Summary
holding FDA's eventual approval meant defendants had remedied whatever problem existed
Summary of this case from Silverstrand Invs. Briarwood Invs. Inc. v. AMAG Pharmaceuticals, Inc.Opinion
Civil Action No. 03-12091-RCL.
October 6, 2005
Connie M. Cheung Lerach Coughlin, Stoia Robbins, San Francisco, CA, Attorney for Phyllis Waltzer (Plaintiff).
Nancy F. Gans Moulton Gans, Boston, MA, Attorneys for Barry Family LP (Plaintiff) Debra S. Folkerts (Plaintiff) James P. Slavas (Plaintiff) Julius Waltzer (Plaintiff) Paul Bennett (Plaintiff) Vincent Ragosta (Plaintiff) Paul Bennett (Plaintiff).
Rebecca R. Hayes Goodwin Procter LLP, Boston, MA, Attorneys for Southern Alaska Carpenters Retirement Trust (Movant) Vincent Ragosta (Plaintiff) Alkermes, Inc. (Defendant).
Theodore M. Hess-Mahan Shapiro, Haber Urmy LLP, Boston, MA, Attorneys for David A. Broecker (Defendant) James M. Frates (Defendant) James L. Wright (Defendant) Michael J. Landine (Defendant) Richard F. Pops (Defendant) Robert A. Breyer (Defendant) The McCallum Family Group (Movant).
Peter A. Lagorio Gilman and Pastor, LLP, Saugus, MA, Attorneys for James P. Slavas (Plaintiff) Julius Waltzer (Plaintiff) Phyllis Waltzer (Plaintiff) Danske Capital (Movant).
Jeffrey W. Lawrence Lerach Coughlin, Stoia Robbins LLP, San Francisco, CA, Attorneys for Barry Family LP (Plaintiff).
William S. Lerach Lerach Coughlin, Stoia Robbins LLP, San Diego, CA, Attorneys for Debra S. Folkerts (Plaintiff) James P. Slavas (Plaintiff) Julius Waltzer (Plaintiff) Paul Bennett (Plaintiff) Phyllis Waltzer (Plaintiff) Vincent Ragosta (Plaintiff) Southern Alaska Carpenters Retirement Trust (Movant) Barry Family LP (Plaintiff).
Richard A. Lockridge Lockridge, Grindal, Nauen Holstein, Minneapolis, MN, Attorneys for Debra S. Folkerts (Plaintiff) James P. Slavas (Plaintiff) Julius Waltzer (Plaintiff) Phyllis Waltzer (Plaintiff) Vincent Ragosta (Plaintiff) Paul Bennett (Plaintiff) Vincent Ragosta (Plaintiff).
David Pastor Gilman and Pastor, LLP, Boston, MA, Attorneys for Danske Capital (Movant).
Brian E. Pastuszenski Goodwin Procter LLP, Boston, MA, Attorneys for Barry Family LP (Plaintiff) Debra S. Folkerts (Plaintiff) Alkermes, Inc. (Defendant).
Samuel H. Rudman Cauley, Geller, Bowman, Coates Rudman, LLP, Melville, NY, Attorneys for David A. Broecker (Defendant) James M. Frates (Defendant) James L. Wright (Defendant) Michael J. Landine (Defendant) Richard F. Pops (Defendant) Robert A. Breyer (Defendant) Vincent Ragosta (Plaintiff).
Shana E. Scarlett Lerach Coughlin Stoia Robbins LLP, San Francisco, CA, Attorneys for Barry Family LP (Plaintiff).
Alexis L. Shapiro Goodwin Procter LLP, Boston, MA, Attorneys for Debra S. Folkerts (Plaintiff) James P. Slavas (Plaintiff) Julius Waltzer (Plaintiff) Paul Bennett (Plaintiff) Phyllis Waltzer (Plaintiff) Vincent Ragosta (Plaintiff) Alkermes, Inc. (Defendant).
Sylvia Sum Lerach Coughlin Stoia Robbins LLP, San Francisco, CA, Attorneys for David A. Broecker (Defendant) James M. Frates (Defendant) James L. Wright (Defendant) Michael J. Landine (Defendant) Richard F. Pops (Defendant) Robert A. Breyer (Defendant) Barry Family LP (Plaintiff).
Stephen D. Whetstone Testa, Hurwitz Thibeault, LLP, Boston, MA, Attorneys for Julius Waltzer (Plaintiff) Debra S. Folkerts (Plaintiff) James P. Slavas (Plaintiff) Paul Bennett (Plaintiff) Vincent Ragosta (Plaintiff) Alkermes, Inc. (Defendant) David A. Broecker (Defendant) James M. Frates (Defendant) James L. Wright (Defendant) Michael J. Landine (Defendant) Richard F. Pops (Defendant) Robert A. Breyer (Defendant).
I. Introduction
On July 12, 2004, the lead plaintiff in this class action litigation (the entire class collectively shall be referred to hereinafter as the "Plaintiffs") filed the Consolidated Complaint for Violation of the Federal Securities Laws (#39) (the "complaint") in the United States District Court for the District of Massachusetts. The defendants are Alkermes, Inc., a biopharmaceutical company, Richard F. Pops ("Pops"), its Chairman and Chief Executive Officer ("CEO"), Robert A. Breyer ("Breyer"), its former President and Chief Operating Officer ("COO"), David A. Broecker ("Broecker"), its COO since March 2001, Michael J. Landine ("Landine"), its Vice President of Corporate Development and former Vice President and Chief Financial Officer ("CFO"), James M. Frates ("Frates"), its Vice President, CFO and Treasurer, and James L. Wright ("Wright"), its Senior Vice President of Research and Development (individuals collectively shall be referred to as the "Individual Defendants"; the Individual Defendants plus Alkermes shall be referred to as the "Defendants").
The complaint incorporates a set of claims for relief against the Defendants: a first claim for relief for alleged violation of § 10(b) of the Securities Exchange Act of 1934 ("the Exchange Act"), 15 U.S.C. § 78j and Rule 10b-5, i.e., fraud, and a second claim for relief for alleged violation of § 20(a) of the Exchange Act, 15 U.S.C. § 78t, i.e., joint and several liability as a control person.
Title 15 U.S.C. § 78j provides, in pertinent part:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange —
(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act), any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
Promulgated by the Securities and Exchange Commission in the Code of Federal Regulations (the "Code"), 17 C.F.R. § 240.10b-5 provides:
Employment of manipulative and deceptive devices
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statement made, in light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
Title 15 U.S.C. § 78t provides:
(a) Joint and several liability; good faith defense
Every person who, directly or indirectly, controls any person liable under any provision of this chapter or of any rule or regulation thereunder shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action.
On September 10, 2004, the Defendants filed Defendants Alkermes, Inc., Richard F. Pops, Robert A. Breyer, David A. Broecker, Michael J. Landine, James M. Frates and James L. Wright's Motion to Dismiss Consolidated Amended Complaint (#44) pursuant to Fed.R.Civ.P. Rules 9(b) and 12(b)(6). Along with the dispositive motion, the Defendants filed a memorandum of law in support (#45), an appendix of unreported authorities (#46) and an appendix of exhibits (#47). In response, the Plaintiffs submitted an opposition (#49) and an appendix of exhibits (#50). The Defendants then filed a reply memorandum of law (#55) in support of their motion.
The motion to dismiss has been referred to the undersigned for the issuance of a Report and Recommendation as to disposition pursuant to 28 U.S.C. § 636(b). (#51) Following a hearing on January 12, 2005, the dispositive motion is poised for decision.
Since the hearing, additional submissions have been made noting updated authority relevant to the issues at hand. See ##57, 64, 65 and 66.
II. Facts
The facts as alleged in the complaint shall be sketched to set the stage. The allegations later shall be examined in more precise detail.Alkermes is a biopharmaceutical company specializing in the development of controlled-release drug delivery technologies, particularly sustained-release systems based on biodegradable polymeric microspheres, including Medisorb polymers. (#39 ¶¶ 2, 48) Alkermes entered into an agreement in 1996 with JPI Pharmaceutical International ("Janssen"), an affiliate of Johnson Johnson Pharmaceutical Research Development, L.L.C. ("Johnson Johnson"), to develop Risperdal Consta, an injectable form of the schizophrenic drug Risperdal. (#39 ¶ 3) Pursuant to the agreement with Janssen, Alkermes was to research and develop injectable Risperdal Consta based on its Medisorb technology at its Blue Ash plant in Ohio, and then manufacture Risperdal Consta at its Wilmington plant, also in Ohio. (#39 ¶¶ 37, 49, 63)
Janssen had been selling an oral form of Risperdal since 1993. (#39 ¶ 3)
In general terms the Plaintiffs contend that:
Through a series of false and misleading statements, defendants engaged in a fraudulent scheme and course of business that operated as a fraud or deceit on purchasers of Alkermes common stock that (a) deceived the investing public regarding Alkermes' prospects and business; (b) artificially inflated the prices of Alkermes' common stock; (c) allowed defendants to sell $200 million of Alkermes securities at artificially inflated prices; (d) allowed Alkermes to enter into an agreement to complete its acquisition of Reliant using Alkermes shares at artificially inflated prices; (e) allowed several defendants to sell their own shares at artificially inflated prices for insider trading proceeds of over $43 million; and (f) caused plaintiff and other members of the class to purchase Alkermes common stock at falsely inflated prices.
Complaint #39 ¶ 34.
The Plaintiffs allege that between April 22, 1999 and July 1, 2002 (the "Class Period") the Defendants represented to the market that they were able to manufacture and produce Risperdal Consta at full commercial scale. (#39 ¶¶ 1, 35) For example, on April 22, 1999, the Defendants issued a press release which stated, inter alia, that Alkermes had completed "scale-up and Phase III manufacturing activities at the expected commercial scale." (#39 ¶ 59) The Defendants represented that, as of the close of Alkermes' fiscal year on March 31, 2000, the Wilmington plant was "adequate for its preclinical, clinical and commercial operations." (#39 ¶ 77) At the end of October, 2001, the Defendants stated in a press release that "[o]ur current manufacturing facility is fully equipped to support launch quantities and to meet the early demand projected for long-acting Risperdal." (#39 ¶ 95) Despite these reassurances, the Plaintiffs assert that throughout the Class Period, due to production and design flaws, the Defendants were not able to produce Risperdal Consta at commercial scale. (#39 ¶¶ 36, 63, 65)
Along with the purported problems being experienced in trying to set up the Wilmington plant for manufacturing, the Plaintiffs allege that there were concerns in the pre-clinical studies with respect to the "effects of residual polymer substance in the body." (#39 ¶ 83) In a February 20, 2001 press release Alkermes stated that "[w]ith the completion of the Phase III clinical trials, Alkermes and Janssen are preparing for the expected submission of a New Drug Application (NDA) to regulatory health authorities including the United States Food and Drug Administration (FDA)." (#39 ¶ 82) This statement is alleged to be false because "the Risperdal Consta drug application had already been delayed far beyond the defendants' original timeline, due to a request from the FDA for additional pre-clinical studies of the product" in 1998 with respect to the "long-term effects of injecting polymers into the body." (#39 ¶ 83) According to the Plaintiffs, the FDA's July 2002 non-approvable letter related to these further pre-clinical studies. (#39 ¶¶ 40, 83)
The third general category of allegations has to do with information the Defendants purportedly told analysts, that being that they should "base their financial models on assumptions of a 10% return on investment." (#39 ¶¶ 38, 66) In the Plaintiffs' view this statement is false and/or misleading because the "defendants would not receive anything near a 10% royalty." (#39 ¶ 69)
The Defendants allegedly were motivated to make false representations in order to receive approval of the New Drug Application ("NDA") from the FDA, obtain cash through the issuance of securities, inflate the stock price in connection with a potential acquisition by another pharmaceutical company, and to maintain salaries, bonuses and other compensation for the Individual Defendants. (#39 ¶¶ 41-44) The Plaintiffs rely on information provided by seven confidential witnesses ("CW1-7") about "the problems occurring at the Company with the production of Risperdal Consta and defendants' knowledge about these problems." (#39 ¶¶ 26-33)
On August 31, 2001, the Defendants submitted their NDA to the FDA. (#39 ¶ 39) On July 1, 2002, the FDA issued a non-approvable letter for Risperdal Consta. (#39 ¶ 40) "As a result of the announcement, Alkermes' stock dropped over a two day period from a high of $16.01 to a low of $4.04, a drop of 74.8%." (#39 ¶ 40) On October 29, 2003, the FDA approved Risperdal Consta, twenty-six months after the original NDA was submitted. (#39 ¶ 109)
III. Discussion A. Rule 12(b)(6)Standard
The Rule 12(b)(6) pleading standard is familiar: "[A] complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the [non-moving party] can prove no set of facts in support of his claims that would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-6 (1957) (footnote omitted). When addressing a motion to dismiss, it is incumbent upon the Court to accept "`the allegations in the complaint as true and mak[e] all reasonable inferences in favor of plaintiff'". Doran v. Mass. Turnpike Auth., 348 F.3d 315, 318 (1 Cir., 2003), cert. denied, 541 U.S. 1031 (2004) citing Rockwell v. Cape Cod Hosp., 26 F.3d 254, 255 (1 Cir., 1994). That general proposition notwithstanding, "bald assertions, . . . subjective characterizations, optimistic predications, or problematic suppositions" need not be credited. United States v. AVX Corp., 962 F.2d 108, 115 (1 Cir., 1992) (internal quotations omitted); U.S. ex rel. Karvelas v. Melrose-Wakefield Hosp., 360 F.3d 220, 224 (1 Cir.), cert. denied, 125 S.Ct. 59 (2004).
Moving under Rule 12(b)(6), a party asserts that an opponent's claims are unavailing because, even if true, the allegations nonetheless fail "to state a claim upon which relief can be granted." Fed.R.Civ.P. 12(b)(6). In short, "[t]he appropriate inquiry on a motion to dismiss is whether, based on the allegations of the complaint, the plaintiffs are entitled to offer evidence in support of their claims." Scheuer v. Rhodes, 416 U.S. 232, 236 (1974).
B. Standards In A Securities Action
The basics that must be pled in a securities case are clear:
`To state a cause of action under § 10(b) and Rule 10b-5 a plaintiff must plead, with sufficient particularity, that the defendant made a false statement or omitted a material fact, with the requisite scienter, and that the plaintiff's reliance on this statement or omission caused the plaintiff's injury.'In re Polaroid Corp. Securities Litigation, 134 F. Supp.2d 176, 183 (D. Mass., 2001) quoting Gross v. Summa Four, Inc., 93 F.3d 987, 992 (1 Cir., 1996); Orton v. Parametric Technology Corp., 344 F. Supp.2d 290, 298 (D. Mass., 2004).
In the context of a motion to dismiss in a securities action, Fed.R.Civ.P. 9(b) and the Private Securities Litigation Reform Act ("PSLRA") must be considered. Guerra v. Teradyne Inc., 2004 WL 1467065, *5 (D. Mass., 2004) (citing Fitzer v. Sec. Dynamics Tech, Inc., 119 F. Supp.2d 12, 17 (D. Mass., 2000)). Rule 9(b) requires that "in all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." Fed.R.Civ.P. 9(b). The PSLRA provides in pertinent part:
(b) Requirements for securities fraud actions
(1) Misleading statements and omissions
In any private action arising under this chapter in which the plaintiff alleges that the defendant —
(A) made an untrue statement of a material fact; or
(B) omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading;
the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.
2) Required state of mind
In any private action arising under this chapter in which the plaintiff may recover money damages only on proof that the defendant acted with a particular state of mind, the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.
Title 15 U.S.C. § 78u-4.
The First Circuit has concluded that "[t]he PSLRA's pleading standard is congruent and consistent with the pre-existing standards of this circuit. This circuit has been notably strict and rigorous in applying the Rule 9(b) standard in securities fraud actions." Greebel v. FTP Software, Inc., 194 F.3d 185, 193 (1 Cir., 1999) (citations omitted); In re Stone Webster, Inc., Securities Litigation, 414 F.3d 187 (1 Cir., 2005). With respect to scienter under the PSLRA, "the complaint must, with respect to each allegedly fraudulent act or omission, `state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.' 15 U.S.C. § 78u-4(b)(2)." In re Polaroid Corp. Securities Litigation, 134 F. Supp.2d at 182; Aldridge v. A.T. Cross Corp., 284 F.3d 72, 82 (1 Cir., 2002); Greebel, 194 F.3d at 196-97; Orton, 344 F. Supp.2d at 298 ("The allegations contained in the complaint must create a `strong' inference of fraudulent intent".). Put another way, as recently explained by the First Circuit, in order to satisfy the provision of 15 U.S.C. § 78u-4(b)(1), "a complaint `must provide factual support for the claim that the statements or omissions were fraudulent, that is, facts that show exactly why the statements or omissions were misleading.'" In re Stone Webster, Inc., Securities Litigation, 414 F.3d at 194 quoting Aldridge, 284 F.3d at 78 (further citation omitted).
Further, as noted, the alleged misstatement or omission must be material. A misrepresentation or omission is material
"only if a reasonable investor would have viewed the misrepresentation or omission as `having significantly altered the total mix of information made available.'" Gross v. Summa Four, Inc., 93 F.3d 987, 992 (1st Cir. 1996) (quoting Basic, Inc. v. Levinson, 485 U.S. 224, 232, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988)).
However, "a corporation does not commit securities fraud merely by failing to disclose all nonpublic material in its possession. The corporation must first have a duty to disclose the nonpublic material information." Id. (citing Roeder v. Alpha Indus. Inc., 814 F.2d 22, 26 (1st Cir. 1987)). "[A] duty to disclose arises only where both the statement made is material, and the omitted fact is material to the statement in that it alters the meaning of the statement." In re Boston Technology, Inc. Securities Litigation, 8 F. Supp.2d 43, 53 (D.Mass. 1998). Although there is a duty to make a corporate disclosure "complete and accurate," this "does not mean that by revealing one fact about a product, one must reveal all others that, too, would be interesting, market-wise, but means only such others, if any, that are needed so that what was revealed would not be `so incomplete as to mislead.'" Gross, 93 F.3d at 992 (quoting Backman v. Polaroid Corp., 910 F.2d 10, 16 (1st Cir. 1990)).Carney v. Cambridge Technology Partners, Inc., 135 F. Supp.2d 235, 242 (D. Mass., 2001); Orton, 344 F. Supp.2d at 298; In re Polaroid Corp. Securities Litigation, 134 F. Supp.2d at 183.
It is within this pleading framework that the allegations of the complaint shall be examined.
C. The Challenged Statements
In the First Circuit, when a claim of securities fraud is premised upon numerous alleged false and/or misleading statements, the challenged statements are analyzed statement-by-statement. See Carney, 135 F. Supp.2d at 243, citing In re Boston Technology, Inc. Securities Litigation, 8 F. Supp.2d 43, 55 (D. Mass., 1998); In re Peritus Software Services, Inc. Securities Litigation, 52 F. Supp.2d 211, 219 n. 1 (D. Mass., 1999). In their respective memoranda and at oral argument the parties essentially grouped the statements at issue in the complaint into three categories, and the Court shall follow suit.
a. Manufacturing
False and/or Misleading StatementParagraph 59 : April 22, 1999 Press Release entitled "Alkermes and Janssen Pharmaceutica to Proceed into Phase III Clinical Trials of Sustained Release Formulation of Anti-Psychotic Drug Risperdal®."
Alkermes, Inc. (NASDAQ: ALKS) announced today that Janssen Research Foundation, a division of Janssen Pharmaceutica, will proceed into Phase III clinical trials of an IM injectable sustained release formulation of the anti-psychotic drug RISPERDAL (risperidone). The product candidate is based on Alkermes' Medisorb drug delivery system and is designed to provide patients with prolonged therapeutic benefit from a single administration. The decision to proceed into Phase III clinical trials follows the successful completion by Janssen of Phase I and Phase II clinical trials of the product candidate and the completion by Alkermes of scale-up and Phase III manufacturing activities at the expected commercial scale.
"This is an important milestone in the development of this product candidate and of our Medisorb drug delivery technology," said Richard F. Pops, Chief Executive Officer of Alkermes. "We have moved rapidly in the development and scale-up of this product candidate with our partners at Janssen Pharmaceutica. We look forward to the next phase of product development."Paragraph 60 : 10-K year ending March 31, 1999
In April 1999, Janssen announced its intention to proceed with a Phase III clinical trial of RISPERDAL, after completing Phase I and Phase II clinical trials. In addition, we have completed scale-up and Phase III manufacturing activities at the expected commercial scale. We will manufacture the Medisorb formulation of RISPERDAL for both the clinical trials and commercial sales, if any.Paragraph 73 : May 19, 2000, Application Ser. No. 09,575,075 filed with the U.S. Patent and Trademark Office for the grant of patent entitled: "Method for Preparing Microparticles Having a Selected polymer Molecular Weight."
The methods of the present invention control the hold time and temperature of a polymer solution in order to control the molecular weight of the polymer in the finished microparticle product. In this manner, the methods of the present invention advantageously allow a selected polymer molecular weight to be achieved from a variety of starting material molecular weights. Alternatively, microparticle products of varying polymer molecular weights can be produced using the same molecular weight starting material. Thus, a range of products can be made from the same starting materials, thereby eliminating the need to reformulate the finished product to achieve the desired molecular weight of the polymer in the finished product.Paragraph 77 : 10-K year ending March 31, 2000
RISPERDAL. We are developing and manufacturing a Medisorb sustained release formulation of Janssen's anti-psychotic drug RISPERDAL. Janssen is an affiliate of Johnson Johnson. In April 1999, Janssen announced its intention to proceed with two Phase III clinical trials of RISPERDAL Depot, after completing Phase I and Phase II clinical trials. In addition, we have completed scale-up and Phase III manufacturing activities at the expected commercial scale. We will manufacture the Medisorb formulation of RISPERDAL for both the clinical trials and commercial sales, if any. Janssen is responsible for conducting all clinical trials.
The relevant paragraphs of the complaint have been transcribed in their entirety with the challenged portions bolded and italicized as they are in the complaint.
* * * * *
We own and occupy approximately 35,000 square feet of manufacturing, office and laboratory space in Wilmington, Ohio. The facility contains state-of-the-art GMP sterile production facility specifically designed for the production of Medisorb microspheres. Construction of a 20,000 square foot addition and renovation of this facility to support commercial scale manufacture of Medisorb product candidates was completed in June of 1998. We believe that our Wilmington facility is adequate for its preclinical, clinical and commercial operations.Paragraph 85 : 10-K for the year ending March 31, 2001
RISPERDAL. We are developing and manufacturing a Medisorb sustained-release formulation of Janssen's anti-psychotic drug RISPERDAL. Janssen is an affiliate of Johnson Johnson. In February 2001, Janssen notified us of the positive results of two multi-center Phase III clinical trials of an intra-muscular ("IM") injectable sustained-release formulation of RISPERDAL. With the completion of the Phase III clinical trials, we and Janssen are preparing for the expected submissions to regulatory agencies, including the FDA. We will manufacture the Medisorb formulation of RISPERDAL for any future clinical trials and commercial sales, if any. Janssen will continue to provide funding to us as we continue the development of Medisorb RISPERDAL and as we prepare to be the commercial manufacturer.
* * * * *
We own and occupy approximately 50,000 square feet of manufacturing, office and laboratory space in Wilmington, Ohio. The facility contains a GMP production facility designed for the production of Medisorb microspheres on a commercial scale. During 2000, we completed an expansion of our Medisorb commercial manufacturing facility in Wilmington, Ohio, to prepare for commercial scale manufacture of Medisorb RISPERDAL. Additionally, we are currently planning to construct a second facility in Wilmington, Ohio for commercial manufacturing. We also lease and occupy approximately 30,000 square feet of laboratory and office space in Blue Ash, Ohio under a lease expiring in 2003.Paragraph 89 : Press release issued September 4, 2001, entitled: "New Drug Application for First Injectable, Long-Acting Atypical Antipsychotic Submitted to FDA"
A new drug application for a long-acting injectable formulation of Risperdal (risperidone)* has been filed with the Food and Drug Administration by Janssen Pharmaceutica Products, LP, and similar filings are now being submitted with health authorities worldwide. If approved, it would be the first atypical antipsychotic medication available in a formulation suitable for long-term use that requires administration just once every two weeks, instead of daily doses.
Using proprietary Medisorb technology developed by Alkermes, Inc., the new formulation encapsulates risperidone in "microspheres" made of a biodegradable polymer, which is injected into the muscle. Laboratory and clinical research has shown that the microspheres gradually degrade at a set rate designed to provide consistent levels of the drug in the bloodstream. The polymer from which the microspheres are made breaks down into two naturally occurring compounds that are then eliminated by the body. Alkermes is scheduled to manufacture this long-acting formulation of Risperdal pending regulatory approval.Paragraph 95 : Press release issued October 30, 2001, entitled: "Alkermes to Expand Production Facility to Meet Projected Demand for Long-Acting Formulation of Risperdal®"
Alkermes, Inc. (NASDAQ: ALKS) today announced the signing of an agreement with Janssen Pharmaceutica that provides for the expansion of Alkermes' manufacturing capacity for production of the new, long-acting injectable formulation of Risperdal (risperidone). A new drug application (NDA) for the new formulation of Risperdal, currently the most widely prescribed antipsychotic medication in the United States, was submitted to the U.S. Food and Drug Administration on August 31, 2001. Risperdal is expected to be the first "atypical" antipsychotic to be available in a formulation that only requires administration every two weeks.
"Our current manufacturing facility is fully equipped to support launch quantities and to meet the early demand projected for long-acting Risperdal," stated David Broecker, Chief Operating Officer of Alkermes. "This expansion will include the construction of a separate, large-scale GMP facility on the same site and is designed to enable Alkermes to significantly expand our production capacity. Our agreement with Janssen eliminates the financial risk associated with the acceleration of this expansion."
Pursuant to the agreement announced today, Alkermes has committed to expand its production capacity prior to FDA approval of the new Risperdal formulation in exchange for the certain guaranteed financial payments. In addition, Alkermes will receive, under earlier agreements, royalties and manufacturing payments from Janssen upon successful commercialization of the new, long-acting Risperdal.Reasons Why False and/or Misleading
The Plaintiffs contend that the statements in paragraph 59 and 60 were false and/or misleading because the Defendants omitted significant information about Medisorb, including that "the Medisorb manufacturing facilities were to be located at Wilmington, Ohio and were not ready for commercial scale manufacturing." (#39 ¶ 62) In particular,
While defendant Pops announced the production of manufacturing lots at commercial scale, defendants concealed that they were still unable to produce the facilities' DMF for the Wilmington facility as required under the 1997 Mfg. Agreement, indicative of the fact that facilities, equipment and manufacturing process problems continued to exist at Wilmington.
Complaint #39 ¶ 63.
According to CW6, the Defendants also concealed that "[d]espite claims of readiness to manufacture at the expected commercial scale, unresolved issues in the polymer manufacturing process and its transfer to the Wilmington commercial manufacturing facility persisted." (#39 ¶ 64)
Paragraph 73 is said to be false and/or misleading because it "conceal[ed] a desperate need to identify product manufacturing methods to `fix' the quality issues relating to wide variations in the quality of Medisorb polymer required for the manufacture of Risperdal Consta." (#39 ¶ 74)
The statements made in the 10-K year ending March 31, 2000 (paragraph 77 of the complaint) were purportedly false and/or misleading because, according to CW6, "by at least February 2000 and continuing into 2001, defendants were experiencing severe problems producing Medisorb polymers." (#39 ¶ 79)
Next it is argued that the statements made in paragraph 85 were false and/or misleading because, according to CW4, the Wilmington plant was not yet ready to engage in full-scale production and there were difficulties in transferring the polymer production from Blue Ash to Wilmington. (#39 ¶ 87)
The statements made in paragraph 89 were allegedly false and/or misleading because the Defendants "misled the market into believing that the Wilmington facility was able to begin commercial manufacture of the product at the expected levels when they knew it was not." (#39 ¶ 91) According to CW2, at the end of 2001 "fill" problems developed because the fill machinery was not functioning properly at the Wilmington facility. (#39 ¶ 92)
The Plaintiffs assert that the statements made in paragraph 95 were false and/or misleading because "facilities, equipment and manufacturing process issues continued to exist at the Wilmington facility." By way of example of the continuing difficulties,
according to CW6, problems in the transfer JN1 polymer production critical to support commercial-scale production of Risperdal Consta were not resolved until at least February of 2002. Thus, despite assertions to the contrary in the October 30, 2001 press release, defendants remained wholly unable to begin commercial manufacture of the product at the expected levels.
Complaint #39 ¶ 96.
Also, based on information provided by CW3, at least up until September 2003, the Wilmington facility had neither plumbing or electrical wiring, nor had the production machines been installed. (#39 ¶ 97)
Analysis
The bulk of the parties' memoranda (#45 at 6-18; #49 at 6-16; #55 at 8-15) focuses on whether the Defendants' manufacturing-related statements were either false or misleadingly incomplete under the applicable case law. The Court need not delve into such an intricate analysis, however, because a separate and discrete reason renders these statements non-actionable. In a nutshell, the Defendants' argument that the Plaintiffs have failed to plead a nexus between the manufacturing-related statements and their loss has merit. Put another way, failure to plead loss causation is a fatal defect in the Plaintiffs' manufacturing-based claims.
In the complaint the Plaintiffs allege that "[o]n July 1, 2002, at the close of the Class Period, the FDA issued a non-approvable letter for Risperdal Consta, based on toxicological studies. . ." . (#39 ¶ 40, emphasis added). It is as a result of the issuance of this non-approvable letter that Alkermes stock dropped in value and the Plaintiffs suffered their losses. (#39 ¶ 40) The Defendants argue that the Plaintiffs have not alleged that the issuance of the non-approvable letter had anything whatsoever to do with any manufacturing problems. As a consequence, the Plaintiffs have failed to plead an element of their claim vis-a-vis the manufacturing allegations, to wit, that the Defendants' purportedly false or misleading statements caused their loss. See Title 15 U.S.C. 78u-4(b)(4); In re Polaroid, 134 F. Supp.2d at 183.
Indeed, even in their opposition memo, the Plaintiffs argue only that "the FDA's July 2002 Non-approvable letter related to questions regarding `pre-clinical data' — a material issue that defendants fraudulently omitted in their representations to investors." (#49 at 28)
At oral argument, Plaintiffs' counsel asserted that the positive manufacturing-related statements issued by the Defendants caused investors to purchase and hold on to Alkermes stock. While that may be so, as the Defendants' counsel observed, the scenario described relates to transactional causation, not loss causation. In the Polaroid case, Judge Saris relied on the Second Circuit's causation analysis which involved
parsing causation into two elements: transaction causation and loss causation. AUSA Life. Ins. Co. v. Ernst and Young, 206 F.3d 202, 209 (2nd Cir. 2000). "Loss causation is causation in the traditional `proximate cause' sense — that the allegedly unlawful conduct caused the economic harm. Transaction causation means that `the violations in question caused the [plaintiffs] to engage in the transaction in question.'" Id. (Internal citations omitted).In re Polaroid, 134 F. Supp.2d at 188; See also Crowell v. Ionics, Inc., 343 F. Supp.2d 1, 22 (D. Mass., 2004) ("A securities plaintiff must plead and ultimately prove two kinds of causation: transaction causation (what induced the purchase) and loss causation (what caused the stock to decline in value and produce a loss).").
Like Judge Saris, in his loss causation discussion in Crowell Judge Young cited Second Circuit case law, AUSA Life. Ins. Co. v. Ernst and Young, 206 F.3d 202, 209 (2 Cir., 2000) and Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87 (2 Cir., 2001), cases upon which the Second Circuit has now expounded in Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d 189, 197 (2 Cir., 2003) and Lentell v. Merrill Lynch Co., Inc., 396 F.3d 161 (2 Cir., 2005). To the extent that the Crowell decision states that pleading loss causation "can be satisfied by alleging that the Ionics Defendants' misstatements artificially inflated the price of Ionics common stock during the class period" alone, it appears to be an explication of transaction causation under recent Second Circuit law, not loss causation. Moreover, the district court cases to which Judge Young cites are distinguishable from the case at bar.
Since the AUSA Life decision, the Second Circuit has had occasion to clarify more fully the distinction in the types of causation. First, in Emergent Capital Inv. Mgmt., LLC v. Stonepath Group, Inc., 343 F.3d 189, 197 (2 Cir., 2003), the Court explained:
As noted in Swack v. Credit Suisse, 383 F.Supp.2d 223, 2004 WL 2203482*14 (D. Mass.), the First Circuit has yet to decide the validity of loss causation issue. See Lucia v. Prospect St. High Income Portfolio, Inc. 36 F.3d 170, 174 n. 7 (1 Cir., 1994) ("Given adequate grounds to support dismissal of plaintiffs' section 10(b) claims, we expressly decline to address the district court's "loss causation" analysis, and its use of Bastian v. Petren Res. Corp., 892 F.2d 680 (7th Cir.), cert. denied, 496 U.S. 906, (1990), in rejecting these same claims.")
The causation element [in a federal securities fraud claim] has two aspects, both which must be alleged and proven: transaction causation and loss causation. Like reliance, transaction causation refers to the causal link between the defendant's misconduct and the plaintiff's decision to buy or sell securities. It is established simply by showing that, but for the claimed misrepresentations or omissions, the plaintiff would not have entered into the detrimental securities transaction.Emergent Capital, 343 F.3d at 197 (citations omitted).
Both the allegations of the complaint and the Plaintiffs' oral argument plainly and unequivocally involve this initial aspect of causation, i.e., that the Plaintiffs bought and retained their Alkermes stock in reliance upon the Defendants' various manufacturing statements. The Defendants' point is that the second aspect, loss causation, is missing. As elucidated by the Second Circuit,
Loss causation, by contrast, is the causal link between the alleged misconduct and the economic harm ultimately suffered by the plaintiff. We have often compared loss causation to the tort law concept of proximate cause, "meaning that the damages suffered by plaintiff must be a foreseeable consequence of any misrepresentation or material omission."
Similar to loss causation, the proximate cause element of common law fraud requires that plaintiff adequately allege a causal connection between defendants' non-disclosures and the subsequent decline in the value of NETV securities.Emergent Capital, 343 F.3d at 197 (citations omitted).
It is undisputed that there is no allegation that the manufacturing-related statements had any connection to the FDA non-approval letter and subsequent decline in the Alkermes stock.
Earlier this year the Second Circuit reiterated these causation distinctions while adding even more definition to the concepts in Lentell v. Merrill Lynch Co., Inc., 396 F.3d 161 (2 Cir., 2005). Quoting that decision at some length, the Court wrote:
It is long settled that a securities-fraud plaintiff "must prove both transaction and loss causation." Transaction causation is akin to reliance, and requires only an allegation that "but for the claimed misrepresentations or omissions, the plaintiff would not have entered into the detrimental securities transaction."
Loss causation `is the causal link between the alleged misconduct and the economic harm ultimately suffered by the plaintiff.' The PSLRA codified this judge-made requirement: "In any private action arising under this chapter, the plaintiff shall have the burden of proving that the act or omission of the defendant alleged to violate this chapter caused the loss for which the plaintiff seeks to recover damages." 15 U.S.C. 78u4-(b)(4). We have described loss causation in terms of the tort-law concept of proximate cause, i.e., "that the damages suffered by plaintiff must be a foreseeable consequence of any misrepresentation or material omission,"; but the tort analogy is imperfect. A foreseeable injury at common law is one proximately caused by the defendant's fault, but it cannot ordinarily be said that a drop in the value of a security is "caused" by the misstatements or omissions made about it, as opposed to the underlying circumstance that is concealed or misstated. Put another way, a misstatement or omission is the "proximate cause" of an investment loss if the risk that caused the loss was within the zone of risk concealed by the misrepresentations and omissions alleged by a disappointed investor. Thus to establish loss causation, "a plaintiff must allege . . . that the subject of the fraudulent statement or omission was the cause of the actual loss suffered," i.e., that the misstatement or omission concealed something from the market that, when disclosed, negatively affected the value of the security. Otherwise, the loss in question was not foreseeable.
We acknowledge that our precedents make clear that loss causation has to do with the relationship between the plaintiff's investment loss and the information misstated or concealed by the defendant. If that relationship is sufficiently direct, loss causation is established; but if the connection is attenuated, or if the plaintiff fails to "demonstrate a causal connection between the content of the alleged misstatements or omissions and `the harm actually suffered,'" a fraud claim will not lie.Lentell, 396 F.3d at (citations omitted).
As applied to the facts of this case, this explication of the law ends the inquiry. In the absence of any allegation that the manufacturing-related allegations "concealed something from the market that, when disclosed, negatively affected the value of the security", the Plaintiffs have failed to allege an element of their claim, loss causation.
To the extent that any question remained extant, this issue was definitively addressed by the Supreme Court in a decision issued on April 19, 2005, Dura Pharmaceuticals, Inc. v. Broudo, 125 S.Ct. 1627 (2005). As succinctly stated by Justice Breyer for a unanimous Court:
A private plaintiff who claims securities fraud must prove that the defendant's fraud caused an economic loss. 109 Stat. 747, 15 U.S.C. § 78u-4(b)(4). We consider a Ninth Circuit holding that a plaintiff can satisfy this requirement — a requirement that courts call "loss causation" — simply by alleging in the complaint and subsequently establishing that "the price" of the security "on the date of purchase was inflated because of the misrepresentation." 339 F.3d 933, 938 (9th Cir. 2003) (internal quotation marks omitted). In our view, the Ninth Circuit is wrong, both in respect to what a plaintiff must prove and in respect to what the plaintiffs' complaint here must allege.Dura Pharmaceuticals, Inc., 125 S.Ct. at 1629.
Consequently, any fraud claim premised on the manufacturing-related allegations must fail as a matter of law.
b. Ten Percent Royalty
False and/or Misleading Statement Paragraph 66 : Needham Co. report issued December 21, 2000
We recently spent time with Alkermes' management and came away with increased confidence about the company's outlook for 2001 and beyond.
A compelling feature of Alkermes is that it has developed true platform technologies that can be applied over and over again to generate a stream of new product candidates. The technology is so valuable that it allows Alkermes to command roughly 10% of product sales in deals signed with corporate partners.
* * * * *
[I]n our view, a key aspect of Alkermes platform technology is that its contribution to a product candidate is extremely valuable to partners. Unlike other platform technologies that can contribute to the generation of new drugs, such as many of the genomics technologies like gene databases and target validation tools, Alkermes contribution typically commands roughly 10% of product sales. Most other platform technologies typically garner 1% or lower (or even no) royalties.Paragraph 67 : Needham Co. report issued April 2, 2001
For each drug commercialized by a partner using Alkermes' technologies, Alkermes receives revenues equivalent to roughly 10% of sales to take to its bottom line. While we consider Nutropin Depot strong proof of concept, we expect Alkermes's share of its second drug, Risperdal Depot [sic], could surpass $40 million annually.Paragraph 68 : Thomas Weisel analyst report issued September 4, 2001
We expect FDA approval and launch by 1QCY03 and estimate that peak sales of Risperdal LA could reach $500mn. Upon approval, Alkermes will manufacture Risperdal LA for commercial sale in exchange for manufacturing revenue and royalties on sales (that we estimate to be between 10%-12%).Reasons Why False and/or Misleading
Paragraphs 66-68 are said to be false and/or misleading because according to CW6 who attended a meeting of senior personnel during which "the royalty stream from Risperdal Consta was discussed," Alkermes knew that Risperdal Consta would not be profitable "unless it achieved the high end of sales projections, an unlikely scenario." (#39 ¶ 69)
Analysis
It is argued that the statements are not actionable for two reasons: 1) since the statements were made by analysts they should be dismissed as a matter of law because they can not be attributed to one of the Individual Defendants, and, 2) the statements were in fact accurate because Alkermes has been receiving nearly 10% of the Risperdal Consta revenues, including the contractual 2.5% royalty payment. (#45 at 19) The Defendants' first point is dispositive of the issue.
When weighing the potential liability of a defendant for an analyst's statements, the First Circuit has held that
the entanglement test is the correct approach. This test requires the plaintiff to demonstrate the defendants' involvement with third-party statements:
[L]iability may attach to an analyst's statements where the defendants have expressly or impliedly adopted the statements, placed their imprimatur on the statements, or have otherwise entangled themselves with the analysts to a significant degree. . . . [T]he court will determine whether the complaint contains allegations which, favorably construed and viewed in the context of the entire pleading, could establish a significant and specific, not merely a casual or speculative, entanglement between the defendants and the analysts with respect to the statements at issue.
Schaffer, 924 F. Supp. at 1310. Entanglement also includes situations where company officials "intentionally foster a mistaken belief concerning a material fact." Elkind, 635 F.2d at 163-64.In re Cabletron Systems, Inc., 311 F.3d 11, 37-8 (1 Cir., 2002) (footnote omitted).
Nowhere in the complaint is the Alkermes source of these alleged statements identified. This failure alone is enough to doom the royalty claims for
Dropping a footnote to paragraph 68 and referencing a statement made by defendant Frates in 2004 simply does not remedy this lack of specificity with respect to third-party statements made in 2000 and 2001.
[t]o state a claim of fraud on the basis of an analyst statement, a complaint must allege "entanglement," and must, pursuant to Rule 9(b), do so with sufficient particularity. Suna, 107 F.3d at 73. In this case, the application of Rule 9(b) to the analyst statements requires that plaintiffs specify the time, place, speaker, and content of what was said to the firms by the defendants that would have induced them to make the allegedly misleading comments and forecasts. Id."In re Boston Technology, Inc. Securities Litigation, 8 F. Supp.2d at 58; Carney, 135 F. Supp.2d 235 at 248; In re Sepracor, Inc. Securities Litigation, 308 F. Supp.2d 20, 37 (D. Mass., 2004).
Having failed to identify the company official at Alkermes who purportedly made the reported statements, paragraphs 66-68 must be dismissed for lack of particularity under Rule 9(b) and the PSLRA.
c. Pending FDA Approval
False and/or Misleading Statement Paragraph 82 : Press Release issued February 20, 2001, entitled: "Alkermes Announces Milestones In Development Of Injectable Sustained Release Risperdal®"
Alkermes, Inc. (NASDAQ: ALKS) today announced that its partner, Janssen Pharmaceutica, has completed two multi-center Phase III clinical trials of an IM injectable sustained release formulations of the anti-psychotic drug RISPERDAL (risperidone). The formulation is based on Alkermes' Medisorb injectable sustained release drug delivery system and is designed to provide patients with prolonged therapeutic benefit from a single administration. With the completion of the Phase III clinical trials, Alkermes and Janssen are preparing for the expected submission of a New Drug Application (NDA) to regulatory health authorities including the United States Food and Drug Administration (FDA).
"We are pleased to be moving forward towards the commercialization of our injectable sustained release formulation of RISPERDAL," said Richard Pops, Chief Executive Officer of Alkermes, Inc. "Our Medisorb injectable sustained release drug delivery system is designed to provide important dosing advantages to patients, their families and caregivers."Paragraph 101: Press release issued July 1, 2002, entitled: "Alkermes Announces Receipt by Johnson Johnson Pharmacaeutical Research Development of Non-Approvable Letter for Risperdal Consta." TM
Alkermes, Inc. (Nasdaq: ALKS) today announced that Johnson Johnson Pharmaceutical Research Development, LLC has received a non-approvable letter from the U.S. Food and Drug Administration (FDA) related to its New Drug Application (NDA) for Risperdal ConstaTM (risperidone) long-acting injection.
"One of the strengths of our business model is the quality of the pharmaceutical companies with whom we collaborate," said Richard Pops, Chief Executive Officer of Alkermes. "Johnson Johnson is one of the world's leading health care companies. We have great confidence in relying on their ability and judgment in dealing with regulatory authorities around the world."
Risperdal Consta is a long-acting injectable formulation of Risperdal that uses Alkermes' Medisorb drug-delivery technology. If approved, Risperdal Consta will be manufactured by Alkermes and the product will be marketed by Janssen Pharmaceutica Products, L.P. in the United States, Janssen-Ortho in Canada and Janssen-Cilag elsewhere.
"Alkermes' business is based on multiple drug delivery technologies and multiple product candidates with independent opportunities for commercial success," said Richard Pops. "We are very committed to the success of Risperdal Consta. The ultimate success of our business, however, is not dependent solely upon it. We have a unique combination of personnel, technologies, financial resources and an operating plan that enables us to develop a broad pipeline of product candidates."Paragraph 102 : Press release issued July 1, 2002, by Johnson Johnson entitled: "Johnson Johnson Pharmaceutical Research Development Receives Non-Approvable Letter for Risperdal Consta."
Johnson Johnson Pharmaceutical Research Development, LLC (JJPRD) today announced that it from the U.S. Food and Drug Administration (FDA) related to its New Drug Application (NDA) for Risperdal Consta(TM) (risperidone) long-acting injection. Issued at the 10-month goal FDA has set for responding to standard NDAs, the letter invited further dialogue with the agency to resolve questions regarding certain aspects of the pre-clinical data. No significant concerns were raised regarding the manufacturing process.
"We believe we will be able to satisfactorily resolve the FDA's questions about the pre-clinical data," said Harlan Weisman, MD, executive vice president of research and development at JJPRD. "We look forward to doing so in an expeditious manner and moving ahead with the approval process."
Risperdal Consta is a long-acting injectable formulation of Risperdal that uses Alkermes' proprietary, injectable, extended-release, drug-delivery technology, Medisorb. The technology is based on the encapsulation of drugs into small polymeric microspheres that degrade slowly and release the medication at a controlled rate following subcutaneous or intramuscular injection. If it is approved, Risperdal Consta will be manufactured by Alkermes and marketed in the United States by Janssen Pharmaceutica Products, L.P.
"We believe Risperdal Consta will represent an important new treatment option for persons with schizophrenia by offering all of the benefits of an atypical antipsychotic in a long-acting form," Dr. Weisman continued. "It has been estimated that as few as 25 percent of persons with schizophrenia take their medication on a consistent basis — a problem that can lead to relapse and re-hospitalization. Because of its two-week duration of effect, thus eliminating the need for daily pills, Risperdal Consta may help increase adherence to treatment."Reasons Why False and/or Misleading
As identified, this press release emanated from Johnson Johnson, an entity that is not a party to this litigation. The Plaintiffs have proffered no explanation as to how this statement can be attributed to the Defendants.
Based upon information from CW4, the Plaintiffs contend that the statement in paragraph 82 was false and/or misleading because the NDA had already been delayed as a result of a request from the FDA for additional pre-clinical studies. (#39 ¶ 83) The reasons for the request, mainly to ascertain the long-term toxicological effects of polymers in the body, were related to the reasons why the FDA did not approve the NDA in July of 2002. (#39 ¶ 83)
With regard to paragraph 101, it is asserted by CW6 that the Defendants should have expected receipt of the non-approvable letter because the pre-clinical toxicology data issues raised therein were the same as had been raised when Janssen had earlier sought approval for the oral form of risperidone. (#39 ¶ 103) According to CW4, the non-approvable letter was also related to the additional studies that had been requested with respect to "having residual polymer substance in the body." (#39 ¶ 104) Analysis
CW4 was not employed by Alkermes in July, 2002, when the non-approvable letter was issued. (#39 ¶ 30) ("Confidential witness 4 ("CW4") was a manager of the quality control laboratory at Alkermes from 1996 until April 2001 at both the Blue Ash and Wilmington facilities.") As such, it is questionable whether the Plaintiffs' allegations met the requisite particularity requirements. See In re Vertex Pharmaceuticals, Inc. Securities Litigation, 357 F.Supp.2d 343, 2005 WL 415911*9-11 (D. Mass., 2005)).
A review of the complaint exposes no allegation that the Defendants made any statement whatsoever to the market regarding test results. In the absence of any affirmative misstatement, the Plaintiffs must hinge the viability of their claims on the premise that there was a misleading omission because the Defendants did not reveal the alleged FDA concerns about the drug.
The Defendants did make several statements throughout the class period indicating that they were awaiting regulatory approval by the FDA of Risperdal Consta. (#39 ¶¶ 82, 89) These statements are challenged as being false and/or misleading because they omitted the fact that the FDA requested additional pre-clinical studies in 1998 to determine the long-term effects of polymers in the body. (#39 ¶¶ 83, 90) The Defendants contend that they were under no duty to disclose this information because nothing in the statements would have led an investor to believe that the FDA did not ask for additional studies. (#45 at 14-16)
When reasonable investors are led to believe that regulatory approval is a "when not if" proposition, "subjective scientific disagreement over the efficacy" of the drug should be disclosed to investors. In re Transkaryotic Therapies, Inc., Sec. Litig., 319 F. Supp.2d 152, 160 (D. Mass., 2004); See In re Biogen Sec. Litig., 179 F.R.D. 25 (D. Mass., 1997). On the other hand, when revealing facts such as a submission of an NDA, a company need not "reveal all others that, too, would be interesting, market-wise, but means only such others, if any, that are needed so that what was revealed would be `so incomplete as to mislead.'" Backman, 910 F.2d at 16 quoting SEC v. Texas Gulf Sulphur Co., 401 F.2d 833, 862 (2d Cir. 1968), cert. denied, 394 U.S. 976 (1969). Materiality of an omission will depend on whether the information would have "significantly altered the total mix of information made available." Basic, 485 U.S. at 232.
The statements challenged in paragraphs 82 and 101 are not actionable because they are not false and/or misleading. The Defendants had no duty to disclose that the FDA had requested additional studies because they had never guaranteed FDA approval. Moreover, in the complaint the Plaintiffs quote the Defendants 10-K for the fiscal year ending March 31, 2000, to the effect that "Janssen [was] responsible for conducting all clinical trials." (#39 ¶ 77) There are no facts alleged in the complaint regarding what, if any, information the Defendants (as opposed to Janssen) even had to disclose. The fact that the FDA did eventually approve the NDA indicates that there were no "subjective scientific disagreement over the efficacy" and the Defendants remedied whatever problem had existed. In short, under the Backman standard, the Defendants' statements are not misleading so as to be actionable.
Although the parties additionally argue the issues of motive and scienter, among others, having reached the conclusion that no actionable statements have been alleged, the Court need go no further.
IV. Recommendation
For the reasons stated, I RECOMMEND that Defendants Alkermes, Inc., Richard F. Pops, Robert A. Breyer, David A. Broecker, Michael J. Landine, James M. Frates and James L. Wright's Motion To Dismiss Consolidated Amended Complaint (#44) be ALLOWED.
V. Review by the District Judge
The parties are hereby advised that pursuant to Rule 72, Fed.R.Civ.P., any party who objects to this recommendation must file a specific written objection thereto with the Clerk of this Court within 10 days of the party's receipt of this Report and Recommendation. The written objections must specifically identify the portion of the recommendation, or report to which objection is made and the basis for such objections. The parties are further advised that the United States Court of Appeals for this Circuit has repeatedly indicated that failure to comply with Rule 72(b), Fed.R.Civ.P., shall preclude further appellate review. See Keating v. Secretary of Health and Human Services, 848 F.2d 271 (1 Cir., 1988); United States v. Emiliano Valencia-Copete, 792 F.2d 4 (1 Cir., 1986); Scott v. Schweiker, 702 F.2d 13, 14 (1 Cir., 1983); United States v. Vega, 678 F.2d 376, 378-379 (1 Cir., 1982); Park Motor Mart, Inc. v. Ford Motor Co., 616 F.2d 603 (1 Cir., 1980); see also Thomas v. Arn, 474 U.S. 140 (1985).