Cozzarelli v. Inspire Pharmaceuticals Inc.

• Citation: 549 F.3d 618
• Decision Date: 12 December 2008
• Docket Number: No. 07-1851.,07-1851.
• Parties: David COZZARELLI; Stephanie Cozzarelli; Frankfurt-Trust Investment Gesellschaft MBH; Carole Swoboda; Robert Swoboda, Plaintiffs-Appellants, v. INSPIRE PHARMACEUTICALS INCORPORATED; Christy L. Shaffer, Ph.D.; Gregory L. Mossinghoff; Gary D. Novack, Ph.D., Defendants-Appellees, and Deutsche Bank Securities Incorporated; Morgan Stanley & Company, Incorporated; Piper Jaffray & Co.; SG Cowen & Co., LLC, Defendants.
• Court: United States Courts of Appeals. United States Court of Appeals (4th Circuit)

549 F.3d 618

David COZZARELLI; Stephanie Cozzarelli; Frankfurt-Trust Investment Gesellschaft MBH; Carole Swoboda; Robert Swoboda, Plaintiffs-Appellants, v. INSPIRE PHARMACEUTICALS INCORPORATED; Christy L. Shaffer, Ph.D.; Gregory L. Mossinghoff; Gary D. Novack, Ph.D., Defendants-Appellees, and Deutsche Bank Securities Incorporated; Morgan Stanley & Company, Incorporated; Piper Jaffray & Co.; SG Cowen & Co., LLC, Defendants.

No. 07-1851.

United States Court of Appeals, Fourth Circuit.

Argued: October 30, 2008.

Decided: December 12, 2008.

ARGUED: Maya Saxena, Saxena White, P.A., Boca Raton, Florida, for Appellants. Barry M. Kaplan, Wilson, Sonsini, Goodrich & Rosati, Seattle, Washington, for Appellees. ON BRIEF: Christopher L. Nelson, Jennifer Keeney, Schiffrin, Barroway, Topaz & Kessler, L.L.P., Radnor, Pennsylvania; Joseph E. White, III, Christopher S. Jones, Saxena White, P.A., Boca Raton, Florida, for Appellants. Nicholas I. Porritt, C. Paul Chalmers, Scott A. Lowry, Wilson, Sonsini, Goodrich & Rosati, Washington, D.C., for Appellees.

Before WILKINSON, Circuit Judge, IRENE M. KEELEY, United States District Judge for the Northern District of West Virginia, sitting by designation, and HENRY E. HUDSON, United States District Judge for the Eastern District of Virginia, sitting by designation.

Affirmed by published opinion. Judge WILKINSON wrote the opinion, in which Judge KEELEY and Judge HUDSON joined.

OPINION

WILKINSON, Circuit Judge:

This case involves claims that a pharmaceutical company and three of its directors violated federal securities laws. Plaintiffs' primary allegation is that Inspire Pharmaceuticals, Inc. committed securities fraud by overstating the prospects for an experimental drug that the company was developing to treat dry eye disease. When we apply the careful scrutiny required by Congress in the Private Securities Litigation Reform Act of 1995 and by the Supreme Court in Tellabs, Inc. v. Makor Issues & Rights, Ltd., ___ U.S. ___, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007), we conclude that plaintiffs' allegations are lacking. In particular, plaintiffs fail to raise the "strong inference" of wrongful intent that is necessary to support their securities fraud claims. We thus affirm the district court's dismissal of the complaint.

I.

Inspire is in the business of developing prescription drugs to treat diseases of the eyes, lungs, and sinuses. One of the company's flagship products is diquafosol tetrasodium ("diquafosol"), a treatment for dry eye disease. Inspire designed diquafosol both to prevent and to heal the long-term damage that dry eye disease causes to the cornea of the eye. Over-the-counter eye drops, in contrast, provide only short-term relief of dry eye symptoms.

Before Inspire could market diquafosol, the company had to demonstrate the drug's safety and efficacy to the satisfaction of the Food and Drug Administration. The FDA generally requires drug companies to conduct clinical trials with predetermined goals, or "endpoints," that must be satisfied. Endpoints may be either subjective or objective. A subjective endpoint is a goal relating to a symptom experienced by the patient, such as itchiness of the eye. An objective endpoint is a goal relating to a verifiable test.

A common objective test for dry eye drugs is known as "corneal staining," a procedure in which a fluorescent dye is used to highlight damaged areas of the cornea. The result of the test (or its "score") varies from zero to five depending on the number of highlighted areas. A score of zero is known as "corneal clearing." Clearly, a showing that diquafosol causes an improvement in patients' corneal staining scores would help the drug's chances for FDA approval. Even better would be a demonstration that diquafosol causes patients' number of stained corneal areas to fall to zero, thus achieving corneal clearing.

To that end, Inspire performed a series of clinical trials for diquafosol. Of significance here is Study 105, a Phase III trial designed to demonstrate efficacy in a large patient population. Diquafosol met its primary objective endpoint in Study 105: patients using diquafosol showed a statistically significant improvement in their corneal staining scores. Importantly, a statistically significant number of patients also exhibited corneal clearing. But diquafosol failed to meet its subjective endpoint. While patients using the drug showed improvement with respect to a subjective symptom—the sensation of a foreign body in the eye—the subjective results were not statistically significant.

With these results in hand, Inspire sought approval to market diquafosol by submitting a New Drug Application to the FDA in June 2003. The FDA had no written guidance for approving dry eye treatments at the time, and the agency's requirements for approval were not altogether clear. It had been thought historically that the FDA would only approve a dry eye treatment that met both an objective endpoint and a subjective endpoint in two trials. But the only prescription treatment for dry eye ever to be approved, Restasis, had gained the FDA's blessing in 2002 despite failing to meet that rigorous standard. Thus, Inspire surmised that diquafosol might be approved despite missing its subjective endpoint in Study 105.

The FDA responded by telling Inspire that it had to conduct at least one more study to obtain approval. In private communications, the FDA gave Inspire two options. Inspire could conduct two additional trials that met both an objective endpoint and a subjective endpoint. Or it could conduct one additional trial that replicated —this time as a primary endpoint —the corneal clearing that Inspire had achieved in Study 105. Inspire chose the latter option and commenced Study 109 in June 2004 with a primary endpoint of corneal clearing.

Inspire announced publicly that it was performing Study 109. But Inspire was tight-lipped regarding the details of the trial, as investment analysts noted at the time. In particular, Inspire stated that it would not disclose the primary endpoint of Study 109 because the company did not want to divulge the FDA's requirements for approval to the company's competitors, who could have used that information to plan their own studies.

However, Inspire did make a handful of public comments regarding Study 109. In prospectuses for stock offerings in July and November 2004, the company stated that it had a "clear understanding of the FDA's additional requirement" for approval of diquafosol. Inspire also referred to Study 109 as a "confirmatory" Phase III trial in those prospectuses and other public statements. Inspire CEO and Director Christy Shaffer further expressed in a conference call with investors and analysts on May 10, 2004 that Study 109's design was "very similar" to that of Study 105. And Shaffer stated in another conference call on November 4, 2004 that the primary endpoint of Study 109 was "a corneal staining endpoint." Despite the fact that Inspire had declined to disclose the exact endpoint of Study 109, and despite the fact that Inspire also had announced that Study 105 had achieved corneal clearing, some stock analysts speculated that the primary endpoint of Study 109 was only a relative improvement in corneal staining scores and that Study 109 was likely to meet that end-point.

While Study 109 was ongoing, Shaffer and two other Inspire directors sold some of their shares in Inspire. Shaffer sold 2,000 shares in July 2004, 2,000 shares in August, and 10,000 shares in November (together, about 3% of her total holdings of shares and vested options). Also in November 2004, Gregory Mossinghoff sold 35,000 shares (12% of his total holdings), and Gary Novack sold 5,700 shares (13%). Despite the sales, all three of the directors actually increased their net holdings in Inspire while Study 109 was pending through the acquisition of vested stock options.

On February 9, 2005, Inspire announced the results of Study 109. Diquafosol had failed to meet its primary endpoint, a statistically significant amount of corneal clearing. Inspire's stock price fell 44.5% from $16.00 on February 8 to $8.88 on February 9. On February 15, this action ensued.

Plaintiffs—David and Stephanie Cozzarelli, Robert and Carole Swoboda, and Frankfurt-Trust InvestmentGesellschaft mbH—filed a Consolidated Class Action Complaint on behalf of purchasers of Inspire stock. Plaintiffs alleged numerous violations of federal securities laws by Inspire, Shaffer, Mossinghoff, and Novack. In particular, plaintiffs claimed that defendants had violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as well as Rule 10b-5, by fraudulently misleading investors as to Study 109's likelihood of success. See 15 U.S.C. §§ 78j(b), 78t(a); 17 C.F.R. § 240.10b-5. Plaintiffs also alleged that defendants had violated Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (15 U.S.C. §§ 77k, 77l (a)(2), 77o) by similarly misleading investors about Study 109 in the prospectuses relating to the company's July and November 2004 stock offerings. Plaintiffs further claimed that Shaffer had committed insider trading in violation of Section 20A of the Exchange Act, 15 U.S.C. § 78t-1.

On defendants' motion, the magistrate judge issued a recommendation that the complaint be dismissed. See In re Inspire Pharm., Inc. Sec. Litig., 515 F.Supp.2d 631, 634 (M.D.N.C.2007). Applying the heightened pleading standards of the Private Securities Litigation Reform Act, the judge held that plaintiffs' claims under the Exchange Act failed because plaintiffs had not established a strong inference of scienter. See id. at 639-40. Further, plaintiffs' entire action warranted dismissal because plaintiffs had insufficiently pled the requisite element that was common to all of plaintiffs' claims: a false or misleading statement by defendants. See id. at 640-41. The district court accepted the magistrate's recommendation and dismissed the...