In re Egalet Corp.

340 F.Supp.3d 479

IN RE EGALET CORPORATION SECURITIES LITIGATION

CIVIL ACTION NO. 17-390

United States District Court, E.D. Pennsylvania.

Signed August 2, 2018

MEMORANDUM RE: DEFENDANTS' MOTION TO DISMISS AND PLAINTIFFS' MOTION TO STRIKE

Baylson, District Judge

I. Introduction

In this securities case, brought pursuant to Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, a putative class of shareholders possessing shares of Egalet Corporation ("Egalet") alleges that three of Egalet's executives defrauded the class by failing to disclose that the FDA was likely to grant intranasal labeling exclusivity to a competitor's abuse-deterrent morphine drug. As a result, upon FDA approval of Egalet's own pain management drug, Egalet was not permitted to market its drug as effective at reducing intranasal opioid abuse, and when this news was announced, shares of the stock dropped significantly within a matter of days.

Presently before the Court are Defendants' Motion to Dismiss, and Plaintiffs' Motion to Strike one of the exhibits that Defendants attached to their Motion to Dismiss.

For reasons discussed below, Plaintiffs' Motion to Strike is DENIED and Defendants' Motion to Dismiss the Amended Complaint is GRANTED WITH PREJUDICE.

II. Procedural History

This case began on January 27, 2017, with the filing of a Class Action Complaint (ECF 1) by Plaintiff George Mineff against Robert S. Radie ("Radie"), Stanley J. Musial ("Musial"), Jeffrey M. Dayno ("Dayno," and together with the aforementioned individuals, "Individual Defendants"), and Egalet (together with Individual Defendants, "Defendants"). On February 10, 2017, Plaintiff Steve Klein filed a Class Action Complaint against Defendants in a separately captioned case (17-cv-617, ECF 1), which was designated as related and assigned to the undersigned. On March 28, 2017, two sets of movants filed motions for consolidation of the related cases, appointment of lead plaintiffs, and approval of their respective selections of legal counsel. (ECF 10-11) However, the first of the two motions was withdrawn on April 11, 2017. (ECF 15) Also on April 11, 2017, Defendants filed a response to the remaining motion, expressing their agreement that the related actions should be consolidated. (ECF 16)

On May 1, 2017, this Court granted the motion of Johseph Spizzirri, Abdul Rahiman, and Kyle Kobold (collectively, "Egalet Investor Group"), thereby consolidating the two related cases under the above caption, appointing Egalet Investor Group as Lead Plaintiff, and approving their selection of counsel. (ECF 17) On May 15, 2017, pursuant to a joint stipulation of the parties, this Court granted leave to Lead Plaintiff to file an amended complaint. (ECF 18) Lead Plaintiff filed its Consolidated Amended Class Action Complaint on July 3, 2017. (ECF 19, "CAC") The Amended Complaint contains two counts: (1) "Violations of Section 10(b) [ 15 U.S.C. § 78j(b) ] and Rule 10b-5 [ 17 C.F.R. § 240.10b-5 ] Promulgated Thereunder Against All Defendants," and (2) "Violations of Section 20(a) [ 15 U.S.C. § 78t(a) ] Against the Individual Defendants." (Id. )

Presently before the Court are three motions. The first two motions are (1) Defendants' Motion to Dismiss the Amended Complaint, which was filed on September 1, 2017; and (2) Plaintiffs' Motion to Strike Exhibit 1 to Defendants' Motion to Dismiss, or in the Alternative, to Treat Defendants' Motion to Dismiss as a Motion for Summary Judgment, which was filed on October 31, 2017. (ECF 24, "MTD"; ECF 26, "MTS") The parties submitted Responses and Replies to each motion. (ECF 25, "MTD Response"; ECF 28, "MTS Response"; ECF 29, "MTD Reply"; ECF 31, "MTS Reply")

On February 20, 2018, the Court held oral argument on both motions. (ECF 39) During oral argument, Plaintiffs represented to the Court that they would like to avail themselves of the opportunity to file a second amended complaint. Thereafter, on March 6, 2018, Plaintiffs filed the third motion now before the Court, a Motion for Leave to File a Second Amended Complaint (ECF 43), to which they attached a proposed third complaint. Defendants filed a Response (ECF 44) on March 20, 2018, and Plaintiffs filed a Reply on March 27, 2018. (ECF 45) Plaintiff also filed a Motion for Leave to File a Surreply (47), which this Court granted on April 4, 2018. (ECF 48).

On July 12, 2018, this Court held oral argument on all open motions, specifically addressing with the parties those portions of the proposed Second Amended Complaint which do not appear in the First Amended Complaint. Because Defendants' Motion to Dismiss is addressed to the First Amended Complaint, it is the principal subject of this opinion. The proposed Second Amended Complaint, which almost entirely mirrors the First Amended Complaint, is discussed infra in the context of whether amendment would be futile.

III. Factual History¹

A. The Parties

Plaintiffs are a class of persons who purchased or otherwise acquired shares of Egalet common stock between November 4, 2015, and January 9, 2017, inclusive (the "Class Period"). (CAC ¶ 1)

Defendant Radie has served as Egalet's CEO, President, and a member of its Board of Directors since March 2012. (Id. ¶ 24)

Defendant Musial has served as Egalet's Executive Vice President since December 2015, CFO since April 2013, and Principal Financial Officer and Secretary since September 2013. (Id. ¶ 25)

Defendant Dayno has served as Egalet's Chief Medical Officer since July 2014. (Id. ¶ 26)

Defendant Egalet is a specialty pharmaceutical company that focuses on developing and commercializing abuse-resistant formulations of opioids and other pain care drugs. (CAC ¶ 33) Egalet's proprietary Guardian Technology employs a novel application of "injection molding" to manufacture "tablets that are hard and difficult to manipulate for misuse and abuse." (Id. ¶ 34)

"At the beginning of the Class Period," Egalet was developing two late-stage lead product candidates: ARYMO ER™ and Egalet-002. (Id. ¶ 35) Both use Guardian Technology to impede abuse. (Id. ) Egalet also acquired two FDA-approved pain care products. (Id. ¶ 36)

Plaintiffs' Amended Complaint centers on ARYMO ER™ ("ARYMO"). Egalet developed ARYMO as an extended release morphine tablet intended to utilize Guardian Technology to deter abuse of the product by increasing resistance to physical methods of manipulation (e.g., cutting, crushing, grinding), chemical manipulation, and extraction. (Id. ¶ 34)

B. The 505(b)(2) Pathway to Drug Approval

In 1984, Congress passed the Hatch-Waxman Amendments to the Food, Drug, and Cosmetic Act, Pub. L. No. 98–417, 98 Stat. 1585 (1984). (See id. ¶ 47) The Hatch-Waxman Amendments require that a drug manufacturer seeking to market a new drug must first obtain approval from the Food and Drug Administration ("FDA"). (Id. ¶ 48) A manufacturer can obtain FDA approval via any of three different application pathways, one of which is known as a Section 505(b)(2) New Drug Application ("NDA"). (Id. )

An applicant for a 505(b)(2) NDA can receive approval for marketing a new drug even where one or more investigations relied upon for approval "were not conducted by or for the applicant and for which the applicant has not obtained a right of reference or use from the person by or for whom the investigations were conducted." (Id. ¶ 51) Thus, a 505(b)(2) NDA applicant can rely on previously published reports of studies and the FDA's own findings with respect to drugs that the FDA has previously approved. (Id. ) When an applicant relies on clinical studies that were previously submitted to the FDA in support of a different drug, the drug for which the borrowed studies were conducted is referred to as the "Reference Listed Drug" ("RLD"). (Id. ¶ 52) A 505(b)(2) NDA applicant may proffer studies conducted on the RLD to satisfy the applicant's burden of proving a new drug's safety and effectiveness. This generally occurs when the new drug differs only slightly from the RLD, such as a drug product innovation or change in drug strength. (Id. ¶ 54)

C. Marketing Exclusivity

The Hatch-Waxman Amendments create certain incentives to encourage innovation of new drug products. (See id. ¶ 55) One of those incentives is "marketing exclusivity," which the FDA can grant to new drugs that it approves. (Id. ¶ 54-55) Marketing exclusivity, as its name suggests, provides exclusive marketing rights over a drug. (Id. ¶ 55) It can prevent the issuance of requested labeling language sought by another applicant or prevent the submission or effective approval of other NDAs (such as 505(b)(2) NDAs). (Id. ) In other words, when the FDA grants marketing exclusivity to a drug, it confers substantial benefits on the drug. (Id. )

For a drug to receive exclusivity, it must meet all statutory requirements and receive approval by the FDA. (Id. ¶ 57) There are four categories of exclusivity, one of which is referred to as "Other Exclusivity." (Id. ) One type of "Other Exclusivity" is "new drug product exclusivity." See 21 C.F.R. § 314.108(b)(4). (Id. ¶ 58) New drug product exclusivity is granted when a 505(b)(2) NDA: (1) contains an active moiety (a sub-division of a molecule) that has previously received FDA approval; (2) includes new clinical investigations (other than bioavailability studies) conducted or sponsored by the applicant that were "essential to the approval of the application"; and (3) is approved by the FDA. (Id. ¶ 58) If these three conditions are met, the FDA will not approve another 505(b)(2) NDA with the same "conditions of approval" for a period of three years from the date of the application's approval. (Id. ¶ 58)

21 C.F.R. § 314 further defines several of the constituent terms in the second condition above—i.e., "the 505(b)(2) NDA includes new clinical investigations (other than bioavailability studies) conducted or sponsored by the applicant that were essential to the approval of the application."

A "new clinical investigation" is:

an investigation in humans the results of which

...