Court: District Court, S.D. Illinois; December 16, 2018; Federal District Court
A putative shareholder class action has been consolidated from three lawsuits against Intellipharmaceutics International Inc. (IPCI) and its executives, Isa Odidi and Domenic Della Penna, for alleged violations of the Securities Exchange Act of 1934. Plaintiffs claim that Defendants misled investors about research and testing for IPCI’s product, Rexista, resulting in a decline in stock value when the facts were revealed. The court consolidated the actions on November 21, 2017, appointing David Ducharme, Sam Snyder, and Julia Ann Snyder as Lead Plaintiffs under the Private Securities Litigation Reform Act of 1995. An Amended Complaint was filed on January 29, 2018, asserting claims under Sections 10(b) and 20(a) of the Exchange Act for all purchasers of IPCI securities at inflated prices. Defendants have moved to dismiss the Amended Complaint for failure to state a claim, which the court is partially granting and partially denying.
The relevant parties include IPCI, a publicly traded Canadian pharmaceutical company focused on controlled-release drugs, particularly in the abuse-deterrent opioid market. Isa Odidi serves as CEO and CSO, while Domenic Della Penna is CFO. The allegations center on misleading statements about the development of Rexista, which was intended to address the opioid market. The Class Period is defined from May 21, 2015, when IPCI announced accelerated development of Rexista, to July 26, 2017, when the FDA advisory committee recommended denying IPCI's New Drug Application for the product. The FDA review process requires an Investigation New Drug Application (IND) to be approved before clinical trials, which must complete three phases before a New Drug Application (NDA) can be submitted for commercialization.
The FDA conducts a threshold review upon receiving a New Drug Application (NDA) to ensure its completeness for substantive evaluation. If accepted, the NDA may be referred to advisory committees for expert guidance on its adequacy and labeling. Should the NDA be denied, the FDA issues a Complete Response Letter detailing deficiencies and offers recommendations for future submissions.
In April 2015, the FDA issued nonbinding guidance for drug sponsors developing opioids with abuse-deterrent properties. This guidance outlines recommended study types to assess abuse potential without imposing new formal requirements. Specifically, it suggests three categories of studies:
1. **Category 1** - Laboratory-based in vitro manipulation and extraction studies to evaluate the susceptibility of the drug to manipulation.
2. **Category 2** - Pharmacokinetic studies to assess how the drug is processed by the body in both intact and manipulated forms.
3. **Category 3** - Clinical abuse potential studies to evaluate the drug’s impact on actual users.
The guidance stresses the interconnectedness of these study categories, indicating that results from one can influence the design and necessity of others. It encourages comprehensive evaluation of abuse potential across three primary routes: oral, nasal, and intravenous. The FDA highlights the importance of understanding how deterrent mechanisms for one route may affect abuse risk through others and acknowledges that some studies may not be necessary for drugs unlikely to be abused through certain pathways.
On March 30, 2015, IPCI submitted an Investigational New Drug (IND) application for Rexista, followed by discussions with the FDA regarding necessary studies for the New Drug Application (NDA). On May 21, 2015, IPCI announced plans to expedite Rexista's development based on positive FDA feedback. IPCI submitted the Rexista NDA on November 25, 2016, and the FDA accepted it for substantive review on February 27, 2017. An advisory committee meeting was scheduled for July 26, 2017, with background materials for the NDA released on July 24, revealing that the NDA included only Category 1 studies focused on intravenous abuse deterrence, lacking any data on oral or nasal abuse routes.
During the advisory committee meeting, members overwhelmingly voted against approving Rexista due to its noncompliance with FDA Guidance. The chairperson noted the committee's discomfort with incomplete data and emphasized the necessity of Category 2 and 3 studies to evaluate the product's abuse-deterrent effects comprehensively. The committee expressed that relying solely on Category 1 studies was insufficient for assessing potential abuse via other routes. On September 25, 2017, IPCI received a Complete Response Letter from the FDA, officially denying the Rexista NDA and recommending that IPCI conduct the necessary Category 2 and 3 studies before any revised submission.
Twenty-four allegedly misleading statements made by the Defendants regarding Rexista are outlined in the Amended Complaint. These statements, issued before the FDA's denial of the Rexista New Drug Application (NDA), primarily describe the drug's features, development status, and the NDA's content and approval prospects. The parties categorize the misrepresentations into three main types:
1. **Study Content and Scope**: Defendants allegedly misrepresented the studies included in the Rexista NDA, particularly abuse-deterrent studies related to various methods of drug abuse, claiming compliance with the FDA's 2015 Guidance. However, the Amended Complaint asserts that the NDA did not contain relevant studies for oral or nasal abuse pathways, nor any Category 2 or 3 studies.
2. **Bioequivalence to OxyContin**: Defendants claimed that demonstrating bioequivalence to OxyContin would eliminate the need for Phase III studies, allowing for an accelerated development plan. The Amended Complaint contends these statements were misleading as IPCI had not conducted necessary studies to confirm bioequivalence per the Guidance.
3. **Abuse-Deterrent Properties**: Defendants described Rexista's formulation as having specific abuse-deterrent properties, including a blue dye that deters abuse methods. The Amended Complaint argues these claims were false because IPCI lacked the data to substantiate that the formulation possessed the stated properties or that the excipients deterred abuse by the nasal and oral routes.
Additionally, the Amended Complaint alleges that Defendants acted with scienter, emphasizing Rexista's critical role in IPCI's business and the obligations to provide truthful information, supported by various facts about the company's operations and reporting duties.
The Amended Complaint alleges that the Defendants misrepresented their compliance with FDA Guidance regarding the Rexista NDA, evidenced by their own statements that acknowledge knowledge of the Guidance. It also highlights Defendants' motives to mislead the market, particularly IPCI's reliance on stock sales to offset operational losses and the financial benefits tied to Rexista's expedited development. Specific attention is given to the incentive packages of Defendants Odidi and Della Penna, which were linked to IPCI's stock performance and NDA generation. Notably, Odidi's stock sales and the establishment of a new pharmaceutical venture around the time the FDA rejected the Rexista NDA suggest he was aware of discrepancies in public representations. Odidi's qualifications, including his Ph.D. in Pharmaceutics and his significant role in preparing the Rexista NDA, are also mentioned.
This legal action commenced on July 28, 2017, with an Amended Complaint filed on January 29, 2018. Currently, the Defendants have filed a motion to dismiss the Amended Complaint. To survive this motion, a complaint must present sufficient factual matter that is plausible on its face, allowing for reasonable inferences of liability. Courts consider all well-pleaded allegations as true and may incorporate relevant documents into the evaluation. Securities fraud claims require heightened pleading standards, necessitating detailed identification of fraudulent statements, including the speaker, timing, and reasoning behind the alleged fraud.
Plaintiffs alleging fraud under federal securities law must detail each allegedly misleading statement, explain why it is misleading, and, if based on belief, provide the facts supporting that belief per the PSLRA (15 U.S.C. § 78u-4(b)(1)). Additionally, they must present facts that create a strong inference of the defendant's scienter, which must be compelling compared to any non-fraudulent intent (15 U.S.C. § 78u-4(b)(2)(A); Tellabs, Inc. v. Makor Issues & Rights, Ltd.). Lead Plaintiffs have filed claims under the Exchange Act, asserting a Section 10(b) securities fraud claim and a Section 20(a) control person claim against specific defendants. The defendants seek dismissal, challenging the material misrepresentation and scienter elements of the Section 10(b) claims. Key elements of a Section 10(b) claim include a material misrepresentation or omission, scienter, a connection to the transaction, reliance, economic loss, and loss causation. Misrepresentations may arise from untrue statements or failures to disclose material facts (17 C.F.R. § 240.10b-5(b)). The materiality standard assesses whether the overall context would mislead a reasonable investor. Statements of opinion can also be misleading if the speaker does not genuinely hold the opinion, provides false supporting facts, or omits critical information. Scienter for Section 10(b) requires an intent to deceive or defraud.
A plaintiff can meet the requirement for alleging fraud by demonstrating either that defendants had motive and opportunity or by providing strong circumstantial evidence of conscious misbehavior or recklessness. Recklessness, in the context of Section 10(b), is defined as a state of mind akin to actual intent, exceeding mere negligence, and must reflect a significant deviation from ordinary care.
In analyzing Defendants' motion to dismiss, the court focuses on three types of misrepresentations from the Amended Complaint. The first type involves Defendants’ claims about the Rexista New Drug Application (NDA) submitted to the FDA. Lead Plaintiffs identify eight specific statements made by Defendants between November 2016 and July 2017, asserting that the Rexista NDA included comprehensive abuse-deterrent studies related to various methods of drug abuse per FDA guidelines. However, these claims are contradicted by the actual contents of the Rexista NDA, as the FDA disclosed that the abuse-deterrent features for oral and intranasal routes had not been properly evaluated. Furthermore, while Defendants claimed the NDA supported abuse-deterrent label claims for multiple routes, it only sought labeling for intravenous use and lacked necessary studies for oral and intranasal routes. Consequently, these misrepresentations may be deemed actionable due to their falsity at the time they were made.
Defendants made statements suggesting that their New Drug Application (NDA) was compliant with the FDA's 2015 guidance on abuse-deterrent opioids, which could mislead investors into believing that they had fully met the necessary criteria for such labeling. Their claims about seeking all possible deterrent claims for Rexista further reinforced this impression. However, the NDA did not actually include the recommended Category 2 and Category 3 data as required by the guidance, leading to potential liability under Section 10(b) for misrepresentation. Defendants argue that the claims are merely "fraud by hindsight," referencing cases where unmet FDA approval did not render prior optimistic statements actionable. However, the allegations center on the inaccuracy of Defendants’ claims regarding the NDA's content, not mere optimistic projections. They also contend that pursuing labeling based solely on Category 1 studies was not inconsistent with guidance, but this assertion is undermined by evidence showing that the FDA had previously indicated such labeling was not aligned with the guidance, and the advisory committee largely opposed it based on the same.
Defendants argue that the FDA's acceptance of the New Drug Application (NDA) for review suggests its substantive sufficiency, although the acceptance process primarily assesses administrative sufficiency. The FDA ultimately rejected the NDA on substantive non-compliance grounds. Despite the relevance of this evidence, it is largely peripheral to Lead Plaintiffs' allegations. Defendants allegedly misrepresented the contents of the NDA by claiming it included various studies when it did not. Lead Plaintiffs assert that these misrepresentations may constitute violations under Section 10(b) due to their plausibility.
The Amended Complaint provides substantial circumstantial evidence of conscious misbehavior or recklessness, indicating that Defendants were aware of facts contradicting their public statements. IPCI, the NDA sponsor, is presumed to have knowledge of the NDA's content and emphasized Rexista's significance to its business strategy, supporting claims of awareness during the misrepresentations. Additionally, statements from former employees detail the involvement of individual Defendants, Odidi and Della Penna, in the NDA's development, suggesting they were also aware of its true contents.
Lead Plaintiffs' allegations imply that these Defendants knowingly misrepresented material facts, aligning with precedents that support fraud claims based on similar misstatements about FDA filings. Furthermore, the Amended Complaint demonstrates that the Defendants had both motive and opportunity to commit fraud, detailing their control over Rexista's development and the alignment of their financial interests with IPCI's stock performance. This includes their dependency on stock sales for operational funding and incentive structures tied to stock price increases and NDA submissions.
Defendants challenge the significance of the motive evidence presented by Lead Plaintiffs, arguing it reflects standard practices in the pharmaceutical industry and typical executive incentives. The Court does not need to determine if the motives attributed to the Defendants are commonplace among corporate officers, as the focus is on whether the collective facts provide a strong inference of scienter, rather than evaluating each allegation individually. The Court finds that when considering the motive evidence alongside the Defendants' significant roles in Rexista's development, the filing of its NDA, and public statements inconsistent with the NDA's content, there is a strong inference of scienter. Consequently, Lead Plaintiffs meet the pleading requirements for their Section 10(b) claims related to the Rexista NDA, allowing the claims to survive the motion to dismiss.
Additionally, Lead Plaintiffs allege misrepresentations regarding Rexista's bioequivalence to OxyContin, citing eleven specific statements. One significant statement made on May 21, 2015, claimed that the FDA notified Defendants they would not need to conduct Phase III studies if bioequivalence was demonstrated. Other statements include claims of having successfully demonstrated bioequivalence and descriptions of supportive pharmacokinetic studies included in the NDA. Despite Lead Plaintiffs' allegations, full documentation indicates that IPCI did conduct studies to establish Rexista's bioequivalence, which were included in the NDA, countering the claims of misrepresentation.
A committee member's opinion regarding IPCI's bioequivalence studies was not endorsed by the FDA or other committee members. Although some members questioned IPCI’s study methodologies, no significant flaws were cited that influenced the vote to deny the Rexista NDA. The Lead Plaintiffs do not claim that IPCI's inability to demonstrate bioequivalency affected the FDA's decision. Even if the FDA expressed skepticism about the studies, it does not invalidate the truthfulness of Defendants' claims that these studies were conducted and submitted. The Defendants' statements about the submission of bioequivalence studies are deemed accurate and not actionable under Section 10(b), as are their opinions on the results, provided that they genuinely held those beliefs and that their supporting facts were true. The Lead Plaintiffs' assertion that Defendants lacked a reasonable basis for their claims of bioequivalence is countered by the existence of multiple studies included in the Rexista NDA that support their claims. Disputes over data interpretation do not constitute grounds for liability. Furthermore, the Lead Plaintiffs allege misrepresentations regarding Rexista's abuse-deterrent features, citing nineteen statements that generally assert these features provide significant barriers to tampering, with particular focus on two specific features they claim are misleading.
Rexista's design includes features intended to prevent abuse, specifically its resistance to alcohol dose-dumping and the use of a stigmatizing blue dye that stains users who tamper with the drug. In vitro studies within Rexista's New Drug Application (NDA) demonstrated these abuse-deterrent characteristics. Although the advisory committee raised concerns about the adequacy of studies supporting these claims, they did not dispute the drug's actual features. The FDA's determination regarding the sufficiency of the studies does not invalidate Defendants' statements about the drug's characteristics. Consequently, Defendants' motion to dismiss the Section 10(b) claims related to these statements is granted.
Regarding Section 20(a) claims, the Lead Plaintiffs have established a primary violation of Section 10(b) by IPCI concerning its statements about the Rexista NDA. This satisfies the first element of control person liability. Additionally, the facts indicating that Defendants Odidi and Della Penna knowingly disseminated false information also demonstrate their culpable participation in the fraud, fulfilling the necessary criteria for liability under Section 20(a).
Defendants' motion to dismiss Lead Plaintiffs' Section 20(a) claims related to IPCI's statements about the Rexista NDA contents is denied. However, the motion is granted for Lead Plaintiffs' Section 10(b) claims concerning Defendants' statements on Rexista's abuse-deterrent features and bioequivalence to OxyContin. Consequently, the court grants in part and denies in part the motion to dismiss. Specifically, dismissal is granted for claims based on statements about Rexista's abuse-deterrent features and bioequivalence, while claims based on statements regarding the Rexista NDA contents are maintained. Defendants are required to file answers to the remaining claims within 21 days. The Clerk of Court is instructed to close the motion at Docket Number 29. Additionally, Defendants submitted a complete version of the Guidance and relevant background materials as part of their motion, including the full transcript from the July 26, 2017 advisory committee meeting. The statements in question were made between May 21, 2015, and July 11, 2017, primarily through SEC filings and a few interviews with analysts. The Amended Complaint defines bioequivalence as the similarity in biological properties between two drugs, allowing reliance on studies from one drug for another.
