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From Securities Regulation Daily, January 29, 2015

Pharmaceutical company fends off fraud claims related to MS drug

By Matthew Garza, J.D.

Investors claiming that the French pharmaceutical company Sanofi committed fraud by painting an overly optimistic picture of the development of a multiple sclerosis drug saw their allegations dismissed by the federal district court in Manhattan. The court ruled that the company did not omit material information regarding FDA criticism of the drug’s clinical trial design and dismissed the complaint with prejudice (In re Sanofi Securities Litigation, January 28, 2015, Engelmayer, P.).

Background. The allegedly overly optimistic statements related to a drug being developed by an acquisition target of the company, Massachusetts-based Genzyme Corporation. The companies could not agree on a valuation of the drug so Genzyme shareholders were issued contingent value rights (CVRs), tradable on the open market, as part of the acquisition. The CVRs entitled investors to cash payments pegged to milestones in the development of the drug, which was called “Lemtrada.”

One milestone was obtaining FDA approval by March 31, 2014. On November 8, 2013, a critical report issued by the FDA hinted strongly to the market that the drug would not be approved, and the price of the CVRs declined from $2 to $0.77. It dropped further to $.32 after the FDA formally rejected the application for approval.

Investors in the CRVs alleged that Genzyme, and later Sanofi, made misleading and incomplete statements about the likelihood of obtaining FDA approval for Lemtrada. Genzyme knew through interim feedback from the FDA that the agency was critical of the design of the clinical trial and would require particularly robust positive results to overcome the flaws, investors said, but neither Genzyme nor Sanofi disclosed this or other negative feedback, and they continued making optimistic statements about the drug’s prospects.

Lemtrada, in the meantime, was approved for use by 30 other countries. Sanofi resubmitted its application to the FDA, and after making more than two dozen amendments to the application, obtained the FDA’s approval for use of the drug on certain MS patients on November 14, 2014.

Misleading statements. The complaint challenged six statements made in SEC filings indicating that Genzyme and later Sanofi expected to obtain FDA approval of Lemtrada, one going so far as to predict a 90 percent likelihood of obtaining approval by the March 31, 2014 milestone. These statements were not accompanied by any mention of the FDA criticism of the trials, investors complained. The court found these statements to be opinions, and the complaint did not plead any basis to indicate that the company did not believe them to be true.

A statement by the Sanofi CEO that rejection of the drug was “not a total surprise” was not inconsistent with positive statements about the drug’s chances, the court said, especially given that the company projected a 10 percent likelihood that it would not be approved by the milestone. “An event or circumstance with a 10 percent possibility of coming to pass can be fairly described as ‘not a total surprise,’” said the court. Positive statements by the company were also not shown to be objectively false, especially given the fact that trials were allowed to proceed despite the FDA’s criticism, and the fact that the drug was eventually approved.

Scienter. The investor’s scienter pleadings failed along with their assertions that the company’s statements were false and misleading. An inference of scienter did not logically follow the non-disclosure of the FDA’s criticism, the court said, because “the law did not impose an affirmative duty to disclose the FDA’s interim feedback just because it would be of interest to investors.” The investors did not provide the court with sufficient allegations showing that the company understood its statements to be inaccurate, or highly unreasonable.

The PSLRA safe harbor for forward looking statements also protected the company’s statements. Each forward looking statement was identified as such in SEC filings and accompanied by cautionary language identifying the risks, according to the court. In addition, information was available to the market that the “single blind” design of the trials was not considered the gold standard by the FDA, and the nature of the trial was disclosed in a publicly-available online database maintained by the National Institute of Health, as well as several prominent medical journals. An investor could reasonably infer that the design of the trial might impede or delay FDA approval.

In addition to disposing of the investor’s federal claims, the court declined to exercise supplemental jurisdiction over allegations asserting violations of California, Massachusetts, and Minnesota blue sky laws.

The case is No. 13 Civ. 8806 (PAE).

Attorneys: John B. Orenstein (Ross & Orenstein LLC) for AG Funds, L.P., AG MM, L.P., AG Super Fund International, L.P., AG Princess, L.P. and Nutmeg Partners, L.P. John A. Neuwirth (Weil, Gotshal & Manges LLP) for Sanofi and Genzyme Corp.

Companies: AG Funds, L.P.; AG MM, L.P.; AG Super Fund International, L.P.; AG Princess, L.P.; Nutmeg Partners, L.P.; Sanofi; Genzyme Corp.

MainStory: TopStory FraudManipulation SecuritiesOfferings CaliforniaNews NewYorkNews MassachusettsNews MinnesotaNews

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