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IN RE BAYER AG SECURITIES LITIGATION

September 14, 2005.

IN RE: BAYER AG SECURITIES LITIGATION.


The opinion of the court was delivered by: WILLIAM PAULEY, District Judge

MEMORANDUM AND ORDER

This securities fraud class action concerns alleged misrepresentations and omissions about the safety and commercial viability of Baycol, a cholesterol-lowering drug known generically as cerivastatin. Plaintiffs assert claims under Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, against Bayer AG, Bayer Corporation ("Bayer Corp."), Wolfgang Plischke ("Plischke") and David Ebsworth ("Ebsworth") (collectively, "Defendants"). Plaintiffs also assert control person claims against the individual defendants pursuant to Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a). By Memorandum and Order, dated September 30, 2004, this Court dismissed the claims of foreign purchasers of Bayer AG shares on foreign exchanges (the "Foreign Purchasers") for lack of subject matter jurisdiction and granted leave to replead. In re Bayer AG Sec. Litig., No. 03 Civ. 1546 (WHP), 2004 WL 2190357, at *17-18 (S.D.N.Y. Sept. 30, 2004) ("Bayer I").

Availing themselves of that opportunity, Plaintiffs filed their Second Consolidated Amended Complaint on January 24, 2005 ("Complaint"), which included a new series of allegations titled "Subject Matter Jurisdiction over Foreign Purchasers on Foreign Exchanges." (Complaint, filed Jan. 24, 2005 ("Compl.") ¶¶ 19-24.) Defendants now move to dismiss the repleaded Foreign Purchasers' claims pursuant to Rule 12(b)(1). For the following reasons, Defendants' motion is granted.

BACKGROUND

I. The Parties

Plaintiffs in this action seek to represent a putative class "of all persons who purchased securities of Bayer AG between August 4, 2000 and February 21, 2003, inclusive (the "Class Period") and have been damaged thereby, to recover damages caused by defendants' violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934." (Compl. ¶ 1.) The factual allegations are described in detail in Bayer I and repeated here only as necessary to facilitate the inquiry into subject matter jurisdiction over the Foreign Purchasers.

Bayer AG is an international healthcare and chemical corporation organized and headquartered in Germany. (Compl. ¶ 27; Affidavit of Roger J. Hawke, dated Feb. 14, 2005 ("Hawke Aff.") Ex. A: Excerpts of Amendment No. 2 to Bayer AG's Form 20-F, dated Jan. 15, 2002.) Bayer AG's shares trade on the Frankfurt, Berlin, Bremen, Dusseldorf, Hamburg, Hannover, Stuttgart and Munich stock exchanges. (Compl. ¶ 174 n. 5.) Bayer AG is also listed on several other European exchanges and the Tokyo Stock Exchange. (Compl. ¶ 159 n. 4; Hawke Aff. Ex. A at 144.) In the United States, Bayer AG began trading on the New York Stock Exchange in December 2001 in the form of American Depositary Shares evidenced by American Depositary Receipts. (Hawke Aff. Ex. A at 144.) During the Class Period, Plaintiffs allege, "Bayer AG manufactured, marketed, distributed, tested, promoted and sold Baycol . . . in worldwide markets, prior to withdrawing the product." (Compl. ¶ 27.) Bayer Corp. is an Indiana corporation with its principal place of business in Pittsburgh, Pennsylvania. (Compl. ¶ 28.) It is a wholly owned subsidiary of Bayer AG. (Compl. ¶ 28.) Plaintiffs allege that during the Class Period, "Bayer Corp. manufactured, marketed, distributed, tested, promoted and sold Baycol for and in North American markets prior to the withdrawal of Baycol." (Compl. ¶ 28.)

During the relevant period, the individual defendants were executive officers of Bayer AG and/or Bayer Corp. From 1995 through December 1999, Ebsworth was President of Bayer Corp.'s Pharmaceutical Division; thereafter, he headed Bayer AG's Pharmaceutical Business Group. (Compl. ¶ 29.) When Ebsworth resigned on January 9, 2002, Plischke assumed leadership of the Pharmaceutical Business Group. (Compl. ¶¶ 29-30.) Previously, Plischke had been Executive Vice President and President of Bayer Corp.'s Pharmaceutical Division. (Compl. ¶ 30.)

II. Development and Marketing of Baycol

In 1997, the Food and Drug Administration (the "FDA") approved the development and marketing of Baycol. (Compl. ¶ 37.) Baycol was officially launched in the United States in February 1998. (Compl. ¶ 40.) In a May 1998 stockholders' newsletter, Bayer AG reprinted a speech given by Manfred Schneider, Chairman of its Board of Management, at its annual stockholders' meeting. The address provided that Bayer AG expected growth for the coming year to be driven by the company's healthcare sector and the "top-selling drugs and new medications such as the cholesterol-lowering drug Lipobay/Baycol." (Compl. ¶ 43.)

In May 1998, a Bayer Corp. post-marketing report revealed that four patients taking Baycol developed rhabdomyolysis. (Compl. ¶ 44.) A later Journal of the American Medical Association article suggested that the incidence of rhabdomyolysis in patients taking Baycol indicated a possible "drug-drug interaction" with the drug gemfibrozil. (Compl. ¶¶ 44-45.) In January 1999, the FDA required changes in Baycol labeling to reflect the reported events of rhabdomyolysis.

In 1999, Bayer AG issued its 1998 Annual Report noting that although Baycol had not met the company's expectations, its anticipated release of a higher dose should yield greater success. (Compl. ¶ 52.) At the next annual stockholders' meeting, the Chairman of Bayer AG discussed the "blockbuster" potential of Baycol, which was later reprinted in a stockholders' newsletter. (Compl. ¶ 55.) The FDA approved the higher dose of Baycol in May 1999 and a marketing campaign ensued. (Compl. ¶ 59.)

Plaintiffs allege that although Defendants knew during this time that the higher dose of Baycol could present an increased risk of rhabdomyolysis, they failed to disclose it. (Compl. ¶¶ 56-59.) By October 1999, the number of rhabdomyolysis cases related to Baycol had risen in the United States and abroad. (Compl. ¶ 65.) In late October, the FDA advised Bayer Corp. that the current Baycol promotional materials were "false, lacking fair balance, or otherwise misleading" and must no longer be disseminated. (Compl. ¶ 66.) In December 1999, Bayer Corp. revised the Baycol label to include a warning that Baycol should not be prescribed with gemfibrozil. (Compl. ¶ 69.) Nonetheless, throughout this period Bayer AG continued to market Baycol aggressively in its press releases. (Compl. ¶¶ 67-68.)

In early 2000, Bayer AG continued to report expectations of increased future growth and profitability based on the strong sales of Baycol. These disclosures were issued in Bayer AG's 1999 Annual Report in March 2000 and a companion press release. (Compl. ¶¶ 81-82.) The company then ...


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