Gillis v. QRX Pharma Ltd.

• Decision Date: 06 July 2016
• Docket Number: 15 Civ. 4868 (PAE)
• Citation: 197 F.Supp.3d 557
• Parties: Marsha GILLIS, Carl Bayney, and Daniel Rehmsmeyer, individually and on behalf of all others similarly situated, Plaintiffs, v. QRX PHARMA LTD. and John Holaday, Defendants.
• Court: U.S. District Court — Southern District of New York

197 F.Supp.3d 557

Marsha GILLIS, Carl Bayney, and Daniel Rehmsmeyer, individually and on behalf of all others similarly situated, Plaintiffs,

v.QRX PHARMA LTD. and John Holaday, Defendants.

15 Civ. 4868 (PAE)

United States District Court, S.D. New York.

Signed July 6, 2016

Phillip C. Kim, Jonathan Stern, Laurence Matthew Rosen, The Rosen Law Firm P.A., New York, NY, for Plaintiffs.

Ellen Victoria Holloman, Olshan Frome Wolosky LLP, Stephen Mark Dollar, Norton Rose Fulbright US LLP, New York, NY, Peter Andrew Stokes, Fulbright & Jaworski LLP, Austin, TX, for Defendants.

OPINION & ORDER

PAUL A. ENGELMAYER, District Judge:

In this putative class action under the federal securities laws, lead plaintiffs Marsha Gillis, Carl Bayney, and Daniel Rehmsmeyer (collectively, "plaintiffs") claim that the Australian pharmaceutical company QRx Pharma Ltd. ("QRX" or the "Company") and its former CEO John Holaday made false and misleading statements about MoxDuo IR ("MoxDuo"), QRX's leading drug candidate, while it was under review by the U.S. Food and Drug Administration ("FDA").

Plaintiffs bring this lawsuit on behalf of all persons who purchased QRX American Depository Receipts ("ADRs") between December 6, 2010 and April 23, 2014, inclusive (the "Class Period"). They allege violations of §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b), 78t(a), and the corresponding rule of the Securities and Exchange Commission, 17 C.F.R. § 240.10b–5 ("Rule 10b-5"). The United States Bankruptcy Court for this District, recognizing QRX's Australian insolvency proceeding as a foreign main proceeding, has dismissed this case as to QRX pursuant to the resolution of that proceeding, leaving Holaday as the only defendant here.¹

Pending now is Holaday's motion to dismiss plaintiffs' Second Amended Class Action Complaint ("SAC") for failure to state a claim, under Federal Rules of Civil Procedure 12(b)(6) and 9(b). For the following reasons, the Court grants the motion and dismisses the SAC in its entirety.

I. Background²

A. The Parties

QRX is a specialty pharmaceutical company headquartered in Australia that focuses on the development and commercialization of treatments for pain management. SAC ¶ 2. Its ADRs³ trade over the counter in the United States. Id . From April 2007 until May 3, 2014, Holaday was QRX's CEO and Managing Director. Id. ¶ 13. Plaintiffs are individuals who purchased QRX ADRs during the Class Period. Id. ¶¶ 10-12.

B. MoxDuo and the Combination Rule

Throughout the Class Period, QRX's main focus was advancing MoxDuo, its lead experimental drug candidate, through the FDA approval process, so that it could be marketed and sold in the United States. See Id. ¶¶ 2-3, 74. MoxDuo is a combination of morphine

sulfate and oxycodone hydrochloride. Id. ¶ 2. If approved, it would have been the first combination drug product to contain two active opioid ingredients. Id. ¶ 15. The intended purpose of the combination was to provide effective analgesia while reducing the frequency and severity of opioid-related side effects, such as nausea, dizziness, oxygen desaturation, and respiratory problems. Id. ¶ 2; Stokes Decl., Ex. 2.

Because MoxDuo combined two existing drugs, QRX was required to satisfy the FDA's "Combination Rule" in order to gain approval. Id. ¶¶ 3, 15. That rule states that "[t]wo or more drugs may be combined in a single dosage form when each component makes a contribution to the claimed effects and the dosage of each component ... is such that the combination is safe and effective for a significant population requiring such concurrent therapy." 21 C.F.R. § 300.50(a) ; SAC ¶ 15.

The Combination Rule "does not specifically address the issue of combining two drugs from the same pharmacological class." Stokes Decl., Ex. 24 ("FDA Memo"), at 12. Nor, as of the start of the Class Period, had the FDA publicly opined on how the rule would apply to a prescription dual-opioid like MoxDuo. See Id. Decades earlier, however, the FDA had set forth a more stringent standard for non -prescription drug products that combine two ingredients from the same category. See Id. at 5, 12. In a 1978 guidance document entitled OTC Drug Combination General Guidelines , the FDA stated that "active ingredients from the same therapeutic category that have the same mechanism of action should not ordinarily be combined unless there is some advantage over the single ingredients in terms of enhanced effectiveness, safety, patient acceptance, or quality of formulation." Id.

C. Overview of Plaintiffs' Claims

The SAC's core allegations are that: (1) before the Class Period, the FDA privately articulated to QRX a "Superiority Requirement" that QRX had to meet in order to satisfy the Combination Rule in the novel context of a prescription dual-opioid drug, to wit, that QRX must demonstrate a safety or efficacy benefit of the combination (MoxDuo) compared to "comparable" or "equi-analgesic" doses of its components (morphine

and oxycodone);⁴ and (2) QRX concealed this information and related setbacks from investors, knowing that QRX could not satisfy the Superiority Requirement. SAC ¶ 3. As result, plaintiffs claim, QRX's optimistic statements regarding its clinical studies and the prospect of FDA approval gave investors the "false impression that QRX had a clear path to getting MoxDuo approved," when, in reality, according to plaintiffs, it was at all times virtually certain that QRX's New Drug Application ("NDA") for MoxDuo would be rejected. Id.

Plaintiffs claim that QRX's misrepresentations caused QRX ADRs to trade at artificially inflated prices throughout the Class Period. Id. ¶ 6. They allege that these misrepresentations were partially dispelled on June 27, 2012, when QRX announced that the FDA had issued a Complete Response Letter declining to approve MoxDuo at that time. Id. ¶ 62. Upon that announcement, QRX's ADRs declined 47%, from $7.37 to $3.88 per share. Id. However, plaintiffs claim, that was "only a partial disclosure of the true state of affairs and a partial materialization of the concealed risks," because QRX continued to conceal the true basis for the FDA's refusal to approve MoxDuo: that QRX was required, but had failed, to satisfy the Superiority Requirement of the Combination Rule. Id.

Plaintiffs allege that the entire truth was not exposed until April 22, 2014, when, during a trading halt on QRX securities, the FDA released a memorandum (the "FDA Memo") recommending against approval of MoxDuo because QRX had not satisfied the Superiority Requirement. See Id. ¶¶ 4, 64. According to plaintiffs, the FDA Memo also revealed that: (1) long before the Class Period, the FDA had informed QRX of the Superiority Requirement; and (2) throughout the development process, QRX had encountered setbacks stemming from its inability to satisfy that requirement. See Id. ¶¶ 4, 65. Later that day, QRX announced that an FDA Advisory Committee had voted to recommend against approval of MoxDuo. Id. ¶ 67. As a result of these disclosures, plaintiffs allege, when trading resumed on April 23, 2014, the price of QRX ADRs declined more than 83%—from $3.40 to $0.42 per share. Id. ¶¶ 5, 68-69.

D. Factual Background

1. Overview of the FDA Review Process

FDA regulations require that drug manufacturers engage in three phases of clinical (i.e. , human) trials before presenting a new drug to the FDA for approval. See21 C.F.R. § 312.21. Phase I studies typically involve 20-80 volunteers. Id. § 312.21(a). They are designed to ascertain the pharmacology and safety of the drug, and, if possible, to gain early evidence of its effectiveness. Id . Phase II trials typically involve groups of "no more than several hundred subjects" and are conducted to "evaluate the effectiveness of the drug for a particular indication ... and to determine [the drug's] common short-term side effects and risks." Id. § 312.21(b). Phase III clinical trials are even larger studies, "performed after preliminary evidence suggesting effectiveness of the drug has been obtained, [which] are intended to gather the additional information about effectiveness and safety that is needed to evaluate" whether the "overall benefit-risk relationship of the drug" supports approval. Id. § 312.21(c).

Before commencing a Phase III trial, a drug manufacturer may, but is not required to, request a Special Protocol Assessment ("SPA") from the FDA. An SPA is a written agreement

which sets out the design and size parameters for clinical trials of a new drug, and the conditions under which the FDA would approve the drug. For the manufacturer, such an agreement minimizes development risk by providing regulatory predictability: Provided that the manufacturer follows the procedure set in the SPA and the drug [ ] meets the benchmarks for effectiveness set in the agreement, the FDA must approve the drug.

Amarin Pharma, Inc. v. U.S. Food & Drug Admin. , 119 F.Supp.3d 196, 210 (S.D.N.Y.2015) (citing U.S. Food and Drug Admin., Guidance for Industry: Special Protocol Assessment (2002), at 2, http://www.fda.gov/downloads/Drugs/.../Guidances/ucm080571.pdf).

Once a pharmaceutical company has completed all three phases of clinical trials, it can submit an NDA to the FDA. See generally 21 C.F.R. § 314. The FDA may refuse to accept an NDA for a variety of technical reasons, such as that the application does not include the requisite components or was not filed in the proper format. See Id. § 314.101(d). Once the FDA has accepted an NDA, it may refuse to approve it for a variety of substantive reasons, including that "[t]here is a lack of substantial evidence consisting of adequate and well-controlled investigations ... that the drug product will have the [safety or efficacy] effect it purports or is represented to have under the conditions of use prescribed, recommended, or suggested in its proposed labeling." Id. § 314.125(b)(5).

If the FDA determines that it will not approve an NDA in its present form, it will send the...