(Aaron Couture)

A class action brought against Hemispherx Biopharma by its shareholders has survived a motion to dismiss in federal court in Philadelphia.

Shareholders claimed securities fraud against the small Philadelphia-based pharmaceutical company after stock prices plummeted following the failure of the company’s flagship drug to get approval from the U.S. Food and Drug Administration.

“The defendants are sophisticated scientists running a regulated, publicly traded corporation; they are alleged to have misrepresented their regulator’s feedback, misrepresented the legal context in which they operated, heralded scientific results which they knew to be the product of empirically faulty procedures and manipulated statistical analysis, and claimed a level of external review that simply did not exist,” said U.S. District Judge William H. Yohn Jr. of the Eastern District of Pennsylvania in his opinion in Frater v. Hemispherx Biopharma.

“If the defendants have good-faith explanations for these misstatements such as to make the inference of scienter less than strong, they do not emerge from the complaint,” Yohn said.

Yohn said the plaintiffs’ complaint pleaded enough facts to raise the inference that executives in the company spoke with scienter when they assured shareholders about the likelihood of success for the company’s biggest drug in an appeal to the FDA.

“This all gives rise to an inference of scienter that is both cogent and compelling,” Yohn wrote.

The drug, called Ampligen, was developed by Dr. William Carter, president and chairman of the board for Hemispherx, while he was a university researcher in the 1970s, according to the opinion. It is meant to treat chronic fatigue syndrome.

The first trial that the company held for the drug was in 1990, which had various flaws noted by the FDA, according to the opinion. That trial was followed, almost a decade later, in 1997, by a second trial that was also flawed. The first was called AMP 502 and the second was called AMP 516.

Hemispherx started the process for getting approval for Ampligen in 2007 by submitting to the FDA a new drug application, called an NDA for short.

In 2009, the FDA told the company that it wouldn’t be approving the drug.

Although the FDA had recommended that the company conduct another clinical trial, Hemispherx instead revisited its old studies, according to the opinion.

By 2012, Hemispherx didn’t have the resources to conduct a new study, and, “its options apparently limited, Hemispherx continued to attempt to demonstrate the safety and efficacy of Ampligen through reanalysis of the AMP 516 data,” Yohn said.

Yohn said the complaint states the company then published an article in what it told shareholders was a peer-reviewed journal, although the online journal, called PLOS ONE, publishes two-thirds of submissions and “typically accepts a publication fee of over $1,000.”

“On March 19, 2012, Hemispherx issued a press release trumpeting the article’s findings. In it, Hemispherx emphasized that PLOS ONE was ‘peer-reviewed,’” Yohn said.

In August 2012, the company announced that it had resubmitted the NDA for Ampligen.

“At no point in the class period did Hemispherx notify the public of the procedural and empirical problems with its AMP 516 reanalysis,” Yohn said, “nor did it publicly disclose the FDA’s statement that reanalysis of previously submitted data would not ordinarily support approval.”

A week before announcing the resubmission of the NDA, “Hemispherx signed an equity distribution agreement with an investment company,” Yohn said. “Hemispherx sold 29.5 million shares of stock between July 23 and the end of the class period on December 18, generating $23 million in proceeds to Hemispherx based on then-existing prices.”

Carter also “persuaded” the board that stock sales would trigger a bonus of 5 percent of the $23 million proceeds for himself and the company’s general counsel, according to the opinion.

In December 2012, the FDA ultimately rejected the drug’s application and the stock price for Hemispherx dropped 43 percent, to 37 cents a share, and then another 23 percent, to 28 cents per share, according to the opinion.

Yohn agreed with the shareholders that the statements made by executives at the company that downplayed the FDA’s concerns about the drug and their assurances that the company’s studies showed that the drug was effective were misleading.

“Collectively, it is reasonable to think these statements would make an attentive investor far more sanguine about the prospects of Ampligen approval than was merited by the reality of the situation,” Yohn said.

“Given that Ampligen was Hemispherx’s flagship drug, such that FDA approval of Ampligen was an essential part of Hemispherx’s value proposition as a company, I have little doubt that an attentive investor would find those statements and misstatements material,” he said.

Yohn said that the plaintiffs had made out a case beyond finding that the company executives had overstated the expectations of success for the drug. Yohn also found the plaintiffs’ allegations raised the inference that the defendants had likely made those statements knowingly, that they had spoken with scienter.

Saranac Hale Spencer can be contacted at 215-557-2449 or sspencer@alm.com. Follow her on Twitter @SSpencerTLI.

(Copies of the 25-page opinion in Frater v. Hemispherx Biopharma, PICS No. 14-0110, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.)