A Dark Cloud's Silver Lining: The First Circuit's Decision In Ariad Pharmaceuticals

ATTORNEY: LOUIS C. LUDWIG
POMERANTZ MONITOR: JANUARY/FEBRUARY 2017

On December 14, 2012, ARIAD Pharmaceuticals announced that the FDA had approved the marketing of ponatinib, a treatment for advanced-stage chronic myeloid leukemia (“CML”), a unique and especially deadly form of leukemia. Like many cancer-focused drug companies, ARIAD first secured approval for ponatinib to treat only the most gravely ill cancer patients. Ponatinib quickly became ARIAD’s most important drug, the linchpin of its entire business. The FDA’s action was not all good news, however, as it required ARIAD to include a “black box” warning on ponatinib’s label disclosing the risk of possibly deadly side effects, most notably adverse cardiovascular events. Meanwhile, ARIAD conducted further studies to see if the drug was safe and effective enough to use with expanded classes of patients, including those who were not as seriously ill.

Despite the black box warning, ARIAD nevertheless continued to publicly project confidence in ponatinib’s future. But before too long, more troubling news came out. First, on October 9, 2013, ARIAD informed investors that it was pausing enrollment in all clinical studies of ponatinib due to increased instances of medical complications. Days later, ARIAD disclosed that it had agreed to halt an international, open-label trial of ponatinib trial entirely. Finally, on October 31, ARIAD announced that it was “temporarily suspending the marketing and commercial distribution” of ponatinib at the direction of the FDA. The market reacted harshly, and ARIAD’s stock price fell all the way to $2.20 per share.

A shareholder class action lawsuit was not far behind. Even for the tiny group of patients who had been allowed to receive the drug, those who were the most desperately ill, ponatinib was something of a mixed blessing. Ponatinib is targeted at relatively few CML patients because the drug is not safe enough for a broader swath of CML patients. ARIAD has used these restrictions to push through price hikes on a regular basis. By early 2015, ponatinib’s monthly gross price was $11,280. As of October 2016, it had increased to $16,561 for a month’s supply, prompting a public rebuke from Senator Bernie Sanders.

As in all securities fraud class actions, ARIAD moved to dismiss the case. The district court granted the motion, but on November 28, the First Circuit held that one of plaintiffs’ alleged misrepresentations did raise a compelling inference that ARIAD’s executives acted with scienter, or intent to defraud. That statement occurred at a breakfast meeting with securities analysts, where ARIAD executives allegedly said that the company expected the drug to be approved by the FDA with a “favorable label.” That statement was then included in an investment bank’s report that was disseminated to the market the following day. The truth, however, was that the FDA had already informed the company that it was rejecting Ariad’s proposed label and requiring additional safety disclosures.

The misstatement that the appellate court held to be actionable is significant because it related to defendants’ representations to investors that failed to disclose critical communications with the FDA. That statement was deemed both material and strongly supported an inference of scienter. The court held that ARIAD’s upbeat comments at the meeting amounted to an “expression of . . . hope without disclosure of recent troubling developments [that] created an impermissible risk of misleading investors” and was therefore knowingly or recklessly misleading. This claim will move forward in the district court.

This is notable because the First Circuit has ratcheted up the already-stringent pleading standards in securities class actions for both materiality and scienter. Its 2015 decision in Fire and Police Pension Ass’n v. Abiomed, Inc. held that doubts about the materiality – or significance to investors – of a statement can prove fatal to a plaintiff’s scienter allegations.

In In re: ARIAD Pharmaceuticals Inc. Securities Litigation, an appellate panel that included retired Supreme Court Justice David H. Souter recognized that misleading statements that omit information about communications with the FDA can support a finding of scienter. Such communications are frequently at the heart of securities class actions involving pharmaceutical companies.

ARIAD Pharmaceuticals is in line with long-standing circuit precedent that statements published in light of a defendant’s knowledge of contrary facts provide classic evidence of scienter. What is new is that the Court of Appeals has joined lower courts within the First Circuit in explicitly extending this principle to the realm of FDA communications so often kept secret until the truth is revealed to investors. Therefore, despite largely affirming the lower court, ARIAD Pharmaceuticals will nonetheless help plaintiffs who allege misrepresentations of FDA communications meet the tough pleading standard set by the First Circuit in Abiomed.