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Second Attempt to Allege Securities Fraud against Drug Company Ends in Defeat

Wednesday, October 5, 2011

Susan M. Greenwood | Bloomberg Law Philco Investments, LTD v. Martin, No. 10-CV-02785, 2011 BL 256556 (N.D. Cal. Oct. 4, 2011) For the second time, the U.S. District Court for the Northern District of California dismissed a securities fraud class action against pharmaceutical company Elan Corporation and three of its officers and directors (collectively, Defendants). The Court found that plaintiffs' First Amended Complaint (FAC) failed to correct the deficiencies to their claims under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. For more on the Court's original dismissal order, see Bloomberg Law Reports®—Securities Law, Securities Fraud Claims against Drug Company Dismissed (Feb. 10, 2011).

Allegations Remain Insufficient

As the Court explained, plaintiffs alleged that Defendants made false and misleading statements about Bapineuzumab, a drug developed to treat Alzheimer's disease, and Tysabri, a drug marketed to treat multiple sclerosis. Specifically, Defendants purportedly misled investors (1) that Elan would commence Phase 3 drug trials for Bapineuzumab only if the results from an interim review of the Phase 2 trials proved "spectacular;" and (2) by failing to disclose certain negative results from the Phase 2 trials. As for Tysabri, Defendants allegedly failed to disclose potential cases of progressive multifocal leukoencephalopthy (PML), a rare and deadly neurological disorder developed by two patients taking Tysabri that led to a temporary withdrawal of Tysabri from the market by the Food and Drug Administration. — Bapineuzumab According to plaintiffs, Defendants informed investors that Phase 3 drug trials would begin only if the interim Phase 2 results met "'certain very specific criteria.'" More generally, Defendants also stated that the Phase 2 results would have to be spectacular to warrant Phase 3 trials. Thus, plaintiffs contend that Elan's early commencement of Phase 3 trials misled them to think that Elan achieved spectacular interim Phase 2 results under the company's specified criteria. In reality, however, Bapineuzumab allegedly failed against a placebo in the tests, known as ADAS-cog and DAD, which Elan used to measure the drug's performance. The Court held that Defendants' use of the adjective "spectacular" was inactionable puffery. Plaintiffs further failed to demonstrate that investors understood Defendants' reference to "certain very specific criteria" to mean the ADAS-cog and DAD tests performed. Moreover, the Court pointed to an Elan press release indicating that for a certain segment of the Alzheimer's disease population, the Phase 2 final results showed "statistically significant and clinically meaningful benefits." Defendants also allegedly failed to disclose certain adverse results of the Phase 2 trial. However, the Court determined that plaintiffs provided no new allegations in the FAC and, thus, failed to correct the deficiencies of the original complaint. — Tysabri Turning to Tysabri, the Court explained that after the drug was temporarily removed from the market, Elan established an Independent Adjudication Committee (Committee) to review potential PML cases. The Committee developed a set of three criteria to confirm a PML diagnosis. Plaintiffs alleged that "Defendants' enthusiastic reports of 'no new confirmed PML cases'" failed to disclose 12 suspected cases. Similarly, in withholding information concerning the suspected cases, Defendants misled investors as to revenue forecasts based on continued Tysabri sales. In the FAC, plaintiffs did not establish how suspected PML cases contradicted Defendants' statement that there were no new confirmed cases. But, plaintiffs did strengthen their claim with respect to revenue forecasts because Defendants' alleged knowledge of suspected PML cases should have been a red flag that Tysabri revenue would decline as sales dropped due to the potential reoccurrence of this deadly side effect. Nevertheless, the Court held that plaintiffs failed to adequately allege scienter. While plaintiffs' theory of scienter was sound, the Court determined that plaintiff offered no specific facts to support it. As the Court explained, Defendants could have known that Tysabri patients who received a blood plasma treatment would likely be confirmed with PML. Missing from the FAC, however, was evidence that Defendants knew that the blood plasma treatment strongly indicated PML or that any Tysabri patients were receiving the treatment. Accordingly, the Court held that it was "unreasonable" to infer that "Defendants acted with the requisite state of mind."

No New Amendment

Noting that the FAC did not resolve plaintiffs' pleading deficiencies, and further that certain allegations remained unchanged from the original complaint, the Court dismissed the FAC with prejudice. Disclaimer This document and any discussions set forth herein are for informational purposes only, and should not be construed as legal advice, which has to be addressed to particular facts and circumstances involved in any given situation. Review or use of the document and any discussions does not create an attorney-client relationship with the author or publisher. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction or situation. Please consult with an attorney with the appropriate level of experience if you have any questions. Any tax information contained in the document or discussions is not intended to be used, and cannot be used, for purposes of avoiding penalties imposed under the United States Internal Revenue Code. Any opinions expressed are those of the author. The Bureau of National Affairs, Inc. and its affiliated entities do not take responsibility for the content in this document or discussions and do not make any representation or warranty as to their completeness or accuracy. ©2014 The Bureau of National Affairs, Inc. All rights reserved. Bloomberg Law Reports ® is a registered trademark and service mark of The Bureau of National Affairs, Inc.

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