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LSI Design and Integration Corp. v. Tesaro Inc.

United States District Court, D. Massachusetts

November 13, 2019

LSI DESIGN AND INTEGRATION CORP., Individually and On Behalf of All Others Similarly Situated, Plaintiff,
v.
TESARO, INC., LEON O. MOULDER, JR. and TIMOTHY R. PEARSON, Defendants.

          ORDER ON MOTION TO DISMISS THE AMENDED COMPLAINT (DOC. NO. 23)

          Leo T. Sorokin United States District Judge.

         This class action case, brought by and on behalf of Lead Plaintiff LSI Integration Corporation (“LSI”) and other similarly situated holders of common stock of Defendant Tesaro, Inc. (“Tesaro”), alleges that Tesaro and two of its officers, Defendants Leon O. Moulder, Jr. and Timothy R. Pearson, [1] made materially false statements that misled investors in violation of Section 10(b) of the Securities Exchange Act (“the Exchange Act”), 15 U.S.C. § 78j(b), and Securities and Exchange Commission (“SEC”) Rule 10b-5 promulgated thereunder, 17 CFR § 240, 10b-5, as well as Section 20(a) of the Exchange Act, 15 U.S.C. § 78t. Doc. No. 22. The Defendants filed a joint Motion to Dismiss LSI's Amended Complaint. Doc. No. 23. For the following reasons, the motion is ALLOWED.

         I. THE AMENDED COMPLAINT'S ALLEGATIONS[2]

         A. Factual Allegations

         Tesaro was an oncology-focused biopharmaceutical company that identified, acquired, developed, and commercialized cancer therapies and oncology supportive care products in the United States and Europe. At the time of the class period-November 4, 2016 to November 14, 2016-Tesaro had commercialized only one U.S. Food and Drug Administration-approved drug: an oral formulation of a drug it called Varubi. Intended to prevent nausea and vomiting associated with chemotherapy administered to treat cancer patients, Varubi generated $5.174 million in sales for Tesaro during 2016. In addition to its Varubi sales, Tesaro relied on $1.4 billion in proceeds from public offerings and private placements of common stock and convertible preferred stock, including $408.9 million raised from a secondary offering of common stock in July 2016.

         However, while Tesaro experienced an influx in investor support in 2016, LSI contends that Varubi sales were not as robust as the company hoped. According to one confidential witness who was responsible for sales of Varubi in California during the class period, Tesaro missed its national sales goal for Varubi sales in both the second and third quarters of 2016, selling 53% and 67% of its targeted sales, respectively.[3] These internal shortcomings, according to a second confidential witness, were discussed by Tesaro corporate leadership on a monthly basis. This second confidential witness also avers that Tesaro leadership, including Defendants Moulder and Pearson, “never expected the oral formulation of Varubi to drive [Tesaro's] revenue, ” given that Varubi sales had not matched the company's internal goals. Doc. No. 22 ¶ 37.

         Against this backdrop, Tesaro and its leadership made three statements that LSI claims were materially false and misleading. First, on November 4, 2016, Tesaro filed a Form 10-Q quarterly report with the SEC, [4] which included statements about Tesaro's financial condition:

We will require additional capital for the continuing commercialization of VARUBI, further development and potential commercialization of our other product candidates, including any license payments or milestone obligations that may arise, required costs relating to our research collaborations, and cash interest obligations related to our Convertible Notes. We may also need additional funds to pursue our strategy of in-licensing or acquiring additional product candidates and to meet our obligation to repay the Convertible Notes at maturity or, at our election, upon conversion. Our balance of cash and cash equivalents as of September 30, 2016, and the cash we expect to generate from sales of VARUBI, are expected to be sufficient to meet our existing cash flow requirements and fund our existing operations at their currently planned levels through at least the twelve months following the filing of this Quarterly Report on Form 10-Q.[5]

         Second, on November 8, 2016, Defendant Moulder gave additional remarks about Tesaro's financial condition at the Credit Suisse Annual Healthcare Conference in Scottsdale, Arizona:

[O]ver the next 12 months or so, we anticipate four launches in the U.S. and in Europe and clinical data, obviously, around our immuno-oncology pipeline and additional trial strategies being implemented for niraparib. And we finished up the third quarter with almost $650 million in cash. So we're well positioned to take this forward.

         Finally, at the Credit Suisse conference, Defendant Moulder made the following statement about the prospect of scaling Tesaro's business in Europe:

VARUBI alone would not have been really an economically sensible thing to do in Europe. VARUBI itself though can pretty much cover over time all of our expenses. So, from that point forward, anything else we put into the sales force is really economic leverage.

         Less than a week after Defendant Moulder's statements, on November 14, 2016, Tesaro announced in a press release that it would commence an underwritten public offering of 1, 750, 000 shares of its common stock and filed a prospectus for said offering with the SEC. The next day, after a national biotech columnist reported that there was “light demand” for Tesaro's stock offering, Tesaro announced in a second press release that it had priced its shares of its common stock at an offering price of $135 per share, about 9% lower than the closing price of Tesaro stock on the previous day. In the wake of these announcements, Tesaro's share price continued to decline, closing at $126.65 per share on November 16, 2016. Given this precipitous decline in the market value of Tesaro's securities, LSI avers that class members “suffered significant losses.” Doc. No. 22 ¶ 54.

         B. Lega ...


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