In re Gilead Sciences Securities Litigation

• Decision Date: 11 August 2008
• Docket Number: No. 06-16185.,06-16185.
• Parties: In re GILEAD SCIENCES SECURITIES LITIGATION. Rick Hartman, on behalf of himself and all others similarly situated; Trent St. Clare; Terry Johnson, Plaintiffs-Appellants, v. Gilead Sciences, Inc.; John C. Martin; John F. Milligan; Mark L. Perry; Norbert W. Bischofberger; Anthony Carraciolo; William Lee, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

536 F.3d 1049

In re GILEAD SCIENCES SECURITIES LITIGATION.

Rick Hartman, on behalf of himself and all others similarly situated; Trent St. Clare; Terry Johnson, Plaintiffs-Appellants, v. Gilead Sciences, Inc.; John C. Martin; John F. Milligan; Mark L. Perry; Norbert W. Bischofberger; Anthony Carraciolo; William Lee, Defendants-Appellees.

No. 06-16185.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted December 6, 2007.

Filed August 11, 2008.

Susan K. Alexander (briefed and argued), Lerach, Coughlin, Stoia, Geller, Rudman & Robbins LLP, San Francisco, CA, for the plaintiffs-appellants.

John C. Dwyer (briefed and argued), Grant Fondo and Jeffrey M. Kaban (appeared only), Cooley, Godward, Kronish, LLP, Palo Alto, CA, for the defendants-appellees.

Appeal from the United States District Court for the Northern District of California; Martin J. Jenkins, District Judge, Presiding. D.C. No. CV-03-04999-MJJ.

Before: ALEX KOZINSKI, Chief Judge, HAWKINS, and ROBERT E. COWEN,^* Circuit Judges.

MICHAEL DALY HAWKINS, Circuit Judge:

A group of individual investors brought this securities fraud action on behalf of themselves and a proposed class comprising all individuals (collectively, the "Investors") who purchased Gilead Sciences, Inc.'s ("Gilead") publicly traded securities between July 14, 2003, and October 28, 2003 ("class period"). They allege that Gilead misled the investing public by representing that demand for its most popular product was strong without disclosing that unlawful marketing was the cause of that strength.

The district court dismissed under Rule 12(b)(6) of Civil Procedure, holding that the Investors failed to sufficiently allege loss causation. We have jurisdiction under 28 U.S.C. § 1291, and we reverse.

FACTS AND PROCEDURAL HISTORY

I. The Complaint's Allegations

The Investors' Fourth Amended Complaint ("complaint") alleges violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a), and SEC Rule 10b-5, 17 C.F.R. § 240.10b-5. The complaint names as defendants Gilead and some of its top officers ("Officers").

Taking its allegations as true, the complaint tells the following story about Gilead and its marketing practices.¹

Gilead is a biopharmaceutical company that specializes in developing and marketing treatments for life-threatening diseases. One of the company's commercial products is Viread, an antiretroviral agent used in combination with other drugs to treat HIV.

Gilead's fortunes, as reflected in its stock price, depended heavily on Viread's commercial success. Sales of Viread amounted to about 65% of Gilead's total revenues at all relevant times of this action. "Wall Street analysts looked to sales of Viread, Gilead's most important and most promoted drug, to gauge whether the Company's business was on track and growing. If Gilead failed to publicly report healthy, growing Viread sales, its stock price would be greatly diminished."

Although Gilead had a clear incentive to aggressively promote Viread, it was required to comply with federal law, including the Food and Drug Administration's ("FDA") marketing regulations. Generally, those regulations prohibit the marketing of drugs for non-FDA-approved uses, commonly referred to as "off-label" uses. "For example, it would be considered off-label for a company to market a FDA-approved HIV/AIDS drug as also being effective for fighting Hepatitis B infection ... if such use of the drug had not been reviewed and approved by the FDA and included in the" drug's FDA-approved package labeling. While physicians are free to prescribe drugs for off-label uses,² they rely on the FDA-approved prescribing information to determine which drugs can be used safely and effectively by patients with specific health problems. The FDA approved Viread for use in approximately 40% of the available HIV patient pool. Repeatedly violating the FDA's off-label marketing regulations in an effort to have Viread prescribed to some of the remaining 60% of available HIV patients, Gilead and its officers:

implemented a scheme to promote and market Viread with off-label, false, and misleading statements in violation of the Federal Food, Drug, and Cosmetic Act. In order to gain market share, artificially increase perceived demand, and increase sales, Gilead officers, executives, and clinical personnel, with the express knowledge and approval of the [Officers], routinely and consistently provided Gilead's sales and marketing team with off-label information and encouraged, expected, and directed them to use it to sell Viread....

Gilead's management began preparing Gilead's sales staff for off-label marketing as early as September 2001, one month before Viread received FDA approval. Management continued to encourage off-label marketing throughout 2002 and the first half of 2003.

These training efforts produced their intended effect. According to two confidential witnesses who served as Gilead salespeople,³ Viread "off-label marketing took three forms: (1) marketing to HIV patients co-infected with Hepatitis B; (2) marketing Viread as a first-line or initial therapy for HIV infection; and (3) marketing against Viread's safety profile." Ultimately, 75% to 95% of Viread sales resulted from off-label marketing efforts.

The company and its Officers emphasized to the public that they carefully complied with federal and state regulations, when in fact they knew that they were acting unlawfully by aggressively marketing Viread for off-label uses.

The first sign of trouble came on March 14, 2002, when the FDA sent an "Untitled Letter" to Gilead that accused the company of understating the risks of Viread—a form of improper off-label marketing. The letter ordered Gilead to "immediately cease" this practice. On March 21, 2002, per the FDA's request, Gilead sent a reply that acknowledged receipt of the FDA's letter and agreed to immediately stop off-label marketing. This was not done. In fact, Gilead's off-label marketing increased, either at the Officers' direction or with their knowledge and tacit encouragement.

By June 2003, Gilead's off-label marketing put it in the position to raise Viread's price. Consistent with standard industry practice, Gilead informed national drug wholesalers of this plan in advance of the price increase. The wholesalers (there are the three major ones that purchase approximately ninety percent of drug manufacturers' drugs) typically stockpile drugs in advance of price increases so that they can resell at a higher price to retailers after the increase takes effect.

Because Gilead had "illegally inflated sales and artificially inflated demand for Viread, the major drug wholesalers stockpiled mass quantities of Viread in advance of the June 2003 price increase. This wholesaler stockpiling would not have occurred but for the off-label marketing and the resulting creation of an artificially increased demand for Viread." The stockpiling furthered Gilead's fraudulent scheme by confirming "the impression that Viread was in high demand and that Gilead's financial and operational results were strong."

On July 14, 2003, Gilead issued a press release announcing that it anticipated its second quarter financial results would exceed analysts' expectations, and explaining that the company's success "was driven primarily by strong sales growth of Viread.... Increasing Viread sales reflect broader prescribing patterns in all commercial markets, as well as increases in U.S. wholesaler inventory levels in the second quarter in anticipation of a Viread price increase."

These statements were materially false and misleading because Gilead and its Officers' "marketing and promotional activities for Viread were not in compliance with FDA approved guidelines, violated federal laws, and created serious public health and safety implications for Viread users." Gilead's promotional scheme was designed to, and did, create the impression that demand for Viread was strong. This campaign was misleading, however, because it was unlawful off-label marketing that was driving prescription volume⁴—and Gilead had already been ordered to cease such marketing.

While securities analysts, for the most part, reacted favorably to the July 14, 2003, press release, Gilead and its Officers felt the need to respond to some analysts' concern that second quarter revenues were primarily attributable to the wholesaler stockpiling, and not a result of strong demand. On the same day that the press release was issued, a Gilead spokeswoman, acting with the knowledge and approval of Gilead and its officers, told Bloomberg News that "[t]he main reason for the jump in Viread sales is an increase in prescriptions, not inventory stocking." This statement was misleading. It created the impression that demand for Viread was strong, which it was, but for reasons that were not well-understood by the public. Omitting the role of off-label marketing in a press release highlighting the drug's success made a true statement (that demand was strong) also a misleading one.

Gilead's financial news had a marked effect on its stock price. On July 14, the price of Gilead shares closed at $67.25, up $7.97 from the previous day's closing price of $59.28 per share. This 13.4% increase represented a near-record high.

Some two weeks later, the FDA issued a July 29 Warning Letter⁵ that chastised Gilead for statements made by one of its sales representatives at the 15th National HIV/AIDS Update Conference in March and April of 2003. The letter stated that the employee "made oral statements that minimized the risk information and broadened the indication for Viread." It reminded Gilead of the Untitled Letter, expressed the "significant public health and safety concerns raised by these repetitive promotional activities," and ordered Gilead to make corrective disclosure. Gilead made such disclosure to the conference attendees on November 7, 2003.

On August 7,...