Fisher v. Fennec Pharm.

1

JEFFREY D. FISHER, Individually and on Behalf of All Others Similarly Situated, Plaintiff, v. FENNEC PHARMACEUTICALS INC., ROSTISLAV RAYKOV, and ROBERT ANDRADE, Defendants.

No. 1:22-CV-115

United States District Court, M.D. North Carolina

October 12, 2022

MEMORANDUM OPINION AND ORDER

Catherine C. Eagles, District Judge

The defendants Fennec Pharmaceuticals, Inc. and two of its officers, CEO Rostislav Raykov and CFO Robert Andrade, move to dismiss this securities fraud class action brought by the plaintiff Jeffrey D. Fisher for failure to state a claim. Because the complaint does not adequately plead actionable statements or omissions or scienter under the applicable heightened pleading standards, the motion will be granted. The defendants' motions to consider and to take judicial notice are denied, as it is unnecessary to consider these materials to grant the defendants' substantive motion.

I. Allegations in the Complaint

Mr Fisher bought stock in Fennec while Fennec's application for approval of a new prescription drug was pending with the Food and Drug Administration. See Doc. 24 at ¶¶ 22, 7-16. He contends that in its public statements about this process beginning on May 28, 2021, Fennec misled investors about the likelihood the application would be approved. Id. at ¶¶ 2-3. These misrepresentations and omissions, he contends, violated § 10(b) of the Exchange Act and a related regulation known as Rule 10b-5. Id. at ¶ 18.

A. Fennec and Pedmark

Fennec is a biotech company with its principal place of business in Research Triangle Park, North Carolina. Doc. 24 at ¶¶ 1, 23. The company's main focus is the development of the new drug known as Pedmark, a formulation of sodium thiosulfate that purports to prevent hearing loss in children undergoing certain types of chemotherapy treatment. Id. at ¶¶ 1, 48. Because Pedmark is a new pharmaceutical drug, the FDA requires Fennec to seek and obtain approval for Pedmark through the FDA's New Drug Application (NDA) process before Fennec can sell, market, and distribute Pedmark for commercial use in the United States. Id. at ¶ 32.

B. New Drug Application Process Generally

The NDA process provides the FDA with the information it needs to determine whether the drug is safe and effective, its benefits outweigh its risks, its proposed labeling is appropriate, and “the methods used in manufacturing the drug and the controls used to maintain the drug's quality are adequate to preserve the drug's identity, strength, quality and purity.” Id. As part of this process, drug sponsors such as Fennec must make a detailed showing about “Chemistry, Manufacturing and Controls” for the drug and the manufacturing facility so “that pharmaceutical drug products are consistently effective, safe and high quality for consumers.” Id. at ¶ 34. If a sponsor changes its drug manufacturer, it must demonstrate to the FDA that the change will not adversely impact the quality, safety, and efficacy of the drug. Id. at ¶ 35.

As part of the NDA process, the FDA will monitor the manufacturer of the drug and conduct a pre-approval inspection of the facilities to assess readiness for commercial manufacturing and conformance to the application, as well as to conduct a data integrity audit. Id. at ¶¶ 41-43. At the end of the inspection, FDA inspectors will conduct an exit interview to explain any observed violations of FDA standards. Id. at ¶ 44. They also memorialize these violations in a Form 483 issued to the manufacturing facility. Id. The Form 483 is not a final decision, and facility management has 15 days to provide written responses to the Form 483 observations. Id. at ¶¶ 46-47.

If the FDA does not approve an NDA, it will send the sponsor a Complete Response Letter (CRL), “which describes all the specific deficiencies that the FDA identified in the NDA and when possible, recommends actions that the sponsor could take to place its NDA in condition for approval.” Id. at ¶ 47. After receiving a CRL, the sponsor may resubmit its NDA. Id.

C. Pedmark's NDA

In December of 2018, Fennec filed an NDA with the FDA for Pedmark. Id. at ¶ 52. Fennec contracted with Pharmaceutics International, Inc. (PII) to manufacture Pedmark. Id. at ¶ 53. PII had been on the receiving end of several negative regulatory findings by European regulators in 2016, who had “prohibited PII from shipping drugs to Europe” because of manufacturing deficiencies. Id. at ¶ 54. And in October of 2016, one pharmaceutical company recalled 43,000 bottles of a drug produced by PII because of “failed stability testing for impurity levels.” Id.

In July 2020, FDA inspectors issued a Form 483 for both of PII's facilities “while it was under contract as Fennec's drug product manufacturer for” Pedmark. Id. at ¶ 55. The FDA saw deficiencies in PII's equipment maintenance, building conditions, and the prevention of microbiological contamination, among other things. Id. at ¶ 56.

In August 2020, the FDA issued a CRL for the Pedmark NDA. Id. at ¶ 57.

According to Fennec's announcement, the FDA did not approve the drug because of the manufacturing deficiencies identified in a Form 483, id., and no concerns about the drug's safety or efficacy were identified. See id. at ¶¶ 5, 57. Because the problems with Pedmark's NDA were manufacturing-related and not a result of concerns over efficacy or side effects, analysts were generally positive about Fennec's stock price. See id. at ¶¶ 67-68.

Some nine months after the CRL letter, Fennec resubmitted the Pedmark NDA, and, in the first statement at issue in this litigation, Fennec announced the resubmission on May 28, 2021. Id. at ¶ 69.^[1] Fennec made generally optimistic statements through a press release about efforts to resolve the manufacturing issues that led to the CRL in August 2020 and about Fennec's progress toward receiving NDA approval. See Id. (general optimistic statements on May 28). Fennec and Mr. Raykov repeated generally optimistic public statements on June 22, id. at ¶ 72, and August 10. Id. at ¶¶ 82-83, 85-86. Over the early summer of 2021, Fennec's stock price went up. Id. at ¶¶ 70, 73.

On August 11, Mr. Raykov again repeated these generally positive statements. See id. at ¶¶ 89-91. He also affirmatively asserted his belief that the manufacturing deficiencies had been addressed and that Fennec's “quality department” believed the facility was ready for resubmission, id. at ¶ 89-90, but he qualified that by telling investors that Fennec had a back-up plan for another manufacturer if that turned out not to be the case. Id. at ¶ 91. Beyond these general statements, he said that “I really don't want to get into the details about the pre-approval proof of inspection because you create expectations.” Id.

On September 22, Mr. Raykov again made public statements about the NDA. He led with the observation that that “[y]ou never want to be overly confident with anything when it comes to the FDA.” Id. at ¶ 93. But his statements were generally optimistic that the NDA would be approved, and he specifically said that the plant had made “significant improvements.” Id. He repeated Fennec's belief that “we think the plant is in good shape to refile,” and stated “we did not do this in a vacuum, we did this based on communication from the plant, we did this in speaking with the FDA on a regular basis.” Id. He asserted that Fennec “expect[ed] approval early next year.” Id. at ¶ 94.

The FDA inspected PII facilities on unspecified dates between July 26 and September 29. Id. at ¶ 75. On September 29, PII provided Fennec with the Form 483 issued by the FDA documenting its inspections, as well as the FDA's audit inspection report, also called an EIR. Id. at ¶¶ 79-80. These documents identified numerous violations of good manufacturing practices, including cracked vials, unsterilized manufacturing suites, and improper glove protocol; some vials of Pedmark were left unsecured and uncapped during a fire alarm. Id. at ¶ 76.

In public statements issued on September 29, Mr. Raykov was noticeably less optimistic, though he continued to express hope that the NDA would be approved. Id. at ¶ 96. He referenced the possibility of an EIR and implied that FDA inspections had resulted in some negative observations though he did not say so directly; he did affirmatively state that “those observations are not critical, so that this plant can pass” inspection. Id. He repeated that if the plant did not pass inspection, Fennec had a second manufacturer so that it could file another NDA after a short delay. Id.

On November 10, Fennec made general statements in a press release that it was spending money on “essential activities in preparation for the launch of” Pedmark. Id. at ¶ 98. It made no mention of any problems at the manufacturing facility or of any recent inspections by the FDA. See id. at ¶¶ 98-99. In an SEC filing the same day, it mentioned a “constructive and collaborative” meeting with the FDA about the 2020 CRL issued after Fennec's first NDA. Id. at ¶ 101.

Mr. Fisher bought Fennec stock on November 23. Doc. 16-4 at 4. On November 30, Fennec announced that it received another CRL from the FDA for the Resubmitted Pedmark NDA which “was issued as a result of identified manufacturing deficiencies which need to be satisfactorily resolved before the Pedmark NDA can be approved.” Doc. 24 at ¶ 110. As a result of the CRL news, Fennec's stock price dropped significantly. Id. at ¶ 112. The FDA had not approved Pedmark at the time Mr. Fisher filed the operative complaint.^[2]

II. Jurisdiction

The Exchange Act gives the district courts of the United States “exclusive jurisdiction” of violations of the Exchange Act “or the rules and regulations thereunder.” 15 U.S.C. § 78aa(a). Because Mr Fisher asserts...