SAYLOR, United States District Judge.
This is a putative class action involving alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and SEC Rule 10b-5. Lead plaintiff GBR Group, Ltd. has brought suit, on behalf of a class of similarly situated persons, against biopharmaceutical company Biogen Inc. and three Biogen executives. Plaintiffs contend that class members were harmed when they purchased Biogen's common stock at prices that were artificially inflated by the company's materially misleading statements and omissions about Tecfidera, its leading multiple sclerosis drug.
Defendants have moved to dismiss the complaint pursuant to Fed. R. Civ. P. 12(b)(6) and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. §§ 78u-4, 78u-5.
As the First Circuit has recently stated, "[n]ot all claims of wrongdoing by a company make out a viable claim that the company has committed securities fraud." Fire and Police Pension Ass'n of Colo. v. Abiomed, Inc., 778 F.3d 228, 231 (1st Cir. 2015). The complaint does not, for example, allege that Biogen's current or historical financials are misleading because of fictitious sales, off-label marketing, inventory parking, or any similar act of corporate fraud. Rather, it alleges in substance that Biogen executives made statements about future Tecfidera sales that were misleading because they were unduly optimistic.
Although most of the alleged misrepresentations appear to be non-actionable, after drawing all reasonable inferences on behalf of plaintiffs, the complaint alleges a plausible claim for at least one material misrepresentation or omission. However, the complaint's allegations that defendants acted with the requisite degree of scienter fail to clear the relatively high hurdle of the PSLRA. Even assuming that defendants made a materially false or misleading statement, plaintiffs have not sufficiently alleged that defendants made those statements with a "conscious intent to defraud or `a high degree of recklessness.'" ACA Fin., 512 F.3d at 58 (quoting Aldridge v. A.T. Cross Corp., 284 F.3d 72, 82 (1st Cir.2002)). Instead, the most compelling inference that can be drawn from the complaint as a whole is that defendants were, at worst, negligent, or engaged in permissible puffery. But "negligence or puffing are not enough for scienter...." Automotive Indus. Pension Trust Fund v. Textron Inc., 682 F.3d 34, 39 (1st Cir. 2012). Accordingly, and for the reasons set
Unless otherwise noted, all facts are stated as set forth in the complaint.
Lead plaintiff GBR Group, Ltd. is a limited partnership located in Jacksonville, Florida. (Compl. ¶ 30).
Biogen Inc. is based in Cambridge, Massachusetts. (Id. ¶ 32). It is a global biopharmaceutical company that develops, manufactures, and markets treatments for certain neurological, autoimmune, and hematological diseases, including multiple sclerosis ("MS"). (Id. ¶ 43). Biogen's securities trade on the NASDAQ under the ticker "BIIB." (Id. ¶ 32).
The complaint alleges claims against Biogen and individual defendants George Scangos (the Chief Executive Officer), Paul Clancy (the Chief Financial Officer and Executive Vice President, Finance), and Stuart Kingsley (the former Executive Vice President, Global Commercial Operations). (Id. ¶¶ 33-35).
Tecfidera is one of Biogen's four principal drugs for the treatment of MS. (Id. ¶ 43). It is an oral pharmaceutical approved for use in the United States and European Union. (Id.).
The complaint alleges that Tecfidera's revenue growth was a function of three factors: (1) the portion of new starts that Tecfidera captured (that is, patients recently diagnosed with MS and starting their treatment with Tecfidera); (2) patients switching over to Tecfidera from other drugs (referred to as "switches" or the "switch rate"); and (3) the growth of the overall market for oral MS drugs. (Id. ¶ 6). Conversely, Tecfidera revenue could be negatively affected by declining overall market growth, lower new starts, and a higher "discontinuation rate" — that is, "the rate at which patients were taken off the drug." (Id. ¶ 8).
Quarterly Revenue Tecfidera Tecfidera Revenue Biogen Biogen Revenue Tecfidera Revenue Quarter Revenue (SMM) QoQ Growth Rate Revenue (SMM) QoQ Growth Rate %Biogen Revenue 2Q 2013 $192 — $1,723 — 11.1% 3Q 2013 $286 49.1% $1,828 6.1% 15.7% 4Q 2013 $398 39.0% $1,966 7.6% 20.2% 1Q 2014 $506 27.1% $2,130 8.3% 23.7% 2Q 2014 $700 38.5% $2,421 13.7% 28.9% 3Q 2014 $787 12.4% $2,511 3.7% 31.3% 4Q 2014 $916 16.4% $2,641 5.1% 34.7% 1Q 2015 $825 (9.9%) $2,555 (3.2%) 32.3% 2Q 2015 $883 7.1% $2,592 1.4% 34.1% 3Q 2015 $937 6.1% $2,778 7.2% 33.7% 4Q 2015 $993 5.9% $2,839 2.2% 35.0%
Annual Revenue Tecfidera Tecfidera Revenue Biogen Biogen Revenue Tecfidera Revenue Year Revenue (SMM) YoY Growth Rate Revenue (SMM) YoY Growth Rate %Biogen Revenue 2013 $877 — $6,932 — 12.6% 2014 $2,909 231.9% $9,703 40.0% 30.0% 2015 $3,638 25.1% $10,764 10.9% 33.8%
On October 22, 2014, Biogen released its third-quarter financial results, announcing revenues of $2.51 billion, up 3.7 percent from the previous quarter. (Id. ¶ 48). It also announced third-quarter revenue for Tecfidera of $787.1 million, which was a 12.4 percent increase from the previous quarter. (Id.). However, Tecfidera's growth rate had decreased significantly from the growth rates of 49.1, 39.0, 27.1, and 38.5 percent in the previous four quarters. (Id. ¶ 43).
(Id. ¶ 48; Def. Ex. 7 at 3).
When the call was opened to questions from research analysts, the first question focused on Tecfidera's future growth rate:
(Compl. ¶ 48; Def. Ex. 7 at 7-8).
When asked a similar question about Tecfidera's overall growth prospects moving forward, Clancy responded that "we will use the end of the year call to give our expectations going into 2015," but then stated, among other things, "[w]e think
(Def. Ex. 7 at 13-14).
(Compl. ¶ 49; Def. Ex. 14-15).
According to the complaint, "[a]nalysts accepted defendants' statements that the PML death would not have a material impact on Tecfidera." (Compl. ¶ 50). One
A month later, on November 25, 2014, the FDA issued a warning to the public about the patient who died from PML while using Tecfidera. (Id. ¶ 54). The FDA stated that the patient was not taking any other drugs associated with PML, and it advised physicians and patients to monitor Tecfidera patients for side effects. (Id.). It further noted that "[a]s a result, information describing this case of PML ... is being added to the Tecfidera label." (Id.). Tecfidera's label was updated in the United States to include the PML risk on December 3, 2014, one day after the class period began. (Def. Ex. 9 § 5.2).
The complaint essentially alleges that defendants, shortly after announcing the PML death in October 2014, knew from both internal data and discussions with physicians that the PML incident was materially affecting Tecfidera sales — an effect that their public statements fraudulently or recklessly misrepresented and concealed. (See Compl. ¶¶ 56-75). In support of its allegations, the complaint relies heavily on statements from ten confidential witnesses ("CWs") who were formerly employed by Biogen across the country.
CW1 was a Biogen ABM responsible for parts of southern Florida and Puerto Rico from November 2010 to June 2015. (Id. ¶ 56). He was five reporting levels removed from Scangos. (Id.). According to CW1, Tecfidera sales in his region "dropped steeply and immediately" after the announcement of the PML incident, and there was a "large drop" in new prescription sales of Tecfidera beginning around November 2014 for "almost all of the neurologist customers in his sales territory." (Id.). He stated that during a "late 2014" regional conference call, his supervisor, Regional Director Robert Nelson, told ABMs that their region was "not the only region where Tecfidera sales were poor; according to Nelson sales were down in almost every region across the United States." (Id.).
CW2 was a Biogen Market Research Manager from 2005 to December 2014. (Id. ¶ 57). He reported to Antonio Melo, Biogen's Senior Manager of Business Planning.
CW3 was a Biogen ABM responsible for parts of southern Florida and Puerto Rico from May 2012 to June 2015. (Id. ¶ 58). CW3 stated that "his Tecfidera sales were strong" until late 2014 or early 2015, when sales "dropped dramatically and failed to recover" by the time he left the company. (Id.). CW3 confirmed that there was a "large drop" in new Tecfidera prescription sales beginning around November 2014 for "almost all" of the neurologist customers in his territory. (Id.). According to the complaint, "[b]ased on conversations with his neurologist customers, CW3 attributed the decline in sales to the PML death and the subsequent FDA label change in November 2014." (Id.). CW3 stated that ABMs in "other Biogen regions" conveyed to him that their Tecfidera sales had also "decreased dramatically" by January 2015. (Id.). Around March 2015, CW3 attended a national sales meeting in Texas where an unnamed person described the PML incident as a "market event," and stated that Tecfidera sales were "not on track." (Id. ¶ 59). "According to CW3, [unnamed] speakers at the meeting stated that sales would need to pick up again if [Biogen] was going to meet [its] expected 14 [to] 16 percent revenue growth." (Id.).
CW1 also recalled a national meeting in Texas in March 2015. (Id. ¶ 60). According to CW1, "senior Biogen leaders" at the meeting "acknowledged" that the PML incident "definitely was impacting Tecfidera sales." (Id.). CW1 also stated that during a Tecfidera "town hall" meeting led by three more senior Biogen employees, "metrics and graphs were presented that showed a sharp decline in Tecfidera sales in most regions." (Id.). According to CW1, one presenter stated that "we understand that the market event has had an impact on sales." (Id.).
CW4 was a Biogen ABM responsible for parts of Kansas and northern Oklahoma from March 2006 to June 2015. (Id. ¶ 61). CW4 reported to the regional director for the midwest region, who reported to the national sales director. (Id.). "CW4 stated that his Tecfidera sales dropped appreciably very early in 2015, while sales of other MS drugs continued to do very well." (Id.). According to CW4, "new prescription rates dropped, and physicians were transferring patients off Tecfidera and onto different therapies." (Id.). He received quarterly sales goals from Biogen's corporate office, but he did not meet his Tecfidera sales goals in 2015. (Id.). CW4 participated in biweekly conference calls with other regional ABMs in 2015; according to him, other "midwest region ABMs reported that they were not meeting their Tecfidera sales goals, up until the time of CW4's departure in June 2015." (Id.).
CW5 was a Biogen ABM responsible for parts of North Carolina and Virginia from April 2013 to April 2015. (Id. ¶ 62). According to CW5, Tecfidera was his "lead product" by early 2014, but he recalled a "big slowdown" in Tecfidera "market expansion" beginning in late October 2014, a slowdown that he discussed with other Biogen ABMs. (Id.). CW5 stated that "there was a linkage between the PML death and the drop in Tecfidera sales." (Id.). He also stated that other south region
CW6 was a Biogen ABM responsible for Montana, Idaho, and Wyoming from April 2011 to August 2015. (Id. ¶ 64). CW6 reported to a regional sales manager, who reported to a senior sales director. (Id.). "CW6 stated that prior to the October 2014 announcement of the PML death, Tecfidera had a `hockey stick' (i.e., exponential) growth." (Id.). CW6 stated that following the October 2014 announcement, his Tecfidera new starts "declined" by the end of 2014, and that his new Tecfidera prescriptions then "significantly slowed down." (Id.). According to CW6, people were "more cautious" following the PML death. (Id.).
CW7 was a Biogen ABM responsible for parts of Virginia, West Virginia, and Maryland from April 2011 to June 2015. (Id. ¶ 65). CW7 reported to a regional sales manager, who reported to a senior sales director. (Id.). According to the complaint, "CW7 stated that his Tecfidera sales were consistently good prior to the announcement of the PML death in October 2014, but that after the PML announcement his territory `took a hit' beginning in December 2014 or January 2015." (Id.).
CW8 was the senior director of commercial operations for Biogen, a position "equivalent to chief of staff for the head of commercial operations," from August 2014 to November 2015. (Id. ¶ 66). CW8 reported to the senior vice president of "U.S. commercial." (Id.). His responsibilities included oversight of operations related to Biogen's MS and hemophilia drugs, including Tecfidera, and he handled operational issues related to Tecfidera on a daily basis. (Id.). According to the complaint, "CW8 stated that all of 2015 was `difficult' for Tecfidera and that beginning with the `event in October,' he could not recall a time when Tecfidera's sales prospects were not a concern." (Id.).
CW9 was a Biogen ABM responsible for parts of Connecticut and New York from July 2009 to March 2015. (Id. ¶ 67). He reported to a regional director of sales, who reported to a national sales director, who reported to a vice president, who reported to the senior vice president of U.S. commercial. (Id.). According to the complaint, "CW9 observed that the ABMs in his territory were not compensated for their Tecfidera sales in [the first quarter of 2015], i.e., they did not meet their Tecfidera sales for that quarter." (Id.).
From July 2012 to October 2015, CW10 was an executive assistant in Biogen's "program leadership and management team," supporting numerous programs including Tecfidera. (Id. ¶ 68). CW10's responsibilities included supporting the Tecfidera program executive and program director, initially Alpna Seth, who was then replaced by Uthra Sundaram before the PML announcement. (Id.). According to the complaint, "Sundaram was a `dotted line' report to Scangos." (Id.). According to CW10, Sundaram met weekly with CEO Scangos and Executive Vice President of Commercial Operations Kingsley, and quarterly with CFO Clancy. (Id. ¶ 69).
According to the complaint, CW1 had access to his region's sales information, including the number of prescriptions written. (Id. ¶ 71). According to CW1, his regional director would access the sales metrics of other regions to compare their region's performance. (Id.). CW4 stated that the "company tracked sales metrics and prescriptions" and that "when a prescription was sold, Biogen's headquarters knew about it." (Id. ¶ 72). CW7 stated that "corporate headquarters would have had up-to-date insight into new prescription rates" because "forms needed to be filled out for every new Tecfidera prescription" and "corporate offices were given copies of th[o]se forms." (Id. ¶ 73). According to CW7, his territory's sales reports were updated nightly and included the identification number assigned to every new patient and the name of the prescribing neurologist. (Id.).
According to CW1, sales goals for Tecfidera "were adjusted downward" in December 2014 to make it easier for ABMs to reach compensation goals. (Id. ¶ 74). CW1 stated that many ABMs in his region still failed to meet the lowered goals. (Id.). CW5 stated that Biogen lowered Tecfidera sales goals around the same time. (Id. ¶ 75). According to him, a Biogen vice president sent an e-mail to ABMs in January 2015 announcing that compensation thresholds for sales representatives were being lowered because of "lower guidance due to unforeseen market events." (Id.). According to the complaint, CW5 understood the market events to be "based on problems with Tecfidera sales." (Id.).
The complaint alleges that "[f]ollowing the announcement of the PML death and the FDA's advisory, and contrary to the material decrease in sales reported internally by sales personnel across all regions, defendants publicly dismissed concerns that the PML death would materially impact Tecfidera performance.... [and] reassured investors that Tecfidera would continue to drive double-digit revenues for Biogen in 2015." (Id. ¶ 76).
On October 22, 2014, before the start of the class period, Biogen released third quarter 2014 financial results and announced the PML incident. (Id. ¶¶ 48-49). CFO Clancy and Doug Williams (Biogen's executive vice president of research and development) spoke on an investor conference call on December 2, 2014. (See id. ¶¶ 106-08). CEO Scangos spoke during a healthcare conference on January 12, 2015. (See id. ¶¶ 108-10).
After fourth-quarter earnings, Kingsley spoke during a February 25, 2015 healthcare conference. (See id. ¶¶ 128-30). Scangos also spoke during a March 2, 2015 healthcare conference. (See id. ¶¶ 131-32).
On April 24, 2015, Biogen released disappointing first-quarter earnings, announcing Tecfidera revenue of $825 million, which was below the market's consensus estimates and a 9.9 percent decrease from the previous quarter. (Id. ¶ 85). On a company level, Biogen's total revenue decreased 3.2 percent from the previous quarter. (Id. ¶ 43). The complaint alleges that the earnings call on April 24 was the "first time [that] defendants partially acknowledged that the PML death was impacting Tecfidera sales." (Id. ¶ 85). In response, Biogen's stock price decreased 6.6 percent on April 24. (Id.). However, maintaining their practice of providing revenue guidance only twice per year, defendants did not change the projected annual revenue growth for Biogen of 14 to 16 percent that they had released after announcing fourth-quarter results in January. (Id. ¶ 86). Instead, Clancy stated, "If [Tecfidera's] U.S. trajectory does not improve, we may come in at the lower end of our previously provided [annual] revenue growth." (Id. ¶ 135).
After announcing first-quarter earnings, Clancy spoke during a healthcare conference on May 6, 2015. (See id. ¶¶ 139-40). A week later, Williams, not a named defendant in this action, spoke during a May 13 healthcare conference. (See id. ¶¶ 141-42). A week later, Kingsley spoke during a May 19 healthcare conference. (See id. ¶¶ 143-44). A week later, Clancy spoke during a May 27 strategic decisions conference. (See id. ¶¶ 145-47). On May 27, 2015, Biogen's stock price increased 2.5 percent, closing at $402.92. (Id. ¶¶ 93, 147).
On July 24, 2015, the day after the end of the class period, Biogen released second-quarter earnings. It announced Tecfidera revenue of $883 million, a 7.1 increase from the first quarter, but still less than the $916 million in revenue earned during the fourth quarter of 2014. (Id. ¶ 43). Biogen's total revenue increased 1.4 percent from the first quarter. (Id.).
Biogen revised its full-year 2015 revenue guidance, stating that "[r]evenue growth is expected to be approximately 6 percent to 8 percent compared to 2014 [down from the January estimate of 14 percent to 16 percent], a decrease from prior guidance based largely on revised expectations for the growth of Tecfidera. Our balance of year forecast assumes limited patient growth for Tecfidera in the United States." (Id. ¶ 94; Def. Ex. 23 at 6).
During the earnings call, Scangos stated:
(Compl. ¶ 150; Def. Ex. 23 at 3).
Kingsley stated:
(Compl. ¶ 150; Def. Ex. 23 at 5).
During the call, Kingsley responded to a question by stating, in part, "[l]ook, the first PML case was a pretty
(Compl. ¶ 153; Def. Ex. 23 at 13).
The market and analysts reacted negatively (Compl. ¶¶ 151-58), and Biogen's stock price decreased $85, or 22 percent, on July 24. (Id. ¶¶ 96, 154). The 22 percent decline occurred on unusually heavy trading volume, with 16.6 million shares traded compared with an average daily trading volume over the class period of 1.8 million shares. (Id. ¶ 154).
After the class period, during a September 18, 2015 healthcare conference, Kingsley stated
Below are the alleged materially false misrepresentations and omissions that defendants made during the class period. They occurred on ten dates between December 2, 2014, and May 27, 2015. Again, bolded text indicates the portion of the statements pleaded in the complaint, and italicized text indicates the specific portions of the statements that plaintiffs allege is actionable. All other text is provided for context.
The complaint alleges that Clancy made the following false and misleading statements about Tecfidera's "market share and discontinuation rates" during a conference call on the first day of the class period, December 2, 2014.
(Compl. ¶ 106; Def. Ex. 8 at 2-4).
The complaint alleges that Clancy's statements that "the indicators that we have is that Tecfidera is unquestionably the leading oral" and that he believed there was "plenty of tailwind still left" were false and misleading because he "knew there had been a `big slowdown' in Tecfidera market expansion by November 2014 and that sales were down in almost every region in the United States." (Compl. ¶ 107).
The complaint alleges that Scangos made the following false and misleading statements about Tecfidera's "ability to drive business" during a healthcare conference on January 12, 2015.
(Id. ¶ 108; Def. Ex. 10 at 5).
The complaint alleges that the italicized statements were false and misleading because "of the immediate and significant impact the PML death had on Tecfidera sales in late 2014 and into 2015." (Compl. ¶ 109).
On January 29, 2015, Biogen issued a Form 8-K containing a press release in which it announced 2014 earnings and released full-year 2015 financial guidance. The company projected annual revenue growth of 14 to 16 percent for 2015. (Id. ¶ 102).
Later that day, Scangos, Clancy, and Kingsley gave opening statements and responded to analysts' questions during Biogen's earnings call. The complaint alleges that defendants made the following false and misleading statements during their opening statements.
(Id. ¶ 111; Def. Ex. 12 at 3). The complaint alleges that the italicized statements were false and misleading because "Tecfidera sales had declined in almost every region by the end of 2014 and into 2015, leading [Biogen] to lower Tecfidera sales goals by January 2015." (Compl. ¶ 112).
(Id. ¶ 113; Def. Ex. 12 at 5). The complaint alleges that the statements in italics were false and misleading because Kingsley "knew sales were down in almost every region in the United States" and because he "admitted after the class period that defendants knew that the PML death had led to a significant change to the safety profile of physicians' confidence in Tecfidera." (Compl. ¶ 114).
(Id. ¶ 115; Def. Ex. 12 at 7). The complaint alleges that the italicized statements were materially false and misleading because "by late 2014, Tecfidera sales had steeply declined in almost every region in the United States." (Compl. ¶ 116).
The complaint alleges that Clancy and Kingsley made the following statements as the call turned to questions from analysts.
(Id. ¶ 117; Def. Ex. 12 at 10-11). The complaint alleges that the italicized statement was materially false and misleading because Clancy "failed to disclose that by late 2014 and into 2015 sales were down in almost every region in the United States." (Compl. ¶ 119).
(Id. ¶ 117; Def. Ex. 12 at 11-13). The complaint alleges that the italicized statements were materially false and misleading because "defendants knew sales were down in almost every region of the United States" and because Kingsley "admitted after the class period that defendants knew the PML death had led to a significant change to the safety profile and physicians' view of Tecfidera." (Compl. ¶ 118).
The complaint alleges that Kingsley made several false and misleading statements about Tecfidera's "safety profile and discontinuation rate" during a healthcare conference on February 25, 2015.
(Id. ¶ 128; Def. Ex. 10 at 4-5).
The complaint alleges that the italicized statements were false and misleading because "by late 2014 and into 2015, sales had declined in most regions" and because Kingsley "admitted after the class period that defendants knew the PML death had led to a significant change to the safety profile and physicians' views of Tecfidera." (Compl. ¶ 129).
The complaint alleges that Scangos made the following false and misleading statement about Tecfidera during a healthcare conference on March 2, 2015.
(Id. ¶ 131; Def. Ex. 15 at 3-4).
The complaint alleges that the italicized statement was false and misleading because Scangos "failed to disclose that sales had declined across the United States since late 2014 and into 2015, and that the Company had been forced to lower sales thresholds for sales teams." (Compl. ¶ 132).
On April 24, 2015, Biogen held its first-quarter-earnings call. It announced that Tecfidera and Biogen revenues that had declined 9.9 percent and 3.2 percent, respectively, from the previous quarter. According to the complaint, defendants, for the first time, "partial[ly] disclose[d] ... the truth regarding patient and physician reaction following the PML death." (Id. ¶ 134). However, it alleges that "defendants continued to mislead the market regarding the true extent of the PML death's impact on Tecfidera sales" and that
CEO Scangos led off the April 24 call:
(Def. Ex. 17 at 3). Williams followed Scangos, and then Kingsley addressed the subject of Tecfidera:
(Compl. ¶ 135; Def. Ex. 17 at 4-5). The complaint alleges that the italicized statements were false and misleading because "Tecfidera sales continued to be significantly lower following the PML death" and because "defendants admitted after the class period that to the contrary [of Kingsley's assertion], Biogen's market research indicated a moderation in physician intent to prescribe." (Compl. ¶ 136).
(Id. ¶ 135; Def. Ex. 17 at 5-6). The complaint alleges that the italicized statements were materially false and misleading "because the 14 [to] 16 [percent revenue growth] metric was no longer achievable based on Tecfidera sales trends as of March 2015." (Compl. ¶ 137).
Scangos closed the April 24 call as follows:
(Id. ¶ 135; Def. Ex. 17 at 6). The complaint alleges that the statement was materially false and misleading because "Tecfidera's trajectory had changed immediately following the announcement of the PML death, and sales continued to be down across the United States, forcing [Biogen] to lower compensation thresholds [for sales employees]." (Compl. ¶ 138).
The complaint alleges that Clancy made the following false and misleading statement about Tecfidera during a healthcare conference on May 6, 2015.
(Id. ¶ 139; Def. Ex. 18 at 2-3).
The complaint alleges that the italicized statement was false and misleading because "he knew that the current trajectory of Tecfidera in the United States had changed immediately after the PML death, and that it still had not recovered at the time of the misleading statement." (Compl. ¶ 140).
The complaint alleges that Williams (who is not a named defendant in this case) made the following false and misleading statement about Tecfidera in response to a question during a healthcare conference on May 13, 2015.
(Id. ¶ 141; Def. Ex. 19 at 6-7).
The complaint alleges that the italicized statements were false and misleading because "defendants failed to disclose that sales of Tecfidera across the United States had not recovered to the level prior to the PML death" and because "Kingsley also admitted after the class period that defendants knew the PML death had led to a significant change to the safety profile and physicians' view of Tecfidera." (Compl. ¶ 142).
The complaint alleges that Kingsley made the following false and misleading statements about Tecfidera during a healthcare conference on May 19, 2015.
(Id. ¶ 143; Def. Ex. 20 at 3).
The complaint alleges that the statements in italics were false and misleading because "Tecfidera sales ha[d] declined since late 2014" and because "Kingsley also admitted after the class period that physicians views of Tecfidera's safety profile had not yet recovered." (Compl. ¶ 144).
Finally, the complaint alleges that Clancy made the following false and misleading statements about Tecfidera during a strategic decisions conference on May 27, 2015.
(Id. ¶ 145; Def. Ex. 21 at 3-4).
The complaint alleges that the statements in italics were false and misleading because "he failed to disclose that Tecfidera sales had significantly declined since late 2014" and because "defendants also admitted after the class period that views of Tecfidera had not yet recovered." (Compl. ¶ 146).
In addition to the statements from the confidential witnesses, the complaint includes other allegations that plaintiffs contend bolster the inference that defendants had the requisite scienter (that is, that they had the conscious intent to defraud investors or acted with a high degree of recklessness).
First, the complaint alleges that Tecfidera was Biogen's core product and that the individual defendants had immediate access to sales numbers and feedback from physicians after the PML death. (See id. ¶¶ 159-67, 173-75). It alleges that Tecfidera was Biogen's main revenue source throughout the class period, accounting for more than one-third of the company's total revenue. (Id. ¶ 159). In the company's SEC filings and public statements, defendants repeatedly stated that Tecfidera was the company's "principal product," "major business driver" and "largest contributor to overall revenue growth." (Id. ¶¶ 160-65). It also alleges that defendants had insider access to — and therefore awareness of — Tecfidera's "daily" sales and market research of physicians' safety perceptions. (See id. ¶¶ 166-67). According to the complaint, Kingsley, as a result of his close proximity to Biogen's sales force, "was aware of, or was reckless in not being aware of, the immediate and significant impact the PML death had on sales of Tecfidera and physician-prescribing patterns." (Id. ¶ 175).
Second, the complaint alleges that Scangos and Clancy had both the motive and opportunity to misrepresent Tecfidera sales, because they "profited from meeting bonus targets based on revenue growth, which in turn depended mainly on Tecfidera growth." (Id. ¶ 168). According to publicly filed SEC Forms 4 submitted by defendants, Scangos, Clancy and Kingsley were all net-acquirers of Biogen shares
The original complaint in this case was filed on August 18, 2015. On November 18, 2015, the Court appointed GBR Group, Ltd. as lead plaintiff and granted plaintiffs' request for an additional sixty days to file an amended complaint. On January 19, 2016, GBR filed a complaint on behalf of all purchasers of Biogen's publicly traded securities, including common stock and exchange-traded options on Biogen common stock, during the period from December 2, 2014, through July 23, 2015. The complaint alleges that Biogen and the individual defendants violated Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 (Count One); that Biogen and the individual defendants violated Rules 10b-5(a) and 10b-5(c) under a theory of "scheme liability" (Count Two); and that the individual defendants violated Section 20(a) of the 1934 Exchange Act (Count Three).
Defendants have moved to dismiss the complaint with prejudice. Defendants contend that Count One should be dismissed under Fed. R. Civ. P. 9(b) and 12(b)(6), and the PSLRA, 15 U.S.C. §§ 78u-4, 78u-5 for two reasons: (1) failure to allege an actionable misstatement or omission; and (2) failure to satisfy the PSLRA's requirement of pleading specific facts giving rise to a strong inference of scienter. Defendants have moved to dismiss Counts Two and Three for failure to plead a "scheme" to defraud, and failure to adequately plead an underlying Exchange Act violation. In their opposition to defendants' motion to dismiss, plaintiffs concede that Count Two should be dismissed.
On a Rule 12(b)(6) motion to dismiss a claim brought under Section 10(b) and Rule 10b-5, courts must, as with any such motion, accept plaintiffs' allegations as true. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). However, Congress has raised the standard of pleading for Section 10(b) and Rule 10b-5 securities fraud claims.
When a plaintiff alleges misrepresentation or omission of a material fact, the PSLRA requires that the complaint "specify each statement alleged to have been misleading [and] the reason or reasons why the statement is misleading." 15 U.S.C. § 78u-4(b)(1); accord Fire and Police Pension Ass'n of Colo. v. Abiomed, Inc., 778 F.3d 228, 240 (1st Cir.2015). "A fact is material when there is `a substantial likelihood' that a reasonable investor would have viewed it as `significantly alter[ing] the total mix of information made available.'" City of Dearborn Heights Act 345 Police & Fire Ret. Sys. v. Waters Corp.,
"`The PSLRA also separately imposes a rigorous pleading standard on allegations of scienter.'" Fire and Police Pension Ass'n of Colo., 778 F.3d at 240 (quoting ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46, 58 (1st Cir.2008)). To plead scienter, the complaint must "with respect to each act or omission ... state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). A strong inference is "more than merely plausible or reasonable — it must be cogent and at least as compelling as any opposing inference of non-fraudulent intent." Tellabs, 551 U.S. at 314, 127 S.Ct. 2499. "A complaint will survive a motion to dismiss only if it states with particularity facts giving rise to a `strong inference' that defendants acted with a conscious intent `to deceive or defraud investors by controlling or artificially affecting the price of securities' or `acted with a high degree of recklessness.'" Fire and Police Pension Ass'n of Colo., 778 F.3d at 240 (quoting Waters Corp., 632 F.3d at 757). "Recklessness, as used in this context, `does not include ordinary negligence, but is closer to being a lesser form of intent.'" Id. (quoting Greebel, 194 F.3d at 188).
In evaluating the adequacy of a complaint, a court "cannot hold plaintiff to a standard that would effectively require them, pre-discovery, to plead evidence." Mississippi Pub. Emps. Ret. Sys. v. Boston Sci. Corp., 523 F.3d 75, 90 (1st Cir.2008) (quoting Shaw v. Digital Equip. Corp., 82 F.3d 1194, 1225 (1st Cir.1996)). However, a plaintiff may not simply rely on a "fraud by hindsight" theory of scienter — that is, "a plaintiff may not simply contrast a defendant's past optimism with less favorable actual results, and then contend that the difference must be attributable to fraud." Shaw, 82 F.3d at 1223 (internal quotation marks and alteration omitted), abrogated on other grounds by 15 U.S.C. § 78u-4(b)(2). Courts should look at the complaint "as a whole" and weigh "competing inferences" in a "comparative evaluation" of plaintiffs' allegations and alternative inferences from those allegations. ACA Fin., 512 F.3d at 59; see also Tellabs, 551 U.S. at 314, 127 S.Ct. 2499. If "there are equally strong inferences for and against scienter," then the tie goes to the plaintiff. New Jersey Carpenters Pension & Annuity Funds v. Biogen IDEC Inc., 537 F.3d 35, 45 (1st Cir.2008) (quoting ACA Fin., 512 F.3d at 59).
Distilled to its essence, the complaint alleges that immediately after Biogen announced the PML death in October 2014, Tecfidera sales did not just slow, but instead dropped "steeply" because physicians became reluctant to prescribe the drug. (Compl. ¶ 18). Based on statements from confidential sources, among other things, the complaint alleges that defendants must have known — and, indeed, did know — that the PML death was having a
Accordingly, the complaint alleges that defendants' statements during the class period were materially false by misrepresentation and omission, and that defendants knew or recklessly disregarded that their statements were materially false and misleading. In addition to the Rule 10b-5 claim (Count One), the complaint also asserts a claim for "scheme" liability under Rule 10b-5(a) and (c) (Count Two), and a claim against the individual defendants as control persons under Section 20(a) of the Exchange Act (Count Three).
Defendants contend that Count One should be dismissed for two principal reasons. First, they contend that the Rule 10b-5 claim should be dismissed because the complaint fails to adequately plead an actionable misstatement or omission. Specifically, defendants contend that the alleged actionable statements are either (1) forward-looking statements protected by the PSLRA's safe harbor provisions, (2) non-actionable statements of corporate optimism or puffery, or (3) not adequately alleged to be false or misleading. Second, they contend that Count One, as well as Count Two, should be dismissed because the complaint fails to allege specific facts giving rise to a strong inference of scienter. Defendants also contend that Count Three should be dismissed for failure plead a predicate Exchange Act violation.
Section 10(b) of the Securities Exchange Act of 1934 makes it unlawful "[t]o use or employ, in connection with the purchase or sale of any security ... any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe." 15 U.S.C. § 78j(b). Pursuant to that section, the SEC promulgated Rule 10b-5, which makes it unlawful:
17 C.F.R. § 240.10b-5. "To state a claim for securities fraud under Section 10(b), a plaintiff must allege: "(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." In re Genzyme Corp. Sec. Litig., 754 F.3d 31, 40 (1st Cir.2014); accord Fire and Police Pension Ass'n of Colo., 778 F.3d at 240.
Only the first two elements are at issue here. The Court will address the complaint's allegations of material misrepresentations and omissions before turning to the issue of scienter.
The complaint alleges that defendants made more than twenty misrepresentations
First, defendants contend that many of the statements are protected by the PSLRA safe harbor provisions for "forward-looking" statements. (See Compl. ¶¶ 102, 108, 111, 113, 115, 117, 131, 135). Specifically, they contend that defendants' formal revenue projections as well as any statement prefaced by "we believe" are protected forward-looking statements. Plaintiffs counter by contending that (1) the safe harbor provisions do not apply to material omissions, (2) defendants' statements about the future of Tecfidera were based on then-current facts, and therefore are not forward-looking, and (3) defendants' cautionary language was not sufficiently meaningful and tailored to the October 2014 PML death.
The PSLRA provides, with certain limitations, that issuers of securities shall not be liable in any private action based on an untrue or misleading statement of a material fact "with respect to any forward-looking" statement if the statement is
See 15 U.S.C. § 78u-5(c)(1); In re Stone & Webster, Inc. Sec. Litig., 414 F.3d 187, 211-12 (1st Cir.2005). The statute defines "forward-looking" statements to include
15 U.S.C. § 78u-5(i)(1); accord In re Stone & Webster, 414 F.3d at 212.
"Forward-looking statements are often contained in financial filings. Congress, in providing the limited safe harbor protection, sought to encourage market efficiency by encouraging companies to disclose future projections without fear that those projections, if they did not materialize, would result in an action for
The following alleged misrepresentations in Biogen's financial projections squarely fall within the statutory safe harbor for "forward-looking" statements concerning projected earnings and "future economic performance." See 15 U.S.C. § 78u-5(i)(1)(A), (C); In re Biogen, 2007 WL 9602250, at *10.
Moreover, those forward-looking statements were accompanied by adequate cautionary language. See 15 U.S.C. § 78u-5(c)(1) (providing safe harbor to forward-looking statements "accompanied by meaningful cautionary statements identifying factors that could cause actual results to differ materially from those in the forward-looking statement"). The fourth-quarter press release contained an explicit safe harbor statement (Def. Ex. 11), and it also referred investors to the risk factors listed in Biogen's SEC filings, which stated as follows:
(Def. Ex. 2, 3, 5) (emphasis added); (see also Def. Ex. 13 at 25, 2014 Form 10-K) (noting that "safety warnings that may be required to be included in the label of our products, such as the risk of developing [PML] ... in the U.S. label for Tecfidera, may significantly reduce expected revenues"). During the earnings calls, the company provided adequate forward-looking statements cautions and referred investors to its SEC filings for a full statement of risk factors. (Def. Ex. 12 at 3; Def. Ex. 17 at 3).
Defendants next contend that most of the alleged fraudulent statements are generic expressions of corporate optimism, or "puffery," that are immaterial as a matter of law. (See Compl. ¶¶ 106, 108, 111, 113, 117, 128, 131, 135, 139, 141, 143, 145). Plaintiffs counter by contending that the statements in question are "concrete, verifiable, and demonstrably false." (Pl. Mem. 26).
"In general, the materiality of a statement or omission is a question of fact that should normally be left to a jury rather than resolved by the court on a motion to dismiss." In re Cabletron Sys., 311 F.3d at 34. Nonetheless, "not every unfulfilled expression of corporate optimism, even if characterized as misstatement, can give rise to a genuine issue of materiality under the securities laws." Shaw, 82 F.3d at 1217.
Id. "The corporate puffery rule applies to loose optimism about both a company's current state of affairs and its future prospects." In re Boston Sci. Sec. Litig., 2011 WL 4381889, at *11 (D.Mass. Sept. 19, 2011), aff'd, 686 F.3d 21 (1st Cir.2012) (citation omitted). However, "[b]ecause `the recent trend is to consider expressions of corporate optimism carefully' ... claims of puffery now require a court to consider (1) `whether the statement is so vague, so general, or so loosely optimistic that a reasonable investor would find it unimportant to the total mix of information' and (2) `whether the statement was also considered unimportant to the total mix of information by the market as a whole.'" Id. (quoting Brumbaugh v. Wave Sys. Corp., 416 F.Supp.2d 239, 250 (D.Mass.2006)).
Here, at least some of the allegedly fraudulent statements are quintessential expressions of corporate optimism and subjective opinion that courts in this district have found to be immaterial. See, e.g., In re Cytyc Corp. Sec. Litig., 2005 WL 3801468, at *22 (D.Mass. Mar. 2, 2005) (finding statements about "momentum" and "consistent" growth non-actionable); Orton v. Parametric Tech. Corp., 344 F.Supp.2d 290, 301 (D.Mass.2004) (finding statements "we are pleased with ... [the] results" and "[the company is] position[ed]... for long-term growth" were "classic example[s] of non-actionable corporate puffery"); In re Parametric Tech. Corp. Sec. Litig., 300 F.Supp.2d 206, 217-18, 221 (D.Mass.2001) (finding statements that company "expects more revenue growth" and "continue[s] to have confidence in the fundamental strength of our business and our strong competitive position" were immaterial).
In short, many of the alleged misrepresentations are immaterial expressions of corporate optimism or puffery, and are therefore not actionable.
As to the balance of the alleged misrepresentations and omissions, defendants contend that the complaint does not adequately allege that the statements were false or misleading when made. Plaintiffs counter by contending that the alleged statements created a "false impression that the PML death was having little or no negative impact on Tecfidera sales, and physicians[' prescribing behavior]." (Pl. Mem. 29).
There are at least three statements that, after drawing all reasonable inferences on behalf of plaintiffs, appear to be plausibly misleading or even false. All three statements occurred during the first quarter of 2015, were made by Kingsley, and concern Tecfidera's discontinuation rates:
At least three facts contribute to a plausible inference that one or more of those statements was false or misleading. First, Tecfidera revenue for the first quarter of 2015 did not just experience slowing growth, it actually decreased $91 million, or 9.9 percent, from the fourth quarter of 2014. (Compl. ¶ 43). Second, at least one confidential witness stated that "very early in 2015" he witnessed "physicians ... transferring patients off Tecfidera and onto different therapies." (Id. ¶ 61). Third, after the class period, during the second quarter 2015 earnings call on July 24, 2015, Biogen's executive vice president of research and development stated "[c]ertainly one of the dynamics that we've seen, that we didn't expect was a modest but not trivial increase in discontinuations in Tec[fidera] in the United States in particular." (Id. ¶ 153; Def. Ex. 23 at 13).
Certainly, those are not the only inferences that can be drawn from Kingsley's statements. For example, the statements on January 29, 2015, were made only one month into the first quarter. Accordingly, the fact that Tecfidera produced lower revenue for the first quarter as a whole and Williams' acknowledgement seven months later that the company had seen a modest, but not trivial, increase in the discontinuation rate does not prove that the statements were false when made; neither does an allegation from a single confidential source stating that sometime in "early 2015" some physicians in one region of the country began transferring patients off Tecfidera. Nevertheless, two months into a quarter during which Tecfidera revenue decreased 10 percent, Kingsley stated "we have not seen any change in the discontinuation rate." And during the very same conference, Kingsley stated "we've talked in the past we are getting about a third of new starts ... and we're getting a nice portion of the switch pool as well." (Compl. ¶ 128). Therefore, because Kingsley's statements suggest that new starts and switches remained positive and consistent with historical numbers, even though Tecfidera revenue actually decreased, it is at least plausible that the three statements were false or misleading.
In summary, many of the alleged statements do not appear to be actionable under the PSLRA, whether considered separately or taken as a whole. However, drawing all reasonable inferences on behalf of plaintiffs, the complaint includes sufficient allegations to conclude that at least three of the alleged statements were material misrepresentations or omissions.
To be actionable under the PSLRA, a statement must be more than merely material and misleading; it also must have been made with the requisite scienter. See ACA Fin., 512 F.3d at 58-59. "Scienter is `a mental state embracing intent to deceive, manipulate, or defraud.'" Id. (quoting Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976)).
"A complaint will survive a motion to dismiss only if it states with particularity facts giving rise to a strong inference that defendants acted with a conscious intent to deceive or defraud investors by controlling or artificially affecting
"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.'" Id. at 58 (quoting Aldridge, 284 F.3d at 82); accord Greebel, 194 F.3d at 198-201. "Recklessness in this context means `a highly unreasonable omission, involving not merely simple, or even inexcusable[ ] negligence, but an extreme departure from the standards of ordinary care, and which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious the actor must have been aware of it.'" Mississippi Pub. Emps. Ret. Sys. v. Boston Sci. Corp. II, 649 F.3d 5, 20 (1st Cir.2011) (quoting SEC v. Fife, 311 F.3d 1, 9-10 (1st Cir.2002)); see also Greebel, 194 F.3d at 188 (noting that recklessness in this context "does not include ordinary negligence, but is closer to being a lesser form of intent"). "Even if plaintiffs wish to prove scienter by `recklessness,' they still must allege with sufficient particularity, that defendants had full knowledge of the dangers of their course of action and chose not to disclose those dangers to investors." Maldonado v. Dominguez, 137 F.3d 1, 9 n.4 (1st Cir.1998).
Scienter "should be evaluated with reference to the complaint as a whole rather than to piecemeal allegations." ACA Fin., 512 F.3d at 59; see also Tellabs, 551 U.S. at 310, 127 S.Ct. 2499 ("[T]he inquiry... is whether all of the facts alleged, taken collectively, give rise to a strong inference of scienter, not whether any individual allegation, scrutinized in isolation, meets that standard."). "There is no set pattern of facts that will establish scienter; it is a case-by-case inquiry." ACA Fin., 512 F.3d at 66. Compelling evidence of scienter most often includes "clear allegations of admissions, internal records or witnessed discussions" that suggest that defendants were "aware that they were withholding vital information or at least were warned by others that this was so" when they made the misleading statements. In re
Greebel, 194 F.3d at 196 (citations omitted). In addition, various other "facts and circumstances indicating fraudulent intent — including those demonstrating motive and opportunity" — may also combine to satisfy the scienter requirement. In re Cabletron Sys., 311 F.3d at 39. The "presence of [contemporaneous] insider trading can be used, in combination with other evidence, to establish scienter." Biogen IDEC Inc., 537 F.3d at 55. However, "[i]nsider trading cannot establish scienter on its own, but rather can only do so in combination with other evidence." Mississippi Pub. Emps. Ret. Sys. II, 649 F.3d at 29.
Here, plaintiffs' theory of scienter has two components. The first is that "ten credible and diverse former Biogen employees provide a compelling, corroborated description of the true crisis that unfolded at Biogen during the class period after the PML death was announced in October 2014." (Pl. Mem. 5). In other words, plaintiffs contend that the allegations of the confidential witnesses establish that defendants knew, or were at a minimum reckless in not knowing, about the real impact the PML death was having on Tecfidera, and that they intentionally or recklessly misled investors about that impact. The second component, referred to as "additional scienter allegations" in the complaint, includes allegations that defendants had both the opportunity to know the true state of Tecfidera sales and the motive to misrepresent them to investors. The complaint also alleges that Tecfidera's status as Biogen's most important product, or part of its "core operations," contributes to an inference of scienter.
Defendants' proposed inference is that Tecfidera sales growth began to slow in 2014 — a fact that defendants disclosed both before and throughout the class period — and that the PML death — again, a risk that they disclosed — had a greater and longer-lasting impact on Tecfidera than they anticipated.
There is little doubt that the scienter allegations are plausible. That is not, however, the relevant question; rather, it is whether the allegations support a "strong inference" of scienter as the law requires. As set forth below, the allegations of the confidential witnesses are not sufficient to support a strong inference of scienter on their own, and the complaint's "additional scienter allegations" add little and are not enough to tip the balance. Accordingly, and for the following reasons, the complaint's allegations are insufficient to support a strong inference of scienter.
The confidential witness allegations, although multiple and generally corroborative, are insufficient to support a strong inference of scienter.
The analysis begins with the allegations from the seven ABMs (CW1, CWs 3 through 7, and CW9) concerning Tecfidera sales. According to the ABMs, the following occurred around late 2014 and early 2015: sales "dropped steeply and immediately"; there was a "large drop in new prescription sales"; there was a "sharp decline" in sales; "sales dropped dramatically"; there was "a large drop in new prescription sales"; "sales dropped appreciably"; there was a "big slowdown" in market expansion; there was a "serious downturn" in "start forms"; "new prescriptions significantly slowed down"; and sales "took a hit." (Compl. ¶¶ 56, 58, 60-65).
Notably absent from those allegations are any specific facts about the sales, such as a measurement of the sales decline, why sales were declining, whether the decline was due to lower new starts and switches or higher discontinuations, or how the sales decline affected the company's financial guidance. See Coyne, 943 F.Supp.2d at 266-67 (concluding that "vague (and largely conclusory) allegations of struggling sales, problems with production, and difficulty retaining repeat clients" were insufficient to demonstrate that company was "incapable of meeting its predicted target"). Furthermore, the complaint does not allege that any of the seven ABMs — most of whom were regional sales employees five levels removed from any of the defendants — or any of the other confidential witnesses ever spoke with one of the defendants. See Fire and Police Pension Ass'n of Colo., 778 F.3d at 245 (noting that the confidential witnesses were not in "senior management positions, and they appear to have had relatively little ongoing contact with senior management").
Plaintiffs contend that defendants' objection to the vagueness of the confidential witness allegations is "myopic," and that requiring them to allege more would require them to plead evidence of fraud. But particularized facts about the Tecfidera sales decline (and more specifically, discontinuations) and whether defendants recklessly or intentionally misled investors about such a decline are necessary here,
(Def. Ex. 12 at 5) (emphasis added). On February 25, 2015 — the same day that the complaint alleges he intentionally or recklessly misled investors about Tecfidera's discontinuation rates — Kingsley again noted the "slowing of the growth rate," told investors that the PML death was a "meaningful event that [Biogen] ha[s] to manage through," and stated that he thought Tecfidera was "resilient" in the face of "hesitancy" among physicians. (Def. Ex. 14 at 4).
In other words, absent more particularized details and stripped of their generalities, the confidential witness allegations about Tecfidera sales are not clearly inconsistent with what defendants were publicly disclosing to the market. See New Jersey Pension & Annuity Funds, 537 F.3d at 52 (concluding that a confidential source's vague allegation that patients being treated with defendants' pharmaceutical suffered "several" infections during trial was not inconsistent with what defendants publicly disclosed and therefore did not "contribute anything additional to plaintiffs' case"); Automotive Indus. Pension Trust Fund v. Textron Inc., 682 F.3d 34, 40 (1st Cir.2012) ("If [defendant] knowingly understated the number of cancellations ... this would be classic evidence of scienter. But ... on the crucial question of when cancellations began piling up, [defendant's] statement and the confidential witness' description of cancellations increasing `suddenly' in `late summer' are not in conflict." (citation and internal quotation marks omitted)). Accordingly, the relatively vague statements of the confidential witnesses, absent more particularized details, lend support to an inference of scienter, but not a strong one.
The allegations about a March 2015 national sales meeting and Biogen's lowering of employees' sales goals likewise add little to the inference of scienter. The complaint alleges that CW1 and CW3 attended a national sales meeting in March 2015 (after Kingsley's three statements about the discontinuation rates, and well after the company's January projections). According to the allegations, unidentified "senior Biogen leaders" at the meeting acknowledged that the PML death "definitely was impacting sales," some unidentified person described the death as a "market event," and some unidentified person stated that "sales [presumably of Tecfidera] would need to pick up again if [Biogen] was going to meet expected 14-16% revenue growth." (Compl. ¶¶ 59-60).
Missing from those allegations are any details about the magnitude of the "impact"
Finally, the complaint alleges that CW2 attended a November 2014 Biogen "town hall" meeting led by Scangos. Notably, the allegation as to the town hall meeting is the only one that directly involves one of the defendants. According to CW2, Scangos's presentation stated that "the overall sense of the trajectory [at Biogen] was changing," and another presentation addressed "potential organizational changes as a result of the PML death." (Compl. ¶ 57). "It was CW2's understanding that the organizational changes stemmed from executive management's expectation that the PML death would have `an impact on performance.'" (Id.). Again, those allegations are vague and otherwise consistent with competing inferences. For example, CW2 does not explain what the potential changes were, any details about how Biogen's "trajectory" was changing, how he came to the "understanding" that the changes were due to executive management's "expectation" about sales, or most importantly, what Scangos said about the alleged "impact." Even viewing CW2's nebulous allegations in light of the entire complaint, they require the Court to make several assumptions to piece together an inference of fraudulent intent or recklessness, let alone a compelling one.
Moreover, those allegations are consistent with the competing inference of a lack of scienter. Biogen had experienced meteoric revenue growth in 2014, and in November 2014 it was only weeks away from announcing 232 percent annual revenue growth for Tecfidera. Nevertheless, the "trajectory" of Tecfidera's growth was changing, as the company disclosed beginning in October 2014. (See Def. Ex. 7 at 8).
(Def. Ex. 12 at 13) (emphasis added).
In short, the various allegations of the confidential witnesses, taken as a whole, support a plausible inference of scienter to some degree. However, without more, they are not sufficiently particularized to support a strong inference of scienter, as the law requires, and they are consistent with the competing non-fraudulent inferences.
The complaint's "additional" scienter allegations add little, if anything, to the confidential witness allegations. The complaint alleges that defendants had both the motive and opportunity to misrepresent Tecfidera's growth projections. However, some of the allegations make little sense in the factual context of Biogen's purported fraud, and they are otherwise too generic to support an inference of scienter. "`[C]atch-all allegations' which merely assert motive and opportunity, without something more, fail to satisfy the PSLRA." In re Cabletron Sys., 311 F.3d at 39 (quoting Greebel, 194 F.3d at 197). Instead, motive and opportunity allegations must state "more than the usual concern by executives to improve financial results." Id.
For example, plaintiffs contend that "Scangos and Clancy did have motive based on compensation that included stock awards and bonus targets tied to revenue growth." (Pl. Mem. 12). That allegation does not make sense in this context. The complaint does not allege that Biogen's revenue reporting was false or misleading in any way. Instead, the complaint alleges that Biogen's future revenue projections were misleading. It is difficult to imagine why defendants would have the motive to overstate projected revenue growth based on the fact that they had bonuses tied to actual revenue growth.
It is also notable that the complaint is bereft of insider-trading allegations. While plaintiffs' counterargument — that insider trading can add to an inference of scienter but not detract from an otherwise strong inference — is perhaps technically correct, see Aldridge, 284 F.3d at 84, that is not the end of the analysis. The Court must read the complaint as a whole and weigh competing inferences. Here, the lack of insider trading contributes to defendants' proposed inference that they simply underestimated the effect that the PML death would have on sales. Indeed, the individual defendants' holdings of Biogen stock actually increased during the class period according to the publicly-filed SEC Forms 4.
Furthermore, the Court must weigh the fact that defendants themselves suffered investment losses based on the decline in Biogen's stock price. See Maldonado, 137 F.3d at 12 n. 9 (noting the fact that defendants "invested and lost one and a half million dollars of their own money ... undermine[d] any inference of scienter"). Here, based on Scangos's holdings of 41,090 shares, Clancy's 22,257 shares, and Kingsley's 8,132 shares, they combined to lose more than $6 million on July 24, 2015, when the stock price dropped $85. (See Def. Ex. 26-28).
The complaint further alleges that defendants must have known that Biogen's Tecfidera revenue guidance was wrong due to their positions and access to "prescription and sales information." (Compl. ¶¶ 167, 173-75). Without more specific allegations, general and conclusory assertions that "headquarters knew about it" when a prescription was sold and that "headquarters would have had up to date insight into new prescription rates" provide little evidence to support an inference of scienter. (Id. ¶¶ 72, 73); see Orton, 344 F.Supp.2d at 306 ("Nor does a vague assertion that a defendant must have known about the fraud by virtue of his position of authority suffice to prove a strong inference of scienter.");
Finally, the complaint's "core operations" allegations fall short of adding sufficient weight for the complaint to plead a strong inference of scienter. The complaint alleges that because Tecfidera was Biogen's main revenue source during the class period, accounting for 33.7% of total company revenue, defendants knew or were reckless in not knowing that their statements about Tecfidera were misleading. (Compl. ¶¶ 43, 68-75, 159-65). Certainly, under Tellabs, the "core operations" allegations and Tecfidera's importance to Biogen must be taken into account as part of the Court's assessment of the complaint's scienter allegations. However, courts have been hesitant to apply significant weight to "core operations" allegations without other significant evidence of a defendant's intent or recklessness, or a "plus factor." See In re A123 Sys., Inc. Sec. Litig., 930 F.Supp.2d 278, 285 (D.Mass.2013) ("Plaintiffs cite [Crowell v. Ionics, Inc., 343 F.Supp.2d 1, 19 (D.Mass. 2004)] for the proposition that `facts critical to a business's core operations or an important transaction generally are so apparent that their knowledge may be attributed to the company and its officers.' Crowell,... [however,] involved allegations of the improper booking and accounting of fraudulent sales, buttressed by a `plus factor' — an e-mail pointing to the company's vice president as the author of the scheme."); see also Lenartz v. American Superconductor Corp., 879 F.Supp.2d 167, 183 n. 9 (D.Mass.2012) (finding the core operations theory inapplicable in accounting fraud case because the facts were "less clear" than the "particularized facts" of Crowell). Here, there is no "smoking gun" e-mail or "plus factor" as in Crowell.
In sum, the complaint's "additional" allegations of motive, opportunity, and "core product," taken as a whole, do not make the complaint's otherwise plausible inference of scienter strong enough to satisfy the PSLRA.
Based on the complaint as a whole, plaintiffs' asserted inference of scienter may be plausible, but it is not strong, cogent, or compelling. Moreover, the Court "must weigh `not only inferences urged by the plaintiff ... but also competing inferences rationally drawn from the facts alleged.'" New Jersey Carpenters Pension, 537 F.3d at 45 (quoting Tellabs, 551 U.S. at 314, 127 S.Ct. 2499). There are at least three facts that further weaken the inference of scienter here.
Most obviously, defendants were cautious in projecting Tecfidera's growth,
Both plaintiffs' brief and the complaint gloss over Biogen's disclosures in an effort to make the case for scienter more compelling, but the transcripts reveal a more complete picture. For example, during a call on October 22, 2014, Biogen announced the PML death and stated that it "reported the case to the regulatory authorities" and that it would "work with them to confirm that the language on [Tecfidera's] label provides patients and their physicians appropriate information regarding lymphopenia." (Compl. ¶ 48; Def. Ex. 7 at 3). During the same call, Kingsley responded to an analyst's question (about third-quarter Tecfidera growth being the lowest of the previous five quarters) by noting that growth was moderating and difficult to predict. (Compl. ¶ 48; Def. Ex. 7 at 7-8) ("As always a little probably difficult to predict exactly, but look, we have always expected Tecfidera's growth rate would moderate over time. I think we are seeing a natural case of that.").
Once the class period began, Clancy stated on December 2, 2014, that investors should be "mindful" of Tecfidera's discontinuation rates, which were in the "teens" and higher than the company would have hoped for an oral MS therapy. (Def. Ex. 8 at 2-4).
In February 2016, Kingsley again noted the effect that the PML death was having on Tecfidera, despite the drug's resilience:
(Compl. ¶ 128; Def. Ex. 10 at 4-5) (emphasis added). When directly asked to predict whether "a lot of the [ ] PML noise or news" had come out in the fourth quarter of 2015 after the December label change, or whether it would carry over into the first quarter, Kingsley was again, at the very least, cautious:
(Compl. ¶ 128; Def. Ex. 10 at 4-5) (emphasis added).
During the first-quarter-earnings call in April 2015, Scangos noted that "Tecfidera had a more challenging quarter, due to a number of issues, including ... the single PML case reported last year." (Def. Ex. 17 at 3). Kingsley again reminded investors about the PML death when he stated, "We believe [moderation in growth rates] is occurring as expected, but also believe that the [Tecfidera] safety event in October further dampened market growth and switch rates in Q1." (Def. Ex. 17 at 4-5). Finally, Clancy warned the market that "[i]f the U.S. [Tecfidera] trajectory does not improve, we may come in at the lower end of our previously provided revenue growth [range of 14 to 16 percent]." (Compl. ¶ 135; Def. Ex. 17 at 5-6). In May 2015, Clancy stated that the "unfavorable impact" that the PML death had on physicians' attitudes toward Tecfidera had "stabilized" but that it "hasn't turned around as quick as we had wanted it to turn around." (Compl. ¶ 139; Def. Ex. 18 at 2-3).
Other factors appear to support the inference that defendants, at worst, negligently overestimated Tecfidera's short-term revenue growth after the PML death. After Biogen announced record quarterly revenue of $916 million in the fourth quarter of 2014, Tecfidera revenue dropped in the first quarter and demonstrated tepid growth in the second quarter due, in part, to the PML death. Notably however, after the class period, Tecfidera revenue rebounded to $937 million in the third quarter and $993 million in the fourth quarter of 2015, contributing to annual growth rates of 25.1 percent and 10.9 percent for Tecfidera and Biogen, respectively. That demonstrates the "meaningful" but "moderating" growth that defendants expected. Moreover, the complaint contains no allegation that defendants hid or otherwise delayed in announcing the PML death to investors, or the subsequent label change. See Fire and Police Pension Ass'n of Colo., 778 F.3d at 243 (noting that medical company defendant "did not withhold information about the FDA's concerns once the FDA issued a Warning Letter" and "did not promise a positive resolution of the matter").
In short, "[t]hese are not the actions of a company bent on deceiving investors as to their future earnings prospects." See id. Defendants' warnings about the PML death fall far short of reckless conduct and do not support an inference of scienter. Rather, they support the inference that defendants were, at worst, overly optimistic in attempting to predict the PML
Considered as a whole, the complaint presents allegations of scienter that are perhaps plausible, but not "cogent and compelling." Tellabs, 551 U.S. at 324, 127 S.Ct. 2499; see also ACA Fin., 512 F.3d at 59 (noting that scienter "should be evaluated with reference to the complaint as a whole rather than to piecemeal allegations"). Again, the allegations from confidential sources — none of whom personally spoke to defendants or witnessed any overtly fraudulent behavior — contribute somewhat to plaintiffs' asserted inference of scienter. However, they are too vague and conclusory to create a strong inference of recklessness or intent. Indeed, the allegations concerning physicians' discomfort after the PML death and declining Tecfidera sales are at least partly consistent with defendants' repeated public disclosures. Furthermore, the complaint's "additional" motive and core-product allegations provide very little support to an inference of scienter. Without more, plaintiffs' circumstantial case of scienter is not strong or compelling.
In sum, even after drawing all reasonable inferences on behalf of plaintiffs, the most compelling inference to be drawn from the complaint as a whole is that defendants were unduly optimistic — at worst, negligently so — in predicting how quickly Tecfidera sales would recover from the PML announcement. "Still, `allegations of corporate mismanagement are not actionable under Rule 10b-5. Nor are allegations of mere negligence.'" Fire and Police Pension Ass'n of Colo., 778 F.3d at 246 (quoting Waters Corp., 632 F.3d at 760) (alteration omitted). Without evidence sufficient to support a strong inference of intent, or at least recklessness, defendants' failure to predict the future does not support a claim for securities fraud; accordingly, under the heightened pleading standard of the PSLRA, Count One will be dismissed.
Count Two of the complaint asserts a claim against defendants for "scheme" liability under Rules 10b-5(a) and 10b-5(c). However, plaintiffs have conceded that claim in their opposition brief. (Pl. Mem. 30 n.24) ("Plaintiff[s] do[ ] not contest the claim for scheme liability."). Accordingly, Count Two will be dismissed.
Count Three of the complaint asserts a claim against the individual defendants under Section 20(a) of the Exchange Act, which imposes joint and several liability on persons in control of entities that violate securities laws. 15 U.S.C. § 78t. However, violations of Section 20(a) depend on an underlying violation of the Exchange Act. 15 U.S.C. § 78t-1(a); see Waters Corp., 632 F.3d at 762 ("Because the plaintiff's Section 20(a) claim was derivative of the Rule 10b-5 claim, it was properly dismissed as well."); ACA Fin., 512 F.3d at 67-68. Because the complaint
Plaintiffs have not formally requested leave to amend the amended complaint. Instead, on the final page of their thirty-page opposition to defendants' motion to dismiss, plaintiffs contend that "leave to amend should be permitted if defendants' motion is granted." (Pl. Mem. 30). Plaintiffs do not state that they have discovered, or could discover, new evidence to suggest that amendment would not be futile; rather, they cite Rule 15(a) and state that "[l]eave to amend is to be `freely given.'" (Id.) (quoting Fed. R. Civ. P. 15(a)).
The original complaint in this case was filed on August 18, 2015, and GBR was appointed the lead plaintiff in November 2015. During the November 17, 2015 status conference, the Court allowed plaintiffs' request for an additional sixty days to file an amended complaint, albeit with some reservation about the schedule of the case. The Court, however, warned plaintiffs' counsel "I'm sure you know ... because this is often the ball game in [securities fraud] cases, if you have factual allegations, they should be in the complaint. In other words, don't hold something back, wait and see if I grant the motion to dismiss or not and then seek to amend the complaint. If you've got something, put it in." (Docket No. 51 at 7:11-17). The amended complaint was filed on January 19, 2016. Accordingly, plaintiffs, and the three law firms listed as their counsel, had more than five additional months between the filing of the initial complaint and the amended complaint to thoroughly investigate their claims — an investigation that should have been completed, at least predominantly, before filing the original complaint. Moreover, plaintiffs had the opportunity to request leave to amend the amended complaint after defendants filed their motion to dismiss, as well as after the motion hearing, during which the Court expressed skepticism about the complaint's ability to survive the PSLRA's rigorous scienter requirement.
As the First Circuit succinctly stated in denying a request for leave to amend in another securities fraud class action:
Fire and Police Pension Ass'n of Colo., 778 F.3d at 247 (emphasis added) (citations omitted); see also ACA Fin., 512 F.3d at 57 (rejecting plaintiffs' argument that district court erred in denying leave to amend because "[p]laintiffs took no action to add new allegations" in response to defendants' motion to dismiss "even though they knew what they would add if they amended," and noting that allowing such a practice would "lead to delays, inefficiencies, and wasted work").
Accordingly, the Court will not grant plaintiffs' informal request for leave to amend after ruling on defendants' motion to dismiss.
For the foregoing reasons, defendants' motion to dismiss is GRANTED.
