Tongue v. Sanofi: Allegations of Misleading Statements Not Actionable Under Revised Omnicare Standard

In Tongue v. Sanofi, No. 15-588, 2016 BL 66168, (2d Cir., Mar. 4, 2016), the Court of Appeals for the Second Circuit affirmed the United States District Court for the Southern District of New York’s grant of Sanofi Pharmaceutical Inc.’s (“Sanofi”), Genzyme Corporation’s (“Gnzyme”), and Sanofi Executives’ (“Executives”, collectively “Defendants”) motion to dismiss the consolidated class action complaint by all persons (“Plaintiffs”) who purchased Contingent Value Rights (“CRVs”) between March 6, 2012 and November 7, 2013.

According to the allegations, Sanofi in February 2011 acquired Lemtrada , a multiple sclerosis treatment, developed by Genzyme, for $74 per share and one CVR per share. Each CVR entitled the holder to cash payouts upon achievements of milestones, such as receiving approval from the FDA by a specific date. In the years leading up to this deadline, Defendants released optimistic statements about Lemtrada’s clinical testing and the FDA approval process. In a call with investors in April 2012, Sanofi’s CEO claimed that, in regards to Lemtrada, “the data are nothing short of stunning.” Defendants, however, omitted the concerns expressed by the FDA about the use of single-blind, rather than double-blind clinical studies, in the testing for Lemtrada. Ultimately, Lemtrada was not approved by the FDA before the deadline and the value of each CVR dropped by more than 62% from $2.00 to $.077 a share.

On April 28, 2014 Plaintiffs filed a complaint alleging Defendants violated Section 10(b) and Section 20(a) of the Security Exchange Act (“Act”), as wells Rule 10b-5 promulgated thereunder, by making materially false and misleading statements that misled investors when Defendants failed to disclose the FDA had expressed concerns about the single-blind, rather than double-blind, testing.

In the period between dismissal by the district court and the decision in the appeal, the Supreme Court decided Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, 135 S. Ct. 1318 (2015). The Court, therefore, applied the analysis in that case. Under the revised standard set forth in Omnicare, an investor must “identify particular (and material facts) in the issuer’s opinion whose omission makes the statement misleading to a reasonable person reading the statement fairly and in context.” While opinions may be actionable if the omitted information makes the statement misleading to a reasonable investor, an issuer failing to disclose facts, which cut against its opinion is not necessarily misleading. A reasonable investor expects the issuer to believe the opinion and that it fairly aligns with the information in the issuer’s possession, but does not expect every fact known to the issuer to support its opinion.

The court determined Sanofi did not make material misleading statements of opinion. While the FDA had concerns with the testing methodology “it also stated that any deficiency could be overcome if the results showed an ‘extremely large effect.’” In effect, the concerns were part of a “dialogue” between the FDA and Sanofi. As the court reasoned, “These sophisticated investors, well accustomed to the ‘customs and practices of the relevant industry,” would fully expect that Defendants and the FDA were engaged in a dialogue, as they were here, about the sufficiency of various aspects of the clinical trials and that inherent in the nature of dialogue are differing views.” Moreover, the dialogue “did not prevent Defendants from expressing optimism, even exceptional optimism, about the likelihood of drug approval.”

Accordingly, the court determined there was an absence of serious conflict between the FDA’s concerns about the testing methodology and the Defendants’ optimism about the approval, affirming the district court’s dismissal.

The primary materials for this case may be found on the DU Corporate Governance website

Donovan Gibbons