Callinan v. Lexicon Pharm., Inc.

• Decision Date: 14 August 2020
• Docket Number: CIVIL ACTION No. H-19-0301
• Parties: Paul E. CALLINAN, and Jorge Rivera, Individually and on Behalf of All Others Similarly Situated, Lead Plaintiffs, v. LEXICON PHARMACEUTICALS, INC., Lonnel Coats, Jeffrey L. Wade, and Pablo Lapuerta, Defendants.
• Court: U.S. District Court — Southern District of Texas

479 F.Supp.3d 379

Paul E. CALLINAN, and Jorge Rivera, Individually and on Behalf of All Others Similarly Situated, Lead Plaintiffs,

v.LEXICON PHARMACEUTICALS, INC., Lonnel Coats, Jeffrey L. Wade, and Pablo Lapuerta, Defendants.

CIVIL ACTION No. H-19-0301

United States District Court, S.D. Texas, Houston Division.

Signed August 14, 2020

Jeremy A. Lieberman, Brian Calandra, Pomerantz LLP, New York, NY, Willie C. Briscoe, The Briscoe Law Firm, PLLC, Dallas, TX, for Lead Plaintiffs.

Paul R. Bessette, Jessica Lynn England, Michael John Biles, Rebecca Teryn Matsumura, King & Spalding LLP, Austin, TX, Lisa M. Dwyer, King & Spalding LLP, Washington, DC, for Defendant Lexicon Pharmaceuticals, Inc.

Paul R. Bessette, Jessica Lynn England, Michael John Biles, Rebecca Teryn Matsumura, King & Spalding LLP, Austin, TX, for Defendants Lonnel Coats, Jeffrey L. Wade.

Paul R. Bessette, King & Spalding LLP, Austin, TX, for Defendant Pablo Lapuerta.

MEMORANDUM OPINION AND ORDER

SIM LAKE, SENIOR UNITED STATES DISTRICT JUDGE

This action is brought against Lexicon Pharmaceuticals, Inc., ("Lexicon"), Lexicon's President, Chief Executive Officer ("CEO"), and a Director of Lexicon, Lonnel Coats ("Coats"), Lexicon's Chief Financial Officer ("CFO") and Vice President - Corporate and Administrative Affairs, Jeffrey L. Wade ("Wade"), and Lexicon's Executive Vice President and Chief Medical Officer Pablo Lapuerta ("Lapuerta"), for alleged violations of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t(a), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, during a proposed class period beginning on March 11, 2016, and ending on July 29, 2019, both dates inclusive.¹ Pending before the court are Defendants’ Motion to Dismiss Plaintiffs’ First Amended Complaint ("Defendant's Motion to Dismiss") (Docket Entry No. 33), and Plaintiffs’ Memorandum of Law in Opposition to Defendants’ Motion to Dismiss Plaintiffs’ First Amended Complaint ("Plaintiffs’ Opposition") (Docket Entry No. 35), in which plaintiffs request leave to amend "[i]f the Court grants any part of the [Defendants’ Motion to Dismiss]."² Also before the court is Defendants’ Reply Brief in Support of Their Motion to Dismiss Plaintiffs’ First Amended Complaint ("Defendants’ Reply") (Docket Entry No. 37). For the reasons stated below, the Defendants’ Motion to Dismiss will be granted, and plaintiff's request for leave to amend will be denied.

I. Procedural History and Alleged Facts

Daniel Manopla initiated this action on January 28, 2019, by filing a Class Action Complaint (Docket Entry No. 1) asserting claims for violations of § 10(b) and § 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder. On April 1, 2019, Paul E. Callinan ("Callinan") and Jorge Rivera ("Rivers") filed their Motion for Appointment as Lead Plaintiffs and Approval of Counsel (Docket Entry No. 10). On May 31, 2019, the court signed an Order Approving Lead Plaintiffs and Approving Selection of Counsel (Docket Entry No. 23) appointing Callinan and Rivera as Lead Plaintiffs, and approving their selection of Pomerantz LLP as Lead Counsel for the class and the Briscoe Law Firm, PLLC as Liaison Counsel for the class. On July 30, 2019, Lead Plaintiffs filed the FACAC (Docket Entry No. 27).

The FACAC alleges that Lexicon is a biopharmaceutical company focused "on the development and commercialization of ‘breakthrough treatments,’ i.e., drugs, ‘for the treatment of human diseases.’ "³ The FACAC alleges that Lexicon is "a Delaware corporation with its principal executive offices located [in] ... The Woodlands, Texas ..., [and that its] common stock trades in an efficient market on the Nasdaq Global Select Market ("NASDAQ") under the ticker symbol ‘LXRX.’ "⁴ The FACAC alleges that Coats has been the President, CEO, and a Director of Lexicon since July 2014,⁵ Wade has been Lexicon's CFO and Vice President – Corporate and Administrative Affairs since February 2015, and that Lapuerta has been Lexicon's Executive Vice President and Chief Medical Officer since February 2015.⁶

The FACAC alleges that

[a]t the start of the Class Period, on March 11, 2016, Lexicon filed its annual report on Form 10-K for the year 2015, which was signed by the Individual Defendants (the "2015 10-K"). That report disclosed, among other things, that Lexicon was "presently devoting most of our resources to the development of our two most advanced drug candidates." These drugs were "XERMELO," an oral treatment for carcinoid syndrome diarrhea, and sotagliflozin [trademarked "Zynquista"].

At the start of the class period, XERMELO, was in phase 3 clinical trials, and the Company was preparing to submit the medication for FDA approval. Sotagliflozin, Lexicon's other "most advanced drug candidate," had begun Phase III clinical trials as a treatment for T1d [Type 1 diabetes ].⁷

The FACAC alleges that in 2015 Lexicon

entered into a collaboration and license agreement for sotagliflozin with Sanofi. Under the Sanofi Agreement, Lexicon granted Sanofi an exclusive, worldwide, royalty-bearing right and license to develop, manufacture and commercialize sotagliflozin. Lexicon, however, was responsible for all clinical development activities related to T1d and retained an exclusive option to co-promote and collaborate with Sanofi, in the commercialization of sotagliflozin for the treatment of T1d in the United States. Sanofi was responsible for all clinical development and commercialization of sotagliflozin for the treatment of T2d [Type 2 diabetes] worldwide and was solely responsible for the commercialization of sotagliflozin for the treatment of T1d outside the United States. Sanofi could terminate the agreement if a regulatory body found the risks associated with sotagliflozin so severe that Lexicon and Sanofi had to stop developing the drug, or if the drug failed to achieve certain results at the endpoints of phase 3 clinical trials for T1d or T2d. Under the Sanofi Agreement, Lexicon received a $300 million upfront payment ... and was eligible to receive up to $4 30 million upon the achievement of specified development and regulatory milestones and up to $990 million upon the achievement of specified sales milestones.⁸

The FACAC alleges that in 2015 Lexicon had debt of $1.1 billion and revenues of $130 million,⁹ which was almost entirely attributable to the initial $300 million payment received pursuant to the Sanofi Agreement.¹⁰ The FACAC alleges that Lexicon reported a loss of $4.7 million in 2015, and greater losses in each of three following years, i.e., over $131 million loss in 2016, over $122 million loss in 2017, and over $120 million loss in 2018.¹¹ The FACAC alleges that Lexicon's cash reserves fell by 70% during the Class Period from approximately $521 million in reported for 2015 to $133 million as of March 31, 2019.¹² The FACAC alleges that "[b]oth Defendants and investors knew that Lexicon would not be able to become profitable - or perhaps even survive - unless the FDA approved Lexicon's products,"¹³ and that "[d]efendants also knew that obtaining FDA approval for sotagliflozin would transform the T1d industry," because it "would be the first oral antidiabetic drug approved in the U.S. for use by adults with [T1d], in combination with insulin."¹⁴

The FACAC alleges that "T1d is an autoimmune disease that renders T1d sufferers unable to produce insulin,"¹⁵ "[t]here is no cure for T1d," and "sufferers treat their T1d by monitoring their glucose levels throughout the day and injecting insulin multiple times per day using insulin pens, syringes or an insulin pump."¹⁶

People who suffer from T2d [Type 2 diabetes ] ... produce insulin, but have developed a condition where their bodies do not use that insulin properly. There is no cure for T2d. Although some sufferers can manage T2d via diet and exercise, T2d usually gets worse over time and they eventually may be prescribed oral medications and insulin.¹⁷

The FACAC alleges that

T1d and T2d can be diagnosed using a variety of tests. One common blood test used to diagnose T1d and T2d, as well as to monitor both conditions, is a test of a patient's "HbA1c levels." ... HbA1c reflects the average glucose level in a patient's bloodstream over the prior two to three months and is determined by measuring what percentage of the patient's hemoglobin i[s] covered with glucose, or "glycated." The higher a patient's HbA1c test percentage, the higher their risk of diabetes complications. Whether a drug is shown to reduce HbA1c levels is a key factor in whether the drug will be approved to treat diabetes.

A person who does not have diabetes, will have a "normal" HbA1c level below 5.7%. A person with an HbA1c level between 5.7% and 6.4% is said to have "prediabetes" and is at risk of developing diabetes in the future. A person with an HbA1c level of 6.5% or higher on two separate occasions has diabetes, and an HbA1c level over 8% indicates that the person's diabetes is not well-controlled and the person is at risk of diabetes complications. Over half of T1d sufferers have an HbA1c level over 8%. Most diabetes sufferers, including T1d sufferers, aim for an HbA1c level of 7% or lower.

T1d and T2d sufferers are at risk of a variety of complications stemming from their bodies’ inability to move glucose from their blood to their cells. One of these complications is "hyperglycemia" or "high blood glucose," which occurs when there is too much glucose in the blood. If left untreated, hyperglycemia can result in DKA. DKA is a serious, life-threatening condition that develops when diabetes sufferers do not produce enough insulin and their bodies are unable to use glucose in their blood for fuel. Without glucose, diabetes sufferers begin to break down fats to use for energy, which results in a build-up of acids in the bloodstream called "ketones." The build-up of ketones causes DKA and, if left untreated, DKA can lead to diabetic coma or death. People with T1d are much

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