MAX O. COGBURN, Jr., District Judge.
FINDINGS AND CONCLUSIONS
The complaint in this matter alleges that Chelsea Thereapeutics International and four individual defendants ("defendants") violated federal securities laws by making materially false and misleading statements and omitting critical information regarding the development and approval of the drug Northera. Northera, also known by its generic name droxidopa, was designed to treat a disorder known as symptomatic neurogenic orthostatic hypotension ("NOH"), a sudden fall in blood pressure that occurs when a person assumes a standing position. The disorder is commonly associated with diabetes, Parkinson's disease, and other neurological disorders.
Before Chelsea could market Northera, it had to demonstrate the drug's safety and effectiveness to the FDA. To do this, Chelsea conducted a series of tests with certain predetermined goals, or endpoints, the results of which would be submitted to the FDA in a New Drug Application. At that point, the FDA could approve the drug, request additional information on the drug, or deny the application altogether.
Four clinical trials were conducted to determine Northera's health and safety in large number of patients, the first of which, Studies 301 and 302, began in early 2008. The primary endpoint for these two studies was the same: Item 1 of the Orthostatic Hypotension Symptom Assessment scale ("OHSA") which measures a patient's dizziness or light-headedness. Together, the OHSA scale and another scale, the Orthostatic Hypotension Daily Activity Scale ("OHDAS"), form the Orthostatic Hypotension Questionnaire ("OHQ"). Study 302, the first to conclude, was a disappointment as it failed to demonstrate a statistically significant effect on Item 1 of the OHSA scale. It may, however, have shown a nominal improvement on the OHQ based on some statistical analyses.
When Study 302 failed to meet its endpoint, Chelsea petitioned the FDA to modify Study 301, which was ongoing at that time. The FDA agreed, allowing Chelsea to change Study 301's endpoint from Item 1 of the OHSA to the relative mean change in the patient's OHQ. The FDA confirmed that the Special Assessment Protocol ("SPA") it had originally granted to Study 301 was still in effect. An SPA is an agreement that the study design, including trial size, clinical endpoints and/or data analyses could help support regulatory approval. In September 2010, Chelsea announced that Study 301 met its primary endpoint—the study indicated a statistical improvement over the placebo on the composite OHQ.
The FDA agreed to accept the Chelsea's New Drug Application ("NDA") for Northera based on the data from Studies 301 and 302 but warned that one successful study is not usually sufficient for NDA approval. It also requested "validation data" for certain instruments used in the studies and justification for why the results of Study 301 were clinically meaningful. Chelsea submitted its NDA the following year in September of 2011.
The application was first reviewed by FDA Staff ("the briefing committee"), who prepared a report in advance of the meeting of the Cardiovascular and Renal Drugs Advisory Committee ("the Advisory Committee") that, in turn, would provide a nonbinding recommendation to the FDA. The briefing committee recommended that Northera not be approved. One reason cited was that "the safety data base of [the] development program was not robust." ECF No. 82-2 at 4. The Advisory Committee, however, went against the briefing committee's recommendation and on February 23, 2012, recommended that Northera be approved. While hopeful that Northera would be approved, Chelsea warned investors that the FDA was not bound by the Advisory Committee's recommendation.
Approximately one week later on April 4, 2012, an initial complaint was filed; and by October 5, 2012, a consolidated Amended Complaint was filed alleging that Chelsea and the four individual defendants had violated § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b) and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5. It further alleges that the four individual defendants violated Section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a).
II. Judicial Notice
Defendants request that the court take judicial notice of a number of documents, some of which are explicitly referenced in the complaint and others which are not but, defendant argues, are nevertheless subject to judicial notice. Under well-established precedent from the Supreme Court as well as this and other circuits, in ruling on a motion to dismiss a court "must examine the facts as a whole, including facts found in `documents incorporated into the complaint by reference.'"
Accordingly, the court will consider documents which were specifically referenced or relied upon in the complaint and will also grant Chelsea's request and take judicial notice of its SEC filings.
To successfully allege a securities fraud claim in violation of section 10(b) of the Exchange Act, a plaintiff must satisfy the following elements: "(1) the defendant made a false statement or omission of material fact (2) with scienter (3) upon which the plaintiff justifiably relied (4) that proximately caused the plaintiff's damages."
While the court agrees there is a substantial question as to whether the first element is satisfied, the court need not reach that issue as plaintiff has failed to allege facts giving rise to an inference of scienter. The Private Securities Litigation Reform Act (the "PSLRA") requires a plaintiff to, among other things, "state with particularity facts giving rise to a strong inference that the defendant acted" with scienter. 15 U.S.C. § 78u-4(b)(2);
In this context, "an inference of scienter can only be strong—and compelling, and powerful—when it is weighed against the opposing inferences that may be drawn from the facts in their entirety."
Plaintiff's theory is that defendants intentionally misled investors to believe that the FDA would approve Northera based on the results of only one successful study, thereby artificially inflating Chelsea's stock price. According to plaintiffs, defendants were motivated to mislead investors and inflate stock values in this way to stave off bankruptcy and fund clinical trials. Pl.'s Br. 28. To that end, Chelsea pushed forward with the Northera NDA in spite of the FDA's warnings that Study 301, by itself, would be insufficient for approval, a fact which Chelsea failed to disclose to investors. These allegations, however, when weighed against the opposing inferences that may be drawn from the facts in their entirety, fail to satisfy the PSLRA's requirement of a strong inference of scienter.
With regards to defendants' alleged motivations, the Fourth Circuit has already addressed and dismissed plaintiff's argument in
Plaintiff also argues that the defendants' communications with the FDA regarding the Northera NDA establish a showing of recklessness. The court disagrees. Plaintiff makes much of the fact that Chelsea only had one successful study on Northera and, according to plaintiff, the FDA requires two successful studies before approving an NDA.
While the briefing committee transcript is certainly not a model of clarity of the FDA's NDA requirements, it casts significant doubt on plaintiff's contention that one successful study would not be sufficient. Compl., ECF 65 ¶ 97; Transcript, ECF 82-17. Dr. Steve Graham, FDA Deputy Director of the Division of Cardiovascular and Renal Products, explained that: "[T]he question was . . . was this study in and of itself going to be sufficient, if successful, to support an application? And we never know what the answer is. As Norman says, an overwhelming effect in one study, you'd be a fool not to approve it."
This alleged deficiency, if it can indeed even be called that, certainly does not rise to the level of scienter or an "extreme departure from ordinary care," especially when it is weighed against the strong competing inferences that weigh in favor of defendants, the most glaring of which is the fact that
The cases cited by plaintiff for the proposition that scienter is established by virtue of the individual defendants' positions are of little relevance here as the Amended Complaint fails to satisfy the PSLRA's heightened pleading requirement for scienter. These cases stand for the proposition that scienter can be established as to an individual defendant through statements that the defendant should have known were false or misleading by virtue of their position. That is simply not the issue in the present case. As discussed above, plaintiff attempts to establish a showing of scienter or recklessness by alleging that Chelsea 1) was on the verge of bankruptcy and 2) knew the NDA would fail as the FDA was going to require two successful studies. Additionally, Chelsea gave investors several clear and explicit warnings regarding the prospects for the Northera NDA.
As discussed above, the court is guided by the binding principles set forth by the Fourth Circuit Court of Appeals in
IV. Section 20(a) Claims
The parties agree that the claims in Count II, which arise under Section 20(a) of the Exchange Act, cannot be sustained in the absence of an underlying primary violation, to wit, the section 10(b) claims. As Count I has been dismissed, the court must also dismiss Count II.
V. Leave to Amend
Plaintiff requests that in the event the court finds the Amended Complaint deficient, he be granted leave to amend under Rule 15(a). Pl.'s Mem. 30 n. 18. The court, however, having carefully considered the briefs, the exhibits, and the extensive Amended Complaint, finds that doing so would be futile and will deny this request.
Furthermore, plaintiff has given no indication how a second Amended Complaint might cure any of the above deficiencies, and a proposed Second Amended Complaint was not proffered. The only mention of leave to amend comes in a footnote at the very end of Plaintiff's brief.