Karuna 'vigorously' denies wrongdoing in shareholder lawsuit over BMS deal disclosures

Karuna Therapeutics is “vigorously” denying any deficiencies with a proxy statement filed last month that has become the focus of a shareholder lawsuit, though the biotech is producing supplemental information to address several of the allegations raised.

Two weeks ago, a Karuna shareholder sued the biotech for allegedly leaving out or misrepresenting information related to the proposed Bristol Myers Squibb merger. Now, Karuna has responded, writing that the “complaint is without merit and that no further disclosure is required to supplement the proxy statement under applicable laws,” in Securities and Exchange Commission (SEC) documents filed March 1.

In late December, the neurology biotech entered a $14 billion merger agreement with BMS in which Karuna shareholders would receive $330 per share of common stock. The biotech currently awaits an FDA decision for lead asset KarXT, placing the company on the cusp of having the first schizophrenia treatment approved in years.

On Feb. 5, Karuna filed a proxy statement with the SEC recommending that stockholders vote for the merger at a March 12 special meeting.

In response to the proxy statement, Karuna shareholder Shannon Jenkins filed suit claiming that nine Karuna directors—including CEO Bill Meury—violated federal securities laws in connection with the proposed acquisition by not including or misrepresenting key information.

Karuna is now filling in some of the missing gaps of information, though the company said it is doing so “without admitting any liability or wrongdoing,” and instead “solely to avoid the costs, burden, nuisance and uncertainties inherent in litigation and to allow the Karuna shareholders to vote on the merger at the special meeting,” according to the March 1 documents.

For example, Jenkins took issue with the lack of information provided regarding other proposed transactions. In January, an SEC filing showed that another large pharma competed for Karuna before BMS’ bid won out, but that pharma was identified only as “Party A.” Karuna continues to refer to the company as “Party A,” writing that the pharma entered into a confidentiality and standstill agreement with Karuna that is still valid.

Second up is the claim that the Karuna proxy fails to disclose potential conflicts of interest, including whether BMS mentioned management retention for the proposed combined company.

Karuna said BMS never discussed with CEO Meury or other Karuna representatives about potential employment or compensation arrangements for Karuna’s senior management team after the possible transaction closes.   

Jenkins also alleges that the document omits or misrepresents material information essential to the vote, such as analyses prepared by Karuna’s financial adviser, Goldman Sachs & Co.

Karuna has now provided a table prepared by the adviser about previous comparative M&A transactions from 2018 to 2023 and offered updated footnotes related to a table of forward-looking financial projections.

Karuna also provided new information revealing that BMS will provide contingent value right payments if KarXT is approved by the FDA in Alzheimer’s disease psychosis by Dec. 31, 2026 and that there isn’t a boxed warning on the product's label. That deadline was pushed back to March 30, 2027, according to the new documents.

Mizuho analysts responded to the new information, writing that while the disclosures were interesting, they don’t believe any of the information could ultimately jeopardize the BMS acquisition.

“Net net, we continue to believe the M&A transaction will close by the current 1H24 timeline expectation,” the analysts wrote March 1.