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In re Dura Pharmaceuticals

February 20, 2008

IN RE DURA PHARMACEUTICALS, INC. SECURITIES LITIGATION


The opinion of the court was delivered by: Honorable Janis L. Sammartino United States District Judge

This Document Relates To: All Actions

ORDER GRANTING IN PART WITHOUT PREJUDICE AND DISMISS FOURTH CONSOLIDATED AMENDED COMPLAINT DENYING IN PART MOTION TO (Doc. No. 138)

This is a putative class action for securities fraud. Presently before the Court is the motion to dismiss the Fourth Consolidated Amended Complaint ("FCAC") by defendants Dura Pharmaceuticals, Inc. ("Dura"); Cam L. Garner; James W. Newman; Charles W. Prettyman; and Walter F. Spath (collectively, "defendants").*fn1 (Doc. No. 138.) Defendants' motion focuses on the allegations pertaining to Dura's Albuterol Spiros inhaler, which failed to obtain FDA approval, and on all allegations concerning Prettyman, Dura's Senior Vice President of Development and Regulatory Affairs. For the reasons stated herein, with respect to the Albuterol Spiros inhaler, the Court grants in part and denies in part. With respect to the allegations concerning Prettyman, the Court grants the motion to dismiss.

BACKGROUND

A. Factual Background

The Court incorporates by reference the thorough description of the background facts of this case contained in the Hon. M. James Lorenz's Order granting in part and denying in part the motion to dismiss the third consolidated amended complaint ("TAC").*fn2 (Doc. No. 135, at 2:1--7:20.) To the extent that the FCAC contains the same factual allegations, the Court does not repeat them here. Where the FCAC provides greater specificity concerning those allegations, the Court addresses those new allegations in its substantive analysis infra.

Generally speaking, this case is a putative class action brought by purchasers of Dura securities between April 15, 1997 and February 24, 1998 ("class period"). (FCAC ¶ 1.) Plaintiffs allege violations of federal securities laws arising from the development of the Albuterol Spiros inhaler, "a method of aerosolizing powders so that asthma medicines . . . could be inhaled." (Id. ¶ 3.) Plaintiffs allege that, despite the discovery of problems during the product development process that effectively guaranteed rejection by the Food and Drug Administration ("FDA"), defendants nonetheless pushed forward with a new drug application ("NDA") and represented to the public that the inhaler would reach the market as a matter of course after obtaining FDA approval.

Plaintiffs further allege violations of federal securities laws arising from misrepresentations and omissions regarding Dura's sales of its primary drug, Ceclor CD. (FCAC ¶ 29.) Plaintiffs specifically allege "a scheme to artificially inflate [Dura's] revenues and earnings" by unloading excessive amounts of Ceclor CD onto wholesalers with unusually favorable terms so as to maximize Dura's revenues and earnings per share. (Id. ¶ 34.) While Dura represented that sales of Ceclor CD were strong and on the rise, those sales actually declined throughout the class period.

B. Procedural Background

With respect to events in this litigation preceding the Order on the TAC, including the decision of the United States Supreme Court on the issue of loss causation, this Court incorporates by reference the thorough description of Judge Lorenz's Order concerning the procedural history of this case. (Doc. No. 135, at 5:22--7:20.) On June 2, 2006, Judge Lorenz dismissed plaintiffs' claim with respect to the Albuterol Spiros inhaler. Although the TAC adequately alleged loss causation, Judge Lorenz dismissed for the failure to plead with sufficient particularity the source of plaintiffs' allegations with respect to falsity and scienter. (Doc. No. 135, at 21:27--22:3.) Plaintiffs were not sufficiently specific in their descriptions of various Dura internal reports detailing problems in the inhaler's development. (Id. at 20:15--21:15.) Also, plaintiffs did not describe any confidential witnesses to support allegations regarding Dura executives' knowledge of those problems or fraudulent intent to conceal those problems. (Id. at 21:16-17.) "The absence of such allegations [was] significant because the crux of Defendants' malfeasance comes from their decision to forge ahead with clinical trials and the NDA submission notwithstanding their inability to remedy the problems identified" in the early stages of product development. (Id. at 21:23-26.)

Judge Lorenz further held that plaintiffs adequately stated a claim against Dura, Newman, Garner, and Spath concerning these defendants' representations and omissions in the scheme to overload wholesalers with Ceclor CD. (Doc. No. 135, at 29:8-10.) With respect to the remaining defendants,*fn3 Judge Lorenz found that the TAC did not successfully impute liability based on group pleading, stock sales, their corporate positions, or motive. (Id. at 29:10-13.) Judge Lorenz limited the scope of the claim to exclude statements in securities analysts' reports. (Id. at 35:25-27, 37:3-6.) Judge Lorenz found that the TAC failed to allege the specific statements that defendants made to the analysts. (Id. at 35:25-26.)

Judge Lorenz granted plaintiffs leave to file an amended complaint. (Doc. No. 135, at 37:2-6.) On July 21, 2006, plaintiffs filed the FCAC. (Doc. No. 137.) On September 5, 2006, defendants moved to dismiss the FCAC. (Doc. No. 138.) Plaintiffs filed their opposition on October 19, 2006. (Doc. No. 144.) Defendants replied on November 13, 2006. (Doc. No. 146.) The motion was then deemed submitted as of December 4, 2006. (Doc. No. 149.)

This case was reassigned to the Hon. Janis L. Sammartino on October 3, 2007. On November 14, 2007, after the Court set the matter for oral argument, but before oral argument took place, plaintiffs submitted a supplemental brief concerning the Supreme Court's decision in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.Ct. 2499 (2007). (Doc. No. 154.) Defendants submitted their own supplemental brief on November 29, 2007. (Doc. No. 156.)

The Court held oral argument on the motion on December 14, 2007. After the matter was taken under submission, plaintiffs submitted a second supplemental brief on February 1, 2008 concerning the Seventh Circuit's decision in Makor Issues & Rights, Ltd. v. Tellabs, Inc., 2008 WL 151180 (7th Cir. Jan. 17, 2008). (Doc. No. 158.) Defendants filed a second responsive supplemental brief on February 12, 2008. (Doc. No. 159.)

LEGAL STANDARD

The Court incorporates by reference Judge Lorenz's thorough description of the applicable law pertinent to motions to dismiss in securities class actions. (See Doc. No. 135, at 7:21--10:7.) That description explained, inter alia, the requirement to plead falsity and scienter with particularity under the Private Securities Litigation Reform Act (PSLRA).

Since Judge Lorenz's Order on the TAC, the Supreme Court clarified that, in determining whether the pleaded facts give rise to a "strong" inference of scienter, the court "must take into account plausible opposing inferences." Tellabs, Inc. v. Makor Issues & Rights, Ltd., - U.S. - , 127 S.Ct. 2499, 2509 (2007). The Court explained that the strength of an inference depends on its particular context: "To determine whether the plaintiff has alleged facts that give rise to the requisite 'strong inference' of scienter, a court must consider plausible nonculpable explanations for the defendant's conduct, as well as inferences favoring the plaintiff." Id. at 2510. A complaint survives a motion to dismiss under the PSLRA "only if a reasonable person would deem the inference of scienter cogent and at least as compelling as any opposing inference one could draw from the facts alleged." Id.

DISCUSSION

A. Sources of the FCAC's Allegations

When plaintiffs base their allegations on information and belief, "[i]t is not sufficient . . . to set forth a belief that certain unspecified sources will reveal . . . facts that will validate [plaintiffs'] claim." In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 985 (9th Cir. 1999); In re Immune Response Sec. Litig., 375 F. Supp. 2d 983, 1023 (S.D. Cal. 2005). Although a complaint may keep confidential the identities of personal sources, those confidential witnesses "should be 'described in the complaint with sufficient particularity to support the probability that a person in the position occupied by the source would possess the information alleged.'" Nursing Home Pension Fund, Local 144 v. Oracle Corp., 380 F.3d 1226, 1233 (9th Cir. 2004); Alaska Elec. Pension Fund v. Adecco S.A., 371 F. Supp. 2d 1203, 1211 (S.D. Cal. 2005). A complaint relying on anonymous confidential witnesses must also contain "adequate corroborating details." Nursing Home, 380 F.3d at 1233; Adecco, 371 F. Supp. 2d at 1211. To determine the adequacy of allegations based on confidential witness accounts, the court evaluates "'the level of detail provided by the confidential sources, the corroborative nature of the other facts alleged (including from other sources), the coherence and plausibility of the allegations, the number of the sources, [and] the reliability of the sources.'" In re Daou Sys., Inc., 411 F.3d 1006, 1015 (9th Cir. 2005) (quoting In re Cabletron Sys., Inc., 311 F.3d 11, 29 (1st Cir. 2002)); Limantour v. Cray Inc., 432 F. Supp. 2d 1129, 1141-42 (W.D. Wash. 2006).

Where plaintiffs rely on internal reports, plaintiffs must provide such details as the sources of the plaintiffs' information about the reports, the way plaintiffs learned about them, the authors, the officers receiving the reports, and an "adequate description" of the contents. Silicon Graphics, 183 F.3d at 985; Adecco, 434 F. Supp. 2d at 831. Here, plaintiffs rely on internal reports as the corroboration of the confidential witnesses. Judge Lorenz's prior Order found that plaintiffs provided sufficient details to establish the reliability of the Eisele List, a summary of problems with the inhaler originally prepared in October 1996 by Dura's Vice President of Product Development. (Doc. No. 135, at 20:7-14.) Otherwise, however, Judge Lorenz found that plaintiffs insufficiently alleged the existence of other internal reports, e.g., analyses of chemical stability test results, minutes of product development meetings, configuration modification reports, and product reliability reports. (Id. at 20:15-21:15.) Because of plaintiffs' reliance on the corroborating details in the internal reports, the Court begins with its analysis of the internal reports and then evaluates the reliability of the confidential witnesses.

1. Internal Reports

Although Judge Lorenz found sufficient indicia of reliability concerning the Eisele List, Judge Lorenz found the TAC's allegations inadequate with respect to three other types of documents: (1) chemical stability test results and analytic reports allegedly circulated during product development meetings; (2) modification reports drafted by Senior Project Engineer Mike Ligotke and Project Leader Linda Gieschen; and (3) product development reports, also prepared by Ligotke and Gieschen.

With respect to the stability tests and analytic reports, the FCAC remains vague, even after amendment, concerning the authors of those reports. (FCAC ¶ 11.) While citing confidential witnesses as plaintiffs' sources concerning those reports, the FCAC still does not explain, in turn, how the confidential witnesses themselves learned of those reports. The ongoing deficiencies in plaintiffs' pleading of these reports are mitigated, however, by the confidential witness accounts of the product development problems. Confidential witnesses identify the specific problems that were allegedly discovered during the stability tests and the ways that the product development team communicated those problems to the defendants.

Plaintiffs have provided further details concerning Ligotke and Gieschen's modification reports. Plaintiffs cite confidential witnesses as their source for learning about the reports. (FCAC ¶¶ 95, 122.) Plaintiffs now explain who received these reports (namely, Prettyman and the Regulatory Affairs Department), although the FCAC remains vague concerning the frequency of the "periodic basis" when these reports were prepared and distributed. (Id.) The FCAC pleads the content of those reports with greater specificity, explaining how the modification reports distinguished among the various inhaler configurations and the tests that Dura ran on each. (Id.)

The allegations concerning the product development reports are responsive to some of the defects identified by Judge Lorenz, but still remain problematic. The FCAC now explains that the reports were generated and distributed between mid-1996 and October 1997, during the class period and contemporaneous with the Eisele list. (FCAC ΒΆ 17.) Nonetheless, the FCAC ...


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