This securities fraud action , originally filed on August 8,2003, and later amended,arises from false and misleading statements and omissions by CV Therapeutics, Inc. (“CVT” or the “Company”) and its senior executives regarding the likelihood that the FDA would approve CVT’s new anti-anginal drug Ranexa in 2004, including known issues with respect to the purported safety and efficacy of the drug. Lead Plaintiff has asserted claims under §§10(b) and 20(a) of the Securities & Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, on behalf of a proposed class of investors who purchased CVT’s publicly-traded securities between December 30, 2002 and December 5, 2003 (the “Class Period”). Named as defendants in this action are CVT and its two top officers: Chairman and Chief Executive Officer, (“CEO”) Louis Lange and Senior Vice President and Chief Financial Officer, (“CFO”) Daniel Spiegelman.
FACTUAL BACKGROUND
Before and during the Class Period, CVT had only one product that was anywhere near FDA approval and marketability, the anti-anginal drug Ranexa. Defendants submitted the New Drug Application (“NDA”) for Ranexa to the FDA in December 2002 and told investors they expected FDA approval by early 2004. Amened Complaint ¶87. Defendants knew, however, that Ranexa was plagued with significant safety and efficacy problems, none of which could be resolved quickly or easily. These problems were evident both in defendants’ own clinical trials and in the FDA’s extensive communications with defendants. Rather than inform the investors of the true status of Ranexa’s development, defendants made false and misleading public statements in which they hid negative clinical trial results and denied that the FDA had repeatedly expressed concerns about Ranexa’s safety and efficacy and the quality of the studies. Defendants falsely represented that Ranexa was primed for imminent FDA approval as a first-line therapy for use in the general population. With investors in the dark, defendants raised over $30 million from equity lines of credit, $100 million in debenture offering and planned a $300 million mixed shelf-offering. ¶¶51-56, 108, 111.
Defendants hid the fact that clinical studies of Ranexa and the resulting data were known to be deficient and did not adequately demonstrate Ranexa’s safety or efficacy. The deficiency resulted in part because defendants used small and non-diverse populations in the studies. ¶¶73, 85; Ex. 3. In certain key trials, defendants tested only a small number of patients, leading to inconclusive results. ¶85; Ex. 3. Defendants also limited their testing to a population of 98% Caucasian males. ¶¶73, 85; Ex. 3. There were no adequate studies of the drug on women or on non-Caucasian patients. ¶¶73, 85; Ex. 3. In order for the drug to be approved, additional testing would be necessary to show Ranexa’s safety and efficacy in the general population.
Furthermore, within the limited population tested, there were incidents of a potential life-threatening side-effect, QT interval prolongation. ¶¶63-64. QT interval prolongation is well-known to be an FDA red flag and has led to the denial of other drug applications, as well as the withdrawal of approved drugs.
Defendants deceptively downplayed the QT effects shown in the Ranexa studies in public statements throughout the Class Period. ¶¶62-66, 88-90, 93-94, 107, 109, 115-16; Ex. 30-35. Defendants presented misleading summaries of the test results and failed to disclose that the FDA had continually voiced concerns about Ranexa’s QT effect to defendants since 2000. ¶¶67-71, 85; Ex. 4 at 13; Brf. Ex. A. For example, in February and April 2003 defendants told investors that there were only five patients in the trials with QT intervals over 500 msec, but the data released in the FDA materials on December 9, 2003 disclosed that there were 53 patients with QTc over 500 msec using the Bazett correction and 20 using the Fridericia correction. ¶64, 89, 95; Ex. 20 at 125.
Not surprisingly, the FDA warned defendants that major obstacles to FDA approval existed. The FDA began voicing its concerns to defendants as early as July 2000. ¶67; Ex. 4 at 13.. The FDA held subsequent meetings and communicated with defendants in 2001, 2002 and 2003 expressing serious reservations about the quality and scope of the Ranexa studies and resulting data, and the unresolved QT prolongation issue. ¶¶67-71; Ex. 4 at 13.
In non-public communications, the FDA warned that additional studies would be needed to resolve these concerns. Before the Class Period on August 13, 2002, the FDA told defendants that “[a]dditional data were needed to verify the efficacy of the drug” and that “the Agency believed that additional safety data were needed.” ¶¶67-68; Ex. 4 at 13. The FDA also told defendants on numerous occasions that the studies were based on such a limited population that they could not conclusively show that Ranexa met safety and efficacy guidelines necessary for FDA approval. ¶¶73, 85, 86; Brf. Ex. A, Ex. 3. In its October 30, 2003 letter to defendants, the FDA also cited the lack of data on female patients and stated “future clinical studies should further characterize this apparent gender difference.” ¶85; Ex. 3 at 2. Defendants knew that new studies would be necessary to satisfy the FDA, yet they denied this to the public and continued to state that they expected Ranexa’s approval in 2004.
The FDA further informed defendants that they should present Ranexa for usage only in patients intolerant to other anti-anginal drugs already on the market, rather than as a first-line therapy. Ex. 4 at 13. On October 10, 2002, the FDA recommended that defendants present the drug strictly as a second-line therapy due to the recurring safety concerns surrounding Ranexa. Ex. 4 at 13; Ex. 21 at 8. In private discussions with the FDA, defendants downgraded Ranexa’s proposed use for only those patients resistant to other available anti-anginals. ¶¶65, 68-69; Ex. 25 at 2; Brf. Ex. A. Defendants knew that their clinical studies could not support Ranexa as a first-line therapy because the FDA repeatedly told them the testing was insufficient to support such broad usage. However, defendants never revealed the restricted use to investors because it would have revealed that Ranexa’s potential market was much smaller than all chronic angina patients, as defendants had represented.
Yet defendants’ studies did not support even this restricted use. In a July 17, 2003 Discipline Review letter, the FDA pointed to the deficiency of clinical data in that “[n]either pivotal trial specifically studied this group [of patients intolerant of other anti-anginals].” Brf. Ex. A. Despite the internal decision to present the drug for second-line approval only, defendants kept giving the public the false impression that Ranexa’s market would be the 6.4 million chronic angina sufferers, rather than the small percentage of anginal patients who cannot tolerate other available drugs. ¶¶65, 87, 90; Ex. 29, 42. Defendants not only failed to disclose the FDA’s repeated concerns, they denied having received any indications that additional studies would be necessary for FDA approval. They also continued to allow investors to believe the drug would gain approval as a first-line therapy. ¶¶65, 87, 90.
Moreover, the FDA raised the issue of Ranexa’s QT prolongation effect numerous times, notifying defendants it was a serious issue that had yet to be satisfactorily resolved. ¶¶66-73, 85; Ex. 4 at 13. As early as June 25, 2000, the FDA told defendants that “QT prolongation remained a major concern and the company would have to prove that the clinical benefit outweighed the safety risks.” ¶¶67-68, 85; Ex. 4 at 13. The FDA’s warnings about the unresolved QT issue were repeated to defendants on August 13, 2002, July 17, 2003 and October 30, 2003. Ex. 4 at 13; Brf. Ex. A; Ex. 3. Again, instead of disclosing the FDA’s repeated concerns to the investors, defendants made misleading public statements that QT prolongation was not a serious issue saying for example, that QT would not “be a particular problem for ultimate review by the agency” but would only be a “discussion item” and that the QT effect was not really a risk but “a perception of a risk” to reassure investors that Ranexa would soon be on the market. ¶¶66, 88, 89, 93-95, 101, 107, 109, 115-116; Ex. 30, 34, 35. Defendants’ failure to inform investors about the FDA’s consistent warnings created the misleading impression that Ranexa’s development status was much better than it actually was.
In the summer of 2003, defendants excitedly announced that the FDA scheduled review of Ranexa by the Cardio-Renal Advisory Committee at their September 2003 meeting. ¶¶74, 99-101. In truth, defendants were anything but excited and knew that the meeting would not take place. The meeting was never listed on the Federal Register and, given the numerous unaddressed concerns raised by the FDA, defendants knew that any such meeting would be disastrous and they were not ready. ¶¶74-84.
On July 17, 2003, defendants received a Discipline Review letter from the FDA, which once again outlined numerous unresolved concerns about the Ranexa studies, issues which would ultimately lead to the FDA’s refusal to approve the drug. ¶¶70, 84; Brf. Ex. A. The July 17, 2003 letter included comments on QT prolongation issues and sufficiency of the database used in the various trials. Defs’ Decl. Ex. J. On the same day, defendants held a conference call with investors but made no mention of the FDA’s letter or their warnings. ¶¶101-102; Ex. 42. Instead, defendants brushed over the significance of the QT issue and reiterated the misleading notion that Ranexa would be on the market in 2004 as a first-line therapy. Id.
On August 1, 2003, defendants announced that Ranexa in fact would not be reviewed at the September Advisory Committee meeting. ¶103. During an August 4, 2003 investor conference call, with the Discipline Review letter in hand, defendant Lange misleadingly stated that “very little had changed other than the September panel being canceled” and that they had received “nothing” from the FDA regarding QT. ¶105, Ex. 27. In contrast to the positive story defendants fed the public, internally they scrambled to respond to the FDA’s letter by supplementing the Ranexa NDA. ¶¶70-84. Defendants filed the NDA supplement on September 13, 2003, but never revealed doing so to the public.
On October 30, 2003, the FDA sent defendants an “Approvable Letter” declining to approve Ranexa. ¶85; Ex. 3. The FDA repeated the same serious problems with the Ranexa studies and trial results as had been previously discussed with defendants. ¶85; Ex. 3. Clearly not satisfied with the data presented, the FDA informed defendants in the Approvable Letter that, given the QT effects shown in the Ranexa trials and the availability of other drugs on the market that did not cause this potential side-effect, “there needs to be a clear reason to approve a therapy with what appears to be an additional, possibly life-threatening risk.” ¶85; Ex. 3 at 2. In a press release, defendants released only excerpts of the letter, omitting material in formation that would have alerted investors of the gravity of the FDA’s concerns and the fact that 2004 approval was highly unlikely. ¶¶85; 113; Ex. 28.
Throughout the Class Period, defendants maintained a consistent pattern. Despite the results of their own studies and the FDA’s continued warnings, defendants spun only positive tales when discussing the drug’s safety, efficacy and future marketability with the investing public. Defendants were aware that Ranexa had a potentially life-threatening side effect QT prolongation, and that Ranexa had not been clinically tested to support it as a first-line anti-anginal therapy. They also were notified many times that the FDA considered these problems significant and that additional studies were necessary to address the FDA’s concerns. Defendants had every indication that their NDA would not gain FDA approval in the near future. To the public, however, defendants misleadingly made Ranexa appear ripe for immediate FDA approval.
Defendants Lange, CVT’s Chairman and CEO, and Spiegelman, CVT’s Senior Vice President and CFO, had actual knowledge (1) that Ranexa would not be approved in 2004, (2) that additional studies would be required before the FDA approved the drug, (3) that Ranexa would not be approved as a first-line therapy, (4) that Ranexa’s QT effect was an obstacle to FDA approval, and (5) that there was no reason to believe the September Advisory Committee meeting would actually occur.
All of these facts were shown in defendants’ studies. Furthermore, the FDA regularly communicated these problems to defendants before and during the Class Period. Lange and Spiegelman, as CVT’s top executives, were well aware of Ranexa’s progress, in both the clinical trials and the FDA’s review of the drug. ¶¶20, 22, 24. Ranexa was CVT’s only drug with any potential for FDA approval in the near future. ¶50. The survival of CVT and the livelihoods of the individual defendants depended on the public perception that Ranexa was moving towards marketability as planned. ¶¶50-57.
Both Lange and Spiegelman made express public statements misrepresenting Ranexa’s development was on a much better track than it actually was. ¶¶87, 88, 90, 91, 93, 94, 96, 99, 100, 101, 103, 105, 109, 113. Taking advantage of their false statements, defendants raised millions of dollars for CVT while the public remained unaware of the problems linked to Ranexa.
On December 8, 2003, the day before the Cardio-Renal Advisory Committee was to review Ranexa, the FDA released internal documents regarding the Ranexa review revealing many of the true facts about the studies and the FDA’s warnings to defendants, all of which defendants had tried so hard to cover up. To date, Ranexa has not yet been approved by the FDA.
III. PROCEDURAL HISTORY
Plaintiffs’ initial consolidated complaint was filed on January 20, 2004, shortly after the appointment of lead plaintiff. Defendants subsequently moved to dismiss. After only one round of briefing and oral argument, on August 5, 2004, the Court upheld the complaint in its entirety, denying defendants’ motions as to all but two individual defendants.
Discovery began in September 2004 with the parties exchanging initial disclosures. Also, in September, plaintiffs served their first set of document requests. Subsequent requests followed in October 2004 and January 2005. Defendants served their first document requests in November 2004. Although the parties agreed to enter into a protective order, they disputed the terms of the order and briefed the issue for the Court. The Court ruled on the form of the protective order on December 3, 2004. On the same date, the Court resolved discreet issues regarding scope of discovery requests. The proper format of electronic discovery was separately briefed and is still pending.
Lead plaintiff has produced all non-privileged documents responsive to defendants’ document requests. Defendants deposed Crossen on January 21, 2005. Plaintiffs’ motion for class certification will be filed on February 11, 2005.
Court ordered deadlines are as follows:
February 4, 2005 Deadline to produce documents
February 11, 2005 Deadline for class certification
March 18, 2005 Hearing on motion for class certification
June 24, 2005 Deadline to complete depositions
July 8, 2005 Cut-off for non-expert discovery
July 29, 2005 Deadline for the designation of experts (supplemental designations due
September 26, 2005)
September 23, 2005 Deadline to complete expert discovery
September 26, 2005 Deadline for supplemental expert designations
October 7, 2005 Deadline to file dispositive motions
November 11, 2005 Hearing on dispositive motions
December 13, 2005 Pretrial conference
January 16, 2006 Trial (estimated to last 16 days)
IV. KEY LEGAL AND FACTUAL ISSUES
In the Complaint, plaintiffs specifically identify defendants’ false and misleading public statements throughout the Class Period along with defendants’ ongoing communications with the FDA. Defendants made both affirmative misleading statements and material omissions regarding the FDA’s serious and repeated concerns about the drug’s safety and efficacy. The contents of the private FDA communications are in stark contrast to defendants’ falsely public statements about Ranexa’s development status.
As discussed in the Court’s order of August 5, 2004 denying defendants’ motion to dismiss, the key factual questions are whether defendants’ 27 challenged statements were false and misleading when they were made, thereby violating §10(b) and Rule 10b-5 of the Securities Exchange Act of 1934. The Court classified these statements into the following five categories for purposes of analysis:
(1) Allegedly false or misleading optimistic statements regarding the likelihood of FDA approval, which statements fraudulently downplayed the existence of certain problems, principally the significance of the QT prolongation issue;
(2) Allegedly false or misleading statements regarding the data in the NDA, principally data that related to QT prolongation;
(3) Allegedly false or misleading statements regarding the scheduling of the Advisory Committee meeting;
(4) Allegedly false or misleading statements regarding the Approvable Letter; and
(5) Allegedly false or misleading statements that failed to disclose the substance of ongoing discussions between CVT and the FDA between the time the NDA was filed and the time the FDA issued its Approvable Letter. Company’s Motion at 12-13 [footnote omitted].
Order Granting in Part and Denying in Part Defendants’ Motion to Dismiss; Granting in Part and Denying in Part Defendants’ Motion for Judicial Notice.
While the Court found that plaintiffs have demonstrated falsity of the statements, defendants argued that they can show:
1. a reasonable basis;
2. that representations of the NDA data were accurate;
3. that statements regarding cancellations of the September Advisory Committee Meeting were true;
4. that statements regarding the Approvable Letter were true; and
5. that the Company had no duty to disclose ongoing discussions between it and the FDA.
Separately, other key factual issues exist. Plaintiffs must prove culpability of the individual defendants Lange and Spiegelman. While Lange and Spiegelman are responsible for many of the 27 statements, plaintiffs must prove scienter. The Court held that taken as a whole, scienter was adequately alleged.
Defendants also argue that they are protected by the safe harbor and bespeaks caution doctrines. The Court held that these defenses do not apply to statements of historical facts known to defendants.
Defendants argue that they are not responsible for analysts’ statements. The Court held, however, that if defendants used analysts as conduits, they are liable.
Finally, defendants will argue that they are not liable as control persons. The Court held that this is an intensely factual issue, but defendants’ control person status is supported by the fact that Lange was CEO, Spiegelman was CFO, and both were responsible for communications with the market and signed the SEC filings.
DAMAGES
There is strong evidence of loss causation present. From the start of the Class Period, defendants had created the misleading impression that the Ranexa studies were strong, the FDA had not expressed any major concerns, and FDA approval was fully expected in 2004. Yet, on August 1, 2003, defendants were forced to admit that Ranexa would not be reviewed at the September Advisory Committee meeting as they had previously touted to the public. Upon this announcement, the stock price dropped 20.8%. ¶5. On October 23, 2003, when CVT publicly stated that the Advisory Committee would review Ranexa in its December meeting, the stock partially recovered and rose to $22.45 per share from $18.22. ¶¶6, 112. However, on October 30, 2003, the stock again dropped significantly, this time by 21.7%, on news of the FDA’s Approvable Letter, in which it declined to approve the drug. ¶¶7, 114. The stock price fell this much even though the public had heard only defendants’ abbreviated and glossed-over version of the letter’s contents. Finally, on December 8, 2003 when the FDA released its internal documents, CVT’s stock price plunged 27% as the public first learned the seriousness of the problems with Ranexa and the FDA’s multiple warnings to CVT. ¶¶10, 122.