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Nguyen v. Newlink Genetics Corp.

United States District Court, S.D. New York

March 29, 2018

MICHAEL NGUYEN and KELLY NGUYEN, individually and on behalf of all others similarly situated, Plaintiffs,

          OPINION & ORDER

          WILLIAM H. PAULEY III, United States District Judge.

         Defendants NewLink Genetics Corporation, Charles Link, and Nicholas Vahanian move to dismiss the Amended Class Action Complaint (“Complaint”). For the reasons that follow, Defendants' motion to dismiss is granted.


         The allegations of the Complaint are presumed true for purposes of this motion. This securities fraud action arises from a failed clinical trial designed to test the efficacy of a pancreatic cancer immunotherapy. The central issue is whether NewLink Genetics Corporation's (“NewLink”) clinical trial was built on faulty assumptions, outdated clinical studies, and a compromised patient pool for the purpose of misleading investors into believing that NewLink's immunotherapy product would be a commercial success.

         Importantly, NewLink and its officers and directors were blinded to the results of the clinical trial. At each clinical trial milestone, an independent monitoring committee analyzed data to determine whether the overall survival of trial participants receiving NewLink's immunotherapy exceeded that of a separate group of participants treated with standard chemotherapy. Although NewLink and its co-founders, Charles Link and Nicholas Vahanian, presented an optimistic outlook on the product's success, that assessment was belied by each interim report concluding that the immunotherapy had not yielded a statistically significant improvement in overall survival. Ultimately, the clinical trial terminated on news that NewLink's product not only failed to increase overall survival rates, but underperformed the standard chemotherapy treatment, with patients in the latter group living three months longer.

         Over the nearly three year trial period, NewLink's stock price vacillated between interim reports of the immunotherapy's middling performance and Defendants' continued assurances that the product would achieve the trial objectives. The trial's final report sounded the death knell for NewLink's plans to commercialize the product and sent its stock price tumbling. Shortly thereafter, Plaintiffs commenced this action against NewLink, Link, and Vahanian, for violations of Section 10(b), Section 20(a), and Section 20A of the 1934 Exchange Act.

         I. NewLink, HyperAcute Pancreas, and Phase 2 Clinical Trial

         NewLink is a clinical stage biopharmaceutical company that specializes in developing cellular immunotherapeutic products to treat cancer. (Complaint, ECF No. 38 (“Compl.”), ¶ 1.) The product at issue in this action is algenpantucel-L, also known as HyperAcute Pancreas, a therapeutic vaccine intended to treat pancreatic cancer. (Compl. ¶ 2.) As NewLink's most advanced treatment candidate, HyperAcute Pancreas is designed to stimulate the human immune system to recognize and attack cancer cells. (Compl. ¶ 2.)

         In February 2010, NewLink completed its 70-patient Phase 2 clinical trial for HyperAcute Pancreas in surgically-resected (surgically removed) pancreatic cancer patients.

         Phase 2 focused on earlier stage, resected pancreatic cancer patients with better prognoses than later stage patients. Phase 2 was designed as an open label, non-randomized trial in which two separate groups of patients were given HyperAcute Pancreas in doses of either 100 million or 300 million cells, respectively, twice a month for six months in combination with a standard chemotherapy-based treatment. (Compl. ¶ 31.)

         Phase 2 did not contain a control group-that is, every patient in the trial received HyperAcute Pancreas with dosage amount as the only variant. (Compl. ¶ 32.) Out of the 70 patients, 26 were prescribed a high dose and 44 received a low dose. The trial resulted in a one-year survival rate of 96% for the high dose group and 79% for the low dose group, though these results did not conclusively establish that HyperAcute Pancreas improved disease-free and overall survival of resected pancreatic cancer patients. (Compl. ¶ 32.)

         II. Initial Public Offering and Phase 3 Clinical Trial

         In May 2010, based on “encouraging interim data” from the Phase 2 trial, NewLink initiated Phase 3. (Compl. ¶ 33.) Shortly thereafter, NewLink submitted a registration statement with the SEC, signaling its intent to become a public company. In November 2011, NewLink issued its prospectus, sold 6.2 million shares of stock at $7 per share, and raised $43.4 million in capital. (Compl. ¶ 33.)

         Phase 3 was designed as an open-label, randomized, and controlled trial evaluating 722 patients with Stage I and Stage II surgically resected pancreatic cancer with no detectable disease by CT scan. (Compl. ¶ 34.) Half the participants were enrolled into the control group and received only the standard chemotherapy based treatment (the “Control Group”). The other half received standard adjuvant therapy with 300 million cells of HyperAcute Pancreas (the “Treatment Group”). (Compl. ¶ 34.) The trial's primary endpoint was to achieve overall survival with secondary goals of disease-free survival, safety, toxicity, and immunological responses. In other words, the trial would only be considered a success if the Treatment Group lived longer than the Control Group, the latter of which Defendants said had a life expectancy of “18, 19 months to low 20s at best.” (Compl. ¶ 34.)

         The Phase 3 trial was conducted under a Special Protocol Assessment with the Food and Drug Administration (“FDA”), which meant the trial's design, clinical endpoints, and statistical analyses were declared acceptable for FDA approval despite the fact that the trial had yet to be completed. (Compl. ¶ 35.) Further, because HyperAcute Pancreas was designed to address an unmet medical need and counter a rare medical condition in pancreatic cancer, the FDA granted the Phase 3 trial a Fast Track designation for expedited review and an Orphan Drug designation, which carried exclusive marketing rights, clinical tax research incentives, and filing fee exemptions. (Compl. ¶ 35.)

         A. Patient Enrollment

         Phase 3 had four major milestones. The first consisted of enrolling 722 qualified patients. The criteria for enrolling patients in the trial were very strict. (Compl. ¶ 40.) During the enrollment period, a former NewLink clinical research associate employed from January 2012 through December 2014 (“Confidential Witness”) said that Vahanian was concerned about getting enough patients for the trial, and pushed to complete patient enrollment within a narrow time frame. As a result of Vahanian's pressure to enroll patients quickly, the Confidential Witness explained that NewLink flouted eligibility rules by registering unqualified patients. (Compl. ¶ 42.) By September 17, 2013, NewLink announced that it had reached the “accrual goal of 722 subjects with surgically resected pancreatic cancer.” (Compl. ¶ 44.) According to the Complaint, Vahanian pushed for expedited enrollment because his and Link's 2013 year-end bonuses were tied to completing Phase 3 patient enrollment. (Compl. ¶ 43.) In total, Vahanian and Link received bonuses of $189, 000 and $297, 440, respectively, and also obtained vested stock for their “extraordinary performance in 2013.” (Compl. ¶ 43.)

         B. Interim Analyses

         The second, third, and fourth milestones of the Phase 3 trial were periodic reviews-or interim analyses-of trial data by an independent Data Safety Monitoring Committee (the “Data Committee”). (Compl. ¶ 36.) The first interim analysis occurred after 222 patient deaths were reported. If the data revealed that there was a 99.5% likelihood that the overall survival of the Treatment Group exceeded that of the Control Group, NewLink could stop the trial and apply for marketing approval. Achieving this benchmark meant that the Treatment Group had an approximately 45% improvement in overall survival over the Control Group. (Compl. ¶ 36.)

         If the data in the first interim analysis did not show such an improvement, the study would continue until 333 patient deaths were reported. In the second interim analysis, if the data showed that there was a 98% likelihood that the overall survival of the Treatment Group eclipsed that of the Control Group, NewLink could proceed immediately to market its product. Passing this threshold meant that the Treatment Group had a 30% improvement in overall survival over the Control Group. (Compl. ¶ 37.)

         The third and final interim analysis occurred after 444 patient deaths were reported. At this point, if the data failed to show about a 95.5% likelihood that the Treatment Group patients were outliving the Control Group patients-or a 20% improvement in overall survival between the two groups-the study would be disbanded. (Compl. ¶ 38.)

         i. First Interim Data Results

         From September 2013 to February 2014, NewLink's stock price tripled in value to $53.48 per share. During this six-month period, Link sold 181, 000 shares and Vahanian sold 177, 162 shares, making millions of dollars in profit. (Compl. ¶ 46.) In March 2014, NewLink announced that the Data Committee had completed its first interim analysis following 222 patient deaths and recommended continuing the trial. (Compl. ¶ 47.) In response to this deflating news, Defendants remarked that the first interim results were an “anticipated outcome, ” and Vahanian added that they “look[ed] forward to continuing the study and to gathering additional, more mature data in support of [NewLink's] mission to provide improved treatment options for patients with pancreatic cancer.” (Compl. ¶ 47.)

         Some investment analysts began questioning whether NewLink had made faulty assumptions about the Control Group's overall survival rate. Defendants assured them that their initial estimates were well-founded, and that the first interim results did not affect their expectations regarding Phase 3's success. (Compl. ¶ 48.) For example, when asked whether it was his “expectation [ ] that the [Control Group] is performing as [he] would have figured it in this statistical plan at this point in time based on when [he] know[s] patients were enrolled in the trial, ” Link answered that the “statistical plan [ ] would easily tolerate a [Control Group] in the low 20[] [months], ” and that there was no “fundamental change that has occurred in the United States that is suddenly going to jump the survival of pancreatic cancer patients in the [Control Group] by five or six months.” (Compl. ¶¶ 48-49.)

         While news of the first interim results caused NewLink's stock price to drop, Defendants' statements comforted investors and analysts, and revived the stock to its pre-announcement price. (Compl. ¶ 52-53.) Between March 2014 and May 2015, as the stock price rebounded, Link sold approximately 300, 000 shares for a $10 million profit. Vahanian sold 100, 000 shares for $5 million, including a conspicuously large transaction involving 60, 000 shares in March 2015, which netted him $3 million. (Compl. ¶ 55.)

         ii. Second Interim Data Results

         In May 2015, NewLink announced that the Data Committee had again concluded that the trial data did not warrant market approval. (Compl. ¶ 56.) To offset the negative implications associated with this news, Defendants parroted statements signaling their expectation of HyperAcute Pancreas's clinical and commercial success. (Compl. ¶ 56.) To that end, Defendants cited the trial's “fast-track status, orphan drug designation, ” and previewed their steps to prepare for the product's regulatory approval and commercialization. (Compl. ¶ 56.) According to Plaintiffs, however, Defendants “continued to mislead investors to believe that the final results from the [Phase 3 trial] would be sufficiently positive to proceed to commercialization.” (Compl. ¶ 56.)

         After announcing the second interim results, the stock price plunged from $52.14 to $36.55 per share in one day. To repair this damage, Defendants again issued materially false and misleading statements to instill confidence in the product. (Compl. ¶ 58.) For example, Defendants showcased their plans to “expand [their] manufacturing capabilities, ” and promised “additional details around [their] manufacturing progress and commercial supply” for the product as they “move[d] closer to the potential launch.” (Compl. ¶ 59.) Despite the persistent questions surrounding the accuracy of the Control Group's survival rate, Defendants maintained that the “median months for overall survival from randomization in the [Control Group] is in the low 20s.” (Compl. ¶ 59.)

         After the release of second interim results, questions swirled around NewLink's compliance with certain clinical requirements pertinent to the trial. Specifically, in a March 2016 report, an investment analyst raised concerns about a note in NewLink's 10-K report that “a clinical site involved in the [Phase 3 trial] was discovered to be non-compliant with certain Good Clinical Practice (GCP) requirements.” (Compl. ¶ 62.) Defendants responded that the problem was “procedural in nature and only a minor issue, ” and because the “site in question only has ‘a few' patients enrolled . . . exclu[ding] these patients should not have a material impact on the trial.” (Compl. ¶ 62.) But according to the Confidential Witness, non-compliance issues were not an isolated problem. The Confidential Witness observed pervasive violations of Good Clinical Practice standards regarding the “handling of client data, clinical report forms, and acceptance of patients in the [Phase 3] trial that did not qualify.” (Compl. ¶ 63.) Other issues plagued the integrity of the trial: “numerous regulatory documentation errors, ” no “quality control documentation in place before the trials began, ” no employees with regulatory experience, and insecure storage of confidential patient information. (Compl. ¶ 63.)

         Despite Defendants' misrepresentations and omissions regarding the facts underlying the Phase 3 trial, the stock price recovered, allowing Link and Vahanian to make “one final push to sell off their NewLink holdings.” (Compl. ¶ 64.) Between May 2015 and May 2016, Link sold 260, 000 shares for $9 million. Vahanian sold 43, 000 shares for over $2 million. (Compl. ¶ 64.)

         iii. Third Interim Data Results

         In May 2016, NewLink reported that the Phase 3 study “for patients with resected pancreatic cancer did not achieve its primary endpoint.” (Compl. ¶ 65.) NewLink's press release fleshed out the details: “[o]verall survival from time of randomization was 29.3 months for both groups combined. There was no statistically significant difference between the two groups. The median survival was 30.4 months and 27.3 months for the [Control Group] and [Treatment Group], respectively.” (Compl. ¶ 65.) Plaintiffs theorize that this harrowing news supported the market's suspicion that the Control Group's estimated survival rate had been understated from the outset to create a false appearance that study participants were living longer because of HyperAcute Pancreas. In reality, however, with Treatment Group patients living three months less than those in the Control Group, the final results suggested that NewLink's product had “harmed the patients and shortened their lives.” (Compl. ¶ 66.)

         These revelations precipitated a 30% drop in the stock's value, from $16.50 to $11.45 per share on May 9, 2016. Over the next few days, the share price continued to slide, closing at $9.71 per share on May 12, 2016. Before the stock's precipitous decline, however, Link and Vahanian had collectively managed to sell a little more than one million NewLink shares, representing 81% and 252% of their overall holdings, respectively, for insider trading profits of approximately $36.4 million.

         DISCUSSION I. Standard

         A. Rule 12(b)(6) Motion

         On a motion to dismiss, a court must accept the facts alleged as true and construe all reasonable inferences in plaintiff's favor. ECA, Local 134 IBEW Joint Pension Trust of Chi. v. JP Morgan Chase Co., 553 F.3d 187, 196 (2d Cir. 2009). Nevertheless, a complaint must “contain sufficient factual matter . . . to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a ‘probability requirement, ' but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Iqbal, 556 U.S. at 678.

         A court may consider “any written instrument attached to the complaint, statements or documents incorporated into the complaint by reference, legally required public disclosure documents filed with the SEC, and documents possessed by or known to the plaintiff and upon which it relied in bringing the suit.” ATSI Commc'ns, Inc. v. Shaar Fund Ltd., 493 F.3d 87, 98 (2d Cir. 2007). “A court may also take judicial notice of news articles discussing the conduct raised in the complaint.” In re Smith Barney Transfer Agent Litig., 765 F.Supp.2d 391, 397 (S.D.N.Y. 2011) (citing In re Salomon Analyst Winstar Litig., 2006 WL 510526, at *4 (S.D.N.Y. Feb. 28, 2006)).

         B. PSLRA ...

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