The opinion of the court was delivered by: Honorable Paul A. Crotty, United States District Judge
Lead Plaintiff Ontario Teachers Pension Plan Board and Plaintiff Minneapolis Firefighters' Relief Association (collectively, "Plaintiffs") bring this class action securities fraud suit challenging the adequacy of Bristol Myers Squibb Co.'s ("Bristol-Myers" or "the Company") public disclosures concerning its attempts to settle patent litigation with generic pharmaceutical drug company Apotex, Inc. ("Apotex") over its patented and highly profitable blood-thinning medication, Plavix. The gravamen of Plaintiffs' Amended Complaint is that Bristol-Myers failed to disclose that the Company had agreed to relinquish certain material legal rights under its settlement agreements with Apotex and failed to disclose that it had entered into "secret" oral side agreements related to the Apotex litigation. Plaintiffs claim that the failure to disclose these critical facts rendered Bristol-Myers's public statements that it would "vigorously pursue" the Apotex litigation, and that Apotex would be "at risk" if it were to launch its generic product, materially false, incomplete, and misleading. Plaintiffs also complain that the existence of the unlawful oral side agreements greatly increased the risk of regulatory rejection of the settlement agreement, and that the Company failed to report the initial regulatory rejection of the settlement in a timely manner. According to the allegations of the Amended Complaint, when the omissions complained of and the true facts surrounding the settlement negotiations were eventually disclosed, securities analysts noted their significance, and the price of Bristol-Myers's stock declined. Plaintiffs seek relief pursuant to sections 10(b) and 20(a) of the Securities Exchange Act of 1934. The class includes all individuals who purchased or acquired Bristol-Myers common stock from after the close of the market on March 21, 2006 through August 8, 2006 (the "Class Period").
Bristol-Myers and individual Defendants Peter Dolan and Andrew Bodnar move to dismiss the Amended Complaint ("Am. Compl.") on the grounds that: (1) the disclosures made by Bristol-Myers regarding the settlement attempts were adequate; (2) Plaintiffs fail to adequately plead loss causation; and (3) Plaintiffs fail to adequately plead scienter. Individual Defendants Bodnar and Dolan also move to dismiss on the basis that Plaintiffs have inadequately pleaded their individual 10(b) claims, and that Plaintiffs inadequately pleaded control person liability pursuant to section 20(a). For the reasons set forth below, Defendants' motions to dismiss are denied.
Bristol-Myers, one of the world's largest pharmaceutical companies, is engaged in the research, discovery, development, licensing, manufacturing, marketing, distribution, and sale of pharmaceutical drugs and related health care products worldwide. (Am. Compl. ¶ 15.) During the Class Period, Defendant Peter Dolan served as the Company's Chief Executive Officer, Director, and Chairman of its Executive Committee, (Am. Compl. ¶ 16), and Defendant Andrew Bodnar, a medical doctor and attorney, was Bristol-Myers's Senior Vice President for Strategy and Medical and External Affairs, and also a member of the Company's Executive Committee. (Am. Compl. ¶ 18.) According to the Amended Complaint, Dr. Bodnar was the lead Bristol-Myers representative involved in the settlement negotiations at issue in this lawsuit.
Bristol-Myers and Sanofi-Aventis ("Sanofi"), a French pharmaceutical company, jointly manufacture and sell the prescription drug Plavix, a very successful and highly prescribed blood-thinning medication which treats or prevents a myriad of cardiac conditions, including heart attack, stroke, arterial disease, acute coronary syndrome, and other heart conditions. (Am. Compl. ¶ 30.) Bristol-Myers sells the drug in the United States, and Sanofi sells it in most other countries. Originally approved by the Food and Drug Administration ("FDA") in 1997, Plavix sales in the United States totaled more than $3.8 billion in 2005. (Am. Compl. ¶ 30.) It is Bristol-Myers's largest selling drug, and the second largest-selling drug in the entire world. (Am. Compl. ¶ 30.) The primary patent covering the pharmaceutical compounds contained in Plavix is scheduled to expire on November 11, 2011. (Am. Compl. ¶ 30.)
In November 2001, Canadian generic pharmaceutical company Apotex filed an Abbreviated New Drug Application ("ANDA") with the FDA seeking permission to introduce a generic form of Plavix in the United States prior to the expiration of the Plavix patent. (Am. Compl. ¶ 31.) As part of that application, Apotex argued that the Plavix patent was invalid and unenforceable, and therefore would not be infringed by the proposed generic product.*fn1 (Am. Compl. ¶ 31.) If granted, the ANDA would guarantee Apotex 180 days of marketing exclusivity over other generic Plavix drugs; that is, for the first six months after ANDA approval, the Apotex generic would be the sole Plavix alternative marketed to consumers. (Am. Compl. ¶ 31.) Given the tremendous popularity of Plavix, and the enormous potential market for a generic form of the drug, it was apparent that an Apotex generic launch would not only likely be successful, but could pose a significant threat to a key element of Bristol-Myers's core business and profitability.
In response to this application, in March 2002 Bristol-Myers (and Sanofi) sued Apotex for patent infringement in the Southern District of New York, and a statutory stay of the ANDA application was invoked. (Am. Compl. ¶ 32.) The stay expired in May 2005 and Apotex immediately began manufacturing and preparing for the sale of generic Plavix. (Am. Compl. ¶ 32.) At that point, Bristol-Myers sought to negotiate a settlement with Apotex by which Bristol-Myers would agree to certain limitations on its patent rights in exchange for a promise by Apotex to delay its generic product launch until shortly before the official patent expiration in November 2011. (Am. Compl. ¶ 32.)
Bristol-Myers and Apotex did, in fact, successfully negotiate a settlement of the patent litigation in March 2006, but due to a consent decree involving prior similar conduct, Bristol-Myers could not finalize the settlement on its own.*fn2 (Am. Compl. ¶ 34.) Rather, Bristol-Myers had to submit all of its settlement agreements to two separate groups: (1) the Federal Trade Commission ("FTC"), and (2) the state attorneys general of all fifty states, for their review and approval. (Am. Compl. ¶ 34.)
In the initial settlement agreement negotiated with Apotex, Bristol-Myers bargained away certain statutory rights with respect to the damages it was entitled to seek, and the injunctive relief it could pursue, if the settlement did not gain regulatory approval and Apotex was able to continue its generic launch. If Apotex launched a generic drug following regulatory disapproval of the settlement agreement but before resolution of the patent litigation, Bristol-Myers agreed, inter alia, to the following terms with respect to the patent litigation:
1) Bristol-Myers would seek only 70% of Apotex's profits in damages from net sales of its generic if Bristol-Myers had not launched its own generic; it would seek 60% if it had launched its own;
2) Bristol-Myers would not seek treble damages from Apotex as entitled by statute;
3) Bristol-Myers would not seek a trial date earlier than two and one-half months from the date of request to the court;
4) Bristol-Myers agreed to a five-day waiting period after the Apotex generic drug launch before seeking a temporary restraining order so that Apotex could flood the market with its generic. (Am. Compl. ¶ 37.)
In light of the agreement, Bristol-Myers publicly announced on March 21, 2006 that it had settled the patent litigation with Apotex, but it did not disclose the precise terms of the settlement in its public statements. Instead, it issued a press release which stated that under the terms of the proposed settlement, Apotex would receive a royalty-bearing license to manufacture and sell a generic form of Plavix over a specific period of time. (Am. Compl. ¶ 58.) The press release also stated that the settlement agreement "includes other provisions." (Am. Compl. ¶ 58.) Beyond the disclosure of a promise of payment from Bristol-Myers to Apotex, however, the statement failed to further explain what those "other provisions" were, and did not disclose that Bristol-Myers had agreed to limitations on damages, nor that the Company had acceded to delays in seeking trial and a restraining order. (See Am. Compl. ¶ 58.) With respect to finalization and approval, Bristol-Myers disclosed the following:
The proposed settlement is subject to certain conditions, including antitrust review and clearance by the Federal Trade Commission and state attorneys general. There is a significant risk that required antitrust clearance will not be obtained. In such event, the proposed settlement would be terminated, and the litigation would be reinstated . . . . If the litigation were reinstated, [Bristol-Myers] intend[s] to vigorously pursue enforcement of [its] patent rights in Plavix. It is not possible at this time reasonably to assess the outcome of this lawsuit or the timing of potential generic competition for Plavix. . . . Apotex could launch a general [Plavix] product at risk . . . .
[L]oss of market exclusivity of Plavix and the subsequent development of generic competition would be material to [Bristol-Myers's] sales of Plavix and results of operations and cash flows, and could be material to . . . [Bristol-Myers's] financial condition and liquidity. (Am. Compl. ¶ 58, Press Release of March 21, 2006 (emphasis added).) According to the Amended Complaint, these same (or similar) disclosures (that the Company would "vigorously pursue" its rights, and that an Apotex launch would be "at risk") were repeated in other securities filings, public statements, and press releases-without further detail or context about the precise status of the settlement negotiations-from March 14, 2006 through at least May 31, 2006. (See Am. Compl. ¶¶ 58-76.)*fn3
In addition to the March 21, 2006 press release, Bristol-Myers also filed a Form 8-K on that same day which stated that if antitrust clearance were not obtained, then Bristol-Myers "intend[ed] to vigorously pursue patent enforcement of [its] patent rights in Plavix" and "if the litigation were reinstated, Apotex could launch a generic [Plavix product] at risk." (Reisner Decl. Ex. E (emphasis added); Am. Compl. ¶ 63.) The Company also posted similar statements on its website. ("Questions and Answers" posted March 21, 2006 (Exhibit 99.2 to Form 8-K, Reisner Decl. Ex. E); Am. Compl. ¶ 65.) Plaintiffs allege that these assertions-that Bristol-Myers would "vigorously pursue" patent enforcement, and that any Apotex generic launch would be "at risk" to Apotex-were issued repeatedly by the Company throughout the class period, despite the fact that they were materially false and misleading statements of Bristol-Myers's true position due to the fact that they did not reflect the concessions already made in the settlement agreement.
In trading on March 22, 2006, presumably on the basis of the previous day's settlement announcement, Bristol-Myers stock increased in value by 11%. (Am. Compl. ¶ 59.) The positive sentiment surrounding the announcement was premature. Although the settlement had been negotiated, it was not finalized. As the press release made clear, the agreement required the approval of the state attorneys general and the FTC in order to become final. (Press Release of March 21, 2006, Exhibit 99.1 to Form 8-K, Reisner Decl. Ex. E; also excerpted at Am. Compl. ¶ 58.)
Approximately six weeks later, on May 5, 2006, Bristol-Myers received word that the state attorneys general had rejected the initial settlement agreement, (Am. Compl. ¶ 38), but Bristol-Myers did not disclose this fact at that time. Instead, on May 8, 2006, Bristol-Myers filed a Form 10-Q making no mention of the attorneys general non-approval, even though it stated with respect to the settlement that "[t]he proposed settlement is subject to certain conditions, including antitrust review and clearance by the Federal Trade Commission and state attorneys general. There is a significant risk that the required antitrust clearance will not be obtained." (Am. Compl. ¶ 73.) In fact, the "significant risk" mentioned in the 10-Q had already occurred with respect to the first negotiated settlement agreement.
Thereafter, in lieu of disclosing the attorneys general rejection of the initial settlement agreement, Bristol-Myers and Apotex sought to quietly renegotiate the terms of the agreement in order to gain regulatory approval. (Am. Compl. ¶ 39.) According to the Amended Complaint, on May 12 and 24, 2006, at the direction of and/or with the knowledge of Defendant Peter Dolan, Defendant Andrew Bodnar of Bristol-Myers and a representative of Apotex attended "secret" meetings to renegotiate the settlement terms. (Am. Compl. ¶ 39.) These meetings were conducted without lawyers present, and, on May 26, 2006, Bristol-Myers and Apotex entered into an amended settlement agreement. (Am. Compl. ¶ 39). A written agreement which purportedly memorialized the amended settlement terms was produced and resubmitted to the FTC and the state attorneys general for approval. (Am. Compl. ¶ 39.)
According to Plaintiffs' allegations, however, the formal written agreement that was submitted for regulatory approval did not contain all of the terms of the amended settlement agreement. (Am. Compl. ¶ 39.) Instead, unbeknownst to regulators and the general public, the amended settlement actually included both the written terms and terms which were agreed to as part of "secret oral side agreements." (Am. Compl. ¶ 39.) Among other things, the oral side agreements allegedly included promises that Bristol-Myers would pay a large cash sum to Apotex, a term specifically noted by regulators as a concern in the initial settlement. (Am. Compl. ¶ 42.)
On May 31, 2006, Defendant and CEO Dolan made public comments about the settlement at a securities analysts' conference, stating that:
[The] [k]ey to revenue growth, obviously, is maintaining Plavix exclusivity. You have read that we have a settlement proposal that is being vetted and evaluated. There's a significant risk that it doesn't get approved. I don't have much more to offer today about Plavix, but it clearly is critical to our future growth. (Am. Compl. ¶ 76.) Despite the fact that this statement directly addressed the ongoing settlement proceedings, it failed to report the initial non-approval of the settlement by the state attorneys general, and did not discuss Bristol-Myers's attempts to renegotiate the settlement. In addition to the failure to publicly report on these matters, Plaintiffs also allege that Dolan and Bodnar informed neither the Bristol-Myers Board of Directors nor their federal monitor about the nature of the renewed settlement negotiations and the secret side agreements, notwithstanding the fact that Plavix exclusivity was admittedly a critical component of the Company's business. (Am. Compl. ¶ 123.)
On June 5, 2006, counsel for Apotex sent a letter to the Department of Justice disclosing that the terms contained in the parties' written agreement were incomplete, and that further terms were hidden from regulators in an effort to surreptitiously gain regulatory approval. (Am. Compl. ¶¶ 4, 42, 43.) Presumably in response to this letter, on June 8, 2006, the FTC requested written certification from the settling parties that there were no side agreements to the amended settlement, and that the Company had not made any representation or commitment that was not explicitly set forth in the written settlement agreement. (Am. Compl. ¶ 50.) On or about June 12, 2006, Bristol-Myers filed the requested certification guaranteeing the absence of oral agreements, which, according to the Plaintiffs, it "knew to be materially false" at the time it was filed. (Am. Compl. ¶ 50.)
On June 25, 2006, Bristol-Myers publicly announced that it had renegotiated the Apotex settlement agreement (Am. Compl. ¶ 79), but still did not disclose the initial non-approval by the state attorneys general. Instead, Bristol-Myers asserted that the renegotiation was conducted in response to regulators' "concerns," and revealed only that "[a]mong other revisions," Apotex had negotiated an earlier licensing date. (Am. Compl. ¶ 79.) No other terms were revealed. (Press Release, June 25, 2006, attached to Reisner Decl. as Ex. H.)
About one month later, on Wednesday, July 26, 2006, the Federal Bureau of Investigation ("FBI") searched Bristol-Myers headquarters in New York, and sought information surrounding the settlement negotiations and agreements. (See Am. Compl. ¶¶ 6, 51.) The next day, Thursday, July 27, 2006, Bristol-Myers confirmed that a criminal investigation had begun.
(See Form 8-K filed July 27, 2006 (Reisner Decl. Ex. I) ("[Bristol-Myers] learned yesterday that the Antitrust Division of the United States Department of Justice is conducting a criminal investigation regarding the proposed settlement of the Apotex litigation described above."); Am. Compl. ¶ 82.) Bristol-Myers stock price declined 7.5%. (Am. Compl. ¶ 85.) One day later, Friday, July 28, 2006, the stock rallied briefly as securities analysts commented that an "at-risk" launch for Apotex was unlikely because it "would be a 'bet-the company' endeavor . . . . [and Bristol-Myers] might be able to collect treble damages." (J.P. Morgan Securities Inc. Report, July 28, 2006, excerpted at Am. Compl. ¶ 89). On that same day (after the close of the market), Bristol-Myers reported that the amended settlement agreement did not win regulatory approval. (Am. Compl. ¶ 87.) On the next trading day, Monday, July 31, 2006, Bristol-Myers shares declined another 2%. (Am. Compl. ¶ 94.) Even then, however, Plaintiffs contend that the full impact of Bristol-Myers's settlement concessions was not apparent to the market, which still believed that the entire spectrum of statutory relief was available in the event of an Apotex generic launch. (See Reuters report, July 31, 2006, excerpted at Am. Compl. ¶ 90 ("Industry analysts cautioned on Monday [July 31, 2006] that Apotex Inc. has the right to immediately launch its copycat form of [Plavix], although it is unlikely to do so because of huge financial risks to the generic drug maker.").)
In fact, it was not until the filing of another Form 10-Q on August 8, 2006 that the exact terms of the amended settlement agreement were revealed. (Am. Compl. ¶ 95.) The terms were similar to those of the initial (rejected) settlement, although the amended agreement contained even more concessions from Bristol-Myers with respect to available damages and injunctive relief. The amended settlement agreed, inter alia, that:
(1) Bristol-Myers would seek no more than 50% of Apotex's profits in damages from net sales of its generic if Bristol-Myers had not launched its own generic; it would seek only ...