SAN FRANCISCO - A U.S. appeals court has ruled that an investor can move forward with a claim against anti-obesity drug Contrave alleging the company released study information early, driving up stock prices.
In an opinion written on Aug. 13, the U.S. Court of Appeals 9th Circuit Southern District of California found that Karim Khoja, an investor with the company Orexigen, the biotechnology firm that developed the drug Contrave, could in fact move forward with a claim alleging violations of the Securities Exchange Act (SEC).
Orexigen Therapeutics is a public pharmaceutical company focused on developing obesity treatments. The company is based in La Jolla, California.
Khoja alleges that the company knowingly released case study information about the obesity drug Contrave prior to the end of the study resulting in an increase in stock prices. The company is now in the midst of bankruptcy proceedings.
Karim Khoja is an Orexigen investor who represents a class of similar Orexigen investors. On Aug. 20, 2015, after numerous related actions were consolidated, Khoja, acting on behalf of investors, filed the operative complaint alleging three securities violations.
Per Federal Drug Administration (FDA) rules, the company conducted a trial of Contrave, called the "Light Study," in 2012. According to the lawsuit, "Orexigen and the executives misrepresented and/or omitted material facts “to conceal the truth and/or adverse material information” about the Light Study." The suit also contends that Orexigen, ran a, "fraud scheme under the Securities Exchange Act Rules by purposefully omitting information regarding the study. In addition, the lawsuit alleges that as a result, “controlling” individuals, those executives are liable for the violations."
In an opinion written by Judge A. Wallace Tashima reversed part of a decision from a lower court that the company violated part of the SEC rules. It also amended the fraud claim. Adding that, "the district court may reconsider those claims in light of our reversal of the district court’s dismissal of claims in Count I and in light of any amendments to the Complaint."
According to court documents, "as required by the FDA, an Executive Steering Committee separate from Orexigen was to oversaw the Light Study. A Data Monitoring Committee was also created to monitor the trial and report its results. FDA guidelines require that trial results remain confidential. Orexigen agreed that when it received the 25 percent interim results, only “those individuals at [Orexigen] who needed to facilitate its regulatory filings with the FDA” would have access to them." However, with, "unexpectedly positive results" moer than 100 Orexigen were informed the results.
Court documents say that in July 2014, Preston Klassen, head of global development for Orexigen submitted a provisional patent application for Contrave to the United States Patent and Trademark Office, "containing only 25 percent of the interim study results." Weeks later, "as the Light Study reached 50 percent completion (“50 percent interim results”), the Light Study no longer indicated a heart benefit from Contrave."
As a result, the study was halted. However, due to the leak, stocks for the company rose significantly in the weeks prior to information of negative results being released.