Brennan v. Zafgen, Inc.

• Decision Date: 09 August 2016
• Docket Number: Civil Action No. 15-13618-FDS
• Parties: Terry M. BRENNAN; Ron Kenner; Kevin Koziatek; Vincent Rampe; and Dragon Gate Management Ltd., individually and on behalf of all others similarly situated, Plaintiffs, v. ZAFGEN, INC. and Thomas E. Hughes, Defendants.
• Court: U.S. District Court — District of Massachusetts

199 F.Supp.3d 444

Terry M. BRENNAN; Ron Kenner; Kevin Koziatek; Vincent Rampe; and Dragon Gate Management Ltd., individually and on behalf of all others similarly situated, Plaintiffs,

v.ZAFGEN, INC. and Thomas E. Hughes, Defendants.

Civil Action No. 15-13618-FDS

United States District Court, D. Massachusetts.

Signed August 9, 2016

Gonen Haklay, Jacob A. Goldberg, The Rosen Law Firm, Jenkintown, PA, Jeffrey C. Block, Block & Leviton LLP, Boston, MA, for Plaintiff.

Adam Slutsky, Deborah S. Birnbach, Kate Elizabeth MacLeman, Goodwin Procter LLP, Boston, MA, for Defendants.

MEMORANDUM AND ORDER ON DEFENDANTS' MOTION TO DISMISS

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 thereunder, 17 C.F.R. § 240.10b–5. The lead plaintiffs have brought suit, on behalf of a class of similarly situated persons, against biopharmaceutical company Zafgen, Inc. and its CEO Thomas E. Hughes.¹ Plaintiffs contend that class members were harmed when they purchased Zafgen's common stock at prices that were artificially inflated by the company's materially misleading statements and omissions concerning its anti-obesity drug, Beloranib.

Before Zafgen became a public company in June 2014, it conducted a Phase II trial of Beloranib from August 2012 to May 2013 (the "ZAF-201 trial"). In the prospectus for its 2014 initial public offering, Zafgen disclosed that two "serious thrombotic events" occurred during that trial.² Zafgen repeated that disclosure multiple times throughout the class period (that is, from June 19, 2014, through October 16, 2015). Zafgen also stated in its disclosures that "[serious AEs] that are not characterized by clinical investigators as possibly related to Beloranib or [serious AEs] that occur in small numbers may not be disclosed to the public" until the FDA-approval process.

In October 2015, Zafgen announced that a patient participating in the Phase III trial of Beloranib had died. After unblinding the trial two days later at the request of the FDA, the company disclosed that the patient had been receiving Beloranib, and that the drug had been placed on a clinical hold. During a conference call with analysts later that day, Zafgen disclosed, for the first time, that two "superficial" thrombotic AEs had occurred during the ZAF-201 trial, in addition to the two previously disclosed "serious" AEs. Zafgen's stock price fell 50 percent the next day, and this lawsuit followed five days later.

The complaint alleges that Zafgen's disclosures during the class period contained materially false misrepresentations and omissions because they failed to disclose that four, not two, AEs occurred during the ZAF-201 trial. It also alleges that defendants made those false disclosures with scienter, that is, with an intent to defraud or a high degree of recklessness. The complaint alleges that when defendants made the disclosures, they knew or recklessly disregarded "that there was a significant risk of thrombotic adverse events in future clinical trials of Beloranib." (Compl. ¶ 36).

As evidence of defendants' knowledge of that risk, the complaint cites scientific literature and news articles that explored "a potential connection between anti-angiogenics, such as Beloranib, and thrombotic adverse events." (Pl. Mem. 13-14). The complaint also alleges that Hughes and other Zafgen insiders had a motive to inflate the company's stock price, as demonstrated by insider stock sales in September 2015.

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, for two principal reasons.³ First, they contend that the complaint fails to set forth plausible allegations that Zafgen's disclosures contain actionable misrepresentations or omissions. Second, they contend that it fails to allege specific facts that give rise to a strong inference of scienter.⁴

As the First Circuit has stated, "[a] statement cannot be intentionally [or recklessly] misleading [under the securities laws] if the defendant did not have sufficient information at the relevant time to form an evaluation that there was a need to disclose certain information and to form an intent not to disclose it." New Jersey Carpenters Pension & Annuity Funds v. Biogen IDEC Inc. , 537 F.3d 35, 45 (1st Cir.2008). In other words, a complaint is insufficient under the PSLRA if it does not contain particularized factual allegations raising a strong inference that at the time of disclosure defendants knew (or were reckless by not knowing) that their failure to provide additional information was misleading.

Even assuming that the complaint plausibly alleges a material misrepresentation or omission, its allegations as a whole fail to clear the PSLRA's relatively high hurdle of pleading a strong inference of scienter. In hindsight, the superficial thrombotic AEs that occurred during the ZAF-201 trial perhaps took on added significance more than two years later when a patient died during the Phase III trial. However, "[p]leading fraud by hindsight, essentially making general allegations that defendants knew earlier what later turned out badly, is not sufficient." Ezra Charitable Trust v. Tyco Int'l, Ltd. , 466 F.3d 1, 6 (1st Cir.2006) (internal quotation marks omitted). Without the benefit of hindsight, the complaint fails to plead particularized facts demonstrating that defendants had "sufficient information at the relevant time to form an evaluation that there was a need to disclose" the "superficial" AEs, and to form an intent not to disclose them. See Biogen , 537 F.3d at 45 (emphasis added). For example, the complaint does not point to a single confidential-source allegation, internal e-mail, or any other direct evidence that would suggest Hughes knew (or was reckless in not knowing) "that there was a significant risk of thrombotic adverse events in future clinical trials of Beloranib." (Compl. ¶ 36). Moreover, the complaint's circumstantial allegations concerning scienter—a patchwork of scientific literature and unsuspicious insider sales—are insufficient to support a strong inference of defendants' "conscious intent to defraud or ‘[ ] 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) ).

Accordingly, and for the reasons set forth below, defendants' motion to dismiss will be granted.

I. Factual Background

Unless otherwise noted, all facts are stated as set forth in the complaint.⁵

A. The Parties and Beloranib

Zafgen, Inc. is based in Boston, Massachusetts. (Compl. ¶ 20).⁶ Founded in 2005, Zafgen is a small biopharmaceutical company "dedicated to significantly improving the health and well-being of patients affected by obesity

and complex metabolic disorders." (Id. ). Defendant Thomas E. Hughes has been Zafgen's Chief Executive Officer since 2008. (Id. ¶ 21). Zafgen became a public company on June 19, 2014 (the first day of the class period), through an initial public offering, and its shares are traded on the NASDAQ stock exchange. (Id. ¶ 20). By the date of its IPO, Zafgen had approximately twelve full-time employees. (Id. ¶¶ 30-31).

Beloranib, an obesity

therapy, is Zafgen's only product candidate in clinical development—that is, past the pre-clinical stage. (Id. ¶¶ 26-27). Beloranib is Zafgen's "lead product candidate ... [,] a novel, first-in-class, twice-weekly subcutaneous, or SC, injection." (Id. ¶ 26). Beloranib treats "severe obesity in two rare diseases, Prader-Willi syndrome, or PWS, and hypothalamic injury-associated obesity, or HIAO, including craniopharyngioma-associated obesity ; and severe obesity in the general population." (Id. ).

The complaint alleges that lead plaintiffs Terry Brennan, Ron Kenner, Kevin Koziatek, Vincent Rampe, and Dragon Gate Management Ltd., purchased shares of Zafgen common stock during the class period, from June 19, 2014, through October 16, 2015. (Id. ¶¶ 1, 14-18).

B. Adverse Events During the ZAF-201 Trial

In total, Zafgen has conducted three Phase I trials, four Phase II trials, and one Phase III trial of Beloranib for different obesity-related diseases. (Id. ¶ 28).⁷ Zafgen conducted the ZAF-201 trial (Beloranib's Phase IIA proof-of-concept clinical trial) over twelve weeks and eight study sites from August 2012 to May 2013. (Id. ¶ 47). During the ZAF-201 trial, 160 obese patients participated, 122 of whom were treated with Beloranib. (Id. ).

Four thrombotic AEs of varying severity occurred during the ZAF-201 trial. (Id. ¶ 48). Third-party clinical investigators categorized two as "superficial" AEs and two as "serious" AEs. (Id. ¶ 49; Def. Ex. E at 18, 31; Def. Ex. I at 5). The two serious AEs were determined to be a pulmonary embolism

and deep vein thrombosis, respectively. (Compl. ¶ 49; Def. Ex. I at 5). The two superficial AEs were determined to be "superficial thrombophlebitis." (Compl. ¶ 49; Def. Ex. I at 5). All four AEs occurred in patients receiving Beloranib (as opposed to a placebo). (Compl. ¶ 49). The complaint does not allege that Beloranib caused those AEs, and to this date investigators have not determined a specific cause. (Def. Ex. I at 5).

In the spring of 2014, after the ZAF-201 trial, Zafgen began to prepare for its IPO. (Compl. ¶ 52). In its April 18, 2014, SEC Form S-1, which was signed by Hughes, the company disclosed the following concerning the ZAF-201 study:

As severely obese patients are at an increased risk for cardiovascular disease

, we measured systemic biomarkers of cardiovascular disease risk, including low density lipoprotein cholesterol, HDL, CRP, triglycerides and blood pressure in trial participants, to determine Beloranib's impact on such biomarkers. The results of these biomarker measurements in this trial, as summarized below, suggest that Beloranib treatment does not increase the risk of...