GARY ABELY, Individually and on Behalf of All Others Similarly Situated, Plaintiff,
AETERNA ZENTARIS INC., JÜRGEN ENGEL, DENNIS TURPIN and PAUL BLAKE, Defendants.
MEMORANDUM AND ORDER
P. KEVIN CASTEL, District Judge.
Plaintiff Gary Abely brings this putative class action on behalf of investors who purchased shares and/or sold put contracts of defendant Aeterna Zentaris Inc. ("Aeterna") between June 1, 2009 and April 1, 2012 (the "Class Period"). According the plaintiff, Aeterna and the three individual defendants - Jürgen Engel, Dennis Turpin and Paul Blake - committed a fraud on the market by misrepresenting and omitting material information about the clinical trials of perifosine, a candidate drug for the treatment of advanced cancer. He asserts that defendants' alleged misrepresentations about perifosine's potential efficacy artificially inflated Aeterna share price, and that when the market learned that the drug was not, in fact, as effective as indicated, company share value plunged 76% from its Class Period high. Plaintiff brings securities fraud claims pursuant to sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "'34 Act"), 15 U.S.C. §§ 78j(b) and 78t, and Rule 10b-5, 17 C.F.R. § 240, 10b-5.
The defendants move to dismiss, arguing that the Second Amended Securities Class Action Complaint (the "Complaint") fails to plead fraud with the particularity required of Rule 9(b), Fed. R. Civ. P., and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4(b)(1) (the "PSLRA"). According to defendants, the Complaint fails to allege material misrepresentations and omissions, and does not adequately allege scienter or loss causation.
Separately, the plaintiff has moved to strike certain exhibits attached to the affidavit of Robert N. Kravitz. (Docket # 26.) He contends that the exhibits are not properly reviewed on a motion to dismiss and not subject to judicial notice under Rule 201, Fed. R. Evid.
For the reasons explained, the motion to dismiss is granted, and the motion to strike is denied.
For the purposes of defendants' motions, all non-conclusory factual allegations are accepted as true, see Ashcroft v. Iqbal , 556 U.S. 662 (2009), and all reasonable inferences are drawn in favor of the plaintiff as the non-movant. See In re Elevator Antitrust Litig. , 502 F.3d 47, 50 (2d Cir. 2007).
I. The Phase 2 Clinical Trial.
Aeterna is headquartered in Quebec City, Canada, and focuses primarily on the development of drugs for oncology and endocrine therapy. (Compl't ¶ 11.) Its shares trade on NASDAQ. (Compl't ¶ 11.) Defendant Engel was Aeterna's president, chief executive officer and a director during the class period. (Compl't ¶ 12.) Defendant Turpin was the company's senior vice president and chief financial officer, and defendant Blake was the company's senior vice president and chief medical officer. (Compl't ¶¶ 13-14.)
In 2007, Aeterna began to focus on the development of a potential new cancer-treatment drug called perifosine. (Compl't ¶ 45.) Clinical trials of perifosine were previously undertaken in or around 1998 by a predecessor company of Aeterna, under the direction of defendant Engel. (Compl't ¶¶ 30-32.) Those earlier trials were limited, and showed mixed results. (Compl't ¶ 31.)
A regulation of the Food and Drug Administration ("FDA") provides for a three-phase clinical investigation of a proposed new drug. See 21 C.F.R. § 312.21. It states in part: "Phase 2 includes the controlled clinical studies conducted to evaluate the effectiveness of the drug for a particular indication or indications in patients with the disease or condition under study and to determine the common short-term side effects and risks associated with the drug. Phase 2 studies are typically well controlled, closely monitored, and conducted in a relatively small number of patients, usually involving no more than several hundred subjects." 21 C.F.R. § 312.21(b).
In 2007, Aeterna and its development partner, Keryx Biopharmaceuticals, Inc. ("Keryx"), took the first steps to initiate an exploratory, "Phase 2 placebo-controlled study of perifosine in combination with other single agent chemotherapies for metastic cancer patients." (Compl't ¶ 45.) Keryx and Aeterna entered into to a License and Cooperation Agreement for Perifosine (the "License Agreement"), pursuant to which Keryx "was responsible for conducting and testing perifosine in North America...." (Compl't ¶ 32.) As discussed in greater detail, Keryx was responsible for key aspects of the clinical investigation, including the design and execution of the study and negotiation of necessary FDA approvals. Many of the alleged misstatements and omissions repeated conclusions that were first announced by Keryx. (Compl't ¶¶ 32, 60, 64, 84, 87, 107.) In exchange for its work on perifosine's development, Keryx would receive a license to sell perifosine in North America. (Compl't ¶ 32.) Perifosine's development was overseen by a Coordination Committee that consisted of two representatives from Keryx and two from Aeterna. (Compl't ¶ 32.)
The Phase 2 trial was split into two distinct stages. (Compl't ¶ 47.) In the first stage, researchers treated terminally ill patients of at least seven types of cancer using either perifosine or placebo combined with one of eight other chemotherapy agents. (Compl't ¶ 45.) The study's primary objective was to determine progression at six months for patients who used perifosine in combination with a second chemotherapy agent, versus patients who were given non-perifosine placebo mixed with a chemotherapy agent. (Compl't ¶ 46.) The Phase 2 trial's initial protocol stated that if, at the completion of Stage 1, more than 30 percent of perifosinetreated patients were progression free, the study would be expanded to Stage 2. (Compl't ¶ 47.) That second stage was to be a hypothesis-confirming stage. (Compl't ¶ 47.)
Plaintiff maintains that the design of this first stage was inherently flawed. As described in the Complaint:
The multiple arms of the study inherently increased the chances for a false positive conclusion, i.e., a spurious finding that perifosine provided a statistically significant benefit to colorectal cancer patients.... Aeterna never disclosed the number of different arms of this study, but given a minimum of seven types of cancer combined with eight different drugs which could be used for treatment of various types of cancer and the varying dosages, there were a minimum of ten arms and possibly dozens more.
(Compl't ¶ 45.) According to plaintiff, this first stage of the testing "was unexpectedly stopped early, " and "amounted to little more than a data mining expedition to identify any arm of subgroup thereof that offered any glimpse of hope for treating some type of cancer." (Compl't ¶¶ 47-48.) Plaintiff asserts that Aeterna "cherry-picked 25 out of 381 patients" to support a hypothesis that perifosine had a clinical benefit. (Compl't ¶ 48.) In a press release dated June 1, 2009 - the first day of the class period - Aeterna announced that Keryx had presented positive Phase 2 data to the American Society of Clinical Oncology, showing that perifosine combined with a chemotherapy agent called capecitabine had a statistically significant effect in slowing the progression of colon cancer. (Compl't ¶ 54.)
The second, hypothesis-confirming stage of the Phase 2 trial studied only patients with terminal, metastatic colorectal cancer, who were treated with perifosine in combination with capecitabine. (Compl't ¶ 49.) Although the trial's protocol called for 50 patients to be enrolled in this stage, Aeterna first enrolled only 25, and then later increased the number of enrollees to 38. (Compl't ¶ 49.) Plaintiff alleges numerous flaws in this second stage of the Phase 2 trial. (Compl't ¶ 49.) Defendants never disclosed whether, consistent with the study's original, stated objectives, 30% of enrollees were free of cancer progression at the six-month point. (Compl't ¶ 49.) According to plaintiff, contrary to standard procedures, the 25 unblinded patients from the first stage were included in stage two testing, thus introducing bias to the study and defeating the purpose of double-blind testing. (Compl't ¶ 49.) The Complaint asserts that defendants misrepresented to investors that the study continued to be double-blind, even though defendants knew the identities for 25 of the 38 stage-two patients. (Compl't ¶ 49.) According to plaintiff, the 25 unblinded patients showed statistically significant improvement in survival, while the 13 additional patients did not. (Compl't ¶ 49.) According to plaintiff, on May 9, 2011, when all data was unblinded, defendants then changed the trial's objectives "to fit the results, " re-framing the primary objective as a study of the combination-treatment of capecitabine and perifosine without performing statistical adjustments to account for false positives. (Compl't ¶¶ 50-52.)
Plaintiff asserts that the defendants misstated and omitted material information concerning the Phase 2 trial. He asserts that a June 1, 2009 press release from Aeterna misleadingly attributed statistically significant results to the Phase 2 study and failed to account for likely false positives. (Compl't ¶ 55.) Aeterna made numerous statements indicating that the Phase 2 findings were promising, including in SEC filings, press releases, investor presentations and investor conference calls from 2009 to 2012. (Compl't ¶¶ 57-61, 64-70, 74-81, 87-88, 90-95, 99-100, 107-10, 113-23, 129-30, 134-35.) For example, at a presentation at an investor conference in September 2011, defendant Blake stated that based on the Phase 2 study, the median survival rate for colorectal cancer patients treated with a combination of capecitabine and perifosine was 15 months, whereas the median survival rate for those treated with capecitabine and placebo was 6 months. (Compl't ¶ 129.) Blake described the results as "dramatic" and "unexpected, " saying that they "gave rise to great enthusiasm in our company and in our partner company, " as well as at the FDA. (Compl't ¶ 129.) According to plaintiff, defendants materially misstated the findings of the Phase 2 study and omitted material information that would have reflected negatively on the prospects of perifosine.
II. The Phase 3 X-PECT Clinical Trial.
Plaintiff asserts that the defendants also are responsible for materially misrepresenting and omitting the duration of the Phase 3 trial of perifosine, thereby causing investors to infer positive interim results in the Phase 3 period. FDA regulation states: "Phase 3 studies are expanded controlled and uncontrolled trials. They are performed after preliminary evidence suggesting effectiveness of the drug has been obtained, and are intended to gather the additional information about effectiveness and safety that is needed to evaluate the overall benefit-risk relationship of the drug and to provide an adequate basis for physician labeling. Phase 3 studies usually include from several hundred to several thousand subjects." 21 C.F.R. § 312.21(c).
On February 3, 2010, Keryx and the FDA agreed to a Special Protocol Assessment for a Phase 3 trial of perifosine. (Compl't ¶ 71.) On April 5, 2010, Aeterna announced that the FDA had given fast-track designation to the Phase 3 trial of perifosine. (Compl't ¶¶ 82-83.) A joint Aeterna-Keryx press release stated that FDA fast-track approval was intended to expedite development and agency review of drugs that had potential to address unmet medical needs for life-threatening conditions. (Compl't ¶ 82.) The press release described perifosine as a "novel, potentially first-in-class, oral anti-cancer agent" for the treatment of advanced colorectal cancer. (Compl't ¶ 82.)
Aeterna and Keryx began the Phase 3 trial on April 8, 2010. (Compl't ¶ 84.) During a conference call on May 13, 2010, defendant Engel stated that the Phase 3 trial involved approximately 430 patients at 40 different sites. (Compl't ¶ 90.) The number of patients ultimately expanded to 465. (Compl't ¶ 127.) Upon the 360th death among the study's patients, the data would be unblinded and analyzed. (Compl't ¶ 71.) Defendant Engel stated that Keryx was sponsoring and conducting the study, and expected that the trial would be complete in the second half of 2011. (Compl't ¶ 90.) Engel noted Keryx's expectation that the treatment would potentially be available to the public by mid-2012. (Compl't ¶ 90.) As the study progressed, Aeterna revised its prior estimate, and stated that the Phase 3 results would be available in the first quarter of 2012. (Compl't ¶ 129.)
According to the plaintiff, in repeated public statements about the estimated time required to complete the Phase 3 trial, the defendants knowingly or recklessly failed to explain that the trial could take more time to complete than its anticipated conclusion in the second half of 2011. (Compl't ¶¶ 91.) "As a result of the omission of this fact, investors were given the false impression that any delays in the reporting of top line results of the study were attributable to increased overall survival in those patients receiving perifosine." (See, e.g., Compl't ¶¶ 79, 83, 91, 93, 100, 103, 105.)
Plaintiff also asserts that defendants issued misleading statements about the prospects of success in the Phase 3 trial. In a March 28, 2012 investor conference call, Engel stated that he expected data from Phase 3 to be unblinded "during this month." (Compl't ¶ 139.) Blake stated: "I'm very confident we're going to get a good result in colorectal cancer. The Phase 2 data was strong." (Compl't ¶ 139.) Blake noted that "if the drug performs as we hope and expect from the protocol design, we should have a longer benefit on overall survival and I think we should have a very acceptable toxicity profile as well." (Compl't ¶ 139.) During this same call, Engel represented that he expected to release "top line results" within four to six weeks. (Compl't ¶ 139.) One analyst on the call pressed for more information concerning the timing of the 360th death and confirmation that it had not yet occurred. (Compl't ¶ 139.) Engel stated that "this will occur during the course of this month, " and stated that following that event, researchers would ensure that anything "said about the results is absolutely correct, accurate and comprehensive and that will become available in the next four to six weeks." (Compl't ¶ 139.) When asked whether the "delay" in the trial completion had made Blake more optimistic about its success, Blake stated that he was "encouraged from the very beginning" of the study, noting the "pretty dramatic difference" between the placebo and perifosine treatments. (Compl't ¶ 139.)
III. The Announcement of the Phase 3 Trial Results.
On April 2, 2012, four days after indicating that the trial results were still four to six weeks away, Aeterna issued a press release stating in part that the Phase 3 trial "did not meet the primary endpoint of improving overall survival versus capecitabine placebo." (Compl't ¶ 141.) Aeterna's stock price declined by $1.44 per share to $0.73, a drop of approximately 67%. (Compl't ¶ 142.) Analysts noted that the results were announced several weeks earlier than expected. (Compl't ¶ 143.)
RULE 9(b), RULE 12(b)(6) AND THE PSLRA'S PLEADING THRESHOLD.
Pursuant to Rule 12(b)(6), Fed. R. Civ. P., "[t]o survive a motion to dismiss, a complaint must plead enough facts to state a claim to relief that is plausible on its face.'" ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan Chase Co. , 553 F.3d 187, 196 (2d Cir. 2009) (quoting Ruotolo v. City of New York , 514 F.3d 184, 188 (2d Cir. 2008)). "A pleading that offers labels and conclusions' or a formulaic recitation of the elements of a cause of action will not do.'" Iqbal , 556 U.S. at 678 (quoting Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 555 (2007)).
Along with the standards of Rule 12(b)(6), "[a]ny complaint alleging securities fraud must satisfy the heightened pleading requirements of the PSLRA and Fed.R.Civ.P. 9(b) by stating with particularity the circumstances constituting fraud." ECA, Local 134 , 553 F.3d at 196 (citing Tellabs Inc. v. Makor Issues & Rights. Ltd. , 551 U.S. 308 (2007)). Rule 9(b) requires a party to "state with particularity the circumstances constituting fraud or mistake." This pleading threshold gives a defendant notice of the plaintiff's claim, safeguards a defendant's reputation from "improvident" charges and protects against strike suits. See ATSI Commc'ns, Inc. v. Shaar Fund, Ltd. , 493 F.3d 87, 99 (2d Cir. 2007). "A securities fraud complaint based on misstatements 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." Id. at 99 (citing Novak v. Kasaks , 216 F.3d 300, 306 (2d Cir. 2000)). Allegations of fraud may be "too speculative even on a motion to dismiss, " particularly when premised on "distorted inferences and speculations.' Id. at 104 (quoting Segal v. Gordon , 467 F.2d 602, 606, 608 (2d Cir. 1972)).
"The PSLRA expanded on the Rule 9(b) standard, requiring that securities fraud complaints "specify" each misleading statement; that they set forth the facts "on which [a] belief' that a statement is misleading was "formed"; and that they state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.' Anschutz Corp. v. Merrill Lynch & Co. , 690 F.3d 98, 108 (2d Cir. 2012) (alteration in original) (quoting Dura Pharms., Inc. v. Broudo , 544 U.S. 336, 345 (2005)). The PSLRA requires a complaint to "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1). As the Second Circuit has repeatedly required, plaintiffs "must do more than say that the statements... were false and misleading; they must demonstrate with specificity why and how that is so." Rombach v. Chang , 355 F.3d 164, 174 (2d Cir. 2004); accord Kleinman v. Elan Corp., plc, 706 F.3d 145, 152-53 (2d Cir. 2013); ATSI , 493 F.3d at 99 ("A securities fraud complaint based on misstatements must... explain why the statements were fraudulent. Allegations that are conclusory or unsupported by factual assertions are insufficient.") (citations omitted).
"Under section 10(b) and Rule 10b-5, an omission is actionable under the securities laws only when the [speaker] is subject to a duty to disclose the omitted facts." SEC v. DiBella , 587 F.3d 553, 563 (2d Cir. 2009). "For an undisclosed fact to be material, there must be 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." Castellano v. Young & Rubicam, Inc. , 257 F.3d 171, 180 (2d Cir. 2001) (quotation marks omitted). If a development renders a past statement misleading, the failure to disclose that development may be a material omission. In re Time Warner Inc. Sec. Litig. , 9 F.3d 259, 267-68 (2d Cir.1993).
The PSLRA also "requires plaintiffs to state with particularity... the facts evidencing scienter, i.e., the defendant's intention to deceive, manipulate, or defraud.'" Tellabs , 551 U.S. at 313 (quoting Ernst & Ernst v. Hochfelder , 425 U.S. 185, 194 & n.12 (1976)). To qualify as "strong, " the "inference of scienter must be more than merely plausible or reasonable - it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent." Id. at 314.
I. The Complaint Fails to Allege Fraud with Particularity.
Defendants assert that the plaintiff has failed to allege material misstatements and omissions consistent with the requirements of Rule 9(b) and the PSLRA. Defendants argue that the Complaint has articulated a non-actionable critique of trial methodologies ...