Biotech Inovio Pharmaceuticals catapulted into the spotlight earlier this year after announcing it rapidly developed a coronavirus vaccine at its San Diego lab.
Multiple lawsuits recently brought by shareholders, however, allege the company publicly misrepresented the viability of its product and defrauded the market.
A class-action lawsuit filed in March claims Inovio artificially inflated its share price when, without basis, it touted how quickly it created a vaccine and when it would begin human testing. The complaint claims the price came back down when a market research firm publicly doubted Inovio’s statements. Two subsequent suits, including one filed on Friday, made similar allegations.
Pennsylvania-based Inovio told KPBS the cases “demonstrate a lack of understanding of the science behind DNA medicines” and that it has confidence in its product. The company said it is continuing to move the vaccine forward and plans to aggressively fight the legal challenges.
Inovio’s efforts were covered by KPBS multiple times, celebrated by San Diego Mayor Kevin Faulconer and featured on 60 Minutes, but the class-action legal challenge specifically points back to a Feb. 14 appearance by Inovio CEO Joseph Kim on Fox Business. During the interview, Kim declared his company’s DNA technology developed a coronavirus vaccine at an incredible speed.
“Using our DNA medicines platform, Inovio doesn’t need to see or get a hold of the virus to make a vaccine. Rather, we just need the genetic sequence of that so within three hours of accessing that, after the Chinese authorities made it available, we’re able to construct our vaccine INO-4800 in about three hours,” Kim said.
He said the company was preparing to begin clinical trials in early summer. The complaint cites that a few weeks later Kim again discussed the company’s speedy vaccine development on March 2 during a recorded meeting with President Donald Trump.
“By getting just the DNA sequence of the virus, we were able to fully construct our vaccine within three hours,” Kim said, adding that human testing would be moved up to April.
Inovio share prices spiked around the time of Kim’s comments but began to drop after a March 9 tweet from Citron Research claiming that Inovio’s three-hour vaccine development was “ludicrous” and called on the U.S. Securities and Exchange Commission to investigate. The class-action lawsuit filed three days later on behalf of investors who purchased shares after Kim’s comments claim the company fraudulently increased its market value; the lawsuit claims Inovio planned to sell $50 million in shares.
Existing shareholders also filed claims in April and on June 12. Attorneys for plaintiffs in all three cases either declined to comment or did not respond to messages.
University of San Diego law professor David McGowan said there are three points to consider in class-action suits alleging securities fraud.
“There’s an alleged misstatement. There’s an alleged correction, and then there’s an allegation of motive,” he said.
The alleged misstatements were the comments Kim made on Fox Business and to President Trump and the alleged motive is the company could sell stock at a high price. The alleged correction came after Citron’s tweet calling for an SEC inquiry — the federal agency declined to comment when KPBS asked if it was investigating the company — and Inovio appeared to respond in a tweet of its own. Inovio said it had created a “vaccine construct” in three hours and the issue was a lack of understanding about its technology, which it repeated in an emailed statement to KPBS on Monday.
However, Citron itself has critics — an online petition is also calling on the federal agency to investigate its founder, Andrew Left. The SEC again declined comment when asked if it was looking into that issue.
McGowan said there are a few points that bode well for Inovio. First, Citron is a short-seller and they may have a stake in stocks going down.
“Which doesn’t mean it was wrong, but it’s something to take into account,” said McGowan, director of the Center for Intellectual Property Law and Markets at USD.
He pointed to the impact on the market of Kim’s alleged misstatements: there wasn’t a major spike in price after Kim’s first comment that Inovio developed a vaccine quicker than you can watch “Lord of the Rings.” The sharpest increase came later when Kim told President Trump about human testing in April.
“Which would make sense if you were an investor and you think that the closer you get to testing, the closer you might be to a product,” McGowan said.
The company’s value eventually went back up after the Citron tweet, suggesting market confidence, and Inovio did begin human testing in April — both positive signs for Inovio, McGowan said.
However, the company still had to have some factual basis to make that statement back then. UCLA Law Professor James Park said publicly traded companies are held to high standards.
“If you’re disregarding certain red flags or evidence indicating that your statement is false, that can be considered sufficient to establish a fraudulent intent,” Park said.
Park, who previously served in the Investor Protection Bureau with the New York State Attorney General’s Office, said if the case moves forward Inovio may have to show emails, internal documents or other evidence that back the comments in question.
“If there’s no documentation at all supporting that there is a viable vaccine that’s been developed, then the company should have been aware that there was no basis for making the statement,” Park said.
Both McGowan and Park expect Inovio to request dismissing the case. Park said securities fraud suits against pharmaceutical companies are tossed out nearly half the time, but he thinks there are enough questions that a judge may allow this case to go forward.
“Surviving a motion to dismiss does not necessarily mean this is a good case; it only means that the court wants to learn more about the facts,” Park said.
The professors said that could be at least months away. Inovio plans to “vigorously” fight the challenges, according to its SEC filings. At the same time, the company said it will begin another clinical trial with its vaccine in South Korea.
The company told KPBS it plans to release results from its human trials later this month.