537 F.3d 35 (1st Cir. 2008), 07-2626, New Jersey Carpenters Pension & Annuity Funds v. Biogen IDEC Inc.

Docket Nº:07-2626.
Citation:537 F.3d 35
Party Name:NEW JERSEY CARPENTERS PENSION & ANNUITY FUNDS; Folksam Asset Management; Third Millennium Trading LLP; Deerfield Beach Non-Uniformed Municipal Employees Retirement Plan; Plumbers and Pipefitters Local No. 520 Pension Fund; Horatio Capital LLC, Plaintiffs, Appellants, Charles Brown, Individually and on Behalf of all others Similarly Situated; Rochel
Case Date:August 07, 2008
Court:United States Courts of Appeals, Court of Appeals for the First Circuit

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537 F.3d 35 (1st Cir. 2008)

NEW JERSEY CARPENTERS PENSION & ANNUITY FUNDS; Folksam Asset Management; Third Millennium Trading LLP; Deerfield Beach Non-Uniformed Municipal Employees Retirement Plan; Plumbers and Pipefitters Local No. 520 Pension Fund; Horatio Capital LLC, Plaintiffs, Appellants,

Charles Brown, Individually and on Behalf of all others Similarly Situated; Rochelle Lobel; Biogen Institutional Investor Group; London Pensions Fund Authority; National Elevator Industry Pension Fund; Cary Grill, Individually and on Behalf of all others Similarly Situated, Plaintiffs,


BIOGEN IDEC INC.; William Rastetter; James Mullen; Burt Adelman; Thomas Bucknum; Peter N. Kellogg; William Rohn, Defendants, Appellees.

No. 07-2626.

United States Court of Appeals, First Circuit.

August 7, 2008

Heard June 2, 2008.

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[Copyrighted Material Omitted]

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Vincent R. Cappucci with whom Stephen D. Oestreich, Robert N. Cappucci, Shannon L. Hopkins, Entwistle & Cappucci LLP, Sanford P. Dumain, Richard H. Weiss, Milberg Weiss LLP, Nancy Freeman Gans, and Moulton & Gans, PC were on brief for appellants.

James R. Carroll with whom Matthew J. Matule, Michael S. Hines, and Skadden, Arps, Slate, Meagher & Flom LLP were on brief for Biogen Idec Inc., William Rastetter, James Mullen, Burt Adelman, Peter N. Kellogg, and William Rohn.

Mark A. Berthiaume with whom Timothy E. Maguire and Greenberg Traurig LLP were on brief for Thomas Bucknum.

Before LYNCH, Chief Judge, TORRUELLA, Circuit Judge, and STAFFORD, [*] District Judge.

LYNCH, Chief Judge.

In this securities case, a drug company, Biogen Idec Inc., conducted clinical trials and received accelerated FDA approval for TYSABRI, a promising new drug for multiple sclerosis and similar autoimmune diseases. The price of the company stock increased as FDA approval was sought and granted. Less than three months after the approval, on February 18, 2005, continuing clinical trials of the drug revealed that two patients had contracted a type of infection perhaps associated with the drug. One of those patients had died. Within ten days, on February 28, 2005, the company, after consultation with the FDA, voluntarily withdrew the drug from the market. The share price precipitously dropped.

This federal securities class action soon followed, alleging the company and senior executives had intentionally misrepresented the safety of and the market for the drug by omission and commission. The district court dismissed the complaint for failing to meet adequately the pleading requirements for scienter established in the Private Securities Litigation Reform Act of 1995 (“PSLRA" ), Pub.L. No. 104-67, 109 Stat. 737. We affirm.


On March 2, 2005, a subset of the plaintiffs in this action brought suit in federal district court against Biogen Idec Inc. and company executives.1 For convenience, we

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refer to all defendants collectively as “Biogen," except where any are specifically differentiated. The plaintiffs sued on behalf of a putative class of individuals and entities who purchased Biogen stock between February 18, 2004 and February 28, 2005, the class period. Other duplicate class actions followed, with complaints filed on March 10, 2005 and April 10, 2005. The actions were consolidated and a consolidated amended complaint was filed October 13, 2006.

We accept well-pled factual allegations in the complaint as true and draw all inferences in the plaintiffs' favor. Miss. Pub. Empl. Ret. Sys. v. Boston Scientific Corp. (Boston Scientific ), 523 F.3d 75, 85 (1st Cir.2008); see also Tellabs, Inc. v. Makor Issues & Rights, Ltd., __ U.S. __, 127 S.Ct. 2499, 2509, 168 L.Ed.2d 179 (2007); ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46, 52 (1st Cir.2008). We also consider the undisputed public documents utilized by each side in this case and considered by the district court. See Boston Scientific, 523 F.3d at 86.

A. TYSABRI and Its Effects

TYSABRI 2 is a drug developed, manufactured, and marketed by Biogen for the purpose of treating autoimmune diseases, especially multiple sclerosis (“MS" ), Crohn's disease, and rheumatoid arthritis.3 Generally, autoimmune diseases cause the human body's immune system to attack otherwise healthy tissues in the body. TYSABRI works, in part, by preventing migration of white blood cells throughout the body.

In MS, for example, the arrival of white blood cells to the central nervous system causes inflammation, which in turn destroys nerve fiber and the fatty tissue surrounding nerve fiber, creating lesions or plaques in the nervous system. Over time, these plaques disrupt the function of the nervous system, causing the various symptoms of MS, including progressive physical disability and eventual cognitive impairment. TYSABRI prevents the white blood cells from migrating to the central nervous system, relieving the inflammation and mitigating the symptoms of MS.

Another effect of TYSABRI's mechanism of action is that the drug could prevent white blood cells from migrating to places in the body where they are needed. This may leave a patient vulnerable to “opportunistic infections," which occur when ordinarily benign organisms infect

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individuals with impaired immune systems. While a healthy immune system would prevent these organisms from causing illness, an impaired immune system may not be able to stave off infection.

One such opportunistic infection is progressive multifocal leukoencephalopathy (“PML" ), a usually fatal disease of the central nervous system caused by the “JC virus." The JC virus is latent in the kidneys of almost all adults, and invades the brain and causes PML only when the immune system is severely impaired.

B. TYSABRI's Path to Market and the FDA Approval Process

The Food and Drug Administration (“FDA" ) requires any drug to go through a series of clinical trials before it can be approved for marketing and sales in the United States. See generally L. Sukhatme, Note, Deterring Fraud: Mandatory Disclosure and the FDA Drug Approval Process, 82 N.Y.U.L. Rev. 1210, 1219-20 (2007) (describing the FDA's drug approval process). After a drug is initially tested on animals, the developer of the drug submits an application to the FDA for approval to test the drug on humans. Id.; see also21 C.F.R. § 312.20. If this request is approved, human testing begins, and typically follows three phases, commonly known as clinical trials. See21 C.F.R. § 312.21. Each phase requires the company to test the drug on a broader population and results in more stringent monitoring and evaluation. Id.

Phase I studies generally involve twenty to eighty subjects, and are designed to determine how the drug works in humans and the side effects associated with increasing doses. Id. § 312.21(a)(1). Phase II studies usually involve no more than several hundred subjects, and are designed to evaluate the effectiveness of the drug, as well as common short-term side effects and risks. Id. § 312.21(b). Phase III studies are large-scale trials, usually involving several hundred to several thousand subjects, and are intended to gather the information necessary to provide an adequate basis for labeling the drug. Id. § 312.21(c). Throughout the clinical trials, the drug company must report to the FDA and to all participating physicians any serious and unexpected adverse drug experiences that occur. Id. § 312.32(c)(1)(i)(A). After Phase III, the FDA considers the results of all of the clinical trials in determining whether to approve a drug for market. See id. §§ 314.125(b), 314.126(a).

If a proposed drug “address[es][an] unmet medical need" for a “serious or life-threatening condition," like TYSABRI does, the FDA provides an expedited approval process. 21 U.S.C. § 356(a)(1); see also Consolidated Am. Compl. (“CAC" ) ¶¶ 83-85. Through this process, which has a target for FDA action of six months, the drug maker interacts with the FDA during drug development and the FDA can begin reviewing portions of the drug application before the full application is completed. See U.S. Food and Drug Administration, Center for Drug Evaluation and Research, FDA's Drug Review and Approval Times, available at http:// www. fda. gov/ cder/ reports/ reviewtimes/ default. htm. The FDA can approve drugs treating life-threatening illnesses that are significant advancements over existing treatments on the basis of preliminary evidence prior to formal demonstration of patient benefit.4 See21 C.F.R. §§ 314.500, 314.510.

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In August 2000, Biogen and another company, Elan Pharma International Limited (“Elan" ), announced that they had entered into a joint collaboration agreement to bring TYSABRI to market. The agreement required the two companies to share equally in the revenues and costs and set up a number of joint teams, so that both companies played a role in both the development of TYSABRI, including clinical trials, and the marketing of TYSABRI. The agreement also required that any information, including adverse events, discovered by one company be reported to the other in a timely manner.

Both the pre-clinical animal trials and the first phase of clinical trials of TYSABRI as a treatment for MS had been completed in the 1990s by Elan's corporate predecessor. After the collaboration agreement, it was decided that Biogen would lead the clinical trials for MS and Elan would lead the clinical trials for Crohn's disease.

By September 2001, preliminary Phase II MS results had begun yielding promising data. Biogen then began Phase III of MS testing in December 2001 with two trials. The first trial, named AFFIRM, sought to test whether TYSABRI was effective in slowing the rate of disability in MS patients. The second, SENTINEL, sought to evaluate the safety and efficacy of TYSABRI in combination with another MS drug produced by Biogen, AVONEX.

The Phase III clinical trials for Crohn's disease began in December 2001...

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