Investor Case Alleging Securities Violations Against Recro Pharma Survives Dismissal

Judge Michael Baylson of the Eastern District of Pennsylvania on Monday denied a motion to dismiss the second amended complaint in a suit alleging that defendant Recro Pharma and company officials violated the Securities Exchange Act of 1934 (Exchange Act) by misleading investors about the efficacy and standards of a drug.

Plaintiff John Alberici originally alleged that Recro, along with executives Geraldine A. Henwood, Stewart McCallum, and John Harlow, failed to be transparent about the effectiveness and quality standards of intravenous meloxicam — considering the U.S. Food and Drug Administration (FDA) had not approved the drug at the time, unbeknownst to investors — thus misleading investors and violating the Exchange Act. The court dismissed the complaint, deciding that the plaintiff had not sufficiently alleged a “culpable mental state” for the alleged conduct, although the court did find that the plaintiff had sufficiently pleaded the materiality of the purported misrepresentations made by the defendants.

Filing the second amended complaint, the plaintiff argued that this complaint remedied the deficiencies of the first complaint; the defendants, in response, filed a motion to dismiss, claiming that because the FDA eventually approved IV meloxicam in February 2020, the court should reconsider certain findings.

The court previously found that the plaintiff failed to specifically plead enough regarding “scienter,” or the defendants’ knowledge that the drug was not as efficacious or reaching quality standards and thus, consciously misled investors. This time around, the court found that the plaintiff succeeded in pleading scienter in its indication of the “who, what, when, where, and how” of the alleged conduct through outlining an anonymous witness, CW1, a purported member of Recro leadership who gained feedback from key opinion leaders (KOLs) on Recro products.

“CW1 informed them that (1) a significant majority of KOLs thought that IV meloxicam was not suitable for soft-tissue use and (2) approximately 30% of KOLs were concerned about insufficient manufacturing oversight in Ireland,” the court explained. “Plaintiff’s allegations show the details of when and how he directly informed — or witnessed as others informed — each Defendant of these concerns throughout the class period. … Plaintiff has satisfied its burden in pleading that Defendants were aware of the KOL concerns at issue here but consciously or recklessly obscured those concerns from investors.”

Examining the defendants’ argument that the court ought to reconsider its findings upon the FDA approval of IV meloxicam, the court disagreed, saying that “approval of the drug almost two years after the end of the class period does not indicate that the statements were not false or misleading at the time they were made.” Thus, the court held its finding that the defendants’ alleged misleading statements did cause investors to buy Recro stock at artificially inflated prices because the after-the-fact FDA approval did not change the fact that the stock price fell in May 2018 after Recro made a corrective disclosure about its lack of approval.

The plaintiff is represented by Pomerantz and Kaskela Law. The defendants are represented by Troutman Pepper Hamilton Sanders.