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Gerneth v. Chiasma, Inc.

United States District Court, D. Massachusetts

February 15, 2018

JOHN J. GERNETH, Individually and on Behalf of All Others Similarly Situated Plaintiff,
v.
CHIASMA, INC., et al., Defendants.

          MEMORANDUM AND ORDER

          Denise J. Casper United States District Judge

         I. Introduction

         Plaintiff John Gerneth (“Gerneth”) brings claims against Defendants Chiasma, Inc. (“Chiasma”), Mark W. Leuchtenberger (“Leuchtenberger”), Mark J. Fitzpatrick (“Fitzpatrick”), Todd Foley (“Foley”), John Scarlett (“Scarlett”), Ansbert Gadicke (“Gadicke”), Dror Brandwein (“Brandwein”), Bard Geesaman (“Geesaman”), Scott Minick (“Minick”), David Stack (“Stack”), Vincent Miles (“Miles”), [1] William Blair & Company, LLC (“William Blair”), Cowen and Company, LLC (“Cowen”), Barclays Capital Inc. (“Barclays”) and Oppenheimer & Co. Inc. (“Oppenheimer”) (collectively, “Defendants”), alleging that Defendants violated Section 11 of the Securities Act, 15 U.S.C. § 77k (“Section 11”) (Count I), and that the Individual Defendants violated Section 15 of the Securities Act (Count II). D. 30. Defendants now move to dismiss the complaint pursuant to Fed.R.Civ.P. 12(b)(6). D. 62. For the reasons stated below, the Court DENIES the motion.

         II. Standard of Review

         The Court will grant a motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) if the complaint fails to plead sufficient facts that “state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007). When considering a motion to dismiss, the Court is tasked with “separat[ing] the factual allegations from the conclusory statements in order to analyze whether the former, if taken as true, set forth a ‘plausible, not merely a conceivable, case for relief.'” Juárez v. Select Portfolio Servicing, Inc., 708 F.3d 269, 276 (1st Cir. 2013) (quoting Ocasio-Hernández v. Fortuño-Burset, 640 F.3d 1, 12 (1st Cir. 2011)). In conducting this examination, the court must not “attempt to forecast a plaintiff's likelihood of success on the merits, ” id. (internal quotation marks omitted), but instead “give the plaintiff the benefit of all reasonable inferences.” Ruiz v. Bally Total Fitness Holding Corp., 496 F.3d 1, 5 (1st Cir. 2007) (citing Rogan v. Menino, 175 F.3d 75, 77 (1st Cir. 1999)).

         III. Factual Background

         The following summary is based upon the allegations in the amended complaint, D. 30, which are accepted as true for the consideration of the motion to dismiss. Chiasma is a late-stage biopharmaceutical company with its principal place of business in Newton, Massachusetts. D. 30, ¶ 16. The company's primary business since 2001 has been applying its proprietary Transient Permeability Enhancer (“TPE”) technology to develop and sell drugs for oral delivery that were previously only available in injectable form. D. 30, ¶¶ 3, 53-55. Chiasma was focused on developing the first oral drug for the treatment of acromegaly, a hormonal growth disorder that causes excess production of growth hormone. D. 30, ¶¶ 4, 48, 55.

         Chiasma's oral acromegaly treatment, Mycapssa, is an oral capsule form of octreotide, a previous injectable treatment, using the TPE technology. D. 30, ¶¶ 3-4, 47, 52-53. Mycapssa would be the first oral treatment for acromegaly available on the market. D. 30, ¶ 51. Upon Mycapssa's approval and success, Chiasma intended to use its TPE technology to develop oral delivery treatments of other drugs that are now only available as injections. D. 30, ¶¶ 4, 53.

         Chiasma decided to seek approval for Mycapssa using the FDA's 505(b)(2) hybrid New Drug Application (“NDA”) pathway. D. 30, ¶ 77. 505(b)(2) allows the applicant to rely partially upon previously submitted clinical studies submitted by prior applicants in support of other drugs. D. 30, ¶ 40. Chiasma performed Phase 1 trials for Mycapssa, D. 30, ¶ 62, and relied upon previously conducted clinical studies of octreotide's injectable drugs in lieu of a Phase 2 trial, D. 30, ¶¶ 55, 111.

         Between March 2012 and November 2014, Chiasma conducted a single-arm, open label, multi-center, baseline-controlled Phase 3 trial to observe whether patients with acromegaly maintained safe and effective responses to treatment when switched from injectable octreotide to Mycapssa. D. 30, ¶ 64. The Phase 3 trial was not conducted in the United States because the FDA required six months of monkey toxicity data to approve enrollment in a U.S. site and Chiasma only had three months of monkey toxicity data. Id. The Phase 3 trial was conducted in two phases: a seven-month “Core Treatment Phase, ” followed by an optional six-month “Extension Phase.” D. 30, ¶ 65. Out of 155 patients enrolled in the Phase 3 trial, 102 completed the Core Treatment Phase and 82 completed the Extension Phase. D. 30, ¶ 67.

         In February 2013, Chiasma entered into a licensing agreement with F. Hoffman-La Roche Ltd. and Hoffman-La Roche Inc. (collectively, “Roche”). D. 30, ¶ 5. Roche promised a $65 million upfront payment and possible future payments based on development and commercial milestones of up to $530 million in exchange for the right to develop and commercialize Mycapssa after FDA approval. D. 30, ¶¶ 5, 71. In May 2014, having received the finalized Phase 3 data, Roche and Chiasma met with the FDA to identify any “major unresolved problems” before submitting the NDA. D. 30, ¶¶ 6, 74, 77, 84, 100, 105, 112-113, 115, 119. In July 2014, Roche terminated its licensing agreement with Chiasma, D. 30, ¶¶ 6, 74, but Chiasma stated that Roche's executives were pleased with the Phase 3 trial results, and that its termination was a strategic decision to avoid becoming “more deeply involved in the endocrinology sector, ” D. 30, ¶ 75.

         On April 17, 2015, Chiasma submitted its draft Registration Statement on Form S-1 to the Securities and Exchange Commission (“SEC”), along with a preliminary prospectus. D. 30, ¶ 83. Chiasma submitted its registration statement on Form S-1 to the SEC, along with a prospectus on Form 424(b)(4), D. 64-1 (the “Prospectus”). D. 30, ¶ 85. Chiasma submitted the Mycapssa 505(b)(2) NDA to the FDA on June 15, 2015. D. 30, ¶¶ 77-78. Chiasma submitted an amendment to its registration statement on Form S-1/A on July 6, 2015. Id. Chiasma's initial public offering took place on July 15, 2015. D. 30, ¶ 85. By the time the IPO was complete on July 21, 2015, Chiasma had received net proceeds of approximately $106.5 million. Id. On November 18, 2015, after the markets closed, Roni Mamluk (“Mamluk”) of Chiasma disclosed during a quarterly earnings conference call that during the May 2014 pre-NDA meeting, the FDA had raised specific questions about (1) Chiasma's ability to get approval of its NDA for Mycapssa under the 505(b)(2) pathway; (2) the duration of the Phase 3 trial; and (3) the durability of Mycapssa's effect on its Phase 3 trial patients. D. 30, ¶ 115. On the same call, Malmuk assured investors that Chiasma had addressed these FDA concerns and that there were “no question[s] any more” with respect to durability or the 505(b)(2) pathway. D. 30, ¶ 116. Malmuk stated that Chiasma had “a clear path forward with the FDA.” Id.

         On April 14, 2016, the market became aware of news that the FDA would reject the Mycapssa NDA, D. 30, ¶ 117, causing negative effects on analysts' price targets, D. 30, ¶¶ 10, 120-123. On April 15, 2016, Chiasma announced that the FDA had issued a Complete Response Letter (“CRL”) explaining its denial of the Mycapssa NDA. D. 30, ¶ 87. On April 18, 2016, Chiasma offered more detailed reasoning from the CRL, including that the FDA did not believe the NDA had offered substantial evidence of efficacy and that Chiasma would need to conduct another clinical trial to resolve this deficiency. D. 30, ¶ 88. Chiasma also explained that the FDA had “expressed concerns” about “certain aspects” of the Phase 3 trial, and among other recommendations it suggested that Chiasma conduct its new trial in the United States, and that the trial have a longer duration. D. 30, ¶ 89. On another conference call on April 18, 2016, before the markets opened, Leuchtenberger said that during a second pre-NDA meeting in December 2014, the FDA had expressed that Chiasma's Phase 3 trial, as constructed, would not be as informative as some alternatives, but that these issues would not preclude Chiasma from filing the Mycapssa NDA. D. 30, ¶ 119. The same day, Chiasma's common stock price dropped more than 63%, falling to $3.75 per share from its first closing price of $10.17. D. 30, ¶¶ 11, 124.

         IV. Procedural History

         The original complaint was filed on June 9, 2016. D. 1. After being appointed as lead plaintiff for the putative class, Gerneth filed an amended complaint on February 10, 2017. D. 30. Defendants have now moved to dismiss the complaint. D. 62. The Court heard the parties on the pending motion and took this matter under advisement. D. 73.

         V. ...


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