Karyopharm highlights practical considerations for life sciences companies’ disclosures about products in development
The First Circuit’s recent ruling in Thant v. Karyopharm, 43 F.4th 214, provides practical guidance to life sciences companies facing disclosure decisions. Karyopharm held that a securities class action complaint failed to allege that a pharmaceutical company made materially misleading statements regarding the safety and efficacy of a developmental-stage drug candidate for which it had submitted a new drug application (NDA) to the FDA.
Life sciences companies frequently face challenging decisions on disclosing information about ongoing clinical trials and NDAs for drug and medical device candidates.
On one hand, interim information about these topics typically does not need to be disclosed, even if material. This follows from the general proposition that there is no generalized duty under the federal securities laws to disclose nonpublic information, even if that information is material. Courts also have held that companies do not have an affirmative duty to disclose all communications with the FDA, and for good reason: companies should be able to interact with the FDA without needing to inject preliminary or premature information into the marketplace, which may create uncertainty and confusion.
On the other hand, most life sciences companies need and want to disclose information about their products in development and/or the status of NDAs to investors and other interested stakeholders. When choosing to make such statements, companies must heed the securities laws. Section 10(b) of the Exchange Act and SEC Rule 10b-5 prohibit making any un1 statement of material fact or omitting a material fact that would render any statement, in light of the circumstances under which it was made, misleading. Section 17(a) of the Securities Act, which is enforced by the SEC, contains similar prohibitions.
If a clinical trial produces disappointing results or the FDA rejects or delays approval of an NDA, life sciences companies can expect investors and potentially the SEC to claim that the company should have disclosed such adverse information earlier so as not to render the company’s statements materially misleading. Karyopharm is an example.
Allegations of the case
Karyopharm is a Massachusetts-based biopharmaceutical company that developed a cancer-fighting drug candidate called selinexor. Karyopharm conducted two clinical trials concerning selinexor at issue in the case. The first, Selinexor Treatment of Refractory Myeloma, or STORM, ended in mid-2018. The second, Bortezomib, Selinexor and Dexamethasone or BOSTON, was ongoing in 2019. Unlike STORM, which was a single-arm study, BOSTON was intended to allow evaluation of selinexor in comparison to a control group.
In August 2018, after STORM concluded, Karyopharm submitted an NDA. At a meeting with Karyopharm three months later, the FDA identified concerns regarding an NDA predicated on only the STORM results. Subsequently, the FDA set a meeting of an advisory committee to provide an advisory opinion on the NDA.
In February 2019, four days before that meeting, the FDA publicly released a briefing booklet addressing the STORM results and presenting its concern about relying solely on STORM data. Karyopharm’s stock price declined following this disclosure, and again when the advisory committee recommended delaying approval of the NDA until BOSTON concluded. A few months later, after Karyopharm submitted an amendment, the FDA approved an amended NDA.
Two months later, investors filed securities fraud cases. The consolidated complaint challenged statements regarding the safety and efficacy of selinexor. The plaintiffs claimed these statements misrepresented that the clinical trials had consistently yielded positive data when the drug actually “was extremely toxic, not well tolerated, and ineffective.”
The district court granted Karyopharm’s motion to dismiss. It opined that a statement in a press release that selinexor had “demonstrated a predictable and manageable tolerability profile” and that the most common adverse events among STORM participants were primarily low grade and manageable conditions (nausea, vomiting, fatigue and reduced appetite) was an arguably incomplete disclosure because other participants had experienced significant adverse events including deaths. The court also found that the complaint plausibly alleged that the CEO’s statements on a conference call that the “success of the STORM study is an important milestone for Karyopharm” and “represent[ed] a significant step in establishing the efficacy and safety of selinexor as a new option for patients” “likely ‘skewed’” the STORM data so as to misleadingly “present a rosy picture.” Nonetheless, the court ruled that plaintiffs failed to plead scienter, highlighting Karyopharm’s prior, voluntary and negative disclosures about selinexor.
First Circuit decision
The First Circuit affirmed the judgment of dismissal, but on a different basis: that the complaint did not plausibly allege a material misrepresentation.
The court determined that the CEO’s conference call statements were non-actionable puffery, as vague optimism about a product’s future “cannot constitute a material misstatement for purposes of the pleading requirements set by the” Private Securities Litigation Reform Act (PSLRA).
As to the press release, the court found that no reasonable investor would interpret the statement that selinexor’s safety profile was “predictable” and “manageable” “to mean the drug was benign.” The court noted that the fact that selinexor may have led to severe adverse events in some STORM participants did not render materially misleading the company’s factually accurate commentary that the “most common” adverse events were more benign. Had Karyopharm misrepresented or mischaracterized which adverse events were most common, the decision may have been different. Here, however, even the FDA’s evaluation of the STORM data seemed to bear out Karyopharm’s statement as to the most common adverse events.
The court also made three other important observations. First, it stated that even though investors may have been interested in knowing about the specific serious adverse events experienced by STORM participants, “we have conclusively established that a company is not, by virtue of making some disclosures about its products, obligated to disclose all potentially interesting information.” The court cited a leading pre-PSLRA decision, Backman v. Polaroid Corp., 910 F.2d 10, 16 (1st Cir. 1990) (en banc), confirming that key principles that should guide companies in making disclosures (and lawyers in defending them) do not come solely from the PSLRA, but rather have long-established roots.
Second, the court found that Karyopharm’s 10-Ks had “proactively and regularly informed investors . . . both before and during the class period, that treatment with selinexor had resulted in ‘serious’ [adverse events] in at least a ‘small percentage’ of patients,” and that serious adverse events could include death. Karyopharm also had disclosed that selinexor was undergoing testing primarily as a treatment for a disease to which nearly all patients eventually relapse and succumb, and that half the STORM trial focused on patients whose cancer had progressed despite extensive and varied prior treatments. These prior disclosures mitigated any alleged deficiencies in the press release because “it is not a material omission to fail to point out information of which the market is already aware.” Indeed, plaintiff himself characterized STORM participants as “‘very sick patients’ pursuing their ‘last chance’ for survival.”
Third, the court found that Karyopharm also had been cautious in discussing the FDA. The press release had stated there could be “no guarantee that any feedback from regulatory authorities will ultimately lead to the approval of selinexor” and that the “accelerated approval” Karyopharm sought from the FDA “carries a high regulatory threshold.” The court distinguished a case, Ariad Pharmaceuticals, in which a pharmaceutical company had made optimistic statements about the prospects of approval for a favorable warning label after the FDA had rejected that label outright. While it is “undoubtedly misleading for a pharmaceutical company to . . . fail to disclose material communications with the FDA” as that other company had done, Karyopharm “neither failed to disclose FDA concerns nor falsely omitted selinexor's most-prevalent risks.”
Karyopharm provides some practical guidance for life sciences companies’ decisions regarding statements about products in development.
First, there is always a risk that statements containing any optimism at all will be viewed negatively. While the First Circuit determined that investors failed to allege any false or misleading statement, the district court disagreed in deciding that there had been “arguably incomplete statements” or statements that “present a rosy picture” to investors. To minimize this risk, life sciences companies should consider making balanced disclosures that cannot be accused of containing only positive information. Put another way, if a company is aware of any adverse information at the time it makes a statement, it should consider whether the omission of that information would be viewed in hindsight as creating a falsely optimistic overall portrayal of the FDA approval prospects, safety, or efficacy of a drug or medical device.
Second, even as the district court found there could be false or misleading statements, it viewed Karyopharm’s voluntary disclosures of adverse information as undermining scienter. The First Circuit took this one step further in holding that the disclosures meant that there was no false or misleading statement in the first place. Thus, if a life sciences company decides to voluntarily disclose interim FDA feedback or clinical trial results, it should consider including adverse information (including concerns from the FDA) even if not required to do so as a matter of law. Such disclosures can be made with an explanation that the company nonetheless remains optimistic, so long as that opinion is honestly held, has some reasonable basis, and (unlike Ariad Pharmaceuticals) is not definitively contradicted by information the company knows but does not disclose.
Third, and related, even as there is no generalized duty to disclose all material information or interim communications from the FDA, Karyopharm does not rule out liability based on the omission of material, negative FDA feedback. Therefore, life sciences companies should frequently monitor their risk disclosures to assess whether they sufficiently encompass the risks known to the company as expressed by the FDA, regardless of whether the company agrees with the FDA, and not just set forth the general risks companies face when seeking drug or medical device approval.
Finally, life sciences companies should avoid binary, yes-or-no representations about the likelihood of FDA approval and other unnecessarily specific disclosures. The First Circuit was impressed by the fact that Karyopharm had disclosed the “high regulatory threshold” it needed to meet and that the most specific statement Karyopharm made – which adverse events were the most common – was supported by the actual data. In contrast, there is no indication in the opinion that Karyopharm ever had made any prediction of ultimate FDA approval (let alone an unqualified statement), and the most optimistic statements that had been made (the CEO’s conference call statements) were highly generalized.Learn more about the implications of Karyopharm by contacting either of the authors.