UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
February 28, 2008
IN RE PFIZER, INC. SECURITIES LITIGATION,
THIS DOCUMENT RELATES TO: ALL CASES
The opinion of the court was delivered by: Lewis A. Kaplan, District Judge.
On December 2, 2006, Pfizer, Inc. ("Pfizer") announced that it was halting clinical trials of the developmental drug torcetrapib.*fn1 By the close of the next trading day, the price of Pfizer common stock had declined by 10.62 percent.*fn2 Plaintiffs then brought a class action against Pfizer and three of its current and former officers and directors (collectively, the "Individual Defendants").*fn3 Plaintiffs seek recovery against defendants under Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act")*fn4 and Rule 10b-5 thereunder.*fn5 They assert an additional claim against the Individual Defendants under Section 20(a) of the Exchange Act.*fn6 The case is before the Court on defendants' motion to dismiss.
The lead plaintiff in this action is the Uniformed Sanitationmen's Association Compensation Accrual Fund. It purports to represent a class of all individuals and entities who purchased Pfizer securities between January 19, 2005, and December 2, 2006, (the "Class Period"). Pfizer is a Delaware corporation that develops, manufactures, and markets prescription medicines and consumer healthcare products.*fn7
During the class period, Pfizer was developing torcetrapib, a drug intended to reduce coronary heart disease ("CHD") by raising so-called "good" cholesterol.
In colloquial terms, there are two varieties of cholesterol: "good" and "bad" cholesterol. Whether cholesterol is good or bad is defined by the type of lipoprotein to which the cholesterol is attached. Low density lipoproteins ("LDLs") carry cholesterol into arteries, where excess cholesterol often is deposited as plaque on arterial walls. The deposition of plaque -- a process known as atherogenesis*fn8 -- narrows arteries and restricts the flow of blood and oxygen to the heart.*fn9 Thus, the cholesterol attached to LDLs ("LDL-cholesterol") is known popularly as bad cholesterol. In contrast, high density lipoproteins ("HDLs") remove cholesterol from the blood, transporting it to the liver for excretion, a process known as reverse cholesterol transport ("RCT").*fn10
Thus, the cholesterol attached to HDLs ("HDL-cholesterol") is known popularly as good cholesterol.
High HDL-cholesterol levels correlate generally with low cardiovascular risk,*fn11 a fact attributed to HDL's role in RCT.*fn12 Pfizer developed torcetrapib to raise HDL-cholesterol. It anticipated that torcetrapib would accomplish this by inhibiting the cholesterol ester transfer protein ("CETP"), which transfers cholesterol between HDLs and LDLs. This was intended to raise HDL- cholesterol levels by causing cholesterol to accumulate on HDL particles. Ultimately, Pfizer hoped artificially raising HDL-cholesterol would increase RCT and correlate with low cardiovascular risk.*fn13
Phase II clinical tests of torcetrapib were designed to determine whether torcetrapib raised HDL-cholesterol levels.*fn14 Those trials showed that torcetrapib was effective at raising HDLcholesterol, but they showed also a 2-3 mm increase in systolic blood pressure.*fn15
By 2004, Pfizer began Phase III of the clinical trials. As the clinical trials progressed, Pfizer updated the medical and financial communities on torcetrapib's development through public statements and press releases.
On December 2, 2006, Pfizer announced that it was "stopping all torcetrapib clinical trials" based on the recommendation of the Data Safety Monitoring Board ("DSMB") that monitored the trials. The recommendation was made "because of an imbalance of mortality and cardiovascular events."*fn16 Following this announcement, shares of Pfizer common stock declined by $2.96 per share, from a closing price of $27.86 per share on December 1, 2006, to a closing price of $24.90 per share on December 4, 2006.*fn17
Plaintiffs allege that defendants, in the period prior to the cessation of Phase III trials, intentionally or recklessly made statements that were misleading because they failed to disclose facts that lessened the likelihood that torcetrapib ultimately would prove safe and efficacious. The misleading statements, plaintiffs claim, were "designed to artificially inflate the price of Pfizer securities" and were part of a "desperate effort to avert significant market loss due to the impending loss of patent protection by principal Pfizer drugs . . . ."*fn18 Plaintiffs allege that defendant McKinnell was motivated to maximize his severance package, but do not allege that any Individual Defendant sold stock during the class period.*fn19
I. Standard Governing Motions to Dismiss
In deciding a motion to dismiss, the Court ordinarily accepts as true all well-pleaded factual allegations and draws all reasonable inferences in the plaintiffs' favor.*fn20 In order to survive such a motion, however, "the plaintiff must provide the grounds upon which his claim rests through factual allegations sufficient 'to raise a right to relief above the speculative level.'"*fn21
Although this motion is addressed to the face of the pleadings, the Court may consider also the full text of "documents incorporated into the complaint by reference, and matters of which a court may take judicial notice."*fn22 Defendants have submitted many exhibits in support of their motion, including Pfizer press releases and analyst call transcripts, academic literature, and analyst reports. The parties agreed that all of these documents could be considered on this motion to dismiss,*fn23 and the Court considers those documents that the complaint incorporates by reference or are amenable to judicial notice.
As this is a securities fraud case, the complaint must satisfy the heightened pleading requirements of Rule 9(b) and the Private Securities Litigation Reform Act ("PSLRA").*fn24 It must state the circumstances constituting fraud with particularity. In particular, it "must: (1) specify the statements that the plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the statements were made, and (4) explain why the statements were fraudulent."*fn25 Where an allegation regarding a misstatement or omission is made on information and belief, "the complaint shall state with particularity all facts on which that belief is formed."*fn26 Finally, the complaint must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind."*fn27
II. Plaintiffs' Section 10(b) Claims
A. Elements of a 10(b) Claim
Section 10(b) makes it unlawful "for any person, directly or indirectly . . . [t]o use or employ, in connection with the purchase or sale of any security . . ., 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." Rule 10b-5 in turn provides:
"It shall be unlawful for any person . . . "(a) To employ any device, scheme, or artifice to defraud, "(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the 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."*fn28
To state a claim based on a misrepresentation or omission in violation of Rule 10b-5, as plaintiffs purport to do here, one must allege that a defendant "(1) made misstatements or omissions of material fact; (2) with scienter; (3) in connection with the purchase or sale of securities; (4) upon which plaintiffs relied; and (5) that plaintiffs' reliance was the proximate cause of their injury."*fn29
B. Allegations that Statements were Materially Misleading
Defendants argue that plaintiffs have not pleaded with particularity facts sufficient to support the belief that defendants' statements were materially misleading. Plaintiffs, however, contend that they have alleged sufficiently that defendants' statements misrepresented (1) torcetrapib's potential for reducing artherosclerosis, and (2) the seriousness of its side effects.
Plaintiffs must do more than allege that statements were materially misleading: "they must demonstrate with specificity why and how that is so."*fn30 Where, as here, factual allegations are made on information and belief, the complaint must allege adequate bases for the allegations.*fn31 It "must identify sufficiently the sources upon which [plaintiffs'] beliefs are based and those sources must have been likely to have known the relevant facts."*fn32 Second, the factual allegations that are based on adequate sources must justify plaintiffs' conclusion that defendants' statements about torcetrapib's were materially misleading.*fn33 An omission is materially misleading if "there [is] a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available."*fn34
1. Torcetrapib's Efficacy
Plaintiffs allege, on information and belief, that defendants' statements were misleading because they cast the likelihood that torcetrapib would prove to be effective in a positive light when in fact this was unlikely.*fn35 They rest this allegation on four subsidiary assertions: (1) a study showed that "RCT was not increased by torcetrapib,"*fn36 (2) another study "demonstrated only that the patients who took torcetrapib were no worse off than those who did not in terms of cholesterol removal . . . ,"*fn37 (3) "there was conflicting evidence on whether CETP inhibition [the mechanism by which torcetrapib raised HDL] was pro- or anti-atherogenic,"*fn38 and (4) "Pfizer had been warned internally that CETP inhibition would not work."*fn39 None, however, withstands analysis.
(a) Do the Cited Sources Support Plaintiffs' Subsidiary Allegations?
The allegation that RCT was not increased by torcetrapib is said to be based on the Brousseau study.*fn40 Contrary to plaintiffs' allegation, however, Brousseau did not reach any conclusion about whether torcetrapib increased RCT.*fn41 In fact, the study observed only that torcetrapib did not affect fecal concentrations of neutral sterols and bile acids, which it used to assess RCT indirectly. But it noted also that these surrogates might not be affected by an increase in RCT if torcetrapib were associated with "a decrease in hepatic cholesterol synthesis and a proportional increase in cholesterol synthesis in the peripheral tissues."*fn42 The complaint's reliance on Brousseau therefore is misplaced.
The claim that another study showed only that patients on torcetrapib were no worse off in terms of cholesterol removal than others rests on the Bamberger study abstract.*fn43 Plaintiffs suggest that Bamberger observed no affirmative evidence of cholesterol removal. In fact, however, the abstract reported statistically significant increases in the two measures of cholesterol removal that were observed and concluded that "partial inhibition of CETP with T[orcetrapib] does not compromise, and may enhance, the cholesterol efflux potential of HDL, which is considered the first step in reverse cholesterol transport."*fn44 Thus, plaintiffs' characterization of Bamberger, like their characterization of Brousseau, is misleading.
Plaintiffs' third allegation is based on scientific articles published between 1993 and 2006.*fn45 These sources support plaintiffs' allegation "that there was conflicting evidence" about torcetrapib's potential efficacy.
Plaintiffs' final and most significant allegation -- viz. that Pfizer had been warned internally that CETP inhibition would not work -- is based entirely on an anonymous blog post.*fn46
Plaintiffs have identified their source -- the text of the blog post -- and included its full text in their complaint. But this is not sufficient.
In addition to identifying the source, the source must be shown to have been likely to know the relevant facts.*fn47 There is no reason to believe that the author of this blog, identified only as RADmanZulu, is likely to have known the relevant facts.
Plaintiffs try to avoid this inevitable conclusion by attributing characteristics to the blog's anonymous author. They assert that RADmanZulu is "a former Pfizer Vice-President and Medical Therapeutic Head of Pfizer's Cardiovascular & Metabolic Group, who also acted as medical director of Pfizer's Cardiovascular Risk Factors Group in the [United States] . . . [through the second half of 2002]."*fn48 But the blog post, plaintiffs' purported source, does not contain any information about RADmanZulu's identity, and plaintiffs do not articulate any other basis for their belief.*fn49
Even if we credited plaintiffs' assertion that RADmanZulu was employed at Pfizer through the end of 2002, the question of whether he would have been likely to know the relevant facts would remain. In the blog post, RADmanZulu claims that, "[e]arly in the program, people like Brian Brewer and Michael Brown warned Pfizer that blocking CETP was likely to accelerate atherosclerosis."*fn50 To support the inference that RADmanZulu would have been likely to know the relevant facts, plaintiffs rely entirely on his alleged positions at Pfizer.*fn51 But the complaint does not describe RADmanZulu's role at Pfizer or his participation in relevant events. Moreover, RADmanZulu's allegation does not claim to be based on personal knowledge and lacks detail that might suggest personal knowledge. For example, the blog post does not describe when,*fn52 how, on what basis, by whom, or to whom the alleged warning was communicated. Even setting aside the numerous deficiencies with this source, RADmanZulu's assertion that someone warned Pfizer that CETP inhibition was likely to accelerate atherosclerosis does not support plaintiffs' larger claim that Pfizer was warned it would not work.
(b) Does the Sufficiently Sourced Subsidiary Allegation Justify Plaintiffs' Inference?
The next question is whether the facts alleged, to the extent they are based on adequate sources, support plaintiffs' inference that torcetrapib was unlikely to reduce artherosclerosis and thus made defendants' positive statements materially misleading.
Only one of plaintiffs' subsidiary allegations is supported by adequate sources -- viz. that there was conflicting evidence on whether CETP inhibition was pro- or anti-atherogenic. Drawing all inferences in plaintiffs' favor, the most this allegation supports is an inference that evidence available during the class period was inconclusive on torcetrapib's potential efficacy.
Defendants' knowledge that evidence of torcetrapib's efficacy was inconclusive does not support an inference that their optimistic statements were materially misleading. Defendants were entitled to take an optimistic view of inconclusive evidence, so long as they did not make positive statements while withholding negative information that would have been material to an investor.*fn53 "[C]orporate officials need not present an overly gloomy or cautious picture" so long as "public statements are consistent with reasonably available data."*fn54
This principle is applicable in the drug development context. In the Carter-Wallace cases, "the Second Circuit concluded that the drug manufacturer's assurances about safety 'did not become materially misleading until [it] had information that [the drug] had caused a statistically significant number of . . . deaths and therefore had reason to believe that the commercial viability of [the drug] was threatened.'"*fn55
To be sure, Carter-Wallace did not adopt a bright-line rule that a statement is materially misleading only if it conflicts with statistically significant evidence.*fn56 Thus, if a drug manufacturer in fact draws a pessimistic conclusion from statistically insignificant evidence, any optimistic statements it makes could be rendered materially misleading if it were to omit even statistically insignificant negative evidence.*fn57 But plaintiffs' allegations do not support an inference that defendants actually drew a negative conclusion from the inconclusive evidence.*fn58 They allege only that Pfizer's optimistic statements were misleading because it failed to state also that there was conflicting evidence as to whether CETP inhibition would be pro- or anti-atherogenic. This is insufficient under Carter-Wallace.
Furthermore, while plaintiffs assert that the allegedly omitted facts relating to torcetrapib's efficacy were material, allegations in the complaint belie that claim.*fn59 An omission is material if there is "a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available."*fn60 In this case, it is clear that the conflicting evidence of torcetrapib's efficacy was part of the total mix of information available to the market.*fn61
Plaintiffs argue that there is a factual question about whether investors "read and digested" the available information.*fn62 But the relevant inquiry is not whether the truth was absorbed by the market, but whether it was available to the market.*fn63 Moreover, the complaint here alleges that the market absorbed all available information.*fn64 This allegation allows plaintiffs to avoid a fact intensive question of whether the market actually was aware of defendants' alleged misstatements. But it simplifies also the question of whether the market was aware of the allegedly omitted facts.
It is evident that the allegedly omitted information was available to the market because plaintiffs, in their effort to identify allegedly omitted information, rely entirely on sources that were available publicly during the class period.*fn65 Indeed, analysts' reports acknowledged the conflicting evidence of torcetrapib's efficacy.*fn66 According to plaintiffs, such reports were "publicly available and entered the public marketplace."*fn67
Finally, plaintiffs argue that the sudden drop in stock price after the "revelation of previously undisclosed information" prevents a conclusion that the allegedly omitted information was absorbed by the market. This is not persuasive. The drop in stock price did not follow the revelation of the allegedly omitted fact -- that there was conflicting evidence about torcetrapib's efficacy. Rather, as plaintiffs explain elsewhere in the complaint, it followed the "sudden news . . . that the clinical trials were being halted," a development that was significant independent of whether there previously had been conflicting evidence of torcetrapib's efficacy.*fn68
2. Blood Pressure Side Effect
Plaintiffs allege, on information and belief,*fn69 that defendants' optimistic statements about torcetrapib's side effects were misleading because its side effects were unmanageable.*fn70 This assertion rests on subsidiary assertions that: (1) even small increases in systolic blood pressure may be dangerous,*fn71 and (2) "Pfizer believed, but did not disclose, that the metabolite(s) of torcetrapib could inhibit [monoamine oxidase], thereby causing increased blood pressure . . . ."*fn72
(a) Do the Cited Sources Support Plaintiffs' Subsidiary Allegations?
Plaintiffs' first allegation is based on scientific research and statements made by Pfizer in other contexts.*fn73 These sources support plaintiffs' factual allegation that even small increases in blood pressure may be dangerous. However, this does not lead inevitably to the inference that the side effect was unmanageable or unjustifiable.
Plaintiffs' second allegation is based on the same RADmanZulu blog post discussed above.*fn74 RADmanZulu asserted that "[t]he current wisdom of the time is that one of the metabolites inhibited mono amine oxidase."*fn75 Even if we assume, as plaintiffs do, that RADmanZulu was employed at Pfizer through the second half of 2002, this source would be insufficient to support plaintiffs' allegation that "Pfizer believed" that torcetrapib could inhibit monoamine oxidase. RADmanZulu's assertion is vague: it does not claim a basis for personal knowledge, nor does it explain when, by whom, or on what basis the "current wisdom of the time" was held.
(b) Does the Sufficiently Sourced Subsidiary Allegation Justify Plaintiffs' Inference?
Drawing all inferences in plaintiffs' favor, the plaintiffs' factual allegations and sources support an inference that small increases in blood pressure can be dangerous. But plaintiffs' sources and factual allegations do not support the inference that torcetrapib's side effects were unmanageable. Nor do the sources or factual allegations support an inference that defendants actually believed the side effect was unmanageable. Indeed, plaintiffs' own source, the blog post, undermines any inference that Pfizer believed the blood pressure side effect was unmanageable.
According to RADmanZulu: "The Groton team felt that [blood pressure] could be managed by lowering the dose and hoped that atorvastatin would also lower [blood pressure]."*fn76
Finally, torcetrapib's ultimate failure is not evidence that the side effects were thought to be unmanageable at the time the alleged misstatements were made. Fraud-by-hindsight is not sufficient to establish liability under Rule 10b-5.*fn77 In any case, plaintiffs have not alleged that torcetrapib failed because its side effects were unmanageable.*fn78 They acknowledge that the most they can allege is that torcetrapib failed because "there was a difference in deaths between the group which got the drug and the group that didn't."*fn79
Plaintiffs have not pleaded with particularity facts sufficient to support their allegation that defendants' statements were materially misleading. Many of plaintiffs' factual allegations are not based on an adequate source or are unsupported by the purported source. Those allegations that are based on adequate sources do not support the inference that defendants' statements about torcetrapib's safety or efficacy were materially misleading. For the foregoing reasons, the complaint fails to state the circumstances constituting fraud with particularity as required by Rule 9(b) and the PSLRA.
Even if the complaint had pleaded adequately the circumstances constituting fraud, it would be insufficient nonetheless. Plaintiffs must "state with particularity facts giving rise to a strong inference that [each] defendant acted with the required state of mind."*fn80 A complaint may satisfy this requirement "by alleging facts (1) showing that defendants had both motive and opportunity to commit the fraud or (2) constituting strong circumstantial evidence of conscious misbehavior."*fn81 A complaint gives rise to a strong inference of scienter "only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged."*fn82
1. Motive and Opportunity
To plead motive, plaintiffs must allege facts demonstrating "concrete benefits that could be realized by one or more of the false statements and wrongful nondisclosures alleged."*fn83
It is not sufficient to allege motives that are "generally possessed by most corporate directors and officers."*fn84 And "[g]eneral allegations that the defendants acted in their economic self-interest" are insufficient.*fn85
Plaintiffs attempt to plead motive by alleging that Pfizer had a "desperate need . . . to assure the financial community of the existence of a new blockbuster drug."*fn86 This is not a unique motive. Rather, it is a way of saying, in a manner tailored to a pharmaceutical company, something that is true for all profit enterprises -- each has an incentive to portray the likelihood that it will continue to prosper.
Courts in this district have found similar allegations of motive insufficient. For example, plaintiffs in In re Bayer sought to plead motive by alleging that "[Bayer] was under pressure to bring a 'blockbuster drug to market.'"*fn87 And in In re Bristol-Myers Squibb, the plaintiffs alleged motive based on the defendants' desire to "'maintain a facade of future potential' for [its] drug pipeline, . . . [and to] address potential concerns about patent expirations . . . ."*fn88 Both courts found these allegations insufficient. The latter court described such allegations as "nothing more than a pejorative characterization of . . . ordinary corporate desires."*fn89
Plaintiffs argue that McKinnell had motive to commit fraud in order to increase his severance package.*fn90 Performance based compensation plans "are typical of nearly every corporation" and are usually insufficient to plead motive.*fn91 "If scienter could be pleaded on that basis alone, virtually every company in the United States that experiences a downturn in stock price could be forced to defend securities fraud actions."*fn92 Plaintiffs' attempt to distinguish McKinnell's severance agreement from generic performance-based compensation plans is disingenuous.*fn93
2. Conscious Misbehavior or Recklessness
To raise a strong inference of scienter based on recklessness, plaintiffs must allege conduct that is "highly unreasonable and which represents an extreme departure from the standards of ordinary care."*fn94 If a complaint fails adequately to allege motive, "the strength of the circumstantial allegations of conscious misbehavior or recklessness 'must be correspondingly greater.'"*fn95 "Where the complaint alleges that defendants knew facts or had access to non-public information contradicting their public statements, recklessness is adequately pled for defendants who knew or should have known they were misrepresenting material facts . . . ."*fn96
Plaintiffs attempt create a strong inference of scienter by alleging that: (1) defendants had knowledge or access to information contradicting their public statements,*fn97 (2) "Pfizer intentionally established endpoints for the Phase II trial of increased HDL-[cholesterol] in order to ensure that the endpoints would be obtained, knowing full well that such endpoints . . . potentially were associated with increased coronary heart risk,"*fn98 (3) "Pfizer intentionally violated AHA [American Heart Association] Rules in order to pre-announce its Phase III clinical results in order to 'spin' the adverse blood pressure side effect results found therein,"*fn99 and (4) "Pfizer knowingly designed the torcetrapib Phase III trials to allow the trial to continue until an unreasonably high statistical certainty was met."*fn100
Plaintiffs rely on the same factual allegations and sources to assert defendants' knowledge of or access to information contradicting their public statements. As addressed above, plaintiffs' factual allegations and sources do not support the inference that defendants' statements were materially misleading. "If the facts alleged in the Complaint are insufficient to support Plaintiffs' belief that false or misleading statements were made, those facts cannot support an inference that Defendants knew or should have known their statements were false or misleading when Defendants made them."*fn101
Even if plaintiffs' factual allegations about torcetrapib's efficacy and safety could be understood as contradicting defendants' statements, the contradictory information was publicly available.*fn102 Numerous courts have suggested or assumed that the contradictory information must have been non-public in order to raise a strong inference of intent.*fn103 That the information was publicly available when the allegedly misleading statements were made weakens any inference that defendants intended to defraud the market.
Plaintiffs' remaining allegations are conclusory statements of defendants' intent. The complaint makes no factual allegations that suggest that Pfizer violated AHA rules in order to spin the results, or that Pfizer designed Phase II studies to avoid uncovering adverse clinical results, or that Pfizer used an unreasonably high measure of statistical significance to postpone termination of Phase III.*fn104 Conclusory allegations of intent are not sufficient.*fn105 Plaintiffs cannot circumvent this requirement by providing subsidiary allegations that merely are conclusory allegations of intent.
III. Plaintiffs' Section 20(a) Claims
Plaintiffs assert also claims under Section 20(a) of the Exchange Act*fn106 against the individual defendants. Section 20(a) claims are necessarily predicated on a primary violation of securities law and impose 'control person' liability on individual defendants.*fn107 Because plaintiffs have failed to state a claim for a primary violation of Section 10(b) of the Exchange Act, their Section 20(a) claim must be dismissed against all defendants.
For the foregoing reasons, defendants' motion to dismiss the amended complaint [docket item 13] is granted. Plaintiffs' request for leave to amend*fn108 is denied without prejudice to a motion for leave to amend supported by a proposed amended complaint.