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IN RE REGENERON PHARMACEUTICALS

February 1, 2005.

IN RE: REGENERON PHARMACEUTICALS, INC. SECURITIES LITIGATION.


The opinion of the court was delivered by: ROBERT SWEET, Senior District Judge

OPINION

Defendants, Regeneron Pharmaceuticals, Inc. ("Regeneron" or the "Company"), Leonard S. Schleifer ("Dr. Schleifer"), George D. Yancopoulos ("Dr. Yancopoulos"), Hans-Peter Guler ("Dr. Guler"), Neil Stahl ("Dr. Stahl"), and Murray A. Goldberg ("Goldberg") (collectively the "Defendants") have moved to dismiss the consolidated amended class action complaint (the "Amended Complaint") pursuant to Fed.R.Civ.P. 9(b) and 12(b)(6) and Section 21E(c)(1) of the Private Securities Litigation Reform Act of 1995 (the "PSLRA"). For the reasons set forth below, the motion is denied.

The Amended Complaint in 217 paragraphs drafted by skilled counsel alleges a securities fraud committed by the Defendants in connection with the fast-track development of AXOKINE, a drug to combat obesity. The instant motion, submitted by equally skilled and prominent defense counsel, has raised difficult issues of the application of the PSLRA and pleading requirements for a securities action. Given the complexities of the science involved, the process by which drugs are approved, and the operation of the securities market, it is difficult to define with precision the issues which must be resolved. The effort to do so follows. Page 2

  Prior Proceedings

  The complaint in this action was filed on May 2, 2003. On August 13, 2003, the present action was consolidated with 03 Civ. 3446 (RWS), 03 Civ. 3704 (RWS), 03 Civ. 3956 (RWS), 03 Civ. 4006 (RWS), 03 Civ. 4214 (RWS), and 03 Civ. 4398 (RWS). On September 9, 2003, Sarah and Joseph Katz, Teri D. Carroll, and Stanley D. Bazewicz were appointed lead plaintiffs pursuant to Section 21D(a)(3)(B) of the Securities Exchange Act of 1934 (the "Securities Exchange Act"). See 15 U.S.C. § 78u-4(a)(3)(B). A consolidated amended complaint ("the Amended Complaint") was filed on November 1, 2003. Defendants' motion to dismiss the Amended Complaint was filed on December 23, 2003. Oral arguments were heard on June 16, 2004, and the motion was considered fully submitted.

  The Parties

  Plaintiffs are a putative class of individuals who purchased Regeneron securities during the period March 10, 2000 through March 30, 2003 (the "Class Period"). (Compl. ¶ 23.)

  Regeneron is a biopharmaceutical company that was founded in 1988 "to develop and commercialize new therapeutic agents to treat unmet medical needs." (Id. ¶ 73.) With an initial focus on treating degenerative neurological conditions, Regeneron also has Page 3 worked to develop drugs for use in the treatment of cancer, rheumatoid arthritis, asthma and obesity. (Id. ¶ 24.) AXOKINE is one of several such drug candidates currently under development by Regeneron. (Id. ¶ 69.)

  The chairman of Regeneron's board of directors, Dr. P. Roy Vagelos ("Dr. Vagelos"), is the former chairman and chief executive officer of Merck & Co. (Orr Aff. Ex. 1 at 31.) Dr. Vagelos is not a defendant in this action.

  Dr. Schleifer founded Regeneron in 1988 and has been its president and chief executive officer since its inception, and he served as chairman of its board of directors from 1990 to 1994. (Compl. ¶ 44; Orr. Aff. Ex. 1 at 31.) He is a licensed physician certified in neurology by the American Board of Psychiatry and Neurology, and he formerly served as a clinical professor of neurology at Cornell University Medical School. (Orr. Aff. Ex. 1 at 31.)

  Dr. Yancopoulos is an executive vice president and chief scientific officer of Regeneron, president of Regeneron Research Laboratories, and a member of Regeneron's board of directors. (Compl. ¶ 45; Orr Aff. Ex. 1 at 32.) He is formerly Regeneron's vice president for discovery and a senior staff scientist. Dr. Yancopoulos received both a Ph.D in molecular biophysics and an M.D. from Columbia University, and he has been listed among the Page 4 most highly cited scientists in biology and medicine. (Orr Aff. Ex. 1 at 32.)

  Dr. Stahl is senior vice president for preclinical development and bimolecular science at Regeneron, and he is its former director of cytokines and signal transduction. (Compl. ¶ 47; Orr Aff. Ex. 1 at 32.) Dr. Stahl received his Ph.D. in biochemistry from Brandeis University. (Orr Aff. Ex. 1 at 32.)

  Dr. Guler is Regeneron's vice president for clinical sciences. (Compl. ¶ 46.) Prior to joining the Company, Dr. Guler was the senior director of clinical development at Chiron Corporation and associate director of drug development in the pharmaceuticals division of CIBA-GEIGY Corporation. (Orr Aff. Ex. 1 at 32.)

  Goldberg is the senior vice president for finance and administration, chief financial officer, treasurer and assistant secretary of Regeneron. (Compl. ¶ 48; Orr Aff. Ex. 1 at 32.) Prior to joining Regeneron, Goldberg was a member of the board of directors, chief financial officer, vice president for finance, and treasurer of Pharma Genics, Inc. From 1988 until 1990, Goldberg was managing director of the structured finance group at the Chase Manhattan Bank, N.A. (Orr Aff. Ex. 1 at 32.) From 1973 until 1987, Goldberg held various management positions in finance and corporate development at American Cyanimid Company. (Id.) Page 5

  The FDA's Drug Candidate Review Process

  The development of any drug requires extensive Food and Drug Administration ("FDA") oversight. Once a drug candidate undergoes pre-clinical testing, the FDA must decide, based on an Investigational New Drug Application ("IND"), whether it is reasonably safe to test the drug candidate on humans. See 21 C.F.R. § 312.20. Assuming that human testing is approved, the FDA and a local institutional review board ("IRB") of physicians, scientists, and other persons who oversee clinical research must approve clinical trial protocols describing who may participate in the clinical trial, the schedule of tests and procedures, the dosages to be studied, the duration of the study, and the study's objectives. (Orr Aff. Ex. 2 at 1.)*fn1

  The clinical trials proceed in four phases. The principal purpose of the Phase I study is to evaluate the drug candidate's safety over a short period of time in a small group of subjects, typically in the range of 20 to 80 healthy volunteers. Page 6 (Id. at 2.) If the Phase I study does not reveal unacceptable levels of toxicity and the design of the next phase is approved by the FDA and IRB, the Phase II study is undertaken. (Id.) The principal purposes of that study are to determine the optimum dose for the drug candidate and to obtain preliminary data on whether the drug candidate works in people with the particular disease or condition, based on a controlled study of short duration. See 21 C.F.R. § 312.21(2) (b). The typical number of subjects in a Phase II study ranges from a few dozen to several hundred. Id. The typical duration for a Phase II obesity study is three months. (Orr Aff. Ex. 3 at 3.)

  If, after examining the results of the Phase II test, the FDA approves the protocol for the next study, the applicant proceeds to the Phase III study. The purpose of the Phase III study is to gather more information about the safety and efficacy of the optimum dose or doses by studying different and larger populations over a substantially longer period of time. See 21 C.F.R. § 312.21(2) (c). The number of subjects in Phase III studies ranges from several hundred to several thousand. (Orr Aff. Ex. 2 at 2.) Phase III trial results are used as the basis for the FDA's decisions concerning approval of a drug candidate. Finally, Phase IV studies occur after a drug is approved by the FDA. They are designed to explore potential new uses for, and the long-term effects of, the approved drug. (Id.) Page 7

  The Development of AXOKINE And Regeneron's Disclosures

  Plaintiffs have alleged that the development of AXOKINE was critical to the overall performance and prospects of Regeneron and that AXOKINE was the Company's leading drug candidate during the Class Period. (Id. ¶ 177.) Plaintiffs have alleged that AXOKINE had the potential to "make or break" the Company, (id. ¶ 178), and that other products in development were secondary to AXOKINE. (Id. ¶ 179).

  AXOKINE is a modified form of a naturally occurring protein known as ciliary neurotrophic factor ("CNTF"). (Compl. ¶ 72.) Regeneron initially tested CNTF as a potential treatment for Amyotrophic Lateral Sclerosis ("ALS" or "Lou Gehrig's Disease"). (Id. ¶ 28.) While testing CNTF in clinical trials, Regeneron discovered that reduced weight loss was a prominent side effect in ALS patients treated with CNTF. (Orr Aff. Ex. 6 at 3.) It was also noted that another side effect was that some patients treated with CNTF developed neutralizing antibodies. (Id.) At approximately the same time, it was noted that there was a strong similarity between the AXOKINE receptor and the receptor of a drug candidate in development called Leptin. (Id.) At the time, Leptin was considered to be a promising drug candidate for combatting obesity. (Id.) In 1997, Regeneron, in association with Procter & Gamble, commenced the development of AXOKINE for the treatment of, Page 8 among other things, obesity and complications of obesity associated with Type II diabetes. (Compl. ¶ 72.)

  1. The Phase I Study

  In early 1999, Regeneron filed an IND with the FDA, seeking approval to commence clinical trials of AXOKINE. (Orr Aff. Ex. 6 at 5.) With the FDA's approval, the Phase I study was conducted in 1999. (Orr Aff. Ex. 6 at 4.) In its Form 10-Q and in press releases, Regeneron disclosed that statistically significant weight loss had been observed in the Phase I study. (Id. Ex. 7 at 2). Regeneron also disclosed that 42% (8 out of 19 subjects) developed antibodies; however, no neutralizing antibodies were discovered using a cell-based neutralizing antibody assay. (Id. Ex. 8 at 4.) Regeneron further disclosed that "the single dose study demonstrated that AXOKINE is well tolerated at low doses," but at higher doses, "nausea, vomiting, and herpes cold sores were observed." (Id. Ex. 6 at 4.) As a result of these side effects, and as Regeneron disclosed, "as part of an internal review of drug development programs and budgets, Proctor & Gamble decided to return to Regeneron the product rights to AXOKINE." (Id.)

  2. The Phase II Study

  In early 2000, Regeneron disclosed that it was seeking FDA approval to initiate a twelve-week, double-blind, placebo-controlled Page 9 Phase II study of 170 patients, which was principally "designed to confirm the weight loss observed in the Phase I study . . . and to determine the lowest effective well-tolerated dose" during a three-month trial. (Compl. ¶ 98.) As a double-blind study, the protocol required that none of the Regeneron scientists, participating physicians, or patients knew which patients received different doses of AXOKINE or which patients received placebo. (Orr Aff. Ex. 8 at 3.) In its Form 10-Q disclosure filed March 31, 2000, Regeneron warned that antibodies could form and that if these antibodies were "neutralizing" antibodies, they could diminish or totally neutralize the effectiveness of AXOKINE. (Id. Ex. 10 at 19-20.) This warning appeared as a risk factor under the heading "Factors That May Affect Future Operating Results." Id. This warning was repeated as a risk factor in other Form 10-Q and 10-K disclosures filed during the Class Period.

  Upon approval by the FDA, Regeneron initiated the Phase II study on March 28, 2000. (Id. Ex. 31 at 15.)

  On November 28, 2000, Regeneron released the results of the Phase II testing (Id. Ex. 4 at 1). With respect to the efficacy of AXOKINE, Regeneron stated:
Patients treated with AXOKINE showed medically meaningful and statistically significant weight loss compared to those receiving a placebo. . . . Patients who received the optimal dose of AXOKINE over the 12 week treatment period averaged 10 pounds more weight loss than patients on placebo. . . .
Page 10

 (Id.)

  According to Regeneron, the Phase II testing accomplished the dual goals of establishing an optimal dose for AXOKINE and demonstrating that this dose was well tolerated and produced medically significant weight loss. (Id. at 3.) Regeneron stated that additional safety and efficacy data would be collected in the Phase III testing. (Id.) Regeneron also noted that "[n]eutralizing antibodies, based on a laboratory test, were not dose-related and occurred in less than 10% of all patients receiving AXOKINE." (Id.) Regeneron stated that the drug's most common side effects were nausea, coughing, and skin irritation at the injection cite. (Id.)

  In the January 2001 Form S-3, the Company stated that the Phase II trial was preliminary and that it might not be predictive of the results of later trials. (Id. Ex. 12 at 5.)

  In its 2001 Form 10-K disclosure, filed in March 2001, Regeneron stated:

  During the conduct of clinical trials, patients report changes in their health, including illnesses, injuries and discomforts, to their study doctor. Often, it is not possible to determine whether or not these conditions are caused by the drug being studied. Various illnesses, injuries, and discomforts have been reported from time-to-time during the clinical trials of AXOKINE, our only product candidate that has completed Phase II trials. The most frequently reported conditions during the AXOKINE Phase II trial were injection site reactions, Page 11 cough, and nausea or vomiting. During the Phase I study that was conducted in 1999, some subjects developed mouth sores, also known as cold sores, when AXOKINE was given in higher does than what is being studied in the Phase III program. These cold sores were thought to be caused by the reactivation of herpes simplex virus, or HSV. Recurrence of HSV was also reported in previous clinical studies of CNTF, AXOKINE's parent molecule. In the Phase I AXOKINE study, one patient who had evidence of previous exposure to HSV prior to treatment and had been previously diagnoses with Bell's palsy, had a recurrence of Bell's palsy approximately two weeks after the patient's last administration of AXOKINE. In the ongoing Phase III study of AXOKINE, one patient was reported to have been diagnosed with Guillain-Barre syndrome following an upper respiratory tract infection.

 
Although AXOKINE was generally well tolerated in the completed Phase II trial, it is possible that as we test AXOKINE in a large and extended Phase III program, illnesses, injuries, and discomforts that were observed in the earlier trials, as well as conditions that did not occur or went undetected in these small trials, will be reported by patients. If additional clinical experience indicates that AXOKINE has many side effects or causes serious or life-threatening side effects, the development of AXOKINE may fail or be delayed, which would severely harm our business.
Many drug research and development programs never lead to the development of commercially successful products. Only a small minority of all research and development programs ultimately result in commercially successful drugs. We are attempting to develop drugs for human therapeutic uses, and our research and development activities may not be successful and none of our potential product candidates may ever complete clinical trials. Even if clinical trials demonstrate safety and efficacy of our product candidates and the necessary regulatory approvals are obtained, the commercial success of any of our product candidates will depend upon their acceptance by patients, the medical community, and third-party payors and on our ability to successfully develop, manufacture, and market our product candidates. If our products are not successfully commercialized, we will not be able to recover the significant investment we have made in developing such products and our business would be severely harmed.
(Id. Ex. 13 at 27.) Page 12

  The Phase II Follow-Up Data

  The AXOKINE Phase II testing lasted 12 weeks. (Id. Ex. 15 at 1.) Regeneron followed up with its Phase II subjects at intervals of 24, 36 and 48 weeks. (Id. at 1-2.) There were no additional safety concerns observed in the subjects in the follow-up testing. (Id.) In addition, Regeneron tracked these patients to determine whether they suffered from "rebound" weight gain (i.e., weight gained after the drug candidate is no longer administered). Evidence from the pre-clinical animal testing had suggested that patients treated with AXOKINE might potentially avoid rebound weight gain, a problem associated with many weight loss regimens. (Id. at 2.) Accordingly, Regeneron reported weight loss/gain data at intervals of 24, 36 and 48 weeks after the patients stopped using AXOKINE. (Compl. ¶¶ 123-24.) At each of these intervals, Regeneron reported that patients treated with the optimal dose of AXOKINE reported, on average, sustained weight loss. (See Ex. 17 at 1; Ex. 15 at 1.)

  In January 2003, the FDA granted "fast track" designation*fn2 to that component of the AXOKINE development program that Page 13 "covers treatment of severely obese people who are unresponsive to, intolerant of, or unsuitable candidates for certain FDA approved medications for the long-term treatment of obesity." (Orr Aff. Ex. 18 at 1.)

  The Phase III Study

  After consultation with the FDA and joint review of the Phase II data, Regeneron announced in July 2001 that it was initiating Phase III clinical trials. (Id. Ex. 19 at 1.) The double-blind, randomized, placebo-controlled Phase III study enrolled approximately 2,000 patients, roughly ten times the number previously studied in Phase II. Whereas the longest previous trial had only exposed patients to AXOKINE for twelve weeks, there was a twelve month treatment period in the Phase III study, allowing Regeneron to observe safety and efficacy issues in a trial of much longer duration. (Compl. ¶ 125; Id. Ex. 20 at 2.)

  On March 31, 2003, one day after the end of the Class Period, Regeneron issued a press release regarding the year-long Phase III study. (Id. Ex. 20 at 1.) Regeneron disclosed that the results of the initial Phase III trial were "preliminary" and that it "subsequently will discuss all of this data with regulatory authorities." (Id.) It stated that "at that time, [it would] be able to discuss [its] plans for further development of AXOKINE for treatment of obesity." (Id.) Page 14

  Regeneron's March 21, 2003 press release further stated that patients treated with AXOKINE, when compared with placebo, achieved statistical significance with regard to both endpoints of the study. (Id.) First, a 25% of AXOKINE-treated patients lost at least 5% of their initial body weight while 17.6% of patients receiving placebo reported such weight loss. (Id.) Second, participants receiving AXOKINE experienced an average weight loss of 6.2 pounds while those receiving placebo experienced an average loss of 2.6 pounds. (Id.) Regeneron stated that "[a]lthough the results of this Phase III study were statistically significant, the overall magnitude of the weight loss was small." (Id. at 1.) Regeneron explained that AXOKINE-associated weight loss was limited, beginning after about three months of AXOKINE treatment, by the development of neutralizing antibodies in patients. (Id.)

  According Dr. Louis Aronne, Director of the Comprehensive Weight Control Program at New York Presbyterian Hospital, who was quoted in the March 31, 2003 press release, the twelve-month study further revealed that in the 30% of AXOKINE-treated patients who were unaffected by neutralizing antibodies, weight loss was comparable to drugs available on the market. (Id. at 2.) Dr. Aronne nonetheless concluded that "AXOKINE [is] a potentially attractive candidate as part of an obesity regimen." (Id.) Page 15

  Events After The March 31, 2003 Announcement Of The Phase III Results

  On March 31, 2003, the date of the Regeneron Phase III press release, Regeneron's stock price dropped from $17.31 to $7.52, closing 56.6% below the closing price for March 28, ...


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