United States District Court, S.D. New York
IN RE KERYX BIOPHARMACEUTICALS, INC., SECURITIES LITIGATION
OPINION & ORDER
KATHERINE B. FORREST, District Judge.
There is a significant public interest in the development of life-saving drugs. For every drug that succeeds, others do not. Clinical trials are phased into stages: some drugs never make it past the first stage, others never make it past the second stage, and so on. The costs of failure are high, but the rewards for success are also high. The relationship and ratio between the two determines whether, as a matter of economics, the costs of experimentation are worth it. Publicly traded pharmaceutical companies have the same obligations as other publicly traded companies to comply with the securities laws, but they take on no special obligations by virtue of their commercial sector. It would indeed be unjust-and could lead to unfortunate consequences beyond a single lawsuit-if the securities laws become a tool to second guess how clinical trials are designed and managed. The law prevents such a result; the Court applies that law here, and thus dismisses these actions.
Plaintiffs brought this purported class action on February 1, 2013 on behalf of all persons who purchased Keryx Biopharmaceuticals, Inc. ("Keryx" or the "Company") common stock between June 1, 2009 and April 1, 2012 (the "Class Period"). Plaintiffs' claims are brought pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act (the "Exchange Act"), as amended by the Private Securities Litigation Reform Act of 1995 ("PSLRA") and Rule 10b-5 promulgated thereunder (17 C.F.R. § 240.10b-5.)
A related case containing substantially similar allegations, 13 Civ. 1307, was subsequently filed on February 26, 2013. By order dated June 10, 2013, the Court granted a motion to consolidate the two actions, and appointed lead plaintiff and lead counsel. (ECF No. 29.) Plaintiffs then filed their consolidated amended complaint on July 10, 2013, and defendants moved to dismiss on August 26, 2013. Defendants' motion became fully briefed on November 12, 2013.
For the reasons set forth below, the motion to dismiss is GRANTED.
1. ALLEGATIONS IN THE CONSOLIDATED AMENDED COMPLAINT
For purposes of this motion, the Court assumes the truth of all well-pleaded factual allegations and construes them in plaintiffs' favor.
Corporate defendant Keryx is a biopharmaceutical company focused on the acquisition, development, and commercialization of medically important pharmaceutical products. (Consolidated Amended Complaint (hereinafter, "CAC") ¶¶ 2, 16, ECF No. 36.) Individual defendant Ronald Bentsur was the Company's chief executive officer ("CEO") at all relevant times and was appointed as a director on June 16, 2009. (ld. ¶ 17.) According to plaintiffs, as a senior executive and director, Bentsur was privy to confidential and proprietary information regarding Keryx's business, finances, products, markets, and present and future business prospects. ( Id., ¶ 19.) Given his access to this information, plaintiffs allege Bentsur knew or recklessly disregarded that certain adverse facts were not disclosed to, or were being concealed from, the investing public. (Id.) As CEO, plaintiffs allege that Bentsur controlled or possessed the authority to control release of the Company's reports, press releases, and presentations to securities analysts. (Id. ¶ 20.) Plaintiffs also allege that Bentsur received stock options and shares linked to certain milestones, including achieving certain share prices, filing a "new drug application" with the U.S. Food and Drug Administration ("FDA"), and commercial sales of the drug perifosine. (Id. ¶ 138.) Perifosine was a drug being tested for its potential to treat metastatic colorectal cancer ("mCRC"). (Id. ¶ 3.) During the Class Period, plaintiffs allege that Bentsur sold common stock for total gross proceeds of $1, 526, 588. (Id. ¶ 141.)
Plaintiffs assert that, just prior to the commencement of the Class Period, the Company's assets and revenues were severely limited, its losses were substantial, an important drug trial had failed, and its stock faced de-listing by the NASDAQ. ( Id., ¶ 28.) As a result, plaintiffs assert that the success of perifosine - which might be Keryx's next drug available to go to market - was critical to the Company's continued viability. (Id.)
Plaintiffs allege that perifosine had a checkered past - it had been the subject of clinical trials going back to 1998, which had shown "decidedly mixed results." (Id. ¶ 29.) Through a licensing agreement, Keryx obtained rights to sell the drug in North America, but was also responsible for conducting all research and development necessary to obtain regulatory approvals. (Id. ¶¶ 30-31.)
During the Class Period, Keryx ran a "Phase 3" clinical trial of perifosine. (Id. ¶ 3.) The CAC alleges defendants misled investors regarding the results of the Phase 2 trial for perifosine, repeatedly asserting that perifosine had demonstrated statistically significant positive results. (Id. ¶¶ 3-4.)
Plaintiffs assert that defendants' representations regarding the Phase 2 test results were misleading half-truths or falsehoods. (Id. ¶ 5.) According to plaintiffs, defendants knew or recklessly disregarded that their statements were false based on the design and analysis of the trial itself. (Id.) The crux of plaintiffs' claims in this regard relies on various omissions which are alleged to have rendered defendants' statements false or half-truths. For instance, plaintiffs assert that defendants' statements omitted the following material facts: that the Phase 2 trial involved multiple testing of different cancer treatments on a group of patients diagnosed with various types of cancer ("multiplicity"), included unplanned interim analyses of hypothesis-generating data from the testing, and other ad hoc, interposed steps that, under both regulatory guidance and the accepted statistical principles that underpin such guidance, required certain adjustments in the data that defendants failed to make when evaluating the statistical significance of the results. (Id.)
A. Allegations Regarding the Flaws in the Phase 2 Trial
Plaintiffs allege that virtually all clinical trials involve multiplicity - multiple tests to assess intervention effects across multiple outcomes or endpoints. (Id. ¶ 34.) However, according to plaintiffs, literature shows that the probability of making a certain type of error (a "Type I error") increases as the number of tests that are performed. (Id. ¶¶ 35-36.) Literature states that "[g]iven the potential of multiplicity to inflate the Type I error rate of an experiment, it is critical to adjust the level of statistical significance when multiplicity is present in order to keep the overall probability of accepting anyone of the alternative hypotheses, when all of the findings are due to chance, at the specified level." (Id. ¶ 37.) Failing to adjust for multiplicity may result in "believing" a research hypothesis "just because a P value is statistically significant." (Id. ¶ 39.) This can lead to errors in hypothesis generation. (Id. ¶¶ 38-44.)
Plaintiffs also allege that the Phase 2 trial was flawed due to "interim analysis" which occurred. (Id. ¶ 45.) The FDA defines "interim analysis" as "any analysis intended to compare treatment arms with respect to efficacy or safety at any time prior to the formal completion of a trial." (Id.) According to plaintiffs, interim analysis "may also introduce bias and impact any purported statistical significance of a study's results when it is not planned and in advance and described in the study's protocol." (Id.) Plaintiffs spend a number of paragraphs describing issues and potential issues with unplanned interim analysis. (Id. ¶¶ 46-48.)
According to plaintiffs, the Phase 2 trial for perifosine was affected by multiplicity, hypothesis generation, and interim analysis data comparisons - "yet, Keryx did not adjust the P-values it used to evaluate the statistical significance of the results." (Id. ¶ 49.) According to plaintiffs, the Company "then went on to tout the Phase 2 results as statistically significant' when, due to Keryx's failure to adjust the statistical evaluation of the Phase 2 results, such claims lacked any reasonable basis." (Id.)
B. Defendants' Public Statements
Plaintiffs' story regarding perifosine's Phase 2 clinical trial begins with a press release Keryx issued on June 1, 2009 when it announced positive FDA Phase 2 trial data. (Id. ¶ 77.) On August 12, 2009, Keryx filed a Form 10-Q with the SEC announcing its financial results for the fiscal quarter ending on June 30, 2009, which included statements regarding the statistical significance of the Phase 2 test results (statements identical to those in the June 1, 2009 press release.) (Id. ¶ 78.) Bentsur submitted certifications to the SEC in which he attested that the Form 10-Q "does not contain any untrue statement of material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which the statements were made, not misleading with respect to the period covered by this report." (Id. ¶ 79.) Keryx then repeated or incorporated by reference its statements regarding the Phase 2 clinical trial results on multiple occasions in 2009. (Id. ¶¶ 80-83.)
On January 25, 2010, the Company issued a press release reporting the updated results of the Phase 2 trial. (Id. ¶ 85.) The press release was entitled: "Keryx Reports Statistically Significant Benefit in Survival from Updated Results of a Randomized, Double-Blind, Placebo-Controlled Phase 2 Study of KRX-0401 (Perifosine) in the Treatment of Advanced Metastatic Colon Cancer." (Id.)
During a conference call on January 28, 2010, Bentsur stated, "[w]e're excited about the dramatic advantages we saw across all key efficacy parameters...." (Id. ¶ 86.) He also made public statements touting the "statistically significant" or "highly successful" Phase 2 results on at least eighteen different occasions over the next year and a half. (Id. ¶¶ 87-89, 92, 94, 97-98, 101-106, 109, 112-15.) Additionally, press releases and quarterly statements issued by Keryx on April 8, June 10, August 9, November 5, 2010, and March 9, 2011, stated essentially the same points. (Id. ¶¶ 93, 96, 99, 110.)
C. Keryx Announces a Phase 3 Trial
In February and April 2010, respectively, Keryx announced that it had a "Special Protocol Assessment" ("SPA") agreement with the FDA for the conduct of a Phase 3 trial of perifosine - and an FDA "Fast Track" designation for the Phase 3 trial. (Id. ¶ 61.) The "Fast Track" program is designed to "facilitate the development and expedite the review of new drugs that are intended to treat serious or life-threatening conditions and that demonstrate the potential to address unmet medical needs." (Id.) Neither an SPA nor a Fast Track designation is tantamount to an FDA determination that a drug has demonstrated clinical efficacy. (Id. ¶ 62.)
In a press release dated April 8, 2010, Keryx announced that it had initiated the Phase 3 trial. (Id. ¶ 64.) Plaintiffs allege that, in this and other public statements regarding the Phase 3 trial, Keryx "emphasized how the purportedly positive results from the Phase 2 mCRC perifosine trial provided a strong' basis for expecting the Phase 3 results to be successful, with a marketable perifosine product for Keryx following immediately thereafter." (Id.)
D. The October 2011 Disclosure
On October 5, 2011, Keryx issued a press release announcing the publication of a clinical manuscript in the Journal of Clinical Oncology ("JCO"). (Id. ¶¶ 6, 117.) In that press release, Keryx set forth data which "highlight[ed] the efficacy and safety data" of the Phase 2 trial on mCRC patients, and when used in combination with another drug, "demonstrated statistical significance with respect to median overall survival and median time to tumor progression." (Id. ¶¶ 6, 117.) Plaintiffs allege that "buried within the clinical manuscript was critical new information, " and amounted to an "admission by Keryx" that "fatally undermined Keryx's claim of statistical significance in the results." (Id. ¶ 6.) The JCO manuscript stated, "[t]he P values were not adjusted for the unplanned interim analyses or for the multiple comparisons... because of the exploratory nature of the study design with small sample size." (Id. ¶ 118.)
On October 19, 2011, a critique of the Phase 2 perifosine trial was published on the website TheStreet.com. (Id. ¶¶ 7, 119.) The critique stated that the design of the clinical trial was flawed, noting "certain unplanned, interim analyses and changes that Keryx had interposed into the original trial plan." (Id. ¶¶ 7, 119.) The critique concluded that the "p values are not real p values in the phase II study." (Id. ¶¶ 7, 119.) The critique also stated that the Phase 2 results were "uninterpretable" and provided "no basis to believe that the Phase 3 mCRC perifosine study results would be positive." (Id. ¶ 7.) The Keryx stock price dropped 6% on October 19, 2011 after a day of heavy trading. (Id. ¶ 120.)
Plaintiffs assert that, notwithstanding the critiques of the Phase 2 trial, the Company continued to insist that the Phase 2 results showed a statistically significant positive result and still provided a strong basis on which to expect a positive outcome for a Phase 3 trial. (Id. ¶ 70.) And, "despite having acknowledged that it had interposed numerous unplanned interim analyses and comparisons during Phase 2, Keryx never disclosed how many of these unplanned actions occuned, or what they involved, as would allow for independent assessment of their impact on the calculation of statistically significance of the Phase 2 data." (Id.)
During a November 3, 2011 earnings call, Bentsur tried to reassure the market and referred to the FDA's grant of the SPA for ongoing Phase 3 study. (Id. ¶ 71.) Plaintiffs claim that this was a misleading "sleight-of-hand" because an "SPA does not equate with an FDA endorsement of claims of drug efficacy at triaL" (Id. ¶ 73.) Bentsur also stated on the call that "it's hard to refute overall survival data from a double-blind randomized study, even if the study was relatively smalL" (Id. ¶¶ 8, 122.) According to plaintiffs, defendants responses to these critiques "raised irrelevancies and obfuscated the flaws in the Phase 2 trial - and the resultant risk as to the Phase 3 trial - that [the critiques] had identified." (Id. ¶ 9.)
In January and February 2012 presentations, Bentsur referred to the Phase 2 results as showing a "pretty dramatic difference" in "median overall survivaL" (Id. ¶¶ 125-26.) On March 2, 2012, Keryx's Form 10-K contained further statements regarding ...