ROMAN ZAK, Individually and On Behalf of All Others Similarly Situated, Plaintiff - Appellant, and CAMERON MCINTYRE, Individually and On Behalf of All Others Similarly Situated Plaintiff,
CHELSEA THERAPEUTICS INTERNATIONAL, LTD.; SIMON PEDDER; WILLIAM D. SCHWIETERMAN, Defendants - Appellees, and L. ARTHUR HEWITT; J. NICK RIEHLE, Defendants
Argued December 10, 2014.
[Copyrighted Material Omitted]
Appeal from the United States District Court for the Western District of North Carolina, at Charlotte. (3:12-cv-00213-MOC-DCK). Max O. Cogburn, Jr., District Judge.
Richard William Gonnello, FARUQI & FARUQI, LLP, New York, New York, for Appellant.
Barry M. Kaplan, WILSON SONSINI GOODRICH & ROSATI, Seattle, Washington, for Appellees.
Lee M. Whitman, Tobias S. Hampson, WYRICK ROBBINS YATES & PONTON LLP, Raleigh, North Carolina; Gregory L. Watts, Seattle, Washington, Ignacio E. Salceda, Cheryl W. Foung, WILSON SONSINI GOODRICH & ROASATI, Palo Alto, California, for Appellees Chelsea Therapeutics International, Ltd., Simon Pedder, and William D. Schwieterman.
Before TRAXLER, Chief Judge, and, KEENAN and THACKER, Circuit Judges.
BARBARA MILANO KEENAN, Circuit Judge:
The plaintiffs in this case claim that Chelsea Therapeutics International, LTD. (Chelsea) and several of its corporate officers (collectively, the defendants) violated Section 10(b) of the Securities Exchange Act of 1934 (the Exchange Act), 15 U.S.C. § 78j(b). Chelsea stockholder Roman Zak, both individually and as a class representative for other investors (the plaintiffs), alleged that the defendants made materially misleading statements and omissions about the development and likelihood of regulatory approval for a new drug, Northera. After considering the defendants' motion to dismiss filed under Federal Rule of Civil Procedure 12(b)(6), the district court dismissed the complaint, holding that the plaintiffs' allegations were
insufficient as a matter of law to establish that the defendants acted with the required scienter.
On appeal, the plaintiffs contend that the district court committed two errors. The asserted errors are: (1) the court's consideration of certain documents filed with the Securities and Exchange Commission (SEC) that were submitted as exhibits with the defendants' motion to dismiss; and (2) the court's determination that the plaintiffs' allegations of scienter were legally insufficient.
Upon our review, we hold that the district court erred in taking judicial notice of the challenged documents filed with the SEC, because those documents did not relate to the contents of the complaint. We further hold that this error was not harmless, because the court incorrectly construed these documents as supporting its holding that the plaintiffs' allegations of scienter were legally insufficient. Finally, we hold that based on the defendants' failure to disclose critical information about the weaknesses of the new drug application, the plaintiffs' allegations were sufficient to support a strong inference of scienter. We therefore vacate the district court's judgment dismissing the plaintiffs' complaint and remand the case for further proceedings.
The plaintiffs alleged in their pleadings the following facts, which we accept as true in our review of the district court's dismissal of the complaint under Federal Rule of Civil Procedure 12(b)(6). Matrix Capital Mgmt. Fund, LP v. BearingPoint, Inc., 576 F.3d 172, 176 (4th Cir. 2009) (citing Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007)). In 2006, Chelsea began its effort to gain approval from the Food and Drug Administration (FDA) concerning the right to market the drug Northera as a treatment for symptomatic neurogenic orthostatic hypotension (NOH). NOH is a condition in which a dramatic drop in blood pressure occurs when a person stands. This drop in blood pressure causes symptoms such as dizziness, impaired vision, fatigue, weakness, nausea, and an inability to think clearly. NOH is associated with the presence of various disorders including Parkinson's disease, multiple systems atrophy, and pure autonomic failure.
After considering the " significant unmet need" for a clinically beneficial treatment of symptomatic NOH, the FDA assigned Northera " orphan drug status." Such status provided Chelsea with seven years of marketing exclusivity, and reduced certain time and expense requirements related to clinical trials mandated for FDA approval of the drug.
Before submitting its " new drug application" to the FDA, Chelsea conducted numerous clinical trials with certain " endpoints," or goals, to demonstrate the drug's efficacy and safety. As relevant to this appeal, Chelsea conducted four efficacy trials, namely, Studies 301, 302, 303, and 306.
Studies 301 and 302 began in 2008. Both those studies had the same general efficacy endpoint of demonstrating a statistically significant effect on lightheadedness and dizziness for individuals suffering from NOH. The endpoint for Study 301 was set forth in a " special protocol assessment"
(SPA), which was an agreement between Chelsea and the FDA that the study design, trial size, and clinical goals could support regulatory approval. The SPA involving Study 301 also stated that the FDA expected two successful efficacy studies before it would grant regulatory approval of the new drug.
The first study to conclude, Study 302, failed to meet its primary endpoint. Later documents showed that the results of Study 302 " clearly . . . dr[e]w the efficacy of [the drug] into question," and demonstrated that symptoms worsened for those individuals taking the drug.
After Chelsea announced to investors the disappointing results from Study 302, Chelsea petitioned the FDA to modify the SPA's endpoint for Study 301, which was ongoing. In November 2009, Chelsea representatives met with FDA officials, and later informed investors that the FDA had agreed to permit Chelsea to use a different assessment scale for Study 301 than was used in Study 302. The FDA officials also had recommended at the November 2009 meeting that Chelsea submit " a confirmatory pivotal study to support" the new drug application, because of the failed results in Study 302. Based on this additional recommendation, Chelsea announced plans to initiate a new clinical trial, Study 306, which would involve an eight-week treatment period.
In September 2010, Chelsea announced that Study 301 had concluded, and successfully had met its revised endpoint by showing a statistically significant improvement in participants' symptoms. However, Study 301, which employed a treatment period of only one week, was the sole efficacy study conducted by Chelsea that met its primary endpoint. Study 303, which included significantly longer treatment periods than Studies 301 and 302, did not meet its endpoint, and failed to demonstrate that the drug provided any " duration effect" on symptoms. Study 306, which also included a significantly longer treatment period, was abandoned after an interim analysis indicated that the study would not meet its endpoint.
On December 10, 2010, Chelsea met with FDA officials to assess the viability of submitting a new drug application based on Study 301 (the December 2010 meeting). During the December 2010 meeting, FDA officials again warned Chelsea that a single successful study typically was not sufficient to support approval of a new drug. Nevertheless, Chelsea announced that the FDA had " agreed" that Chelsea's new drug application for Northera could be submitted based on data from Study 301, the only study to meet its primary endpoint, and data from Study 302, which had not met its primary endpoint, without the need for any further efficacy studies.
During a conference call held with Chelsea investors, Dr. Simon Pedder, Chelsea's President and Chief Executive Officer, described the December 2010 meeting as a " successful outcome" that " reflect[ed] the strength of the data" generated by Chelsea's drug development program, and " mark[ed] a significant step forward for Chelsea." Dr. Pedder also stated that the FDA officials had clarified " that additional efficacy studies were not required" for a new drug application filing. On the same conference call, Dr. William Schwieterman, Chelsea's Vice President and Chief Medical Officer, represented that after the December 2010 meeting, Chelsea was " very pleased" with the FDA's responses to
Chelsea's questions about its application and supporting data. After these statements concerning the December 2010 meeting, Chelsea's stock price rose about 28 percent.
In September 2011, Chelsea announced that it had submitted to the FDA its new drug application based on purportedly " robust" efficacy data from Studies 301 and 302. However, as later observed by the FDA, these studies involved treatment periods of only one week.
In accordance with the FDA's initial evaluation process for new drug applications, an FDA staff member prepared a briefing document in advance of the meeting of the FDA's Cardiovascular and Renal Drugs Advisory Committee (the advisory committee), which was held to review Chelsea's application. The briefing document included the staff member's recommendation against approval of Northera, which recommendation was based in part on Chelsea's failure to demonstrate that the drug had a " durable effect (i.e., more than 4 weeks)."
On February 13, 2012, eight days before the FDA briefing document was made available to the public, Chelsea issued a press release. In the release, Chelsea stated that it was in " receipt of [the] briefing document," and that " several lines of inquiry . . . have emerged as significant components of the benefit-risk analysis of Northera," including that Chelsea's drug development program " may not adequately establish a durable treatment effect as a result of the short duration of" the clinical trials. Notably, however, Chelsea's press release did not disclose that the FDA briefing document concluded with the recommendation that Northera not be approved. Also in that release, Chelsea stated that the advisory committee would review the application on February 23, 2012. Finally, the release included a website address where the FDA briefing document later would be made available.
After the February 13, 2012 press release issued, Chelsea's stock price dropped about 37.5 percent. When the briefing document became public eight days later on February 21, 2012, Chelsea's stock price dropped an additional 21 percent.
On February 23, 2012, however, the FDA advisory committee announced its non-binding recommendation in favor of approving Northera as a new drug. Several members of the advisory committee raised the same concerns outlined in the staff briefing document. Although the advisory committee chairperson voted in favor of approving the drug, he nevertheless stated, " virtually all [members of the advisory committee] agree that" the failed studies " do not provide confirmatory evidence of benefit. And the primary study, [Study] 301[,] also did not provide evidence regarding the duration of effect in any direct way."
On March 28, 2012, the FDA denied the new drug application. The FDA provided its decision in a " complete response letter," stating, among other things, that the FDA required an additional successful study to support " durability of effect."
About a week after the FDA's decision, the initial complaint in this case was filed. The plaintiffs later filed a consolidated class action complaint (the complaint), asserting violations of Section 10(b) of the Exchange Act and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5 (Rule 10b-5). In their complaint, the plaintiffs, who purchased Chelsea stock between November 3, 2008 and March 28, 2012 (the class period), asserted numerous claims including that the defendants misled investors to believe ...