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In re Delcath Systems, Sec. Litigation

United States District Court, S.D. New York

June 27, 2014

IN RE DELCATH SYSTEMS, INC. SECURITIES LITIGATION

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For Delcath Systems Group, Inc., Lead Plaintiff: Jeremy Alan Lieberman, Marc Ian Gross, Pomerantz LLP, New York, NY; Patrick Vincent Dahlstrom, Pomerantz LLP, Chicago, IL.

For Bryan Green, Individually and On Behalf of All Others Similarly Situated, Plaintiff: Jeremy Alan Lieberman, Marc Ian Gross, Tamar Aliza Weinrib, Pomerantz LLP, New York, NY; Patrick Vincent Dahlstrom, Pomerantz LLP, Chicago, IL; Peretz Bronstein, Bronstein, Gewirtz & Grossman, New York, NY.

For William Gable, Jr., Sue C. Gable, William L. Mauerhan, George Mannina, Lavi Malhotra, Consolidated Plaintiffs: Brian C. Kerr, LEAD ATTORNEY, Brower Piven, A Professional Corporation, New York, NY.

For Thomas Patten, Consolidated Plaintiff: Nicholas Ian Porritt, LEAD ATTORNEY, Levi & Korsinsky LLP (DC), Washington, DC.

For Vijay Kankatala, Michael Curatolo, Curtis Younts, Judith Johnson, Bryan Pinion, Consolidated Plaintiffs: Curtis Victor Trinko, Law Offices of Curtis V. Trinko, LLP, New York, NY.

For Xiaodong Zhou, Movant: Phillip C. Kim, LEAD ATTORNEY, The Rosen Law Firm P.A., New York, NY.

For Gary Ponagajba, Movant: Peter George Safirstein, LEAD ATTORNEY, Morgan & Morgan, P.C., New York, NY.

For Donald Kosch Revocable Living Trust U/A DTD 03/21/1979, Movant: Thomas G. Amon, Robbins Arroyo, LLP, San Diego, CA.

For Bahman Teimourian, Peter Sutherland, Sam Etheridge, Emil Peters, Robert Howard, Movants: Jeremy Alan Lieberman, Pomerantz LLP, New York, NY.

For Joe Randazzo, Movant: Richard William Gonnello, Faruqi & Faruqi, LLP, New York, Ny.

For Robert B. Williams, Movant: Gregory Bradley Linkh, LEAD ATTORNEY, Glancy Binkow & Goldberg LLP (NYC2), New York, NY.

For Tareq Ali Hasan, Movant: David Avi Rosenfeld, Robbins Geller Rudman & Dowd LLP(LI), Melville, NY.

For Delcath Systems, Inc., Eamonn P. Hobbs, Krishna Kandarpa, Defendants: David H. Kistenbroker, LEAD ATTORNEY, Joni S. Jacobsen, PRO HAC VICE, Dechert LLP, Chicago, IL.

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OPINION AND ORDER

LORNA G. SCHOFIELD, UNITED STATES DISTRICT JUDGE.

Lead Plaintiff, the Delcath Systems Group, brings this putative class action on behalf of all persons or entities that purchased or otherwise acquired securities in Delcath Systems, Inc. (" Delcath" or the " Company" ), from April 21, 2010 through and including September 13, 2013, seeking remedies under the Securities Exchange Act of 1934. Lead Plaintiff alleges that Defendants Delcath and its then CEO Eamonn Hobbs made material misrepresentations and omissions to shareholders, upon which Plaintiffs relied in purchasing Delcath stock. Defendants move to dismiss the Consolidated Complaint (the " Complaint" ) for failure to state a claim. Because the Complaint states a claim for relief under the Section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder, the Motion to Dismiss is denied.

BACKGROUND

I. Facts[1]

Delcath is a specialty pharmaceutical and medical device company focused on

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oncology. Delcath common stock is listed on the NASDAQ. The Company had 17 employees at the end of 2009, 47 employees at the end of 2010, 80 employees at the end of 2011, and 92 employees at the end of 2012. The Company has directed all of its research efforts towards the development of the " Melblez Kit," a device designed to administer high-dose chemotherapy and other therapeutic agents to treat metastatic cancer in the liver. The purpose of the Melblez Kit is to control the exposure of the high-dose therapies to the body, by isolating the circulatory system of the liver from the bloodstream, infusing the liver with melphalan, a chemotherapeutic agent, and then filtering it from the blood before returning the blood to the bloodstream. The system is intended to address the limitations of traditional treatments by permitting delivery of much higher doses of toxic treating agents to the liver while minimizing systemic exposure. The key to the Melblez Kit is the filter, which extracts the high dose of melphalan from the bloodstream in order to prevent severe side effects or death.

FDA approval is required before pharmaceuticals and devices may be marketed in the United States. The FDA requires rigorous testing to ensure that a drug is safe and effective for its intended use. Before considering approval of a drug, the FDA requires a sponsor to submit a New Drug Application (" NDA" ), which contains data from clinical trials, preclinical studies, and manufacturing information that supports the product's safety and efficacy. 21 U.S.C. § 355(b); 21 CFR 314.50(d). Clinical trials typically are conducted in three phases.

Phase I trials are conducted on a small number of patients to assess the tolerability and safety profile of the drug. Phase II clinical trials are conducted in a limited patient population afflicted with a specific disease in order to assess and evaluate the drug's appropriate dosages, safety profile, and preliminary efficacy. Phase III trials are large, controlled clinical trials, conducted on patients with a specific disease in sufficiently large numbers to allow the FDA to assess the efficacy and safety of the product. According to FDA regulations, the FDA must be notified no later than 15 days after the trial sponsor learns of a serious adverse experience (" SAE" ), which includes any reaction that is fatal, life threatening, or that requires hospitalization.

During its Phase III trial of the Melblez Kit, Delcath used the " Clark filter," a different filter from the " Asahi filter" used during the Phase I and a portion of the Phase II testing. Before using the Clark filter in its Phase III clinical trial, Delcath had tested it in vitro -- so called " bench testing" -- but had not tested it on live subjects. In February 2010, Delcath concluded its Phase III study of the Melblez Kit. The Phase III trial was conducted under an FDA " Special Protocol Assessment" at medical centers throughout the United States. In the trial, patients were randomly assigned to one of two groups, the former receiving treatments using the Melblez Kit (the " Drug Group" ) and the latter control group, receiving the best alternative care, which included a doctor's

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choice of systemic, regional, or other appropriate therapy (the " Control Group" ). Patients assigned to the Control Group were permitted to cross over into the Drug Group if they showed signs of disease progression. A majority of patients crossed over to the Drug Group. The goal, or " primary endpoint," of the study was to slow the progression of metastases in the liver. Secondary objectives included studying the response, safety, tolerability and overall survival rates for patients using the Melblez Kit.

Delcath filed an NDA with the FDA on December 22, 2010. On February 22, 2011, Delcath announced that it had received a " refusal to file" letter from the FDA, refusing to accept the NDA and requesting additional information " involving manufacturing plant inspection timing, product and sterilization validations and additional safety information." On August 15, 2012, the Company announced that it had refiled its NDA with the FDA. The revised NDA proposed using a third filter, called the " Generation 2" or " Gen 2" filter, replacing the Clark filter used in the Phase III trials, which had replaced the Asahi filter used in the Phase I and Phase II trials. The Generation 2 filter had not been clinically tested, but had been bench tested. On October 15, 2012, the Company announced that the FDA had accepted its revised NDA for review.

On April 30, 2013, the FDA published its staff briefing documents in advance of a May 2, 2013, meeting of the Oncologic Drugs Advisory Committee (" ODAC" ). The briefing documents stated that 7% of Phase III participants treated with the Melblez Kit died, while none of the patients in the Control Group died, and stated that " [s]ubstantial and severe toxicity was identified in all three trials with a toxic death rate of 7%." The briefing documents also revealed that 24% of the patients in the Drug Group experienced serious side effects such as heart attack and acute kidney failure. They further stated that during the Phase III trial there was " an increase in the risk of serious and fatal toxicities . . . following device modifications involving the . . . filter . . . component." Upon the release of the briefing documents, Delcath shares declined over 40%.

The FDA documents also stated that " [n]o clinical trial data have been submitted to support the safety or efficacy of this device" and that " non-clinical studies . . . did not identify factors which caused the clinically important increase in toxicity seen in the Asahi-to-Clark transition. Therefore, these non-clinical studies are insufficient alone to safely bridge the marketing of a device containing a new filter, and clinical trial safety data are necessary to support an approval..." On May 2, 2013, the FDA staff met to discuss the Melblez Kit. One participant stated:

The clinical benefit of this antitumor activity is uncertain in light of the trend toward overall survival detriment. We must remember that antitumor activity does not always translate into clinical benefit, which is really what defines efficacy. The risks of ...

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