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District Of New Jersey Dismisses Putative Securities Class Action Against Pharmaceutical Company
08/12/2025On July 30, 2025, Judge Brian R. Martinotti of the United States District Court of the District of New Jersey granted a motion to dismiss a putative securities fraud class action against a drug manufacturing company (the “Company”) and its CEO and CFO (the “Individual Defendants” and, together, the “Defendants”) for alleged violations of Section 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder. Feldman v. Scynexis, Inc., No. 2:23-cv-22082 (BRM) (CLW) (D.N.J. July 30, 2025). Plaintiff alleged that Defendants made material misstatements and omissions regarding the Company’s drug manufacturing process and compliance with applicable regulatory standards, but the Court found no actionable misstatement or omission and dismissed the complaint without prejudice.
Plaintiff alleged the Company’s only drug candidate, approved by the FDA in 2021 to treat fungal infection, was required under the FDA’s “Good Manufacturing Process” regulations (“cGMP”) to be segregated from non-antibacterial beta-lactam substances to avoid potential allergic reaction in users. In 2023, the Company shifted focus to other drugs and licensed its product to a large pharmaceutical company (the “Commercial Partner”). Six months afterwards, the Commercial Partner allegedly discovered non-antibacterial beta-lactam contamination. The Company disclosed the issue, recalled affected batches, and halted production, allegedly leading to a stock price drop.
Plaintiff alleged that between 2021 and the disclosure of the contamination in 2023, Defendants allegedly made false and misleading statements about its drug manufacturing programs’ integrity, including that its third-party manufacturers and vendors had complied with cGMP and that the drug was manufactured in a way that would prevent contamination. Defendants moved to dismiss on the basis of failure to plead falsity and scienter.
On Defendants’ motion to dismiss, the Court held that plaintiff failed to allege with requisite particularity under Rule 9(b) and the PSLRA that Defendants’ statements regarding their belief that the Company and its contractors followed the cGMP and implemented adequate quality assurance systems and controls for such compliance were false or misleading at the times they were made. The Court found it significant that the complaint did not include any facts from which to infer that there was contradictory information that would undercut the sincerity of Defendants’ alleged beliefs, such as an allegation that the facilities in which the drug was being manufactured had previously been used to manufacture non-antibacterial beta-lactam substances.
Plaintiff argued that Defendants should have known of the contamination because its Commercial Partner “quickly uncovered” the contamination after taking over the drug manufacturing process. But the Court found this assertion to be undermined by plaintiff’s own allegations. While plaintiff provided alleged testimony from a third-party analyst, who stated that the Commercial Partner would have reasonably undertaken an inspection of the manufacturing facilities after taking over production, plaintiff alleged that the Commercial Partner did not identify any such contamination until six months afterwards. The Court, therefore, dismissed plaintiff’s Section 10(b) and Rule 10b-5 claims as impermissibly based on “fraud by hindsight” allegations.
Because plaintiff failed to plead falsity, the Court did not address scienter and dismissed the Section 20(a) claims for lacking a predicate violation. The Court’s dismissal was without prejudice.
