In re Emergent BioSols. Sec. Litig.

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IN RE EMERGENT BIOSOLUTIONS INC. SECURITIES LITIGATION

Civ. No. DLB-21-955

United States District Court, D. Maryland

September 1, 2023

MEMORANDUM OPINION

Deborah L. Boardman, United States District Judge

Nova Scotia Health Employees' Pension Plan and City of Fort Lauderdale Police & Firefighter's Retirement System as lead plaintiffs, bring this securities class action against Emergent BioSolutions Inc. (“Emergent”) and three Emergent officers (collectively, “the Individual Defendants,” and collectively with Emergent “the Defendants”). Emergent is a biopharmaceutical company that was tasked by the federal government in the early days of the pandemic to develop and manufacture drug substances for COVID-19 vaccines. The lead plaintiffs, on behalf of a class of shareholders who acquired Emergent stock between March 10, 2020 and November 4, 2021 (collectively, “the Plaintiffs”), assert violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t(a) (2018) (“the Exchange Act”), and a regulation promulgated thereunder, 17 C.F.R. § 240.10b-5 (2022) (“Rule 10b-5”). Generally, they allege the Defendants defrauded them by misrepresenting Emergent's drug substance manufacturing capabilities at a facility located in Baltimore, Maryland and, after news broke of a contamination incident at the facility, by misrepresenting the magnitude of the contamination and its causes. The disclosures of the alleged misrepresentations caused the prices of Emergent stock to drop sharply, resulting in shareholder losses.

The Defendants move to dismiss the amended complaint under Rules 12(b)(6) and 9(b) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995 (“PSLRA”). ECF 72. The motion is fully briefed. ECF 80 & 115. A hearing was held on April 19, 2023. For the following reasons, the motion to dismiss is granted in part and denied in part.

I. Factual Background^[1]

A. Emergent and the Bayview facility

Emergent is a Maryland-based biopharmaceutical company that provides preparedness and response products to address public health threats. Emergent is comprised of six segments focusing on different public health threat categories, including a Contract Development and Manufacturing Organization (“CDMO”) segment that provides “molecule-to-market” offerings such as drug substance manufacturing for vaccines. Emergent provides CDMO services to biopharmaceutical companies, government agencies, and non-governmental organizations. The company is led by Defendant Robert G. Kramer, who has served as President since March 2018 and Chief Executive Officer and Director since April 2019. Defendant Richard S. Lindahl has been Emergent's Executive Vice President, Chief Financial Officer, and Treasurer since March 2018. Defendant Syed T. Husain was Emergent's Senior Vice President and Head of the CDMO segment until his resignation, announced on April 29, 2021.

Emergent has seven manufacturing and development facilities in the United States, including a facility in Baltimore, Maryland (“the Bayview facility” or “Bayview”) that Emergent acquired in 2009. Originally a contract testing laboratory, the Bayview facility underwent renovations in 2011 and 2018 to add manufacturing and pilot plant capabilities, resulting in four separate suites (also referred to as “Areas”). It is one of just three facilities in the United States that is federally designated as a Center for Innovation in Advanced Development and Manufacturing (“CIADM”), the purpose of which is to support public health emergency needs. In June 2012, the U.S. Department of Health and Human Services (“HHS”) awarded Emergent a $163 million contract to prepare the Bayview facility for mass production of vaccines in a pandemic.

B. Emergent and COVID-19 vaccines

In early 2020, soon after the COVID-19 pandemic began, the United States government funded Operation Warp Speed (“OWS”) to support rapid development, manufacturing, and distribution of vaccines. As part of OWS, on April 23, Emergent entered into an agreement with Johnson & Johnson (“J&J”), valued at $135 million, to provide drug substance manufacturing services for J&J's COVID-19 vaccine as well as to reserve large-scale manufacturing capacity for J&J. The parties entered into another agreement on July 6 that expanded the arrangement to a five-year deal, valued at an additional $480 million for the first two years. During those years, Emergent would provide drug substance manufacturing services for J&J at the Bayview facility. For the remaining three years, it would provide a “flexible capacity deployment model to support annual dose requirements.” ECF 54, ¶ 52.

On May 30, HHS's Biomedical Advanced Research and Development Authority (“BARDA”) issued a task order to Emergent to ensure capacity reservation and expansion to facilitate the manufacture of third-party COVID-19 vaccines. The contract, valued at approximately $628 million, required Emergent to “maintain the reserved capacities in a state of readiness to perform current good manufacturing practices (cGMP) manufacturing activities . . . for the entirety of the period of performance.” Id. ¶ 53.

On June 11, Emergent contracted with AstraZeneca (“AZ”) to provide CDMO services and reserve large-scale manufacturing capacity at the Bayview facility for AZ's COVID-19 vaccine. That agreement was valued at approximately $87 million. On July 27, Emergent entered another deal with AZ, valued at approximately $174 million through 2021, to produce large-scale drug substance manufacturing at the Bayview facility under a flexible capacity deployment model.

In August, Emergent began manufacturing the AZ bulk drug substance in Area 3 of the Bayview facility. Each “batch” of AZ bulk drug substance translated to roughly 2.5 - 3 million AZ COVID-19 vaccine doses. Several months later, in November, Emergent began manufacturing the J&J bulk drug substance in Areas 1 and 2 of the Bayview facility. Each “batch” of J&J bulk drug substance translated to roughly 10 - 15 million J&J COVID-19 vaccine doses. J&J vaccines, once manufactured, were sent to a J&J laboratory for quality control testing before distribution.

In total, Emergent was awarded approximately $628 million in government funding and a combined $876 million from its J&J and AZ agreements to provide large-scale manufacturing facilities that would support the rapid supply of vaccine doses to the public once the vaccines were developed and approved. When each of these deals was announced, analysts raised the price target on Emergent's stock.

C. Contamination and quality control concerns

The Plaintiffs allege that between March 10, 2020 and November 4, 2021 (“the Class Period”), there were “myriad deficiencies that plagued the Bayview facility and created the persistent risks of contamination of COVID vaccine drug product.” Id. ¶ 59. These deficiencies included widespread mold, poorly disinfected equipment, inadequate staffing and training, substandard quality control procedures, and improper waste procedures. To support these allegations of undisclosed deficiencies, the Plaintiffs rely on confidential witness statements, FDA and other inspection reports, news reports, preliminary Congressional findings, and final Congressional findings published on May 10, 2022 (“2022 Congressional Report”).

The Plaintiffs identify ten confidential witnesses (“CWs”) who observed and reported various deficiencies at Bayview. They include: (1) CW1, a Senior Project Manager at corporate headquarters from April to December 2020; (2) CW2, a Senior Program Manager, Operational Excellence from December 2018 to January 2021, then Director, Operational Excellence from January to December 2021, based at Bayview and other facilities; (3) CW3, a Quality Assurance Analyst at the Bayview facility from November 2020 to November 2021; (4) CW4, a Quality Control (“QC”) Microbiology Analyst II at the Bayview facility from July 2019 to July 2020; (5) CW5, a Project Analyst at corporate headquarters from August 2020 to January 2021; (6) CW6, a QC Microbiology Specialist, Data Review Supervisor at the Bayview facility from October 2020 to May 2021; (7) CW7, a Lead QC Biological Laboratory Support Technician at the Bayview facility from March to October 2020; (8) CW8, a QC Supervisor at the Bayview facility from June to December 2020; (9) CW9, a Manufacturing Assistant and then Bioprocess Associate at the Bayview facility from July 2020 to October 2021; and (10) CW10, a QC Analyst II - Microbiology at the Bayview facility from April 2020 to May 2021. The CWs generally allege that when Emergent took on COVID-19 contracts in spring and early summer 2020, the Bayview facility did not have the properly trained personnel, equipment, quality control processes, physical space, or functional capability needed to handle the work-in short, that Emergent was unqualified and unprepared for mass production of vaccine drug substance. These deficiencies, the CWs allege, persisted throughout the Class Period.

Beginning in April 2020, a series of internal and external audits of the Bayview facility took place. On April 1, a BARDA audit found that Bayview had “substantial evidence of site cGMP non-compliance” and “risk to CIADM readiness” due to “inadequate quality unit oversight” and “failure of quality systems,” including improper procedures, mishandling of products, and unqualified staff. See ECF 79-4, at 3. The FDA inspected the Bayview facility in April 2020 and issued an inspection report on April 20. Though the inspection was initially intended as a preapproval inspection regarding an anthrax drug, when the FDA investigator observed “multiple deficiencies with data integrity and general cGMP...