The opinion of the court was delivered by: Lucy H. Koh United States District Judge
ORDER GRANTING DEFENDANTS' MOTION TO DISMISS WITH LEAVE TO AMEND
Defendants Intuitive Surgical, Inc., Benjamin Gong, Aleks Cukic, Jerome McNamara, Mark J. Rubash, Gary Guthart, Marshall Mohr, and Lonnie Smith (collectively "Defendants") 20 move to dismiss the claims in this securities class action. Lead Plaintiff Police Retirement Systems 21 of Saint Louis ("Plaintiff") opposes the motion. Pursuant to Civil Local Rule 7-1(b), the Court 22 deems this motion appropriate for resolution without oral argument, and vacates the August 11, 23 2011 motion hearing. For the reasons explained below, the Court grants Defendants' motion to 24 dismiss with leave to amend. In light of the dismissal, the case management conference scheduled 25 for August 11, 2011 is continued to Wednesday, October 26, 2011 at 2:00 p.m.
Plaintiff purchased or otherwise acquired Intuitive Surgical common stock between February 1, 2008 and January 7, 2009 inclusive (the "Class Period"). Defendant Intuitive Surgical 4 is a medical device manufacturer of cutting-edge robotic surgery devices used for certain kinds of 5 minimally invasive surgery procedures. First Amended Complaint ("FAC") ¶ 1. Intuitive urgical's central product is the da Vinci System, which costs upward of $1.7 million. Id. The da Vinci System and its accompanying surgical instruments are "Class II" medical devices, and are 8 subject to extensive regulation by the U.S. Food and Drug Administration ("FDA"). The da Vinci 9
System was introduced in the U.S. in 2000 after the FDA approved its use for "general" 10 laparoscopic procedures. Since then, the da Vinci System has been approved for prostatectomy procedures (in 2001), other urological procedures (in 2005), and gynecological procedures, 12 including hysterectomy procedures (also in 2005). Id. at ¶ 2. Plaintiff refers to da Vinci 13 prostatectomy procedures as dVP procedures, and refers to da Vinci hysterectomy procedures as 14 dVH procedures. From 2005 to 2007, Intuitive Surgical increased its total revenues, based on all 15 procedures, over the prior year by more than 60%. Id. at ¶ 5.
The individual Defendants were employed at Intuitive Surgical during the Class period:
Gong was the Vice President of Finance; Cukic was the Vice President of Business Development 18 and Strategic Planning; McNamara was the Executive Vice President of Worldwide Sales; Rubash 19 was a Director and the designated Audit Committee Financial Expert; Guthart was the President 20 and a Director; Mohr was the Chief Financial Officer; and Smith was the Chief Executive Officer 21 and Chairman of the Board. 22
23 repeatedly asked about the effects of the economic crisis, and "steadfastly" assured analysts and 24 investors that "the economic crisis was not negatively impacting da Vinci sales and revenues," 25 when in truth, the economic crisis was negatively impacting Intuitive Surgical's sales and 26 revenues. Id. at ¶ 8. Moreover, by the end of 2007 and unbeknownst to investors, Intuitive 27
Finally, and also by the end of 2007, Intuitive Surgical had essentially "saturated" the market for
Plaintiff alleges that, throughout the Class Period, the individual Defendants were Surgical "had reached a ceiling" as to the growth rate for some its most popular procedures.
first-time placement of the da Vinci System in key regions of the U.S., thus making further growth 2 difficult. Id. at ¶ 7. To support its allegations, Plaintiff relies on Intuitive Surgical's public filings 3 with the U.S. Securities and Exchange Commission ("SEC"), other publicly available information 4 such as news and financial analyst reports, and interviews with former Intuitive Surgical employees 5 and independent contractors, identified by Plaintiff as "Corroborating Witnesses." According to 6 these Corroborating Witnesses, Intuitive Surgical had an extensive and accessible tracking system, 7 which allowed employees, including the individual Defendants, to access information on every 8 procedure performed. Id. at ¶ 254.
Plaintiff alleges nineteen false and/or misleading statements or omissions covering four "Analyst Calls" in 2008, in which various individual Defendants made statements about Intuitive Surgical's financial results and prospects. Statements 1-5 concern the first Analyst Call on January 31, 2008. Statements 6-9 concern the second Analyst Call on April 17, 2008. Statements 10-14 13 concern the third Analyst Call on July 22, 2008. Statements 15-19 concern the fourth Analyst Call 14 on October 16, 2008.
January 31, 2008 Analyst Call
During the January 31, 2008 Analyst Call, Defendant Gong [Intuitive Surgical's Vice President of Finance] stated "Starting with procedures, we continue to expect dVP and dVH adoption to grow in our 2008 recurring revenues. For 2008, we expect dVP procedures to grow approximately 40% from a base of approximately 55,000 procedures performed in 2007. And we expect dVH to grow approximately 150% from a base of approximately 13,000 procedures performed in 2007. . . . Overall we expect total procedures to grow at least 55% in 2008 from a base of approximately 85,000 procedures performed in 2007. . . . We expect our total 2008 revenues to grow approximately 40% over 2007. Instrument and accessory revenues, which are specifically driven by procedures performed, are expected to grow approximately 55% over 2007. We expect this growth to result from procedures performed on new system placements as well as increased utilization of existing installed systems."
During the January 31, 2008 Analyst Call, Deutsche Bank analyst Tao Levy asked, "Okay. And you look [at] the new system sales that are taking place today. Obviously in the past urology was still the drive, it's probably still one of the big drivers. How does gynecology fall into that selling process today?" Defendant Smith stated, "Gynecology plays a bigger and bigger role each day. I would also say that the uptake in gynecology has in many instances put stress on hospitals that only have one [da Vinci] system, and I think you've seen again this quarter probably being the strongest side of that, and a total of 20 systems that went to repeat customers. So gynecology is a big player in that, and I think will continue to be and continue to expand."
During the January 31, 2008 Analyst Call, Michael Tue, an analyst for Oppenheimer, asked ". it appears that you are at least about 33% penetrated into the Tier 1 hospitals mostly in major metropolitan areas. So, on a go forward basis, how should we think about system placement growth?" Defendant Smith replied, "Again, I think it's important to know when you look at however you want to stratify hospitals and large hospitals or Tier 1 or Tier 2 or Tier 3 that when you're talking about the largest hospitals, our view is that those -- and we see it more and more every quarter, that those become very strong candidates for multiple systems. So I would probably push on that math that you did there a little bit."
During the January 31, 2008 Analyst Call, Derek Lewis, an analyst for Morgan Stanley, asked "On new accounts, is it a safe assumption, as you look at the U.S. business replacements on a go-forward basis, the opportunity in the U.S. is really for existing customers? And we think we have peaked out in terms of new account generation in the U.S.?" Defendant Smith responded, "No. Actually there are a lot of new systems placements.. And really the opportunity here to place systems at hospitals that don't have any is still very, very large."
During the January 31, 2008 Analyst Call, Michael Tue, an analyst for Oppenheimer, asked "This has been a, the topic that has been discussed for a lot of capital equipment manufacturers, and wanted to find out if you are seeing any sort of slowdown pressure in terms of the overall credit crunch market and anything that's affecting finance?" Defendant Smith responded, "The answer to that is, no. As we've talked to you, we have about half of our sales force right now meeting to -- going through their pipeline. And I had [Defendant] McNamara ask them if they've seen any delay because of the credit crunch, and the answer, no one responded with any kind of positive experience there. So no one has seen any deals delay because of it."
April 17, 2008 Analyst Call
During the April 17, 2008 Analyst Call, Defendant Gong reassured investors regarding the Company's guidance for fiscal year 2008 and even increased guidance for total revenue and system revenue, stating "Now, starting with the procedures, we continue to expect dVP and dVH adoption to drive the growth in our 2008 recurring revenues. For 2008, we continue to expect dVP procedures to grow approximately 40% on a base of about 55,000 procedures performed in 2007. And we expect dVH procedures grow to approximately 150% from a base of about 13,000 procedures performed in 2007. With regard to revenue, we expect our total 2008 revenues to grow approximately 42% over 2007, which is up from our previous estimate of 40%. Instrument and accessory revenue, which is specifically driven by procedures performed, is on track to grow 55% this year. During Q1, procedures grew in line with our previous estimates. And, therefore, we are maintaining our forecast for 55% growth in instrument accessory revenues for the year. System revenues were modestly stronger than we expected in Q1, and we are increasing our forecast for the year. We are forecasting system revenue to grow 33-35% over 2007, which is up from our previous forecast of 30% growth. We expect this growth to come from an increase in shipments." This false and misleading statement or omission regarding the Company's guidance was repeated in the Company's quarterly report filed with the SEC on Form 10-Q filed on April 18, 2008, and signed by Defendant Mohr.
During the April 17, 2008 Analyst Call, Cowen and Company analyst Eli Kammerman asked, "[W]ith the very small sequential decline in systems you had for the quarter what do you think this says for the pattern of seasonality that you expect to see this year? Are you expecting to see relatively level system sales through the year, or do you think we'll see the same kind of thing as we saw in '07, where the fourth quarter was significantly higher than the first?" Defendant Gong replied, "I think seasonality is going to be similar, as far as we know. It was sequentially down in Q1 this year, as it has been in previous years. We expect Q4 to be our highest quarter. But, that said, we think the total number is going to increase year-over-year by between 33 and 35%."
During the April 17, 2008 Analyst Call, Deutsche Bank analyst Tao Levy asked, "Anything on capital equipment spending that you're hearing from your sales reps?" Defendant Gong replied, "No, we're not hearing anything there. I know over the quarter we've had various questions as to whether or not there's been an impact due to credit issues. And as far as we can tell, we haven't had any impact to our system sales."
During the April 17, 2008 Analyst Call, Bear Stearns analyst Rick Wise asked ". The anxiety over [capital] spending and hospital credit, I don't know if it is a question for [Defendant Smith] or [Defendant Mohr] but -- when you look at the environment, or your conversations with hospitals or decision-makers, is there anything in the external environment that makes you incrementally more concerned as you look out over the next 12 months in the U.S. versus where you might have felt six months ago, just in that external environment?" Defendant Smith replied, "On the external side, I'll try to answer that. I don't get any -- I'm still not getting any feedback from the sales organization that there's pressure. Some hospitals are in better shape than others. But there's always a decision within a hospital of how do they prioritize their capital investment. And I think we come up typically fairly high on that priority list.. We aren't hear[ing] anything that causes us any significant concern. I've got lots of concerns about other things we ought to be running, but that one has not yet looked like a real issue. So, I don't have any different news than we had; no change from last quarter, I guess, is the simple way to state it."
July 22, 2008 Analyst Call
During the July 22, 2008 Analyst Call, Defendant Gong stated, "Based on our second quarter results, we are increas[ing] our previous guidance for revenue and profits for 2008. Starting with procedures, we are seeing higher growth rates across a number of different procedures, and we expect our total procedures to grow 57 to 58% this year, up from our previous forecast of 55% growth. [dVH] continues to be one of our fastest growing procedures, and we continue to expect this procedure to grow at least 150% this year from a base of approximately 13,000 procedures performed last year. [dVP] has continued to grow strong, but has been growing less than our previous forecast of 40%. We now expect our dVP procedures to grow between 35 and 39% this year from a base of approximately 55,000 procedures performed last year. At the same time, our newer emerging procedures, such as nephrectomies, vasectomies, and sacrocoplexies, are growing much faster than we previously expected, and therefore we have increased our overall procedure growth estimate for the year from 57 to 58% from a base of approximately 85,000 total procedures performed in 2007. We are increasing our top line revenue guidance for 2008. We nowexpect revenue to grow 45 to 47% over 2007, which is up from our previous estimate of 42%. We had strong sequential growth in instrument and accessory revenues during Q2, and we are increasing our estimate for annual growth. Instrument and Accessory revenue is expected to grow 57% to 58% this year. This is up from our previous estimate of 55% growth. System revenues in Q2 were also stronger than previously expected, driven primarily by our overall procedure growth. We are now forecasting system revenue to grow 38 to 40% over 2007, which is up from our previous forecast of 33-35% growth. We expect this growth to come from an increase in unit shipments." Defendant Cukic had stated earlier on the July 22, 2008 Analyst Call, "We also saw solid growth within our dVP business.." This false and misleading statement or omission regarding the Company's guidance was repeated in the Company's quarterly report filed with the SEC on Form 10-Q on July 25, 2008, and signed by Defendant Mohr.
During the July 22, 2008 Analyst Call, Deutsche Bank analyst Tao Levy asked, "[Defendant Gong], you talked about sequentially being down Q3 because of seasonality, and then up in Q4 . do you think seasonality will become  more felt and that's kind of how we should be thinking in our model?" Defendant Gong replied, "We have had seasonality in previous third quarters in that the growth for procedures has always been lower, so we would anticipate the same kind of lower procedure growth, and it was a pretty strong quarter for system placements in Q2. We are forecasting that Q3 system placements might be relatively flat for Q3 from Q2, and then again higher in Q4."
During the July 22, 2008 Analyst Call, Leerink & Swann analyst Rick Wise noted that 18 of 79 system purchases were to current accounts and asked, "Maybe just give us a little color
on why that, second, third, or fourth system was bought. Was it for new procedures, [or] was it higher volume in [dVP]? Any clear trend there, [Defendant Cukic]?" Defendant
Cukic responded, "Well, I think the answer is probably yes in some instance to all of those questions.. So those procedures, GYN procedures specifically, if you go back to the GYN approval that we received in '05 and you sort of map this out over that period, you'll see that the addition of those procedures has required a lot of hospitals to get third and fourth systems. And we see that continuing."
During the July 22, 2008 Analyst Call, Leerink & Swann analyst Rick Wise asked, "[O]n the [dVP], sort of slightly lower guidance. Obviously these are small numbers, but just to understand how you are looking at it. Does this suggest in any kind of way that you have hit a market penetration ceiling, if you will, in [dVP], or, or [is] that clearly offset by all of the emerging procedures?" Defendant Smith replied, "Well, we don't think we have a penetration ceiling." Defendant Cukic added in terms of the offset by new procedures, "We talked about [dVH], it's a market of 250,000 or more procedures in the United States alone.
Potentially renal cancer is another 50,000. Sacrocolpopexy, the number just really grows. So you -- you're really -- I mean struggling to get full attention in everyone of our opportunities, which is a nice high class problem, but they are making tradeoffs as well. So do we -- do we think -- that, the remaining procedures are going to come our way? We do."
During the July 22, 2008 Analyst Call, Oppenheimer analyst Amit Hazan asked, "[I]t does look like the second half of the year is going to grow slower in terms of system sales.. I was just wondering, because we get the question all of the time, if you can answer again the question about changes in hospital spending patterns on capital equipment. Have you seen any of that? Or if your guidance at all implies any slowdown that you have seen?"
Defendant Gong replied, "Certainly not. We have actually not seen any impact on let's say credit crunch on the buying patterns of our customers. We get that question often, we've had it for the past six months and the answer is still ...