City of Sterling Heights Gen. Employees' Ret. Sys. v. Hospira, Inc.

• Court: U.S. District Court — Northern District of Illinois
• Writing for the Court: AMY J. ST EVE
• Decision Date: 13 February 2013
• Docket Number: No. 11 C 8332,11 C 8332
• Citation: City of Sterling Heights Gen. Employees' Ret. Sys. v. Hospira, Inc., No. 11 C 8332 (N.D. Ill. Feb 13, 2013)
• Parties: CITY OF STERLING HEIGHTS GENERAL EMPLOYEES' RETIREMENT SYSTEM, et al., Plaintiffs, v. HOSPIRA, INC., THOMAS E. WERNER, CHRISTOPHER B. BEGLEY, F. MICHAEL BALL, and JAMES H. HARDY, JR., Defendants.

CITY OF STERLING HEIGHTS GENERAL EMPLOYEES' RETIREMENT SYSTEM, et al., Plaintiffs,

v.HOSPIRA, INC., THOMAS E. WERNER, CHRISTOPHER B. BEGLEY, F. MICHAEL BALL, and JAMES H. HARDY, JR., Defendants.

No. 11 C 8332

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

Date: February 13, 2013

MEMORANDUM OPINION AND ORDER

AMY J. ST. EVE, District Court Judge:

This is a federal securities class action against Hospira, Inc., F. Michael Ball, Thomas E. Werner, Christopher B. Begley, and James H. Hardy, Jr. Plaintiffs have brought this action on behalf of themselves and all person or entities who purchased or acquired shares of Hospira between February 4, 2010 and October 17, 2011 (the "Class Period"). Plaintiffs allege that Defendants engaged in a fraudulent scheme to artificially inflate Hospira's stock price during the Class Period. Defendants have moved to dismiss the Amended Consolidated Class Action Complaint (the "Complaint"). (R. 75.) In response, Plaintiffs moved to strike Exhibits D, and O-V from Defendants' memorandum accompanying their Motion to Dismiss, as well as "all references to and assertions based upon those materials" in the memorandum. (R. 90, Pls.' Mot. to Strike.) For the reasons discussed below, the Court grants Defendants' Motion to Dismiss in part without prejudice and denies in part Defendants' Motion to Dismiss. The Court also grants Plaintiffs' Motion to Strike.

FACTUAL ALLEGATIONS

I. The Parties

The Court appointed Plaintiffs Sheet Metal Fund, KBC Asset Management NV, Laborers Funds, and Roofers Fund to serve as Lead Plaintiffs in this case. (Am. Compl. ¶¶ 17-20.) Each Plaintiff allegedly purchased Hospira stock at artificially inflated prices during the Class Period and suffered an economic loss "when the true facts about the Company's business and financial condition were disclosed and the stock price resultantly declined." (Id. ¶¶ 17-20.)

Defendant Hospira, formed in 2004 from a spin-off from Abbott Laboratories, "is a U.S.-based global pharmaceutical and medical device company headquartered in Lake Forest, Illinois, and describes itself as the world's leading provider of injectable drugs and infusion technologies." (Id. ¶¶ 35, 39.) Its products are "used by hospitals, clinics, long-term care facilities, and home healthcare providers." (Id. at ¶ 35.) In 2011, it had $4.1 billion in sales. (Id.)

Hospira conducts business primarily in three segments: 1) the Americas, including the United States, Canada, and Latin America; 2) Europe, the Middle East, and Africa; and 3) Asia Pacific, including Asia, Japan, Australia, and New Zealand. (Id.) Hospira markets products in each of these segments in three general categories: 1) specialty injectable pharmaceuticals ("SIP"), "which include approximately 200 injectable generic drugs that provide customers with lower cost alternatives to name brand products;" 2) other pharmaceuticals, including large volume intravenous ("IV") solutions and nutritional products and solutions for cleaning wounds and surgical sites; and 3) medication management systems, "which include electronic pumps to deliver IV fluids and medications to patients and other offerings to support the pumps." (Id. ¶36.) Hospira's Rocky Mount, North Carolina facility is among Hospira's largest facilities, producing "approximately 100 different injectable pharmaceuticals-or roughly half of Hospira's entire SIP portfolio" and "account[ing] for 25% of [Hospira's] $4 Billion in annual revenue." (Id. ¶¶ 37, 38.)

Defendant F. Michael Ball has served as the Chief Executive Officer ("CEO") of Hospira since March 28, 2011 and the Director of the Board since March 2011. (Id. at ¶ 22.) Defendant Thomas E. Werner is the Chief Financial Officer and Senior Vice President of Finance of Hospira. (Id. at ¶ 23.) Defendant Christopher Begley is the Executive Chairman of the Board of Hospira, and served as Hospira's CEO until March 28, 2011. (Id. at ¶ 25).¹ Defendant James H. Hardy, Jr. served as the Senior Vice President of Operations from January 2011 until his departure from Hospira in April 2012. (Id. at ¶ 24.) Previously, Mr. Hardy served as Corporate Vice President, Supply Chain, from 2009 through 2010. (Id.)

II. Factual Allegations

Plaintiffs allege violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5. Plaintiffs contend that throughout the Class Period, while Defendants were "promising" to address issues raised by the FDA following inspections of Hospira's facilities, "they were actually making the problems worse by gutting quality control efforts through cost cutting aimed at boosting short-term profitability." (Id. at ¶ 3.)

In August of 2009, following an inspection of Hospira's Morgan Hill, California facility, the U.S. Food and Drug Administration ("FDA") issued a warning letter to Hospira. (Id. ¶¶ 116, 145.) The August 2009 Warning Letter raised issues "related to Hospira's corrective actionplans with respect to the failure of certain AC power cords . . . used on certain infusion pumps and related products." (Id. ¶ 145.)

In March of 2009, Hospira began Project Fuel, an initiative "with the stated purpose to increase shareholder value through the purported optimization of Hospira's operations." (Id. ¶ 45.) Defendants stated that Project Fuel would accomplish this goal by (1) identifying and eliminating underperforming and duplicative units and non-strategic assets; and (2) "reducing Hospira's global workforce by 10% through a 'de-layering' of its management structure, a consolidation of certain functions, and a 'heightening' of the Company's focus on 'process improvement.'" (Id. ¶ 17.) According to Plaintiffs, Project Fuel's "reduced operating budgets and slashed workforces . . . wreak[ed] havoc on Hospira's already declining quality control efforts, especially at Rocky Mount - the Company's largest facility." (Id. ¶ 47.) As a result, Project Fuel exacerbated Hospira's problems, including "quality and equipment failures, rejected products, production delays, and re-inspection delays." (Id. ¶ 59.)

In January of 2010, an FDA inspection of Hospira's Rocky Mount facility revealed significant problems with Hospira's quality control and drug validation processes. (Id. ¶ 4.) On April 12, 2010, the FDA issued a warning letter to Begley "identifying numerous violations of the Federal Food, Drug, and Cosmetic Act and its implementing regulations." (Id. ¶¶ 4, 107.) With respect to the Rocky Mount facility, the April 2010 Warning Letter noted the following: Hospira (1) "did not have adequate written procedures for production and process controls designed to assure that the drug products it manufactured had the identity, strength, quality, and purity they were purported to have"; (2) "had failed to adequately validate the mixing processes for certain products"; and (3) "had failed to submit adverse events reports to the Agency." (Id. ¶ 108.) The April 2010 Warning Letter also identified "Current Good Manufacturing" issues atHospira's Clayton, North Carolina facility. (Id. ¶ 107.) The April 2010 Warning Letter allegedly showed that Hospira had failed to address the concerns raised about Hospira's facilities in the FDA's August 2009 Warning Letter. (Id. ¶ 4.) Plaintiffs allege that Defendants "were well aware of the Company's significant and varied operational deficiencies, particularly at Rocky Mount." (Id. ¶ 8.)

Following a May/June 2011 inspection of Rocky Mount, on June 17, 2011, the FDA issued a Form 483 to Hector Jimenez, the Director of Quality at Rocky Mount, identifying 18 "manufacturing and quality control deficiencies." (Id. ¶ 112.) On August 4, 2011, the FDA issued another Form 483 addressed to Jonathan Waldron, Rocky Mount's Vice President of Operations, following a July/August 2011 inspection. The August 2011 Form 483 allegedly cited three deficiencies: (1) "Hospira's failure to thoroughly review the failure of a batch or any of its components;" (2) "the Company's laboratory controls not including the establishment of scientifically sound and appropriate test procedures designed to assure that drug products conform to appropriate standards"; and (3) "the quality control unit's failure to fully follow applicable responsibilities and procedures, which resulted in numerous product lots being released for distribution despite having failing in-process and/or finished product results." (Id. ¶ 114.)

Plaintiffs allege that from February 2010 through July 2011, Defendants knowingly or recklessly made various misleading or false statements or omitted statements of material fact regarding Project Fuel and Hospira's quality control issues, remediation efforts, and relationship with the FDA in Hospira's SEC filings, press releases, on conference calls, and at investor conferences. (Id. ¶¶ 142-219.) Defendants Begley and Werner also signed certifications for certain filings attesting that the filings complied with the requirements of the Exchange Act andthat the information in them "fairly presented . . . the financial condition and results of the operations of the Company." (Id. ¶ 145.) Plaintiffs contend that these alleged misrepresentations hid information from the market and "buoy[ed Hospira's share price, allowing Defendants Begley and Werner to line their pockets during the Class Period with nearly $27 million in combined proceeds from unusual and suspicious insider stock sales." (Id. ¶ 220.)

After Hospira's disclosures at a September 7, 2011 "Investor Day," Hospira's stock price fell "approximately 13%, from a close of $45.61 on September 7, 2011, to a close of $39.51 on September 13, 2011." (Id. ¶¶ 221, 225.) Specifically, Plaintiffs allege that these disclosures revealed "the seriousness of Hospira's quality control and facility deficiencies at Rocky Mount," "the scope and cost of remediation efforts necessary to fix the problems," and "the fact that Project Fuel was not improving quality but was working against it."...