Securities class actions brought against drug development and medical device companies often are based on alleged misrepresentations related to the regulatory approval process. Plaintiffs assert that the company’s officers must have known that the drug or device would not be approved, because the product was key to the company’s success. But is that a plausible way of looking at how companies interact with their investors and regulators?
In Ngyuen v. Endologix, Inc., 962 F.3d 405 (9th Cir. 2020), the plaintiff alleged that Endologix misled its investors about whether the Food and Drug Administration (FDA) would approve Nellix, the company’s aneurysm sealing product. In particular, Endologix supposedly knew the device had encountered development problems in Europe that would manifest again in U.S. clinical trials, which would in turn lead the FDA to deny pre-market approval. The district court dismissed the complaint, finding that the plaintiff had failed to adequately plead a strong inference of scienter (i.e., fraudulent intent).
On appeal, the Ninth Circuit questioned whether the plaintiff’s version of events was the most likely. As the court explained, the “plaintiff’s core theory—that the company invested in a U.S. clinical trial and made promising statements about FDA approval, yet knew from its experience in Europe that the FDA would eventually reject the product—has no basis in logic or common experience.” The court found that was especially true given that the complaint did not allege the existence of suspicious insider stock sales. Moreover, the complaint’s reliance on statements from a former Endologix officer could not fill this gap because the information attributable to the officer “lack[ed] any detail about the supposed device migration problems that Nellix encountered in the European channel.” Without those details, the plaintiff could not establish “a strong inference that defendants’ later statements about FDA approval were intentionally false or made with deliberate recklessness.”
Holding: Dismissal affirmed.
Quote of note: “[W]e are asked to accept the theory that defendants were promising FDA approval for a medical device application they knew was ‘unapprovable,’ misleading the market all the way up to the point that defendants were ‘unable to avoid the inevitable.’ The allegation does not resonate in common experience. And the PSLRA neither allows nor requires us to check our disbelief at the door.”
Additional note: Interestingly, the confidential witness relied upon by the plaintiff apparently “submitted a declaration in the district court disavowing the plaintiff’s allegations, denying having ‘ma[de] many of the statements attributed to me,’ and stating that ‘most of the factual assertions attributed to me … are contrary to my understandings of fact and my opinions.'” Neither the district court nor the appellate court, however, considered this declaration in rendering their decisions.