Bass, Berry & Sims attorney Chris Lazarini provided insight on case in which class plaintiffs allege certain company officers knowingly made misleading statements about a drug’s potential adverse effects which, when later disclosed, caused the company’s stock price to decline. Because these statements were made contrary to an FDA ruling requiring the company to include a “black box” warning on the label, the Court, reversing a lower court’s decision, allowed Plaintiffs to proceed with their action. 

Chris provided the analysis for Securities Litigation Commentator (SLC). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SLC, please visit the SLC website to sign up for the newsletter.

Ariad Pharmaceuticals, Inc. Securities Litigation, In Re: Bradley vs. Ariad Pharmaceuticals, Inc., No. 15-1491 (1st Cir., 11/28/16) 

* The Private Securities Litigation Reform Act requires plaintiffs to state with particularity facts giving rise to a strong inference that defendants acted with scienter.
**It may be knowingly or recklessly misleading for an issuer to express hope for a favorable regulatory outcome, without disclosing negative statements by the regulator that indicate that there will be a less positive outcome. 

In this stock drop case, the Court, conducting a de novo review, affirms dismissal of Plaintiffs’ claims under Sections 11 and 15 of the Securities Act of 1933. In reaching this conclusion, the Court finds that Plaintiffs did not allege sufficient facts to “trace” their open market purchases of Ariad’s stock back to the company’s registration statement containing alleged misrepresentations and omissions. The Court also affirms dismissal of all but one of Plaintiffs’ claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, finding that Plaintiffs failed to meet the PSLRA’s pleading requirements by failing to allege key aspects of the timing of the alleged events and when Defendants knew about them. The Court reverses the lower court, however, on one Exchange Act claim, allowing Plaintiffs to proceed. 

Ariad develops and manufactures cancer treatment drugs. In October 2012, the Food and Drug Administration (FDA) rejected Ariad’s proposed label for a developmental drug due to inadequate safety disclosures. The FDA was concerned about the drug’s 8% rate of serious cardiovascular events during testing. Following additional communications with the company, the FDA approved the drug for limited marketing, but required Ariad to include a “black box” warning on the label advising of the risk of adverse cardiovascular events. On December 11, members of Ariad’s management team, including some who were involved in the negotiations with the FDA, publicly stated that they were optimistic about the drug’s prospects for U.S. approval “with a favorable label.” They also noted “low rates of cardiovascular issues” and cited pancreatitis as the “most prevalent” serious adverse event. Three days later, on December 14, Ariad announced the FDA’s “black box” label requirement, and its stock price fell from $23.88 per share to $18.93 per share. This action followed. 

Assuming the truth of the allegations, the Court finds that it was knowingly or recklessly misleading for Ariad’s officers to express optimism about the drug’s chances for a favorable label in light of the negotiations with the FDA. The expression of hope, without disclosure of the FDA’s position, created an impermissible risk of misleading investors, the Court explains. Similarly, it was knowingly or recklessly misleading for Ariad to cite pancreatitis as the most prevalent serious adverse event, when the cardiovascular issues were more prevalent. The Court has “little trouble” concluding that the FDA’s concerns and the rate of serious adverse cardiovascular events were material facts that, if disclosed, would have altered the total mix of information available to investors. For these reasons, the Court finds that plaintiffs should be allowed to proceed with their Exchange Act claims related to Ariad’s December 11 statements. 

The defendants included several securities underwriters.