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Novan IPO and Misleading Info on Acne Drug Securities Class Action

Chin with Pimple

Novan, a drug development company, was testing a drug for acne vulgaris when it held its initial public offering (IPO) on September 26, 2016. The complaint for this class action claims that Novan’s public statements omitted important information, leading investors to believe that the drug was more promising than it was. By early December, Novan’s stock price had climbed from an initial $11 to $29.09 a share—and then came a sharp drop to around $4.86, after the company announced the results of its trials for the new drug.

The class for this action is all persons, other than defendants, who acquired Novan stock, between September 26, 2016 and January  26, 2017, (1) pursuant or traceable to Novan’s initial public offering on September 26, 2016, and/or (2) on the open market.

Novan focuses on the development and commercialization of dermatology therapies using a nitric oxide releasing platform. While it can be difficult to store and administer nitric oxide, the company believes that its “Nitricil technology” and topical formulation science can overcome these difficulties.

Novan’s leading product candidate was SB204, a topical treatment for acne vulgaris. According to the complaint, Novan said in its offering documents (the Registration Statement and Prospectus for its IPO) that it had begun two “identically-designed” Phase 3 clinical trials for the drug, that it hoped to see results early in 2017, and that if the trials were successful, it hoped to submit its new drug application to the Food and Drug Administration (FDA) by the end of 2017. These hopeful statements marked the beginning of the class period.

Unfortunately, the complaint alleges that the company’s statements left out a good deal, for example, that the two trials were not in fact “identical” since one was for women taking oral contraceptives. The complaint alleges that the FDA had encouraged the company to evaluate the effectiveness of SB204 with this group.

Not disclosing this, the complaint alleges, violates Item 303 of Regulation S-K of the Securities Act of 1933, which requires the disclosure of all “known trends … that have had or that the registrant reasonably expects will have a material … unfavorable impact on … revenues” and Item 503, which requires “a discussion of the most significant factors that make the offering speculative or risky.” Other misleading statements, the complaint alleges, violate the Securities Exchange Act of 1934.

On January 26, 2017, the company announced the results of the “identical” trials. Although the drug had achieved all of its goals in one, in the other it had failed to perform better than a placebo. At this revelation, the stock price fell.

Within the next six months, the complaint alleges, several executives left the company or were replaced, including the CEO, CFO, and CMO (Chief Medical Officer). On June 5, the company announced it was laying off 20% of its workforce and shifting its focus away from SB204 to other projects. Again the stock’s price fell. 

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