United States District Court, D. Massachusetts
JOSEPH HARRINGTON, on behalf of himself and those similarly situated Plaintiff,
TETRAPHASE PHARMACEUTICALS INC., GUY MACDONALD, JOHN CRAIG THOMPSON, and DAVID LUBNER, Defendants. DAN SCHLAPKOHL, on behalf of himself and those similarly situated Plaintiff,
TETRAPHASE PHARMACEUTICALS INC., GUY MACDONALD, JOHN CRAIG THOMPSON, and DAVID LUBNER, Defendants.
ORDER ON MOTION TO DISMISS (DOC. NO. 70)
Sorokin United States District Judge
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.
allegations set forth in the Complaint,  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.
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
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.
Eravacycline clinical testing
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.
Lead-in portion of IGNITE 2
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.
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.
Pivotal portion of IGNITE 2
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
Id. at 27.
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.
6, 2015, a Tetraphase press release noted that it had
completed enrollment for the pivotal trial
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. 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.
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.” 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.” Id. (citing Dura Pharm., Inc.
v. Broudo, 544 U.S. 336, 341-42 (2005)).
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).
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)).
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.
make a few general allegations of scienter that would apply
to all claims. 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.
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