(CN) - After a 66 percent drop in its shares, Hemispherx Biopharma must face claims that it repeatedly lied about its non-FDA-approved fatigue drug Ampligen, a federal judge ruled.
Shareholders say Hemispherx's president and board chairman, Dr. William Carter, developed Ampligen in the 1970s, and has pursued approval of the drug from the Food and Drug Administration since at least 1988.
In a consolidated class action
, shareholders alleged that the firm and its senior officials repeatedly concealed studies indicating that Ampligen was unlikely to gain FDA approval.
Shareholders say a placebo-controlled trial from 1990 to 1991 allegedly deviated from the prespecified protocol by failing to determine a statistical analysis plan until after the study was unblinded.
The study also switched from a 48-week to a 24-week trial midstream; included 15 fewer participants than specified; and used some participants' best and others' worst performances, an FDA briefing from Dec. 18, 2012, allegedly states.
At that briefing the FDA also allegedly said that another clinical trial in 1997 failed to follow protocol, and results analysis showed that Ampligen was ineffective.
The next day, Hemispherx's share price dropped 43 percent in value to a close of $0.368 per share, and in the next two days, another 23 percent, to $0.280 per share, shareholders claim.
Though Hemispherx was aware of the trials' flaws, it never notified the public, but submitted a new drug application in October 2007, according to the complaint.
Shareholders say the FDA refused to consider the app, however, citing errors and discrepancies in Hemispherx's report, and later recommended the firm conduct another study.
Hemispherx failed to do so, and on March 14, 2012, it allegedly published in an online trade journal an article written by Carter and other executives stating that the study's design was "reviewed by the FDA," and that Ampligen yielded significant benefits for several subgroups.
But shareholders say those statements were not true, and that the journal publishes at least two-thirds of submissions and often accepts a publication fee of more than $1,000 from authors.
One week before announcing it was resubmitting its rejected app, Hemispherx agreed on July 23, 2012, to sell 29.5 million shares of stock by Dec. 18, generating $23 million, 5 percent of which was given to each of the firm's directors and general counsel, according to the complaint.
The FDA ultimately again refused to approve Ampligen in February 2013.
U.S. District Judge William Yohn Jr. refused to dismiss the complaint on Jan. 24, finding that the shareholders indeed put forth "material" allegations of securities fraud.
"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," Yohn wrote.
The judge later added: "Here, when defendants' various allegedly misleading statements were contradicted by the FDA at the end of the class period, the price of Hemispherx stock plummeted. This drop subsequent to disclosure strongly suggests that the withheld and/or misrepresented information was material information to investors."
Hemispherx had "ample motive and opportunity to commit the fraud," the ruling states.
"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," Yohn wrote. "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."