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Engstrom v. Elan Corp.

October 18, 2011

MARY B. ENGSTROM AND WILLIAM R. ENGSTROM, INDIVIDUALLY AND ON BEHALF OF ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS,
v.
ELAN CORPORATION, PLC, G. KELLY MARTIN AND SHANE COOKE, DEFENDANTS.



The opinion of the court was delivered by: Shira A. Scheindlin, U.S.D.J.

OPINION AND ORDER

I. INTRODUCTION

Lead Plaintiff, Thomas Bown, II, brings this putative securities fraud class action individually and on behalf of all purchasers of American Depository Shares ("ADSs") of Elan Corporation, plc, ("Elan") between July 2, 2009, and August 5, 2009 (the "Class Period"). Bown asserts claims under Section 10(b) and 20(a) of the Securities Exchange Act of 1934,*fn1 and Rule 10b-5 promulgated thereunder by the Securities and Exchange Commission,*fn2 for alleged false and misleading statements made by Elan, its Chief Executive Officer ("CEO"), G. Kelly Martin, and its former Chief Financial Officer ("CFO"), Shane Cooke (collectively the "defendants").

Defendants now move to dismiss the Complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure for failure to state a claim as required under Rule 9(b) and the Private Securities Litigation Reform Act ("PSLRA")*fn3 on

the grounds that (1) Bown has failed to plead facts giving rise to a strong inference of scienter, and (2) Bown has failed to plead particular statements that were false and misleading. Because I find that Bown has failed to plead facts raising a strong inference of scienter, defendants' motion is granted and Bown is granted leave to amend.

II. BACKGROUND*fn4

A. The Parties and Their History

Elan is a neuroscience-based biotechnology company headquartered in Ireland with its primary research and development, manufacturing and marketing facilities located in Ireland and the United States.*fn5 Elan's ADSs are listed on the New York Stock Exchange ("NYSE") under the symbol ELN, and its shares of common stock trade on the Irish Stock Exchange.*fn6 Elan is organized into two business units, BioNeurology and Elan Drug Technologies.*fn7 Elan Drug Technologies describes itself as "the world's leading drug delivery business" which "develops and manufactures innovative pharmaceuticals" in partnership with other pharmaceutical companies.*fn8 Elan derives nearly all of its revenue from Tysabri, a Food and Drug Administration ("FDA") approved therapy for relapsing forms of multiple sclerosis.*fn9 Tysabri is a tremendously successful blockbuster drug - one with sales exceeding one billion dollars.*fn10 During the Class Period, G. Kelly Martin was Elan's President and CEO, and Shane Cooke was Elan's CFO.*fn11
Lead plaintiff Bown purchased Elan ADSs on the NYSE during the Class Period in reliance on defendants' public statements.*fn12 Bown's ADSs, as well as those of all individuals who purchased ADSs during the Class Period, declined in value after Elan lost an opportunity to secure an additional $115 million as part of a major agreement because of defendants' alleged false and misleading statements.*fn13

B. The Biogen Agreement

On August 15, 2000, Elan entered into a collaboration agreement (the "Biogen Agreement") with Biogen, a large pharmaceutical company, to develop and finance the drug that ultimately became Tysabri.*fn14 The Biogen Agreement contains a non-assignment clause providing that: "Neither this Agreement nor any right or obligation hereunder may be assigned or delegated, in whole or part, by either party without the prior express written consent of the other, except as expressly set forth below . . . ."*fn15 The Biogen Agreement also has a "change of control" provision under which if either party undergoes a change in control, the nonacquired party obtains the right to buy out the acquired party's interest in Tysabri.*fn16 The Biogen Agreement also has a confidentiality provision, a common practice in the pharmaceutical industry, because it contains sensitive information.*fn17

Furthermore, the Biogen Agreement provides that in the case of a material breach by either party, the breaching party may lose all of its rights in Tysabri if it fails to cure within sixty days.*fn18

Tysabri was approved by the FDA in 2004, and by 2009, several companies were interested in gaining access to both Tysabri, and Elan's other potential blockbuster drug Bapineuzumab, a treatment for Alzheimer's Disease in phase III of FDA testing.*fn19 Tysabri is sold and marketed by Elan and Biogen pursuant to the Biogen Agreement, and the agreement is absolutely essential to Elan's financial viability.*fn20 Since 2000, the Elan-Biogen partnership has been "by and large a very good" one.*fn21

C. The J&J Agreement

By 2009, Elan had incurred a substantial amount of debt and needed

to sell itself, or a part of itself, in order to service its debt.*fn22 On July 2, 2009, Elan issued a joint press release with Johnson & Johnson ("J&J") announcing a "definitive agreement" (the "J&J Agreement") whereby J&J would acquire substantially all of Elan's assets and rights related to its Alzheimer's Immunotherapy Program ("AIP"), and J&J would invest one billion dollars in Elan in return for 18.4 percent of Elan's outstanding ADSs.*fn23 The J&J Agreement

contemplated that the rights and interests in AIP - including Bapineuzumab - would be transferred to a newly formed company, Janssen Alzheimer Immunotherapy ("Janssen"), in which J&J would own a 50.1 percent equity interest and the remaining 49.9 percent would be owned by Elan.*fn24 The J&J Agreement also had a provision giving J&J an option to finance Elan's purchase of Biogen's rights in Tysabri in the event that Biogen experienced a change of control ("the Option").*fn25 The Option further required Elan to follow instructions from J&J regarding certain aspects of the negotiation that would take place if Elan were to have the opportunity to purchase Biogen's stake in Tysabri.*fn26 Elan informed its shareholders that the Option was added to ensure that Elan would have sufficient resources to buy out Biogen's interest in Tysabri if and when Biogen were to undergo a change in control.*fn27 Elan stated that the actual "change of control" provisions were confidential, but its existence was a matter of public knowledge.*fn28

Bown asserts that the Option was added in an effort to "coerce Biogen into acceding to the J&J Agreement despite the fact that the J&J Agreement violated the express terms of the Biogen Agreement."*fn29

As a result of the press release, the price of Elan's ADSs increased by over eight percent in a single day.*fn30 Analysts immediately noted that this deal would be an effective way for Elan to supplement its liquidity and reduce leverage.*fn31 In articles in the Wall Street Journal and Bloomberg News dated July 20, and July 21, 2009, market commentators further reflected on the consequences of the J&J Agreement.*fn32 Both articles, however, also emphasized the Option and speculated about whether the Option signified an interest by either Elan or J&J to ultimately acquire Biogen's rights in Tysabri or even, perhaps, to acquire Biogen itself.*fn33 Defendants' statements in both the articles as well as Elan's Earnings Call identified the Option as an important part of the J&J Agreement.*fn34

In negotiating the J&J Agreement, Defendants carefully considered any potential consequences that the J&J Agreement might have on the Biogen Agreement.*fn35 In fact, Elan stood to lose nearly all of its revenue if it breached the Biogen Agreement, and in negotiating the J&J Agreement defendants represented to J&J that the agreement would not create any conflict with the Biogen Agreement.*fn36 Bown contends, however, that defendants never disclosed the provision of the Option granting J&J the ability to direct Elan in certain aspects of potential buy out negotiations, the so-called "secret provision."*fn37

D. The Declaratory Judgment Action

On July 28, 2009, during the Class Period, Biogen sent Elan a letter advising Elan that it had breached material terms of the Biogen Agreement by entering into the J&J Agreement.*fn38 Specifically, Biogen complained that Elan had violated the "non-assignment" clause in the Biogen Agreement, and that failure to cure within sixty days would result in Elan's loss of rights in Tysabri.*fn39 On August 6, 2009, Elan issued a press release countering Biogen's letter as well as announcing that Elan had filed suit in this Court seeking declaratory judgment and injunctive relief.*fn40 Elan commenced its declaratory judgment action on August 6, 2009, and in its Complaint, Elan asked this Court to find that Elan's participation in the J&J Agreement did not constitute a breach of the Biogen Agreement.*fn41 Elan also asked this Court for a preliminary injunction and submitted affidavits as well as copies of both the Biogen and the J&J Agreements under seal for the Court's review.*fn42 Elan further asked the Court for an expedited briefing schedule because of its concern that if it was found to be in breach, Elan would have less than sixty days remaining to cure.*fn43 Following these disclosures, the price of Elan's ADSs declined 4.6 percent in a single day.*fn44

The action was assigned to Judge Deborah Batts of this Court, who granted Elan's request for expedited briefing, and ruled on the matter at a hearing on September 3, 2009.*fn45 Judge Batts denied Elan's motion for a preliminary injunction, after finding that the J&J Agreement, as submitted, would constitute a breach of the Biogen Agreement.*fn46 Specifically, the Court found that "while it would seem to the Court that while a right has not been assigned . . . it appears to the Court that Elan has delegated an obligation that it has to J&J by taking direction from J&J about the negotiations for the purchase price" of a potential buyout of Biogen's rights in Tysabri.*fn47 Elan was given twenty-three days to cure its breach, and it proceeded to do so immediately.*fn48 Bown contends that the declaratory judgment action was a "sham litigation" designed to force Biogen "into acceding to Elan's demands based upon the 'carrot' that Elan now had brought a potential suitor to the table for Biogen in the form of J&J."*fn49 Bown further asserts that the breach of the Biogen Agreement was either "plainly and unambiguously" known to defendants or, if not, they were extremely reckless in failing to discover it.*fn50

E. Restructuring the J&J Agreement

On September 3, 2009, Elan issued a press release stating "We respect the Court's decision . . . . We are committed to working with Johnson & Johnson to close the transaction as quickly as possible, consistent with the Biogen-Elan Tysabri Collaboration Agreement."*fn51 A second press release was issued by Elan eleven days later on September 14, 2009, stating that Elan had "cured an unintended breach" of the Biogen Agreement by modifying the terms of its "pending transaction with Johnson & Johnson."*fn52 The J&J Agreement finally closed on September 17, 2009.*fn53 However, because of the elimination of the Option, J&J dropped its investment in Elan to $885 million instead of one billion dollars.*fn54 At that point, the declaratory action was dismissed as moot inasmuch as the J&J Agreement no longer constituted a breach of the Biogen Agreement.*fn55 The J&J Agreement included its own "change of control" provision whereby J&J could purchase Elan's 49.9 percent share of Janssen if Elan where to undergo a change of control.*fn56 As reported by Reuters, ADSs in Elan were down thirteen percent by March 12, 2010 since the J&J Agreement was first announced on July 2, 2009.*fn57

Bown initiated the present action on February 23, 2011, claiming that in addition to breaching its agreement with Biogen, Elan and its chief officers are guilty of securities fraud for failing to fully inform the public about the Option and its "secret provision," and failing to disclose how Elan thereby breached the Biogen Agreement, created a high risk of breaching the Biogen Agreement, or recklessly failed to investigate whether Elan breached the Biogen Agreement.*fn58

Following defendants' original motion to dismiss filed on June 6, 2011, Bown requested and was granted leave to amend his Complaint pursuant to Rule 15(a)(1)(B) and defendants' motion to dismiss was withdrawn. Defendants ...


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