The US District Court for the Middle District of Tennessee recently granted BioMimetic Therapeutics Inc.’s motion to dismiss the class action against it, and denied plaintiffs leave to amend their complaint. Shareholders claimed that BioMimetic violated the Securities and Exchange Act of 1934 because it knowingly made material representations about the development process and approval prospects of its flagship product, Augment, a synthetic bone-growth factor for the surgical treatment of foot and ankle bone defects.

Specifically, plaintiffs alleged that the Food and Drug Administration (FDA) sent BioMimetic a deficiency letter detailing the regulatory agency’s concerns about Augment’s clinical trials, and in particular the company’s decision to change the study population so the resulting data would cast the product in a more favorable light. BioMimetic, however, allegedly failed to disclose those issues, and instead painted an unjustifiably rosy picture of Augment’s progress towards approval. When the FDA later convened a panel of experts to review the product, the contents of the deficiency letter came to light and caused a 35% drop in BioMimetic’s share price. After the panel narrowly voted to approve Augment, shares sunk another 12%.

Notwithstanding plaintiffs’ identification of confidential witnesses, the court found the overall allegations did not satisfy the pleading requirements of the Private Securities Litigation Reform Act. First, the court determined that the company made no false statements because it disclosed and sought to explain the change in Augment’s study population. Second, BioMimetic’s single stock offering—months before it received the deficiency letter—did not give rise to an inference of scienter. Moreover, the court noted that the company never suggested FDA approval was certain, and instead consistently framed its statements with a forward-looking-statement disclaimer.

Most significantly, the court sought to define when a life sciences company must disclose the contents of a deficiency letter. Though it remains an open question, the decision strongly suggests that no such duty exists. Noting that “a deficiency letter is not a final FDA decision, but a request for more information,” the court explained that not “every critical comment by a regulatory agency has to be seen as material for securities law reporting purposes.” If companies were obligated to report everything, the “flood of data” would ultimately be unhelpful, as uninformative noise would drown out key facts.

Sarafin v. BioMimetic Therapeutics Inc. et al., No. 3:11-06533 (M.D. Tenn. Jan. 10, 2013).