Hirtenstein v. Cempra, Inc.

Decision Date26 October 2018
Docket Number16cv1303
Citation348 F.Supp.3d 530
CourtU.S. District Court — Middle District of North Carolina
Parties Johnathan HIRTENSTEIN, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. CEMPRA, INC., Prabhavathi B. Fernandes, Mark W. Hahn, David W. Oldach, Defendants.

David Garrett Schiller, Schiller & Schiller, PLLC, Raleigh, NC, Janet Ward Black, Nancy Routh Meyers, Ward Black Law, Greensboro, NC, for Plaintiff.

James R. Carroll, Michael S. Hines, Sara J. Van Vliet, Skadden, Arps, Slate, Meagher & Flom LLP, Boston, MA, Samuel A. Slater, Lee Michael Whitman, Wyrick Robbins Yates & Ponton LLP, Raleigh, NC, for Defendants.

MEMORANDUM OPINION AND ORDER

Thomas D. Schroeder, United States District JudgeThis is a putative federal securities class action on behalf of all persons1 who owned common stock of the biopharmaceutical company, Cempra, Inc. ("Cempra"), between July 7, 2015, and November 4, 2016 (the "class period"). In their amended complaint (Doc. 46), Plaintiffs seek recovery for stock losses under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 ("Exchange Act"), as amended by the Private Securities Litigation Reform Act of 1995 ("PSLRA") and Rule 10-b5 promulgated thereunder, 17 C.F.R. § 240.10b-5. The Defendants are Cempra; Prabhavathi B. Fernandes, Ph.D., Cempra's then-chief executive officer ("CEO"), president, and member of the board of directors from the company's founding in November 2005 until December 12, 2016 (Doc. 46 ¶ 22); Mark W. Hahn, Cempra's executive vice president and chief financial officer ("CFO") during the class period (Doc. 46 ¶ 25); and David W. Oldach, M.D., Cempra's chief medical officer, during the class period (together, "Defendants"). (Doc. 46 ¶ 28.) Before the court is Defendants' motion to dismiss the amended complaint for failure to state a claim pursuant to Federal Rule of Civil Procedure 12(b)(6). (Doc. 49.) Plaintiffs oppose the motion and also filed a motion to strike seven exhibits contained in the appendix to Defendants' motion (Doc. 56), which the court recently denied without opinion. (Doc. 65.)

For the reasons set forth below, Defendants' motion to dismiss will be granted. In addition, the court will address Plaintiffs' motion to strike and explain which exhibits the court considered.

I. BACKGROUND

The facts alleged in the amended complaint, which are accepted as true and viewed in the light most favorable to Plaintiffs for purposes of the present motion, and the contents of other documents which the court may consider in deciding the motion to dismiss, show the following:

Cempra is a biopharmaceutical company that develops antibiotics for the treatment of infectious diseases. (Doc. 46 ¶ 4.) Cempra's lead product, solithromycin, is being developed for the treatment of community-acquired bacterial pneumonia ("CABP"), as well as other indications. (Id. ) During the class period, solithromycin was in the late stages of its clinical development for the treatment of CABP, the seventh leading cause of death and the leading cause of death due to infection in the United States, with a reported five to ten million cases per year. (Id. ¶¶ 5-6, 36.) In August 2015, the Food and Drug Administration ("FDA") granted the drug "Fast Track" designation for the short-term (five to seven day) treatment of CABP with intravenous ("IV") and oral capsules under the FDA's Fast Track program, which is designed to facilitate the development of new drugs that have the potential to address unmet medical needs and are designed to treat serious or life-threatening conditions. (Id. ¶ 6.) On May 1, 2016, Cempra completed and submitted its New Drug Applications ("NDAs") for solithromycin to the FDA for the treatment of CABP, which qualified for eight-month priority review under the Prescription User Drug Fee Act. (Id. )

Cempra generated little revenue during the class period and depended largely on raising capital through public stock offerings to sustain its business operations and complete the clinical development of solithromycin. (Id. ¶¶ 91-92.) During this period, Cempra conducted two stock offerings in order to raise capital to fund the company's operations for combined net proceeds of approximately $170 million. (Id. ¶¶ 94-95.) In January 2016, Cempra sold 4.17 million shares of common stock at a price of $24.00 per share, resulting in net proceeds of $94 million. (Id. ¶ 94.) Between May 2016 and July 2016, Cempra sold an additional 4 million shares of common stock during an "at-the-market" offering for net proceeds of $75.1 million. (Id. ¶ 95.)

In their amended complaint, Plaintiffs allege that Defendants made false and misleading statements regarding the safety profile of the drug and failed to adequately disclose instances of drug-induced liver injury ("DILI") observed in clinical trials prior to and during the class period. (Id. ¶¶ 58-65, 67, 69-77.) According to the amended complaint, these false and misleading statements caused Cempra's common stock to trade at artificially high prices, so that when the risks were revealed by the FDA at the end of the class period, Plaintiffs suffered losses from the subsequent stock price decline. (Id. ¶¶ 12, 96–102.)

A. Solithromycin's Clinical Development Program

Solithromycin belongs to a class of antibiotics known as macrolides that are frequently prescribed to treat respiratory tract infections. (Id. ¶ 34.) Due to the serious side effects associated with another class of antibiotics known as fluoroquinolones, macrolides are the preferred first-line treatment for CABP. (Id. ¶ 35.) Solithromycin is a fourth-generation fluoroketolide macrolide-class antibiotic, which was designed to address the growing problem of antibiotic resistance among the currently-approved class of macrolides approved to treat CABP. (Id. ¶ 5.) During the class period, analysts estimated that Cempra would earn up to $2 billion a year in sales if solithromycin were approved by the FDA. (Id. ¶ 36.)

The potential risk of DILI among this particular class of macrolides was well known to both the company and potential investors prior to the class period. In 2004, the FDA approved the drug telithromycin, known by the brand name Ketek, a third-generation macrolide and the first ketolide antibiotic. (Id. ¶ 37.) Shortly after its approval, Ketek was found to cause severe adverse effects in patients, including reversible visual disturbances, loss of consciousness, myasthenia gravis (a neurological disorder associated with improper muscle regulation), and severe liver injury that resulted in liver failure, liver transplant, and death. (Id. ) These safety issues led to two congressional investigations into the FDA's approval of the drug and accusations that the FDA stifled concerns over the drug raised by its own reviewers and ignored suspicious clinical data that were later determined to be fraudulent. (Id. ¶ 37.) Ultimately, the FDA revoked Ketek's approval for treatment for all indications other than CABP and required a "black box" warning label highlighting the risk of potential liver injury. (Id. )

Cempra recognized that the approval of solithromycin depended on the company's ability to differentiate the drug from Ketek. (Id. ¶¶ 38, 69.) As a fluoroketolide, solithromycin has a nearly identical chemical structure to Ketek, except it includes an aminophenyl group with a 1, 2, 3-triazole ring as opposed to the pyridine attached to an imidazole ring in Ketek. (Id. ¶ 38.) Cempra claimed that removing the pyridine moiety would prevent the drug from inhibiting the body's nicotinic acetylcholine receptors, which purportedly caused the severe adverse effects observed with Ketek. (Id. ¶ 38, 69.)

Prior to obtaining marketing approval, a developmental drug must undergo a series of pre-clinical and clinical trials to evaluate its safety and effectiveness for a particular treatment. (Id. ¶¶ 39-43.) Clinical trials are conducted in three distinct phases of clinical investigation in humans, identified as Phase 1, Phase 2, and Phase 3. (Id. ¶¶ 39-43); see 21 C.F.R. § 312.21. Each phase of clinical testing is designed to gather information on the safety and efficacy of the drug in human subjects. (Doc. 46 ¶ 43.) Phase 1 trials "are designed to determine the metabolism and pharmacologic actions of the drug in humans, the side effects associated with increasing doses, and, if possible, to gain early evidence on effectiveness." (Id. ¶ 40 (quoting 21 C.F.R. § 312.21(a) ).) Phase 2 trials are exploratory studies designed to address efficacy and to determine common short-term side effects and risks. (Doc. 46 ¶ 41); 21 C.F.R. § 312.21(b). Phase 3 trials are expanded studies to address the efficacy and safety of the drug, which generally involve hundreds of, and sometimes several thousand, subjects. (Doc. 46 ¶ 43); 21 C.F.R. § 312.21(c). FDA rules and regulations require that a sponsor promptly report all drug-related serious adverse events ("SAEs"), including a single occurrence that is either uncommon or strongly associated with drug exposure, such as hepatic (i.e., liver) injury. (Doc. 46 ¶ 57 (citing 21 C.F.R. § 312.32(c)(1)(i)(A) ) ); 21 C.F.R. § 312.32(c)(1)(i) (requiring sponsor to file a report within fifteen days after a determination by the sponsor that the information qualifies for reporting as a "[s]erious and unexpected suspected adverse reaction").

Cempra's development of solithromycin for treatment of CABP involved a proposed short-term course of five to seven days, depending on the mode of administration. (Doc. 51-15 at 5, 62.) Prior to the class period, Cempra completed Phase 1 and Phase 2 trials for the oral and IV dosages of solithromycin to treat CABP, which Cempra represented demonstrated a promising safety and tolerability profile for those dosages to treat CABP. (Doc. 46 ¶ 44.) Cempra disclosed in its SEC filings that the FDA placed a partial clinical hold on a Phase 1 trial for oral solithromycin and later converted it to a full clinical hold, citing concerns that the...

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