Strezsak v. Ardelyx Inc.

Background

Ardelyx developed tenapanor, initially as a treatment for irritable bowel syndrome and later for hyperphosphatemia, a condition involving high phosphate levels in the blood. The company conducted Phase 3 clinical trials using serum phosphate levels as a substitute measure of effectiveness. The Food and Drug Administration told Ardelyx that the size of tenapanor’s treatment effect needed to be clinically relevant and that any application would need to address that issue.

On July 19, 2021, Ardelyx disclosed that the agency had identified deficiencies that prevented its application from moving forward. The opinion states that the company’s share price fell 74% the next trading day. The agency later stated that tenapanor was effective at reducing serum phosphorus in certain patients but that the treatment effect was small and of unclear clinical importance.

The lead plaintiff brought a proposed securities class action on behalf of people who purchased or otherwise acquired Ardelyx securities during the alleged class period, March 6, 2020, through July 19, 2021. The complaint asserted claims under Section 10(b) of the Securities Exchange Act and Securities and Exchange Commission Rule 10b-5, which prohibit materially misleading statements or omissions connected to securities trading. It also asserted a Section 20(a) control-person claim. The defendants named in the motion were Ardelyx Inc., Mike Raab, Justin Renz, and David Rosenbaum.

Requests Concerning Documents

The defendants asked the court to treat various exhibits as part of the complaint under the incorporation-by-reference doctrine and to take judicial notice of them. Incorporation by reference allows a court deciding a dismissal motion to consider certain documents extensively referenced in the complaint. Judicial notice allows a court to consider facts from sources whose accuracy cannot reasonably be disputed, although it does not establish the truth of disputed facts in those documents.

The court granted incorporation by reference for exhibits A–D, F–I, and N–S, and declined to incorporate exhibits J and L because the complaint did not specifically refer to those press releases or allege that they materially supported the claims. The court also took judicial notice of the described documents for the limited purpose of considering what Ardelyx disclosed to the market, without assuming that the factual assertions in those documents were true.

Rule 10(b) and Rule 10b-5 Claims

To state a securities-fraud claim under Section 10(b) and Rule 10b-5, a plaintiff must adequately plead a material misrepresentation or omission, scienter, a connection to the purchase or sale of a security, reliance, economic loss, and loss causation. Scienter means the required wrongful mental state, including an intent to deceive or deliberate recklessness. The Private Securities Litigation Reform Act and Federal Rule of Civil Procedure 9(b) require particularized allegations of falsity and scienter.

Falsity

The plaintiff challenged statements that Ardelyx’s interactions with the FDA were proceeding very well and were ordinary, descriptions of the clinical-trial data as comprehensive, extensive, significant, robust, and clinically relevant, and statements expressing confidence in tenapanor’s prospects and eventual FDA approval.

The court held that the complaint did not allege enough facts to support the plaintiff’s proposed inferences. The FDA had required Ardelyx to address the clinical relevance of the treatment effect, but the court found that the FDA had not expressed doubts about approval, identified special hurdles, or contradicted the defendants’ statements about the sufficiency of the clinical trials. The court also found that Ardelyx had publicly disclosed risks, including that the FDA could interpret the clinical data differently and that approval of a first-in-class drug might be more difficult.

The court therefore concluded that the plaintiff did not plausibly allege that the defendants’ optimistic opinions were objectively false or not honestly held, or that the defendants omitted information that made those opinions misleading. The court additionally noted that nearly all of the challenged statements were nonactionable corporate optimism, although it stated that the statement concerning clinically relevant outcomes did not appear to be merely subjective corporate puffery.

Scienter

Because the plaintiff failed to plead a false or misleading statement, the court stated that it did not need to reach scienter. It nevertheless discussed the allegations to guide any amended complaint.

The plaintiff argued that the defendants’ knowledge of FDA concerns supported scienter. The court rejected that theory because the complaint did not adequately allege that the challenged statements were false or misleading or that the FDA communications conveyed serious and express concerns known to the defendants.

The plaintiff also relied on Mike Raab’s stock sales. The complaint alleged that Raab sold 29,698 shares in 2019 and 198,516 shares, worth approximately $1.25 million, during the fifteen-month class period. The court found that the complaint described the sales but did not sufficiently connect specific sales to particular misrepresentations or omissions. It also lacked allegations about what percentage of Raab’s holdings he sold and provided no corroborating insider trading by other defendants.

The plaintiff further relied on the company’s core operations. That theory presumes that corporate officers know important information about their company’s central activities. The court held that the complaint merely alleged that tenapanor was important to Ardelyx and did not plead particular facts showing that the defendants had access to the specific information at issue or actually knew it.

Considering the allegations together, the court found that the stronger inference was that the defendants believed the trials were successful, viewed their FDA communications as ordinary, and expected approval. The complaint therefore did not plead the strong inference of scienter required by the securities-fraud statute.

Loss Causation

Loss causation is the requirement that the alleged fraud be a substantial factor in causing the investor’s economic loss. The court held that because the complaint did not identify a false or misleading statement, the alleged July 19 disclosure could not have corrected an actionable misstatement. The plaintiff therefore did not adequately plead that the alleged statements caused the stock-price decline.

Section 20(a) Claim

The court held that the Section 20(a) control-person claim failed because the plaintiff had not adequately pleaded the underlying Section 10(b) claim.

Disposition

The court GRANTED the motion to dismiss WITH LEAVE TO AMEND. The plaintiff could file an amended complaint within 21 days. The court also required any amended complaint to include a statement-by-statement chart identifying each allegedly false or misleading statement or action, why it was false or misleading when made, the facts supporting allegations based on information and belief, which defendant made each statement or omission, and the facts supporting a strong inference of the required mental state. The court set a telephonic case-management conference for April 23, 2024, and directed the parties to submit a joint case-management statement by April 16, 2024.