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Wu v. Tokai Pharmaceuticals, Inc.

Superior Court of Massachusetts, Suffolk

January 8, 2019

HAO WU, Individually and on Behalf of Others Similarly Situated
v.
TOKAI PHARMACEUTICALS, INC. et al.

          File Date: January 9, 2019

          OPINION

          Janet L. Sanders, Justice of the Superior Court

          This is a putative class action alleging violations of Sections 11 and 15 of the Securities Act of 1933. Plaintiffs are all holders of common stock of the defendant Tokai Pharmaceuticals, Inc. (Tokai). The stock was purchased in or traceable to an initial public stock offering (IPO) that was made based on a Registration Statement and Prospectus which the plaintiffs claim was inaccurate and misleading. Defendants now move to dismiss the Consolidated Class Action Complaint (the Complaint) pursuant to Rule 12(b)(6), Mass.R.Civ.P. For the following reasons, this Court concludes that the Motion must be DENIED .

          BACKGROUND[1]

         Tokai is a biopharmaceutical company headquartered in Boston. At the time of the IPO, Tokai was focused on the commercialization of a prostate cancer drug therapy called Galeterone. Galeterone is an androgen receptor targeted therapy (ATT) that was supposed to treat a specific class of prostate cancer patients with metastatic castration-resistant prostate cancer (CRPC). Two other ATT drugs— Xtandi and Zytiga— had already been approved by the FDA for treatment of CRPC patients by the time Tokai entered Phase II of its clinical trials of Galeterone. In 2014, however, research showed that Xtandi and Zytiga were ineffective in treating a subset of CRPC patients— specifically, "AR-V7 positive" patients. Tokai decided to embark on a Phase III trial of Galeterone which focused on this smaller group of patients. The purpose of the IPO was to fund this trial.

         As to how the decision to embark on a Phase III trial came about, the Complaint alleges the following. Of the 87 CRPC patients involved in Phase II, seven were identified as being AR-V7 positive. Rather than launch a new Phase II trial aimed at this smaller group of patients, Tokai conducted a "retrospective analysis" of the data it had already generated and came up with results which it viewed as promising in six of the seven AR-V7 patients. With this data, it decided to conduct a Phase III trial to test the effectiveness of Galeterone versus Xtandi in this small subset of prostate cancer patients.

          The Complaint alleges that the results from Phase II trial of Galeterone did not support proceeding to Phase III. Moreover, Tokai had no reasonable basis to believe that a Phase III trial would be successful. AR-V7 positive CRPC patients are rare and very hard to identify; recruiting a sufficient number for the Phase III trial would therefore be extremely difficult, if not impossible. The Complaint alleges that Tokai was aware before the Phase III trial began that physicians regarded a taxane chemotherapy regime to be more effective in treating these patients, thus increasing the likelihood that patients would choose not to participate. Phase III clinical trials are the last and most important phase of testing a drug before a company can FDA approval but only if they are capable of producing statistically significant results. The Complaint alleges that it was apparent even before the Phase III trial began that it would not be able to generate such results, given the difficulty in enrolling AR-V7 positive patients and the availability of better treatment options. This risk became a reality: when Phase III was discontinued in 2016, Tokai had found only 73 patients who were AR-V7 positive, and of that number, only 38 enrolled in the trial.

          In May 2014, Tokai filed with the SEC a Registration Statement which, following several amendments, would be ultimately utilized for an IPO that took place on September 18, 2014. The Registration Statement described Tokai’s efforts to develop Galeterone for treatment of prostate cancer and Tokai’s plans to conduct a Phase III trial targeted at the AR-V7 positive CRPC patients. It stated that, although Xtandi and Zytiga had experienced "rapid sales growth" and generates millions of dollars in revenues, they had "treatment limitations" with respect to this smaller group of patients and that there was therefore an "unmet need" that Tokai hoped to address. It described the Phase III trial as "pivotal." As set forth in more detail below, the Complaint alleges that the Registration Statement was inaccurate and misleading in describing both the Phase II trial results and the prospects for Phase III.

          The IPO was successful in raising more than $ 105 million in gross proceeds for Tokai. The Phase III trial of Galeterone was not successful: in July 2016, it was discontinued and, the value of the publicly offered stock plummeted. This lawsuit ensued.

          DISCUSSION

         Since plaintiffs haves alleged only negligent misrepresentation, the heightened pleading standard of Rule 9(b) does not apply. See Hutchison v. Deutsche Bank Securities Inc., 647 F.3d 479, 484 (2d Cir. 2011) (motion to dismiss Securities Act claim); Lenartz v. American Superconductor Corp., 879 F.Supp.2d 167, 189 (D.Mass. 2012) (Young, J.) (same). The Complaint must, however, satisfy the standard that this Court applies under Rule 12(b)(6). That standard requires that the complaint allege facts that "plausibly suggest" the plaintiff has a viable claim. Lopez v. Commonwealth, 463 Mass. 696, 701 (2012), quoting Iannacchino v. Ford Motor Co., 451 Mass. 623, 636 (2008), and Bell A. Corp. v. Twombly, 550 U.S. 544, 557 (2007). Conclusory allegations that a defendant has acted unlawfully are not enough. Here, plaintiffs assert a violation of Section 11 of the Securities Act— a statute described by courts as imposing a stringent standard of liability that requires more than literal accuracy in documents like registration statements. See Omnicare, Inc. v. Laborers Dist. Council Cost. Industry Pension Fund, 135 S.Ct. 1318, 1331 (2015) (reversing dismissal of Section 11 claim). Plaintiffs bringing section 11 claims need not allege or prove scienter, reliance, or loss causation. In re Morgan Stanley Info. Fund Securities Litigation, 592 F.3d, 347, 359-60 (2d Cir. 2010). Moreover, many of the questions that bear on liability— including for example, whether omitted information was material— are inherently fact specific and cannot be resolved on a motion to dismiss. See New Jersey Carpenters Health Fund. v. Royal Bank of Scotland Group, PLC, 709 F.3d 109, 126 (2013) (reversing dismissal of Section 11 claim). This Court concludes that the Complaint sets forth sufficient facts to plausibly suggest a Securities Act violation.

          The following allegations in the Complaint regarding the Registration Statement support that conclusion:

Galeterone development was not clinically advanced enough for a Phase III trial: As the Complaint alleges, Phase III trials are conducted after Phase I and II trials have assessed a drug and determined its effectiveness. Phase III is to "confirm the efficacy" of the drug and is the last and most important phase of testing before a company seeks FDA approval. Tokai decided to launch a Phase III trial on AR-V7 positive CRPC patients without first having performed a Phase II trial designed specifically with that subset of patients in mind. Rather, the Phase II trial it did conduct was aimed at a much larger group, with the data concerning AR-V7 positive patients generated only by a retrospective analysis, essentially "cherry-picking" data. Although the Registration Statement did mention a retrospective analysis, it failed to convey the fact that the data that was generated was wholly inadequate to proceed to Phase III.
Tokai omitted important information about the Phase II Trial: With regard to the data generated from the retrospective analysis, Tokai did disclose in the Registration Statement that the analysis was of results from seven AR-V7 positive patients, with six of them showing positive results. What the Registration Statement did not disclose, however, was that two of the six patients who appeared to have responded favorably to Galeterone stopped treatment after participating in the Phase II trial the requisite twelve weeks. That one-third of the patients elected not to continue treatment with Galeterone was significant. ...

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