Thant v. Rain Oncology Inc.

Background

Rain Oncology Inc. licensed milademetan, a drug candidate, after another pharmaceutical company completed a Phase 1 clinical trial. Instead of conducting a Phase 2 trial, Rain moved directly to Phase 3. The Phase 3 trial failed, Rain’s stock price fell from $9.93 per share to $1.22 per share, Rain suspended further development of milademetan, and it implemented layoffs before agreeing to an acquisition by PathosAI, Inc.

Investors sued Rain, two officers—Avanish Vellanki and Richard Bryce—and six directors. They brought claims under Sections 11 and 15 of the Securities Act of 1933 concerning statements connected to Rain’s initial public offering. They also brought claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 concerning statements made after Rain became public.

The challenged statements fell into six categories: statements that Phase 1 had validated a dosing schedule; statements about anticipating or beginning the Phase 3 trial based on Phase 1 data; optimistic statements about Rain’s progress; statements describing Rain as a late-stage company; statements that milademetan had the potential to be best-in-class; and development-pipeline diagrams. The defendants moved to dismiss for failure to state a claim.

Pleading standards

The court applied the ordinary rule requiring enough factual allegations to support a reasonable inference that a defendant is liable. Because the claims sounded in fraud, the court also applied the rule requiring fraud to be pleaded with particularity, including the who, what, when, where, and how. For the Exchange Act fraud claims, the investors also had to plead particular facts supporting a strong inference that the officers acted with the required wrongful state of mind, called scienter.

Falsity

The court rejected the investors’ challenge to the validation statements. It treated statements that the Phase 1 trial had validated a rationally designed dosing schedule as opinions about how Rain and its scientists interpreted clinical data. The investors did not adequately allege that the statements were objectively false, that Rain’s decisionmakers did not believe them, or that Rain had omitted information that created a misleading impression about the basis for the opinions.

The court found the commencement statements adequately pleaded as misleading. Although the Phase 3 trial did begin in the second half of 2021 as stated, the investors plausibly alleged that the statements suggested that proceeding directly to Phase 3 was materially justified overall. The investors alleged that bypassing Phase 2 ordinarily required a well-understood mechanism of action and a well-characterized safety profile, and that milademetan’s safety profile was not well understood because its Phase 1 trial was the first time it had been given to humans. Rain’s disclosures about the general risk that a Phase 3 trial might fail did not, at the pleading stage, eliminate the alleged additional risk from skipping Phase 2.

The court rejected the challenges to the optimistic statements as non-actionable puffery, meaning vague corporate optimism that ordinarily does not create a legally actionable misleading impression. The court also rejected the challenges to the late-stage statements because they were alleged to be literally true and Rain had repeatedly disclosed its limited clinical-trial experience. The best-in-class statements were also puffery, and the pipeline diagrams were not adequately alleged to be misleading because Rain disclosed that Daiichi conducted the Phase 1 trial and that Rain skipped directly from Phase 1 to Phase 3.

Scienter and loss causation

Because the investors adequately pleaded falsity only for the commencement statements, the court considered scienter only for those statements. It found the allegations insufficient. The officers’ experience in the biopharmaceutical industry and the importance of milademetan to Rain did not show that they actually interpreted the Phase 1 data as inadequate for proceeding to Phase 3 or deliberately disregarded that risk. The confidential witness’s allegations largely reflected her own views and did not show that relevant information reached the officers. The alleged desire to save money also was not enough to establish scienter.

The court nevertheless found that the investors adequately pleaded loss causation, which asks whether the alleged misstatement caused the investors’ loss. The investors alleged that the risk concealed by the statements materialized when the Phase 3 trial failed and Rain’s stock price declined.

Control-person claims

The court allowed the Section 15 control-person claim tied to the commencement statements to proceed because the investors adequately pleaded a related Section 11 claim. Section 15 provides a derivative claim against alleged control persons based on a Securities Act violation. The court dismissed the remaining Section 15 claims because the investors did not adequately plead falsity for the other statements. It dismissed all Section 20(a) control-person claims because the investors did not adequately plead scienter for any statement.

Disposition

The court granted in part and denied in part the defendants’ motion to dismiss. The Section 11 claim based on the commencement statements and the corresponding Section 15 claim may proceed. All other claims were dismissed. The court permitted the investors to file an amended complaint within 30 days and directed the parties to meet and confer and submit a stipulated schedule within 14 days.