b'On October 5, 2020, the court denied defendantsJun Shi v. Ampio Pharma, Inc., Case No. motion to dismiss. The court first held that the amended2:18-cv-07476 (RGK), 2020 WL 5092910 complaint plausibly alleged that Amyriss statements(C.D. Cal. June 19, 2020) disclosing its revenue were materially misleading be- Flawed Trial Design and Failure to Obtain cause the company disclosed that it was in compliance with ASC 606, but in fact was recognizing revenue be- FDA Approvalfore underlying sales occurred. The court rejected de- Ampio Pharmaceuticals, Inc. (Ampio) is a biopharma-fendants argument that the companys explanation ofceutical company focused on developing therapies to its royalty estimation method in its SEC filings neutral- treat inflammatory conditions, like osteoarthritis of the ized the revenue recognition statements, because theknee (OAK), including its drug candidate Ampion, a explanation was part of a discussion of the companysnon-opioid injectable treatment for OAK. To obtain FDA practice of recognizing revenue only after the comple- approval to market and sell Ampion, Ampio needed tion of saleswhile in practice the company recog- to complete two Phase 3 clinical trials. In 2013, Ampio nized revenue before sales had occurred. The courtcompleted the first Phase 3 pivotal trial, involving also held that the companys statements concerning the329 participants. The trial was a success, and Ampio sustainability of its revenue, including revenue projec- disclosed that Ampion demonstrated a statistically tions, were actionable. The court rejected that thesesignificant reduction in pain compared to the control. statements were protected by the PSLRAs safe harbor,Ampio thereafter failed twice to successfully complete because (1) even if the statements were forward-a second Phase 3 pivotal trial. On May 1, 2017, Ampio looking in form, in context they were based on andstarted its third attempt to conduct a second Phase intertwined with the misstatements of current reve- 3 trial (the AP-003-C trial). This time, Ampio did not nues, and therefore misrepresented past or presentfollow the steps it had taken for its previous attempts; rather than exclusively future events, and (2) the state- in particular, it elected not to obtain FDAs concurrence ments were not accompanied by cautionary languageregarding the adequacy of the protocol design, and that meaningfully address[ed] the risks underlying thedosed fewer trial participants. AP-003-C also lacked projections in light of the companys true accountinga concurrent placebo control group. Ampio still inject-practices. Finally, the court concluded that defendantsed one group with Ampion and a second group with statements reflecting that the company previously, inplacebo, but rather than comparing the Ampion group 2017, had deficiencies in its accounting controls, andwith the placebo group, Ampio compared the Ampion that the company was remediating the issues, wereparticipants in the AP-003-C trial to placebo groups actionable because contrary to the representations, thefrom all Ampion studies. On December 14, 2017, Ampio company was in fact was experiencing further deterio- announced that its third attempt was successful and ration of controls.had demonstrated Ampios efficacy and safety. With The court also held that the amended complainttwo Phase 3 pivotal trials complete, Ampio announced pleaded facts supporting a strong inference of scienter,plans to file a Biologics License Application (BLA) based on (1) the companys widespread and signifi- with FDA. However, in August 2018, FDA informed cant violations of GAAP accounting principles, (2) theAmpio that the AP-003-C trial did not provide sufficient companys CFOs direct involvement in revenue recog- evidence of effectiveness to support a BLA, citing nition and a public statement by the CFO reflecting thatthe trials lack of a concurrent control group and the she understood the requirements of ASC 606, (3) thesmall number of participants. FDA recommended that fact that the individual defendants had accounting ex-pertise and the revenue at issue was part of the compa-nys core operations, and (4) the fact that the companyWhile plaintiffs had advanced three engaged in a secondary stock offering approximately two weeks after the company reported strong earn- theories in an attempt to plead scienter, the ings, and that the individual defendants bonuses werecourt explained that none of the theories dependent on reported revenues, providing motives for the alleged fraud. supported the conclusion that Ampio, The parties are now engaged in discovery. Summarya company highly dependent on the judgment motions are expected to be filed by July 8,success of the new drug, would knowingly 2022.or recklessly carry on a defective triala premise that the court noted virtually defies reason.50'