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Mulligan v. Impax Labs., Inc.

United States District Court, N.D. California

April 18, 2014

DENIS MULLIGAN, individually and on behalf of all others similarly situated, Plaintiff,
IMPAX LABORATORIES, INC., et al., Defendants. HAVERHILL RETIREMENT SYSTEM, individually and on behalf of all others similarly situated, Plaintiff,
IMPAX LABORATORIES, INC., et al., Defendants

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For Boilermaker-Blacksmith National Pension Trust, (Lead Plaintiff) (3:13-cv-01037-EMC), Plaintiff: Christopher Lometti, LEAD ATTORNEY, PRO HAC VICE, Cohen Milstein Sellers and Toll PLLC, New York, NY; Daniel S. Sommers, Joshua Michael Kolsky , Steven J. Toll , LEAD ATTORNEYS, PRO HAC VICE, Cohen Milstein Sellers and Toll PLLC Securities, Washington, DC, Washington, DC; Solomon B. Cera, Thomas C. Bright, Gold Bennett Cera & Sidener LLP, San Francisco, CA.

For Haverhill Retirement System, Individually and on behalf of all Others Simiarly Situated (3:13-cv-01037-EMC), Plaintiff: Christopher T. Heffelfinger, LEAD ATTORNEY, Berman DeValerio, Palm Beach Gardens, FL.

For Impax Laboratories, Inc., Larry Hsu, Arthur A. Koch (3:13-cv-01037-EMC), Defendants: Marcy Christina Priedeman, Peter Allen Wald, LEAD ATTORNEYS, Latham Watkins LLP, San Francisco, CA; Patrick Edward Gibbs, LEAD ATTORNEY, Latham & Watkins LLP, Menlo Park, CA.

For City of Pontiac General Employees' Retirement System (3:13-cv-01037-EMC), Movant: Blair Allen Nicholas, LEAD ATTORNEY, Bernstein Litowitz Berger & Grossmann, San Diego, CA.

For Haverhill Retirement System, Individually and on Behalf of All Others Similarly Situated (3:13-cv-01566-EMC), Plaintiff: Christopher T. Heffelfinger, LEAD ATTORNEY, Berman DeValerio, Palm Beach Gardens, FL.

For Impax Laboratories, Inc., Larry Hsu, Arthur A. Koch (3:13-cv-01566-EMC), Defendants: Marcy Christina Priedeman, Peter Allen Wald, LEAD ATTORNEYS, Latham Watkins LLP, San Francisco, CA; Patrick Edward Gibbs, LEAD ATTORNEY, Latham & Watkins LLP, Menlo Park, CA.

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EDWARD M. CHEN, United States District Judge.


Plaintiffs Boilermaker-Blacksmith National Pension Trust and Haverhill Retirement System (" Plaintiffs" ) have filed the instant securities class action alleging that Defendant Impax Laboratories (" Impax" ) and its CEO (Larry Hsu) and CFO (Arthur Koch) made false and misleading material statements. These statements pertained to Impax's response to various FDA notices and warnings regarding problems in the manufacturing and quality control processes at Impax's manufacturing facility. Specifically, Plaintiffs allege that Defendants failed to disclose the true nature of the problems present in the facility and misrepresented the scope, nature, and efficacy of the remediation efforts made in response to the FDA warnings. Defendants have moved to dismiss on a number of grounds, including: (1) that the alleged misstatements are protected under the Private Securities Litigation Reform Act's (" PSLRA" ) safe harbor provision for forward looking statements, (2) that they constitute " mere puffery," and (3) that there

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are insufficient allegations suggesting that the statements were false when made. Finally, Defendants argue that the Plaintiffs' allegations fail to give rise to a " strong inference" of scienter as required. The Court DENIES Defendants' motion to dismiss.


Defendant Impax Laboratories is a pharmaceutical company that " engages in the development, manufacture, and marketing of bio-equivalent pharmaceutical products referred to as generics as well as branded products." First Amended Complaint (" FAC" ) ¶ 2. Impax maintains a manufacturing facility in Hayward, California. Id.

A. FDA Inspection and Noncompliance Procedures

The Food and Drug Administration (" FDA" ) is statutorily required to inspect all manufacturing facilities such as Impax's Hayward facility every two years, but given a lack of resources, the FDA has prioritized certain facilities over others. Id. ¶ 37. The purpose of these inspections is to ensure that the facility is in compliance with applicable laws and to " ensure[] the quality of drug products by carefully monitoring drug manufacturers' compliance with the FDA's Current Good Manufacturing Practice ('cGMP') regulations." Id. ¶ 35, 36. cGMP regulations constitute " minimum requirements for the methods, facilities, and controls used in manufacturing, processing, and packaging of a drug product." Id. ¶ 36 (citation omitted).

Plaintiff's First Amended Complaint contains a voluminous description of the inspection process and procedures the FDA employs where a manufacturing facility is found to not be in non-compliance with cGMP. The Court need not recount the entire discussion on this point. Relevant for purposes of the instant motion, Plaintiff alleges that trained FDA " investigators tour facilities, accompanied at all times by the inspected company's staff, and cite factual observations of significant deviations from the" statutes the FDA enforces. Id. ¶ 42. These deviations are recorded in a " Form 483" which is presented and explained to the company's management. Id. A Form 483 is intended for use in " notifying the inspected establishment's top management in writing of significant objectionable conditions, relating to products and/or processes" observed during the inspection. Id. ¶ 44 (citation omitted). While the investigators may note whether an observation is recurring/not-corrected, it need not do so. Id. Investigators then draft an Establishment Inspection Report (" EIR" ) which contains more detail than a Form 483 and may contain additional objectionable conditions in the manufacturing facility than those listed in the Form 483. Id. ¶ 43. Management of a company that receives a Form 483 has an opportunity to provide written responses to the FDA. Id. ¶ 46. If the FDA finds a company's responses to a Form 483 to be inadequate, it may issue a Warning Letter. Id.

Plaintiffs provide the following definition of a " Warning Letter" (emphases in original):

A Warning Letter is a correspondence that notifies regulated industry about violations that FDA has documented during its inspections or investigations. Typically, a Warning Letter notifies a responsible individual or firm that the Agency considers one or more products, practices, processes, or other activities to be in violation of the Federal Food, Drug, and Cosmetic Act (the Act), its implementing regulations and other federal statutes. Warning Letters should

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only be issued for violations of regulatory significance, i.e., those that may actually lead to an enforcement action if the documented violations are not promptly and adequately corrected. A Warning Letter is one of the Agency's principal means of achieving prompt voluntary compliance with the Act.

Id. ¶ 47 (quoting FDA, Regulatory Procedures Manual 4.1 (2012)). Prior to issuing a Warning Letter, the FDA considers: (1) The company's compliance history; (2) the nature of the violation at issue; and (3) the overall adequacy of the firm's corrective action. Id. The FDA's policy states that a Warning Letter " should not be issued if the agency concludes that a firm's corrective actions are adequate and that the violations that would have supported the letter have been corrected." Id. (citation omitted).

B. FDA Inspections, Form 483s, and Warning Letter Regarding Impax's Hayward Facility

1. 2009, 2010, and 2011 FDA Inspections and Form 483s

In 2009, two FDA inspectors inspected Impax's Hayward facility between July 27 and August 7, 2009. Id. ¶ 55. They presented Impax's VP of Regulatory Affairs & Compliance (Mr. Mark Shaw) a Form 483 which enumerated four categories of deficiencies, supported by observations of nine specific events. Id. These four categories of deficiencies were:

(1) the " quality system, for failure to investigate root causes of out of specification ('OOS') events;
(2) facilities and equipment, for failure to validate ( e.g., investigate and justify) standards Impax set for cleaning;
(3) laboratory systems, for failure to update weight calibration and for three instances of failure to note in data notebooks that certain retesting samples emanated from a particular sample that failed; and
(4) production systems, for failure to stop operations and investigate when product powder 'was flowing in a steady stream' outside of the plastic enclosure on a piece of equipment."

Id. The FAC alleges two specific occasions where product was erroneously packaged and Impax failed to document the root cause of these deviations were contained in the 2009 Form 493 -- " failure to document the probable root cause for product erroneously packaged without desiccant on two occasions or to document the probable root cause related to that deviation's impact on product quality." Id. ¶ 52(a) (emphasis omitted)

Between April 7, 2010 and April 22, 2010, three different FDA inspectors toured Impax's Hayward facility. Id. ¶ 57. These inspectors again provided Mr. Shaw a Form 483 for " [s]ignificant cGMP deficiencies." Id. This Form 483 " contained seven Observations covering nine events related to manufacturing standards and review of manufacturing." Id. The deficiencies were generally grouped into three categories:

(1) Standard operating procedures for " scientifically unsupported cleaning procedures and deficiencies in completeness;
(2) test methods, for failure to establish the sensitivity and accuracy of QC testing methods; and
(3) lack of review of deviations with regard to metal contamination in product."

Id. The FAC specifically alleges the Form 483 called out Impax's " 'failure to thoroughly review any unexplained discrepancy whether or not the batch has already

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been distributed' and a failure to address the root cause in the investigation of metal contamination." Id. ¶ 52(b); 58.

Six months after receiving the April 2010 Form 483, Arthur Koch -- Impax's Chief Financial Officer at the time -- participated in a Goldman Sachs Healthcare Conference. When asked about the Form 483s Impax had received from the FDA, Mr. Koch replied that Impax had " gotten a small number of minor 483s that [Impax] addressed promptly." Id. ¶ 59. He also noted that they had perceived an increased level of scrutiny by the FDA, and that there was a clear focus on quality by the FDA. Id. ¶ 60. He told the participants that Impax had been able to " enjoy a very good FDA inspection record," notwithstanding the Form 483s. Id.

On January 21, 2011, Impax received a third Form 483 following a two month inspection. Id. ¶ 61. The 2011 Form 483 identified five observations relating to deficiencies in the manufacturing process or the auditing of the manufacturing process. Id. ¶ 62. These were:

(1) the failure to review " any unexplained discrepancy" -- which was marked as a " repeat" observation by the FDA;
(2) the lack of control procedures to " validate the performance of manufacturing processes" thus " potentially causing variability of in-process material" ;
(3) the failure to maintain the equipment " in a manner that would prevent malfunctions and contamination" ;
(4) the " failure to follow and concurrently document process control procedures" ; and
(5) the " failure to establish written procedures."

Id. In addition, during the 2011 inspection, an FDA investigator gave Impax's management a " verbal warning" for misleading the inspection team. Id. ¶ 85. Plaintiff alleges that Impax's Director of Technical Services misled an investigator by " referring several times to the metal contamination in Oxymorphone HCL extended-release as 'grey particulates" and continued to do so until shown documentation showing the " particulates" were, in fact, metal. Id.

In explaining the " Repeat Observation" -- that Impax had failed to thoroughly review any unexplained discrepancy -- the Form 483 pointed to a number of issues. First, it noted that there was continued metal contamination in the product -- an issue that had been highlighted for Impax in the 2010 Form 483. Id. ¶ 66. In fact, Impax had initiated and closed four " Corrective And Preventative Actions" (" CAPAs" ) to correct this issue, apparently without success. Second, the Form 483 faulted Impax for failing to properly investigate low-weight capsules in two batches of Impax's Fenofibrate products. Id. ¶ 67. Additional failures to investigate discrepancies included the failure to identify the cause of a pungent vinegar-like odor in one of Impax's products, the presence of black specs in another (and the failure of Impax to replace equipment causing the specks), and the use of powder ingredient instead of granular ingredient as required by one product's specifications. Id. ¶ 65. Both the Form 483 and subsequent EIR noted that these deficiencies were a violation of 21 C.F.R. § 211.192 which requires unexplained discrepancies to be thoroughly investigated. Id.

The remaining observations generally faulted Impax's quality control. For instance, the EIR explained that Impax employees were using pre-filled " batch records" instead of contemporaneously

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filling in batch records during the manufacturing process. Id. ¶ 69. The FDA inspectors expressed a belief that technicians were doing this to " save time" and thus were not providing a real-time record that could then be used in the investigation and resolving of any deviations in finished product that might result. Id. ¶ ¶ 69, 70. Further, the Form 483 and EIR noted inadequate and perfunctory investigations into potential discrepancies. Id. ¶ ¶ 73-74. Similarly, the FDA inspectors identified aging machines which were warped, had chipping paint (which created the risk of paint getting in pills), and frequent lubrication leaks. Id. ¶ ¶ 75-82. Plaintiff alleges that a number of Impax technicians -- now serving as confidential witnesses for Plaintiff -- attempted to tell Impax officials about the need for new equipment, but were ignored. See id. ¶ 75-84.

2. FDA Issues a Warning Letter to Impax and Impax's Public Response

Impax subsequently received a Warning Letter from the FDA. The Warning Letter stated that the FDA had reviewed Impax's response to the 2011 Form 483 and found that it " lacks sufficient corrective actions." Id. The Warning Letter specifically called out Impax's lack of written procedures to " monitor and validate" the manufacturing processes that could have been responsible for variations in finished products. It further noted the " Repeat Observation" from the 2010 and 2011 Form 483s regarding the failure to thoroughly investigate batches not meeting specifications (for example, through metal contamination). Id. ¶ 87.

On June 6, 2011, Impax released a press release announcing receipt of the Warning Letter. Id. ¶ 86. This press release included a quote from Larry Hsu -- CEO of Impax -- which stated:

" Impax remains committed to providing the highest quality products to our customers and working with the FDA to diligently resolve any issues. . . . We intend to promptly respond to the FDA's letter, and have already begun to implement changes and establish procedures that address the observations cited during the inspection. We will work diligently to remedy and outstanding issues in a timely manner. . . . We don't anticipate that this manufacturing setback will delay our ongoing research and development activities. We expect to continue to develop our generic pipeline of 82 products and two brand products."

Id. ¶ 154 (emphases omitted). Plaintiff alleges that during this time, analysts " responded cautiously but optimistically" to the press release, with one analyst report stating that the Warning Letter would likely cause a " temporary halt to approval of pending ANDA [Abbreviated New Drug Application] applications from the Hayward facility" and that the issues in the Warning Letter " appear fixable, and should have no long term negative impact" on Impax. Id. ¶ 88 (emphases omitted).

In an earnings call on August 2, 2011, Mr. Hsu allegedly informed investors that remedial measures implemented in response to the Warning Letter were nearing completion. Id. ¶ 156. He stated: " Many commitments in our responses are nearing completion as a result of our work since we received the Form 4[8]3. . . . We hope to be able to close out the warning letter in the next six to eight months." Id. (emphases omitted). On the same day, ...

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