In re Alliance Pharm. Corp. Securities Lit.

• Decision Date: 13 August 2003
• Docket Number: No. 01 Civ.1674 CM.,01 Civ.1674 CM.
• Citation: 279 F.Supp.2d 171
• Parties: In re ALLIANCE PHARMACEUTICAL CORP. SECURITIES LITIGATION
• Court: U.S. District Court — Southern District of New York

279 F.Supp.2d 171

In re ALLIANCE PHARMACEUTICAL CORP. SECURITIES LITIGATION

No. 01 Civ.1674 CM.

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

August 13, 2003.

COPYRIGHT MATERIAL OMITTED

Joel C. Feffer, Wechsler, Harwood LLP, New York, NY, for Plaintiffs.

Alan M. Klinger, James L. Bernard, James L. Bernard, Stroock & Stroock & Lavan, L.L.P., New York, NY, Julia Beatrice Strickland, Mary Deanna Manesis, Stroock & Stroock & Lavan LLP, Los Angeles, CA, for Defendants.

MEMORANDUM DECISION AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION FOR SUMMARY JUDGMENT

MCMAHON, District Judge:

Plaintiffs, former shareholders of Molecular Biosystems, Inc. ("MBI"), bring this action against Alliance Pharmaceutical Corp. ("Alliance") and three of its officers —Duane J. Roth ("D. Roth), Theodore D. Roth ("T. Roth"), and Tim T. Hart ("Hart")—under Sections 11 and 12(a)(2) of the Securities Act of 1933 (15 U.S.C. §§ 77k, 77l). Plaintiffs also allege that the individual defendants, as control persons of Alliance, violated Section 15 of the Securities Act of 1933 (15 U.S.C. § 77o). Defendants move for summary judgment under Fed.R.Civ.P. 56 on all of the plaintiffs' claims.

Defendants' motion is granted in part and denied in part.

I. BACKGROUND

A. Factual History

The following facts, unless otherwise noted, are undisputed.

1. The Merger of Alliance and MBI and the Commencement of this Lawsuit

Defendant Alliance, a New York corporation, is a pharmaceutical research and development company. (Defendants' 56.1 Statement ("Def. 56.1"), 6.) Alliance is the developer of Oxygent, a temporary oxygen carrier or blood substitute designed to reduce or eliminate the need for blood transfusions during surgery. Id. at 7. MBI is the developer of Optison, an intravenous ultrasound contrast agent used in ultrasound examinations of the heart. Id. at 94.

In October 2000, Alliance and MBI announced that they had entered into an agreement for Alliance to acquire MBI. Id. at 1. Under the terms of the parties' merger agreement, Alliance would acquire all of MBI's stock in exchange for 770,000 shares of Alliance stock and MBI would become a wholly-owned subsidiary of Alliance. Id. at 2. In connection with the proposed merger and stock exchange, Alliance filed a Registration Statement with the Securities and Exchange Commission on November 9, 2000 and two amendments thereto on November 22 and 29, 2000 (collectively the "Registration Statement").

Id. at 3. The Registration Statement included a proxy statement-prospectus. The Registration Statement was declared effective by the SEC on November 29, 2000. Id. at 4.

On December 29, 2000, at a special shareholder's meeting, the shareholders of MBI voted to approve the merger. Id. at 5.¹ On January 3, 2001, Alliance issued a press release announcing that it had completed its acquisition of MBI. (SAC, 9.)

On January 8, 2001, Alliance issued a press release publicly disclosing that it had voluntarily suspended further patient enrollment in its Phase 3 study of Oxygent in cardiac surgery patients due to an imbalance in certain adverse events between the control group and the Oxygent treatment group. (Def. 56.1, 82.)

Plaintiffs allege that this announcement had a devastating effect on the stock prices of both companies. On the day preceding the merger announcement, MBI common stock closed at $0.45 per share, while Alliance common stock closed at $13.50 per share. (SAC, 2.) On January 3, the day the merger was announced, Alliance's common stock traded as high as $8.813 per share and closed at $8.625 per share. Id. at 9. On January 8, when Alliance announced the suspension of the Oxygent trial, the price of Alliance common stock plunged 62% from the previous day's closing price of $7.50, to close at $2.375 per share. Id. at 11. Plaintiffs allege that on January 22, 2001, Alliance issued a report stating that (1) it would reduce its workforce by approximately 20%; and (2) the bulk of the staff positions eliminated were those "involved in preparations for the anticipated near-term commercialization of Oxygent." Id. at 14: Plaintiffs also allege that "[i]t was reported that contrary to the representations in the Registration Statement, the Company may not have sufficient cash to meets [sic] its working capital commitments for the current fiscal year." Id. at 14.²

On February 23, 2001, in response to the precipitous drop in the value of their stock, plaintiffs filed this action on behalf of all individuals—except defendants and related parties—who acquired common stock of Alliance pursuant to the merger between MBI and Alliance. Plaintiffs filed their second amended complaint on February 14, 2002. Plaintiffs allege that defendants failed to disclose (1) known problems in the Phase 3 study of Oxygent, (thereby inflating Alliance's value), and (2) information about an agreement between MBI and "its only viable competitor" for Optison sales in Japan, South Korea, and Taiwan (thereby deflating MBI's value). (SAC 4, 7, 8.)

2. The Clinical Testing of Oxygent

At the time that the Registration Statement became effective, on November 29, 2000, Alliance had three main products under development. Id. at 6. One of those products—characterized by plaintiffs as Alliance's "premiere" product—was Oxygent, an intravenous temporary oxygen carrier that was being developed to reduce or eliminate the need for blood transfusions during surgery. Id. at 7. As of November 29, Oxygent was being evaluated in two "Phase 3" clinical trials. Id. at 13. Phase 3 trials, which are trials in patients, are the final stage of trials required prior to requesting marketing approval from regulatory agencies. Id. at 13, 18. Oxygent had also been previously evaluated with human subjects in eighteen other clinical trials. Id. at 14.

One of the Phase 3 studies was being conducted in Europe on patients undergoing general surgery. (SAC, 44.) In September, 2000, Alliance announced that the initial results of the European study showed that Oxygent provided a statistically significant reduction in the need for donor blood. Id. at 45. The other Phase 3 study, which began in December 1999, was being conducted in the United States. (Def. 56.1, 16, 17.) The subjects of that trial were undergoing cardiac bypass surgery. Id. It is the progress of the United States cardiac trial that is at issue in this case.

Alliance established a Data Safety Monitoring Board ("DSMB") to monitor patient safety during the Phase 3 cardiac trial. Id. at 19. The DSMB was an independent committee of five experts: four physicians, all of whom had expertise and extensive experience in cardiac surgery and anesthesiology, and a biostatistician. Id. at 21. The DSMB was responsible for periodically reviewing safety data from the Oxygent cardiac trial as it progressed to ensure patient safety and maintain the integrity of the trial. Id. at 22. The DSMB had no involvement in the conduct of the cardiac trial, and its review of safety data was independent from Alliance and the principal investigators conducting the trial. Id. at 23. The DSMB was authorized to make recommendations to Alliance regarding modification or termination of the cardiac trial based on its interim reviews of safety data. Id. at 24. The DSMB met quarterly to discuss its interim review of accruing safety data from the Oxygent cardiac trial. Id. at 25. Certain Alliance clinical and medical personnel were invited to participate in open sessions of the DSMB meetings. Id. at 26. At the closed DSMB meetings, which were attended only by DSMB members, the DSMB reviewed unblinded safety data and discussed trial results and trends and any recommendations regarding the trial. Id. at 27.

At the outset of the cardiac trial, the DSMB and Alliance agreed to specially track neurological post-operative complications, since they are a known risk of bypass surgery, particularly in older patients and patients with a history of cerebrovascular disease. Id. at 33. On October 18, 2000, the DSMB held its third meeting with Alliance personnel to review safety data from more than 200 patients in the Oxygent cardiac trial. Id. at 34. In reviewing safety data for the October 18 meeting, the DSMB observed that adverse neurological events appeared to be more prevalent in the treatment group receiving Oxygent than the control group not receiving Oxygent, particularly in patients who were 70 years or older. Id. at 35. However, the difference in the incidence of adverse neurological events between the two groups was not statistically significant. Id. at 36. DSMB performed further statistical analyses, and indicated that the issue of adverse neurological events would be reviewed at the next DSMB meeting scheduled for January 31, 2001. Id. at 37. Alliance agreed to contact the DSMB upon receiving new reports of stroke in the trial. Id. at 38. The DSMB concluded the October 18, 2000 meeting by recommending that the trial proceed uninterrupted and additional patients be recruited. Id. at 39.

On December 19 and 20, 2000, Dr. Hans de Haan, acting director of Alliance's Product Safety Surveillance Department ("PSSD"), learned that two additional patients in the Oxygent cardiac trial group had suffered strokes. Id. at 10, 40. These two additional strokes rendered the difference in incidence in adverse neurologic events between the treatment group and control group statistically significant for the first time. Id. at 41. However, the stroke incidence in the Oxygent group was consistent with the expected stroke incidence for cardiac bypass patients published in medical literature, while the stroke incident in the control group was "below the expected incidence and remarkably low." Id. at 42, 43.

Consistent with Alliance's guidelines regarding the trial protocol, a meeting was held on December 21, 2000 so that Dr. de Haan could apprise his superiors, Dr. Joerg Limmer and Dr. Howard Dittrich, about the new strokes and the...