In re Inspire Pharmaceuticals Inc. Securities

• Citation: 515 F.Supp.2d 631
• Decision Date: 26 July 2007
• Docket Number: Master File No. 1:06CV00201.
• Parties: In re INSPIRE PHARMACEUTICALS, INC. SECURITIES LITIGATION This Document Relates to: All Actions.
• Court: U.S. District Court — Middle District of North Carolina

515 F.Supp.2d 631

In re INSPIRE PHARMACEUTICALS, INC. SECURITIES LITIGATION This Document Relates to: All Actions.

Master File No. 1:06CV00201.

United States District Court, M.D. North Carolina.

July 26, 2007.

COPYRIGHT MATERIAL OMITTED

James Anthony Penry, Cynthia A. O'Neal, Taylor Penry Rash & Riemann, PLLC, Raleigh, NC, Joseph E. White, III, Christopher S. Jones, Maya Saxena, Saxena White P.A., Boca Raton, FL, Robin Winchester, Christopher Nelson, Sehiffrin & Barroway, LLP, Radnor, PA, for Plaintiffs.

Barry M. Kaplan, Wilson Sonsini Goodrich & Rosati, Seattle, WA, C. Paul Chalmers, Scott A. Lowry, Wilson Sonsini Goodrich & Rosati, P.C., Washington, DC, Daniel R. Taylor, Jr., William Mark Conger, Kilpatrick Stockton, L.L.P., Winston-Salem, NC, for Defendants.

ORDER AND JUDGMENT

OSTEEN, District Judge.

In this Standing Order 30 proceeding, the Magistrate Judge has recommended that Defendants' Motion to Dismiss be granted. Lead Plaintiffs filed a timely objection to the Recommendation and Defendants responded to the objections.

This court has conducted a review of the file and has determined that the Recommendation of the Magistrate Judge is appropriate and should be adopted.

For the reasons set forth in the Magistrate Judge's Recommendation of May 14, 2007,

IT IS ORDERED AND ADJUDGED that Defendants; Motion to Dismiss (Doc. No. 21) is granted and this action is dismissed with prejudice.

RECOMMENDATION OF MAGISTRATE JUDGE ELIASON

RUSSELL A. ELIASON, United States Magistrate Judge.

On March 27, 2006, following consolidation of five shareholder class action lawsuits into a single civil action, Plaintiffs filed a consolidated class action complaint in this Court against Inspire Pharmaceuticals, Inc. ("Inspire") and certain of its senior officers. The complaint alleges violations of Securities and Exchange Commission Rule 10b-5, sections 10(b), 20(a), and 20A of the Securities Exchange Act of 1934, and sections 11, 12(a) and 15 of the Securities Act of 1933. It particularly focuses on Defendants' allegedly false and misleading statements regarding a Phase 3 FDA clinical trial of diquafosol, Inspire's development drug for the treatment of dry eye disease.

Relying on the Private Securities Litigation Reform Act of 1995 ("PSLRA" or "the Act") and Federal Rules of Civil Procedure 9(b) and 12(b)(6), Defendants now move to dismiss the Complaint for failure to plead fraud with particularity and failure to state a claim upon which relief can be granted. Specifically, Defendants claim that Plaintiffs failed to allege sufficient facts to support their fraud claim or sufficiently allege that Defendants' statements were made with the requisite scienter.

Defendants also contend that the Complaint's failure to sufficiently allege misrepresentation is fatal to Plaintiffs' separate claims under Sections 20(a) and 20A of the Exchange Act, and Sections 11, 12(a)(2), and 15 of the Securities Act. As will be seen, to successfully state a claim under any of these sections, Plaintiffs must first plead a predicate violation of securities fraud under section 10(b) of the Exchange Act or Rule 10b-5.

Facts

Inspire, a biopharmaceutical company, developed diquafosol as a potential treatment for dry eye disease. Diquafosol was the first drug for which the company sought FDA approval for commercial use, and it did so only after nearly six years of development. Once preclinical studies showed promising data regarding the drug, Inspire received permission from the FDA to begin a sequence of clinical trials to determine the drug's efficacy and the nature of any side effects. For all new drugs, the FDA requires three phases of clinical trials, with Phase III studies providing the pivotal risk-benefit and efficacy statistics necessary for a drug to gain approval. Accordingly, Inspire conducted two Phase III clinical trials — Studies 104 and 105 — before submitting a New Drug Application to the FDA.

Both of the Phase III studies built on the relative success of Study 103, which was a Phase II trial. Study 103 demonstrated significant improvements both objectively, i.e., through signs of eye health, and subjectively, i.e., in terms of reported symptoms, though the results did not meet all of the company's desired endpoints in either category. Like Studies 104 and 105, Study 103 had a primary objective endpoint of "improvement in mean corneal staining scores." Corneal staining refers to a procedure using a fluorescein fluid to highlight damaged areas on the surface of the eye. A corneal staining score of five indicates extensive damage, while a score of zero indicates no damage, or "corneal clearing." Therefore, to achieve improvement in mean corneal staining scores, a study must show a statistically significant improvement in the average corneal staining scores of test subjects. If a meaningful number of subjects demonstrate a complete absence of staining by the end of a study, the drug has also achieved corneal clearing. Notably, both corneal clearing and improvement in mean corneal staining may be classified as "corneal staining endpoints" because they utilize the same staining process.

The primary endpoints for Inspire's first Phase III trial, Study 104, were both an objective endpoint of improvement in mean corneal staining scores and a subjective endpoint of improvement in patients' selfreported worst symptoms. Unfortunately, the study did not result in statistically significant objective improvement. In contrast, Study 105 employed the same primary objective endpoint and demonstrated a highly significant improvement in mean corneal staining scores. While Study 105 narrowly missed its primary subjective endpoint of clearing foreign body sensation, Inspire disclosed that the study had achieved corneal clearing in a statistically significant number of patients.¹

In June 2003, Inspire submitted a New Drug Application to the FDA based on its Phase III trials, particularly the apparent success of Study 105. Later that year, Inspire received an "approvable" letter from the FDA, which stated that diquafosol could be approved if the company met one of two conditions: (1) conduct two additional studies with both objective and subjective endpoints, or (2) conduct one additional study to replicate the corneal clearing results of Study 105. Because no study had ever succeeded in simultaneously meeting both objective and subjective endpoints, Inspire chose the second option. For proprietary reasons, the company also chose to keep the details of its new Phase III trial, Study 109, secret. When Inspire publically announced on January 30, 2004 that it would conduct such a trial, it only disclosed that it was working with the FDA to establish a "protocol and that the purpose of Study 109 was to substantiate diquafosol's efficacy. Later, on November 4, 2004, Inspire CEO Christy Shaffer ("Shaffer") stated to one analyst that the study had "a corneal staining endpoint," but the specific endpoint, i.e., corneal clearing, was never officially revealed. Nevertheless, most analysts took it upon themselves to speculate that Study 109's primary endpoint was simply improvement in mean corneal staining, as in the company's previous studies.²

Inspire conducted two offerings of its common stock during 2004 in order to finance its development of diquafosol, one in July and another in November, and the company issued separate prospectuses for each. Both offerings were firm commitment offerings, meaning that neither Inspire nor its officers sold stock directly to the public. Instead, all stock was first sold to underwriters.

Unfortunately, Inspire learned in February 2005 that the results of Study 109 were not statistically significant enough to meet its corneal clearing endpoint. The company's stock price dropped when these results were announced on February 9, 2005, and purchasers of stock from the July and November 2004 offerings reacted by filing class action lawsuits in this Court. These suits, now consolidated into the present action, name Inspire, Shaffer, and two former company officers, Gregory Mossinghoff and Gary Novack, as Defendants. Plaintiffs claim that Defendants' oral and written statements between May 10, 2004 and February 8, 2005 misled the market as to Study 109's true endpoint. Defendants now move to dismiss the Complaint for failure to plead fraud with particularity and failure to state a claim upon which relief can be granted.

Discussion

Rule 9(b) of the Federal Rules of Civil Procedure carves out an exception to the general requirement that a plaintiff need only set forth "a short and plain statement of the claim showing that [he or she] is entitled to relief." Fed.R.Civ.P. Rule 8(a). Specifically, Rule 9(b) requires that "[i]n all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity." While this rule was intended to sort out and dispose of unfounded fraud claims at an early stage of litigation, its inconsistent application by the courts failed to prevent abusive practices in many private securities fraud actions. See Teachers' Rd. Sys. v. Hunter, 477 F.3d 162, 171 (4th Cir.2007). Consequently, Congress enacted the PSLRA in an effort to strengthen and clarify pleading requirements and discourage frivolous securities claims. Id. This Act mandates that:

the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed. 15 U.S.C. § 78u-4(b)(1). In short, the PSLRA requires that plaintiffs plead sufficient facts to support any claim of material misrepresentation under section 10(b) of the Exchange Act or Rule 10b-5.

In the context of a Rule 12(b)(6) motion to dismiss, the PSLRA represents a departure from the general scheme of the...