A Connecticut federal judge has dismissed a proposed securities fraud class action against BioXcel Therapeutics Inc. Shareholders had accused the AI-driven drugmaker of making misleading statements about a dementia drug study's compliance issues, but the court found that the plaintiffs failed to show the company intended to deceive investors.

Misleading Statements but No Intent to Defraud

U.S. District Judge Sarala V. Nagala ruled Thursday that investors sufficiently alleged BioXcel and its executives made two materially misleading statements. These statements involved the company's failure to disclose a U.S. Food and Drug Administration notice detailing flaws in the trial. However, Judge Nagala determined that the investors did not adequately plead that BioXcel acted with scienter, or intent to deceive, in making those statements.

BioXcel Investor Fraud Suit : Stock Sales Timing Not Sufficient Evidence

The investors pointed to suspiciously timed stock sales as evidence of a motive to commit fraud. However, Judge Nagala noted that the trading plans in question were entered into months before the class period began, diminishing their relevance to pleading scienter. Additionally, she found that stock sales by directors close to the FDA's inspection and BioXcel's disclosure were also made under pre-existing trading plans, undermining any inference of fraudulent intent.

Opportunity to Amend Complaint

Judge Nagala gave investors until August 1 to file an amended complaint addressing the deficiencies identified in her ruling. The investors had alleged BioXcel misled them in a risk disclosure statement by omitting the FDA notice and in a May 2023 presentation where the company's chief medical officer, Robert Risinger, stated the trial was complete despite the ongoing FDA inspection. Judge Nagala agreed these claims were adequately pled.

BioXcel Investor Fraud Suit : FDA Inspection and Stock Drop

According to the amended complaint filed in December, BioXcel sought FDA approval for a drug treating agitation in dementia and Alzheimer's patients. The investors alleged BioXcel misled them about the FDA's December 2022 inspection, which resulted in a Form 483 outlining several trial flaws. These included improper consent forms and deviations from the approved protocol. The investors claimed BioXcel withheld this information until June 2023, after which the company's stock plummeted by 63.8%.

BioXcel's Defense

In February, BioXcel moved to dismiss the suit, arguing that investors lacked factual support for their claims. The company maintained that the trial was progressing toward FDA approval and that its data remained positive despite potential integrity concerns. BioXcel also argued it had no duty to disclose the Form 483 earlier and that the investors failed to show how the notice made prior statements false or misleading.

BioXcel Investor Fraud Suit : Court's Final Ruling

Judge Nagala rejected the investors' attempt to plead intent through circumstantial evidence of conscious misbehavior or recklessness. She stated that BioXcel's knowledge of the FDA notice did not demonstrate recklessness, and the importance of the trial to BioXcel's business did not strongly support an inference of scienter without direct false representations about FDA compliance.

Legal Representation

The investors are represented by Shannon Hopkins, Devyn R. Glass, and Adam M. Apton of Levi & Korsinsky LLP, and Daniel L. Berger, Alexandra E. Forgione, and Caitlin M. Moyna of Grant & Eisenhofer PA. The BioXcel defendants are represented by Colleen C. Smith, Michele Johnson, Sarah Tomkowiak, Meryn Grant, Richard Frohlichstein, Benjamin Feiner, and Erica Pena of Latham & Watkins LLP. Both parties' counsel did not immediately respond to requests for comment.