The U.S. District Court for the Middle District of Tennessee Jan. 10 dismissed an investor suit alleging biotech concern BioMimetic Therapeutics Inc. (BMTI) and certain of its officials made material misrepresentations concerning the clinical trial for its flagship product, Augment Bone Grafting, as well as the prospects for regulatory approval (Sarafin v. BioMimetic Inc., M.D. Tenn., No. 3:11-0653, 1/10/13).
Judge Kevin Sharp found that the plaintiffs failed to adequately plead the scienter or intent-to-deceive element of their securities fraud claims.
The court explained that the present standard of care for foot and ankle fusion surgeries requiring supplemental graft material is the autologous bone graft, or autograft. In an autograft, surgeons harvest bone or tissue, usually from other part of the body, thus requiring a second surgical procedure, the court said. Augment, if proven safe and effective, would “likely be a preferable procedure” as it would obviate the need for the procedure in which the graft material is harvested.
For Augment to be successful, it needs Food and Drug Administration approval, the court said, detailing the approval process and issues related to BMTI’s application in particular.
Throughout the relevant period, BMTI “painted a rosy picture of the prospects for Augment’s approval by the FDA. Such portrayals were made in quarterly and annual reports, earnings class, and press releases,” the court said.
However, the court noted that the FDA expressed various concerns as to the effectiveness and safety of Augment which, along with other factors, allegedly led to a significant price drop in BMTI stock. The court noted that at the time of the filing of the amended complaint, Augment had not received FDA approval. Last January, BMTI issued a press release indicating that it anticipated submitting amendments to its FDA filings that could bring product approval in 15 to 24 months.
The court dismissed the case and denied leave to amend, rejecting various arguments by the plaintiffs. The allegations in the complaint, the court found, “do not raise an inference of fraudulent intent or recklessness that is at least as compelling as the opposing inference one could draw from the facts alleged.” Thus the complaint does not satisfy requirements of the Private Securities Litigation Reform Act, the court said.
The “notion that BMTI would recklessly forego necessary tests and studies or hide adverse events makes little sense, even disregarding Defendants’ assertion that they poured their own money into the company.”
The plaintiffs’ own allegation is that Augment is BMTI’s flagship product and necessary to the company’s success, “begging the question why it would sabotage all of the company’s efforts to that point.”
Meanwhile, as to the “deficiency letter” the FDA sent to BMTI, the court said that whether a company “'has an affirmative duty to disclose the scope and conduct of a deficiency letter appears to be open to question. . . . What is clear, however, is that a deficiency letter is not a final FDA decision, but a request for more information, and, in fact, 'very few’ [applications] are approved without the issuance of a deficiency letter.”
Also clear, the court wrote, is that it “simply cannot be” that every critical comment by a regulatory agency “has to be seen as material for securities law reporting purposes,” because to think otherwise would be to insist on a flood of data that would overwhelm the market and, ironically, be uninformative. The court also rejected the plaintiffs’ claims of “'bait and switch’” concerning a switch in the study population.
For a copy of the opinion, please see /uploadedFiles/Content/News/Legal_and_Business/Bloomberg_Law/Legal_Reports/sarafin(1).pdf
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