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Harrington v. Tetraphase Pharmaceuticals Inc.

United States District Court, D. Massachusetts

May 10, 2017

JOSEPH HARRINGTON, on behalf of himself and those similarly situated Plaintiff,
v.
TETRAPHASE PHARMACEUTICALS INC., GUY MACDONALD, JOHN CRAIG THOMPSON, and DAVID LUBNER, Defendants. DAN SCHLAPKOHL, on behalf of himself and those similarly situated Plaintiff,
v.
TETRAPHASE PHARMACEUTICALS INC., GUY MACDONALD, JOHN CRAIG THOMPSON, and DAVID LUBNER, Defendants.

          ORDER ON MOTION TO DISMISS (DOC. NO. 70)

          Leo T. Sorokin United States District Judge

         These consolidated class action cases allege that between March 5, 2015, and September 8, 2015, (the class period) Tetraphase Pharmaceuticals, Inc., and three individual defendants, Guy MacDonald, President and CEO, John Thompson, COO during the class period, and David Lubner, CFO and senior vice president during the class period, violated securities laws. Plaintiffs allege that the defendants (collectively “Tetraphase”) knew that the drug they were testing would fail long before that information was released to the public. Tetraphase filed a Motion to Dismiss, Doc. No. 70, Plaintiffs opposed, Doc. No. 74, Tetraphase replied, Doc. No. 75, and the Court held a hearing, Doc. No. 77. For the reasons stated below, the Motion to Dismiss is ALLOWED.

         FACTS

         A. Background

         The allegations set forth in the Complaint, [1] Doc. No. 62, surround Tetraphase's clinical testing of eravacycline, a broad-spectrum tetracycline-derivative antibiotic. Id. at 11. The Court summarizes the relevant and material factual allegations from the lengthy Complaint.

         A lab at Harvard University discovered a fully synthetic process to develop tetracyclines. Id. Previously existing conventional development methods were semi-synthetic and allowed only limited chemical diversity. Id. Harvard granted Tetraphase the exclusive rights to develop eravacycline using the fully synthetic process under a license agreement on August 3, 2006. Id. at 18. The licensing agreement required Tetraphase to successfully complete each stage of human clinical trials and submit a new drug application (NDA) to the FDA within specified timeframes. Id. The agreement deemed any failure to meet these goals a material breach permitting Harvard to terminate the agreement and reassert its rights over eravacycline. Id.

         Tetraphase received external funding for the development process from the Biomedical Advanced Research and Development Authority (BARDA), a small government agency, under a contract that required Tetraphase to meet certain development milestones between February 1, 2012, and January 31, 2017. Id. at 100. Successful completion of those milestones made Tetraphase eligible for additional financing of up to approximately $39.8 million. Id. The contract required that Tetraphase complete all clinical development milestones by the “definitive performance deadline” of January 31, 2017. Id.

         B. Eravacycline clinical testing

         Eravacycline was developed through the IGNITE clinical development program which included two phase 3 clinical trials. Less relevant to this case, IGNITE 1 tested whether eravacycline was an effective treatment for complicated intra-abdominal infections (cIAIs). Id. at 2. At issue here is IGNITE 2 which tested the efficacy of eravacycline as compared to Levofloxacin, a currently-approved broad-spectrum antibiotic used in the treatment of complicated urinary tract infections (cUTIs). Id. Tetraphase hoped that eravacycline would prove to be an IV-to-oral transition therapy for the treatment of cUTIs. Id. at 1-2. The IGNITE 2 phase 3 trial consisted of two parts: a lead-in portion and a pivotal portion. Id. at 2. The lead-in portion “was designed to study the potential efficacy of Eravacycline and use clinical data to support selection of a drug-dosing regimen for the pivotal portion of the trial. The dosing regimen selected from the lead-in portion of IGNITE 2 as the most efficacious would be further tested in the pivotal IGNITE 2 to prove the efficacy of Eravacycline and, Defendants claimed, support the submission of a NDA to the FDA.” Id. at 23.

         1. Lead-in portion of IGNITE 2

         The lead-in portion of IGNITE 2 began in December 2013 and patient enrollment was completed on June 19, 2014. Id. at 24. Tetraphase split approximately 120 patients into three groups. Id. One group received the active comparator, Levofloxacin, while the other two groups received an eravacycline IV followed by either 200 mg oral eravacycline every 12 hours or 250 mg eravacycline every 12 hours. Id. at 25.

         On September 2, 2014, Tetraphase announced the results of the lead-in portion of IGNITE2. Id. Tetraphase reported that eravacycline has positive first-line results. Id. “The results showed that the IV-to-oral 200 mg dose of Eravacycline had a 70.8% response rate, as compared to a 64.3% response rate in the 250 mg dose, and a 52.2% response rate for Levofloxacin.” Id. The European trial results were 75.0%, 64.3%, and 56.5% respectively. Id. Thus, the results suggested that the lower oral dose of eravacycline was more effective than the higher 250 mg dose. Id.

         2. Pivotal portion of IGNITE 2

         On October 6, 2014, Tetraphase announced the initiation of the IGNITE 2 pivotal phase trial at the 200 mg dose. Id. at 26-27. The press release stated that:

Initiation of the pivotal portion of the IGNITE 2 trial is an important milestone and we look forward to top-line data from the study in mid-2015. We believe eravacycline is a differentiated antibiotic candidate given its potential as an IV-to-oral transition therapy and its activity against a wide variety of bacterial pathogens, including multidrug-resistant Gram-negative bacteria. IGNITE 2 is the second study in our IGNITE pivotal program, which also includes IGNITE 1, a Phase 3 clinical trial of an IV formulation of eravacycline in complicated intra-abdominal infections. We expect to announce top-line data from IGNITE 1 early in the first quarter of 2015.

Id. at 27.

         On March 11, 2015, Tetraphase announced a secondary offering of 4.3 million shares of common stock at $35 per share, a total offering size of $150 million. Id. at 29. In Tetraphase's Offering Prospectus, filed with the SEC on March 12, 2015, the company noted that it planned to use the proceeds from the offering “to fund pre-commercialization activities and prepare for commercial launch of eravacycline” and stated that its products were “a significant innovation in the creation of tetracycline drugs that has the potential to reinvigorate the clinical and market potential of the class.” Id. The prospectus also noted that “we expect to submit a NDA to the FDA by the end of 2015 and a marketing authorization application to the European Medicines Agencies in the first half of 2016.” Id. Tetraphase raised approximately $173.1 million from the sale of 4.945 million shares of common stock at $35 per share before deducting the underwriter discount and commissions. Id.

         On May 6, 2015, a Tetraphase press release noted that it had completed enrollment for the pivotal trial “recently.” Id.

         On September 8, 2015, Tetraphase announced that the pivotal portion of IGNITE 2 had failed to meet its primary endpoint compared to Levofloxacin. Doc. No. 62 at 30. In other words, the trial aimed to establish that eravacycline was as effective as (or at least not inferior to) Levofloxacin in an IV-to-oral therapy formulation; but the trial showed that eravacycline was less effective than Levofloxacin. After the announcement, Tetraphase's stock price dropped by 80%, a $1.3 billion loss. Id. at 31. Throughout the class period and up until the day of the press release announcing that the eravacycline had failed, the individual defendants made large trades of Tetraphase stock. Id. at 31-32, 90-97. The trades were all made under 10b5-1 trading plans. MacDonald established his plan in November 2014 while Thompson and Lubner each established their plans in March 2015.[2] Id. at 81. On December 15, 2015, Thompson resigned from his position as COO. Id. at 31-32. On January 1, 2016, Lubner announced his resignations from his positions as CFO and senior vice president. Id. at 89.

         ANALYSIS

         A. Legal Standard

         “Under the PSLRA, as with any motion to dismiss under Rule 12(b)(6), we accept well-pleaded factual allegations in the complaint as true and view all reasonable inferences in the plaintiffs' favor.”[3] ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46, 58 (1st Cir. 2008). “In order to survive a motion to dismiss, a complaint must allege ‘a plausible entitlement to relief.'” Id. (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 560 (2007)). “For a complaint to state a claim for securities fraud under section 10(b) and Rule 10b-5, it must plead six elements: (1) a material misrepresentation or omission; (2) scienter, or a wrongful state of mind; (3) a connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation.”[4] Id. (citing Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005)).

         Under the PSLRA, a plaintiff's complaint must “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).

         Additionally, the scienter element requires the plaintiff to show “with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.” Id. § 78u-4(b)(2)(A). “In this circuit, a plaintiff may satisfy the scienter requirement with a showing of either conscious intent to defraud or ‘a high degree of recklessness.'” ACA Fin. Guar. Corp., 512 F.3d at 58 (quoting Aldridge v. A.T. Cross Corp., 284 F.3d 72, 82 (1st Cir. 2002)). “Recklessness in this context is a highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the standards of ordinary care.” Local No. 8 IBEW Retirement Plan & Trust v. Vertex Pharm., Inc., 838 F.3d 76, 80 (1st Cir. 2016) (quoting In re Smith & Wesson Holding Corp. Sec. Litig., 669 F.3d 68, 77 (1st Cir. 2012)). “The omission must ‘present a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it.'” Id. (quoting In re Smith & Wesson Holding Corp. Sec. Litig., 669 F.3d at 77) (alteration omitted). “While under Rule 12(b)(6) all inferences must be drawn in plaintiffs' favor, inferences of scienter do not survive if they are merely reasonable, as is true when pleadings for other causes of action are tested by motion to dismiss under Rule 12(b)(6).” Id. at 59 (quoting Greebel v. FTP Software, Inc., 194 F.3d 185, 195 (1st Cir. 1999)). Scienter “should be evaluated with reference to the complaint as a whole rather than to piecemeal allegations” and “competing inferences should be weighed against plaintiffs' preferred interpretation of the facts.” Id. A “strong inference” of scienter “must be more than merely plausible or reasonable-it must be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Id. (quoting Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314 (2007)).

         Plaintiffs allege that various statements from eleven documents are actionable fraudulent statements. These documents are four press releases, three transcripts from conference calls, Tetraphase's annual report and Form 10-K for 2014, and two of Tetraphase's Form 10-Qs. In its submission, Tetraphase included all of those documents except the two Form 10-Qs. For each of the statements, Plaintiffs allege either all or some subset of the following reasons why the statements were materially false and misleading:

(i) Eravacycline's chemical properties made it an ineffective treatment for cUTIs; (ii) Eravacycline would never be successful as an oral therapy; (iii) the Company inappropriately rushed into the pivotal portion of the IGNITE 2 trial without properly analyzing the inconsistent and nonsensical dose response results of the lead-in portion of the trial; (iv) as a result of (i) - (iii) Eravacycline would never meet its primary endpoint of statistical non-inferiority compared to Levofloxacin and the Company would not be able to submit a NDA to the FDA within the time periods stated in their public filings, if ever; (v) Eravacycline would have a much more limited market than represented; (vi) the Company had materially overstated the efficacy of Eravacycline and its business prospects; (vii) as a result of the above, Tetraphase's business prospects were far worse than represented; and (viii) the Company maintained inadequate internal controls.

Doc. No. 62 at 35-36.

         B. Scienter Allegations

         Plaintiffs make a few general allegations of scienter that would apply to all claims.[5] Central to these scienter allegations is the assertion that “[t]he Individual Defendants knew that the Phase 3 IGNITE 2 pivotal trial had failed more than four months before they publicly disclosed the results to investors . . . .” Doc. No. 62 at 80 (emphasis in original). Plaintiffs allege in their Complaint that Tetraphase knew about the pivotal trial results “at least by April 20, 2015.” Doc. No. 62 at 31. This assertion is based on the EU Clinical Trials Register which apparently indicated that the trial ended on that date. Id. at 29. In their Opposition, Plaintiffs amend this date to “by the beginning of May 2015 at the latest.” Doc. No. 74 at 34. They base this new date on a bit of mathematical gymnastics:

Defendant MacDonald stated during a March 5, 2015 earnings call, the “global phase 3 clinical program [was] nearing completion” and the Company “look[s] forward to reporting top-line results from the pivotal portion of IGNITE 2 midyear” thereby implying that the result would be reported in June 2015. According to Defendants, analyzing the trial results would “take longer than six weeks” (Defs.' Br. At 16). Thus, they obviously anticipated having all of the data by the beginning of May 2015.

Id. at 34-35 (emphasis in original) (citations omitted). First, Plaintiffs math is just wrong. Whether the study concluded on April 20, 2015 (as alleged in the Complaint) or by the beginning of May 2015 (as asserted in the opposition to the Motion to Dismiss), Tetraphase could not possibly have the “results” by “April 20, 2015” as alleged in the Complaint. Plaintiffs state that it took Defendants six weeks to analyze and release the results of the lead-in trial after completing patient enrollment. In fact, according to the dates Plaintiffs alleged it took slightly over ten weeks. Patient enrollment was completed on June 19, 2014, and the results were released on September 2, 2014. Doc. No 62 at 24-25. Even if patient enrollment were completed at the start of May, a ten-week analysis period would indicate that the results would be ready for release in mid-July at the earliest. Plaintiffs are claiming that Tetraphase had the results the moment that enrollment was completed or shortly after. But Plaintiffs have not laid out any facts supporting the inference that they had the results before making the allegedly false statements. The only fact Plaintiffs pointed to at the hearing to support such an inference was that Tetraphase would have wanted to know the results as soon as possible. That is insufficient to allow an inference the Plaintiffs had the results in the beginning of May.

         Second, insofar as Plaintiffs are asserting that Tetraphase possessed the results long before the release date, they have failed to allege a factual foundation for that assertion. The initial substantially smaller phase took almost three months to analyze, on the present record concluding that evaluating ...


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