News from the US of two sets of legal proceedings against executives of listed biotechs. Both cases relate to comments they made publicly, or press releases they issued, about clinical trials results. The cases are a salutary warning about the risks to the C-suite NASDAQ-listed UK biotech companies, and the need for extreme caution when reporting clinical trials results to the market.
RA Capital Healthcare Fund v ChemoCentryx Inc & Thomas Schall
In RA Capital Healthcare Fund v ChemoCentryx Inc & Thomas Schall, the well-known Boston hedge fund investor (nb: not one of the RA Capital venture funds) is seeking damages from ChemoCentryx, a then clinical-stage company it had invested in, and from ChemoCentryx’ CEO (Mr Thomas Schall) personally. The amount of the claim is not specified, but RA Capital estimates it at “tens of millions of dollars”. The claim alleges breach of various US securities laws (including the Exchange Act and the SEC regulations promulgated under it), fraud and negligent misrepresentation.
ChemoCentryx is the developer of avacopan (Tavneos™), an orally-administered small molecule selective complement 5a receptor inhibitor for the treatment of patients with anti-neutrophil cytoplasmic antibody (ANCA)-associated vasculitis (a rare and severe autoimmune condition affecting the body’s small blood vessels). It was NASDAQ-listed at the time of the alleged incident.
RA Capital invested in a $310 million secondary public offering of ChemoCentryx common stock (priced at $58 per share) following a press release and investor call about the topline results of a pivotal study sponsored by the company. ChemoCentryx was known to be seeking FDA approval for avacopan (in combination with an immunosuppressant) to “completely replace” steroids (in combination with an immunosuppressant) as the standard of care in treating patients with ANCA vasculitis. (Steroids pose significant safety risks to patients, so this label would have opened up a significant market for avacopan).
ChemoCentryx’ CEO claimed in the investor call that (i) the study was an overwhelming success; (ii) both primary and secondary endpoints had been achieved; and (iii) avacopan was a safe alternative to steroids and could completely replace steroids as the standard of care. Its stock surged 281% in one day following the announcement, and increased by a further 100% in the following six (6) months leading up to the secondary public offering.
However, RA Capital alleges that, unbeknownst to investors:
- the FDA had already told ChemoCentryx that the design of its pivotal study (a non-inferiority study) would not demonstrate, even if successful, avacopan’s efficacy or its suitability to replace steroids in treating vasculitis
- the FDA had suggested changes to the study design to make it acceptable for those purposes (including changing it to a superiority study), but ChemoCentryx agreed to only a few of the suggested changes.
The FDA’s concerns only came to light when the FDA published its briefing pack ahead of its Advisory Committee meeting, some 8 months into the FDA’s assessment of ChemoCentryx’ Application New Drug. ChemoCentryx’ share price immediately fell by 45% on the day of publication (from $48.82 to $26.63), and declined by a further 62% ($27.49 to $10.46) on the day of the Advisory Committee meeting itself (they are held in public).
The FDA ended up giving avacopan only a limited label, for treating patients suffering from severe ANCA associated vasculitis, and only as an “adjunctive treatment” to be taken in combination with standard steroid treatment (not as a replacement for steroid use).
The claim was filed on 2 May 2024 and is still pending. ChemoCentryx is also facing a class action lawsuit for securities fraud, arising out of the same set of facts .
Life sciences companies are a popular litigation target in the US, accounting for 20% of all federal securities class action filings in 2022.
US v Nader Pourhassan & anor
The second case is US v Nader Pourhassan & anor. Mr Nader Pourhassan is the former President and CEO of CytoDyn Inc., a NASDAQ-listed biotech company developing leronlimab, a monocloncal antibody for the treatment of HIV. Mr Pourhassan is charged with the criminal offences of conspiracy, wire fraud and securities fraud. The indictment alleges that the CEO made (and caused CytoDyn to make) materially false and misleading representations about the timeline for completion and submission to the FDA of its biologics licence application (“BLA”) for leronlimab.
After Cytodyn repeatedly missed its publicised timelines for BLA submission, Mr Pourhassan is alleged to have directed CytoDyn’s CRO/regulatory agent to submit the BLA even if it was incomplete, so that he could announce to the market that the BLA had been submitted. According to the SEC prosecutors, after submitting the incomplete BLA, he issued a press release stating that a “complete” BLA had been submitted to the FDA, when in fact he knew that it was incomplete and the FDA would refuse to review it. Pourhassan then allegedly sold millions of dollars worth of CytoDyn stock, before news of the FDA’s rejection of the BLA became public knowledge.
If convicted, Mr Pourhassan (and the CEO of Cytodyn’s CRO) face a maximum penalty of 20 years in prison on each wire fraud and securities fraud charge, and 5 years imprisonment on the conspiracy count. Trial is scheduled for 4 November 2024.
If you would like to discuss any of these issues, or have faced similar issues on reporting clinical trials results, please let us know, or contact your usual TW contact.
- Case ¬cv-026450-JCS (N.D. Cal)
- It is interesting to note that ChemoCentryx was subsequently bought by Amgen for $4 billion in cash in October 2022, 19 months prior to the lawsuit being filed. This case serves as a reminder of the importance of looking at prospective litigation matters in the context of life sciences M&A.
- Jonnie Homyk v ChemoCentryx Inc et al, no 4:21-cv-03343-JST (N.D. Cal)
- Court Docket No.:22-CR-440, (MD)
