Plaintiffs Defeat Motion to Dismiss Claims Against Axsome Therapeutics
On March 31, 2025, Pomerantz secured a victory on behalf of a proposed class of investors in Axsome Therapeutics, Inc., defeating defendants’ motion to dismiss securities fraud claims related to Axsome’s New Drug Application (“NDA”) for one of its core products, AXS-07.
Axsome is a small pharmaceutical company that develops therapies for central nervous system disorders. AXS-07, a migraine medication, was one of the company’s two main products and the one that it represented as closest to commercialization during the period from May 10, 2021 to April 22, 2022 (the “Class Period”).
Plaintiffs allege in their Second Amended Complaint (“Complaint”) that throughout the Class Period, Axsome and its senior executives misrepresented the company’s ability to manufacture AXS-07 and the strength of its NDA that was required for the drug to be approved by the Food and Drug Administration (“FDA”). Then, on April 25, 2022, Axsome announced that it expected that the FDA would not approve the AXS-07 NDA because of “unresolved” issues with chemistry, manufacturing and controls (“CMC”), sending Axsome’s stock price plummeting by 22% and causing its investors to suffer significant financial losses.
The Complaint supported the allegation that defendants misrepresented the status of AXS-07 and its NDA submission based on several sources, including a confidential witness who worked on a study of AXS-07 and reported that Axsome’s third-party contract manufacturing organization (“CMO”) was completely unable to manufacture the drug during the Class Period because of equipment problems at the manufacturer. Plaintiffs also cited defendants’ subsequent admissions, when discussing their resubmission of the NDA after the Class Period, that Axsome still needed to manufacture additional batches of AXS-07 for certain studies that were needed for the submission.
The court upheld nearly all of the alleged misstatements in the Complaint and held that scienter — defendants’ intent — was adequately alleged as to two of the individual defendants, Axsome’s CEO and its Chief Operating Officer, as well as for the company itself. The Complaint thus adequately alleges claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against these defendants.
There are several notable aspects of the court’s decision denying defendants’ motion to dismiss, including its rejection of defendants’ arguments concerning the elements of falsity, scienter, and loss causation.
Falsity
Even with strong allegations that Axsome experienced the manufacturing problems with AXS-07 alleged in the Complaint, plaintiffs had to overcome defendants’ arguments that their statements would not have misled investors about the status of AXS-07 and its NDA submission.
The court rejected defendants’ arguments, holding that their “statements about AXS-07 were misleading because they created an impression that the Company was not facing supply issues, when, in reality, the [Complaint] alleges that Axsome was unable to produce sufficient AXS-07 for at least a year” and that statements about the NDA submission “were misleading because they implied that Axsome actually was conducting, or at least was able to conduct, stability testing” when in fact “Axsome could not obtain sufficient AXS-07 to conduct the necessary stability studies,” which “would result in an inadequate NDA filing.”
The court therefore rejected nearly all of defendants’ arguments that their alleged misstatements were nonactionable opinion statements, were otherwise not material (or significant) to investors, or were not inconsistent with the underlying facts alleged. Rather, the allegations in the Complaint “support the inference that Axsome was experiencing manufacturing and supplier issues that Defendants were obligated to disclose to make other statements not misleading.” The court also agreed with plaintiffs that Axsome’s alleged equipment problems were material to investors since they “impacted the likelihood of NDA approval because they were delaying AXS-07’s stability testing timeline.”
In addition, the court held that defendants’ purportedly for-ward-looking statements were not protected by a safe harbor for such statements because when these statements were made, Axsome was “already facing supply issues that were delaying ‘the development and commercialization’ of AXS-07,” the Complaint adequately alleged “actual knowledge” of falsity, and the safe harbor “does not protect material omissions.”
More fundamentally, the court agreed with plaintiffs’ theory of falsity, holding that the Complaint was not alleging “that Defendants ‘promise[d]’ FDA approval, but instead that Defendants ‘promote[d] the likely approval of AXS-07’ while being aware of facts that materially decreased the likelihood of such approval.” This ruling shows that defendants cannot evade liability by contending that they cannot predict the future when their positive statements are inconsistent with the underlying facts that they are aware of at the time that reduce the probability of a positive outcome for the company.
Scienter
The court’s scienter ruling helpfully shows how several different scienter allegations “taken together” can plead the requisite showing of intent, that a confidential witness’s “information need not be based on direct contact with the Individual Defendants to be reliable,” and that post-Class Period statements can support inferences about defendants’ state of mind during the Class Period.
In particular, the Complaint adequately alleges the scienter of Axsome’s CEO and COO — and by extension, of Axsome itself — because AXS-07 was a “core product” for Axsome, which “is a small pharmaceutical company with only about 100 full-time employees as of early 2022”; these defendants’ “public statements evinced a strong familiarity with AXS-07’s manufacturing process”; an FDA inspection report related to Axsome’s other main product described these defendants’ responsibilities for the relevant functions at the company; the confidential witness reported to the COO’s report; and defendants’ post-Class Period statements “ illustrate that Defendants knew that AXS-07’s June 2021 NDA would likely be deficient due to supply delays that limited stability testing.”
In other words, plaintiffs may adequately plead the defendants’ scienter based on the circumstances as a whole. The court will not accept the defendants’ alternative explanation of events when a commonsense interpretation of the relevant information dictates that individual defendants, such as a company’s top executives responsible for the topic at issue, knew or recklessly disregarded the underlying facts that made their statements false and misleading to investors.
Loss Causation
The court also ruled that the Complaint adequately alleges loss causation — i.e., that that defendants’ misstatements caused plaintiffs’ losses. This ruling also confirms the importance of common sense in interpreting the course of events.
In their motion to dismiss, defendants attempted to argue that loss causation was not adequately alleged because the Complaint did not sufficiently “allege that the basis for the FDA’s denial of the NDA was Axsome’s inability to manufacture AXS-07.” The court rejected this argument because even though Axsome did not disclose the specific CMC issues that caused the FDA to reject the NDA for AXS-07, the “allegations give rise to the reasonable inference that the CMC issues to which the FDA referred [when rejecting the NDA for AXS-07] were the manufacturing issues described throughout” the Complaint and the Complaint “alleges that undisclosed manufacturing issues created a particular risk that the FDA would reject the AXS-07 NDA.”
Here too, as with the Court’s earlier rulings, plaintiffs prevailed because their interpretation of the available information was far more reasonable than defendants’ attempt to avoid liability through a farfetched reading of those events.
The case is In re Axsome Therapeutics, Inc., No. 1:22-cv-3925 (S.D.N.Y.)