In re Synergen, Inc. Securities Litigation, Civ. A. 93-B-402.

• Decision Date: 15 September 1994
• Docket Number: No. Civ. A. 93-B-402.,Civ. A. 93-B-402.
• Citation: 863 F. Supp. 1409
• Court: U.S. District Court — District of Colorado
• Parties: In re SYNERGEN, INC. SECURITIES LITIGATION.

863 F. Supp. 1409

In re SYNERGEN, INC. SECURITIES LITIGATION.

No. Civ. A. 93-B-402.

United States District Court, D. Colorado.

September 15, 1994.

Gerald L. Bader, Renee B. Taylor, Bader & Villanueva, Denver, CO, Robert P. Frutkin, Barbara A. Podell, Savett Frutkin Podell & Ryan, P.C., Sherrie R. Savett, Carole A. Broderick, Berger & Montague, P.C., Philadelphia, PA, for plaintiffs.

Nancy J. Gegenheimer, Edwin P. Aro, Holme Roberts & Owen, Denver, CO, Michael R. Griffinger, Crummy, Del Deo, Dolan, Griffinger & Vecchione, Newark, NJ, Boris Feldman, Bruce Vanyo, Wilson, Sonsini, Goodrich & Rosati, Palo Alto, CA, for defendants.

MEMORANDUM OPINION AND ORDER

BABCOCK, District Judge.

Defendants Synergen, Inc. (Synergen), Jon Saxe, Kenneth Collins, Larry Soll, and Michael A. Catalano (collectively the defendants) move pursuant to Fed.R.Civ.P. 12(b)(6) to dismiss plaintiffs' consolidated amended class action complaint (the complaint) or, alternatively, for summary judgment under Fed.R.Civ.P. 56. Because the parties present materials outside the pleadings to support their positions, the defendants' motion is treated as one for summary judgment. The motion is exhaustively briefed and orally argued. For all the reasons set forth below, the motion will be denied.

I.

Plaintiffs allege that Synergen and certain directors and officers (the individual defendants) defrauded investors in violation of § 10(b) of the Securities Exchange Act of 1934 (§ 10(b)), 15 U.S.C. § 78j(b), and Rule 10b-5 of the Securities and Exchange Commission (Rule 10b-5), 17 C.F.R. § 240.10b-5. Plaintiffs also seek to hold the individual defendants liable for the alleged misstatements and omissions under § 20(a) of the Securities Exchange Act of 1934 (§ 20(a)), 15 U.S.C. § 78t(a). These claims have been certified as class action claims with the class period beginning on November 7, 1991 and ending February 19, 1993 (the class period).

Synergen is a biopharmaceutical company engaged in the discovery, development and manufacture of protein-based pharmaceuticals. Plaintiffs' exh. 178. The individual defendants are: Jon Saxe (Saxe), Synergen's president and chief executive during the class period; Kenneth Collins (Collins), vice president of finance and administration from January, 1992 to the end of the class period; Michael A. Catalano (Catalano), vice president of clinical research throughout the class period, and; Larry Soll (Soll), chairman of the board of directors and Synergen consultant during the class period.

Plaintiffs' complaint alleges that these defendants misrepresented or concealed material facts concerning: 1) the studies of the effect of Antril in septic animals; 2) the Phase II clinical trial of Antril in patients with sepsis; and 3) the number and characteristics of septic patients that Antril "will treat". Complaint, ¶ 15. The defendants move for summary judgment on the grounds that: 1) they did not make any misrepresentations which are actionable under § 10b or Rule 10b-5; 2) they did not act with fraudulent scienter; 3) the market recognized the risks of investing in Synergen; and 4) the individual defendants are not liable.

II.

Summary judgment shall enter where there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). If a movant establishes entitlement to judgment as a matter of law given uncontroverted facts contained in the documentary evidence, summary judgment will lie. Mares v. ConAgra Poultry Co., Inc., 971 F.2d 492, 494 (10th Cir.1992). The operative inquiry is whether, based on all the documents submitted, a reasonable trier of fact could find by a preponderance of the evidence that the plaintiff is entitled to a verdict. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986); Mares, 971 F.2d at 494. Summary judgment should not enter if, viewing the evidence in a light most favorable to the nonmoving party and drawing all reasonable inferences in that party's favor, a reasonable jury could return a verdict for that party. Anderson, 477 U.S. at 252, 106 S.Ct. at 2512; Mares, 971 F.2d at 494.

III.

Analysis of the defendants' motion entails an understanding of: 1) the medical condition of sepsis; 2) Synergen's development of Antril; 3) Synergen's anticipation of Antril's efficacy in the treatment of sepsis; 4) the Food and Drug Administration's (FDA) drug approval process; 5) the testing and effect of Antril on septic animals; and 6) the testing and effect of Antril in Phases I, II and III of the FDA approval process on humans. I consider the defendants' statements made throughout the class period concerning Antril's effect on animals and human patients in light of this background and the information they possessed or lacked when these statements were made.

I now turn to the facts, drawing all reasonable inferences in plaintiffs' favor. Sepsis is a complex illness in which systemic inflammation affects cells throughout the body. Declaration of John P. Pribble (Pribble), ¶ 3. This disease affects approximately 500,000 people in the United States each year. Id. Sepsis occurs when the immune system goes awry in fighting severe infection. Id. at ¶ 4. There are two types of sepsis: 1) sepsis syndrome, which is sepsis accompanied by clinical evidence of impaired organ function; and 2) septic shock, which is sepsis syndrome accompanied by significant reductions in blood pressure (hypotension). Plaintiffs' exh. 5. Sepsis is caused by diverse types of infections. Declaration of Scott Manaker (Manaker), ¶ 4. In most cases, bacterial infections cause sepsis. Id. at ¶ 6. Bacterial infections generally fall into one of two categories: gram-negative or gram-positive bacteria. Id. In the remaining cases, the infecting agent is viral, fungal or parasitic. Id.

The mortality rate for sepsis patients is high at approximately 40% and varies greatly. Pribble at ¶ 3; Manaker at ¶ 9. The principal mortality risk determinants include severity of the patient's condition, age, underlying disease(s), and presence of organ failure. Manaker at ¶ 9. Since death in sepsis syndrome patients may be caused by underlying conditions other than sepsis, the measurement of a drug's effect on reducing mortality from sepsis syndrome is more uncertain than establishing a drug's effect on patients with a single condition. Id. at ¶ 8. Imbalances in patient characteristics between drug-treated patients and patients receiving a placebo may also skew clinical trial results because the trial's results may be due to the imbalances rather than the drug. Id. at ¶ 9.

Currently, there is no approved sepsis treatment in the United States other than standard supportive care such as antibiotics. Pribble, ¶ 3; Manaker, ¶ 5. In 1990, Synergen announced that it had successfully produced recombinant human IL-1ra, which came to be called Antril. Pribble, ¶ 6. The first FDA approved drug for the treatment of a disease has a marked competitive advantage over subsequently approved drugs. Manaker, ¶ 3. Doctors become accustomed to using the drug, and are unlikely to switch to a subsequently approved drug unless the latter drug has appreciably better therapeutic advantages, a better side effect profile, will treat a wider spectrum of patients, or has cost advantages. Id.

In addition to Synergen, other biotechnology companies including Centocor, Xoma and Bayer/Chiron were developing drugs to treat sepsis. Preston, ¶ 14; Saxe Tr. 182. Saxe believed that either Xoma, Centocor, or Bayer would bring its sepsis drug to market before Synergen because two or three of those companies had initiated their clinical evaluations before Synergen. Saxe Tr. 183. However, unlike Antril, Centocor's and Xoma's drugs were limited to treating sepsis caused by gram-negative bacteria only. Saxe Tr. 184. Thus, development of a drug effective in treating sepsis caused by gram-positive bacteria would establish market advantage.

The first step in obtaining FDA approval for a new drug is testing the drug in animals in which the condition to be treated is induced. The animal studies are then used to file an investigational new drug application (IND). Declaration of Robert Makuch, (Makuch) ¶ 10. If the drug appears to have any treatment effect in animals, coupled with a rational basis to explain the result, the FDA will permit safety testing in humans (Phase I). Deposition of Charles A. Dinarello, M.D. (Dinarello Tr.) 134-135. In Phase I, the drug is tested for safety. Dinarello Tr. 135. If successful, that trial may be followed by a Phase II trial in which varying dosages may be tested, along with the efficacy of the drug. See Plaintiffs' exh. 192, p. 5. That trial is followed by Phase III, the efficacy test. Dinarello Tr. 135.

a) Animal Studies

Studies of IL-1ra were conducted in mice, rats, rabbits and baboons in which septic shock was induced by infusing relatively large quantities of bacteria. No studies were conducted on animals absent septic shock. In all but one of these studies the animals were infused with gram-negative bacteria or the endotoxin component of gram-negative bacteria. In three of the gram-negative studies, in infant rats, baboons, and burned rats, Antril had either no effect or a detrimental effect. Plaintiffs' exhs. 9 and 183. In the infant rat study, higher doses of Antril actually increased mortality. Defs' exhs. 14 and 15. In the baboon study, Antril had no treatment effect on septic baboons who were infused with sublethal does of bacteria. Plaintiffs' exh. 183. Similarly, Antril had no treatment effect in a study of septic rats who were immunocompromised due to burns over thirty percent of their bodies. Plaintiffs' exh. 9 at SYN072528.

In June 1992, Synergen attempted to replicate some of the animal trials so as to determine whether IL-1ra produced at a new factory had the same qualities as IL-1ra used previously. Plaintiffs' exh. 17 at SYN260957....