On May 19, 2022, Sidley obtained a decisive victory in the United States Court of Appeals for the Ninth Circuit for Nektar Therapeutics and its officers. Nektar develops novel therapies for patients with unmet medical needs, including cancer patients. The panel affirmed the district court’s dismissal of a putative securities fraud class action in which plaintiffs challenged Nektar’s statements about Phase 1 clinical trial results for one of its oncology drug candidates.
The case began in 2018 when plaintiffs alleged that in reporting on the average increase in Phase 1 patients’ cancer-fighting cells after treatment with the drug, Nektar misleadingly included an “outlier” patient. Plaintiffs sought to recover for stock drops that occurred after Nektar reported Phase 1/2 results below investor expectations in June 2018, and after a short seller posted a blog critical of the oncology drug in October 2018. The district court dismissed the case without prejudice in July 2020 and then with prejudice later that year, both times on falsity, scienter, and loss causation grounds.
The Ninth Circuit affirmed dismissal, in a published opinion, on both falsity and loss causation grounds. On the element of falsity, the panel articulated and reiterated a key insight applicable to securities fraud claims against life sciences companies generally: “Pharmaceutical companies often suffer setbacks in their clinical trials after earlier testing offered highly promising results. That is the nature of the industry” — but it does not amount to a fraud claim. The court concluded that plaintiffs’ allegations of falsity were insufficient because plaintiffs had not established what the Phase 1 trial results would have been absent the inclusion of the “outlier.” Nor had plaintiffs established why investors would have found trial results in which the outlier was excluded to be meaningfully different from the challenged statements.
On the element of loss causation, the court held that disappointing clinical results do not “correct” more favorable results in an earlier phase of testing — and therefore that investors challenging statements about the earlier phase may not recover for losses suffered when later-phase results are announced. The court’s loss causation holding should be useful precedent in other cases in which plaintiffs’ claims span multiple clinical trials or phases of trials. Meanwhile, the court’s recognition of the “nature of the industry” can be expected to be an influential precedent in future Section 10(b) cases against life sciences companies developing novel treatments.
The Sidley team included Sara Brody, Robin Wechkin (who was the principal author of Nektar’s briefs and presented oral argument to the district court and Ninth Circuit), and Matthew Dolan, and associates Zarine Alam and Tyler Wolfe.