In the latest COVID-related securities class action lawsuit, a shareholder plaintiff has filed a securities suit against a clinical-stage pharmaceutical company whose application for emergency use authorization (EUA) for a COVID-19-related treatment therapy was rejected by the FDA. Among other things, this latest filing shows that the wave of coronavirus-related securities lawsuit filings, like the coronavirus itself, show few signs of abatement. A copy of complaint filed on January 18, 2022 against NRx Pharmaceuticals can be found here.

 

Background

NRx Pharmaceuticals is clinical-stage pharmaceutical company that develops therapies for treatment of central nervous system and pulmonary disorders. Among its product under development is an investigational pre-commercial drug called ZYESAMI, intended to treat COVID-19-related respiratory failure.

 

On June 1, 2021, the company announced that it had filed an application with the FDA requesting emergency use authorization (EUA) for ZYESAMI to treat critically ill COVID-19 patients suffering respiratory failure.

 

On November 4, 2021, the company issued a press release disclosing, among other things, that the FDA had “declined to issue” an EUA for ZYESAMI. The press release reported that the FDA had stated that “it was unable to issue the EUA at this time due to insufficient data regarding the known and potential benefits of the medicine and the known and potential risks of ZYESAMI in patients suffering from Critical COVID-19 with respiratory failure.” According to the subsequently filed securities class action lawsuit complaint, the company’s share price declined over 25% on this news.

 

The Lawsuit

On January 18, 2022, a plaintiff shareholder filed a securities class action lawsuit in the District of Delaware against NRx Pharmaceuticals, its CEO, and its CFO. The complaint purports to be filed on behalf of investors who purchased the company’s securities between June 1, 2021 (the date the company announced the EUA filing) and November 4, 2021 (the date the company announced the FDA’s declination of the EUA application).

 

The complaint alleges that during the class period, the defendants made false and/or misleading statements and/or failed to disclose that: “(i) the ZYESAMI EUA Application contained insufficient data regarding the potential benefits and risks of ZYESAMI; (ii) accordingly, the FDA was unlikely to approve the ZYESAMI EUA Application its present form; and (iii) as a result, the Company’s public statements were materially false and misleading at all relevant times.”

 

The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The complaint seeks to recover damages on behalf of the putative plaintiff class.

 

Discussion

Even though we are only in the third full week of January, this new lawsuit is already the third COVID-19 securities lawsuit to be filed this year. By my count, this lawsuit is also to the 45^th coronavirus-related securities lawsuit overall to be filed since the initial U.S. COVID-19 outbreak in March 2020. The filing of this lawsuit confirms an observation I have had throughout the period since the initial outbreak, which is that the filing of these lawsuits has continued steadily and arguably evenly during that period.

 

As I have previously noted with respect to the coronavirus-related securities lawsuit filings, the companies sued in these suits have generally fallen into one of three categories: companies that experienced coronavirus outbreaks in their facilities (cruise ships lines, private prison systems, meat packing plants); companies that hoped to profit from the coronavirus outbreak (vaccine development companies; diagnostic testing companies; and personal protective equipment manufacturers); and companies whose operations or financial performance were disrupted by the outbreak (hospital systems; real estate developers). In addition, in late 2021, a fourth category emerged: companies that prospered at the outset of the pandemic but whose fortunes flagged as the pandemic unfolded and circumstances changed (e.g., Peloton Interactive, as discussed here).

 

This lawsuit clearly falls in the second category, as the company hoped to capture the opportunity to commercialize its proposed COVID-19 respiratory therapy. It looks to me as if this lawsuit is already the second of these “second category” lawsuit to be filed in 2022. As I noted in a prior post (here), earlier this month, a plaintiff investor filed a securities class action lawsuit against Talis Biomedical Corporation, a company that, like NRx, had sought an emergency use authorization for a developmental stage COVID-19-related product. (In the case of Talis, the product was not a COVID-19 therapy but was instead a COVID-19-related testing product.) These cases underscore the fact as companies seek to develop and commercialize products designed to address COVID-19, the face numerous challenges and uncertainties that can affect their share price, and that, if the development process comes up short, can lead to securities litigation.

 

This latest lawsuit has only just been filed and it remains to be seen how it will fare. However, in seeking to sustain his claims, the plaintiff will face a significant challenge meeting the “straight face” test. That is, in order for this case to be able to succeed on the theory set forth in the complaint, the plaintiff is going to have to convince the court that the executives of this company deliberately submitted to the FDA an EUA application that they knew was deficient and that they knew did not contain sufficient information to obtain the EUA. The complaint contains not a single allegation that would suggest why on earth anybody, much less these defendants, would do such an obviously counter-productive thing as the complaint alleges. The more obvious inference from defendants’ actions is that they submitted their application hopeful in their belief that it would succeed and in the belief that their application was sufficient to succeed, but their hopes and beliefs were disappointed by the FDA’s rejection. At a minimum, at the motion to dismiss stage, the court will have to search long and hard to find anything in this complaint that would even arguably support an allegation of scienter.

 

I will say this, when observers from outside the U.S. make comments about the abusive and counterproductive U.S. class action system, they have lawsuits exactly like this one in mind.

 

In any event, given the plaintiffs’ lawyers’ willingness to file lawsuit no more meritorious than this one, it seems likely that we will continue to see coronavirus-related securities class action lawsuits filed in the weeks and months ahead.