Securities Litigation Risks in Biotech: The PepGen Case and Its Implications for Investor Confidence

The biotech sector, long a haven for high-risk, high-reward investors, has become a hotbed for securities litigation. The recent Karam v. PepGen Inc. case—centered on alleged misrepresentations about the company's lead drug, PGN-EDO51—exemplifies the growing legal and financial risks facing clinical-stage biotechs. For investors, this case is a microcosm of a broader trend: a 21.1% share of federal securities lawsuits in 2024 targeted biotech firms, the highest since 2020. These lawsuits aren't just legal hurdles; they're reshaping how capital flows into the sector and how investors evaluate risk.

The PepGen Saga: A Case Study in Biotech Volatility

PepGen's stock price history over the past year is a textbook example of how litigation and regulatory scrutiny can devastate investor confidence. The company's shares plummeted nearly 33% in July 2024 after announcing “positive” data from its CONNECT1 trial that fell short of expectations. A December 2024 FDA clinical hold on its CONNECT2 study triggered another 18.86% drop, and a January 2025 safety pause led to a 22% decline. By March 2025, the stock had lost nearly 19% of its value after voluntarily pausing the CONNECT2 study.

The lawsuit alleges that PepGen's executives overstated the drug's safety and efficacy, artificially inflating the stock price before the truth emerged. For investors who bought in during the “Class Period” (March 2024–March 2025), the company's stock has lost roughly 70% of its value. This volatility isn't unique to PepGen. Across the sector, companies like Alto Neuroscience and Kiromic BioPharma have faced similar lawsuits after missing clinical milestones or overhyping AI-driven drug discovery pipelines.

Investor Confidence in the Crosshairs

The rise in litigation has forced investors to recalibrate their approach to biotech. Three key shifts are evident:

1. Transparency Demands: Investors now scrutinize clinical trial data with a magnifying glass. Third-party analyses and independent validation of results are no longer optional—they're table stakes. For example, PepGen's claim of a 0.61% dystrophin level in its Duchenne muscular dystrophy trial was met with skepticism by analysts, who noted it fell far below therapeutic thresholds.

2. Risk Reassessment: The sector's allure—high upside from breakthrough therapies—is now tempered by the risk of regulatory setbacks and litigation. Investors are favoring companies with diversified pipelines and robust governance over single-asset biotechs. PepGen's reliance on PGN-EDO51, a single candidate, left it vulnerable to catastrophic losses when clinical holds emerged.

3. Capital Flight to Established Players: Smaller biotechs are struggling to attract funding. In 2024, over 200 publicly traded biotech companies had negative equity, signaling a lack of faith in their long-term viability. Meanwhile, firms like Takeda and Moderna, which maintain transparent communication with stakeholders, are seeing stronger capital inflows.

The Ripple Effect on Capital Flows

The PepGen case underscores how litigation can stifle innovation. Clinical-stage companies, already cash-strapped, face dual pressures: legal costs and reputational damage. For instance, Revance Therapeutics spent 8% of its 2024 revenue on securities litigation, a burden that could have funded years of R&D. This financial strain forces companies to prioritize short-term survival over long-term innovation, slowing the development of critical therapies.

Moreover, the rise of “AI washing”—where firms overstate the role of AI in drug discovery—has introduced new legal risks. While no biotech-specific cases have emerged yet, the broader trend of lawsuits against AI hype suggests this could become a hot topic.

Strategic Advice for Navigating the Biotech Minefield

For investors, the lesson is clear: due diligence is non-negotiable. Here's how to approach biotech investing in this litigious climate:

1. Diversify Within the Sector: Avoid single-asset bets. Prioritize companies with multiple therapeutic candidates and a history of regulatory compliance.

2. Demand Clinical Transparency: Scrutinize trial design, patient cohorts, and endpoint definitions. If a company's data lacks peer-reviewed validation, proceed with caution.

3. Monitor Regulatory Engagement: Track FDA interactions and clinical hold notices. A company's ability to address regulatory concerns swiftly can signal operational strength.

4. Factor in Legal Costs: Review a company's legal expenses in 10-K filings. A sudden spike could indicate underlying governance issues.

5. Stay Informed on Class Actions: Cases like PepGen's have deadlines for lead plaintiff appointments (August 8, 2025, in this instance). While participation isn't mandatory, understanding the legal landscape helps avoid unexpected volatility.

Conclusion: The New Normal for Biotech Investing

The PepGen lawsuit is a cautionary tale for the biotech sector. As litigation becomes a recurring feature of the industry, investors must adapt by prioritizing transparency, diversification, and risk management. While the sector's potential for groundbreaking therapies remains intact, the path to success is now littered with legal and regulatory hurdles. For those willing to navigate these challenges with diligence, biotech can still offer compelling returns—but only for those who do their homework.