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Fraud Suit Against Biopharm Concern Survives Materiality, Scienter Challenges

Friday, May 23, 2014

May 16 — ViroPharma Inc. shareholders may proceed with their would-be class securities fraud claims that the biotechnology company made material misstatements and omissions regarding the likelihood of favorable Food and Drug Administration action on a key pharmaceutical, the U.S. District Court for the Eastern District of Pennsylvania held May 15.  

Judge C. Darnell Jones II concluded that the alleged misstatements would be material to a reasonable investor and did not fall within the Private Securities Litigation Reform Act's safe harbor for forward looking statements.

The court also concluded that, taking the allegations as true, the inference that the defendants acted with scienter “is at least as likely as any plausible opposing inference.”

Lucrative Property

The court recounted that ViroPharma sells a number of products, including the antibiotic Vancocin for a gastrointestinal infection. “Vancocin was a lucrative property for ViroPharma, and comprised a substantial portion of ViroPharma's revenues from 2005-2011.”

Although the patent for Vancocin expired in 1996, the court continued, an FDA requirement regarding proof of bioequivalence “created a barrier for generics to enter the market.”

However, in 2006, the FDA changed its position on proof of bioequivalence—a move that allegedly lowered any barriers to entry and threatened ViroPharma's hold on the Vancocin market. According to the court, ViroPharma filed a citizen's petition with the FDA, amending it 20 times between 2006 and 2011. No generic drug could be introduced while the petition was pending, the court explained.

Citizens' Petition

Then, in 2008, Congress passed a law allowing the FDA to grant an additional three years of marketing exclusivity for older antibiotics such as Vancocin, if the company were able to show that the old antibiotic could be administered for a new “condition of use.”

To stave off the introduction of competitors' generics, gain the three years of exclusivity, and market Vancocin for a new condition of use, ViroPharma licensed a study conducted by Genzyme Corp. to support a supplemental new drug application—sNDA—to the FDA.

Thereafter the plaintiffs alleged, after having expressed misgivings throughout the sNDA process, the FDA formally denied ViroPharma's citizen's petition. The announcement of the FDA's action, which specifically referenced the Genzyme study, sent the company's stock price into a 21 percent decline.

In their lawsuit, the plaintiffs contended that throughout the class period, ViroPharma made materially misleading statements and omissions regarding the FDA's likely approval of the additional three years. They contended that despite ViroPharma's optimistic predictions, the FDA repeatedly had signaled its disinclination to approve the citizen's petition.

Direct Contradiction

In allowing the suit to go forward, the court first noted that the plaintiffs set forth specific statements and omissions that they claimed were misleading. The plaintiffs also identified who made each statement or omission, when the statement was made, and the reasons each was misleading.

The court next disagreed that the alleged misstatements were protected by PSLRA's safe harbor for forward looking statements.

It acknowledged that the defendants' statements regarding Vancocin's chances of receiving an extra three years of exclusivity “concerned a future FDA decision.”

However, the court noted, according to the plaintiffs, the statements were false and misleading because they omitted to state that the FDA “repeatedly” advised ViroPharma of its concerns regarding the Genzyme study.

Assuming the truth of the allegations, “those public statements directly contradict information Viropharma had privately received from the FDA regarding the Administrations' view on the inadequacies of the Genzyme study.” As such, the court said, the statements were not forward looking, even though they were accompanied by “`meaningful cautionary language,' because the risks being warned of had already come to pass at the time the statements were made.”

Moreover, the court said, it cannot conclude that a reasonable investor would not have found the information regarding ViroPharma's ongoing communications with the FDA significant in making an investment decision.

Active Involvement

Finally, the court concluded that the plaintiffs adequately alleged that the defendants acted with the requisite scienter. Among other specifics, it cited testimony by confidential witnesses that the defendants “were actively involved in the sNDA application and were in contact with the FDA.”

In addition, the fact that Vancocin sales comprised ViroPharma's core business “also supports the inference that Defendants either knew or should have been aware of the issues concerning the drug's approval.”

To see the decision, go to http://www.bloomberglaw.com/public/document/CASTRO_v_VIROPHARMA_INCORPORATED_et_al_Docket_No_212cv02714_ED_Pa.

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