The opinion of the court was delivered by: Loretta A. Preska, United States District Judge
Lead Plaintiff Joseph J. Masters ("Plaintiff" or "Masters") brings this putative class action alleging that GlaxoSmithkline ("GSK") and GSK CEO and Chairman Jean-Pierre Garnier ("Garnier") (collectively "Defendants") violated section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b)(1994), and Rule 10b-5, 17 C.F.R. § 240.10b-5 (2001), by making various false and misleading statements resulting in damages to GSK investors during the class period. Defendants move to dismiss pursuant to Rule 12(b)(6) for failure to state a claim on which relief may be granted on grounds, inter alia, that certain claims are time-barred, and that Plaintiff has failed to plead fraud with particularity, failed to allege scienter, and failed to allege loss causation. For the reasons set forth below, Defendants' motion (dkt. no. 13) is granted, and the Consolidated Second Amended Complaint ("SAC") is dismissed with prejudice.
This is a putative class action filed on behalf of
individuals who acquired GSK common stock or American Depositary Receipts ("ADRs") during the period from December 27, 2000 to August 5, 2004 (the "Class Period"). (SAC ¶ 9). Plaintiff alleges that he acquired GSK securities during the Class Period and suffered damages as a result. (SAC ¶ 2). More specifically, according to his class representative certifications, Masters purchased 1,400 shares of GSK on September 28, 2001 at a share price of $56.28 and sold the same number of shares on June 13, 2002 at a price of $39.43. Plaintiff purchased an additional 350 shares of GSK on February 17, 2004 at a share price of $42.96 and had not sold those shares as of May 10, 2005.
GSK is a public company whose securities trade on the New York and London Stock Exchanges. (SAC ¶ 3). Garnier was CEO and Chairman of GSK throughout the Class Period. (SAC ¶ 4). The SAC alleges that on February 19, 2004, Garnier sold 142,250 shares of GSK stock for $6,143,293 based on material non-public information. (SAC ¶ 279).*fn1
The initial complaint in this action was filed on April 12, 2005. Two additional actions, No. 05-cv-3885 and No. 05-cv-4723, were brought in this district on April 18, 2005 and May 16, 2005, respectively. A fourth related action, No. 05-cv-6231, was transferred here from the Eastern District of Pennsylvania.
By order dated July 25, 2005, this Court consolidated all four actions and granted Masters' unopposed motion for appointment as lead plaintiff. This Court also set up a procedure whereby Plaintiff was directed to serve a consolidated amended complaint, Defendants were to advise Plaintiff of perceived deficiencies, i.e., grounds for a motion to dismiss, and Plaintiff was given the opportunity to file a second amended complaint with the understanding that no further amendments would be permitted. The parties availed themselves of this procedure, and the SAC was docketed on April 6, 2006.
B. The Second Amended Complaint
The SAC alleges violations of the Exchange Act in two counts. The first count alleges that Defendants violated section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder by, inter alia, making untrue statements of material fact that resulted in damages to Plaintiff and the class. (SAC ¶¶ 282-286). The second count alleges control person liability under section 20(a) of the Exchange Act as to Defendant Garnier. (SAC ¶¶ 287-291).
Broadly speaking, the SAC alleges that GSK violated the Exchange Act in four ways: 1) by misrepresenting the safety and efficacy of the use of its drug Paxil in children (the "Paxil Pediatric Allegations"); 2) by making false statements and omissions regarding the viability of GSK's patents for Paxil and Augmentin and engaging in a course of frivolous litigation with respect to those patents (the "Patent Allegations"); 3) by suppressing information about Paxil's addictiveness and withdrawal effects (the "Paxil Withdrawal Allegations"); and 4) by violating the Federal False Claims Act by overcharging Medicare and Medicaid for GSK's pharmaceutical products, resulting in multiple lawsuits against GSK (the "False Claims Act Allegations"). The SAC also alleges that Garnier sold GSK stock based on material, non-public information (the "Insider Trading Allegations"). (SAC ¶ 279).
1. The Paxil Pediatric Allegations
GSK manufactured and sold paroxetine under the name Paxil in the United States and Seroxat in Great Britain (hereinafter "Paxil") throughout the Class period. (SAC ¶ 18). Paxil is a selective serotonin re-uptake inhibitor ("SSRI") that is approved by the FDA for treatment of depression, anxiety and other conditions in adults. (Id.). Paxil has not been approved by the FDA for treatment of any conditions in children or adolescents. (Id.). Physicians, however, are permitted to prescribe FDA-approved drugs for non-FDA-approved uses where, through the exercise of independent judgment, they determine that the prescription is appropriate. (Id.). This practice is referred to as an "off-label" use. (Id.). GSK reported Paxil sales of £1.55 billion for the year 2000. (SAC ¶ 31). In 2002, Paxil prescriptions to treat children and adolescents totaled $55 million in the United States and "much more" worldwide. (SAC ¶ 19).
The SAC alleges that GSK misrepresented the safety and efficacy of Paxil in treating Major Depressive Disorder ("MDD") in children by allowing positive information about Paxil to be disclosed publicly but withholding or concealing negative information. (SAC ¶ 20). More specifically, the SAC alleges that on various occasions prior to and during the Class Period, research scientists sponsored by or known to GSK published articles and presented posters at research conferences reporting on the safety and efficacy of Paxil for treatment of children and adolescents. (SAC ¶¶ 22-29, 32-47).
The SAC also alleges that GSK made misrepresentations about Paxil by allowing dissemination of a study that showed mixed results about the safety and efficacy of Paxil but withholding the results of studies that had negative results. (SAC ¶¶ 58-80). Two out of three placebo-controlled studies conducted by GSK, studies 377 and 701, showed no statistically significant difference between the effectiveness of Paxil and the effectiveness of the placebo. (SAC ¶ 67). A third study, study 329, presented a mixed picture, with Paxil failing to outperform the placebo on two primary measures of efficacy but outperforming the placebo on three out of five secondary measures of efficacy. (SAC ¶ 68). In all three studies, suicidal thoughts and acts, as well as mood swings and crying (behavior coded as "emotional lability") were significantly higher in the Paxil group compared to the placebo group. (SAC ¶ 70). Specifically, study 329 showed emotional lability in 6.5% of the Paxil group compared with 1.1% of the control group. (Id.); study 377 showed emotional lability in 4.4.% of the Paxil group compared with 3.2% of the control group; and study 701 showed emotional lability in 3.6% of the Paxil group compared with 1.4% of the control group. (Id.)
The SAC alleges that GSK disseminated the results of study 329, concealing or downplaying its negative aspects, but suppressed dissemination of the other studies. (SAC ¶¶ 58-62, 73-80). After GSK submitted studies 329, 377 and 701 to the FDA in connection with an application for approval of Paxil to treat Obsessive Compulsive Disorder ("OCD") in children and adolescents, various regulatory agencies in the United States and abroad issued warnings against the use of Paxil in children and adolescents. (SAC ¶¶ 81-90).
With regard to loss causation, the SAC specifies two price drops of GSK securities following the release of information to the public about Paxil's adverse effects on children. On June 2, 2004, the New York State Attorney General announced a lawsuit against GSK based on suppression of the adverse pediatric studies, resulting in a price drop from $42.77 to $41.39, or $1.38 per share, on that date. (SAC ¶ 48). On December 9, 2004, the ABC News program Primetime Live aired a story about the adverse effects of Paxil on children, resulting in a stock price drop from $45.08 to $44.82, or 23 cents per share, the following day. (SAC ¶ 51).
2. The Paxil Withdrawal Allegations
The SAC alleges that GSK engaged in a "disinformation campaign" designed to suppress information about the withdrawal effects of Paxil. (SAC ¶ 238). The SAC alleges that GSK knew from pre-marketing studies that Paxil had higher addictive potential than other SSRIs. (SAC ¶¶ 240-242). Despite this alleged awareness, GSK included in its promotional literature the following statement: "Paxil belongs to a class of medications called SSRIs, which have not been shown to be associated with addiction." (SAC ¶ 243). The SAC catalogues 18 scientific studies or reports between 1993 and 2000 documenting withdrawal symptoms as a result of Paxil discontinuation, none of which was acted upon. (SAC ¶¶ 246-263).
In August 2001, a class action was filed in California on behalf of consumers addicted to Paxil. (SAC ¶ 238). The SAC alleges that on September 6, 2001, GSK's share price fell from $45.14 to $44.10, or $1.04 per share, on news of the class action suit alleging that Paxil caused withdrawal symptoms. (SAC ¶ 264). In December 2001, the FDA ordered GSK to begin warning patients about Paxil's withdrawal symptoms, and the company rewrote Paxil's warning label to include "discontinuation effects." (SAC ¶ 265).
3. The Patent Allegations
Broadly speaking, the Patent Allegations allege that GSK misled investors by issuing statements misrepresenting the validity and duration of GSK's patents for Paxil and Augmentin. The Patent Allegations allege that GSK engaged in a course of baseless patent filings and frivolous patent litigation.
With regard to Augmentin, the SAC alleges that in a July 26, 2000 Financial Times article, Garnier stated that a newly granted patent on Augmentin would extend patent protection to 2013. (SAC ¶ 132). After a federal court ruled on February 2, 2002 that GSK lost certain patent protections for Augmentin, Garnier appeared for a CNBC interview and said, "We are very confident we can defend our patents." (SAC ¶ 134). Garnier also stated, "The PTO confirmed that those patent[s] were genuine, they were rock solid. And we feel that the courts eventually will recognize the letter of the law and give us the added protection for Augmentin." (Id.). On February 25, 2002, a federal district court ruled that GSK's '380 patent for Augmentin was invalid. (SAC ¶ 137). On November 23, 2003, the Federal Circuit upheld the district court's ruling that GSK did not have patent protection for Augmentin. (SAC ¶ 141).
Regarding loss causation, the SAC alleges that after a March 13, 2002 announcement that GSK had lost part of its court battle over Augmentin, GSK's share price fell from $48.81 on March 13, 2002 to $48.27 on March 14, 2002, and to $47.62 on March 15, 2002, a total of $1.19 per share in two days. (SAC ¶ 138). When GSK announced on May 23, 2003 that it lost patent protection for Augmentin completely, GSK's share price fell from $41.47 to $38.03, or $3.44 per share. (SAC ¶¶ 139-140, 174-175).
The SAC alleges that GSK represented in its Form 20-F for the years 1999 through 2001 that its patent protection for Paxil expired in 2006. (SAC ¶¶ 99, 103). The SAC alleges that this representation was false because the patent protection was based upon "evergreening," i.e., obtaining frivolous patents in order to extend patent life. (SAC ¶ 111). More specifically, the SAC alleges that GSK attempted to protect Paxil from generic competition by filing additional patents "concerning chemical properties of the molecule that have nothing to do with its effectiveness." (Id.).
The SAC alleges that GSK filed numerous baseless patent infringement lawsuits against competitors who sought to market generic forms of Paxil. (SAC ¶¶ 104-108, 158-161, 202-227). With regard to loss causation, the SAC describes six stock price drops following negative news about Paxil's patent protection.
After the Financial Times reported on Saturday July 13, 2002 that the German company BASF prevailed in court and won the right to produce generic versions of Paxil, GSK shares fell from $38.15 to $36.65 on Monday July 15, 2002. (SAC ¶ 165). When GSK announced on July 23, 2002 that it lost a Paxil patent case in the United States, GSK's stock fell from $34.02 to $32.86, or $1.16 per share. (SAC ¶ 166). On October 24, 2002, GSK's share price dropped from $41.34 to $39.27, or $2.07 per share, on news that GSK had reserved £145 million for legal costs. (SAC ¶ 169). Following a court ruling on March 4, 2003 that competitor Apotex did not infringe GSK's patent on Paxil, GSK's stock price fell from $35.27 to $34.15, or $1.12 per share. (SAC ¶ 173). When Apotex received FDA approval on July 31, 2003 to market a generic version of Paxil, GSK's stock price fell from $39.22 ...