In the high-stakes world of small and mid-sized pharmaceutical companies, a single drug can make or break a company’s market valuation. Unlike established, large-cap pharmaceutical giants with diverse portfolios, these smaller biotech firms often have a limited number of drug candidates in the pipeline. This makes the success or failure of a single clinical trial a matter of life and death for the company's stock price. As a result, investors pay extremely close attention to the progress of these trials, and any statement about them can have an immediate and dramatic impact on valuation.

To understand this impact, it’s crucial to know the different phases of a clinical trial:[1]

• Phase 1 trials: These initial trials focus on safety and involve a small group of 20 to 80 healthy volunteers. The goal is to determine the drug’s safety, side effects, and best dosage. This phase can take several months.
• Phase 2 trials: If a drug is found to be safe in Phase 1, it moves to Phase 2, which emphasizes effectiveness. These studies involve a larger group of people (typically 100 to 300) who have the disease or condition the drug is intended to treat. Researchers continue to monitor for short-term side effects. A positive result from a Phase 2 trial is a critical milestone that can lead to a significant increase in a company's stock price, often used to secure additional funding to move forward with the expensive and extensive Phase 3 trials.
• Phase 3 trials: These are large-scale studies that gather more information on a drug’s safety and effectiveness. Phase 3 trials involve hundreds to several thousand participants across different patient populations, at various dosages, and sometimes in combination with other drugs. If the drug is successful in this phase, the manufacturer can submit it to the FDA for approval. A successful Phase 3 trial is a significant achievement, often leading to a substantial market capitalization increase and the anticipation of future revenue.
• Phase 4 trials: After a drug has been approved and is available to the public, Phase 4 trials take place. They involve post-market surveillance to monitor the drug’s long-term safety and effectiveness in a large, diverse population.

Because so much is riding on these outcomes, investors increasingly scrutinize every public statement a company makes about its test drugs. When adverse news—whether it’s about a trial’s design, its results, or a company’s relationship and/or communications with regulators—is disclosed, the reaction in the market can be brutal, leading to dramatic stock price declines. Thus, when companies make false or misleading statements about these trials, they expose themselves to significant potential liability under U.S. securities laws.

A Look at the Recent CytoDyn Case

This issue has become a hot topic in private securities class litigation, as demonstrated by the recent court opinion in Courter v. CytoDyn Inc. In this case, the court denied the biotechnology company’s motion to dismiss a putative class action complaint, allowing an investor’s claims of securities fraud to proceed. The court’s ruling, made at the pleading stage, highlighted a critical point: even if a company discloses that a trial missed its primary endpoint, it can still be held liable for securities fraud if it then makes misleading statements about secondary endpoints. The court found that the complaint sufficiently alleged that it was deceptive for CytoDyn to claim “statistically significant” results in secondary endpoints and to call them “more important” without allegedly disclosing that the FDA had found the data insufficient to support approval.

The aTyr Pharma Investigation

The importance of accurate trial disclosures has once again arisen with aTyr Pharma, Inc., a clinical-stage biotechnology company focused on developing new therapies for fibrosis and inflammation by translating tRNA synthetase biology. Its lead product candidate is efzofitimod. The drug is purportedly a first-in-class biologic immunomodulator that is being developed to treat interstitial lung diseases (ILD), which are immune-mediated disorders that cause chronic inflammation and scarring of the lungs.

The company’s shares, publicly traded on the NASDAQ under the ticker symbol ATYR, plummeted over 80% on September 15, 2025, after it announced that its late-stage study of efzofitimod failed to meet its primary goal.

Hagens Berman has now opened an investigation into whether aTyr may have misled investors about its Phase 2 data and the design of its Phase 3 trial. aTyr had previously represented to investors that “the data that we […] produced in Phase 2 was some of the best data that the experts have ever seen[,]” and had emphasized a multi-billion-dollar market opportunity.

Conclusion

The highlighted examples serve as a powerful reminder that in an industry where investor confidence is paramount, a company’s statements about its clinical trials are not just scientific updates—they are material facts that carry legal weight and directly affect investor fortunes. The dramatic market reactions and resulting litigation reinforce the message that for pharmaceutical companies, accuracy and transparency are essential.