Securities Class Action Risks in Clinical-Stage Biotech Firms: Lessons from PepGen and the Importance of Governance and Transparency

The biotechnology sector has long been a double-edged sword for investors: a source of groundbreaking innovation and astronomical returns, but also a minefield of volatility and litigation risk. Clinical-stage firms, in particular, operate in a high-stakes environment where the success or failure of a single therapy can determine a company's fate—and its legal exposure. The recent case of PepGen Inc. (NASDAQ: PEPG) exemplifies how overhyped clinical trials, regulatory missteps, and poor corporate governance can trigger securities class actions, erode investor trust, and destabilize entire portfolios. For investors, the lesson is clear: in high-risk innovation sectors, governance and transparency are not just ethical imperatives—they are survival strategies.

The PepGen Case: A Blueprint for Disaster

PepGen's securities class action lawsuit, Karam v. PepGen Inc., underscores the perils of overpromising and underdelivering in clinical-stage biotech. The company's lead product, PGN-EDO51, was marketed as a breakthrough for Duchenne muscular dystrophy (DMD), with claims of dystrophin production levels exceeding expectations. However, the reality was far grimmer.

1. Overstated Efficacy and Dismantling Confidence:
   In July 2024, PepGen reported a mean dystrophin level of 0.61% of normal in the CONNECT1 trial—a figure below the 1% threshold analysts had anticipated. The stock plummeted 32.69% in a single day. The lawsuit alleges the company exaggerated these results and failed to disclose flaws in trial design, including inadequate sample sizes and unvalidated biomarkers.

2. Regulatory Red Flags Ignored:
   The FDA placed a clinical hold on PepGen's CONNECT2 study in December 2024 due to safety concerns, including reduced kidney function in trial participants. Health Canada also demanded additional data. By March 2025, PepGen voluntarily paused the study, leading to an 18.86% stock price drop. The final blow came in May 2025, when the company announced PGN-EDO51 had failed to meet dystrophin targets and abandoned its DMD programs.

3. Legal and Financial Fallout:
   Investors who purchased PepGen shares between March 2024 and March 2025 faced steep losses. The lawsuit accuses executives of securities fraud under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, alleging deliberate misstatements and omissions.

Broader Trends in Biotech Litigation

PepGen is not an outlier. The Sidley 11th Annual Survey of Securities Class Actions in the Life Science Sector reveals a troubling pattern: biotech firms accounted for 21.1% of all federal securities lawsuits in 2024, with 44 new cases filed. Rocket Pharmaceuticals (NASDAQ: RCKT) faced similar scrutiny after the FDA halted its Danon disease trial in May 2025 following a participant's death, triggered by undisclosed protocol changes. These cases highlight systemic issues:

• Overhyping AI-Driven Pipelines: Firms like Frequency Therapeutics and Kiromic BioPharma have been sued for “AI washing”—exaggerating the role of artificial intelligence in drug discovery while downplaying clinical setbacks.
• Single-Asset Dependency: Companies reliant on a single therapy (e.g., Rocket Pharmaceuticals' RP-A501) face existential risks if that asset fails.
• Regulatory Scrutiny Intensifies: The FDA's focus on data integrity and patient safety has led to stricter enforcement, increasing the likelihood of litigation when missteps occur.

Strategic Implications for Investors

For investors, the PepGen case serves as a cautionary tale. Here's how to navigate the risks:

1. Demand Rigorous Clinical Trial Disclosures:
   Scrutinize trial design, sample sizes, and biomarker validation. Avoid companies that use vague language like “promising preliminary results” without concrete data.

2. Assess Regulatory Engagement:
   A history of FDA Form 483 notices or warning letters is a red flag. Investors should also monitor interactions with regulatory bodies—frequent delays or holds may signal deeper issues.

3. Diversify Portfolios and Avoid Single-Asset Bets:
   Companies with multiple therapeutic candidates or diversified pipelines are better positioned to weather setbacks. PepGen's overreliance on PGN-EDO51 left it with no fallback.

4. Evaluate Governance Structures:
   Look for boards with regulatory expertise and robust compliance frameworks. Firms that proactively communicate risks—rather than obscuring them—are less likely to face litigation.

Mitigating Risk in a High-Volatility Sector

Biotech litigation is not a new phenomenon, but the stakes are higher than ever. Courts increasingly dismiss cases without clear evidence of scienter (intent to deceive), but investors can still protect themselves by prioritizing transparency. For example, companies like Takeda Pharmaceutical and Moderna have navigated regulatory challenges by maintaining open communication with investors and regulators.

Conversely, firms like Revance Therapeutics, which saw legal costs surge to 8% of revenue in 2024 amid a securities lawsuit, demonstrate the financial toll of poor governance. Investors should monitor legal expenses relative to revenue—a spike may indicate trouble.

Conclusion

The PepGen case is a microcosm of the broader risks facing clinical-stage biotech firms. In a sector where hope and hype often outpace reality, governance and transparency are the ultimate safeguards. For investors, the path forward lies in rigorous due diligence, diversification, and a healthy skepticism of overly optimistic narratives. As the Rocket Pharmaceuticals and PepGen lawsuits show, the line between innovation and litigation is perilously thin—and those who cross it risk not just their stock price, but their entire business.

In an industry defined by uncertainty, the most successful investors are those who bet on science, not spin.