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In Re Forest Laboratories

September 18, 2006

IN RE FOREST LABORATORIES, INC. DERIVATIVE LITIGATION


The opinion of the court was delivered by: Richard J. Holwell, United States District Judge

MEMORANDUM OPINION AND ORDER

Plaintiffs Jeff Michelson and Eleanor Turberg, shareholders of Forest Laboratories, Inc. ("Forest" or the "Company"), bring this derivative action on behalf of Forest against its directors and officers alleging a breach of fiduciary duty arising out of defendants' sale of the Company's stock while allegedly misleading shareholders as to the future prospects of its key products, the antidepressants Celexa and Lexapro. Plaintiffs bring additional counts alleging breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment.

Defendants now move to dismiss the Verified Consolidated Shareholder Derivative Complaint (the "Complaint") pursuant to Rule 23.1 of the Federal Rules of Civil Procedure for failure to assert well-pled allegations showing that demand upon the Forest Board of Directors would have been futile. For the reasons set forth below, the Court grants defendants' motion, thereby dismissing the Complaint in its entirety. BACKGROUND

The following recitation of facts is drawn entirely from the complaint, except where otherwise indicated.

1. Defendants

a.Forest Labs

Nominal defendant Forest is incorporated under Delaware law. (Compl. ¶ 23.) Plaintiffs, shareholders of Forest, bring this suit on its behalf. (Id. 1, 15, 22.) Forest and its subsidiaries develop, manufacture, and sell ethical drug products which require a physician's prescription, as well as nonprescription pharmaceutical products for over-the-counter sale. (Id. ¶ 23.)

b. Inside Director Defendants

Of the seven directors on Forest's Board of Directors at the time this complaint was filed, two are inside directors. Individual director Howard Solomon ("Solomon") was Forest's Chief Executive Officer and Chairman of its Board (id. ¶ 24), and individual defendant Kenneth E. Goodman ("Goodman") was Forest's President and Chief Operating Officer, and a member of its board (id. ¶ 25) (collectively, the "Inside Directors").

c. Outside Director Defendants

The remaining five members of Forest's board are William J. Candee, III ("Candee"), George S. Cohan ("Cohan"), Daniel L. Goldwasser ("Goldwasser"), Lester B. Salans ("Salans"), and Phillip M. Satow ("Satow") (collectively, the "Outside Directors"). None of the Outside Directors serve as officers in the Company.

d. Officer Defendants

Three defendants, John E. Eggers (id. ¶ 26), Elaine Hochberg (id. ¶ 27), and Lawrence S. Olanoff (id. 33), are officers of Forest, but not members of Forest's Board of Directors. Allegations concerning them will therefore not be relevant to determining demand futility.

2. Allegations of Wrongdoing

Plaintiffs' allegations of wrongdoing arise out of misrepresentations allegedly made (or allowed to be made) by defendants with respect to three lines of Forest pharmaceutical products, allegedly resulting in the artificial inflation of Forest's stock price underlying plaintiffs' breach of fiduciary and other claims.

a. Antidepressants: Celexa and Lexapro

The first, and most significant, is Forest's antidepressant franchise, which consists of the selective serotonin reuptake inhibitors ("SSRIs") Celexa (citalopram HBr) and its successor Lexapro (escitalopram oxalate). (See Compl. 7.) Plaintiffs allege that Forest made misrepresentations regarding the efficacy of Celexa for use in treating pediatric depression while in possession of a study which contradicted those representations. (Id. 10-11, 13, 68-69, 74, 82, 111.)

To date, Celexa has only been approved for use in adults 18 years of age or older.

(Id. 1i 9.)*fn1 In 2001, Forest, in cooperation with its licensor, Lundbeck, funded a study on the use of Celexa in pediatric care. (Id. ¶ 67.) On December 13, 2001, Forest issued a press release "Results of Escitalopram and CelexaTM Studies Presented at Major Scientific Conference" which reported that the clinical study (the "Texas Study")*fn2 showed that "Celexa may significantly reduce depression in adolescents and children" and that the "study is significant because few studies involving any antidepressant have shown efficacy compared to placebo in the treatment of depression in children and adolescents." (Id. ¶ 69.) Early in 2002, following Forest's release of its positive fiscal third quarter results for 2001, the media attributed Forest's rise in profits to strong demand for Celexa, and reported that Forest hoped to leverage robust sales into developing Lexapro for depression and memantine for Alzheimer's. (Id. ¶¶ 70--71.) In May 2002, the Texas Study was presented at an American Psychiatric Association conference. (Id. ¶ 74.) Through late 2002, medical-industry publications also reported the results of the Texas Study, as well as an additional Forest-sponsored study conducted in South Africa, both of which demonstrated that Celexa was well tolerated and efficacious in treating pediatric depression. (Id. ¶¶ 77 , 82.) On July 17, 2002, Forest announced that the FDA granted Forest a six-month extension on marketing exclusivity for Celexa based on its review of Forest's pediatric data,*fn3 extending the exclusivity period through January 2004. (Id. ¶ 75.) In addition to allowing Forest to receive an extension on market exclusivity, studies reflecting Celexa's efficacy in treating pediatric depression also can result in off-label prescriptions, which, in turn, leads to an increase in revenues for Forest. (Id. at ¶¶ 8-9.)

Around the same time, on August 15, 2002, Forest announced that Lexapro*fn4 had received FDA approval for the treatment of major depressive disorder in adults, based on efficacy and safety data from clinical trials on patients between the ages of 18 and 65 with moderate-to-severe depression. (Id. ¶ 76.) Forest commenced, and continued throughout 2003, a campaign to convert Celexa patients to Lexapro prior to the emergence of generic competition (expected in January 2004 absent FDA approval for label expansion). (Id. ¶¶ 79, 81.) This campaign to promote Lexapro relied on the emergence of new and favorable comparative clinical data (against Celexa and other antidepressants on the market, in particular Pfizer's Zoloft). (Id. 83, 85, 91, 93-94, 96-99, 131.) In April 2003, Forest reported significant earnings for the fourth quarter 2002, and attributed growth to the continued success of Celexa and Lexapro, and predicted continued growth. (Id. 84.) Plaintiffs allege that the foregoing positive ...


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