Emerson v. Genocea Biosciences, Inc. et al
Filing
88
Chief Judge Patti B. Saris: MEMORANDUM and ORDER entered. The motion to dismiss (Docket No. 59 ) is ALLOWED. The motion to strike (Docket No. 69 ) is moot considering the Court's ruling. Associated Cases: 1:17-cv-12137-PBS, 1:17-cv-12168-PBS, 1:17-cv-12474-PBS(Geraldino-Karasek, Clarilde)
UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
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v.
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GENOCEA BIOSCIENCES, INC., WILLIAM
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D. CLARK, JONATHAN POOLE, and SETH
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HETHERINGTON.
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Defendants.
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________________________________________)
STEVEN EMERSON, individually and on
behalf of all others similarly
situated, SHELDON GRONER, BARRY HEANY,
MARK HANESS, SCOTT HARTMANN,
SATYA KUNAPULI, LIRIO FIOCCHI, RAUL
ZAMUDIO, and OMER YUKSEL,
Plaintiffs,
Civil Action
No. 17-12137-PBS
MEMORANDUM AND ORDER
December 6, 2018
Saris, C.J.
I. INTRODUCTION
Plaintiffs bring this class action against Genocea
Biosciences, Inc. and three of its corporate officers alleging
violations of Section 10(b) of the Securities Exchange Act of
1934 (the “Exchange Act”) and SEC Rule 10b-5 (Count I). The suit
also brings derivative claims against the officers, President
and Chief Executive Officer William D. Clark, Chief Financial
Officer Jonathan Poole, and Chief Medical Officer Seth
Hetherington, under Section 20(a) of the Exchange Act (Count
II). Plaintiffs allege that Defendants violated the Exchange Act
1
and Rule 10b-5 by making materially misleading statements to
investors about its clinical test results for a genital herpes
immunotherapy treatment called GEN-003.
Before the Court are (1) Defendants’ motion to dismiss all
counts for failure to state a claim (Docket No. 59) and (2)
Plaintiffs’ motion to strike certain exhibits and documents
submitted in support of Defendants’ motion to dismiss (Docket
No. 69). For the reasons stated below, after hearing,
Defendants’ motion to dismiss is ALLOWED. Because the Court only
relied on the uncontested documents, the Court need not rule on
the motion to strike the other documents.
II. FACTUAL BACKGROUND
Facts are drawn from Plaintiffs’ consolidated amended
complaint (“Compl.”)(Docket No. 49), as well as documents
uncontested by Plaintiffs.1 At this stage of the litigation, the
Court must “accept all factual allegations in the complaint as
true.” See Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551
U.S. 308, 322 (2007).
A. Genital Herpes Simplex Virus
Genocea is an early-stage biopharmaceutical company based
in Cambridge, Massachusetts, that researches, develops, and
seeks to bring to market T cell vaccines to treat infectious
1
See discussion of Plaintiffs’ motion to strike in Section III, below.
2
diseases. Compl. ¶¶ 2, 20. Throughout the proposed Class Period
– March 31, 2016 through September 25, 2017 – Genocea’s only
product candidate in active clinical development was a genital
herpes immunotherapy treatment called GEN-003. Id. ¶¶ 1, 3.
The genital herpes simplex virus (HSV-2) is an incurable
disease. Id. ¶ 30. After a patient is initially infected, the
herpes virus can remain latent in the body until it periodically
and sporadically reactivates; such reactivation is highly
variable in individual patients. Id. ¶¶ 30–31. While the virus
is active, it travels to a patient’s skin and mucus membrane in
a process known as “viral shedding.” Id. ¶ 30. During active
periods a patient may also develop genital lesions – sometimes
referred to as “outbreaks” – because of the virus. The virus can
be sexually transmitted during viral shedding even if the
patient appears “asymptomatic” i.e., does not appear to have
genital lesions. Id. ¶ 31.
At the time GEN-003 was in clinical trials, there were
already products on the market to treat genital herpes, either
through a daily pill to decrease the risk of transmission and
outbreaks or through pills that patients take once an outbreak
occurs to lessen the pain and discomfort. Id. ¶ 3. One drug,
acyclovir, is very effective in minimizing genital lesion
outbreaks and is “dirt cheap.” Id. ¶ 30. Defendants were
developing GEN-003 as a therapeutic vaccine, which could be
3
administered every six to twelve months, rather than daily, to
patients already infected with the virus. Id. ¶¶ 3, 27–28.
B. The Phase 2b Clinical Trial
Beginning in 2012, Genocea tested GEN-003’s efficacy in
three phased clinical trials – Phase 1/2a, Phase 2, and Phase
2b. Id. ¶ 4. During each of the phases, participants were
randomly assigned to receive either a dose of the vaccine or a
placebo. Id. ¶ 5. To establish a baseline viral shedding rate
for each patient, Genocea instructed trial participants to swab
their genital areas twice-daily for 28 days before receiving any
treatment. Id. ¶ 36. Participants then received three injections
at 21-day intervals of either the vaccine or placebo. Id. ¶ 42.
Immediately following the last injection, each participant
swabbed his or her genital areas again twice-daily for 28 days
(“immediately post-dosing”). Participants then swabbed again for
28 days at six months post-dosing, and twelve months postdosing. Id. ¶¶ 36, 42. Participants submitted their swabs for
viral shedding analysis, as well as forms with self-reported
lesion recurrences for analysis of genital lesion rates. Id.
¶36.
In anticipation of commercialization, Genocea announced a
Phase 2b trial which would test a modified version of GEN-003.
Id. ¶ 53. Up until this point, GEN-003 had been manually
formulated; the modified GEN-003 would be manufactured using a
4
commercial, scalable process. Id. ¶ 53. The goal of Phase 2b was
to ensure that the new formulation remained safe and effective,
and the primary end point for the phase was the reduction in
viral shedding rates immediately post-dosing. Id. ¶¶ 53-54.
Secondary endpoints of the Phase 2b trial included viral
shedding rate reductions at six and twelve months post-dosing
and reductions in genital lesion recurrence. Id. ¶¶ 54. The
Phase 2b trial contained two dose groups and one placebo control
group. Id. ¶ 55. The two doses were a 60 µg per protein/50 µg of
Matrix-M2 dose (“60/50 dose”), and a 60 µg per protein/75 µg of
Matrix-M2 dose (“60/75 dose”). Id. ¶ 55.
On September 29, 2016, Genocea revealed results for the
study’s primary endpoint, the Phase 2b viral shedding results
for immediately post-dosing. Id. ¶ 73. The company found that
the 60/50 dose produced a 40% reduction in viral shedding and
was statistically significant compared to both the baseline and
placebo. Id. ¶ 73. The 60/75 dose showed a 27% decrease in viral
shedding, but that result was not statistically significant
against either the baseline rate or placebo control group. Id. ¶
73. The press release stated, in part:
The study achieved its primary endpoint, with GEN-003
demonstrating a statistically significant reduction of
40 per cent in the rate of viral shedding in the 60 μg
per protein/50 μg of Matrix-M2 dose group compared to
both baseline and placebo. The viral shedding rate
reduction for this dose was consistent with its
5
performance at the same time point in a prior Phase 2
trial.
Id. ¶ 73. On an earnings call held the same day, CMO
Hetherington emphasized that GEN-003’s viral shedding rate
reduction results for Phase 2b were “consistent with the
statistically significant 41% reduction that we observed for
this dose group in the prior Phase 2 trial, this gives us great
confidence that the effect is robust and replicable.” Id. ¶ 75.
On November 3, 2016, CEO Clark announced that the six month
post-dosing viral shedding results for Phase 2b would be
released “later in the first half of 2017.” Id. ¶ 76. The six
month viral shedding results would not be released with the six
month genital lesion results; this differed from the reporting
schedule used previously in Phase 2. Id. ¶ 76.
On January 5, 2017, Genocea released the Phase 2b six month
post-dosing genital lesion results. Id. ¶ 57. At six months
post-dosing, two different GEN-003 doses produced statistically
significant reductions in genital lesion rates both against
participants’ baseline and the placebo control group. Id. ¶ 57.
The press release announced, “Positive 6-Month Results from GEN003 Phase 2b Clinical Trial – Trial meets statistical
significance vs. placebo for multiple clinical endpoints through
six months.” Id. ¶ 78. The release did not mention the Phase 2b
six month post-dosing viral shedding results. Id.
6
According to two confidential witnesses, at a company-wide
meeting following the announcement of the six month genital
lesion results, Clark announced that there was “no interest”
from potential funding partners in sponsoring the planned Phase
3 trials for GEN-003. Id. ¶ 60. Clark stated the company was
going to focus more heavily on its oncology program. Id. A
confidential witness also noted that layoffs occurred after the
meeting. Id.
SEC filings in February reiterated that the “viral shedding
rate reduction data at six months post dosing [was] expected in
the first half of 2017.” Id. ¶¶ 83–84.
On May 5, 2017, Genocea filed its first quarter 10-Q, which
summarized the genital lesion data that Genocea announced in
January 2017, describing it as “positive.” 5/5/2017 Form 10-Q,
Q1 2017 at 21. The company still did not disclose the Phase 2b
six month viral shedding results, but stated “viral shedding
rate reduction data at six-months and twelve-months post dosing
is expected in the middle of 2017.” Id. The form also reassured
investors that Genocea continued “to expect that GEN-003 will be
Phase 3-ready in the fourth quarter of 2017.” Compl. ¶ 85.
At a July 2017 internal “all hands” meeting, Clark
announced the Phase 2b twelve month post-dosing results for both
viral shedding and genital lesions. At twelve months postdosing, GEN-003 showed statistically significant reductions in
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genital lesions for patients against the baseline rate as well
as the placebo control group. Id. ¶ 57. However, the viral
shedding results were not positive. Participants in the 60/50
dose saw a 42% reduction in viral shedding; while this was
statistically significant against the baseline rate, it was not
statistically significant against the placebo group, which saw a
52% decrease in viral shedding. Id. ¶ 88. The placebo group had
performed better than the GEN-003 dose group in reducing viral
shedding rates. Id. ¶ 61.
Outraged by the results, company scientists questioned
Clark about the still undisclosed six month viral shedding
results. Id. According to a confidential witness present at the
meeting, scientist Scott Munzer asked Clark how the twelve month
placebo result “was even possible.” Id. Clark stated that he did
not have the answers and that Hetherington was better positioned
to answer. Id.
Hetherington responded that such results had
happened in other trials and that he would be looking into it
more. Id.
On July 24, 2017, the company issued a press release
announcing the Phase 2b twelve month post-dosing results. The
press release stated that the 60/50 dose of the Phase 2b
clinical trial had shown a statistically significant reduction
in the median genital lesion rate and that “[o]ther clinical
endpoints for this dose improved or were consistent with
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previously reported positive data.” Id. ¶ 87. The press release
language was silent as to the twelve month viral shedding
results; however, the chart included with the press release
disclosed the negative twelve month viral shedding results and
the placebo effect.
Slides distributed for the July 24, 2017 analyst call
announced: “GEN-003 Phase 3 on Track to Start by End of 2017,”
and “GEN-003 Strongly Positioned Ahead of Phase 3,” with a
footnote on each slide stating “[s]ubject to obtaining capital.”
Id. ¶ 89. Defendant Clark started the analyst call by stating:
“I am delighted to be sharing the most important readout from
our Phase 2b trial and maybe the most important data in
Genocea’s history as we look ahead to Phase 3.” Id. ¶ 90. On the
call, Hetherington explained the placebo effect seen in the
twelve month viral shedding data, stating:
We know that GEN-003 works by reducing viral shedding
and believe that variability in shedding data is a
consequence of the sporadic nature of shedding in the
small number of subjects provided [sic] data at this
time point. We do not expect that this will be a
factor in Phase 3 studies, given the much larger
sample size.
Id. ¶ 91. On July 24, 2017, after the announcement of the Phase
2b twelve month results, Genocea’s stock price increased to over
$6.00/share. See Docket No. 60 at 32.
During the proposed class period, Clark and Hetherington
did not sell any of their Genocea stock. Poole made two sales of
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Genocea common stock – the first on May 8, 2017 and the second
on July 24, 2017, the same day Genocea issued the Phase 2b
twelve month post-dosing results. Id. ¶¶ 101–102. Until the
summer of 2017, Poole had not sold any of the stock he had
acquired since joining the company in April 2014. Id. ¶ 100. On
May 8, Poole sold 6,213 shares of common stock. 5/10/17 Poole
Form 4. On May 10, 2017, Poole entered into a 10b5-1 plan
authorizing his broker to sell shares when Genocea’s stock price
hit $6.00/share. Ex. W, Rule 10b5-1 Trading Plan Between
Jonathan Poole and E*TRADE Securities LLC.
Finally, on September 25, 2017, after financial markets had
closed, Genocea issued a press release announcing that it would
not be moving forward with the planned Phase 3 clinical trial of
GEN-003. Instead, the company stated that it was “exploring
strategic alternatives for GEN-003, and “ceasing GEN-003
spending and activities and reducing its workforce by
approximately 40 percent.” Compl. ¶ 95. The next day, Genocea’s
share price fell $4.08, or 76.5%, to close at $1.25. Id. ¶ 96.
The Phase 2b six month post-dosing viral shedding results
have, to this date, never been publicly disclosed.
III. PLAINTIFFS’ MOTION TO STRIKE
Defendants filed over fifty exhibits and other documents in
support of their motion to dismiss. In response, Plaintiffs
moved to strike thirty-three of those documents. Ordinarily when
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ruling on a motion to dismiss under Rule 12(b)(6), “a court may
not consider any documents that are outside of the complaint, or
not expressly incorporated therein, unless the motion is
converted into one for summary judgment.” Alt. Energy, Inc. v.
St. Paul Fire & Marine Ins. Co., 267 F.3d 30, 33 (1st Cir.
2001). However, there are “narrow exceptions” to this rule “for
documents the authenticity of which are not disputed by the
parties; for official public records; for documents central to
plaintiffs’ claims; or for documents sufficiently referred to in
the complaint.” Watterson v. Page, 987 F.2d 1, 3 (1st Cir.
1993); accord Miss. Pub. Employees' Ret. Sys. v. Bos. Sci.
Corp., 523 F.3d 75, 86 (1st Cir. 2008).
Plaintiffs do not contest thirty documents filed by
Defendants.2 The uncontested documents include various press
releases, SEC filings, transcripts of investor calls and
published scientific articles referred to in the complaint.
Accordingly, the Court considered these documents for the
Plaintiffs do not contest fifteen documents which they agree are relied on
in the complaint: Exhibits E, H, I, L, M, P, Q, R, T, U, Y, Z, BB, and the
May 5, 2017 and August 9, 2017 Form 10-Qs. Docket No. 70 at 1 n.1. The other
unchallenged documents include Exhibit W, a medical dictionary definition
(Docket No. 60 at 4 n.3), Genocea’s stock chart price (Docket No. 60 at 32–
33), and selected Form 4s for Defendants Poole, Hetherington, and Clark, as
well as other Genocea leadership from April 12, 2014 through July 24, 2017. A
summarized list of these documents can be found in Appendix A to Defendants’
opposition to Plaintiffs’ motion to strike. See Docket No. 77-1, “Appendix
A”. Defendants also filed three exhibits with their reply brief which
Plaintiffs did not have an opportunity to contest. The Court also does not
consider these exhibits – Exhibits GG, HH, and II - when ruling on the motion
to dismiss.
2
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purposes of Defendants’ motion to dismiss. See Shaw v. Dig.
Equip. Corp., 82 F.3d 1194, 1220 (1st Cir. 1996) superseded by
statute on other grounds (holding a court “may properly consider
the relevant entirety of a document integral to or explicitly
relied upon in the complaint, even though not attached to the
complaint, without converting the motion into one for summary
judgment”). The Court did not consider other, contested exhibits
and documents Defendants submitted in ruling on the motion to
dismiss, so need not rule on the motion to strike.
IV. DEFENDANTS’ MOTION TO DISMISS
A. Standard of Review
Plaintiffs alleging violations of Section 10(b) must plead
“(1) a material misrepresentation or omission; (2) scienter, or
a wrongful state of mind; (3) in connection with the purchase or
sale of a security; (4) reliance; (5) economic loss; and (6)
loss causation.” In re Genzyme Corp. Sec. Litig., 754 F.3d 31,
40 (1st Cir. 2014). Rule 9(b) requires a plaintiff “alleging
fraud or mistake” to “state with particularity the circumstances
constituting fraud or mistake.” Fed. R. Civ. P. 9(b).
Additionally, under the Private Securities Litigation Reform Act
(“PSLRA”) the complaint must “specify each statement alleged to
have been misleading” as well as the “reason or reasons why the
statement is misleading.” 15 U.S.C. § 78u–4(b)(1). The PSLRA
also requires plaintiffs to “state with particularity facts
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giving rise to a strong inference that the defendant acted with”
scienter. 15 U.S.C. § 78u-4(b)(2)(A); see also ACA Fin. Guar.
Corp. v. Advest, Inc., 512 F.3d 46, 58 (1st Cir. 2008)
(describing the PSLRA's pleading standard for scienter as
“rigorous”). However, while the “pleading requirements under the
PSLRA are strict, they do not change the standard of review for
a motion to dismiss.” Aldridge v. A.T. Cross Corp., 284 F.3d 72,
78 (1st Cir. 2002) (citation omitted); see also Tellabs, 551
U.S. at 322.
Defendants moved to dismiss the complaint in its entirety
based on Plaintiffs’ failure to allege any material
misstatements or omissions, failure to allege facts supporting a
strong inference of scienter, and failure to sufficiently plead
loss causation. Plaintiffs’ case rests largely on the allegation
that Defendants knowingly or recklessly omitted the Phase 2b six
month post-doing viral shedding test results, thereby causing
members of the class to purchase Genocea’s stock at an
artificially inflated price.
B. Material Misrepresentation or Omission
Plaintiffs argue that Defendants’ failure to disclose the
Phase 2b six month post-dosing viral shedding results was a
material omission that would have altered the total mix of
information available in light of Genocea’s positive statements
about other Phase 2b results, the overall importance of viral
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shedding results, and GEN-003’s expected marketability. At the
hearing, Plaintiffs directed the Court to three specific
instances in which they allege Defendants made misleading
statements due to the omission of the six month viral shedding
data: January 5, 2017, May 5, 2017, and July 24, 2017. 3
An omission is materially misleading when there is a
“substantial likelihood that the disclosure of the omitted fact
would have been viewed by the reasonable investor as having
significantly altered the total mix of information made
available.” Basic Inc. v. Levinson, 485 U.S. 224, 231–32 (1988)
(internal quotation omitted). However, “it bears emphasis that §
10(b) and Rule 10b-5(b) do not create an affirmative duty to
disclose any and all material information. Disclosure is
required under these provisions only when necessary to make
. . . statements made, in the light of the circumstances under
which they were made, not misleading.”
Matrixx Initiatives,
Inc. v. Siracusano, 563 U.S. 27, 44 (2011) (internal quotation
The complaint also alleges another category of misstatements related to
Defendants’ touting “statistically significant,” “consistent,” and “positive”
clinical trial results. See Compl. ¶¶ 62-72. At the September 25, 2018
hearing before the Court, Plaintiffs’ counsel acknowledged that allegations
related to swabbing protocol and the Poisson statistical model were “more
icing on the cake and not misstatements.” Docket No. 86 at 18. Plaintiffs’
counsel also stated at the hearing that the “heart of this case” rests on
three instances – January 5, 2017, May 5, 2017, and July 24, 2017 - when
Defendants’ statements were allegedly misleading due to their failure to
disclose the Phase 2b six month post-dosing viral shedding results. See id.
This Court focuses on the material omission of the Phase 2b six month postdosing viral shedding results in ruling on Defendants’ motion to dismiss.
3
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omitted). Importantly for this case, “[a] statement cannot be
intentionally misleading if the defendant did not have
sufficient information at the relevant time to form an
evaluation that there was a need to disclose certain information
and to form an intent not to disclose it.” N. J. Carpenters
Pension & Annuity Funds v. Biogen IDEC Inc., 537 F.3d 35, 45
(1st Cir. 2008).
Plaintiffs do not know the contents of the Phase 2b six
month viral shedding results, but urge the Court to infer that
Genocea had the six month viral shedding results as early as
January 2017, and that the results were negative. Plaintiffs
suggest that Defendants had the six month viral shedding results
in January 2017 because (a) Genocea had a pattern of releasing
genital lesion and viral shedding data at the same time, and (b)
Clark stated at a company-wide meeting on January 5, 2017 that
there was “no interest” from potential funding partners in
sponsoring the planned Phase 3 trial. Compl. ¶¶ 60, 72. Neither
fact supports this inference.
Defendants alerted investors before January 2017 that the
six month viral shedding results would not be released on the
same timeline as the genital lesion results. On the September
2016 investor call, Hetherington stated that the release of the
six month viral shedding results “may not be simultaneous [with
genital lesion results] because . . . those assays have to be
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run.” Ex. P, 9/26/16 Investor Call, at 6. He was “hopeful” the
viral shedding results would be “available around the first
quarter of next year,” but that it was unclear exactly when the
results would be available “based on the sample acquisition and
running of the assays.” Id. Clark stated on November 3, 2016
that the six month post-dosing viral shedding results would be
released “later in the first half of 2017.” Compl. ¶ 76; accord
Ex. R, Transcript of November 3, 2016 Genocea Biosciences, Inc.
Q3 2016 Investor Call, at 2. Whether “first quarter” or “first
half,” investors were alerted that the viral shedding results
were not expected at the same time as the genital lesion results
for this Phase. Additionally, SEC filings in February and May of
2017 reiterated that the six month post-dosing viral shedding
data was expected in the “first half of 2017.” Compl. ¶ 84;
5/5/2017 Form 10-Q, Q1 2017 at 21. Without more, the Court
cannot reasonably infer that the Defendants had the six month
viral shedding results in January 2017. The only inference that
can be drawn is that Defendants had the six month results by the
time they released the twelve month post-dosing results in July
2017.
Clark’s January 2017 statement also provides little support
for the inference. According to two confidential witnesses, at a
company-wide meeting in January 2017, Clark announced that there
was “no interest” from potential funding partners in sponsoring
16
the planned Phase 3 trials and that the company was going to
focus more heavily on its oncology program. Compl. ¶ 60.
Plaintiffs argue there was “no interest” because Defendants must
have had the negative six month viral shedding results at that
point, which must have scared off potential funders. This is
farfetched because there are no factual allegations or even a
reasonable inference that Defendants told potential funders
about the six month viral shedding results that they allegedly
knew at the time. Plaintiffs speculate as to why there was “no
interest” from funders and then ask the Court to infer
Defendants had the six month results in January 2017 based on
that speculation. The Court, without more, cannot reasonably
draw such an inference. See Rodriguez-Vives v. P. R.
Firefighters Corps of P. R., 743 F.3d 278, 286 (1st Cir. 2014)
(noting that the “bareness of the factual allegations” may
“make[] clear that the plaintiff is merely speculating about the
fact alleged and therefore has not shown that it is plausible
that the allegation is true”).
Drawing all reasonable inferences in Plaintiffs’ favor, the
Court infers that Defendants had the Phase 2b six month postdosing viral shedding results in July 2017 and that these
results were not positive. If they had been positive, then
Defendants would have released them.
17
Accordingly, the Court only considers the allegedly
material misstatements made on July 24, 2017. On that date,
Defendants announced the Phase 2b twelve month post-dosing
results for both genital lesions and viral shedding. The
company’s press release declared “Genocea Reports Positive TopLine 12-Month Phase 2b Data for GEN-003 in Genital Herpes.” In
the release, the company announced that at twelve months postdosing, the 60/50 dose demonstrated a statistically significant
reduction in the medial genital lesion rate and that “[o]ther
clinical endpoints for this dose improved or were consistent
with previously reported positive data.” Compl. ¶ 87.
The
second page of the release included a chart disclosing that at
twelve months post-dosing, GEN-003 did not produce a
statistically significant reduction in viral shedding compared
to the placebo group. The press release’s language made no
mention of the twelve month viral shedding results that were
disclosed and was silent about the undisclosed six month viral
shedding results.
Slides distributed for an analyst call that same day
declared “GEN-003 Phase 3 on Track to Start by End of 2017,” and
“GEN-003 Strongly Positioned Ahead of Phase 3,” with a footnote
on each slide stating “subject to obtaining capital.” Compl. ¶
89. On the analyst call, Clark declared the twelve month results
were “the most important readout from [the] Phase 2b trial and
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maybe the most important data in Genocea’s history as we look
ahead to Phase 3.” Compl. ¶ 90. In response to a question about
the placebo effect seen for the twelve month viral shedding
results, Hetherington stated:
We know that GEN-003 works by reducing viral shedding and
believe that variability in shedding data is a consequence
of the sporadic nature of shedding in the small number of
subjects provided [sic] data at this time point. We do not
expect that this will be a factor in Phase 3 studies, given
the much larger sample size.
Id. ¶ 91. Plaintiffs allege that each of these statements was
rendered materially misleading because Defendants omitted the
Phase 2b six month post-dosing viral shedding results. Id. ¶¶
87-91.
The question is whether the six month viral shedding
results were material facts “necessary in order to make the
statements made, in light of the circumstances under which they
were made, not misleading.” 17 C.F.R. § 240.10b–5(b). Plaintiffs
do not clearly explain why the disclosure of the negative six
month viral shedding results in July would significantly alter
the total mix of information available to investors who, at that
point, had the negative twelve month results. Plaintiffs point
to Clark’s statement that the twelve month results were the
“most important readout” from the Phase 2b trial, Compl. ¶ 90.
Plaintiffs also argue that Hetherington’s statement to investors
was misleading because he sought to “explain away” the negative
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twelve month viral shedding results. However, Plaintiffs do not
allege facts to indicate that this was not the most important
readout or that the placebo effect was not “a consequence of the
sporadic nature of shedding in the small number of subjects
[who] provided data” at that point. Compl. ¶ 91.
Relying on In re Delcath Systems, Inc. Securities
Litigation, Plaintiffs argue that it is materially misleading to
disclose one set of results without disclosing sufficient facts
to “to allow a reasonable investor to make an accurate
assessment of the disclosures that were made.”
36 F. Supp. 3d
320, 332 (S.D.N.Y. 2014) (holding that disclosing a 7% mortality
rate from the treatment group but not disclosing that there were
zero deaths from the control group mislead investors about the
safety of the tested medical device). By July 2017, Defendants
had disclosed from the Phase 2b trial the positive viral
shedding results from immediately post-dosing, positive genital
lesion results from six months post-dosing, positive genital
lesion results from twelve months post-dosing, and the negative
viral shedding results from twelve months post-dosing.
Defendants persuasively argue that the viral shedding six
month results could not have been material to investors given
the positive market response to the negative twelve month viral
shedding results in July 2017. Genocea’s stock price rose on
July 24, 2017, following the release of the negative Phase 2b
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twelve month viral shedding results. Since Genocea’s stock price
did not drop when the company released the negative twelve month
viral shedding results, the absence of the six month results is
likely not material to investors who focused more on the genital
lesion results. The release of the negative twelve month viral
shedding results without consequence is fatal to Plaintiffs’
allegations.
C. Scienter
Plaintiffs ask this Court to find a strong inference of
scienter from the omission of the six month viral shedding
results in July 2017. They argue that Defendants knew, or were
reckless in not realizing, that failing to disclose the six
month viral shedding results would mislead investors about the
prospects for GEN-003 and the Phase 3 clinical trials. Scienter
is a “mental state embracing intent to deceive, manipulate, or
defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12
(1976). At the pleading stage, the PSLRA requires that a
complaint state with particularity specific facts giving rise to
a “strong inference,” 15 U.S.C. § 78u–4(b)(2)(A), that
“defendants consciously intended to defraud, or that they acted
with a high degree of recklessness.” Aldridge, 284 F.3d at 82.
Recklessness is “a highly unreasonable omission, involving not
merely simple, or even inexcusable, negligence, but an extreme
departure from the standards of ordinary care, and which
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presents a danger of misleading buyers or sellers that is either
known to the defendant or is so obvious the actor must have been
aware of it.” Greebel v. FTP Software, Inc., 194 F.3d 185, 198
(1st Cir. 1999). “Even if plaintiffs wish to prove scienter by
‘recklessness,’ they still must allege, with sufficient
particularity, that defendants had full knowledge of the dangers
of their course of action and chose not to disclose those
dangers to investors.” Maldonado v. Dominguez, 137 F.3d 1, 9 n.4
(1st Cir. 1998).
“There is no set pattern of facts that will establish
scienter; it is a case-by-case inquiry.” ACA Fin., 512 F.3d at
66. But whatever facts are alleged, they must “present a strong
inference of scienter. A mere reasonable inference is
insufficient to survive a motion to dismiss.” Greebel, 194 F.3d
at 196. For an inference of scienter to be strong, “a reasonable
person would [have to] deem [it] cogent and at least as
compelling as any opposing inference one could draw from the
facts alleged.” Tellabs, 551 U.S. at 324. The First Circuit has:
found this exacting standard satisfied where the
complaint “contains clear allegations of admissions,
internal records or witnessed discussions suggesting
that at the time they made the statements claimed to
be misleading, the defendant officers were aware that
they were withholding vital information or at least
were warned by others that this was so.”
In re Ariad Pharm., Inc. Sec. Litig., 842 F.3d 744, 751 (1st
Cir. 2016) (quoting In re Boston Scientific Corp. Securities
22
Litigation, 686 F.3d 21, 31 (1st Cir. 2012)). Additionally, “a
plaintiff ‘may combine various [other] facts and circumstances
indicating fraudulent intent,’ including those demonstrating
‘motive and opportunity,’ to satisfy the scienter requirement.”
Brennan v. Zafgen, Inc., 853 F.3d 606, 614 (1st Cir. 2017)
(quoting Aldridge, 284 F.3d at 82).
Genocea’s own disclosure of the negative twelve month viral
shedding results weakens any showing of scienter. See Brennan,
853 F.3d at 617–18 (1st Cir. 2017)(finding that where defendants
disclosed some but not all adverse events, and disclosed that
they would not report all adverse events as they occurred, a
strong competing inference to scienter was that defendants
disclosed what they considered to be, at the time, the most
relevant information about the clinical trials).
Plaintiffs assert a “core operations” theory - that
Defendants intentionally withheld the Phase 2b six month viral
shedding results because GEN-003 was core to Genocea’s viability
as a company. Again, Plaintiffs’ core-operations theory is
weakened because Defendants released the negative twelve month
viral shedding results in July 2017. If Plaintiffs’ theory was
true, Defendants would have had a similar motive to withhold the
twelve month viral shedding results as they did the six month
viral shedding results.
23
Plaintiffs also draw the Court’s attention to Poole’s stock
sales, but these sales do not bolster a strong inference of
scienter. “Insider trading cannot establish scienter on its own,
but it can be used to do so in combination with other evidence.
Insider trading in suspicious amounts or at suspicious times may
be probative of scienter.” Bos. Sci., 523 F.3d at 92 (citations
omitted). Even weak insider trading allegations may provide some
support for scienter, but the “vitality of the inference to be
drawn depends on the facts, and can range from marginal to
strong.” Greebel, 194 F.3d at 197-98 (citation omitted).
As an initial matter, Clark and Hetherington did not sell
any stock during the proposed class period. See generally
various defendant officers’ Form 4s. During the summer of 2017,
Poole made two sales of Genocea common stock: the first on May
8, 2017 and the second on July 24, 2017, the same day Genocea
publicly released the twelve month results. Compl. ¶¶ 101–102.
The May sale cannot be evidence of scienter as there are
insufficient allegations that Defendants had the six month postdosing viral shedding results at that time. The July 24, 2017
sale was actually executed by a stock broker based on a 10b5-1
plan Poole filled out on May 10, 2017. See Ex. W, Rule 10b5-1
Trading Plan. The trading plan occurred before the Court can
reasonably infer Defendants had the six month viral shedding
results. Additionally, the existence of a Rule 10b5-1 trading
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plan “generally rebuts an inference of scienter and supports the
reasonable inference that stock sales were pre-scheduled and not
suspicious.” In re Smith & Wesson Holding Corp. Sec. Litig., 604
F. Supp. 2d 332, 345 (D. Mass. 2009) (internal quotation
omitted). Therefore, while this evidence of insider trading is a
concern, standing alone, it does not support a strong inference
of scienter with respect to the six month data.
4
D. Count II - Section 20(a) Claims
Since Plaintiffs fail to allege a primary violation of
Section 10(b), their Section 20(a) control person claims fail as
a matter of law and are also dismissed. See Ganem v. InVivo
Therapeutics Holdings Corp., 845 F.3d 447, 453 n.4 (1st Cir.
2017) (explaining that the derivative control person claim under
Section 20(a) was properly dismissed where the district court
dismissed the Section 10(b) claim).
ORDER
The motion to dismiss (Docket No. 59) is ALLOWED. The
motion to strike (Docket No. 69) is moot considering the Court’s
ruling.
/s/ PATTI B. SARIS
Patti B. Saris
Chief United States District Judge
The Court does not reach the issue of loss causation because Plaintiffs
already fail to sufficiently allege necessary elements of a claim under
Section 10(b) of the Exchange Act.
4
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