Hou Liu v. Intercept Pharmaceuticals, Inc., 2020 WL 5441345 (S.D.N.Y. Sept. 9, 2020)

On September 9, 2020, Judge Lewis A. Kaplan of the Southern District of New York denied a motion to amend judgment and a request for leave to file a second amended complaint following the Court’s dismissal of an action against Intercept Pharmaceuticals, Inc. and certain of its executives.  The Court ruled that plaintiffs failed to identify any facts the Court overlooked in dismissing the action on March 26, 2020, and had not offered any newly-discovered evidence justifying leave to amend the complaint.

As discussed in a previous post, Judge Kaplan dismissed plaintiffs’ complaint alleging that defendants’ statements regarding the safety of Ocaliva, a drug designed to treat a rare liver disease, and statements regarding patients’ tolerance of the drug, were misleading in light of allegedly omitted reports of adverse events (“SAEs”).  In dismissing the complaint, the Court held that the “mere existence” of SAEs is not sufficient to establish that such SAEs are material to investors within the meaning of the securities laws; rather, “something more” is needed to link SAEs to a drug.  According to the Court, the alleged fact that twenty-seven out of 3,000 Ocaliva users experienced an SAE during a one-year class period could not support a statistically significant allegation of causation for purposes of alleging materiality.

In reviewing plaintiffs’ motion to file an amended complaint, Judge Kaplan focused on whether plaintiffs had alleged scienter, i.e., fraudulent intent.  The Court observed that the new allegation that Intercept executives must have reviewed reports including information on SAEs was “somewhat” persuasive but rejected this argument as nothing more than speculation.

In addition, the Court pointed to the fact that the FDA did not withdraw the drug from the market or otherwise restrict or modify its availability as further undermining plaintiffs’ claim that the defendants acted within an intent to defraud.

Finally, the Court noted that plaintiffs’ new allegations differed significantly from the U.S. Supreme Court Matrixx Initiatives case that is key in this area of law, including because, in that case, there were allegations that the company believed SAEs were “meaningful.”  In contrast, according to the Court, there were no such allegations in the plaintiffs’ proposed amended complaint.

Judge Kaplan’s decision thus demonstrates the significance for disclosure purposes of the FDA’s reaction to SAEs potentially caused by a drug.  It also underscores that courts should take a nuanced look at the degree to which a company allegedly understood (or did not understand) SAEs to have significant consequences in determining whether shareholders have adequately alleged an intent to defraud.