MEMORANDUM AND ORDER
This case is a consolidation of a number of securities fraud actionsbrought on behalf of all persons and entities who purchased common stockof Sepracor, Inc. ("Sepracor") from April 14, 2000 through March 6, 2002(the proposed "Class Period"). The various actions have been reduced totwo Consolidated and Amended Complaints (the "Complaints"), one on behalfof equity securities purchasers and the other on behalf of debtpurchasers, containing virtually identical allegations.1 Theplaintiffs sue Sepracor and three of its officers,2 allegingviolation ofPage 2Sections 10(b) and 20(a) of the Securities and Exchange Act of1934, 15 U.S.C. § 78j(b) and 78t(a), and the corresponding Securitiesand Exchange Commission ("SEC") Rule 10b-5, 17 C.F.R. § 240.10b-5.
Defendants move to dismiss all counts. The motion is GRANTED IN PARTand DENIED IN PART.
For the purposes of the present motion, the allegations contained inthe Complaints are accepted as true.
Sepracor is a pharmaceutical company primarily engaged in developingderivatives of existing drugs. (Compl. ¶ 31.) During the ClassPeriod, Soltara, a non-sedating anti-histamine for the treatment ofseasonal allergies, was the most promising drug in Sepracor's pipeline,and the only drug for which Sepracor had filed a New Drug Application("NDA") with the Food and Drug Administration ("FDA"). (Id. SI 35.) Bythe end of 2001, Sepracor was losing money at a rate of $400 million peryear, with enough funds on hand for approximately one more year. (Id.¶ 34.)
Soltara is a modified version of Hismanal, which was an earliergeneration of non-sedating antihistamine approved by thePage 3FDA in 1988 and used by millions of people over the followingdecade. (Id. ¶ 37.) In 1998, the FDA discovered that a very smallnumber of people taking Hismanal had died due to cardiac arrhythmiacaused by "Qt prolongation" (instability of the heart's electricalsystem, which can cause cardiac arrest). (Id.) On the basis of thisfinding, Hismanal was withdrawn from the market in 1999. (Id.) Anotherearlier-generation non-sedating antihistamine, Seldane, had beenwithdrawn in 1997 for the same reason. (Id. SI 39.) In 2000 and 2001, theFDA stated publicly several times that no new antihistamine would beapproved if there was any risk of potential cardiac effects. (Id. ¶¶42-46.)
Drugs sold in the United States must first be approved by the FDA.Approval by the FDA requires preclinical trials, usually done on animals,followed by at least three phases of clinical trials on humans (thesetrials are referred to as phases I, II, and III). When Phase III clinicaltrials are completed, the drug company files an NDA. After making itsdecision, the FDA sends one of three letters: an "approval" letter, a"not approvable" letter, or an "approvable" letter.
According to the Complaints:
. . . . [B]y 1999 Sepracor tested the effects of Soltara in dogs and rats. While the animal studies in each of the three FDA-approvedPage 4 second generation non-sedating antihistamines, Claritin, Allegra and Zyrtec[,] had not revealed any cardiac or other safety problems, in the dog and rat studies of Soltara, the drug caused potentially fatal cardiac effects, as well as liver damage. In dog studies, Soltara caused both Qt prolongation and phospholipidosis, a fat storage disorder which can result in drug-induced cirrhosis of the liver. In a rat study, Soltara caused cardiomyopathy, a potentially fatal disease of the heart muscle that causes the heart to lose its ability to pump blood, leading to cardiac arrhythmia. Moreover, the incidence of cardiomyopathy in rats treated with Soltara was dose dependent, i.e. the incidence increased with increasing doses of the drug, demonstrating that the cardiomyopathy was drug-induced. The rat study was disastrous for [Sepracor], because cardiomyopathy is highly unpredictable in humans, making it extremely difficult to prove that the drug would not cause cardiomyopathy in some humans. Due to the FDA's announced zero tolerance policy for cardiac effects in antihistamines for which FDA approval was sought, the rat study as well as the Qt prolongation in a dog study meant that Sepracor would have to prove that Soltara could not cause potentially fatal cardiac effects in humans, which requires far more than the human safety studies that were conducted for the existing FDA-approved antihistamines or the safety studies conducted by Sepracor.
(Compl. ¶ 53.)
Johnson & Johnson, which had agreed to jointly fund the developmentof Soltara and share the profits, withdrew its participation in May 1999,following the animal studies. (Id. ¶¶ 48-49.) Sepracor,however, continued to develop Soltara,Page 5proceeding to clinical trials. The aim of the clinical trials wasto demonstrate that Soltara was safe to use in humans. According to thecomplaints, however: Sepracor's safety studies of Soltara, . . . were not designed to provide the necessary evidence that the effects seen in animals could not occur in humans, because, inter alia, they did not provide evidence that the drug could not cause cardiac effects or organ damage at the highest possible accumulation in the patient's body.(Compl. ¶ 54.) This was so, plaintiffs contend, because theclinical trials measured the safety of the drug only at maximum plasma(blood) concentration rather than at maximum tissue concentration.Antihistamines such as Soltara reach maximum plasma concentration withintwo weeks, but continue to build up in tissue for approximately ninetydays.
As detailed below, plaintiffs allege that defendants made numerouspublic statements regarding the safety of Soltara that omitted anymention of the side effects that were observed in the animal studies.Defendants also made numerous statements expressing confidence thatSoltara would gain FDA approval. Additionally, in public statementsregarding the clinical trials, defendants made reference to testingSoltara at "maximum concentration" without making clear that the level ofconcentration tested was maximum plasma accumulation rather thanPage 6maximum tissue accumulation. Plaintiffs allege that thesestatements were materially misleading and artificially inflated themarket price of Sepracor securities.
On March 7, 2002, Sepracor announced that the FDA had issued a "notapprovable" letter regarding the company's application to market Soltara.Sepracor issued a press release that day stating: The FDA identified three issues that are not adequately addressed in light of certain aspects of the drug's pharmacokinetics and potential for accumulation in tissue. Two of the issues pertained to observations for safety studies in animals that were not observed in humans: phospholipidosis (an adaptive storage response to drug administration) and cardiomyopathy (pathologic condition of the heart muscle). A third issue concerned the need for additional assurance of the absence of any potential for Qtc prolongation (an effect on electrical impulse conduction in the heart). It is Sepracor's interpretation of the FDA's concerns that, as a result of [Soltara's] long terminal elimination phase in both normal and cardiac-compromised patients, a review of the kinetic data in man suggests that Sepracor's safety evaluations were not of sufficient duration to provide adequate safety data at tissue steady-state.
Due to SOLTARA's extended elimination phase, the FDA also concluded that additional evaluation of tissue concentrations of the drug after prolonged exposure were needed to quantify the potential for [Soltara's] accumulation in target organs.Page 7
(Compl. ¶ 91.)
When this information was made public, the price of Sepracor stock fellapproximately 60% from a closing price of $47.26 on March 6, 2002, to aclosing price of $19.64 on March 7, 2002. (Id. SI 92.)
Tim Bepler, a portfolio manager at Acacia Research Investment Corp.,was quoted in a March 7, 2002 Bloomberg article as saying thatthe FDA's mention of possible cardiac effects was "a huge surprise"because previously public investors "hadn't seen any cardiac effects inthe data" that was made publicly available by Sepracor. (Id. ¶ 97.) Areport by Morgan Stanley Dean Witter the following day stated that "themajority of the [March 7] sell-off was a rational response by investorsto the negative news" and that "[m]anagement credibility will definitelybe an issue going forward, which will probably weigh down on the stock."(Id. SI 98.) The report further stated that the FDA had previously toldSepracor that the animal studies showing cardiac and liver damage wereissues that had to be resolved. (Id.)
On October 22, 2002, Sepracor issued a press release stating thatcontingent upon successful completion of "approximately ten additionalclinical (human) studies and ten additional preclinical studies," itwould file an amendment to its NDA. (Id. ¶ 100.) In a publicconference call the same day,Page 8a Sepracor spokesperson stated that it would be necessary toconduct nine-month studies of the effect of Soltara in primates and pigs,and that, assuming successful completion of the additional studies,Sepracor would not file an application with the FDA for marketingapproval until 2004, with the result that revenues from the drug wouldnot be realized until 2005. (Id.)
II. Applicable Law
To state a claim under Section 10(b) and Rule 10b-5, plaintiffs mustallege with particularity that defendants (1) made a false statement oromission of material fact (2) with scienter (3) upon which defendantsjustifiably relied (4) that proximately caused plaintiffs' damages.See Gross v. Summa Four, Inc., 93 F.3d 987, 992 (1st Cir.1996). A fact is material if there is a substantial likelihood "that thedisclosure of the omitted fact would have been viewed by the reasonableinvestor as having significantly altered the "total mix' of informationmade available." Basic, Inc. v. Levinson, 485 U.S. 224, 231-32(1988). While Rule 10b-5 does not create an affirmative duty ofdisclosure, "such a duty may arise if . . . a corporation haspreviously made a statement of material fact that is either false,inaccurate, incomplete, or misleading in light of the undisclosedinformation." Gross, 93 F.3d at 992.Page 9
Under Fed.R.Civ.P. 9(b), "[i]n all averments of fraud or mistake, thecircumstances constituting fraud or mistake shall be stated withparticularity." Under the Private Securities Litigation Reform Act("PSLRA"), plaintiffs must "state with particularity facts giving rise toa strong inference that the defendant acted with [intent to deceive]."15 U.S.C. § 78u-4(b)(2).
The "safe harbor" provision of the PSLRA defines "forward-lookingstatements" to include projections of revenues, income and earnings,statements of management's plans and objectives for future operations,statements about future economic performance, and disclosure of theissuer's assumptions underlying the foregoing. 15 U.S.C. § 78u-5 (i)(1). Forward-looking statements are not actionable if one of thefollowing three conditions is met: (1) the statement is identified asforward-looking and "accompanied by meaningful cautionary statementsidentifying important factors that could cause actual results to differmaterially from those in the forward-looking statement"; (2) thestatement is "immaterial"; or (3) the plaintiff does not plead that thestatement was made with actual knowledge that the statement was false ormisleading. 15 U.S.C. § 78u-5(c).Page 10
III. Allegedly Fraudulent Statements
The statements alleged to be fraudulent fall into three categories: (1)statements regarding the results of the animal studies; (2) statementsregarding the prospects for FDA approval of Soltara; and (3) statementsregarding the clinical trials which ostensibly tested Soltara at "maximumconcentration." The statements regarding the animal studies all raise thesame questions of law, and are accordingly analyzed together; thestatements in the second and third categories are numbered as Statements1-7 for clarity and convenience.
A. Statements Regarding Animal Studies
On May 17, 1999, in a public conference call held by Sepracor,defendant Rubin stated that:
[O]bviously with all antihistamines now, there is always going to be issues concerning the evaluation of its potential for this Qtc prolongation side effect. We did a number of preclinical trials. From these studies, we determined that norastemizole [Soltaral] was anywhere from 100-1000 fold less likely to cause any significant Qtc prolongation. In fact, as you see, this has been substantiated at least in our clinical studies to date . . . Also, we have everything in place from a preclinical perspective in terms of a late 2000 regulatory submission . . . In addition, we looked at mean changes in Qt and Qtc, which is a corrective value of QtPage 11 prolongation, and in fact, there were no clinically relevant or statistically significant differences in changes in Qt when you looked at norastemizole doses compared to placebo. . . . At least in [initial studies in patients], there is no obvious difference between norastemizole and placebo in terms of Qt prolongation or sedation. We have a number of large scale trials planned between now and time of [NDA] filing . . . that would allow us to conduct adequate studies to round our dossier for this particular drug.
(Compl. ¶ 55, emphasis added).
On November 15, 1999, at the annual meeting of the American Academy ofAllergy, Asthma and Immunology, Dean Handley, Sepracor's Senior Director,Office of Medical Communications and Scientific Affairs, reported that"virtually no change in the Qtc interval" was observed in relativelylarge doses of the drug, and that no change in Qtc interval was observedeither one or two weeks into treatment that would indicate any cardiacpropensity. He then stated that "these clinical data arewell-substantiated by a variety of molecular, genetic, and animalstudies." These representations were published by Med-AssociationCommunications in an article that was posted on the Internet. (Id. ¶57.)
On October 19, 2000, after announcing that Eli Lilly had terminated thelicensing and development of an unrelated drug with Sepracor due to Qtprolongation, Sepracor stated in a conference call that "Qtc prolongationhas not cropped up as aPage 12side effect in trials of other drugs in its extensive pipeline."(Id. SI 59.)
A press release issued by Sepracor on December 4, 2000 stated "Inclinical trials to date, norastemizole [Soltara] has demonstrated . . .no observed cardiovascular side effects." (Id. ¶62.)
The same day, Sepracor held an investor/analyst meeting in New YorkCity, which included presentations by each of the Defendants and wasdescribed by analysts in attendance as "upbeat." (Id. ¶64.) Rubin stated that Sepracor expected to launch Soltara in 2002, andreassured investors that Soltara appeared to have no cardiac effects.(Id. ¶ 65.)
On January 29, 2001, Sepracor issued a press release summarizing thepreclinical studies of Soltara and stating in relevant part: "In clinicalstudies to date, [Soltara] has demonstrated . . . no apparentcardiovascular side effects." (Id. ¶ 67.)
B. Analysis of Statements Regarding Animal Studies
As a threshold matter, the statements at issue are material. If, asplaintiffs allege, the FDA had previously stated a "zero tolerance"policy for any cardiac side effects, including those found in animalstudies, then information aboutPage 13cardiac side effects in the animal studies of Soltara would "havebeen viewed by the reasonable investor as having significantly alteredthe `total mix' of information made available." Basic, 485 U.S.at 231-32.
Furthermore, the subject matter of the alleged misrepresentations— the results of the animal studies — were a matter of factrather than conjecture by the time the statements were made. Thus, thestatements cannot be characterized as forward-looking, and the safeharbor provision of the PSLRA does not apply.
The question to be resolved, therefore, is whether plaintiffs haveadequately alleged scienter.
The Complaints make the following allegations regarding scienter: Defendants knew from the animal studies that Soltara caused Qt prolongation and phospholipidosis in dogs and cardiomyopathy in rats, as this information was included in the NDA for Soltara filed with the FDA; Soltara was a derivative of Hismanal, which had been withdrawn from the market because of Qt prolongation; Defendants knew that Sepracor's stock price had dropped approximately 30% when it was announced that its Prozac derivative would not be developed because of Qt prolongation;
Sepracor had a high cash burn rate;Page 14 Defendants had the motivation to misrepresent and conceal the facts about Soltara's prospects so that Sepracor could raise almost one billion dollars in sales of debt securities to the public. In February 2000, Sepracor issued $400 million face value of %5 Convertible Subordinated Debentures due 2007 and issued an additional $60 million on March 9, 2000. In November 2001, Sepracor issued $400 million face value of 5-3/4% Convertible Subordinated Notes due 2006 and issued an additional $100 million in December 2001.
Defendants repeatedly represented that Soltara was Sepracor's most advanced drug which was likely to produce huge near-term revenues. Since Sepracor's near-term success and the credibility of its technology substantially depended on Soltara, defendants had the motive to mislead the market about the prospects of Soltara. Defendants knew from public FDA pronouncements that an antihistamine would not be approved by the agency if there was any reason to believe that the drug might cause fatal cardiac effects, particularly where the drug was derived from a drug that had such effects, and that the required evidence of the absence of such effects included animal studies.(Compl. ¶ 103.)
Defendants argue that Plaintiffs offer only conclusory allegations thatSoltara caused Qt prolongation and phospholipidosis in dogs, and fail tocite any specific information such as the percentage of dogs whodeveloped these conditions, the degree of severity of the conditions, orthe doses at which the dogs developed the conditions. Similarly,Page 15they note that Plaintiffs' allegations regarding the rat studiesinclude no statistical data from the studies which would support aninference that Sepracor knew the studies would adversely impact thechances for FDA approval of Soltara.
Defendants further contend that plaintiffs have failed to identify anyspecific facts, supported by sources, showing that prior to beinginformed of the FDA's decision to issue a not approvable letter, Sepracorhad any reason to believe the animal studies jeopardized approval of theNDA for Soltara. Allegations of a subjective scientific disagreement,they argue, amount to nothing more than "fraud by hindsight." In re.Medimmune, Inc. Sec. Litig., 873 F. Supp. 953, 966 (D. Md. 1995)(citation omitted). Defendants point out that the only specific factcited in the Complaints regarding the animal studies is a statement madeat the 2000 annual meeting of the American College of Allergy, Asthma& Immunology by Dr. Lawrence DuBuske, who worked with Sepracor on thetesting of Soltara. At the meeting, DuBuske disclosed that "[a]nimalstudies have demonstrated alteration of Qtc intervals only at extremelyhigh concentrations;" that the drug had "no cardiac toxicity at normaldoses;" and that "[p]reclinical studies of [Soltara] are very promising."(Trowbridge Aff., Exh. I, at 6.) The initial portion of this statement isquoted in SI 61 of the Complaints, apparently toPage 16demonstrate that Sepracor had knowledge of the side effectsexhibited in the animal studies.3 Defendants argue that, whenconsidered in full, the statement raises the opposite inference: thatSepracor did not seek to hide the results of the animalstudies, and that it did not see the side effects as obstacles to FDAapproval.
In addition, Defendants argue that scienter may not be inferred fromthe individual defendants' high level positions at Sepracor. Such genericand conclusory allegations of "scienter by status," defendants contend,have been found by the First Circuit to be inadequate to establish thestrong inference required by the PSLRA. See Maldonado v.Dominguez, 137 F.3d 1, 9 (1st Cir. 1998). Moreover, defendantscontend, courts have rejected generic motives of ensuring corporatesuccess, which could be imputed to officials of any publicly-ownedenterprise. See, e.g., Nathenson v. Zonacren, Inc.,267 F.3d 400, 410 (5th Cir. 2001); Novak v. Kasaks, 216 F.3d 300, 307(2d Cir. 2000).
Plaintiffs counter that it is well established that liability may beimposed under Rule 10b-5 where a defendant knowingly or recklessly makesfalse or misleading statements about the safety profile of a drug,including the results of drugPage 17studies. See, e.g.. In re Amylin Pharms., Inc. Sec.Litig., 2003 U.S. Dist. LEXIS 7667 (S.D. Cal. May 1, 2003); Inre Viropharma, Inc. Sec. Litig., 2003 U.S. Dist. LEXIS 5623 (E.D.Penn. Apr. 3, 2003); In re Neopharm, Inc. Sec. Litig., 2003Dist. LEXIS 1862, *43-44 (N.D. Ill. Feb. 7, 2003). They further arguethat defendants' reliance on Medimmune is misplaced: while thecourt in Medimmune dismissed allegations that the companyshould have disclosed design defects in the drug study, it held thatfalse statements about the drug tests were actionable.Medimmune, 873 F. Supp. at 967. Here, plaintiffs contend,defendants made material omissions regarding the results of the animalstudies, and thus have no defense of having merely conducted "badscience."
Plaintiffs further contend that, in light of the FDA's "zero tolerance"policy, the mere presence of any side effects in the animalstudies would have been cause for concern by investors. Therefore, theyargue, it is not necessary for the Complaints to cite specificinformation regarding the frequency or severity of the conditions thatwere observed. They cite the observation of the court inAmylin:
There is nothing unlawful about taking a calculated risk. However, if, as Plaintiffs allege, Defendants misled Plaintiffs about such risks by making assurances regarding the completeness of the data and the likelihoodPage 18 of FDA approval, Defendants may be held liable.
2003 U.S. Dist. LEXIS 7667, at *13.
The Supreme Court has defined scienter as "a mental state embracingintent to deceive, manipulate, or defraud." Ernst & Ernst v.Hochfelder, 425 U.S. 185, 193 n. 12 (1976). The First Circuit hasadopted a fact-specific, case-by-case approach rather than a rigidformula for alleging scienter. See In re. Cabletron Systems,Inc., 311 F.3d 11, 39 (1st Cir. 2002). "Scienter may be demonstratedby indirect evidence, and may extend to a form of extreme recklessnessthat is closer to a lesser form of intent." Id. (internalquotation and citation omitted). Scienter may be established byallegations of defendants' motive and opportunity to commit the allegedfraud, although "`catch-all allegations,' which merely assert motive andopportunity, without something more, fail to satisfy the PSLRA."Id. (citations omitted).
As noted above, the PSLRA requires plaintiffs in private securitieslawsuits to "state with particularity facts giving rise to astrong inference that the defendant acted with the requiredstate of mind." 15 U.S.C. § 78u-4(b)(2) (emphasis added). However,the inference of scienter "need not be irrefutable." Cabletron,311 F.3d at 38 (citation omitted).Page 19
This case presents a close call. The Complaints do not present a"smoking gun" in the form of internal Sepracor memoranda or evidence ofinsider trading. However, according to the Complaints, the cardiac sideeffects of Soltara's predecessor Hismanal were rare and difficult topredict in humans, and any indication that such side effectsmight possibly arise in humans had been identified by the FDA as causefor concern. Moreover, there were already three non-sedatingantihistamines on the market which caused no cardiac sideeffects. In light of this combination of factors, the Complaints allege,the FDA had articulated an extremely strict stance against even thefaintest possibility of cardiac side effects in any new antihistaminesbeing developed. In addition, the Complaints allege, Sepracor was burningcash at a high rate and was dependent on Soltara as the most promisingdrug in its pipeline. The First Circuit has indicated its willingness toconsider many different types of evidence as relevant to scienter,including "the self-interested motivation of defendants in the form ofsaving their salaries or jobs." Greebel v. FTP Software, Inc.,194 F.3d 185, 196 (1st Cir. 1999). See also Cabletron, 311 F.3dat 39 (strong inference of scienter where allegations constituted "morethan the usual concern by executives to improve financial results; theexecutives' careers and the very survival of the company were onPage 20the line.")
The sum of the present allegations, taken together, does give rise to astrong inference that defendants were knowing or reckless in omittinginformation regarding Soltara's cardiac side effects in their publicstatements regarding the safety of Soltara. Far from merely alleging"scienter by status," the Complaints set forth "specific facts that makeit reasonable to believe that defendant[s] knew that [the] statement[s][were] false or misleading." Maldonado, 137 F.3d at 9. Thisinference of scienter rests heavily on the allegations regarding theFDA's "zero tolerance" policy, a factual matter not suitable forresolution on a motion to dismiss.4
Accordingly, the motion to dismiss is DENIED as to the statementsconcerning the results of the animal studies.
C. Statements Regarding Prospects for FDA Approval
On March 12, 2001, Sepracor issued a press releasePage 21announcing that it had filed an NDA with the FDA for marketingapproval for Soltara. The press release quoted defendant Barberich asfollows: "With its expected product characteristics, SOLTARA has thepotential to be an important new entrant in [the] fast-growing allergymarketplace." (Compl. ¶ 69.)
On July 23, 2001, Sepracor conducted a quarterly conference call inwhich Rubin stated that the company was "confident" that the FDA wouldapprove Soltara. (Id. SI 70.)
On January 23, 2002, in a quarterly conference call for securitiesanalysts and investors, in which all the individual defendantsparticipated, Rubin stated that Soltara "can attack any of the currentantihistamines and win." He also stated that an "approvable letter" forSoltara was expected from the FDA on March 11, 2002, with final approvalin the summer of 2002, and that revenues were expected to amount to $100million in 2002 and $2 billion by 2005. (Id. ¶¶ 85-86.)
As to Statements 1 and 3, Defendants argue that they are inactionableunder all three prongs of the PSLRA's safePage 22harbor provision. According to Defendants, the statements areprecisely the type of puffery that courts have rejected as immaterial.See, e.g., In re Allaire Corp. Sec. Litig., 224 F. Supp.2d 319,332 (D. Mass. 2002) (no liability for "vaguely optimistic platitudesthat are constantly bandied about in the marketplace"). Moreover, theycontend, the statements were identified as forward-looking andaccompanied by appropriate cautionary language. Statement 1 included thefollowing warning:
This news release contains forward-looking statements that involve risks and uncertainties, including statements with respect to the safety, efficacy and potential benefits of the Company's ICE pharmaceuticals under developments. Among the facts that could cause actual results to differ materially from those indicated by such forward-looking statements are: the submission of NDAs, acceptance of submitted NDAs for filing, and approval of NDAs; the results of the Company's clinical trials with respect to its products under development; the commercial success of Sepracor's products; the ability of the Company to attract and retain qualified personnel; the scope of the Company's patent prosecution with respect to such product candidates; the availability of sufficient funds to continue research and development efforts; and certain other facts that may affect future operating results and are detailed in the Company's periodic reports filed with the Securities and Exchange Commission.Page 23
(Trowbridge Aff., Exh. A.5) The warning that accompanied Statement 3was as follows: Certain statements included herein may be considered forward-looking statements. There are a number of factors that could cause actual results to differ materially from those anticipated by these statements. Those factors are listed in the company's filings with the SEC.(Trowbridge Aff., Exh. F, at 2:21-3:3.6) Finally, Defendantsargue that the statements are not actionable because Plaintiffs havefailed to allege specific contemporaneous facts showing that Sepracor hadactual knowledge that the challenged statements were false or misleadingat the time that they were made.
As to Statement 2, Defendants do not contest its materiality butcontend that it is inactionable under the second and third prong of thesafe harbor provision. They note that it was accompanied by the followingcautionary statement:
I'll start by reading the Safe Harbor statement which applies to the whole conference call. Some statements included herein may be considered forward-looking statements, there are a number of factorsPage 24 that could cause actual results to differ materially from those anticipated by the statement, those factors are listed in the company's filings with the SEC.
(Trowbridge Aff., Exh. C, at 3:10-18.7) Defendants also repeatthe argument, advanced with regard to Statements 1 and 3, that Statement2 is inactionable because Plaintiffs have failed to allege specificcontemporaneous facts showing that Sepracor had actual knowledge that thechallenged statement was false or misleading at the time that it wasmade.
Plaintiffs argue8 that the cautionary statements cannot insulateDefendants from liability because the misrepresentation at issueconcerned critical facts regarding studies that hadPage 25already been performed. They contend that an opinion orstatement of belief is actionable if there are undisclosed facts thatseriously undermine the accuracy of the statement. See Helwig v.Vencor, Inc., 251 F.3d 540, 557 (6th Cir. 2001), cert.denied, 536 U.S. 935 (2002); Rubinstein v. Collins,20 F.3d 160, 166 (5th Cir. 1994); In re Wells Fargo Sec. Litig.,12 F.3d 922, 930 (9th Cir. 1993). Moreover, they argue, the cautionarystatements were not "meaningful" as required by 15 U.S.C. § 78u-5(c)(1)(A)because they were not tailored to the representationsregarding the animal studies. See In re Amylin Pharms., Inc. Sec.Liticr., 2003 U.S. Dist. LEXIS 7667, at *21 (S.D. Cal. May 1, 2003)(holding that purported cautionary statements were not meaningful becausethey were not tailored to representations regarding sufficiency of clinictrials).
Analysis of Statements 1, 2, and 3
In certain circumstances, vague statements expressing confidence in aproduct's potential would undoubtedly, as Defendants argue, be deemedmere puffery. However, such a conclusion is not possible in light of thefactual context alleged here. Defendants' predictions regarding Soltara'sfuture contain "at least three implicit factual assertions: (1) that thestatement is genuinely believed, (2) that there is a rationalPage 26basis for that belief, and (3) that the speaker is not aware of anyundisclosed facts tending to seriously undermine the accuracy of thestatement." Helwig, 251 F.3d at 557 (quoting In re AppleComputer Sec. Litig., 886 F.2d 1109, 113 (9th Cir. 1989)). Asconcluded above, if Plaintiffs' allegations regarding the FDA's "zerotolerance" policy are accepted as true, the Complaints raise a stronginference that Defendants were aware of, or recklessly disregarded,undisclosed facts tending to seriously undermine the accuracy of anypredictions about Soltara's potential success. Thus, the statementscannot be deemed mere puffery.9 Furthermore, Plaintiffs have allegedspecific contemporaneous facts (i.e., the FDA's "zero tolerance" policy)showing that Defendants had actual knowledge that the challengedstatements were false or misleading at the time that they were made.Hence, neither the first nor the third prong of the safe harbor provisionmay shield Defendants from liability at this stage of the proceedings.Page 27
As to the second prong of the safe harbor provision, the accompanyingcautionary statements are effective only if "meaningful."15 U.S.C. § 78u-5(c)(1)(A). "Vague or boilerplate disclaimersare insufficient to invoke safe harbor protection." Amylin, 2003 U.S.Dist. LEXIS 7667 at *21 (citation omitted). In Amylin, the courtfound that cautionary statements in SEC filings containing generalstatements regarding the uncertainty of FDA approval were ineffectivebecause they were not tailored to the defendants' statement regardingthe sufficiency of clinical trial results. The court concluded thatconcerns expressed by the FDA to the defendants were more significantthan just a "bump in the road" and shed serious doubt on the sufficiencyof the trials. Id. at *22. Although Amylin concerned clinicaltrials rather than, as here, animal studies, the conclusion is thesame: in light of the FDA's alleged "zero tolerance" policy, the sideeffects observed in the animal studies represented more than a "bumpin the road" for Soltara, and cast serious doubt on its prospects forFDA approval. Accepting Plaintiffs' allegations as true, Defendantswould have been obliged under the circumstances to disclose known factsabout the animal studies that undermined their predictions of Soltara'ssuccess. The generic cautionary statements are not sufficiently tailoredto these circumstances to shield the Defendants from liability.Page 28
Accordingly, the motion to dismiss is DENIED as to Statements 1, 2, and3.
On August 6, 2001, Southwell was interviewed by the Wall StreetTranscript, which published a transcript of the interview on thesame day. In the interview, Southwell stated: Next year we expect to launch SOLTARA, our non-sedating antihistamine. . . . [W]e're very excited about the SOLTARA launch because we believe it has the potential to be a leader in a substantial market. *** In 2003, we expect SOLTARA revenues to grow significantly since it will be the full calendar year that we're marketing and selling the drug. *** We're a company that we think has the potential for product sales of approximately $2 billion in 2005.(Compl. ¶ 72.)
On October 12, 2001, Southwell made virtually identical statements inanother interview published in the Wall Street Transcript. (Id.SI 75.)
Defendants argue that these statements are inactionablePage 29under the third prong of the safe harbor provision, becausePlaintiffs have failed to allege specific facts showing that thestatements were made with actual knowledge that they were false ormisleading.
Analysis of Statements 4 and 5
This question again reduces to the factors considered above indetermining whether scienter has been sufficiently alleged. For thereasons cited above, I conclude that the third prong of the safe harborprovision does not shield these statements.
Accordingly, the motion to dismiss is DENIED as to Statements 4 and 5.
During a conference call on October 19, 2001, Rubin stated thatSepracor had conducted numerous studies evaluating the safety of Soltara,and assured participants in the call that the effect of Soltara on Qtprolongation had been tested in patients in whom Soltara concentrationhad reached maximum concentration, which Rubin represented to mean "thatanother dose will not increase the exposure." He further represented thatSoltara did not result in Qt prolongation in patients at maximumPage 30concentration of the drug. (Compl. ¶¶ 77-78.)
Defendants argue that the statement is non-actionable on severaldifferent grounds. First, they contend, Plaintiffs have not citedcontemporaneous evidence to support their assertion that this statementwas false and misleading and was made with scienter — for example,evidence that any company official or researcher had questioned whethermaximum concentration had been achieved, or that anyone had otherwisequestioned the design, adequacy, or results of the clinical trials. Theycontend that the FDA's ultimate criticism of the study design, whichoccurred five months after the statement was made, shows only that therewas a legitimate scientific disagreement between Sepracor and the FDA.Such subjective scientific disagreements, Defendants argue, do not giverise to a claim of securities fraud. They rely on In re MedimmuneSec. Litig., 873 F. Supp. at 965, in which the court dismissedallegations regarding a flawed drug study, commenting that "[m]edicalresearchers may well differ over the adequacy of given testing proceduresand in the interpretation of test results." Id. See also PLCSystems, 41 F. Supp.2d 106, 121 (D. Mass. 1999) ("There is nothingin the pleadings other than plaintiffs' opinions to suggest that . . .the data generated, even ifPage 31initially insufficient to satisfy the FDA, was fundamentallyunsound or inaccurately reported."); Nathenson, 267 F.3d at 420(5th Cir. 2001) ("[Where] a company accurately reports the results of ascientific study, it is under no obligation to second-guess themethodology of that study.").
Defendants point to Sepracor's March 7, 2002 conference call asundermining any allegation of scienter and supporting the inference thatthis was a good faith scientific disagreement. In that call, Sepracorstated that it believed it needed to demonstrate safety at "plasma(blood) steady state" (which, in fact, it had), while the FDA took theposition that it was required to demonstrate safety at "tissue steadystate." (Trowbridge Aff., Exh H, at 5-8.) Rubin stated that "we firstheard about this concern . . . that information at tissue steady statewould be necessary, when we had the conference call with the FDAyesterday." (Id. at 7:1-4.) According to Defendants, this statement,combined with Plaintiffs' failure to cite any evidence that the FDA hadpreviously communicated to Sepracor the need to show safety at tissuesteady state (or even any public statement by the FDA regarding such arequirement), negates any possible inference of scienter.
Plaintiffs argue that in articulating its "zero tolerance" policy, theFDA had stated publicly the importance ofPage 32tissue concentrations on evaluation of the effects of the drug,observing that "[m]ultiple doses may lead to greater effect on [Qt]because of accumulation." (Compl. ¶ 45.) The FDA had also stated that"U.S. experience demonstrated failure of label warnings and educationalefforts to prevent serious cardiac arrhythmias and death due [to]improper use of some second generation antihistamines." (Id.¶ 43.) According to Plaintiffs, such statements made clear that FDAapproval of an antihistamine would not be forthcoming if there were anyrisk of cardiac arrhythmia caused by improper use, and that approvalwould require evidence that the antihistamine did not cause cardiaceffects at any concentration in the body.
Analysis of Statement 6
"The securities laws do not impose a duty to conduct `good science.'"PLC Systems, 41 F. Supp. at 121. Hence, the inadequacy of theclinical trials alone is insufficient to allege fraud. However, at issuehere is not the design of the study itself but the representation byRubin that the study tested the safety of Soltara at "maximumconcentration" "such that another dose will not increase exposure." It isundisputed that, because antihistamines continue to accumulate in thebody after maximum plasma concentration is reached, another dose in factwould havePage 33increased exposure. Once again, the question comes down to whetherPlaintiffs have sufficiently alleged that this material misrepresentationwas made knowingly or recklessly.
Here, Plaintiffs' allegations are considerably weaker than those putforth with regard to the statements discussed above. Plaintiffs note intheir own brief that there was no FDA approved protocol at the time forthe testing of Soltara at the maximum exposure in patients' bodies, andthat such testing was, as Defendants stated in a conference call inOctober 2002, "state-of-the-art," i.e., experimental. The FDA statementcited by the Plaintiffs — "[m]ultiple doses may lead to greatereffect on [Qt] because of accumulation" — does not specify tissuerather than plasma accumulation. Thus, although the allegations in theComplaints may raise an inference that Defendants knew or recklesslydisregarded the misleading nature of the statement, they do not raise thestrong inference required in a securities fraud action.
Accordingly, the motion is GRANTED as to Statement 6.
In early November, 2001, Sepracor's senior management met with GregoryB. Gilbert, a Merrill Lynch securities analyst, and assured him that"Soltara's efficacy and safety would make itPage 34a key player in the multi-billion dollar antihistamine market" andthat "investor concerns about the safety of Soltara were misplaced."During the meeting, Sepracor senior management told Gilbert that "itpreviously met with [the] FDA to identify all necessary trials that needto be done to put the Qt issue to rest." These statements were reportedto the investing public in a Merrill Lynch report on November 12, 2001.(Compl. ¶ 83-84.)
Defendants repeat their contentions with regard to scienter, and argueadditionally that this allegation is not actionable because theComplaints fail to identify the speaker by name, as required byFed.R.Civ.P. 9(b). See In re Newbridge Networks Sec. Litig.,962 F. Supp. 166, 173 (D.D.C. 1997) (analyst's report of beliefs of"Newbridge management" defective because it "failed to identify who atNewbridge held these beliefs"). See also, Boston Tech.,8 F. Supp.2d 43, 55 (D. Mass. 1998) ("[A] plaintiff is required to allegewith particularity the time, place, content and speaker of the issuer'scommunication with the analysts. . . .").
In opposition, Plaintiffs cite Cabletron, in which the FirstCircuit articulated an "entanglement" test to determine whetherstatements by third parties were attributable to defendants.Cabletron, 311 F.3d at 38 (citation omitted). OnePage 35of the statements deemed actionable in Cabletron wasbased on "information from Levine and other Cabletron executives."Id. Citing this example, Plaintiffs argue that, undercontrolling precedent in this Circuit, they are not required to identifythe senior management by name. Plaintiffs further note thatNewbridge Networks, relied upon by the Defendants, has beencriticized for failing to comport with the liberal pleading requirementsof the federal rules. See International Motor Sports Group, Inc. v.Gordon, U.S. Dist. LEXIS 12610, *14 (S.D.N.Y. Aug. 16, 1999).
Analysis of Statement 7
Plaintiffs stand on stronger ground here than with regard to Statement6. Two elements of the statement, that "Soltara's efficacy and safetywould make it a key player in the multi-billion dollar antihistaminemarket" and that "investor concerns about the safety of Soltara weremisplaced," are subject to the same scienter analysis as the statementsregarding the animal studies and Soltara's prospects for success. For thereasons discussed above in connection with those statements, theComplaints raise a strong inference of scienter.
The third element of the statement, that Sepracor "previously met with[the] FDA to identify all necessary trialsPage 36that need to be done to put the Qt issue to rest," must be viewedin light of the FDA's ultimate decision not to approve the NDA due toconcerns about the sufficiency of the clinical trials. If, as Sepracorargues in connection with Statement 6, the FDA did not reveal its view ofthe necessary scope of the clinical trials until March 6, 2002, it cannotbe true at the same time that the FDA had, by November 2001, identified"all necessary trials that need to be done to put the Qt issue to rest."Furthermore, the allusion to "investor concerns about the safety ofSoltara" bolsters the inference that a misrepresentation regarding theFDA's purported approval of the clinical trials was made with scienter.
Although scienter has been properly alleged, however, the statementfails to clear the hurdle imposed by Rule 9(b). Rule 9(b) requires thatplaintiffs "(1) specify the statements that the plaintiff contends werefraudulent, (2) identify the speaker, (3) state where and whenthe statements were made, and (4) explain why the statements werefraudulent." Suna v. Bailey Corp., 107 F.3d 64, 73 (1st Cir.1997) (citation omitted, emphasis added). Cabletron did notalter this standard. The two analyst reports identified by theCabletron court as meeting the entanglement test were (1) areport "based on information from Levine and other Cabletron executives,"and (2) a report "basedPage 37on a presentation by a named Cabletron official responsible forinvestor relations." Cabletron, 311 F.3d at 38. It is not clearfrom the Cabletron decision whether the identity of the "other Cabletronexecutives" was omitted from the complaint or merely from the decision;in any case, however, at least one executive — Levine — wasidentified, and the court took particular note of the fact that thesecond report was based on a presentation by a named source.
Accordingly, the motion will be GRANTED with regard to Statement 7unless Plaintiffs amend the Complaints within 45 days to include the nameor names of the speakers.
In sum, except as to Statements 6 and 7, the Complaint meets thepleading requirements of Rule 9(b) and the PSLRA, and the motion todismiss is DENIED.
It is so ordered.
1. For the sake of convenience, all citations to the "Complaint" inthis Memorandum and Order are to the Consolidated and Amended ClassAction Complaint on Behalf of the Equity Securities Purchaser Class.
2. The individually named defendants are Timothy J. Barberich, theCEO and Chairman of the Board of Directors; Paul Rubin M.D., ExecutiveVice-President of Drug Development and ICE Research; and David Southwell,Executive Vice-President, CFO, and Secretary.
3. The complaints do not allege that there was anything fraudulentabout the statement itself, nor is Dr. DuBuske named as a defendant.
4. Defendants contend in a Reply Brief that the FDA's "zerotolerance" policy was confined to clinical trials; plaintiffs, in turn,argue in a Sur-Reply Brief that the policy encompassed all stages of drugtesting. However, a motion to dismiss is not the appropriate method bywhich to test the accuracy of the facts alleged in the complaint.Plaintiffs' allegations regarding the FDA's "zero tolerance" policy mustbe accepted as true.
5. The SEC filings referred to in the statement included warningssuch as "WE HAVE NEVER BEEN PROFITABLE AND WE MAY NOT BE ABLE TO GENERATEREVENUES SUFFICIENT TO ACHIEVE PROFITABILITY" and "Our potential productsmay not . . . be proven safe and efficacious in clinical trials."
6. As of the date of the conference call, Sepracor's SEC filingscontained substantially the same list of risk factors described above inconnection with Statement 1.
7. The SEC filings referred to here contained risk statementsvirtually identical to those quoted in connection with Statement 1. Inaddition, on March 28, 2001, Sepracor had filed a Form 10-K for the yearending December 31, 2000 which described the FDA approval process andwarned that We may not successfully complete Phase I, Phase II or Phase III testing within any specified time period, if at all, with respect to any of our products subject to this testing. Furthermore, the FDA may not accept our evidence that a particular product meets our claims of superiority.(Trowbridge Aff., Exh. E, at 21.)
8. Plaintiffs, without explanation, fail to address Statement 1 intheir opposition brief. However, they present arguments in connectionwith Statements 2 and 3 that appear equally applicable to Statement 1 andwill be construed as relating to all three.
9. Throughout their brief, Defendants rely extensively on In reMedimmune. Inc. Sec. Litig., 873 F. Supp. 953 (D. Md. 1995), whichheld that "Mere expressions of hope or expectation regarding futureapproval, not worded as guarantees, are not actionable." However, inAmylin, the court commented: "This court is not bound byMedimmune and disagrees with this holding. If a defendantstates that it believes or expects that the FDA will approve its drug buthas information tending to seriously undermine the accuracy of itsstatement, the statement is actionable." Amylin at * 23, n.3(citing In re Apple Computer Sec. Litig., 886 F.2d 1109, 1113(9th Cir. 1989)).Page 1