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Khoja v. Orexigen Therapeutics, Inc.

United States District Court, S.D. California

September 23, 2019

KARIM KHOJA, on behalf of himself and all others similarly situated, Plaintiff,
v.
OREXIGEN THERAPEUTICS, INC., JOSEPH P. HAGAN, MICHAEL A. NARACHI, and PRESTON KLASSEN, Defendants. AND ALL CONSOLIDATED S

         ORDER (1) GRANTING IN PART AND DENYING IN PART THE MOVING DEFENDANTS' REQUEST FOR JUDICIAL NOTICE, (2) DENYING LEAD PLAINTIFF'S REQUEST FOR JUDICIAL NOTICE, AND (3) GRANTING IN PART AND DENYING IN PART THE MOVING DEFENDANTS' MOTION TO DISMISS (ECF Nos. 98, 98-15, 103-1)

          Hon. Janis L. Sammartino, United States District Judge

         Presently before the Court is Moving Defendants Joseph P. Hagan, Michael A. Narachi, and Preston Klassen's Motion to Dismiss Consolidated Complaint for Violation of the Federal Securities Laws ("Mot., " ECF No. 98).[1] Also before the Court are Lead Plaintiff Karim Khoja's Response in Opposition to ("Opp'n, " ECF No. 103) and the Moving Defendants' Reply in Support of ("Reply, " ECF No. 105) the Motion, as well as the Moving Defendants' Request for Judicial Notice ("Defs.' RJN, " ECF No. 98-15) and Reply in Support of their RJN ("RJN Reply, " ECF No. 106) and Lead Plaintiffs Declaration of Alayne Gobeille in Support of His Opposition ("Pl.'s RJN, " ECF No. 103-1), which the Court construes as a request for judicial notice. The Court vacated the hearing and took the Motion under submission without oral argument pursuant to Civil Local Rule 7.1(d)(1). See ECF No. 107. Having carefully considered Lead Plaintiff s Consolidated Complaint ("CC, " ECF No. 55) and the material appropriately incorporated by reference, the Parties' arguments, and the law, the Court GRANTS IN PART AND DENIES IN PART the Moving Defendants' RJN, DENIES Plaintiffs RJN, and GRANTS IN PART AND DENIES IN PART the Moving Defendants' Motion as follows.

         BACKGROUND[2]

         I. Factual Background

         Defendant Orexigen is a developmental stage biotechnology firm focusing on the development of pharmaceutical product candidates for the treatment of obesity. CC ¶ 7. Orexigen is a small company with approximately fifty employees. Id. ¶ 33. Its common stock is traded on the NASDAQ. Id. ¶¶ 33, 131(a). Defendant Narachi is Orexigen's CEO and a director, id. 134, Defendant Hagan is Orexigen's Chief Business Officer and Acting CFO, id. ¶ 36, and Defendant Klassen is Orexigen's Head of Global Development. Id. ¶¶ 38.

         Orexigen's primary obesity treatment candidate is Contrave, id. ¶ 7, which is designed to treat overweight and obese persons already at high risk for major adverse cardiovascular events ("MACE"), defined as myocardial infarction (heart attack), stroke, or cardiovascular death. Id. ¶¶ 8, 87. Contrave is made from two off-patent generic drugs, bupropion and naltrexone. Id. ¶ 66. Orexigen has a collaboration agreement with Takeda Pharmaceutical Company Limited to develop and commercialize Contrave in the United States, Canada, and Mexico. Id. ¶ 7.

         Orexigen submitted a new drug application for Contrave to the United States Food and Drug Administration ("FDA"). Id. 149. Concerned that Contrave may cause adverse cardiovascular events because of its effect on blood pressure and heart rate, id. ¶ 127, in January 2011, the FDA mandated a randomized, double-blind, placebo-controlled clinical trial designed to assess the cardiovascular risks associated with Contrave (the "Light Study") before the new drug application could be approved. Id. ¶¶ 8, 49. The Light Study's Executive Steering Committee ("ESC") was chaired by Dr. Steven Nissen, a Department Chair of Cardiovascular Medicine at the Cleveland Clinic. Id. at 1 n. 1. Orexigen initiated the Light Study in June 2012, and completed screening in December 2012, resulting in approximately 8, 900 patients randomized for treatment. Id. ¶ 51. The FDA agreed that if the Light Study's interim analysis revealed that Contrave did not increase the risk of a major cardiac event by 40 percent or more, Contrave could be approved. Id. ¶¶ 51, 96, 126.

         In November 2013, the Light Study's Data Monitoring Committee ("DMC") shared with Orexigen the completed interim results. Id. ¶ 52. The results, based on ninety-four MACE, which was approximately 25 percent of the planned MACE for the Light Study, indicated that Contrave reduced cardiovascular events by 41 percent compared with a placebo. Id. ¶¶ 70, 87. Specifically, thirty-five Contrave patients experienced MACE, whereas fifty-nine placebo patients did. Id. ¶ 88.

         The Light Study's ESC, DMC, and Orexigen entered into a data access plan ("DAP"), pursuant to which all agreed to limit the number of people within Orexigen who had access to the interim results to just those individuals who needed to facilitate submission of Orexigen's marketing application to the FDA. Id. ¶ 53 & n.10. The Light Study's statistical review team, however, subsequently discovered that Orexigen had leaked the positive interim data to over 100 people. Id. ¶¶ 10, 53. Among those to whom the data was leaked was Narachi, who publicly pledged in a November 25, 2013 Forbes article, "We're going to honor the integrity of [the Light Study's] blind so we don't screw it up and get the final analysis." Id. ¶¶ 9, 52, 58. Others who saw the data included investment bankers and several representatives from Takeda. Id. ¶ 58.

         The FDA later confirmed in a September 10, 2014 report that Orexigen improperly had disseminated unblinded interim data "far beyond the intended core group." Id. (emphasis omitted). The Light Study's DMC "found that it [was] particularly concerning that members of Orexigen's Board of Directors . . ., who have financial interest in the outcome of the trial, were also provided full access to the unblinded data." Id. (emphasis omitted). Consequently, the FDA required Orexigen to sign a new DAP. Id. ¶¶ 11, 60.

         At a June 4, 2014 meeting, the FDA reminded Narachi and Klassen that the 25 percent interim results have "a high degree of uncertainty and were likely to change with the accumulation of additional data." Id. ¶ 59. The FDA was also concerned that Orexigen's corporate leaders knew the 25% interim results. Id. ¶10. The FDA also noted that the unblinding violated Orexigen's data access plan and that the extent of the confidentiality breach of interim results in the Light Study was unprecedented. Id.

         On July 2, 2014, Orexigen filed patent application number 14/322, 810 (the "'810 Application") with the United States Patent and Trademark Office ("USPTO"), listing Klassen as the "patent applicant" and "inventor." Id. ¶¶ 12, 61. The '810 Application covered a new indication-a cardiovascular benefit-for Contrave based on the 25 percent interim data. Id. ¶ 66. The '810 Application explicitly included the 25 percent interim Light Study data, id. ¶¶ 12, 62, and noted:

Surprisingly, rather than increasing the occurrence of MACE in this high risk patient population, the results indicate that treatment with [Contrave] decreases the occurrence of MACE in overweight and obese subjects with cardiovascular risk factors. Briefly stated, fewer subjects in the [Contrave] treatment group experienced a MACE even compared to placebo.

Id. ¶ 62 (alterations in original) (emphasis omitted). Pursuant to 35 U.S.C. § 122, Orexigen requested that the USPTO keep the '810 Application confidential. Id. ¶¶ 12 & n.6, 61.

         On September 10, 2014, the FDA approved Contrave for commercial use, id. ¶¶ 14, 55, 126, and in December 2014, the Committee for Medicinal Products for Human Use ("CHMP"), the centralized expert advisory committee of the European Medicines Agency, adopted a positive opinion for Contrave and recommended that the European Commission grant a centralized marketing authorization.[3] Id. ¶ 63. The European Commission also informed Orexigen that it would review a draft decision granting marketing authorization for Contrave during a meeting of the Standing Committee scheduled for March 2015. Id.

         On January 5, 2015, in hopes that the USPTO's publication of the 25 percent interim Light Study data would influence European regulators, Narachi and Klassen rescinded Orexigen's prior nonpublication request to the USPTO. Id. ¶¶ 14, 64-65. On January 8, 2015, the USPTO indicated that the '810 Application was "in the publication queue." Id. ¶14 (emphasis omitted). On February 5, 2015, Hagan and Narachi were awarded a stock option grant of 202, 650 and 635, 150 shares, respectively, at an exercise price of $5.34, id. ¶ 84, and on February 11, 2015, the USPTO advised Orexigen that the '810 Application would be issued as a patent on March 3, 2015. Id. ¶ 67.

         On February 25, 2015, Klassen informed investors on a conference call that "there wo[uld]n't be any release of the [Light Study] information unless pre-specified boundaries [we]re hit." Id. (emphasis omitted). Orexigen's February 27, 2015 Form 10-K noted that "[disclosure of interim results of ongoing clinical trials, including disclosure of interim results related to the protection of intellectual property . . . could significantly affect our product development costs or adversely impact our ability to maintain or receive additional regulatory approvals." Id. ¶ 68 (alteration in original) (emphasis omitted).

         On March 3, 2015, the USPTO issued U.S. Patent No. 8, 969, 371 (the "'371 Patent") from the '810 Application. Defs.' RJN Ex. B, ECF No. 98-4; see also CC ¶¶ 15, 69. That same day, Orexigen also filed a Form 8-K with the United States Securities and Exchange Commission ("SEC") announcing the publication of the '371 Patent and releasing the 25 percent interim Light Study Results. CC ¶¶ 15, 69, 87. The Form 8-K noted that the '371 Patent "incorporate[d] data from [the Light Study], " and that the '371 Patent "contain[s] claims related to a positive effect of Contrave on [cardiovascular ("CV")] outcomes" based on an "analysis . . . conducted based on 94 observed an adjudicated [MACE], which was approximately 25% of the planned MACE for the Light Study." Id. ¶ 87. The Form 8-K further explained that the interim analysis "was prospectively designed to enable an early and preliminary assessment of safety to support regulatory approval" and that "[a] larger number of MACE are required to precisely determine the effect of Contrave on CV outcomes." Id. Orexigen did not consult the FDA, Dr. Nissen, or Takeda prior to filing the Form 8-K. Id. ¶15.

         Soon thereafter, Forbes reported that FDA senior official Dr. John Jenkins had stated that the FDA was unaware that Orexigen's '810 Application contained the 25 percent interim data and expressed "serious concerns" about Orexigen's disclosure of the interim data. Id. ¶¶ 93, 118. The FDA reported that it was "very disappointed by Orexigen's actions" and warned patients and physicians that it was "critical that the[] interim data [] not be misinterpreted." Id. ¶ 93 (alterations in original). The FDA noted that "[e]ndpoints with less than 100 total events are statistically unreliable and were to be viewed with extreme caution. Id. ¶118.

         Late on March 3, 2015, in response to the Forbes article, Orexigen published a press release, explaining that it "filed patent applications based on the results in order to preserve the potential for additional intellectual property." Id. ¶¶ 94, 119. It also explained that "[d]uring the course of the study, the FDA informed [Orexigen] it had determined that the Light Study would not serve as the postmarketing requirement for Contrave; a new trial would be required." Id. ¶ 94. Orexigen added that the new trial would start "later this year, " and results "are anticipated by 2022." Id. Orexigen added that "[t]his morning the USPTO published the patent and supporting documentation, and [Orexigen] believed it was appropriate and necessary to make sure this information was equally available to all investors." Id. ¶¶ 94 (emphasis omitted), 119.

         Although Orexigen's stock had closed at $5.79 per share on March 2, 2015, it closed at $7.64 per share on March 3, 2015, trading as high as $9.37 per share. Id. ¶¶ 16, 89, 117. More than 95.7 million Orexigen shares were traded on March 3, 2015, a "highly unusual trading volume, " id. ¶¶ 89, 117, especially when compared to the average daily trading volume of approximately 3 million shares per day. Id. ¶16 n.7.

         Analysts responded positively to the March 3, 2015 Form 8-K. Id. ¶¶ 90-91. For example, Analyst Simos Simeonidis from RBC Capital Markets noted that "[w]e view the news as very significant" and "[t]he newly revealed data demonstrated that not only is Contrave safe to use from a CV standpoint, but it actually appears to have a CV benefit." Id. ¶ 90 (emphasis omitted). Consequently, he rated Orexigen's shares to "outperform." Id. Similarly, analysts at Piper Jaffray noted that the Light Study's interim results "[c]ould turn the obesity/metabolic syndrome market on its head. We see this [cardiovascular outcome trial ("CVOT")] effect as surprisingly positive and it has several implications, in our view for the potential of Contrave." Id. ¶¶ 17, 90 (emphasis omitted). Leerink analyst Paul Matteis reported that "[t]he data this morning show a statistically significant Contrave benefit." Id. ¶ 91 (emphasis omitted). Wells Fargo analyst Matthew J. Andrews, in analyzing the data, noted that "the 'holy grail' for treating cardiometabolic diseases is demonstration of a CV mortality benefit, which to date has not been demonstrated by an obesity therapeutic." Id. ¶¶ 17, 91 (emphasis omitted).

         On March 4, 2014, the Wall Street Journal published an article explaining that the FDA "considers the preliminary data 'far too unreliable to conclude anything further about cardiovascular safety.'" Id. ¶96 (emphasis omitted). The article noted that "LIGHT study data was disclosed inappropriately" previously and that the FDA consequently had decided that "Orexigen would have to launch a new study to satisfy the conditions of the approval of its Contrave drug." Id. (emphasis omitted). The Wall Street Journal reported that Dr. Nissen, "the lead researcher for the study[, ] is upset." Id. Dr. Nissen noted that "he was not aware of the interim study results until yesterday, " "the disclosure was not approved by the data monitoring committee or the trial's executive committee, " and Orexigen's business management was not included in the list of individuals with approved access to the data. Id. (emphasis omitted). On March 4, 2015, the price of Orexigen's stock closed at $8.49 per share, id. ¶¶ 16, 97, 120, "again on unusually high trading volume of more than 40.5 million shares." Id. ¶¶ 97, 120.

         A March 5, 2015 Forbes article reported that "[t]here is widespread speculation that Orexigen used the excuse of the patent filing to publicly reveal the interim results of the trial." Id. 170 (emphasis omitted). The Forbes article further reported that critics believed that "[disclosing the results, through the medium of a patent filing and an SEC disclosure, is a deeply cynical and manipulative action." Id. (emphasis omitted). Forbes also speculated that Orexigen's repeated disclosure of the Light Study interim results could potentially threaten its relationship with the FDA and its ability to obtain further drug approvals. Id. 1121. On March 5, 2015, Orexigen's stock closed at $8.01 per share, down from its opening price of $8.50 per share. Id. ¶¶ 19, 121.

         After the close of trading on March 5, 2015, Forbes published another report, which included criticisms of Orexigen and its decision to release the interim trial data by Dr. Jenkins, the FDA's director of the Office of New Drugs. Id. ¶¶ 18, 122. Dr. Jenkins criticized the released data as "unreliable, " "misleading, " and "likely false, " and warned that Orexigen "could face fines, civil penalties, or even the withdrawal of Contrave from the market" if it did not complete the new post-marketing study that the FDA would require. Id. On March 6, 2015, the price of Defendant Orexigen's stock dropped to $6.76 per share in intraday trading and closed at $7.10 per share, "again on unusually high trading volume." Id. ¶¶ 19, 123, 125.

         On March 13, 2015, Orexigen filed a Form S-8 Registration Statement, registering six million shares of common stock at a proposed maximum offering price of $7.08 per share. Id. ¶¶ 20, 85; see also Defs.' RJN Ex. I, ECF No. 98-11, at 3.

         In its March 26, 2015 Form 8-K, Orexigen announced that Contrave had received marketing authorization in Europe. CC ¶¶ 21, 72, 99. Over nine million shares of Orexigen's stock traded on that day, with stock prices increasing from an opening price of $6.89 on March 26, 2015, to a closing price of $7.54 on March 27, 2015. Id. ¶ 72.

         Also on March 26, 2015, Light Study researchers discovered that Contrave's purported 25 percent interim heart benefit vanished once the additional 50 percent Light Study results were considered. Id. ¶¶ 21, 74. The Light Study's ESC unanimously voted to terminate the Light Study and to release immediately the 50 percent interim data. Id. ¶¶21, 74, 127. Defendants were shown the 50 percent interim data demonstrating that the 25 percent interim cardiovascular benefit had disappeared. Id. ¶¶ 21, 74, 99, 127. Dr. Nissen began to draft a press release disclosing the 50 percent Light Study data and termination of the Light Study, which Takeda approved but Orexigen refused to authorize. Id . ¶¶ 21, 75.

         On May 8, 2015, Orexigen filed a Form 8-K containing a press release announcing its business and financial results for the first quarter ended March 31, 2015. Id. ¶ 100. The press release noted that Contrave's "clinical trial program also includes a double-blind, placebo-controlled cardiovascular outcomes trial known as the Light Study." Id. (emphasis omitted). Orexigen also filed a Form 10-Q, id. ¶ 103, noting that its share price might be impacted by "announcements regarding [its] clinical trials, including [ ] the Light Study and the post-marketing required clinical trials, including the new CVOT, for Contrave." Id. ¶104 (second alteration in original). The Form 10-Q also represented that "additional analysis of the interim results or new data from the continuing Light Study, including safety-related data, and the additional cardiovascular outcomes trial, may produce negative or inconclusive results, or may be inconsistent with the conclusion that the interim analysis was successful." Id. (emphasis omitted). The Form 10-Q also noted that "[a]ny failure by [Orexigen] or delay in completing [its] clinical trials, including the Light Study, or in obtaining regulatory approvals, could cause a delay in the commencement of product revenues and cause [its] research and development expenses to increase." Id. ¶105.

         That same day, Orexigen also hosted an earnings conference call for analysts and investors. Id. ¶¶ 22, 107. In response to a question about whether the Light Study had been terminated, Klassen represented that the "Light Study is continuing and we are continuing to engage both Orexigen and Takeda with the FDA and with ESC and DMC regarding ultimately the status of the study, but it's an ongoing entity as of right now." Id. ¶108 (emphasis omitted). In response to a query about the 50 percent interim data, Klassen responded:

We have passed the 50% time point and as we've stated before, those results are viewed by the Data Monitoring Committee and it wasn't a planned look by the sponsors, like the 25% was. The 25% was special because it was for regulatory purposes and so we have had 50% time point.

Id. ¶109 (alteration in original). Narachi added:

The results from the 50% analysis . . . only come out in the context of wrapping up the trial or as a final analysis. So, if the decision is made to terminate the trial 1early and focus resources on the next CVOT, which is what we have been advocating, then I think results would come out sooner.

Id. ¶110 (emphasis omitted). Narachi also noted that, "if there was a decision to terminate the [Light Study]..., that would be a disclosure that we would make." Id. ¶111 (emphasis omitted).

         On May 12, 2015, Orexigen and Takeda announced the discontinuation of the Light Study, id. ¶¶ 24, 126, but did not reveal the 50 percent data. Id. ¶¶ 24. They noted that they were "pleased that the Light Study is now being terminated and want[ed] to thank the patients and all those involved in the study." Id. ¶ 27 (alteration in original) (emphasis omitted).

         Minutes later, Dr. Nissen and the Cleveland Clinic issued a press release announcing both the termination of the Light Study and the 50 percent interim data. Id. ¶¶ 24, 75, 126, 127. The 50 percent Light Study data revealed that at 192 MACE, the difference between the Contrave and placebo groups shrank to 12 percent and was no longer statistically significant. Id. ¶127. Dr. Nissen noted:

These results do not confirm the cardiovascular benefits of Contrave claimed by Orexigen in the patent application based on the data obtained at the 25 percent time point in the trial .... These results show neither benefit nor harm for patients taking the drug, but are consistent with the requirement by the FDA that the Light Trial demonstrate an absence of a doubling of cardiovascular risk for patients taking the drug .... The inconsistency of effects on cardiovascular outcomes between the first 25 percent and the second 25 percent of the Light Study clearly illustrates the risks inherent in pre-judgment of clinical trial results based upon an interim analysis and demonstrate why interim results should remain confidential during any ongoing trial.

Id. 1126 (emphasis omitted).

         In an article appearing on Forbes.com, Dr. Nissen claimed that "[p]atients were misled, investors were misled." Id. ¶127 (emphasis omitted); see also Id . ¶25. Dr. Nissen also noted that Orexigen had refused to approve a press release publicizing the 50 percent Light Study data for six weeks. Id. ¶¶ 25, 127. An article published in Medscape on that same day quoted Dr. Nissen as saying:

Essentially, when they [Orexigen] filed the patent the company chose what they were going to put in there and what they were going to leave out.... We felt it was in the public interest to take an unprecedented step and release the 50% data because we couldn't allow unreliable data to be used in clinical decision making. We had a duty to the public and also to the investment community, to tell the truth.

Id. ¶128 (alteration in original); see also Id . ¶26. The price of Orexigen's common stock fell from an opening price of $6.75 on May 11, 2015, to $5.02 per share at the close of May 13, 2015. Id. ¶¶26, 130.

         II. Procedural Background

         On March 10, 2015, Plaintiff Lisa Colley filed a class action complaint against Defendants, alleging (1) violation of § 10(b) of the Securities Exchange Act of 1934 (the "1934 Act") and Rule 10b-5, and (2) violation of § 20(a) of the 1934 Act. See generally ECF No. 1. The case was originally assigned to United States District Court Judge M. James Lorenz. See Id . Two related actions-Stefanko v. Orexigen Therapeutics, Inc., No. 15-CV-00549 JAH (JLB) (S.D. Cal), and Yantz v. Orexigen Therapeutics, Inc., No. 15-CV-557 CAB (MDD) (S.D. Cal.)-were filed on March 11, 2015. See ECF No. 4.

         On May 12 and 13, 2015, a number of competing motions for consolidation, appointment of lead plaintiff, and approval of lead counsel were filed. See generally ECF Nos. 26, 27, 28, 29, 32, 33, 34, 35, 37, 38. On June 15, 2015, Lead Plaintiff informed Judge Lorenz that his motions were unopposed. See ECF No. 42. Consequently, Judge Lorenz granted Lead Plaintiffs motions on June 22, 2015. See generally ECF No. 43.

         On June 26, 2015, Judge Lorenz recused himself from this action, which was reassigned to this Court. ECF No. 46. On August 20, 2015, Lead Plaintiff filed his Consolidated Complaint, see generally ECF No. 55, which Defendants ...


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