Electrical Workers Pension Fund, Local 103, I.B.E.W. et al v. Nuvelo Inc. et al, No. 3:2007cv04056 - Document 69 (N.D. Cal. 2008)
Court Description: ORDER Granting [doc #34] Defendants' MOTION to Dismiss. Plaintiffs are granted leave to file an amended consolidated complaint not later than 12/31/2008. (vrwlc2, COURT STAFF) (Filed on 12/4/2008).
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Electrical Workers Pension Fund, Local 103, I.B.E.W. et al v. Nuvelo Inc. et al Doc. 69 1 2 3 4 5 6 7 8 9 United States District Court For the Northern District of California United States District Court For the Northern District of California 10 11 12 IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA 13 14 15 IN re NUVELO, INC, SECURITIES LITIGATION Master File No / C 07-4056 VRW 16 17 18 Class Action This Document Relates to: All Actions / ORDER 19 20 In this securities fraud putative class action, 21 defendants move to dismiss plaintiffs’ 73-page consolidated 22 complaint (Doc #31). 23 investors who purchased securities of Nuvelo, Inc at prices 24 plaintiffs allege were inflated by misstatements and misleading 25 omissions defendants made between January 5, 2006 and December 8, 26 2006, inclusive (the “class period”). 27 10 and 20 of the Securities Exchange Act of 1934, naming as 28 defendants Nuvelo, its Chief Executive Officer Ted W Love, its Doc #34. Plaintiffs seek to represent Plaintiffs invoke sections Dockets.Justia.com 1 Chief Financial Officer Gary S Titus and Senior Vice President 2 Michael D Levy. Nuvelo develops thrombolytic drugs, which are drugs United States District Court For the Northern District of California 3 4 designed to dissolve blood clots. Nuvelo’s star candidate to treat 5 blood clots was a drug called alfimeprase. 6 approval for alfimeprase included “phase 2” and “phase 3” clinical 7 trials. 8 for alfimeprase appeared successful, the trials suffered from a 9 number of flaws that made alfimeprase a very risky endeavor and The process of FDA Plaintiffs allege that although Nuvelo’s phase 2 trials 10 Nuvelo’s stock a risky investment. Plaintiffs allege that those 11 flaws eventually played out when the phase 3 trials failed. 12 Plaintiffs allege that when defendants trumpeted the results of 13 their phase 2 trials and expressed confidence in the phase 3 14 trials, defendants failed to disclose the risks and flaws that 15 defendants knew made the phase 2 trials unreliable and made 16 regulatory approval and successful commercialization of alfimeprase 17 unlikely. 18 Defendants claim their disclosures were sufficient as a 19 matter of law and that the alleged omissions did not render their 20 statements misleading and on this basis move to dismiss the 21 complaint. 22 plaintiffs have failed to allege misstatements and omissions with 23 the required particularity and failed to link the misstatements and 24 omissions asserted to the causes of the plaintiffs’ losses. 25 Because, however, it appears that there may be a set of facts from 26 which a claim under sections 10 and 20 of the Exchange Act could be 27 alleged, this dismissal shall be without prejudice to plaintiffs 28 filing a further amended complaint. The court concludes that in the present complaint 2 I 1 Section 10(b) of the ‘34 Act and SEC Rule 10b-5 make it United States District Court For the Northern District of California 2 3 unlawful for any person, in connection with the purchase or sale of 4 any security: 5 statement regarding a material fact or (3) to make a misleading 6 statement by omitting a material fact. 7 § 240.10b-5. 8 misrepresentation or omission of fact; (2) scienter; (3) connection 9 with the purchase or sale of a security; (4) reliance; (5) economic (1) to engage in fraud, (2) to make an untrue 15 USC § 78j(b); 17 CFR The elements of a Rule 10b-5 claim are: (1) material 10 loss and (6) loss causation. 11 544 US 336, 341–42 (2005). 12 Rule 10b-5 must first meet the particularity requirements of FRCP 13 9(b). 14 1404 (9th Cir 1996). 15 to “set forth what is false or misleading about [the] statement, 16 and why it is false.” 17 1541, 1548 (9th Cir 1994) (superseded by the Private Securities 18 Litigation Reform Act (“PSLRA”) on other grounds). 19 Dura Pharmaceuticals, Inc v Broudo, Claims brought under section 10(b) and In re Stac Electronics Securities Litigation, 89 F3d 1399, FRCP 9(b) requires a plaintiff alleging fraud In re GlenFed Securities Litigation, 42 F3d Additionally, a complaint must satisfy the more stringent 20 requirements imposed on securities fraud pleadings by the PSLRA. 21 The PSLRA requires that a complaint: (1) “specify each statement 22 alleged to have been misleading [and] the reason or reasons why the 23 statement is misleading” (15 USC § 78u-4(b)(1)); (2) for any such 24 allegations based on information and belief, “state with 25 particularity all facts on which that belief is formed” (15 USC § 26 78u-4(b)(1)) and (3) “with respect to each act or omission * * * 27 state with particularity facts giving rise to a strong inference 28 that the defendant acted with the required state of mind” (15 USC § 3 1 78u-4(b)(2)). 2 when the complaint alleges “that the defendants made the false or 3 misleading statements either intentionally or with deliberate 4 recklessness.” 5 2005), citing In re Silicon Graphics Securities Litigation, 183 F3d 6 970, 974 (9th Cir 1999). 7 “are generally strongly inferred from the same set of facts and the 8 two requirements may be combined into a unitary inquiry under the 9 PSLRA.” United States District Court For the Northern District of California 10 The required state of mind —— scienter —— is met In re Daou Systems Inc, 411 F3d 1006, 1015 (9th Cir In securities cases, falsity and scienter In re Vantive Corp Securities Litigation, 283 F3d 1079, 1091 (9th Cir 2002) (internal citations omitted). 11 12 A 13 As an initial matter, defendants request judicial notice 14 of 30 documents (Doc #35, Exhs A–DD) relating to their motion to 15 dismiss. 16 referenced by plaintiffs in their consolidated complaint. 17 R–DD include securities filings, press releases, conference call 18 transcripts, journal articles and an FDA Guidance report appearing 19 on the FDA website. 20 courts to take judicial notice of matters that are “capable of 21 accurate and ready determination by resort to sources whose 22 accuracy cannot reasonably be questioned.” 23 Doc #36. Exhibits A–Q are the full versions of documents Id. Exhibits Federal Rule of Evidence 201 allows Fed R Evid 201(b). Plaintiffs do not contest the authenticity of the 24 documents mentioned in the defendant’s request except for two 25 (exhibits W and X are contested). 26 the court takes judicial notice of the submitted documents, 27 disputed factual statements within the documents will be taken as 28 true. Doc # 41. Plaintiffs’ concern is that if Defendants do not request judicial notice for the 4 1 truth of the statements within the documents; defendants merely 2 seek judicial notice that the documents are authentic and the 3 information contained in them was available to the market during 4 the class period. United States District Court For the Northern District of California 5 Doc #53 at 3. Courts hearing securities fraud cases routinely take 6 judicial notice of documents with unquestioned authenticity that 7 were referenced in the complaint or that demonstrate the 8 information available to the market during the class period. 9 Construction Laborers Pension Trust of Greater St Louis v See 10 Neurocrine Biosciences, Inc, 2008 US Dist LEXIS 38899, *5 (S D Cal 11 May 12, 2008) (taking judicial notice of FDA guidelines because 12 they were “publicly available to a reasonable investor”); In re Wet 13 Seal, Inc Securities Litigation, 518 F Supp 2d 1148, 1157–58 (C D 14 Cal 2007) (taking judicial notice of SEC filings and other 15 documents to show “the availability of information to the market”). 16 These documents may be considered “to establish ‘whether and when 17 certain information was provided to the market’ not the truth of 18 the matters asserted in the reports.” 19 Securities Litigation, 310 F Supp 2d 1106, 1116 (C D Cal 2003), 20 quoting In re PetSmart, Inc Securities Litigation, 61 F Supp 2d 21 982, 987 n1 (D Ariz 1999). 22 notice of exhibits A–Q (documents referenced in the complaint) and 23 Y–DD (documents available to the market) not for the truth of the 24 statements contained in those documents, but in order to consider 25 the complete record of the defendants’ alleged misstatements in 26 light of the other information available to the market. 27 Wet Seal, Inc Securities Litigation, 518 F Supp 2d 1148, 1157 (C D 28 Cal 2007). In re Infonet Servs Corp Accordingly, the court takes judicial 5 See In re Judicial notice of stock sales contained in securities 1 2 filings with the SEC is appropriate, particularly where plaintiffs 3 rely on stock sales in their complaint. 4 Pension Trust of Greater St Louis, 2008 US Dist LEXIS 38899 at *5. 5 Accordingly, the court takes judicial notice of exhibits R–V for 6 the information about the stock sales contained in those documents 7 as well as to demonstrate information available to the market. Plaintiffs dispute the accuracy of two submitted 8 United States District Court For the Northern District of California 9 See Construction Laborers conference call transcripts (exhibits W and X) that were not 10 referenced in the complaint and contain disclaimers about their 11 accuracy. 12 Because there is a dispute about the accuracy of these transcripts 13 and taking judicial notice of them is not necessary to the result 14 here, the court declines to do so at this time. Doc #41 at 7; Doc# 35-40, Exh W at 14, Doc# 35-41 at 15. 15 B 16 17 In In re Cutera Securities Litigation, ___ F Supp 2d ___ 18 (N D Cal 2008), the court had occasion to address some of the 19 problems that attend a long and evidentiary-laden complaint in a 20 securities fraud action, such as the complaint at bar. 21 discussion will not be reprised here although the difficulties that 22 the complaint in Cutera presented are present here. 23 complaint makes more, rather than less, difficult the task of 24 determining whether a complaint meets the heightened pleading 25 standards of the PSLRA. 26 plaintiffs have adequately alleged loss causation, the topic to 27 which the court turns first. 28 That Such a Such a complaint also obscures whether As noted in Cutera, the class period in an open market 6 1 securities fraud case coincides with the period “during which 2 defendants’ fraud was allegedly alive in the market.” 3 Clearly Canadian Securities Litigation, 875 F Supp 1410, 1420 (N D 4 Cal 1995)(Walker, J). 5 in the securities at issue while the fraud could have been 6 affecting those securities’ value who can possibly state a claim 7 for damage resulting from the fraud.” 8 376 F Supp 2d 956, 966 (N D Cal 2005)(Schwarzer, J). United States District Court For the Northern District of California 9 In re Thus it is “only those plaintiffs who traded Zelman v JDS Uniphase Corp, As the essence of an open market securities fraud claim 10 is that true facts were withheld from the market or were misstated, 11 a good place to begin analysis of a complaint alleging such a claim 12 is what the complaint alleges the true facts were that revealed the 13 prior misstatements or misleading omissions of the defendants. 14 the complaint at bar, these alleged facts are set forth in 15 paragraph 158 at page 66, needless to say deep into the pleading: 16 17 18 19 20 21 22 23 24 25 26 27 28 In The inflation in Nuvelo’s securities prices was eliminated when the market learned that, contrary to defendants’ statements during and even prior to the Class Period, alfimeprase had not worked as represented in the Phase 2 trials, that the Phase 3 trials had failed as a result of risks that had been concealed or downplayed by defendants in a manner that misled investors during the Class Period, that the drug did not meet the Company’s target product profile necessary to market it for [catheter occlusion], and the FDA had imposed an extraordinary high standard for approval of the drug for [catheter occlusion]. Most of this inflation was eliminated when Nuvelo announced, on December 11, 2006 —— the last day of the Class Period —— that alfimeprase had failed the Phase 3 clinical trials, causing Nuvelo’s stock price to plummet. Nuvelo’s share price fell from $19.55 to close at $4.05, a one day drop of nearly 80% on extraordinary trading volume of 90,150,600 shares —— more than 150 times its daily average, causing injury to investors who purchased at the fraud-inflated prices prevailing in the market during the Class Period. Doc #31 at 69-70 (emphasis added). as follows: 7 The very next paragraph begins 1 The remaining inflation was eliminated on June 27, 2007, when Bayer pulled out of further efforts to develop alfimerprase and defendants revealed the full extent by which the risks of failure in the Phase 3 trials had been withheld from investors, causing additional injury to Class members who continued to hold their securities through the date of the announcement. 2 3 4 5 Doc #31 at 70 (emphasis added). United States District Court For the Northern District of California 6 The problem with this, as the underlined text highlights, 7 is obvious. 8 Nuvelo stock before the class period (January 5, 2006 to December 9 8, 2006) or afterwards. Plaintiffs do not seek to represent purchasers of In Dura Pharmaceuticals, the Supreme Court 10 held that a complaint must not merely allege stock price inflation 11 resulting from a misrepresentation, but must also allege, and 12 plaintiffs later must prove, that the misrepresentation 13 “proximately caused the plaintiff’s loss.” 14 Price inflation due to a misstatement or omission, the Supreme 15 Court in Dura Pharmaceuticals noted, may be “a necessary condition” 16 of market fraud, but is insufficient to prove economic loss. 17 343. 18 (e g, “changed economic circumstances, changed investor 19 expectations, new industry-specific or firm-specific facts, 20 conditions, or other events”), Id, Dura Pharmaceuticals requires 21 that the facts that drive the security’s price lower to inflict 22 investor losses must be the same facts whose earlier 23 misrepresentation or omission inflated the price. 24 544 US at 342-46. “Given the tangle of factors affecting [a security’s] price” Id at 345-46.* Hence, if there remains unresolved inflation in the price 25 26 27 28 Id at * The text of the Supreme Court’s opinion in Dura Pharmaceuticals refers to a misrepresentation. The logic of the Court’s holding applies equally to a misleading omission. 8 United States District Court For the Northern District of California 1 of the security due to a misstatement or omission, the class period 2 should extend to the time the inflation is eliminated. 3 extending the class period in this manner would have the effect of 4 increasing the number of claimants to any recovery plaintiffs 5 obtain and presumably diminish by at least some amount the recovery 6 of the claimants who purchased in the class period alleged. 7 Extending the class period also may present the problem of 8 differing levels of price inflation due to the different 9 informational mix as the falsity of the defendants’ representations Of course, 10 is revealed. 11 claimants. 12 of all or only some of those allegedly defrauded. 13 with the allegation that there remained some undigested fraud on 14 the market until late June 2007 is that, if this is so, then there 15 is a potential conflict between the class that plaintiffs seek to 16 represent and the potential class that they do not seek to 17 represent. 18 This creates possible conflicts among the class Plaintiffs can, of course, choose to represent a class But the problem More importantly, and in addition, plaintiffs’ suggestion 19 that some misinformation remained in the market after the December 20 11 announcement is entirely at odds with the fraud-on-the-market 21 presumption which underlies plaintiffs’ theory of liability. 22 Judge Easterbrook has explained, plaintiffs proceed on the 23 assumption that the market for Nuvelo stock is “informationally 24 efficient”: 25 // 26 // 27 // 28 // 9 As 1 2 3 4 5 6 United States District Court For the Northern District of California 7 [O]nly if the market is inefficient is partial transmission [of information] likely, and if the market for [the company’s] stock is inefficient then this suit collapses because a fraud-on-the-market claim won’t fly. An investor who invokes the fraudon-the-market theory must acknowledge that all public information is reflected in the price, just as the Supreme Court said in Basic [Inc v Levinson, 485 US 224, 246 (1988)]. Asher v Baxter International, Inc, 377 F3d 727, 732 (7th Cir 2004). Accordingly, the allegation about elimination of the 8 “remaining inflation” on June 27, 2007 adds nothing to plaintiffs’ 9 claim unless plaintiffs are prepared to allege that the class 10 period extends to June 27. 11 distortion and the class period in an open market securities fraud 12 action must coincide. 13 class period to June, 2007, the allegations about “remaining 14 inflation” are beside the point of the claims plaintiffs seek to 15 prosecute and are simply surplusage. 16 The period of the alleged price As plaintiffs have not sought to extend the In the same way, plaintiffs’ allegations of events prior 17 to the class period are beside the point or, perhaps more 18 accurately, merely background. 19 events consumes thirty paragraphs on at least eleven pages of the 20 complaint —— rather excessive space to devote to a mere windup 21 before we get to the pitch. 22 that plaintiffs rely on alleged misstatements prior to the class 23 period as distorting the price of Nuvelo stock, the period in which 24 such statements were made should be included in the class period. 25 Again, as it must be presumed under the efficient market hypothesis 26 that the price of Nuvelo stock reflects the information available 27 to the market, plaintiffs’ unwillingness to extend the class period 28 to before January 5, 2006 is tantamount to a concession that the The recounting of pre-class period See Doc #31 at 11-22. 10 To the extent 1 defendants had not made misstatements or misleading omissions prior 2 to this date. 3 alleged misstatements or omissions related to the reliability of 4 the phase 2 trials, which were concluded over twelve months before 5 the start of the class period. United States District Court For the Northern District of California 6 This is significant because some of the defendants’ An analysis of the price behavior of Nuvelo stock during 7 the class period highlights other deficiencies in plaintiffs’ 8 pleading of loss causation. 9 information “capable of accurate and ready determination by resort 10 to sources whose accuracy cannot reasonably be questioned” and are 11 the proper subject of judicial notice in a motion to dismiss. 12 FRE 201(b); In re Finisar Corporation Derivative Litigation, 542 F 13 Supp 2d 980, 990 n4 (N D Cal 2008)(Whyte, J)(taking judicial notice 14 of public stock prices). 15 misleading omissions, the court can, therefore, look at the alleged 16 misleading omissions against the backdrop of the price behavior of 17 Nuvelo’s stock. 18 // 19 // 20 // 21 // 22 // 23 // 24 // 25 // 26 // 27 // 28 // Closing stock prices are public See In analyzing plaintiffs’ allegations of 11 1 The following figure depicts the price behavior of Nuvelo 2 stock along with the allegedly actionable misleading statements 3 that plaintiffs allege defendants made during the class period. 4 Doc #31 at 31-56. 5 but six information releases that allegedly are actionable; these 6 are information releases on January 5, February 27, March 15, April 7 10, May 5 and August 3. Within the class period, the complaint recounts Doc #31 at 31-56. 8 9 United States District Court For the Northern District of California 10 11 12 13 14 15 16 17 18 19 20 21 22 23 The allegedly misleading statements fit into three 24 general categories: (1) statements about the effectiveness of 25 alfimeprase during the phase 2 trials, (2) statements that the two 26 alfimeprase indications chosen for trials represented a “low-risk 27 path to regulatory approval” and (3) statements that alfimeprase 28 had the potential to have “transformational” commercial success. 12 1 Doc #31 at 34–59. 2 commercial success are “forward-looking statements” and fit into 3 the PLSRA “safe harbor provision,” see infra, but the plaintiffs 4 argue that the alleged misstatements about the effectiveness of the 5 phase 2 trials do not fall under that provision because those 6 statements look back rather than forward. United States District Court For the Northern District of California 7 The statements regarding regulatory approval and Doc #40 at 36-37 n22. Plaintiffs are correct about the direction of the phase 2 8 trial allegations. 9 statements about the phase 2 trials avoid the safe harbor provision But while some of the alleged misleading 10 by looking backward, they pose additional loss causation issues 11 associated with the selection of January 5, 2006 as the first day 12 of the class period. 13 touting the success of phase 2 trials is that they were misleading 14 because “Nuvelo omitted to disclose” certain “known risks” about 15 those trials that rendered replication of the results unlikely. 16 Doc #31 at 36. 17 have been inflated due to fraud beginning the moment the defendants 18 were aware of those risks and did not disclose them. 19 phase 2 trials for alfimeprase were completed and results reported 20 by early December, 2004, this theory cannot be squared with the 21 selection of January 5, 2006 as the first day of the class period. 22 The complaint does not allege that defendants only became aware of 23 the undisclosed risks thirteen months after the conclusion of the 24 phase 2 trials, one possible explanation for a January 5, 2006 25 class period start date. 26 might have alleged is that the affirmative statements on January 5, 27 2006 made the omission of the risks misleading for the first time. 28 But the complaint presents similar statements about the phase 2 Plaintiffs’ theory regarding statements If that is true, then Nuvelo’s stock price would Because all Another possible explanation plaintiffs 13 United States District Court For the Northern District of California 1 studies as early as May 2, 2005. 2 2, 2005 Nuvelo company statement that the company had “‘power 3 calculations’ that clearly established the efficacy of alfimeprase 4 as compared to a placebo”). Doc #31 at 26 (discussing a May 5 Although the particularity requirement of 15 USC § 78u- 6 4(b)(1) (“if an allegation regarding the statement or omission is 7 made on information and belief”) and § 78u-4(b)(2) (“required state 8 of mind”) may not apply to the allegation of loss causation, Dura 9 Pharmaceuticals, 544 US at 346 (“[W]e assume, at least for 10 argument’s sake, that neither the Rules [of Civil Procedure] nor 11 the securities statutes impose any special further requirement in 12 respect to the pleading of proximate causation * * * .”), the 13 Supreme Court nonetheless observed that the complaint must at least 14 provide “fair notice.” 15 be interpreted to require the complaint to spell out the connection 16 between the alleged misstatement or omission and the plaintiffs’ 17 loss. 18 in Bell Atlantic Corporation v Twombly, ___ US ___, 127 S Ct 1955, 19 1966 (2007) (“So, when allegations in a complaint, however true, 20 could not raise a claim of entitlement to relief, this basic 21 deficiency should be exposed at the point of minimum expenditure of 22 time and money by the parties and the court.” [quotation marks 23 omitted]). 24 between the defendants’ alleged misstatements about the phase 2 25 studies and the plaintiffs’ loss it fails the test of Dura 26 Pharmaceuticals. 27 28 Id at 346. Fair notice can only reasonably See the Supreme Court’s discussion of Dura Pharmaceuticals Because the complaint does not allege the relationship The complaint attempts to resolve the lack of congruence between the start of the class period and the beginning of the 14 1 alleged fraud-induced price inflation by alleging that the entire 2 drop in the stock price at the close of the class period was caused 3 by disclosure of the previously omitted known risks. 4 a claim, plaintiffs must allege that the omitted facts were unknown 5 to the market and, had they been disclosed, would have lowered the 6 trading prices of Nuvelo stock. 7 1065–66 (9th Cir 1999). 8 United States District Court For the Northern District of California 9 To plead such Binder v. Gillespie, 184 F3d 1059, Plaintiffs do allege, and the price behavior of Nuvelo’s stock substantiates, that the December 11 disclosures had a 10 dramatic effect on Nuvelo’s stock causing it to lose 80 percent of 11 its value. 12 releases: (1) a press release dated December 11, 2006 and (2) a 13 conference call in which Nuvelo’s CEO Love discussed the 14 information in the press release with securities analysts. 15 #42, Exhs 1-2. 16 facts disclosed on December 11 to false statements or misleading 17 omissions during the class period. 18 These disclosures were contained in two information Doc The issue is whether plaintiffs have linked the The meat of the December 11 disclosures is contained in 19 the first paragraph of the press release: 20 // 21 // 22 // 23 // 24 // 25 // 26 // 27 // 28 // 15 1 Nuvelo, Inc (NASDAQ: NUVO) and Bayer HealthCare today announced top-line data demonstrating that the Phase 3 clinical trial of alfimeprase in acute peripheral arterial occlusion(PAO), known as NAPA-2 (Novel Arterial perfusion with Alfamiprase-2) did not meet its primary endpoint of avoidance of open vascular surgery within 30 days of treatment. The companies also announced that the Phase 3 trial in catheter occlusion (CO), known as SONOMA-2 (Speedy Opening of Non-functional and Occluded catheters with Mini-dose Alfimeprase-2), did not meet the endpoint of restoration of function at 15 minutes. These trials did not meet key secondary endpoints. In addition, the companies announced that they have temporarily suspended enrollment in the ongoing Phase-3 trials, NAPA-3 and SONOMA-3, until further analysis and discusisons with outside experts and regulatory agencies are completed. 2 3 4 5 6 7 8 9 United States District Court For the Northern District of California 10 Doc# 42, Ex 2. 11 As the figure above illustrates, the December 11 12 disclosures —— in addition to providing information on some of the 13 specific risks in the phase 3 trials that Nuvelo had not previously 14 disclosed —— revealed to the market that alfimeprase failed in 15 phase 3 trials. 16 plaintiffs do not allege that defendants knew that the phase 3 17 trials had failed or would fail or made false statements during the 18 class period about the probable success of the phase 3 trials, the 19 complaint fails to link the truthful information released on 20 December 11 with allegedly misleading information put into the 21 market during the class period. 22 had the omitted known risks alleged in the complaint been disclosed 23 previously, what the effect on the price of Nuvelo stock would have 24 been without the accompanying news that the phase 3 trials indeed 25 failed. 26 consistent with a scenario in which the information releases prior 27 to December 11 were not misleading as an alternative scenario that 28 these informational releases were misleading. Because, as will be discussed presently, The complaint does not make clear, In other words, the failure of the phase 3 trials is as 16 Accordingly, the 1 complaint does not specify the cause of the plaintiffs’ alleged 2 loss as Dura Pharmaceuticals requires. 3 4 United States District Court For the Northern District of California 5 II In addition to the complaint’s failure to plead loss 6 causation, the complaint fails to plead with the required 7 particularity that the statements about alfimeprase’s “path to 8 regulatory approval” and potential for “transformative” commercial 9 success were misleading. Plaintiffs identify four risks to 10 alfimeprase achieving regulatory approval and commercial success 11 that were allegedly known by the defendants during the class 12 period, but not to the market. 13 reliability in one phase 2 trial result due to an “observer 14 effect,” (2) an unusually stringent target success rate for one 15 phase 3 trial, (3) an internal target phase 3 trial success rate 16 that was even more stringent and (4) a smaller potential market due 17 to competition from off-label drugs and mechanical techniques. 18 court addresses these alleged undisclosed risks in turn. These risks included (1) a lack of The 19 20 21 A Plaintiffs allege that an observer effect biased phase 2 22 results related to one particular potential use for alfimeprase. 23 That potential use was to dissolve blood clots of a type usually 24 occurring in the leg. 25 for peripheral arterial occlusions. 26 treat blood clots intravenously, alfimeprase must be delivered to 27 the clot using a “drug delivery system.” 28 made use of a catheter to deliver alfimeprase to the clot area. Such clots are known as PAOs, which stands 17 Doc #31 at 5. In order to The drug delivery system 1 Once the catheter delivered the drug, alfimeprase was supposed to 2 break up the clot. United States District Court For the Northern District of California 3 The project name for Nuvelo’s clinical trials for PAOs 4 was “NAPA.” 5 alfimeprase in 2003 and 2004. 6 2004, Nuvelo presented the results of the phase 2 trial. 7 at 12–13, 19. 8 rates of up to 76 percent and blood flow was restored at rates of 9 up to 60 percent within four hours of administering alfimeprase. Doc #31 at 17. Nuvelo conducted its phase 2 trial of Doc #31 at 12–13. On September 30, Doc #31 Nuvelo reported that leg clots were dissolved at 10 Doc #31 at 19. 11 mg/kg of alfimeprase avoided surgery for thirty days. 12 effects such as bleeding were minimal, and none of the patients 13 suffered a stroke or death. 14 Sixty-one percent of the patients receiving 0.3 Id. Side Id. Plaintiffs allege those results were unreliable because 15 of what scientists call “observer effects.” 16 related to but not the same as Heisenberg’s uncertainty principle 17 or Schrödinger’s paradox. 18 of observing a phenomenon changes the properties of that 19 phenomenon. 20 body’s temperature using an oral thermometer. 21 underneath the tongue hovers around 98.6 degrees, but the glass and 22 mercury in the thermometer will be slightly cooler. 23 thermometer is inserted into the mouth, an endothermic process 24 begins, and heat transfers from the mouth to the thermometer. 25 absorption of heat causes the mercury to expand into the hollow 26 chamber inside the thermometer, allowing the observer to read the 27 temperature as marked by the tick marks on the side of the 28 thermometer. The observer effect is Observer effects occur when the very act The most commonplace example occurs when taking the The temperature When the This The thermometer reading will always be inaccurate, 18 1 however, because the mouth was ever-so-slightly warmer before the 2 thermometer was inserted and began absorbing heat. 3 measuring the mouth’s temperature lowers the mouth’s temperature. 4 The effect might be trivial in that instance, but the magnitude of 5 the observer effect can be large depending on the circumstances. United States District Court For the Northern District of California 6 The act of Plaintiffs allege that the design of the PAO alfimeprase 7 phase 2 trials contained serious risk of a powerful observer 8 effect. 9 insertion of a catheter in order to observe the impact of While a clinician administered alfimeprase via the 10 alfimeprase on a blood clot, there was a risk that the catheter 11 itself would break up the clot before the alfimeprase arrived. 12 many clots were dissolved by the catheter, this would have 13 overestimated the effectiveness of alfimeprase. 14 alfimeprase would have received credit for dissolving more clots 15 than it actually dissolved due to “help” from the catheter itself. 16 Accordingly, plaintiffs allege that there was a risk that the phase 17 2 trial results were unreliable. 18 If Essentially, Plaintiffs allege defendants “knew or recklessly 19 disregarded” the risk that alfimeprase was subject to this problem. 20 Doc #31 at 43. 21 [a confidential witness] prior to the class period with high- 22 ranking officers of Nuvelo, including Love * * *. [The confidential 23 witness] said that, in 2004 or 2005, s/he discussed the potential 24 for the drug delivery system to disrupt the clot during quarterly 25 company-wide meetings regularly held after each Board of Directors 26 meeting.” 27 28 “In fact, this precise risk had been discussed by Doc #31 at 15. Plaintiffs allege that the failure to disclose this potential observer effect rendered a number of defendants’ 19 United States District Court For the Northern District of California 1 statements misleading. 2 results of the phase 2 trial, suggested that alfimeprase was the 3 one and only cause of blood clot dissolution among the participants 4 in the trial. 5 the class period, defendants stated that “[a]lfimeprase * * * has 6 been shown in clinical studies to provide rapid clot dissolution.” 7 Doc #35-2, Exh A at 2. 8 “the NAPA-1 trial, a Phase 2 dose escalation study, demonstrated 9 that alfimeprase can restore arterial blood flow within four hours Defendants, in promoting the encouraging For example, on January 5, 2006, the first day of On April 10, 2006, defendants stated that 10 of initiation of dosing.” 11 Titus stated that Nuvelo “believe[s it] still [has] overwhelming 12 statistical power to detect the difference between an active 13 therapy such as alfimeprase —— which is indeed very active based on 14 our Phase 2 studies to date —— and placebo.” 15 13. 16 gratified in phase [2] to find that alfimeprase worked very well on 17 big clots and on small clots * * * . [¶] And it’s worked on what we 18 thought were new clots and old clots * * *.” 19 On December 11, 2006, Nuvelo informed the market that its phase 3 20 tests had failed, stating that the observer effect described above 21 was “probably” responsible for the encouraging phase 2 results. 22 Doc #31 at 24. 23 $15.50 a share in unusually heavy trading * * *.” Doc #35-13, Exh G at 2. On May 5, 2006, Doc #35-14, Exh H at And on August 3, 2006, Levy stated that Nuvelo was “very 24 Doc #35, Exh I at 11. “Nuvelo’s stock closed at $4.05 a share, down Id at 32. Plaintiffs allege that each of the positive statements 25 above was misleading because defendants attributed the drug’s 26 success to the drug itself and did not disclose the known risk that 27 the drug delivery system might be the true source of the results in 28 the study. According to the plaintiffs, “defendants knew, but did 20 United States District Court For the Northern District of California 1 not disclose, that the mere insertion of the drug delivery catheter 2 would have caused some of the blood clots in patients enrolled in 3 the PAO trials to be broken apart.” Doc #44 at 16–17. 4 Because there was “no placebo arm” in the phase 2 study 5 (no control group to which clinicians administered a catheter but 6 not alfimeprase), Nuvelo lacked the data needed to determine 7 conclusively whether the drug or the drug delivery system was 8 responsible for dissolving clots. 9 Instead, Nuvelo relied on “placebo assumptions” to estimate the Doc #31 at 18; Doc #44 at 16–17. 10 efficacy of alfimeprase independent of other variables. 11 26. 12 “conservative case scenario” that 5 to 10 percent of patients would 13 respond to a placebo compared with 70 percent of patients 14 responding to alfimeprase. 15 Nuvelo stated it assumed that even if alfimeprase outperformed the 16 placebo not by 60 to 65 percent but by only 22 percent, the study’s 17 sample size was sufficiently large that the drug would still be 18 deemed effective. 19 Doc #31 at Nuvelo disclosed those assumptions to investors under a Doc #31 at 52; Doc #35-18, Exh L at 4. Doc #35-18, Exh L at 4. Plaintiffs allege those statements were insufficient and 20 had “no reasonable basis in fact because defendants did not know 21 how many patients avoided open surgery for thirty days as a result 22 of the catheter insertion breaking up the clot.” 23 Plaintiffs argue that defendants’ disclosure of the assumed placebo 24 rate is “irrelevant” because “investors did not have sufficient 25 information to understand that the placebo rate, and hence the 26 power calculations, lacked a reliable basis.” 27 28 Doc #31 at 26. Doc #44 at 12. Plaintiffs argue that disclosing the assumption of a 5 to 10 percent placebo response was misleading because it conveyed a 21 1 sense of certainty in a situation where the observer effect permits 2 none: “Far from disclosing that the lack of a placebo arm together 3 with the risk of catheter-caused clot busting rendered the Phase 2 4 results potentially misleading and the power calculations 5 unreliable, this statement assured investors that any placebo 6 effect was known to be relatively minor and would have little 7 impact on trial results.” 8 United States District Court For the Northern District of California 9 Doc #44 at 12. Plaintiffs’ argument goes too far. merely an assumption. An assumption is By disclosing that the placebo rate was 10 based on assumptions rather than on data, defendants disclosed that 11 they were most definitely not certain whether alfimeprase alone was 12 causing patients to avoid surgery in the phase 2 trials. 13 Defendants put reasonable investors “on notice” that some variable 14 other than alfimeprase might account for the results in the trial. 15 See Brody v Transitional Hospitals Corp, 280 F3d 997, 1007 (9th Cir 16 2002). 17 Plaintiffs insist that providing any assumption at all 18 was necessarily false and misleading in light of defendants’ 19 awareness of the observer effect: 20 of a low placebo rate was directly contrary to their knowledge that 21 the mere insertion of a catheter would disrupt clots in patients 22 receiving placebo.” 23 false. 24 number of patients avoided surgery as a result of the drug delivery 25 system rather than alfimeprase; plaintiffs do not allege that 26 defendants knew this would occur in many patients or significantly 27 more than 5 to 10 percent of patients. 28 disclosures are entirely consistent with what plaintiffs allege “defendants’ stated assumption Doc #44 at 12. On its face, this argument is Plaintiffs allege that defendants knew that some uncertain 22 Accordingly, defendants’ 1 they knew. United States District Court For the Northern District of California 2 In essence, plaintiffs complain that defendants failed to 3 disclose a risk whose magnitude was uncertain —— the risk that the 4 catheter, rather than the alfimeprase, broke up the clot. 5 defendants need not go into all the details behind their placebo 6 assumptions. 7 who report information from imperfect studies include exhaustive 8 disclosures of procedures used, including alternatives that were 9 not utilized and various opinions with respect to the effects of But The securities laws do not “require that companies 10 these choices on the interpretation of the outcome data.” 11 Scios Nova, Inc, 1996 WL 539711 (N D Cal Sept 18, 1996) (Patel, J). 12 In Padnes, the defendant did not disclose that its phase 2 trials 13 were not double-blinded and were not fully randomized, among other 14 defects. 15 is analogous to the problem at issue here because single-blinded 16 tests allow for a type of observer bias to distort the results. 17 Padnes held that only with the benefit of hindsight was it possible 18 to determine that the failure to double-blind the study made the 19 phase 2 tests unreliable. 20 MedImmune, Inc Sec Litig, 873 F Supp 953, 966-67 (D Md 1995). 21 same is true here. 22 had responded to the catheter rather than alfimeprase. 23 disclosed that they assumed 5 to 10 percent of patients would 24 respond to some variable other than alfimeprase. 25 reveals that the effect of the catheter was significantly larger 26 than that assumption. 27 28 See Padnes at *5. Padnes v The failure to double-blind the study See Padnes at *5, citing In re The Defendants allegedly knew that some patients Defendants Only hindsight Accordingly, plaintiffs have not alleged with particularity that defendants’ statements regarding the phase 2 23 1 trials for alfimeprase in PAO patients were misleading. 2 3 B United States District Court For the Northern District of California 4 Plaintiffs allege a second undisclosed risk relating to 5 another potential use for alfimeprase. 6 treatment of blood clots that develop inside or around catheters 7 that are permanently implanted in patients’ veins. 8 million catheters are placed in patients in the United States each 9 year to deliver chemotherapy, nutritional support, antibiotics and 10 blood products.” 11 known as catheter occlusions, or COs. 12 Doc #31 at 20. This second use was the “An estimated 5 Blood clots in catheters are Id at 5. The alleged omissions regarding CO are related to phase 3 13 testing. 14 —— codenamed SONOMA-2 —— in September 2005. 15 began enrollment in its second phase 3 trial for CO —— codenamed 16 SONOMA-3 —— in February 2006. 17 announced that SONOMA-2 had failed and that it was suspending 18 enrollment in SONOMA-3. 19 $19.55 to $4.05. 20 Nuvelo began enrollment in its first phase 3 trial for CO Id. Id at 22. Nuvelo On December 11, 2006, Nuvelo Id at 32–33. The share price dropped from Id at 32. Plaintiffs do not allege any observer effects in the use 21 of alfimeprase to treat CO. 22 defendants secretly imposed extraordinarily strict efficacy 23 requirements in the phase 3 testing. 24 defendants had agreed with the FDA to impose “a much more stringent 25 p-value requirement on Nuvelo to demonstrate success at a 26 statistical significance level that was forty times more stringent 27 than what the market believed.” 28 Instead, plaintiffs allege that Plaintiffs allege that Doc #31 at 6. Plaintiffs allege that the phase 3 trial failed because 24 1 the results were not statistically significant. 2 allege, statistical significance is expressed in terms of a “p- 3 value,” which is a statistical measure of the probability that a 4 difference between groups in a clinical trial happened by chance. 5 Statistical significance consisting of a p-value of less than 0.05 6 has traditionally been considered convincing evidence by the FDA.” 7 Doc #31 at 16. 8 it is that the results of the study are meaningful and not a fluke. United States District Court For the Northern District of California 9 As plaintiffs The lower the p-value of a study, the more likely Plaintiffs allege that the phase 3 trial failed to meet 10 the p-value imposed by the FDA. 11 that the target p-value for alfimeprase was not the traditional FDA 12 0.05 number but rather a much lower (which is to say stricter) 13 number and that the failure to meet this atypically low number was 14 responsible for the drug’s failure. 15 allege defendants eventually disclosed that although the study had 16 a p-value of 0.022 —— within the FDA’s normal approval range —— 17 Nuvelo and the FDA had previously agreed to a p-value target of 18 0.00125. 19 demanding p-value, Nuvelo shut down the remaining phase 3 trials. 20 Id at 23–24. Doc #31 at 24. Plaintiffs allege In particular, plaintiffs Because SONOMA-2 did not meet that more Plaintiffs do not allege that defendants made any 21 specific misleading statements regarding the p-value for the CO 22 alfimeprase testing. 23 to disclose the ultra-low p-value requirement of 0.00125 was 24 misleading. 25 value requirement for alfimeprase was forty times more stringent 26 than normal (because 0.00125 x 40 = 0.05), investors would have 27 been more doubtful that alfimeprase could succeed in the phase 3 28 trials and gain FDA approval. Instead, plaintiffs allege that the failure Plaintiffs argue that had investors known that the p- Id at 22. 25 United States District Court For the Northern District of California 1 But the complaint does not account for a crucial 2 exception to the FDA’s normal p-value requirements. 3 usually requires two phase 3 trials, each with a p-value of 0.05. 4 If an applicant desires approval based on only one trial, the FDA 5 will require assurance that the single trial is not a fluke. 6 Doc 35-43, Exh Z at 16. 7 low p-value. 8 “more stringent” than the traditional p-value; the FDA would be 9 offering two equivalent paths to approval: either a single study at Id. The FDA See Accordingly, the FDA might impose a very In that instance, the lower p-value would not be 10 a low p-value or two studies at a higher p-value. 11 might wish to avoid the risk or expense of a second trial by 12 seeking regulatory approval based on a single study at phase 3, but 13 in order to past muster that single study must prove the drug’s 14 efficacy with greater certainty. 15 A drug company Plaintiffs ignore this relationship between p-values and 16 the number of phase 3 studies conducted. 17 alfimeprase to a p-value of 0.00125 across each of two studies, 18 then plaintiffs would be correct that the standard was far more 19 stringent than normal and that the failure to disclose the abnormal 20 p-value would be misleading. 21 alfimeprase to a p-value of 0.00125 for a single phase 3 study, 22 then the omission of the p-value would not be misleading because 23 the FDA would accept those study results just as eagerly. 24 relationship between the number of studies conducted and the 25 required p-level was not a mystery to the market, as it appeared in 26 the FDA’s guidelines. 27 28 Had Nuvelo been holding But had Nuvelo been holding This Id. Plaintiffs allege no facts that support an inference that investors believed Nuvelo was conducting two phase 3 trials, each 26 United States District Court For the Northern District of California 1 at a p-value of 0.00125. 2 that defendants actually planned to perform two trials at 0.00125. 3 The complaint and the statements cited therein suggest the opposite 4 —— that Nuvelo wanted to conduct either two trials with the normal 5 p-value or a single trial with the stricter p-value. 6 quotes Levy as stating that Nuvelo was considering two phase 3 7 trials, each with a p-value requirement of 0.05. 8 Love’s statement that Nuvelo “had an agreement with the FDA” 9 regarding “the more stringent p-value required for a single pivotal And plaintiffs allege no facts suggesting The complaint Doc #31 at 24–25. 10 trial” (Id at 22, 24) suggests only that if the first trial 11 (SONOMA-2) could hit an ultra-low p-value, then Nuvelo could go to 12 the FDA with its impressive results and argue that a second phase 3 13 trial would be unnecessary. 14 lost its chance to win approval with only one phase 3 trial, even 15 though it could have pushed on in hopes that SONOMA-3 would also 16 achieve a p-value of less than 0.05, thereby meeting the FDA’s 17 threshold. 18 suggests Nuvelo intended all along to abandon SONOMA-3 and pin its 19 hopes on SONOMA-2 hitting the ultra-low p-value, and plaintiffs 20 allege no facts supporting that claim. 21 analysts cited in the complaint voiced any outrage or shock that 22 the p-value in the phase 3 tests was supposedly forty times more 23 stringent than normal. 24 plaintiffs’ contention that the failure to disclose the p-value up 25 front was misleading. 26 Id at 24–25. When SONOMA-2 came in at 0.022, Nuvelo No reading of defendants’ statements And none of the market The silence on that score undermines Accordingly, plaintiffs have not pled with particularity 27 that the omission of the p-value was misleading. 28 not alleged with particularity that a p-value of 0.05 for two 27 Plaintiffs have 1 trials “differs in a material way from” the p-value and number of 2 trials that Nuvelo actually used. 3 Technology, No 06-15454, slip op at 6394 (9th Cir June 5, 2008), 4 quoting Brody, 280 F3d at 1006. 5 particularity that the difference between using a p-value of 0.05 6 for two trials and using a p-value of 0.00125 for one trial is 7 material. 8 Nuvelo used any combination of p-value and number of trials other 9 than one of those two options. See Whiting v Applied Signal Plaintiffs have not alleged with And plaintiffs have not alleged with particularity that United States District Court For the Northern District of California 10 11 12 C Plaintiffs third alleged misleading omission also relates 13 to CO phase 2 trial p-values. 14 business team imposed an even stricter efficacy requirement whereby 15 Nuvelo would market alfimeprase to treat CO only if alfimeprase 16 substantially outperformed competition from off-label thrombolytic 17 drugs, “even if the drug was otherwise qualified for FDA approval.” 18 Doc #31 at 6. 19 ‘target product profile’ which would be necessary to meet in order 20 for [Nuvelo] to market alfimeprase for CO, such that [Nuvelo] would 21 not proceed to market alfimeprase for that indication if the trial 22 results did not meet that profile, even if the drug was otherwise 23 qualified for FDA approval.” 24 Plaintiffs allege that Nuvelo’s Plaintiffs allege that “Nuvelo had an undisclosed Id. Acknowledging that alfimeprase might receive FDA approval 25 if SONOMA-3 replicated the results of SONOMA-2, plaintiffs allege 26 that defendants terminated SONOMA-3 because, as Levy disclosed at 27 the end of the class period, defendants believed alfimeprase 28 “likely would not meet the target product profile [they] believe[d] 28 1 necessary for commercial success in the marketplace.” 2 Levy further stated, “Clearly, the marketplace today is only around 3 $100 million and to be successful, you really have to have a very 4 good product profile.” 5 alfimeprase would need to be an especially effective treatment in 6 order to beat competition from off-label drugs. 7 Accordingly, plaintiffs claim that defendants harbored secret 8 criteria for judging the marketability of alfimeprase, criteria 9 which were exceptionally high and which made investment in Nuvelo United States District Court For the Northern District of California 10 Id at 25. Id at 24–25. Plaintiffs allege that Id at 6. more risky than investors were led to believe. 11 The first flaw in plaintiffs’ theory is the lack of 12 particularized allegations in the complaint. 13 details of the supposed “target product profile.” 14 there is no factual basis from which to infer that the differences 15 between the “target” product profile and the product profile 16 necessary for FDA approval were material. 17 Plaintiffs allege no Accordingly Plaintiffs state in their opposition to defendants’ 18 motion to dismiss that the “target product profile” was simply a p- 19 value requirement of 0.001. 20 allegation of fact does not appear in the complaint, and plaintiffs 21 may not plead new facts via motion practice. 22 of the “target product profile” were disclosed after the end of the 23 class period, raising loss-causation issues —— the end of the class 24 period should coincide with the revelation of the fraud to the 25 market. 26 had been disclosed earlier and alleged in the complaint, plaintiffs 27 allege no facts from which to infer that a p-value of 0.001 differs 28 in a material way from a p-value of 0.00125. Doc #44 at 26 & n16. To begin, that Moreover, the details But even if details regarding the target product profile 29 The court can 1 calculate that the difference is 0.00025, but the court has no 2 context in which to interpret that number. 3 with particularity why that difference is meaningful rather than 4 trivial. 5 earlier disclosure of this internal target product profile would 6 have affected the stock price materially. United States District Court For the Northern District of California 7 Plaintiffs do not state There are no facts alleged sufficient to prove that Perhaps more fundamentally, the risk that a product may 8 receive federal approval but not the marketplace’s acceptance 9 should be obvious. Plaintiffs do not explain how defendants 10 “affirmatively create[d] an impression of a state of affairs that 11 differ[ed] in a material way from the one that actually exist[ed].” 12 Brody, 280 F3d at 1006. 13 successful commercialization would be a likely or automatic result 14 of FDA approval. Nowhere did defendants suggest that 15 16 D 17 Finally, plaintiffs allege that defendants failed to 18 disclose the risk that competition from off-label use of other 19 drugs and mechanical clot-busting techniques would render the 20 market for alfimeprase smaller than they led the market to believe. 21 Doc #31 at 36–37, 42, 46, 50, 53, 57. 22 this undisclosed risk rendered misleading defendants’ statements 23 about the potential market share for alfimeprase if it were to win 24 regulatory approval. 25 According to plaintiffs, There are significant problems with this final 26 contention. 27 these concerns apply. 28 there are three statements presented in the complaint that are First, plaintiffs do not specify to which statements See Doc #31 at 34–59. 30 Putting that aside, United States District Court For the Northern District of California 1 candidates. 2 defendant Love stated during a conference call with investors, “So 3 I think people really do see this as a transformational therapy, 4 much like serotonin reuptake inhibitors were in Depression * * * .” 5 Doc #35-3, Exh B at 7. 6 defendant Levy stated, “In the case of acute PAO, there is no 7 currently available FDA approved drug making it an unmet medical 8 need and the Phase 2 data for alfimeprase has demonstrated that it 9 has a real potential to transform the treatment of this condition.” On January 5, 2006, the first day of the class period, In a February 27, 2006 conference call, 10 Doc #35-4, Exh D at 6. 11 call, defendant Love stated, “Our partnership with Bayer is 12 predicated on a belief that alfimeprase has the potential to 13 transform treatment for the more than 10 million people in the 14 western world who suffer from blood clot related conditions each 15 year * * * .” 16 And in the same February 27 conference Id at 8. None of these three statements is specifically alleged to 17 be false. 18 Love referred did not see alfimeprase as transformational, that 19 there were other FDA approved drugs for acute PAO to compete with 20 alfimeprase or that the partnership with Bayer was predicated on 21 something different. 22 these statements together create the impression that alfimeprase 23 will have no market competition, which is allegedly false because 24 of competition from off-label use of other drugs and mechanical 25 clot busting techniques. 26 The complaint does not allege that the people to which Instead, the complaint seems to allege that Moreover, plaintiffs have not alleged sufficient facts to 27 indicate that these statements are misleading. 28 use is “commonplace in modern medical practice and ubiquitous in 31 First, off-label United States District Court For the Northern District of California 1 certain specialties.” 2 F3d 331, 333 (D C Cir 2000). 3 fraudulently stated that there would be no competition from off- 4 label uses of other drugs, defendants cannot be said to have misled 5 the market by failing to disclose information that is generally 6 understood. 7 disclosed that off-label drugs were being used to treat PAO. 8 #35-6, Exh E at 10. 9 alleged facts sufficient to demonstrate that defendants made Washington Legal Foundation v Henney, 202 Absent an allegation that defendants Second, in its March 15, 2006 Form 10-K, Nuvelo Doc Based on that disclosure, plaintiffs have not 10 misleading or inaccurate statements about the potential market size 11 of alfimeprase or potential competition from off-label uses of 12 other drugs. 13 14 15 III Additionally, defendants’ alleged misstatements about the 16 “path to regulatory approval” and potential for “transformative” 17 commercial success are shielded by the PLSRA safe harbor provision. 18 The alleged misstatements about the likelihood of future success at 19 phase 3 trials, regulatory approval, or commercialization of 20 alfimeprase all fit the definition of forward-looking statements 21 under the PLSRA. 22 looking statements as including “a projection of revenues,” “plans 23 and objectives of management” and “assumptions underlying or 24 relating to” the above); Noble Asset Management v Allos 25 Therapeutics, Inc, 2005 WL 4161977, at *9 (D Col 2005) 26 (“Projections about the likelihood of FDA approval are forward- 27 looking statements” because they are predictions of the “Company’s 28 plans for its product * * * .”). 15 USC § 78u-5(i)(1)(A)-(D) (defining forward- 32 United States District Court For the Northern District of California 1 As such, these forward-looking statements are not 2 actionable because they meet the requirements for protection under 3 the PLSRA safe harbor provision. 4 “shall not be liable” with respect to any forward-looking statement 5 that is “identified as a forward-looking statement, and is 6 accompanied by meaningful cautionary statements identifying 7 important factors that could cause actual results to differ 8 materially from those in the forward-looking statement.” 9 78-u-5(c)(1). Under that provision, a defendant 15 USC § Defendants identified their statements about phase 3 10 trials, regulatory approval and commercial success as “forward- 11 looking.” 12 statements at issue contained the usual cautionary statements. 13 See, e g, Doc #35-2, Exh A at 3. 14 language “boiler-plate risk warnings,” Doc #40 at 37, language of 15 this sort generally suffices to invoke the safe harbor of section 16 21E as long as it is “precise and relate[s] directly to the 17 forward-looking statements at issue.” 18 Securities Litigation, 311 F Supp 2d 857, 882 (ND Cal 2004). 19 Statements in recent SEC filings, incorporated by reference in 20 defendants’ projections, included among the risk factors possibly 21 affecting forward-looking projections: 22 lengthy, complex, and expensive processes with uncertain results. * 23 * * Results attained in pre-clinical testing and early clinical 24 studies, or trials, may not be predictive of results that are 25 obtained in later studies. * * * If the clinical trials for a drug 26 candidate are unsuccessful, we will be unable to commercialize the 27 drug candidate.” 28 Teamsters Local Nos 175 & 505 Pension Trust Fund v Clorox Co, 353 See, e g, Doc #35-2, Exh A at 3. Additionally, the While plaintiffs label such In re Copper Mountain “Clinical trials are Doc #35-26, Exh R at 20–21. 33 See Employers United States District Court For the Northern District of California 1 F3d 1125, 1133 (9th Cir 2004) (relying on similar language in SEC 2 filing for cautionary language rendering the safe harbor 3 applicable). 4 included the precise problem that went wrong and caused Nuvelo to 5 fail to replicate its phase 2 trial results at phase 3 (Doc #40 at 6 37), but the law does not require specification of the particular 7 factor that ultimately renders the forward-looking statement 8 incorrect. 9 1999); Noble Asset Management, 2005 WL 4161977, at *9 (holding that Plaintiffs argue that none of these risk factors See Harris v IVAX Corp, 182 F3d 799, 807 (11th Cir 10 general warnings about phase 3 trial failures were sufficient to 11 put investors on notice about uncertainties surrounding FDA 12 approval). 13 future success in phase 3 trials, regulatory approval and 14 commercialization are not actionable for the additional reason that 15 they are shielded by the safe harbor provision. Accordingly, the alleged misstatements relating to 16 17 IV 18 Because plaintiffs have failed to: (1) link defendants’ 19 alleged misstatements and omissions with the cause of plaintiffs’ 20 alleged loss as required by Dura Pharmaceuticals, (2) allege that 21 defendants’ statements were misleading or (3) demonstrate that 22 defendants’ statements were not shielded by the safe harbor for 23 forward-looking statements, the court GRANTS defendants’ motion to 24 dismiss. 25 consolidated complaint not later than December 31, 2008. 26 of the possibility that plaintiffs may be able to allege defendants 27 had knowledge of problems with the phase 2 trials that, although 28 insufficient to put defendants to a duty to disclose these problems Plaintiffs are granted leave to file an amended 34 Because 1 prior to the class period, made one or more statements during the 2 class period actionable, this dismissal is without prejudice. 3 Should plaintiffs amend the complaint, the court strongly urges 4 that they heed the directive of Rule 8 to plead “a short and plain 5 statement” of their claim without the distended evidentiary detail 6 that characterizes the pleading this order dismisses, but instead a 7 pleading which directly (and one hopes succinctly) addresses the 8 causation and other difficulties discussed in this order. 9 United States District Court For the Northern District of California 10 IT IS SO ORDERED. 11 12 VAUGHN R WALKER United States District Chief Judge 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 35
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