In re Novan, Inc., 2018 WL 6732990 (M.D.N.C. Nov. 30, 2018), adopted by, No. 1:17CV999 (M.D.N.C. Jan. 28, 2019).

On January 28th, 2019, United States District Judge Catherine C. Eagles of the Middle District of North Carolina adopted a recommendation from a magistrate judge granting the defendants’ motion to dismiss a putative securities class action brought against pharmaceutical company Novan, Inc. and its officers, directors, and underwriters.

The plaintiffs alleged that defendants made false statements and omissions about the Company’s leading drug candidate in connection with an initial public offering of its stock and in the weeks subsequent to the offering.

At issue was the development of SB204, a topical gel for the treatment of acne. After Phase 2 trials, the FDA recommended that the Company run trials both with and without women taking oral contraceptive prescriptions.  The Company took this recommendation into consideration and devised what it described as two “identically-designed” Phase 3 trials.

In its securities offering documents issued in connection with the IPO, Novan made general statements regarding its interactions with the FDA regarding the drug candidate, without specifically mentioning what the FDA’s recommendations consisted of, stating “that it met with the FDA in advance of the Phase 3 trials, that it received feedback, that its Phase 3 trial design was based upon that feedback, that the feedback did not constitute a binding agreement that the FDA agreed with the trials’ design (apart from endpoints), and that [the company] believed the feedback was sufficient to move forward on its Phase 3 development program.”

Several weeks after its IPO, Novan announced the top-line results of the two Phase 3 clinical, disclosing that although the drug met its endpoints in one of the trials, it was not found to be more effective than a placebo in the other trial.

Plaintiffs claimed that Novan should have disclosed details regarding the FDA’s suggestion that Novan separately report data regarding women on oral contraceptives with an acne indication.  However, the Court found that it was sufficient that the Company generally disclosed its interactions with the FDA without specifying in detail what the FDA’s recommendations were. Importantly, the magistrate judge had specifically noted that the FDA’s recommendation did not suggest that the FDA was “critical” of the efficacy of the drug or the drug trials generally, and had further found that the FDA’s recommendation had not impacted the truth or falsity of any of Novan’s public statements.

Plaintiffs also alleged that the Company’s description of the two Phase 3 trials—which they construed as a representation that the trials were “identical”—was false and misleading, because one of the trials included women on oral contraceptives.  But the Court found that Novan had not represented that the trials were identical—only that they were “identically designed”—and there was no well-pled allegation that this was not the case.

The Novan decision demonstrates that courts will not require companies to disclose every detail of their interactions with the FDA, but that companies should be especially sensitive to disclosure decisions around any comments by the FDA that could be construed as “critical”—a factor that did not exist in the Novan case.  In addition, the Court’s decision is a reminder that disclosures concerning clinical drug trials must be carefully nuanced, given the importance of the distinction between the company’s statement that the two Phase 3 trials were “identically designed” and the Plaintiffs’ construction of the statement as one supposedly representing the two trials were “identical.”