Schueneman v. Arena Pharm., Inc.

• Decision Date: 26 October 2016
• Docket Number: No. 14-55633,14-55633
• Citation: 840 F.3d 698
• Parties: Todd Schueneman, on behalf of himself and all others similarly situated; William Sutliff; Jean Sutliff; Arena Investors Group; Anthony Caravella, Plaintiffs, and Carl Schwartz, Plaintiff–Appellant, v. Arena Pharmaceuticals, Inc. ; Jack Lief; Robert E. Hoffman ; Dominic P. Behan; William R. Shanahan; Christy Anderson, Defendants–Appellees, v. Chris Georgakopoulos; Larry Sprowl; Maxat Amankossov; David Prince; Ford L. Williams; John Lee; Babak Ghayour, Movants.
• Court: U.S. Court of Appeals — Ninth Circuit

840 F.3d 698

Todd Schueneman, on behalf of himself and all others similarly situated; William Sutliff; Jean Sutliff; Arena Investors Group; Anthony Caravella, Plaintiffs,

and

Carl Schwartz, Plaintiff–Appellant,

v.Arena Pharmaceuticals, Inc. ; Jack Lief; Robert E. Hoffman ; Dominic P. Behan; William R. Shanahan; Christy Anderson, Defendants–Appellees,

v.Chris Georgakopoulos; Larry Sprowl; Maxat Amankossov; David Prince; Ford L. Williams; John Lee; Babak Ghayour, Movants.

No. 14-55633

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 4, 2016, Pasadena, California

Filed October 26, 2016

Peter K. Stris (argued), Dana Berkowitz, and Victor O'Connell, Stris & Maher LLP, Los Angeles, CA; Laurence D. King and Mario M. Choi, Kaplan Fox & Kilsheimer LLP, San Francisco, CA; Robert N. Kaplan and Jeffery P. Campisi, Kaplan Fox & Kilsheimer LLP, New York, NY; for Plaintiff–Appellant.

John C. Dwyer (argued), Cooley LLP, Palo Alto, CA; Koji F. Fukumura, Mary Kathryn Kelley, and Ryan E. Blair, Cooley LLP, San Diego, CA; for Defendants–Appellees.

Before: Harry Pregerson, Jay S. Bybee, and N. Randy Smith, Circuit Judges.

OPINION

BYBEE, Circuit Judge:

Lead plaintiff Carl Schwartz filed a putative federal securities class action against Defendants Arena Pharmaceuticals, Jack Lief, Dominic Behan, William Shanahan, and Christen Anderson¹ in connection with public statements made about Arena's weight-loss drug, lorcaserin. At various times, Defendants all made positive public statements about lorcaserin's safety and the likelihood of FDA approval. On certain occasions, Defendants claimed that lorcaserin was not carcinogenic and referred to supporting “animal studies.” When Arena filed its application with the FDA, the FDA's advisory panel published a briefing document that disclosed, for the first time, that Arena had been in a “highly unusual” back-and-forth with the FDA regarding the results of cancer studies on rats (the “Rat Study”). For years, Arena knew that the rats receiving lorcaserin were getting cancer. And the FDA wanted evidence that it was not a threat to humans. The market was surprised by the undisclosed Rat Study, and Arena's stock dropped significantly. Schwartz filed suit after news of the Rat Study broke. After further study, the FDA ultimately signed off on lorcaserin, and the product is now on the market.

The district court dismissed the First, Second, and Proposed Third Amended Complaints, holding that Arena and the FDA were engaged in a good-faith scientific dispute regarding the cause of the rat cancer and that, therefore, scienter was not adequately pleaded. Schwartz filed this timely appeal. We conclude that Schwartz has properly pleaded scienter, and we reverse.

I. BACKGROUND

A. Arena Pharmaceuticals and Lorcaserin

Arena is a bio-pharmaceutical company that developed (and eventually marketed) a weight-loss drug called lorcaserin. Lorcaserin is a “serotonin agonist,” and functions in some ways similar to the notorious drug, “Fen–Phen.” Given the disastrous health consequences of Fen–Phen, the FDA gives close scrutiny to serotonin agonists when it comes to potential cardiovascular problems, and lorcaserin's safety was of obvious importance to investors for the same reason. Prior to approving a drug, the FDA requires extensive clinical studies (testing on humans) and nonclinical studies (testing on animals and in labs). Clinical testing is done in three phases. Each phase of clinical testing attempts to gather more information on drug safety and efficacy in human subjects, and each phase requires a larger and larger population size.

Between September 2006 and July 2009, Arena conducted two Phase III clinical tests with lorcaserin—known as the “BLOOM” (Behavioral modification and Lorcaserin for Overweight and Obesity Management) and “BLOSSOM” (Behavioral modification and Lorcaserin Second Study for Obesity Management) tests. They involved thousands of patients who used lorcaserin for up to two years. At the same time, Arena was conducting the Rat Study—a nonclinical study in which lorcaserin was given to lab rats to test lorcaserin's carcinogenicity. The animal tests are run so that the FDA can see whether there is a risk of humans developing cancer from the drug. If the rats develop cancer, the burden is then on the drug developer to show the FDA that the carcinogenic mechanism is not relevant to humans. This is generally done in one of two ways: (a) demonstrating that the biological mechanism causing the cancer is unique to rats (or at least not present in humans), or (b) showing that there is a sufficiently large safety threshold to make risk to humans irrelevant (e.g., the cancer-causing dosage levels for rats is significantly higher than human prescription-level dosages).

By February 2007, the Rat Study's initial results indicated that lorcaserin was causing mammary tumors, brain cancer, skin cancer, and nerve sheath cancer in the rats. In May 2007, Arena reported these results to the FDA. Arena believed that the cause of the carcinogenic mechanism was the hormone prolactin, a theory it deemed the “Prolactin Hypothesis.” Prolactin is a hormone that has been linked to cancer in rats. The FDA did not halt the clinical studies, but requested follow-up testing and bi-monthly updates on whether the rats taking lorcaserin experienced increased prolactin levels.² Arena complied and submitted “initial readings” of the ongoing Rat Study.

In April 2008, Defendants Shanahan, Behan, and Anderson sat down with the FDA to discuss these and other matters. Once again, the FDA did not put the BLOOM and BLOSSOM studies on hold, instead insisting that Arena submit a draft of the final Rat Study report as soon as possible. The FDA permitted the human testing to continue because:

1) the updated informed consent forms included the nonclinical [Rat Study] findings; 2) [it] learned that drug exposure in rats was nearly twice as high as predicted, which increased the safety margin to clinical exposure; 3) preliminary data showed a modest increase in serum prolactin levels after a single dose in male rats ...; 4) [it] acknowledged that the interim tumor incidence data would change (e.g., might be less worrisome) ...; 5) only with continued clinical study was it possible to assess whether long-term dosing with lorcaserin increased serum prolactin levels in humans; 6) only with continuation of clinical dosing would [it] obtain an accurate assessment of lorcaserin's weight-loss efficacy and safety in diabetics; and 7) given that lorcaserin is non-genotoxic, [it] believed that cancer risk was low under the conditions of use in the ongoing clinical trials....³

In February 2009, Arena put together the final report, concluding that follow-up studies substantiated the connection between prolactin and the cancer.

On March 12, 2009, less than one month after Arena put together the final Rat Study report for the FDA, CEO Jack Lief told investors that Arena was confident about lorcaserin's approval. That confidence was “based on the Phase II data, the Phase I data, the preclinical studies that was [sic] done, [and] all the animal studies that have been completed. ” (Emphasis added.) A May 2009 SEC filing, signed by Lief, similarly represented that “the long-term safety and efficacy” of lorcaserin had been “demonstrated,” in part, through “long-term preclinical toxicity and carcinogenicity studies . These preclinical, animal studies are required to help us and regulatory authorities assess the potential risk that drug candidates may be toxic or cause cancer in humans .” (Emphasis added.) In a shareholder call on September 18, 2009, Christen Anderson, Vice President of Clinical Development, represented that Arena “ha[d] favorable results on everything that we've compiled so far .” (Emphasis added.) During a shareholder call on November 10, 2009, Lief stated that “at [that] time [they] ha[d] all of the data in hand that [would] be included” in the soon-to-be-submitted application. (Emphasis added.) Arena's Chief Scientific Officer, Dominic Behan, told investors that “[a]s you can see from the data, we believe that lorcaserin is a game changer.” And when discussing the upcoming Advisory Committee meeting, Arena's Chief Medical Officer, William Shanahan, said, “we're not expecting any surprises associated with the panel.”

In December 2009, Arena submitted its final application (which included all study data and the Rat Study conclusions) to the FDA. The FDA scheduled an Advisory Committee meeting to consider whether lorcaserin should be recommended for FDA approval. In preparation for this meeting, Arena hired Dr. Gary Williams, a world-renowned toxicologist (specializing in carcinogenicity) to answer questions for the Committee.⁴

On September 14, 2010, the FDA published Arena's and the FDA's briefing documents on the FDA's website. In its briefing documents, the FDA disclosed the existence of the Rat Study and concerns about lorcaserin's possible carcinogenicity for the first time. Investors and analysts were “caught off guard,” “surprised,” and “completely blindsided” by the “unforseen,” “[un]disclosed,” “significant concern” about “pre-clinical cancers in rats.” Arena's stock took a plunge, declining in value by 40% in a single day.

At a later meeting with the Advisory Committee, Arena interpreted the data to support the safety of lorcaserin. Arena explained that the Rat Study showed that (a) the dosage rates for rats getting cancer were 82 times higher than human exposure, thus creating an acceptable safety margin, and (b) the timing of prolactin increases substantiated the Prolactin Hypothesis and that the amount of prolactin increase should not be the focus of the inquiry.

The FDA Advisory Committee disagreed, initially. It believed that in order to prove the Prolactin Hypothesis, the studies needed to show robust and sustained increases in prolactin levels in the rats, which the data did not show. Advisory Committee members recognized...