Kim v. Allakos Inc.

Background

Allakos is described in the opinion as a clinical-stage biopharmaceutical company focused on AK002, a drug being developed to treat eosinophil- and mast-cell-related diseases, including eosinophilic gastritis and eosinophilic gastroenteritis. Allakos conducted a Phase 2 clinical trial, called the ENIGMA Trial, during 2018 and the first half of 2019.

The plaintiffs sought to represent purchasers of Allakos stock during a stated class period based on statements about the Phase 2 trial. After the court dismissed an earlier complaint but allowed amendment, the plaintiffs filed a Second Amended Complaint. It expanded the proposed class period and challenged two statements Tomasi made at a September 10, 2021 healthcare conference: the “Enrollment Statement,” concerning the Phase 3 trial’s enrollment and dosing, and the “Population Statement,” concerning the similarity between the Phase 2 and Phase 3 patient populations.

In February 2022, Allakos announced that the Phase 3 population differed from the Phase 2 population in diagnostic history and baseline eosinophil and immunoglobulin E levels.

Court’s Analysis

The court granted the motion to dismiss. The plaintiffs did not make substantive changes to their claims concerning the Phase 2 trial and said they included those allegations to preserve them for appeal. Based on its earlier ruling, the court again found that the plaintiffs failed to state a claim concerning that trial.

The plaintiffs also acknowledged that they could not maintain claims based on newly challenged statements by individual defendants other than Tomasi because those statements occurred after the named plaintiffs purchased their shares. The court therefore dismissed all claims based on the Phase 2 trial with prejudice.

The plaintiffs asked for an opportunity to identify a new lead plaintiff and amend the complaint again. The court considered factors governing leave to amend, including delay, improper motive, repeated failure to amend, prejudice, and whether amendment would be futile. It found that the absence of identified replacement lead plaintiffs, the fact that the proposed new statements post-dated the named plaintiffs’ purchases, and the prospect of a fourth complaint weighed against reopening the selection process.

On falsity, the court concluded that the Enrollment Statement, viewed in context, emphasized the structure and results of the Phase 2 trial and the change in Phase 3 trial size; it therefore could not reasonably be read as referring to the diagnostic-history and baseline-level differences later disclosed. The court reached a different conclusion about the Population Statement, finding the plaintiffs’ interpretation plausible and holding that they had sufficiently alleged that statement was misleading.

On scienter—meaning the required intent or deliberate recklessness—the court found the allegations insufficient. It considered the alleged motive, Tomasi’s position and access to information, and his stock sales. The court found that the alleged motive did not support the required inference, that the “core operations” allegations were insufficient by themselves, and that the stock sales did not create a suspicious inference because they occurred under a trading plan, took place before the challenged statements, and left Tomasi holding more stock at the end of the class period than at the beginning.

Disposition

The court granted the defendants’ motion to dismiss the Second Amended Complaint. It denied the plaintiffs’ request for leave to reopen the lead-plaintiff selection process, dismissed the case with prejudice, directed that a separate judgment issue, and ordered the clerk to close the file. Judge Jeffrey S. White signed the order.