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Construction Laborers Pension Trust of Greater St. Louis v. Neurocrine Biosciences

May 12, 2008

CONSTRUCTION LABORERS PENSION TRUST OF GREATER ST. LOUIS, ET AL.,
v.
NEUROCRINE BIOSCIENCES, INC., GARY A. LYONS, PAUL H. HAWRAN, WENDELL D. WIERENGA, HENRY Y. PAN, RICHARD F. POPS, AND WYLIE W. VALE, DEFENDANTS.



The opinion of the court was delivered by: Irma E. Gonzalez, Chief Judge United States District Court

ORDER: (1) GRANTING DEFENDANTS' MOTION TO DISMISS CONSOLIDATED AMENDED COMPLAINT; (Doc. No. 36) (2) GRANTING PLAINTIFFS LEAVE TO AMEND; (3) GRANTING IN PART AND DENYING IN PART DEFENDANTS' REQUESTS FOR JUDICIAL NOTICE; (Doc. Nos. 37 & 48) (3) GRANTING IN PART AND DENYING IN PART PLAINTIFFS' MOTIONS TO STRIKE (Doc Nos. 41 & 52).

Presently before the Court are: (1) a motion to dismiss the consolidated amended complaint in its entirety, filed by defendants; (2) a motion to strike defendants' request for judicial notice, filed by plaintiffs; and (3) a motion to strike defendants' supplemental request for judicial notice, filed by plaintiffs. The lead plaintiffs are Charles N. Seiji and Raymond J. Mertz. Defendants are Neurocrine Biosciences, Inc., Gary A. Lyons, Paul H. Hawran, Wendell D. Wierenga, Henry Y. Pan, Richard F. Pops, and Wylie W. Vale. For the following reasons, the Court: (1) grants defendants' motion to dismiss the consolidated amended complaint; (2) grants plaintiffs leave to amend; (3) grants in part and denies in part defendants' requests for judicial notice; and (4) grants in part and denies in part plaintiffs' motions to strike.

BACKGROUND

A. Factual Background

This action alleges a common scheme and course of conduct by Neurocrine Biosciences, Inc. ("Neurocrine"), its officers, and its directors to defraud investors in violation of Section 10(b) and Section 20(b) of the Securities Exchange Act of 1934. Plaintiffs represent a purported class of investors who purchased Neurocrine stock between February 10, 2005 and June 23, 2006 ("the class period").

Neurocrine engages in the development and discovery of drugs for the treatment of neurological and endocrine-related diseases and disorders in the United States. (Consolidated Amended Complaint ("Complaint") ¶ 32.) In 1998, Neurocrine acquired the rights to a drug called "indiplon" which the company claimed could be used for the treatment of insomnia. (Id. ¶¶ 33-34.) A modified-release ("MR") formula of the drug could potentially maintain a patient's sleep, differentiating indiplon from the other available insomnia medications only approved to induce sleep. (Id. ¶¶ 35, 55 & 59.)*fn1 Neurocrine also indicated indiplon could be approved without the "short-term" label which restricts use of other insomnia medications to only seven to ten days. (Id. ¶ 36.)

Pharmaceutical companies seeking Food and Drug Administration ("FDA") approval of a new drug must establish the drug is safe and effective. (Id. ¶ 28.) After completing three phases of human clinical trials, the company submits a New Drug Application ("Application") to the FDA. The agency then determines "if clinical trials and other data demonstrate that the drug is effective for its intended use and that the established benefits of the drug outweigh its known risks." (Id. ¶ 29.) If the data is incomplete, inaccurate, biased, or if it suggests the product is unsafe or ineffective, the FDA will not approve the Application. (Id. ¶ 30 (citing 21 C.F.R. § 314.125(b)(3), (4) & (5)).)

In December of 2002, Neurocrine entered into a collaboration agreement with "pharmaceutical giant" Pfizer, Inc. to pursue FDA approval of indiplon. (Complaint ¶¶ 41-42.) During the class period, Neurocrine focused primarily on the development and commercialization of indiplon, and had no other major products or sources of funding. Plaintiffs allege the company encountered problems with MR indiplon in the clinical testing of 20 and 30 milligram doses, specifically "tolerance" (decreasing efficacy of the drug over time) and "next-day drowsiness." (E.g., id. ¶¶ 53-54.) Because of these problems, defendants decided not to file an Application for the 20 and 30 mg doses. (Id. ¶ 66.) Plaintiffs support these allegations with details provided by anonymous witnesses. (Id. ¶¶ 75-78.)

Defendants then performed two studies of a 15 mg dose, in what plaintiffs allege was a futile attempt to muster any support for the new dose. (Id. ¶¶ 66 & 77.) Publically, Neurocrine reported it completed 70 trials with over 7000 subjects, and repeatedly emphasized the quantity of data supporting the Application. (E.g., id. ¶¶ 62-63.) On November 22, 2004, Neurocrine announced the submission of the Application for MR indiplon. (Id. ¶ 72.) On December 21, 2004, the company announced the FDA was having technological problems accessing the Application, but Neurocrine re-filed in a better format inMayof 2005. (Id. ¶ 73.) Plaintiffs allege defendants took advantage of the opportunity to re-file by adding additional data to the Application from a second study of the 15 mg dose,*fn2 despite reassuring the public the Application was complete and still "on track" for FDA approval. (Id. ¶ 80.)

The complaint includes an anonymous technical writer's report that Neurocrine's "VP of Regulatory Affairs and VP of Clinical Development for MR indiplon told the executive team that there was insufficient data at the 15 mg dose, but defendants ignored the warning and submitted the MR Application knowing it contained insufficient data." (Id. ¶ 81(a).) Plaintiffs claim defendants made false statements when they spoke optimistically about the chance of success of the Application and claimed it was complete and well-supported. (Id. ¶ 81(a)-(b).) Plaintiffs also allege defendants made material misrepresentations by stating MR indiplon was safe and efficacious, in light of the tolerance and next-day drowsiness problems alleged above. (Id. ¶¶ 81(c)-83.)

While the FDA considered the indiplon Application, defendants continued to make optimistic statements regarding FDA approval. Plaintiffs identify and quote many such statements in the complaint. Representative examples include the statements by defendants Lyons and Wierenga in an October 24, 2005 conference call. Lyons stated "indiplon regulatory is moving according to schedule. We remain optimistic in receiving a first cycle approval on our PDUFA [Prescription Drug User Fee Act] dates . . . so everything is tracking according to plan in that respect." (Id. ¶ 87.) Wierenga added "the program, as Gary noted, is proceeding on track with the agency. And we are looking forward to an expansion of opportunities for indiplon post approval as we expand the Phase 4 opportunities for the drug." (Id.) When asked about his confidence regarding the PDUFA dates, Lyons explained:

The confidence is simply I think we have done the most comprehensive registration trial and program, have submitted a complete package, have obviously tracked other submissions that have gone to the neuropharm agencies that we don't think are as robust as the indiplon data package, so we remain optimistic that we have identified and done the necessary trials to over come any obstacles.

(Id.)

Before the market opened on May 16, 2006, Neurocrine publically announced the FDA had issued a "non-approvable" letter regarding 15 mg indiplon.*fn3 (Id. ¶ 96.) A non-approvable letter signifies deficiencies in the Application such that approval in the future may require additional data or additional clinical trials. (Id. ¶ 31.) During a conference call on May 16, 2006, defendant Lyons explained "the FDA response was a surprise to us" but characterized it as a "short-term setback." (Id. ¶ 97.) According to a later press release by the company, the FDA's "nonapprovable" letter regarding 15 mg indiplon requested the company "reanalyze certain safety and efficacy data." Plaintiffs also allege the letter "questioned the sufficiency of the Company's objective sleep maintenance clinical data for the 15 mg tablet in view of the fact that the majority of the Company's indiplon tablet studies were conducted with doses higher than 15 mg." (Id. ¶¶ 99 & 101.)

This announcement caused a 62% drop in the stock price, which sank from $54.54 to $20.76 per share. On June 22, 2006, Neurocrine announced Pfizer terminated its collaboration agreement with Neurocrine. As a result of this news, Neurocrine's stock fell to $9.85 per share.

During the class period, Gary A. Lyons was Neurocrine's Chief Executive Officer and President; Paul H. Hawran was the Executive Vice President and Chief Financial Officer; Wendell D. Wierenga was the Vice President of Research and Development; Henry Y. Pan was the Executive Vice President and Chief Medical Officer; Richard F. Pops was a director, and Wylie W. Vale was a director and Chief Scientific Advisor. (Id. ¶¶ 19-24.) Plaintiffs allege defendants Lyons, Hawran, Pops and Vale sold shares of Neurocrine's stock during the class period. (Id. ¶¶ 111-12.) Plaintiffs also allege defendants Lyons, Hawran and Wierenga received performance-based bonus payments linked to achieving goals for indiplon and other drugs in 2005.

B. Procedural Background

Plaintiffs initially filed this action on June 19, 2007, and filed the operative complaint on November 30, 2007. (Doc. No. 33.) On January 11, 2008, defendants filed a motion to dismiss the complaint (Doc. No. 36), and an accompanying request for judicial notice (Doc. No. 37). On February 28, 2008, plaintiffs filed an opposition to the motion. (Doc. No. 40.) On March 10, 2008, plaintiffs filed a motion to strike defendants' request for judicial notice. (Doc. No. 41.) On March 24, 2008, defendants filed an opposition to the motion to strike (Doc. No. 46), and a reply in support of their motion to dismiss (Doc. No. 47), along with a supplemental request for judicial notice. (Doc. No. 48.) On March 25, 2008, plaintiffs filed a motion to strike defendants' supplemental request for judicial notice (Doc. No. 52), and on March 26, 2008, defendants opposed that motion (Doc. No. 53). On March 28, 2008, plaintiffs filed a reply in support of their first motion to strike. (Doc. No. 54.) On April 15, 2008, plaintiffs filed a reply in support of their second motion to strike. (Doc. No. 56.)

The Court heard oral argument at 9:30 a.m. on April 22, 2008. Michael Dowd, Daniel Drosman, Jennifer Keeney and Karen Reilly appeared on behalf of plainitffs. William Grauer, Mary Kathryn Kelley, and Ryan Blair appeared on behalf of defendants.

DISCUSSION

Legal Standards

1. Rule 12(b)(6) Motion to ...


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