THE IN UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF NORTH CAROLINA
In re INSPIRE PHARMACEUTICALS, SECURITIES LITIGATION
INC.;
Master File No.
1:06CV00201
This
Document Relates
To:
ALL ACTIONS
RECOMMENDATION OF MAGISTRATE JUDGE ELIASON On March 27, 2006, following consolidation of five shareholder class action lawsuits into a single civil action, Plaintiffs filed
a consolidated class action complaint in this Court against Inspire Pharmaceuticals, officers. The Inc. ("Inspire") alleges and certain of of its senior and
complaint
violations 10(b),
Securities
Exchange Commission Rule lOb-5,
sections
20(a),
and 20A of and 15 on
the Securities Exchange Act of 1934, of the Securities Act of 1933.
and sections 11, It particularly
12(a)
focuses
Defendants' Phase 3 FDA
allegedly false and misleading statements regarding a clinical trial of diquafosol, Inspire's development
drug for the treatment of dry eye disease. Relying 1995 9 (b) ("PSLRA" on the Private Securities Litigation Reform Act of
or "the Act")
and Federal Rules
of Civil
Procedure
and 12 (b) (6), Defendants now move to dismiss the Complaint for state a
failure to plead fraud with particularity and failure to claim upon which relief can be granted. Specifically,
Defendants
claim that Plaintiffs failed to allege sufficient facts to support
Case 1:06-cv-00201-WLO-RAE
Document 38
Filed 05/14/2007
Paae 1 of 18
their
fraud
claim
or
sufficiently
allege
that
Defendants'
statements were made with the requisite scienter. Defendants sufficiently also contend that the Complaint's is fatal to failure to
allege
misrepresentation
Plaintiffs'
separate claims under Sections 20(a) and Sections 11, 12(a)(2),
and 20A of the Exchange Act, As will
and 15 of the Securities Act.
be seen, to successfully state a claim under any of these sections, Plaintiffs must first plead a predicate violation of securities
fraud under section 10(b)
of the Exchange Act or Rule lOb-5. Facts
Inspire, a potential
a biopharmaceutical company, treatment for dry eye
developed diquafosol as Diquafosol was the
disease.
first drug for which the company sought FDA approval for commercial use, and it did so only after nearly six years of development.
Once preclinical studies showed promising data regarding the drug, Inspire received permission from the FDA to begin a sequence of
clinical trials to any side effects. of clinical
determine the drug' s efficacy and the nature of For all new drugs, the FDA requires three phases with Phase III studies providing the pivotal
trials,
risk-benefit and efficacy statistics necessary for a drug to gain approval. trials Accordingly, Studies 104 Inspire and 105 conducted two before Phase III a clinical New Drug
submitting
Application to the FDA. Both of the Phase III studies built on the relative success of Study 103, which was a Phase II trial. Study i.e., 103 demonstrated
significant improvements both objectively,
through signs of
-2-
Case 1:06-cv-00201-WLO-RAE
Document 38
Filed 05/14/2007
Paae 2 of 18
eye health, though the
and subjectively, results did not
i.e., meet
in terms of reported symptoms, all of the company's desired
endpoints in either category. had a primary objective staining scores."
Like Studies 104 and 105,
Study 103
endpoint of "improvement
in mean corneal
Corneal staining refers to a procedure using a
fluorescein fluid to highlight damaged areas on the surface of the eye. A corneal staining score of five indicates extensive damage, or "corneal clearing."
while a score of zero indicates no damage, Therefore,
to achieve improvement in mean corneal staining scores, show a statistically significant improvement in the If a meaningful
a study must
average corneal staining scores of test subjects. number of subjects
demonstrate a complete absence of staining by the drug has also achieved corneal clearing and improvement in clearing. corneal
the end of a study, Notably, both
corneal
mean
staining may be classified as "corneal staining endpoints" because they utilize the same staining process. The primary endpoints for Inspire's first Phase III trial,
Study 104,
were both an objective endpoint of improvement in mean
corneal staining scores and a subjective endpoint of improvement in patients' self-reported worst symptoms. Unfortunately, the study
did not result in statistically significant objective improvement. In contrast, Study 105 employed the same primary objective endpoint
and demonstrated a highly significant improvement in mean corneal staining scores. endpoint While of Study 105 narrowly body missed its primary Inspire
subjective
clearing
foreign
sensation,
-3-
Case 1:06-cv-00201-WLO-RAE
Document 38
Filed 05/14/2007
Paae 3 of 18
disclosed
that
the
study
had
achieved
corneal
clearing
in
a
statistically significant number of patients.' In June 2003, FDA based of on its Inspire submitted a New Drug Application to the Phase 105. from III trials, that particularly year, Inspire that the apparent an
success
Study
Later the
received
"approvable" could be
letter
FDA,
which one
stated of two
diquafosol (1)
approved
if the
company met
conditions:
conduct two additional endpoints, or (2)
studies with both objective and subjective one additional study to replicate the
conduct
corneal clearing results of Study 105.
Because no study had ever
succeeded in simultaneously meeting both objective and subjective endpoints, reasons, Phase III Inspire chose also the second to option. the When For details Inspire proprietary of its new
the
company
chose
keep
trial,
Study
109,
secret.
publically
announced on January 30,
2004 that it would conduct such a trial,
it only disclosed that it was working with the FDA to establish a protocol and that the purpose Later, of Study 109 was 4, to substantiate Inspire CEO
diquafosol's
efficacy.
on November
2004,
Christy Shaffer
("Shaffer")
stated to one analyst that the
study i.e.,
had "a corneal staining endpoint," but the specific endpoint,
'The term "clearing" takes on two unrelated meanings in this context. Corneal clearing refers to the objective clearing of eye damage. A patient may also report a subjective clearing of symptoms, e.g., a clearing of foreign body sensation in the eye. Inspire presented a paper detailing the corneal clearing results achieved in Study 105 at the Association for Research in Vision and Ophthamology' s annual conference in May 2003. This paper defined corneal clearing as a corneal staining score of zero and was publicized by both Inspire and securities analysts, who described the results as "clearing of corneal staining." (Chambers Decl. Ex. 4)
-4-
Case 1:06-cv-00201-WLO-RAE
Document 38
Filed 05/14/2007
Paae 4 of 18
corneal
clearing,
was
never
officially
revealed.
Nevertheless,
most analysts took it upon themselves to speculate that Study 109's primary endpoint was simply improvement in mean corneal staining, as in the company's previous Inspire conducted two studies.' offerings of its common stock during
2004 in order to finance its development of diquafosol, one in July and another in for November, each. and Both the company were issued firm separate commitment
prospectuses
offerings
offerings, meaning that neither Inspire nor its officers sold stock directly to the public. Instead, all stock was first sold to
underwriters. Unfortunately, Inspire learned in February 2005 that the
results of Study 109 were not statistically significant enough to meet its corneal clearing endpoint. The company's stock price and
dropped when these results were announced on February 9, purchasers reacted suits, by now of stock from the July and November in this 2004
2005,
offerings These Inspire,
filing
class
action into
lawsuits present
Court. name
consolidated
the
action,
Shaffer,
and two former company officers, as Defendants.
Gregory Mossinghoff and oral 2005
Gary Novack, and written
Plaintiffs claim that Defendants' 2004 and February 8,
statements between May 10,
misled the market as to Study 109's true endpoint. move to dismiss the Complaint for failure to
Defendants now fraud with
plead
'It is not clear just how much improvement the analysts thought would be required in Study 109 and what possible basis they could have used for such speculation.
-5-
Case 1:06-cv-00201-WLO-RAE
Document 38
Filed 05/14/2007
Paae 5 of 18
particularity and failure to state a claim upon which relief can be granted. Discussion Rule 9(b) of the Federal Rules of Civil Procedure carves out
an exception to the general requirement that a plaintiff need only set [he forth "a short and plain or she] is entitled to statement of the claim showing that R. Civ. P. Rule 8 (a) .
relief."
Fed.
Specifically, or mistake, be
Rule 9 (b)
requires that "[ i] n all averments of fraud constituting fraud or mistake shall While this rule was intended to
the circumstances
stated with particularity."
sort out and dispose of unfounded fraud claims at an early stage of litigation, its inconsistent application by the courts failed to
prevent abusive practices in many private securities fraud actions. See Teachers' Ret. Sys. v. Hunter , 477 F.3d 162, 171 (4th Cir.
2007).
Consequently, and
Congress
enacted the PSLRA in an effort to requirements and discourage
strengthen
clarify
pleading Id.
frivolous securities claims.
This Act mandates that:
the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed. 15 U.S.C. 78u-4(b)(1). In short, the PSLRA requires that
plaintiffs plead sufficient facts to support any claim of material misrepresentation under section 10(b) lOb-5. of the Exchange Act or Rule
-6-
Case 1 : 06-cv-00201 -WLO-RAE
Document 38
Filed 05/14/2007
Paae 6 of 18
In the context of a Rule 12(b)(6) motion to dismiss, represents Rules, that a departure from the general scheme of
the PSLRA Federal
the
which allow a court to take into account any set of facts could be even proved though consistent such facts with have the not allegations been of the
complaint, alleged. plaintiff
specifically
Instead, has
the Act authorizes all of the facts
courts to assume that the upon which he bases his If a
stated
allegation of a misrepresentation. complaint person to fails find to state the to sufficient defendant dismiss 216
Hunter , facts made
477 F.3d at 172.
to permit a reasonable a false or misleading Id. Cir. at 174
that
statement, (citing
the motion v.
should be 300,
granted. (2d
Novak
Kasaks ,
F.3d
313-14
2000).
Formulaic or conclusory allegations cannot satisfy the requirements of the PSLRA and Rule 12(b)(6); rather, specific facts must be in
alleged to support a reasonable belief that the statement was, fact, misleading. Hunter , 477 F.3d at 175.
A failure to provide
such facts has implications Act claims as well, the
for other Exchange Act and Securities of these claims, a including those of
since many
articulated securities
by
Plaintiffs, section
require
primary lOb-5.3 657 n.7
claim See ,
fraud under
10(b) 392
or Rule
e.g. ,
Greenhouse v. 2004) .
The statements
MCG Capital Corp. ,
F.3d 650,
(4th Cir.
complaint which
at
issue
in claim
this were
case
sets
out
numerous Plaintiffs
Plaintiffs
misleading.
'This claim is contained in Count IV against Inspire and the individual Defendants.
-7-
Case 1:06-cv-00201-WLO-RAE
Document 38
Filed 05/14/2007
Paae 7 of 18
contend
that
these and
statements, oral and
in
the
form
of
press by
releases, CEO
prospectuses,
written
statements
Inspire
Christy Shaffer, endpoint for
"failed to disclose that the FDA mandated primary 109 was not mere improvement in mean corneal
Study
staining as in the earlier Phase III trial, difficult to achieve corneal clearing." 128, 141.) However, Plaintiffs claims. other than
Study 105,
but a more
( See , e.g.. , Compl. 11 117, recurring, to fail conclusory their
this little
allegation,
provide
support
misrepresentation
They particularly
to explain how
each of Defendants'
statements misled investors or even show that
investors were misled by Defendants at all. While Defendants did, as Plaintiffs claim, label Study 109 as
a "confirmatory" study, the Complaint offers no evidence to support Plaintiffs' assertion that the mere use of the word "confirmatory"
misled them to "believe that Study 109 was simply the same as the three prior Phase III studies .i4 (Compl. (1 69.) Notably, the
Complaint itself reveals that prior trials of diquafosol - namely Studies 103, 104, and 105 - differed not only from Study 109, but
from each other in terms of subjective primary endpoints, objective and subjective secondary endpoints, 53.) Further, and protocols. (Compl. 11 49-
and contrary to Plaintiff's that Studies 105 and
assertions, 109
Defendant "very
Shaffer's
statement
employed
similar" protocols did not imply that both studies were identical,
41n addition to Phase III Studies 104 and 105, the third Phase III trial which Plaintiffs ostensibly refer is Study 108, which differed substantially to from Inspire's other trials of diquafosol and which the FDA declined to include in the approval process. (See Compl. 5 57.)
-8-
Case 1:06-cv-00201-WLO-RAE
Document 38
Filed 05/14/2007
Paae 8 of 18
or even that they shared the same primary endpoint. 116-117.) Complaint, In fact, the July 2004 It Prospectus, conveys as
( See Compl. 11 quoted in the were
suggests
otherwise.
that
Defendants
"working closely with [ the FDA]
to develop a protocol"
for Study
109 so that the study would meet the FDA' s "additional requirement" for regulatory approval, (Compl. of i.e., 1 67.) 109 a requirement Moreover, that its not addressed in
previous studies. from the beginning
Defendants emphasized FDA-mandated endpoint,
Study
eventually revealed to be corneal name for purely competitive
clearing,
was not disclosed by Decl. Ex. 10.)
reasons.
(Chamber
Considering these facts, a fraud claim based on Defendants' to disclose the endpoint is meritless,
failure
and speculation by investors
and analysts that Study 109 would be a simple repeat of the prior Phase III studies was self-deluding and ill-founded. conclusory argument to the contrary, than Defendants' out-of-context Plaintiffs'
interspersed with little more is insufficient to
statements,
support a claim of misrepresentation. Even Defendant Shaffer's statement to analyst David Steinberg that Study 109 had "a corneal staining end point" does not sustain Plaintiffs' the misrepresentation claim. did not specify ( See Compl. 1 135.) First, Second,
statement
any particular
endpoint.
like the allegations above, this claim totally lacks the supporting facts showing there to be a misrepresentation as required by the
-9-
Case 1:06-cv-00201-WLO-RAE
Document 38
Filed 05/14/2007
Paae 9 of 18
PSLRA.5
The Complaint itself clearly confirms the possibility that
corneal clearing is simply one type of corneal staining endpoint. First, score areas" it of asserts to zero that "[c]orneal staining is of assigned a number
five based on the number one possible corneal
stained or damaged endpoint in is "a
and
that
staining (i.e.,
statistically corneal defines
significant scores." clearing
improvement (Compl. as "the (1
decrease) the
mean
staining corneal
48.) complete
Later,
Complaint of stains
absence
indicating damage to the surface of the eye," or, a corneal staining score of zero. Shaffer, for good reasons only ( See Compl. spoke in
in other words, Thus, while terms and
1 108.) shorthand
possibly was not as clear as she could have been,
her statement is
'Plaintiffs' argument rests on the view that corneal clearing is impossible achieve and, therefore, Defendants had a duty to reveal that corneal clearing to was the endpoint of Study 109. (Pls.' Br. 14-15.) The basis for this contention is that, according to some clinicians and a couple of ophthalmologists, corneal clearing is more difficult, if not "nearly impossible," to achieve. (Compl. 55 111 & 112.) Nothing is mentioned about what the FDA actually expected. According to Plaintiffs, the FDA mandated an "impossible" test that necessarily would fail. This is a rather extraordinary claim and, therefore, requires a solid factual statement for support. The Court finds the purported experts' off the cuff statements wholly deficient to prove the claim. The "experts"' statements raise more questions than providing answers and, for this reason alone, are insufficient. More significantly, one of Inspire's previous studies, Study 105, had apparently already demonstrated corneal clearing. In fact, three analyst reports from Morgan Stanley told investors that Study 105 showed "a significantly higher percentage of clearing of corneal staining in both treatment groups at weeks 6 and 8." (Chambers Decl. Ex. 6 at 30.) As stated previously, these corneal clearing results were also presented in a paper at a major eye conference prior Thus, corneal clearing would seem to be far from to the class period. "impossible," and failure to use that terminology to describe the endpoint provides no basis for a securities fraud claim. Moreover, in as much as the term corneal clearing was already used by analysts in describing Study 105, the use of it to describe Study 109 would not have made a difference.
-10-
Case 1:06-cv-00201-WLO-RAE
Document 38
Filed 05/14/2007
Paae 10 of 18
not false or misleading.6
To the extent it may be confusing to a
layman to refer to corneal clearing as a type of corneal staining endpoint, a layman has no right to impose his or her own scientific Plaintiffs in improper reveal
requirements or terminology on Defendants or the FDA. also argue that because the analysts engaged
assumptions
and speculation,
Defendants
were
obligated to However,
all of the details of Study 109 at some point.
Plaintiffs
fail to show this to be the law or even provide a meaningful basis for anyone to know when such a point would ever arrive. Even assuming there was a misstatement by the executive, every misstatement is grounds for a lawsuit. this case, including the Plaintiffs, knew not
Everyone involved in that their investment
involved a substantial degree of risk.
Because Defendants openly
announced that it was their competitive strategy not to reveal the primary endpoint known of Study 109, Plaintiffs claims specifically on this knew or
should have
that
any analysts'
matter were
speculative at best.
The Complaint shows that Plaintiffs relied on statements made by analysts who predicted
the wildly speculative
Study 109 would be a success.
But Plaintiffs also knew that the in fact, were not even
analysts did not speak for Defendants and, scientists.
Their assertions as to the study's endpoint were well Plaintiffs real failure to
outside of their realm of knowledge and expertise. beef is with the analysts. In any event,
Plaintiffs'
'In addition, because Shaffer's statement was made on November 4, had no bearing on stock purchased during the company's July offering.
2004,
it
-11-
Case 1:06-cv-00201-WLO-RAE
Document 38
Filed 05/14/2007
Paae 11 of 18
allege sufficient facts to support a misrepresentation claim based on Shaffer's statement precludes the claim from going forward.
Another reason for dismissal lies in the fact that the PSLRA, in addition to requiring particularized pleading of supporting
facts as discussed above, also significantly heightens the pleading standards for alleging scienter. mind to be averred generally, While Rule 9(b) the PSLRA permits state of plaintiffs to
requires
"state with particularity facts giving rise to a strong inference that the defendant acted with Thus, to the required state of mind." 15
U.S.C.
78u-4(b)(2).
support a securities
fraud claim Plaintiffs that each
under section 10(b) must allege facts
of the Exchange Act and Rule lOb-5, to support a "strong inference"
defendant acted with "intent to deceive, manipulate, or defraud" or with "severe recklessness" regarding the danger that Group, Plaintiffs Inc. , 353
would be misled. F.3d 338, In 343-344 the
Ottmann v. (4th Cir.
Hanger Orthopedic
2003). Plaintiffs order scienter to attempt an by to contrive that The (1)
present evidence with
case, in
circumstantial Defendants
support
inference the PSLRA.
acted
the
required
Complaint sets forth two interrelated arguments on this point:
Defendants had the motive and opportunity to defraud investors, and (2) individual Defendants' These insider trading implies fail to intent raise or an
recklessness. inference, First,
arguments
ultimately
much less a "strong inference," of scienter. Plaintiffs take a significant leap from their
allegations of motive and opportunity to their conclusion of intent
-12-
Case 1:06-cv-00201-WLO-RAE
Document 38
Filed 05/14/2007
Paae 12 of 18
- all without providing sufficient facts to connect the two. example, material, the Complaint alleges that "Defendants had access alia,
For to the
nonpublic
information
concerning,
inter
Company's true financial condition, the prospects for the Company' s lead development by the drug, FDA for (1 diquafosol, the 185.) and Under 109, and the primary III endpoint trial as of "a net
required
"confirmatory' It also
Phase
diquafosol." company losses." decided to
(Compl.
describes ever
Inspire
hemorrhaging (Compl. conduct (1
cash 2.)
reporting Plaintiffs it
increasing
scenario, FDA)
Defendants knew would
Study
which
(and the
necessarily fail,
in order to raise money through a stock offering. the conclusory, some facts, if not while
While perhaps not absolutely inconceivable, wildly speculative, allegations, along
with
arguably demonstrating a possible motive, suggest that Defendants' motives,
lend nothing to actually
made their public offerings based on these
let alone that they did so with "severe recklessness" or
intent to defraud. Plaintiffs' insider trading claim is equally unpersuasive. It
alleges that "[ n] otwithstanding the duty not to sell Inspire common stock under these prior and circumstances, to selling sold the or to disclose the insider Shaffer, that were
information Mossinghoff
stock, stock
Defendants at prices
Novack
Inspire
artificially inflated by Defendants' statements and omissions." (Compl.
material false and misleading (1 186.) While Defendants action
undeniably sold a number of their shares period, sales alone provide no grounds
during the class
for Plaintiffs'
securities
-13-
Case 1:06-cv-00201-WLO-RAE
Document 38
Filed 05/14/2007
Paae 13 of 18
fraud claim.
Notably,
Plaintiffs
fail to
state
facts
to
support
their claim that Study 109 was succeed. See n.5.
entirely fraudulent and could not there is no evidence that
Without such facts,
Defendants undertook their sales with the intent to defraud. To details overcome this hurdle, Plaintiffs sales sold in an alternatively offer
of the three Defendants' the number price of of shares share sales -
during the class period on each date to and prove 11 the the 187-
including
corresponding suspicious 193.)
per the
attempt ( see
nature
themselves.
Compl.
For Shaffer,
Plaintiffs
also include the (Compl. (1
same
information However, figures
regarding her pre-class
period sales.
189.) and the
both the analysis by Plaintiffs themselves
of these
figures
fail to strongly infer scienter.
First, as the Fourth Circuit has held, insider trading implies scienter [is] "only if the timing and amount of a defendant's or suspicious.' " Hunter , 477 F.3d at 183. trading Thus,
"unusual
Plaintiffs must provide the context for Defendants' to support their claim. Here, Plaintiffs
sales in order that two
state
defendants, Novack and Mossinghoff, in the two their sales years prior to the
did not sell any Inspire stock period or at any time 11 190-91.) since the
class
in November 2004.
(Compl.
However,
Complaint also reveals that both men resigned from Inspire around the time of their rather sales than (Compl. an intent (1 192.), to indicating that their
departures,
defraud,
may have prompted shows...