In re Bioscrip, Inc. Sec. Litig.

• Decision Date: 31 March 2015
• Docket Number: No. 13–cv–6922AJN.,13–cv–6922AJN.
• Citation: 95 F.Supp.3d 711
• Parties: In re BIOSCRIP, INC. SECURITIES LITIGATION.
• Court: U.S. District Court — Southern District of New York

95 F.Supp.3d 711

In re BIOSCRIP, INC. SECURITIES LITIGATION.

No. 13–cv–6922AJN.

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

Signed March 31, 2015.

Evan M. Berkow, Gerald H. Silk, Hannah Elizabeth Ross, Jai Kamal Chandrasekhar, Bernstein Litowitz Berger & Grossmann LLP, New York, NY, for Fresno County Employees' Retirement Association.

Jeremy Alan Lieberman, Lesley Frank Portnoy, Pomerantz LLP, New York, NY, for Timothy Faig Individually and on Behalf of all Other Persons Similarly Situated.

Hannah Elizabeth Ross, Bernstein Litowitz Berger & Grossmann LLP, Curtis Victor Trinko, Law Offices of Curtis V. Trinko, LLP, New York, NY, for West Palm Beach Police Pension Fund.

Jay Philip Lefkowitz, Joseph Serino, Jr., Kirkland & Ellis LLP, Shireen Anneke Barday, USDC, Southern District of New York, New York, NY, for BioScrip, Inc., Richard M. Smith, Hai V. Tran, Patricia Bogusz, Kohlberg & Co., LLC, Myron Z. Holubiak, Charlotte W. Collins, Samuel P. Frieder, David R. Hubers, Richard L. Robbins, Stuart A. Samuels, Gordon H. Woodward, Kimberlee Seah.

Bradley Jay Butwin, Jonathan Rosenberg, Ross Bradley Galin, William Joseph Sushon, O'Melveny & Myers, LLP, New York, NY, for Jeffries LLC, Morgan Stanley & Co. LLC, Suntrust Robinson Humphrey, Inc., Dougherty & Company, Noble International Investments, Inc.

MEMORANDUM & ORDER

ALISON J. NATHAN, District Judge:

This is a securities class action brought on behalf of all persons and entities who purchased or acquired the publicly traded common stock of BioScrip, Inc. (“BioScrip”) between November 9, 2012 and November 6, 2013. The lead plaintiffs in the case are the Fresno County Employees' Retirement Association (“Fresno”) and the West Palm Beach Police Pension Fund (“West Palm Beach” and, collectively with Fresno, “Plaintiffs”). Plaintiffs principally allege that BioScrip violated the securities laws through deception about two distinct areas of the Company's business—first, the failure to disclose the Government's interest in possible violations of the Anti–Kickback Statute and False Claims Act by BioScrip's specialty pharmacy division, and, second, the so-called “PBM Services Scheme,” in which the Defendants allegedly withheld the fact that one of its most profitable business segments was in the process of collapsing.

Plaintiffs bring claims against two sets of Defendants. The first group,¹ subject to claims under both the Exchange Act and the Securities Act, now moves to dismiss Plaintiffs' Consolidated Class Action Complaint (“CCAC”) in its entirety.See Dkt. No. 41. The second group of Defendants, including the BioScrip's underwriters and a number of the company's directors and officers, move to dismiss Counts III and IV of the CCAC. See Dkt. No. 45. For the reasons below, both motions are GRANTED IN PART and DENIED IN PART.

BACKGROUND

I. The Defendants

Plaintiffs bring claims against a large number of Defendants under both the Exchange Act of 1934, 15 U.S.C. § 78a et seq., and the Securities Act of 1933, 15 U.S.C. § 77a et seq. Defendants BioScrip, Smith, Tran, Bogusz, and Kohlberg are subject to claims under each Act.

BioScrip is a Delaware corporation with its principal place of business in Elmsford, New York. See CCAC ¶ 31. It provides healthcare services with a specialization in home-based medical treatments. Id. The company also sells prescription discount cards that allow cardholders to purchase prescription medications at discounted prices through its “PBM Services” operating segment. Id. For a time the company operated specialty pharmacies that provided medications intended to treat a variety of serious and chronic medical issues, including cancer, HIV/AIDS, and multiple sclerosis. Id. Notably for purposes of this case, BioScrip's specialty pharmacy division also sold the drug Exjade. Id. ¶ 38. BioScrip sold its specialty pharmacy division in May 2012. Id.

During the time period at issue, BioScrip's President and Chief Executive Officer was Defendant Richard M. Smith. Id. ¶ 32. Smith was first appointed Chief Operating Officer of BioScrip in January 2009 and was promoted to Chief Executive Officer in January 2011. Id. Also during the time in question, BioScrip's Senior Vice President, Chief Financial Officer and Treasurer was Defendant Hai V. Tran, who was appointed to those positions in May 2012. Id. ¶ 33. Defendant Patricia Bogusz was at all relevant times was the company's Vice President of Finance. Id. ¶ 34.

The final Defendant subject to Exchange Act claims is Kohlberg, a private-equity firm that manages and advises a number of funds, including, inter alia, Kohlberg Management V, L.L.C., Kohlberg Investors V, L.P., Kohlberg Partners V, L.P., Kohlberg TE Investors V, L.P., and KOCO Investors V, L.P. (collectively the “Kohlberg Funds”). Id. ¶ 36. The Kohlberg Funds beneficially owned, at their peak, approximately 26 percent of BioScrip's outstanding stock. Pursuant to a 2010 stockholder's agreement, Kohlberg was entitled to elect two members of BioScrip's eight-person Board of Directors. Id.

In addition to the Exchange Act claims brought against the aforementioned Defendants, Plaintiffs also bring claims under the Securities Act against Myron Z. Holubiak, Charlotte W. Collins, Esq., Samuel P. Frieder, David R. Hubers, Richard L. Robbins, Stuart A. Samuels, Gordon H. Woodward, and Kimberlee Seah (collectively, and in conjunction with Smith, Tran, and Bogusz, the “Individual Securities Act Defendants”). Defendant Holubiak was appointed Chairman of the Board on April 18, 2012 and was a signatory to the Shelf Registration Statement at issue in this case. CCAC ¶ 261. Defendants Collins, Hubers, Robbins, Samuels are directors of BioScrip who signed the Shelf Registration Statement and the 2012 Form 10–K. Id. ¶¶ 262, 264–66. Defendants Frieder and Woodward are both officers of Kohlberg and directors of BioScrip. Id. ¶¶ 263, 267. Defendant Seah was BioScrip's Senior Vice President, Secretary, and General Counsel throughout the class period. Id. ¶ 268.

Plaintiffs also bring their Security Act claims against various underwriters of BioScrip's common stock offerings, including Jeffries LLC (“Jeffries”), Morgan Stanley & Co. LL (“Morgan Stanley”), SunTrust Robinson Humphrey, Inc. (“SunTrust”), Dougherty & Company (“Dougherty”), and Noble International Investments, Inc. (“Noble”) (collectively the “Underwriter Defendants”).

II. The Alleged Kickback Scheme

From November 2005 to May 2012, BioScrip sold a pharmaceutical known as Exjade, an iron-chelation drug that helps remove iron from a patient's body. Id. ¶ 46. Exjade, which was first approved by the Food and Drug Administration (“FDA”) in November 2005, is used primarily to treat patients who have had repeated blood transfusions, which can lead to a buildup of iron in the body, leading to possible liver and pancreas damage. Id.

Exjade is produced by Novartis Pharmaceuticals Corp. (“Novartis”), which first began selling the drug in 2005. Id. ¶ 47. Novartis distributed Exjade through a system known as EPASS (Exjade Patient Assistance and Support Services), which established an exclusive distribution network with consumer-facing pharmaceutical companies that would actually sell the drug to patients. Id. BioScrip was one of three pharmaceutical companies accepted into EPASS by Novartis. Id. In order for a patient to receive Exjade, a doctor would submit enrollment forms on the patient's behalf to EPASS. Id. ¶ 49. For approximately half of the Exjade prescriptions, the proscribing doctor selected which company would ultimately fill the order, while the other half of prescriptions were referred by EPASS, which was controlled by Novartis. Id.

The basic structure of the alleged Exjade kickback scheme was that in return for aggressively pushing Exjade on patients, in spite of its known severe side effects, BioScrip would receive preferential rebates and referrals from Novartis and EPASS. Id. ¶ 50. The Plaintiffs allege that, due to its side effects, Exjade was not selling as well as Novartis had hoped. Id. ¶ 52. Accordingly, in early 2007, Novartis redoubled its efforts to sell Exjade and put tremendous pressure on BioScrip to maximize the number of refill orders of the drug. Id. ¶¶ 56–57. Specifically, in February 2007, Novartis informed BioScrip that their refill rate for Exjade lagged behind the two other pharmaceutical companies in EPASS. Id. ¶ 58. Novartis placed BioScrip on a 45–day probation period from February to April 2007, during which time BioScrip was expected to significantly increase its Exjade refill rate. Id.

Because Exjade represented an exceptionally profitable product for BioScrip, the company began undertaking great efforts to bolster sales of the drug. Id. ¶¶ 56–58. This included the creation of an “Exjade Team” whose sole purpose was to promote Exjade, encourage patients to make refills, and to provide clinical counseling and support to Exjade patients. Id.

BioScrip's efforts were tremendously successful and at the end of their probationary period in April 2007 they had significantly increased their refill rate for Exjade.

Id. ¶ 70. Novartis was pleased with BioScrip's success, particularly in light of the fact that it had achieved the highest per-patient profit margin amongst the three EPASS participants. Id. ¶ 71. Accordingly, Novartis began offering a series of financial incentives to BioScrip, which Plaintiffs deem kickbacks, to further stimulate Exjade refills. First, in January 2008, Novartis increased the standard rebate it offered BioScrip from $13 per shipment of Exjade to $20 per shipment. Id. ¶ 72. Later in 2008, Novartis would again increase this rebate, this time to $30. Id. Second, Novartis began referring EPASS patients to the three EPASS participants based on their Exjade refill rates. Id. ¶ 73. In light of BioScrip's newfound success, Novartis referred approximately 60 percent of undesignated patient referrals to BioScrip in 2009.Id. Third, in addition to the per shipment rebates, Novartis began offering...