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Local No. 8 Ibew Retirement Plan & Trust v. Vertex Pharmaceuticals, Inc.

United States Court of Appeals, First Circuit

October 3, 2016

LOCAL NO. 8 IBEW RETIREMENT PLAN & TRUST, on behalf of itself and all others similarly situated, Plaintiff, Appellant,
v.
VERTEX PHARMACEUTICALS, INC.; JOSHUA BOGER, Ph.D.; JEFFREY LEIDEN, Ph.D.; PETER MUELLER, Ph.D.; PAUL SILVA; ELAINE ULLIAN; NANCY J. WYSENSKI, Defendants, Appellees.

         APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. F. Dennis Saylor IV, U.S. District Judge]

          Amanda F. Lawrence, with whom David R. Scott, Joseph P. Guglielmo, Beth A. Kaswan, Donald A. Broggi, and Scott Scott, Attorneys at Law, LLP, were on brief, for appellant.

          John F. Sylvia, with whom Andrew Nathanson, Matthew D. Levitt, Rebecca L. Zeidel, and Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., were on brief, for appellees.

          Before Torruella, Kayatta, and Barron, Circuit Judges.

          KAYATTA, Circuit Judge.

         During the course of clinical trials for an experimental drug combination intended to treat a fatal lung disease, Vertex Pharmaceuticals, Inc. ("Vertex") announced interim results that overstated the improvement in lung function exhibited in a group of patients receiving the combination treatment. Following this announcement, Vertex's stock price rose from $37.41 per share to close at $64.85 three weeks later. It then lost some of its gain, dropping to $57.80, after Vertex corrected the initial release's overstatement. Acting on behalf of all those who acquired Vertex stock during the period in which the overstatement stood uncorrected, Local No. 8 IBEW Retirement Plan & Trust ("Local No. 8") filed this securities fraud class action complaint against Vertex and six past and current Vertex employees. The district court dismissed the complaint, finding that it failed to create a strong inference that the defendants had acted with scienter, the requisite mental state. See Local No. 8 IBEW Ret. Plan v. Vertex Pharm., Inc., 140 F.Supp.3d 120, 137 (D. Mass. 2015). We agree and so affirm.

         I. Background[1]

         As one of the world's largest biotechnology companies, Vertex researches, develops, and sells treatments for a variety of ailments. In 1998, Vertex began working on drugs to combat cystic fibrosis, a fatal and as yet incurable lung disease. In early 2012 it gained Food and Drug Administration ("FDA") approval to market a drug, Kalydeco, to treat patients with a rare form of the disease. This approval, along with a contemporaneous drop in the value of Vertex's stock due to Vertex's diminishing returns from another product line, prompted Vertex to focus its energies on developing a more broadly marketable cystic fibrosis treatment.

         In pursuit of this aim, Vertex explored a "combination therapy, " in which a cystic fibrosis patient first undergoes a course of treatment with an experimental drug called VX-809 and only then begins taking Kalydeco. Hoping that this combination would be effective against the most common form of cystic fibrosis, Vertex began a three-phase clinical investigation required for FDA approval. See N.J. Carpenters Pension & Annuity Funds v. Biogen IDEC Inc., 537 F.3d 35, 39 (1st Cir. 2008) (describing the FDA approval process); 21 C.F.R. § 312.21 (describing the three phases of clinical investigation). On May 7, 2012, while the second phase of this process was ongoing, Vertex issued a press release announcing interim results drawn from roughly half of the 108 enrolled patients.[2] The press release focused in particular on one of the principal markers used to evaluate the effectiveness of a cystic fibrosis treatment: lung function, as measured by the amount of air a patient is capable of exhaling in one second. According to the press release,

[o]f those who received [the combination therapy], approximately 46 percent (17/37) experienced an absolute improvement from baseline to Day 56 [of the trial period] in lung function of 5 percentage points or more, and approximately 30 percent (11/37) experienced an absolute improvement from baseline to Day 56 of 10 percentage points or more. None of the patients treated with placebo (0/11) achieved a 5-percentage point or more improvement from baseline to Day 56 in lung function.

         The press release described these results as "exceed[ing] [Vertex's] expectations, " although it cautioned that "complete data" were not yet available and that "the final outcomes of this clinical trial or future clinical trials . . . may be less favorable than the interim analysis reported today, or may not be favorable at all."[3]

          The same day, Vertex held a conference call for media and investors. On the call, Vertex's Executive Vice President and Chief Scientific Officer, Peter Mueller ("Mueller"), described the interim results as "really, really fantastic" and went on to say, "I have never seen anything like this." Vertex's Chief Executive Officer ("CEO"), Jeffrey Leiden ("Leiden"), also expressed confidence in the results, saying that they were "driving us to . . . plan for potential market entries sooner than we had previously planned" and that, "[p]ending final data this summer and discussions with regulators, we look forward to accelerating the development of our [cystic fibrosis] combination regimen." Nancy Wysenski ("Wysenski"), at that time Vertex's Chief Commercial Officer and Executive Vice President, further noted that the number of patients who stood to benefit from the combination treatment under review exceeded 70, 000--a market that could translate into billions of dollars in potential sales.[4]

         Vertex's stock price swiftly responded to the announcement of the promising interim results. On May 7, 2012, the day of the announcement, Vertex stock closed at $58.12 per share--up from the prior close of $37.41, with a trading volume forty times higher than average. By May 25, 2012, the closing price had risen to $64.85 per share. Meanwhile, five Vertex employees named as defendants in this suit--Joshua Boger ("Boger"), then Vertex's Director; Paul Silva ("Silva"), who had formerly served as Vertex's Vice President and Corporate Controller; Elaine Ullian ("Ullian"), Vertex's co-lead independent director; Mueller; and Wysenski--sold a total of 539, 313 shares of Vertex stock, collecting almost $32 million in all.

         On May 29, 2012, Vertex announced in a press release that the interim results that had so energized its market prospects had overstated the improvement in lung function exhibited among the Phase 2 patients receiving the combination treatment. The error, as Vertex acknowledged that day in a conference call, stemmed from a "misinterpretation" as to whether the results Vertex had received from the third-party statistical analysis vendor reflected the absolute improvement in the patients' lung function or, rather, the improvement relative to the patients' baseline levels of lung function.[5] When evaluated properly, Vertex's press release explained, the data showed that 35 percent of the patients taking the combination treatment (rather than 46 percent, as had initially been reported experienced an absolute improvement of 5 percent or more, and that 19 percent (rather than 30 percent, as had initially been reported) experienced an absolute improvement of 10 percent or more. Immediately following the announcement of the corrected results, the closing price of Vertex stock experienced its greatest decline in three years, dropping to $57.80 per share, down from $64.85 per share on May 25, yet still well up from the May 4 close of $37.41.

         Just short of two years later, Local No. 8 filed a class-action complaint against Vertex--as well as Boger, Leiden, Mueller, Silva, Ullian, and Wysenski--on behalf of all those who, like Local No. 8, had acquired Vertex stock between the announcement of the overstated interim results on May 7, 2012, and the announcement of the corrected results on May 29, 2012. The complaint charged all defendants with securities fraud under section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78j(b), and the Securities and Exchange Commission's Rule 10b-5, 17 C.F.R. § 240.10b-5. It also charged the six individual defendants with joint and several liability under section 20(a) of the Exchange Act, 15 U.S.C. § 78t(a), for the alleged securities fraud, on the theory that these defendants "controlled Vertex, and/or controlled other Individual Defendants"; and charged Boger, Mueller, Silva, Ullian, and Wysenski with insider trading under section 20A of the Exchange Act, id. § 78t-1(a). The gravamen of the alleged fraud, according to the complaint, is that, "[w]hen faced with . . . study results that seemed too good to be true, Defendants, rather than checking the results, turned a blind eye, accepting and promoting unlikely data that offered them a windfall on the sale of their stock."

         The defendants moved to dismiss for failure to state a claim, see Fed.R.Civ.P. 12(b)(6), arguing that the facts alleged in the complaint fail to generate a strong inference that the defendants acted with the mental state required to render them liable under section 10(b) and Rule 10b-5. The district court agreed. It found as well that Local No. 8's section 20(a) and section 20A claims could not survive in the absence of a proper section 10(b) and Rule 10b-5 claim, and dismissed the complaint. See Local No. 8, 140 F.Supp.3d at 137. This timely appeal ensued.

         II. ...


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