LI v. AETERNA ZENTARIS, INC. et al

Filing 66

MEMORANDUM AND ORDER Granting in part and denying in part 57 Motion to Dismiss; ORDERED that the Motion to Dismiss Count I is DENIED as to Aeterna and Engel; and it is GRANTED as to Blake, and Pelliccione; ORDERED that the Motion to Dismiss Count II is DENIED as to Engel, Dodd, Blake and and Pelliccione; ORDERED that Turpin, Dinges, and Sachse are dismissed from this action. Signed by Judge Peter G. Sheridan on 3/2/2016. (kas, )

NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY

BING LI. Individually and on Behalf of All
Others Similarly Situated,

Civil Action No.: 3:14-cv-7081(PGS)(TJB)

Plaintiffs,
v.

MEMORANDUM
AND
ORDER

AETERNA ZENTARIS. [NC., DAVID A.
DODD, JUERGEN ENGEL, DENNiS
TURPIN, JUDE DINGES, RICHARD
SACHSE and PAUL BLAKE,

De/’ndanis.

SHERIDAN, District Judge.
Facts and Procedural History:
This matter is based upon Defendants’ Motion to Dismiss the Second Amended Class
Action Complaint (‘SAC”), which is alleging

§

10(b)(5) and 20(a) violations of the federal

securities laws. Defendant Aeterna Zentaris, Inc. (“Aeterna”) is a biopharmaceutical company
engaged in developing treatment in endocrinology and oncology. (SAC

¶ 2.) Plaintiffs purchased

Aeterna securities at prices they allege were artificially inflated during the Class Period. The
drug in question, AEZS-130, is intended to diagnose adult growth hormone deficiency (AUHD).
(Id.

¶ 3.)

‘1his action concerns Defendants’ effort to obtain FDA approval of a new drug

application NDA) for AEZS-130. Plaintiffs claim that they purchased securities in Aeterna at
artificially inflated prices based upon misrepresentations of the drugs likelihood of FDA
approval during the Class Period, and have been damaged thereby.

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In 2009, Aeterna sought to purchase from Ardana Bioscience (“Ardana”), the rights to
the drug AEZS-130. Aeterna performed a due diligence investigation of the data for an
incomplete Phase 3 study for an NDA that was pending before the FDA, including a review to
check whether each subject in the Ardana study was properly classified. (Id.

¶ 37.) Aeterna then

acquired the rights to AEZS-130 on June 8, 2009, when Ardana was experiencing financial
problems. (Id.

¶ 36.) The FDA and Aeterna agreed that Aeterna could complete the Phase 3

study begun by Ardana by enrolling additional subjects. (Id.

¶ 5.) On December 20, 2010, the

FDA and Aeterna agreed to a Special Protocol Assessment (“SPA”), wherein the design and
subject inclusion criteria were set forth for the Phase 3 study. (Id.

¶ 6.) A successful Phase

study was essential in order to have the NDA approved by the FDA. (Id.

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¶ 7.)

On the same day, December 20, 2010, Aeterna issued a press release stating that Ardana’s
study included 42 patients with confirmed AGHD, and a control group of 10 subjects without
AGI-ID, which were matched for age, gender, etc. (Id.

¶ 53.)

In order to complete the SPA,

Aeterna was required to: (1) add 30 normal control subjects; (2) add an additional 20 subjects (10
AGHD and 10 matched normal); and (3) the entire database would include approximately 100
patients (52 from Ardana’s portion of the Phase 3 study, and 50 from Aeterna’s part.) (Id.

¶ 56.)

Thereafter, Aeterna issued at least one other press release plus some publicly disclosed
documents filed with the Securities and Exchange Commission, announcing that it had
‘favorable top-line results” in completing the Phase 3 study of AEZS-130 in accordance with the
SPA parameters. (Id.

¶ 64.) There were other public releases

announcing the success of the study

leading up to the pre-NDA meeting with the FDA in May 2012.
Aeterna submitted the NDA on November 5, 2013. (Id.

¶ 94.) About a year later. on

November 6, 2014, the FDA denied approval of the NDA for AEZS-130, because the Phase 3

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trial did not meet its stated primary efficacy objective as agreed to in the SPA. (Id.

¶ 95).

According to the SAC, Defendant Dodd revealed that “AEZS-l 30 was only shown effective
when results from two previously-confirmed AGHD patients, who Aeterna later asserted did not
have confirmed AGHD. were excluded from the analysis.” (Id.
when “two patients were thrown out” of the study. (Id.

¶

‘

101). Or, as the Plaintiffs put it.

102.) This change in the study group

was inconsistent with the requirements of the SPA.
The SAC further alleges that Aeterna’s “manipulations” were noted in the Form 20-F that
was filed for the year 2011. That Form 20-F states: “Of the 53 AGHD subjects enrolled, 52
received AEZS-130, and 50 who had confirmed AGHD prior to the study entry, were included in
this analysis, along with 48 controls.” (Id. at

¶

103). According to the SAC, this means oniy 50 of

the 52 AGHD subjects were included in the analysis. (Id.) Also, one of the 53 AGHD subjects
had dropped out before receiving AEZS-130 because of collapsed veins. (Id. n. 7)
The class action is for the period of August 30, 2011 through November 6, 2014 (Id.

¶

I.)

An Amended Complaint was filed in this case on April 10, 2015 (ECF No. 31.) On September
14, 2015, this Court dismissed the Amended Complaint because it failed to demonstrate scienter
with the requisite particularity (ECF No. 48.) Plaintiffs were permitted to amend, and they filed
the SAC

on

October 14, 2015 (ECF No. 49.) Defendants now move to dismiss the SAC.

Legal Standard:

On a motion to dismiss for failure to state a claim pursuant to Rule 12(b)(6), the Court is
required to accept as true all allegations in the complaint, and all reasonable inferences that can
be drawn therefrom, and to view them in a light most favorable to the non-moving party. See

Oshiver

v. Leviii.

38 F.3d 1380, 1384 (3d Cir. 1994). To survive a motion to dismiss, a complaint

must contain sufficient factual matter. accepted as true to “state a claim to relief that is plausible

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on its face.’ A.shcro/l v. Iqhal. 556 U.S. 662. 678 (2009); see also, Bell Atlantic v. Tuonthly, 550

U.S. 544. 570 (2007). In order to survive a motion to dismiss, the complaint must allege facts
that raise the right to relief above the speculative level. See Twoinbly, 550 U.S. at 555. The
question is whether the claimant can prove any set of facts consistent with his or her allegations
that will entitle him or her to relief, not whether that person will ultimately prevail. See
Semerenko v. Cendant, Corp., 223 F.3d 165, 173 (3d Cir. 2000).
To establish a claim under Securities Exchange Act

§

10(b) and Rule lOb-5, the plaintiff

must satisfy following elements: “(1) a material misrepresentation (or omission); (2) scienter,
i.e., a wrongful state of mind; (3) a connection with the purchase or sale of a security; (4)
reliance...; (5) economic loss; and (6) loss causation.’ i.e., a causal connection between the
material misrepresentation and the loss.” McCabe v. Ernst & Young, 494 F.3d 418, 424 (3d Cir.
2007).
When applying the elements of the 10(h)(5) claim, the court must invoke the Private
Securities Litigation Reform Act (“PSLR.A”). wherein the complaint must “state with
particularity facts giving rise to a strong inference that the defendant acted with the required state
of mind.” Insifluuional Investors Group v.Avaya. 564 F.3d 242, 253 (3d Cir. 2009). As a result,
particularized facts against each defendant are necessary, and courts frown upon group pleading.
See. Israeli v. Team Telecom, 2006 WI. 2883237, *5 (D.N.J. 2006). Generalized imputations of
knowledge do not suffice in meeting that burden. Id. In looking at a 10-b claim, the complaint
must show falsity by specifying allegedly misleading statements, and why the statement was
misleading and why it was material. Materiality is “when there is a substantial likelihood that the
disclosure of the admitted fact would have been viewed by the reasonable investor as having

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significantly altered the ‘total mix’ of information made available.’ City of Roseville Employees
Retirement System v. Horizon Lines. Inc.. 713 F.Supp.2d 378. 386 (D. Del. 2010).
“Scienter is defined as a mental state embracing intent to deceive, manipulate or
defraud,” which requires “a knowing or reckless state of mind.” Avaya, 564 F.3d at 252

(internal

citations omitted). Usually the inquiry is, “whether all the facts alleged, taken collectively, give
rise to a strong inference of scienter, not whether any individual allegations scrutinized in
isolation meets that standard.” Avaya. 564 F.3d at 267-68. ‘Cobbling together a litany of
inadequate allegations” is insufficient. Roseville, 713 F.Supp.2d at 386. A strong inference is
more than merely plausible or reasonable, it must be “cogent.” Id. at 395.
Analysis:
I.

Claim against Aeterna

The Court has struggled with applying the scienter standard to this case. Plaintiffs allege
that Defendants knew that two of the subjects of the Phase 3 study had to be eliminated to meet
the statistical requirements of the study. The SAC does not clearly point to knowledge of any
defendant during the Class Period. There are no confidential witnesses attesting to said
knowledge. and no memo has been disclosed showing such knowledge. The only time that
knowledge can clearly he attributed to Defendants is in November 2013 when the Phase 3
results were submitted to the FDA. At that time, Defendants had to know they were filing for
approval based on a modified sample of the SPA by deleting two subjects. This modification
warranted disclosure. Even if Aeterna had not believed this modification in the study would
have adversely affected its application, the modification warranted some disclosure to investors.
especially in light of the prior ongoing positive statements during the approval process. Failing
to disclose at that time was reckless.

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To be clearer, what is alleged in the SAC that was not set forth in the FAC is that
modification of a final dataset after a data lock and a subsequent exclusion of study subjects
violates the custom and practice of the industry and FDA. Moreover, it breaches the clinical
trial protocol. (SAC

‘

111-113). The FDA’s “Statistical Principles for Clinical Trials—E9”

states that. according to the intention to treat” principle, all randomized subjects should be
included in the primary analysis of a clinical trial. (Id.
bias. (Id.

¶

111). Plaintiffs cite to Corban

¶

113). This decreases the possibility of

v. Sarepla Therapeutics,

Inc., 2015 WL 1505693 (D.

Mass. 2015), where the court stated that, “FDA law and regulations recognize that a complete
and accurate risklbenefit profile of an investigational product depends upon the data from every
subject’s experience in the clinical trial.. .Removal of already collected data—including data
from the subjects who have withdrawn from the study—would undermine the scientific and
ethic integrity of the research.” Id. at *2. The existence of these policies suggests that Aeterna
was on notice regarding the propriety of their actions during and after the trial, and supports the
fact their public announcements were reckless.
As noted above. “scienter is a mental state embracing intent to deceive, manipulate, or
defraud, and requires a knowing or reckless state of mind.” Avaya. 564 F.3d at 252. Also, the
question is ‘whether all the facts alleged, taken collectively, give rise to a strong inference of
scienter, not whether any individual allegations scrutinized in isolation meets that standard.” Id.
at 267-68. When the facts are all taken together, there are sufficient allegations that Defendants
here at least had a “reckless state of mind.” Aeterna performed due diligence before taking on the
Ardana study, agreed to an SPA with the FDA setting the terms for the study, published press
releases after the completion of the study stating that the study was essentially successful and
complied with the terms agreed to with the FDA. It is highly improbable that Aeterna had not

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known that the data sample was modified in violation of the usual policy. The SAC plausibly
establishes that if the Defendants did not have a knowing state of mind, they at least had a
reckless state of mind when they did not alert the public to the FDA’s concerns before the NDA
was rejected.
In regard to the remaining elements of the cause of action, Defendants also assert that
Plaintiffs cannot establish false or misleading statements with the required particularity, or
sufficiently allege loss causation. This Court finds that Plaintiffs have sufficiently established
both of these elements. Aeterna made numerous statements that their trial proved effective in
accordance with FDA guidelines when that was not the case. ‘In the Third Circuit, the making of
an affirmative statement on a securities matter triggers a duty to include such information as
would prevent the statements from misleading a reasonable investor.” Jaroslawic! v. Engeiharid
Coip., 704 F. Supp. 1296, 1299 (D.N.J. 1989). “[Wjhen a company puts an issue into play,’ it
acquires a duty to disclose information relating to that topic.” In re Merck & Co., Inc. Sec..
Derivative & ERISA Lilig., 2012 WL 3779309 (D.N.J. 2012). At the time of submission, Aeterna
knew of the modifications; it should have been disclosed that these patients were not included in
contravention to the SPA, and it should been communicated to the investors as well.
Loss causation is another element of the cause of action. Plaintiffs only have to provide
some indication of the loss and the causal connection that the plaintiff has in mind.” Durui
Pharms, Inc. v. Broudo. 544 U.S. 336, 347 (2005). The “issue of loss causation is usually not
resolved on a motion to dismiss,” because more factual discovery is ofien necessary. Dudley v.
Haub, 2013 WL 1845519 at *18 (D.N.J. 2013).
Additionally, Courts have recognized that, “[w]hen someone makes a statement about a
security that is misleading but is not yet recognized as such, the security’s price will change to

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reflect the addition of the misleading statement to the overall mix of publically available
information about the security.” Argent Class/c Convei-iible Arbitrage Fund L..P. v. R/le Aid
Corp., 315 F. Supp. 2d 666, 674 (E.D. Pa. 2004). Indeed, “[bjecause purchasers rely on the price
as an indication of the stock’s value, courts presume that purchasers rely indirectly on the
misleading statement when they purchase a security in an efficient market at a price that reflects
the misleading statement, even if they did not actually and directly rely on the misleading
statement when they purchased the security.” Id. (internal citations omitted). Aeterna’s stock had
increased following several announcements about the success of its study. Then on November 6,
2014, Aeterna revealed that the FDA had denied its NDA application and that day Aeterna’s
stock price dropped almost 50%

from

the prior day’s closing. Plaintiffs have successfully pled a

claim under 1 0(b) and Rule I Ob-5 against Aeterna.
(laims Against Individual 1)efendants

II.

Plaintifis make claims against the Individual Detbndants. as x\ell. Incler Count 1. there

are allegations under 1 0(h) and 1 ()h—5 against Delendanis Engel. Blake and Pellicione. In Count
II, Plaintiffs allege additional violations oI § 20(a) against Dctcndants Engel, Blake, Pellicione,
and Dodd. Section 20(a) of the Securities Exchange Act ol 1934. 15 LT.S.C.A. § 78t(a.

“imposes

)oiflt and se\eral liability on any person who controls a person liable under any provision

I Exchange Act I.” In re Exxon IiOl/l (otp. S’ec.

ol

the

Lilig.. 387 F. Supp. 2d 407, 413 (D.N..l. 2005)

intcrna1 citations omitted). To maintain a claim under

§ 20(a). plaintiffs mrLst establish “(I) an

underlying violation by the company: and (2) circumstances establishing deiendants control
over the companys actions.” Dudle’ v. Ilaub, 2013 WI. 1845519, at *20 (D.N.J. 2013). Also.

“the

O\

cr\\ helming trend in this circuit” is that “culpable Participation does not ha e to be pled in

order to survive a motion to dismiss.” id. at *20. n. 5 (internal citations omitted).

8

Defendant Paul Blake was the Chief Medical Officer of Aeterna from August 5, 2007 to
March 13,2014. The Company’s annual reports list him as one of the four senior corporate
officers during the Class Period. Allegedly, Blake was responsible for explaining to the FDA
Aetcrn&s reasons for excluding patients. and he attended the prc-NDA meeting. (SAC ¶ 30.)
Defendant Nicholas 3. Pelliccione was the Company’s Senior Vice President, Regulatory Affairs
and Quality Assurance from May 2007 through March 2014. The annual reports also listed him
as one ofthe four senior corporate officers of Aeterna during the Class Period. Like Blake, he
also purportedly explained Aeterna’s position to the FDA. including at the pre-NDA meeting.
(SAC 131.) The allegations in the SAC indicate that both Blake and Pelliccione were intimately
involved in the study, and in discussions with the FDA. Under § 20(b). the allegations lo
support a reasonable inference that [defendants] had the potential to influence and direct the
activities of the primary violator’.” litre Loewen Group Inc., 2004 WL 1853137, at 26 (E.D.
Pa. 2004). However., there are not enough facts showing that they actually made
misrepresentations to the public. Therefore. the § 20(b) claim against Blake and Pelliccione may
proceed, while the § 10(b) claim against them is dismissed.
1)eI’endant David A. Dodd joined Acterna as CEO in April 2013 (SAC ¶ 29). l)odd was
irnolved in the completion of the NDA submission. said that he believed Aeterna was addressing
the FDA’s concerns. and he announced that the FDA had rejected their submission. It is not clear
that he made any misrepresentations, but hc does satisfy the 20(a) standard. The 20(a) claim will
remain against Dodd.
Finally. Defendant Juergen Engel served as the Company’s President and CEo from
September 2008 to April 2013. 1-Ic allegedly attended the pre-NDA meeting. and he also stated in
an August 30, 2011 press release that AEZS-l30 had met the SPA’s parameters and

9

demonstrated effectiveness. I—Ic signed each 20-F Form during the Class Period. The SAC
suggests that he

was

aware of his Compan

‘s

actions since the purchase of Ardana. and the

timing of his departure——about six momhs before submission of the clinical testing results—gives

‘

rise

to

a

plausible inf.rence that he knew something about the clinical modifications. (SAC

28.) Neither claim against Engel ill be dismissed.
There is also a dispute as to the proper service of OCCSS on Defendants Engel. Blake and

Pelliccione. Plaintiffs claim that their server affixed a cop\ of the SAC and summons to
Pelliccione’s residence in New York, and copies were mailed o him on November 12, 2015.
This was apparently done after the server attempted but failed to serve him at his residence on
three separate occasions. (See Exhibit I to the Declaration of’ Laurence Rosen (“Rosen Dccl.”)).
This is permitted under New York Civil Practice Law and Rules (“CPLR”) in this circumstance.
See CPLR 308. Plaintiffs state that they initiated service on Engel and Blake through the Hague

Convention,

since

they reside in Germany and the U.K.. respectively. ‘Ihe time period required

by Rule 4(m) for service does not apply to foreign defendants residing outside of the U.S. See
Fed. R. Civ. P. 4(m). The Court is satisfied with the process here.
Finally, there are no allegations in the SAC implicating named Defbndants Dennis
Furpin. .lude Dinges. or Dennis Sachse. Therefore. they are all dismissed.

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ORDER
Having carefully reviewed and taken into consideration the submissions of the parties, as
well as the arguments and exhibits therein presented. for the reasons stated on the record, and for
good cause shown,
IT IS on this 2nd day of March, 2016,
ORDERED that Defendants’ Motion to Dismiss Plaintiffs’ Second Amended Complaint
[ECF No. 57j is DENIED in part and GRANTED in part; and it is further
ORDERED that the Motion to Dismiss Count I is DENIED as to Aeterna and Engel; and
it is GRANTED as to Blake, and Pelliccione; and it is further
ORDERED that the Motion to Dismiss Count II is DENIED as to Engel. Dodd. Blake.
and Pelliccione; and ii is further
ORDERED that Turpin, Dinges, and Sachse are dismissed from this action.

PETER G. SHERIDAN, U.S.D.J.

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