Intercept Pharmaceuticals Securities Litigation Continues: Plaintiffs Adequately Alleged Scienter Regarding Defendants’ Failure to Disclose Safety Issues

A purported class of investors (“Plaintiffs”) brought actions pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 against Intercept Pharmaceuticals, Inc. (“Intercept”) and its Chief Executive Officer and Chief Medical Officer (collectively, “Defendants”) in the United States District Court for the Southern District of New York alleging the omission of negative information from drug trial results in a press release. In re Intercept Pharmaceuticals, Inc. Securities Litigation., No. 14 Civ. 1123, 2015 BL 58016 (S.D.N.Y. Mar. 4, 2015).

Defendants moved to dismiss the Consolidated Amended Complaint (“CAC”) under Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure and pursuant to 15 U.S.C. § 78u-4 of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), arguing the Plaintiffs failed to adequately allege scienter. The court found the pleading sufficient and denied the Defendants’ Motion to Dismiss.

According to the allegations, Intercept is a publicly traded biopharmaceutical company that was developing obeticholic acid (“OCA”) as a treatment for liver ailments, including nonalcoholic steatohepatitis (“NASH”), for which there is no approved drug. The National Institute of Diabetes and Digestive and Kidney Diseases (“NIDDK”) conducted a trial, known as “FLINT,” to test OCA as a treatment for NASH. The trial was stopped early on the basis of “efficacy” and “significant lipid abnormalities” in patients.

After becoming aware of the findings through a series of conversations and emails between the Chief Medical Officer and NIDDK’s Scientific Advisor, according to the allegations, Intercept issued a press release and held a conference call with analysts and investors regarding the conclusion of the FLINT trial. The Company did not mention the finding of lipid abnormalities. Following the release, Intercept’s stock price rose from $73.39 to $497 per share between January 9 and 10, 2014, ultimately closing at $445.83. After receiving media requests for additional information, NIDDK released a statement disclosing the findings of lipid abnormalities, causing Intercept’s stock price to drop to $190.71 per share by January 13, 2014.

Plaintiffs filed suit alleging, among other things, that Intercept violated the antifraud provisions by omitting to mention the  “the significant lipid abnormalities” identified in the trial.  Defendants moved to dismiss, arguing Plaintiffs failed to adequately plead scienter.

Under FRCP 9(b), the pleading requirements for securities fraud are heightened. In addition, the PSLRA requires a plaintiff to allege particular facts that “give rise to a strong inference that the defendant acted with the required state of mind.” This inference can be established by alleging facts that demonstrate the “defendants had both motive and opportunity to commit fraud” or “strong circumstantial evidence of conscious misbehavior or recklessness.”

The court found Intercept’s alleged failure to mention the lipid abnormalities gave rise to “a sufficient inference of scienter.” Intercept was informed the trial was stopped on the basis of a positive and a negative development (lipid abnormalities), and Intercept chose to selectively report only the positive development, which created a “real possibility of misleading investors.” Concerned the information would “cause issues,” Intercept sought approval for the selective disclosure, evidencing the decision was made knowingly.

Because the court found that the allegations in the complaint were sufficient to establish that Intercept acted consciously and recklessly in failing to disclose the lipid abnormalities, Plaintiffs’ allegations were deemed sufficient to adequately plead scienter pursuant to Rule 9(b) and the PSLRA. Accordingly, the court denied Defendants’ Motion to Dismiss.

Primary materials for this case may be found on the DU Corporate Governance website.

Nicole Jones