Some investors in a Seattle-based drug company claim leaders misled investors ahead of its initial public offering, and are pursuing a class-action lawsuit against the fledgling company.

Such claims are often brought against newly public biotech startups, particularly those that see their stock price soar and then drop. But the legal action could impact hundreds or thousands of shareholders in Silverback Therapeutics.

A startup developing tissue-targeted biopharmaceuticals to treat cancer, chronic viral infections and other serious diseases, Silverback saw its stock price climb rapidly after it began trading on NASDAQ in December 2020.

The company, listed as SBTX, issued 11.5 million shares priced at $21 a share during its IPO, a price that peaked in March at more than $60. By the following September, though, the stock price dropped to $14.90, and has continued to slide since. It closed Wednesday at $4.19.

Several investors sued late last year after a report that one of Silverback’s products was not as effective as the company said in public statements and filings with the Securities and Exchange Commission, according to the lawsuit. Among them is Benjamin Dresner, who claims to have lost more than $18,000.

Dresner, a 33-year-old criminal defense attorney from Anchorage, Alaska, and his legal team say Silverback executives and board members knew the company’s public statements didn’t include all the facts — namely those that cast doubt on the efficacy of one of its products.

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Silverback Therapeutics provided documents that “contained untrue statements of material fact or omitted to state other facts necessary to make the statements made not misleading,” Dresner’s attorneys said in the lawsuit. They went on to claim company leaders made “materially false and misleading statements” about the business.

But those sorts of claims can be hard to prove, said Jay Ritter, a professor at the University of Florida who studies IPOs.

“With biopharmaceutical companies, sometimes the science works, sometimes the science doesn’t work,” he said. “It’s hard for an outsider who’s not an expert to know — did the company mislead some investors at a point in time by indicating there was a higher probability of success than management knew at the time? Or management might have been overly optimistic.”

Proving a company intentionally misled investors can come down to internal emails or a whistleblower testifying under oath, Ritter said. Other times, it’s just a matter of opinion.

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Dresner is one of the plaintiffs in a potential federal class action filed in Seattle on behalf of other individuals who bought stock in the biopharmaceutical company between Dec. 2020 and Sept. 2021. Dresner, who purchased 1,400 Silverback shares between August and September 2021, lost $18,170.

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It’s not clear how many class members there could be, but Dresner’s attorneys estimate it could be hundreds or thousands. In January, two more shareholders added their name to the case.

The plaintiffs did not respond to requests for comment. Silverback Therapeutics declined to comment. 

Data around SBT6050, Silverback’s product that was the subject of the September announcement mentioned in the lawsuit, gives the company “confidence” in its plan to test the therapy for specific tumor types, CEO Laura Shawver said at a conference in January. The drug, which is currently in clinical trials, could “make a meaningful impact” when combined with other anti-cancer agents, Shawver said.

“There’s a lot going on at Silverback and our team is poised to execute on these milestones this year and beyond,” she said.

Most securities class-action lawsuits — cases filed by investors who claim to have lost money as a result of violations of the securities laws — ultimately settle, said Priya Cherian Huskins, senior vice president at insurance company Woodruff Sawyer in San Francisco.

In 2021, 46% of securities class action lawsuits settled, according to a year-end report from Woodruff Sawyer. Another 41% were dismissed and 13% withdrawn. The average settlement was $32 million, the report found.

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“There are some cases that settle for very large amounts, and these are the real fraud cases,” Huskins said. “There are lots of cases where the facts are a little bit murky, and it is more economically sensible for the company to settle the matter rather than take it to” trial.

Life sciences and tech companies are among the most frequently sued, in part because they have “binary outcomes,” Huskins said. If the company has bad news about its product, its stock will drop.

Biotech companies were the subject of 25% of securities class-action cases filed in 2021, according to Woodruff Sawyer’s report.

“The fact that [Silverback Therapeutics] was sued is something to notice. It doesn’t necessarily mean they did anything wrong,” Huskins said. “It’s not illegal to be wrong about your forecast, but you need to have believed it was true at the time you said it.”

The nature of the case and the question of misleading investors intentionally or accidentally may sound similar to the recent conviction of Elizabeth Holmes, founder of blood testing startup Theranos, but they’re really not comparable, said Ritter, from the University of Florida.

With pharmaceutical companies, “the vast majority of these companies have no revenue, certainly no profits and no prospects of revenue and profits from product sales for many years in the future,” Ritter said. “Investors are basically betting on whether the company will be lucky or not.”

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For the three months between July and September 2021, the most recent financial data available, Silverback Therapeutics reported a net loss of $22.7 million, attributed to increased expenses for research and development, a jump in head count, salaries and bonuses and an increase in legal fees and administrative expenses after its initial public offering.

Ritter said the convictions in Holmes’ case likely weren’t a referendum on litigation that revolves around misleading investors. He doesn’t expect that criminal prosecution will change the outcome of these types of civil lawsuits.

Lawsuits like the one brought against Silverback Therapeutics are “one of the burdens of being a public company,” Ritter said. “If there weren’t these lawsuits there probably would be more fraud than there is.

“As with many things, life is full of trade-offs.”