Class Action Failed to Adequately Allege Securities Law Violations because Pharmaceutical Company’s Meta-Analyses were Inconclusive and because Class Action Failed to Adequately Plead Scienter New York Federal Court Holds
Plaintiffs filed a putative class action against pharmaceutical company GlaxoSmithKline (GSK) and certain individual officers and directors of GSK for violations of federal securities laws; specifically, the class action complaint alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and of Rule 10b-5 on the grounds that defendants failed to disclose the truth about its meta-analysis in connection with its diabetes drug, Avandia. Borochoff v. GlaxoSmithKline PLC, ___ F.Supp.2d ___ (S.D.N.Y. May 9, 2008) [Slip Opn., at 1-2]. Plaintiffs filed an amended class action complaint 5 months later, and defense attorneys moved to dismiss the class action under Rule 12(b)(6), id., at 9-10. The district court granted the motion and dismissed the class action.
The class action complaint alleged that in September 2005, GSK finalized a meta-analysis that “showed an estimate of…an increased risk of heart attack, associated with the use of Avandia.” Borochoff, at 2. Nonetheless, its October 2005 press release attributed GSK’s “excellent pharmaceutical sales growth” in part to Avandia’s “tremendous success” and “emphasize[d] that we do not expect the growth rate to slow down over the next couple of years.” Id., at 2-3. GSK’s February 2006 press release also referred to Avandia as a “significant growth driver,” id., at 3. GSK did not disclose the results of its first mea-analysis, which were duplicated by its second meta-analysis, finalized in March 2006. Id. On the contrary, GSK’s 2005 Annual Report, filed on March 3, 2006, stated that “strong growth” from Avandia was expected to continue in 2006. Id., at 4. The class action alleged that GSK’s statements were “materially false and misleading” because it knew, based on its meta-analyses, that use of Avandia carried with it an increased risk of heart attack, id. The class action also cited two additional press releases, from April and July 2006, that called Avandia a “key growth driver” and stressed a “32% increase in sales of Avandia.” Id., at 4-5.
GSK provided the FDA with a meta-analysis of Avandia in August 2006; the class action complaint alleged, “According to the FDA, it did not publicly disclose the data submitted by Glaxo at the time it was submitted in August 2006 because the FDA wanted to wait until it was able to perform a comprehensive internal re-analysis of that data.” Borochoff, at 5. The class action cited to several additional statements by defendants made after its submission to the FDA that continued to stress the success of Avandia, see id., at 5-8. This included a statement in October 2006 that Avandia was “a big engine” that was “[not] going to stall anytime soon,” and a February 2007 press release that stated the results of one of its new studies that showed “no statistically significant” risk of heart attack from the use of Avandia. Id., at 7. But in May 2007, the New England Journal of Medicine published a meta-analysis that concluded use of Avandia carried an increased risk of heart attack, and that same day the FDA issued a safety alert identifying an increased risk of heart attack from the use of Avandia, id., at 8. GSK stock dropped more than $4 a share (almost 8%) on the news, id.
Relying on Bell Atlantic Corp. v. Twombly, 127 S.Ct. 1955 (2007) and Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336 (2005), the district court explained that plaintiffs were required to “plead enough facts to state a claim for relief that is plausible on its face,” and that the six elements required to state a claim under Section 10(b) and Rule 10b-5 are “(1) a material misrepresentation or omission; (2) scienter; (3) a connection with the purchase or sale of a security; (4) reliance; (5) economic loss; and (6) loss causation.” Borochoff, at 10. Defense attorneys moved to dismiss the class action, inter alia, on the grounds that plaintiffs had not established a material misrepresentation or omission and had not adequately pleaded scienter. Id., at 11.
According to defense attorneys, the failure to disclose the meta-analyses was not material and thus not actionable because “[the] results were inconclusive and thus GSK had not duty to disclose them.” Borochoff, at 11. The district court agreed. “‘Silence, absent a duty to disclose, is not misleading under Rule 10b-5.’” Id., at 12 (citation omitted). The class action complaint did not allege that the meta-analyses provided “statistically significant evidence” of increased heart attack risks; rather, “The most it claims is that the meta-analyses showed an ‘estimate’ that an increased risk of heart attack was ‘associated’ with the use of Avandia.” Id., at 12-13. The district court noted that even the FDA believed the meta-analyses results were inconclusive, quoting FDA testimony before Congress that “[t]he pooled analysis and the population-based database study presented inconsistent data with regard to the potential cardiovascular risk of rosiglitazone…. In looking at all the studies to date related to the potential contribution of rosiglitazone to increasing the risk of heart attack, the data are inconsistent and conclusions are not clear.” Id., at 14. The federal court concluded at page 15,
Thus the statements referred to in the amended complaint do not show that the heart attack risk was either statistically significant or sufficiently serious or frequent to affect Avandia’s future earnings. “Companies conduct many experiments and tests in connection with their products, and to require the public announcement of each one would risk ‘bury[ing] the shareholders in an avalanche of trivial information.’” [Citation.] [¶] GSK had no duty to disclose the results of its meta-analyses, and the amended complaint does not sufficiently plead that defendants made a material omission.
Based on the recent Supreme Court opinion in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 127 S.Ct. 2499 (2007), concerning scienter under the PSLRA (Private Securities Litigation Reform Act), see Borochoff, at 16, the district court concluded that the class action failed to adequately allege scienter, see id., at 15-21. Put simply, the district court found that the class action failed to “allege that defendants purposefully concealed known conclusive risks from the public” because the meta-analyses “did not show a decisive link between Avandia and cardiovascular risks.” Id., at 21. The federal court also denied plaintiffs’ leave to file a second amended class action complaint on the grounds that amendment “would be futile.” Id., at 24. Accordingly, it granted the defense motion to dismiss the class action with prejudice. Id.
NOTE: The district court explained, “‘A meta-analysis is known as the synthesis of research results through the use of an array of statistical methods to cull and merge results from previously performed separate, but related, studies. This type of analysis is done when the individual studies, alone, would not be deemed large enough to adequately examine a particular question.’” Borochoff, at 2 n.1.