a second amended complaint, which the district court also denied. This appeal followed.
Misrepresentations. The district court found that of more than twenty statements alleged to be material misstatements or omissions, three were plausibly misleading or false:
- on a January 29, 2015 earnings call, a statement that "we have not noticed a meaningful change in discontinuation rates";
- on the same call, a statement noting that this development was encouraging because it did not suggest that "people are anxious to pull patients out," but the contrary; and
- a statement at a February 25, 2015, health care conference that the discontinuation rate was consistent with historical averages.
On appeal, the shareholders argued for two additional statements: (1) a statement on April 24, 2015, that "internal market research" suggested that physician intent to prescribe Tecfidera was improving; and (2) a statement on May 13, 2015, that physicians’ perspectives about the safety profile were back to where they were before the PML death. The First Circuit agreed with the trial court that there were no allegations supporting any inference that these statements were misleading. But even assuming the shareholders were correct, the complaint would still fail to meet PSLRA’s requirements as to scienter.
Scienter. The First Circuit affirmed the dismissal of the complaint with prejudice because it failed to meet the rigorous standard of pleading under the PSLRA. The confidential witness statements were insufficiently particular, did not make misleading the defendants’ public disclosures, and did not speak with specificity as to why the defendants’ alleged misstatements were untrue or misleading. Likewise, the complaint’s "core operations" allegations were consistent with the defendants’ statements to investors. And the most cogent inferences from the record favored the defendants.
Confidential witness statements. As proof that the statements were misleading and made with scienter, the complaint makes several allegations based on statements from ten confidential witnesses. The confidential witnesses’ statements purportedly established that Biogen experienced a significant decline in Tecfidera sales following the announcement of the PML incident and throughout the Class Period. The confidential witnesses described corporate events and policy changes that purportedly established the defendants’ private acknowledgement of this decline in sales and the connection to the PML death.
The First Circuit found that the confidential witnesses’ statements "do not even begin to quantify the magnitude of the sales decline at the company level." They do not explain "whether the sales decline resulted from higher discontinuations, fewer new starts, changes in the market, or some other combination of factors." Nor did the confidential witnesses purport to contradict any of the financial information released by Biogen in its periodic reports during the class period. Indeed, the confidential witnesses were consistent with the company’s public disclosures. As the district court observed, the "defendants were cautious in projecting Tecfidera’s growth, and they repeatedly warned investors about the downside risks, including moderating growth and the PML label change."
There were also "significant timing problem[s]" in that the later confidential witnesses did not go to how the defendants’ statements, which were earlier, were knowingly or recklessly misleading at the time they were made. In other cases, the confidential witnesses had no connection to the defendants.
"Evidentiary admissions." The shareholders alleged that various statements were "evidentiary admissions" illustrative of scienter. But all those involved statements made by the defendants, well after the end of the class period, that did not provide particularized insight into the defendants’ knowledge at the time of the alleged misstatements—in effect pleading fraud by hindsight, which is not proper.
"Core operations" allegations. The shareholders claimed that the district court wrongly did not account for the amended complaint’s "core operations" allegations because there was no "smoking gun" or "plus factor," and to require such showing runs afoul of Tellabs. The First Circuit declined to reach the issue because the allegations here clearly fell short. "The allegations are inapt because the evidence does not establish that, at the time the challenged statements were made, there existed reasonably accessible data within the company materially contradicting those statements."
Other factors. The compensation structure and stock holdings also weakened any inference of scienter. Compensation was tied to revenue growth, but there was no allegation that revenue growth was misreported. Moreover, the defendants in fact suffered losses because of the decline in stock price, which cuts against scienter. In sum, the facts alleged in the complaint at the very least supported a strong competing inference that the defendants disclosed what they considered to be, at the time, the most relevant information.
Thus, the shareholders’ claims under Exchange Act Section 10(b) and Rule 10b-5 were dismissed for failure to allege scienter. Because Exchange Act Section 20(a) liability depends on a primary violation, that claim was dismissed as well.
Motion to vacate and amend. The First Circuit found no abuse of discretion in the district court’s denial of the shareholders’ motion to vacate the judgment and for leave to amend the complaint. The First Circuit agreed that the shareholders had not made a sufficient showing that the "new evidence" was not available such that the proposed second amended complaint could have been filed while the motion to dismiss was still pending.
The case is No. 16-1976.
Attorneys: Garrett James Bradley (Thornton Law), Peretz Bronstein (Bronstein, Gewirtz & Grossman, LLC) and Michael P. Canty (Labaton Sucharow LLP) for GBR Group Ltd. James R. Carroll (Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates) for Biogen, Inc.
Companies: GBR Group Ltd.; Biogen, Inc.
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