Law360 (June 15, 2020, 8:52 PM EDT) -- The top brass at biopharmaceutical company Inovio Pharmaceuticals Inc. was hit Monday with a shareholders' derivative action in Pennsylvania federal court accusing the firm's leadership of preying on investors by claiming it had only needed "three hours" to come up with a coronavirus cure.
In the suit filed June 15, plaintiffs Krishna Kishor Devarakonda and Brian Foster alleged that the company's top executive and its board of directors deliberately misled the public to push up the company's stock price by implying that the company had needed "just three hours" to come up with a coronavirus vaccine.
"Such representations were utterly false. Inovio had not developed a working vaccine for COVID-19, but rather, a 'vaccine construct,' i.e., an early stage prototype that after extensive clinical trials, could eventually lead to a viable vaccine," Devarakonda and Foster said Monday.
The investors claim that the three-hour suggestion surfaced on Feb. 14, 2020, when Inovio's president and chief executive J. Joseph Kim said in a televised interview that the company's drug development capabilities allowed it to prepare vaccines for a virus within "in about three hours" of receiving the virus' genetic sequence.
Of a treatment for the coronavirus, Kim said, "We have it, and we've proven that we can do this for other infections like MERS and Zika in the past."
Kim also claimed in the Valentine's Day interview that the company was preparing for clinical trials of its vaccine "early this summer."
In the following months, similar claims would continue to push the company's stock price up, the investors said. Among the examples cited in the complaint is a March 2 round table meeting at the White House, at which Kim allegedly told U.S. President Donald Trump that "by getting just the DNA sequence of the virus, we were able to fully construct our vaccine within three hours."
Moreover, in a filing with the U.S. Securities and Exchange Commission on March 8, the investors said, the company said it "believes it may be in a position to begin human clinical trials in the United States in April 2020 and soon thereafter in China and South Korea."
According to the investors, that belief was unfounded.
"Inovio had not developed a viable COVID-19 vaccine in only three hours, but rather a vaccine construct, [and] the company had no reason to believe that clinical trials for Inovio's purported COVID-19 vaccine would begin as soon as April 2020," the investors emphasized.
Public perception of the company's purported cure allegedly began to change when a short-seller's report on March 9 characterized Inovio's three-hour claim as "ludicrous and dangerous."
The investors claim that the short-seller's statement precipitated the company's clarification, via Twitter, that it had "designed a vaccine construct for its coronavirus vaccine within three hours after the viral sequence was publicly available."
According to the investors, this acknowledgment by Inovio pushed down the company's stock price, which had gone as high as $19.36 during trading days since mid-February. The company's share price closed out at $5.70 on the day after the short-seller's statements, the investors said.
The investors in the derivative action also noted that the company also faces a separate proposed securities class action that was filed March 12 in the same federal district.
In the proposed class action, Inovio investor Patrick McDermid claimed "Inovio and Kim made false and misleading statements to the market, claiming unequivocally that the company had successfully developed a vaccine against the spread of COVID-19 and that it anticipated rapidly bringing that vaccine to market."
"Given the heightened anxiety surrounding this pandemic and the desperate demand for an effective COVID-19 vaccine, defendants knew and were deliberately reckless as to the falsity of their claims," McDermid said in March.
The derivative complaint claims the eight individual defendants are liable for breach of fiduciary duty, unjust enrichment, abuse of control, gross mismanagement and waste of corporate assets in violation of fraud provisions of the Securities Exchange Act of 1934.
The parties named in the suit, alongside the company and Kim, are Inovio's board chairman Simon X. Benito and six directors, Angel Cabrera, Ann C. Miller, Jay P. Shepard, David B. Weiner, Wendy L. Yarno and Lota S. Zoth.
In a statement emailed Tuesday, Inovio told Law360 that "Reports such as these demonstrate a lack of understanding of the science behind DNA medicines."
"Inovio designed a vaccine construct for its coronavirus vaccine (INO-4800) within three hours after the viral sequence was publicly available; produced the vaccine at small scale and was in preclinical trials in January; in human trials in April and will report results later this month. Based on extensive prior work creating DNA vaccines using our proprietary DNA medicines platform, we are confident that we have a viable approach to address the COVID-19 outbreak," the firm said.
On Monday, attorneys for the investors did not immediately respond to requests for comment.
Devarakonda and Foster are represented by Jacob Goldberg and Phillip Kim of the Rosen Law Firm PA.
Counsel information for Kim, Benito, Cabrera, Miller, Shepard, Weinder, Yarno and Zoth could not be immediately determined Monday.
The case is Devarakonda et al. v. Kim et al, case number 2:20-cv-02829, in the U.S. District Court for the Eastern District of Pennsylvania.
--Editing by Amy Rowe.
Update: this story has been updated with a statement from Inovio.
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