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Schaffer v. Horizon Pharma PLC

United States District Court, S.D. New York

January 18, 2018

GEORGE S. SCHAFFER, et al., Plaintiffs,
v.
HORIZON PHARMA PLC, et al., Defendants.

          OPINION AND ORDER

          JESSE M. FURMAN UNITED STATES DISTRICT JUDGE

         In this putative class action, Plaintiffs bring securities fraud claims against Horizon Pharma PLC (“Horizon” or the “Company”), a number of Horizon's executives, (the “Individual Defendants”), and various underwriters (collectively, the “Underwriter Defendants” and, together with Horizon and Individual Defendants, “Defendants”). Plaintiffs allege that Horizon and the Individual Defendants made certain material misstatements and omissions in connection with its “Prescriptions-Made-Easy” or “PME” program and, in so doing, committed securities fraud in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and Securities Exchange Commission (“SEC”) Rule 10b-5, 17 C.F.R. § 240 (the “Exchange Act claims”). The Amended Complaint also contains claims against the Underwriter Defendants - in addition to Horizon and the Individual Defendants - under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the “Securities Act claims”). Defendants now move, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, to dismiss the Amended Complaint. For the reasons stated below, Defendants' motion is GRANTED, and the Amended Complaint is dismissed.

         BACKGROUND

         The following facts, which are taken from the Amended Complaint, documents it incorporates, and matters of which the Court may take judicial notice, are construed in the light most favorable to Plaintiffs. See, e.g., Kleinman v. Elan Corp., PLC, 706 F.3d 145, 152 (2d Cir. 2013); LaFaro v. N.Y. Cardiothoracic Grp., PLLC, 570 F.3d 471, 475 (2d Cir. 2009); Aurecchione v. Schoolman Transp. Sys., Inc., 426 F.3d 635, 638 (2d Cir. 2005).

         Horizon is a “specialty biopharmaceutical company” that develops drugs to treat arthritis, pain, inflammation, and rare diseases. (Docket No. 103 (“Am. Compl.”) ¶¶ 3, 41). As a biopharmaceutical company, Horizon can be greatly affected by the conduct of Pharmacy Benefit Managers (“PBMs”). In simplest terms, PBMs are entities that “act as ‘middlemen' hired by health benefit providers (such as employers, health maintenance organizations, and public and private health plans) ‘to provide prescription drug benefit administration and management services, '” Pharm. Care Mgmt. Ass'n v. D.C., 522 F.3d 443, 445 (D.C. Cir. 2008) (citation omitted). As alleged in the Amended Complaint, one way that PBMs seek to reduce their clients' costs is to recommend that their clients “exclude” drugs from insurance coverage. (Am. Compl. ¶ 51). That is, if the costs of a drug are high in comparison to the costs of an another therapeutically identical or similar treatment, a PBM may “exclude - or suggest excluding - the high-cost drug[].” (Id.).

         In July 2014, prior to the start of the Class Period, two large PBMs - CVS Caremark and Express Scripts - announced that they were adding Horizon's two major revenue generating drugs, DUEXIS and VIMOVO, to their exclusion lists due to the availability of significantly cheaper over-the-counter and generic alternatives. (Id. ¶¶ 9, 41, 47, 52). To allay investors' concerns over the effect these decisions would have on the company's profitability, Horizon announced that it would be accelerating its use of a program called “Prescriptions-Made-Easy” or “PME.” (Id. ¶ 55). Through the PME program, Horizon sales representatives provided doctors with the means to transmit prescriptions directly to specialty pharmacies designated by Horizon. (Id. ¶ 57). Horizon guaranteed that if the doctor prescribed the drug through the PME program (that is, routed the prescription to one of the designated pharmacies), patients would receive the drugs - whether or not their insurance covered the medications - for little or no money. (Id.). If the patient's health plan later rejected coverage, Horizon, through a third party vendor, would step in and pay for it. (Id.). The idea was to ensure that doctors would continue to prescribe Horizon's drugs - even if they were excluded from coverage - by avoiding the the hassles of repeated rejection by payors (namely, calls from pharmacists, further consultation with patients, and decisions whether to substitute other drugs). As long as the profits from reimbursed prescriptions exceeded the costs of subsidized prescriptions, Horizon would benefit.

         The PME program appeared to be successful at first. (See Id. ¶¶ 57, 60-61). But an increase in negative media attention and Horizon's disclosure of an investigation by the Department of Justice in late 2015 and early 2016 led to a steep decline in the price of Horizon's stock. (Id. ¶¶ 114-16, 127-28, 131-34). In March 2016, the perhaps inevitable securities fraud lawsuits followed. (Docket No. 1; see also 16-CV-1789, Docket No. 1). In their operative complaint - the Amended Complaint - Plaintiffs assert claims under Sections 10(b) and 20(a) of the Exchange Act of 1934 and Sections 11, 12(a)(2), and 15 of the Securities Act of 1933. With respect to the former claims, Plaintiffs allege that, between January 12, 2015, and April 12, 2016 (the “Class Period”), Horizon and the Individual Defendants misled investors about the sustainability of the PME business model by failing to disclose its “control” over various pharmacies and allegedly improper sales and marketing techniques. (Id. ¶ 4, 14). The reality, according to Plaintiffs, was that contrary to Horizon's public statements about the “arm's length” nature of its relationships with the pharmacies, the Company “exerted both financial and operational control” over them. (Id. ¶¶ 14, 67-88). Plaintiffs also maintain that Defendants' misstatements concealed improper sales and marketing practices that Horizon and its network of pharmacies used to sell its drugs at exorbitant prices. (Id. ¶¶ 89-112).

         As noted, Plaintiffs also bring claims under the Securities Act - on behalf of those who purchased Horizon stock “pursuant and/or traceable” to offering materials (the “Offering Documents”) issued in connection with an April 2015 offering of Horizon's common stock. (Id. ¶ 300). Like the Exchange Act claims, these claims are aimed at disclosures with respect to the PME program. Specifically, Plaintiffs allege various omissions and misleading affirmative statements in the Offering Documents in connection with the PME program. (Id. ¶ 419). Unlike the Exchange Act claims, however, these claims are brought not only against Horizon and the Individual Defendants, but also against the Underwriter Defendants.

         LEGAL STANDARDS

         In reviewing a motion to dismiss pursuant to Rule 12(b)(6), a court must accept the factual allegations set forth in the complaint as true and draw all reasonable inferences in favor of the plaintiff. See, e.g., Cohen v. Avanade, Inc., 874 F.Supp.2d 315, 319 (S.D.N.Y. 2012). The Court will not dismiss claims unless Plaintiffs have failed to plead sufficient facts to state a claim to relief that is facially plausible, see Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007), that is, one that contains “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged, ” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). More specifically, Plaintiffs must allege facts showing “more than a sheer possibility that a defendant has acted unlawfully.” Id. A complaint that offers only “labels and conclusions” or “a formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555. If Plaintiffs have not “nudged their claims across the line from conceivable to plausible, [those claims] must be dismissed.” Id. at 570.

         Because Plaintiffs in this case allege securities fraud, they must also satisfy the heightened pleading requirements of both Rule 9(b), which requires that the circumstances constituting fraud be “state[d] with particularity, ” Fed.R.Civ.P. 9(b), and the Private Securities Litigation Reform Act (“PSLRA”), 15 U.S.C. § 78u-4(b), which requires that scienter - that is, a defendant's “intention to deceive, manipulate, or defraud” - also be pleaded with particularity, Tellabs, Inc. v Makor Issues & Rights, Ltd., 551 U.S. 308, 313 (2007) (internal quotation marks omitted). To satisfy Rule 9(b), a plaintiff generally “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.'” Anschutz Corp. v. Merrill Lynch & Co., 690 F.3d 98, 108 (2d Cir. 2012) (quoting Rombach v. Chang, 355 F.3d 164, 170 (2d Cir. 2004)). To satisfy the PSLRA, a complaint must, “with respect to each act or omission alleged to [constitute securities fraud], state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” ATSI Commc'ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 99 (2d Cir. 2007) (quoting 15 U.S.C. § 78u-4(b)(2)(A)). A plaintiff may do so by alleging facts “(1) showing that the defendants had both motive and opportunity to commit the fraud or (2) constituting strong circumstantial evidence of conscious misbehavior or recklessness.” Id. For an inference of scienter to be “strong, ” a reasonable person must deem the inference “cogent and at least as compelling as any opposing inference one could draw from the facts alleged.” Tellabs, 551 U.S. at 324.

         DISCUSSION

         As noted above, Plaintiffs bring claims under both the Exchange Act and the Securities Act. The Court will address each set of claims in turn.

         A. Exchange Act Claims

         Plaintiffs first seek to hold Defendants liable for securities fraud under Sections 10(b) and 20(a) of the Exchange Act and Securities Exchange Commission Rule 10b-5. To state a claim that Defendants made material misrepresentations or omissions in violation of Section 10(b) and Rule 10b-5, Plaintiffs must allege “(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation.” Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27, 37-38 (2011) (internal quotation marks omitted); see IBEW Local Union No. 58 Pension Tr. Fund & Annuity Fund v. Royal Bank of Scotland Grp., PLC, 783 F.3d 383, 389 (2d Cir. 2015). Relatedly, to state a claim under Section 20(a), Plaintiffs must, at a minimum, plead a plausible “primary violation” of Section 10(b). See, e.g., SEC v. First Jersey Sec., Inc., 101 F.3d 1450, 1472 (2d Cir. 1996); Total Equity Capital, LLC v. Flurry, Inc., No. 15-CV-4168 (JMF), 2016 WL 3093993, at *2 (S.D.N.Y. June 1, 2016).

         Significantly, some alleged misstatements, like “expressions of puffery and corporate optimism do not give rise to securities violations.” Rombach, 355 F.3d at 174; see also Novak v. Kasaks, 216 F.3d 300, 309 (2d Cir. 2000) (“[A]s long as the public statements are consistent with reasonably available data, corporate officials need not present an overly gloomy or cautious picture of current performance and future prospects.”). The PSLRA also provides a safe harbor for forward-looking statements. See 15 U.S.C. § 78u-5(c). Forward-looking statements are those that contain, among other things, “a projection of revenues, income . . ., [or] earnings, ” “plans and objectives of management for future operations, ” or “a statement of future economic performance.” Id. § 78u-5(i)(1). A forward-looking statement is not actionable if it “is identified and accompanied by meaningful cautionary language or is immaterial or the plaintiff fails to prove that it was made with actual knowledge that it was false or misleading.” Slayton v. Am. Exp. Co., 604 F.3d 758, 766 (2d Cir. 2010) (describing 15 U.S.C. § 78u-5(c)). To qualify as “meaningful, ” cautionary language “must convey substantive information about factors that realistically could cause results to differ materially from those projected in the forward-looking statement.” Id. at 771. Finally, “subjective statements of opinion are generally not actionable as fraud.” In re Sanofi Sec. Litig., 87 F.Supp.3d 510, 528 (S.D.N.Y. 2015), aff'd sub nom. Tongue v. Sanofi, 816 F.3d 199 (2d Cir. 2016). Statements of opinion are only actionable “if they (1) were not honestly believed when made; (2) were supported by untrue facts; or (3) omit to mention facts that conflict with what a reasonable investor would take away from the statements themselves.” Gillis v. QRX Pharma Ltd., 197 F.Supp.3d 557, 589 (S.D.N.Y. 2016).

         Applying all of the foregoing standards here, Plaintiffs' Section 10(b) and Rule 10b-5 claims fail for at least two independent reasons: first, Plaintiffs do not adequately plead a material misrepresentation or omission; and second, Plaintiffs do not adequately allege scienter. The Court will address each of these defects in turn.

         1. Material Misrepresentations or Omissions

         Plaintiffs' Exchange Act claims are based on three categories of statements:

(1) statements relating to the relationship between Horizon and the PME pharmacies;
(2) statements relating to alleged improper business practices; and (3) statements relating to the sustainability and drivers of success of the PME program.

         a. Statements Relating to the Relationship Between Horizon and the PME Pharmacies

         First, Plaintiffs allege that Defendants made false and misleading statements by describing the relationship between Horizon and the pharmacies participating in the PME program - namely, Clybourn Park, Linden Care, and Halsted - as “fully independent, ” “non-exclusive, ” and “arm's length.” (Am. Compl. ¶¶ 22, 88). Plaintiffs do not allege (or allege plausibly) that Horizon owned a stake in any of the pharmacies or had an exclusive relationship with any of the pharmacies. Instead, they contend that the pharmacies were “captive” because ...


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