In re Galena Biopharma, Inc. Sec. Litig.

In re GALENA BIOPHARMA, INC. SECURITIES LITIGATION

Civil Action No. 17-929

UNITED STATES DISTRICT COURT DISTRICT OF NEW JERSEY

November 12, 2019

Not for Publication

OPINION

John Michael Vazquez, U.S.D.J.

This putative class action concerns allegations of securities fraud. D.E. 58. Plaintiffs assert that Galena Biopharma, Inc. ("Galena") and several of its key officers and/or employees engaged in fraud under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. § 78a et seq., as to public statements relating to Galena's product Abstral (fentanyl) Sublingual Tablets. D.E. 58. Currently pending before the Court is Defendants' motion to dismiss Plaintiffs' First Amended Class Action Complaint ("FAC") for failure to state a claim pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b), as well as the Private Securities Litigation Reform Act of 1995 ("PSLRA"), 15 U.S.C. § 78u et seq. D.E. 62. The Court reviewed the parties' submissions in support and in opposition¹ and decided the motion without oral argument pursuant to Fed. R. Civ. P. 78(b) and L. Civ. R. 78.1(b). For the reasons stated below, Defendants' motion to dismiss is granted.

I. INTRODUCTION²

A. Background

Plaintiffs are persons and entities that purchased Galena common stock from August 11, 2014 through January 31, 2017 (the "Class Period"). FAC ¶ 1. Defendant Galena is a biopharmaceutical company that develops hematology and oncology therapeutics. Id. ¶ 2. Defendant Mark J. Ahn was the President, CEO, and Director of Galena until August 20, 2014. Id. ¶ 40. Defendant Mark W. Schwartz was the COO of Galena from 2011 to August 20, 2014, and then President and CEO of Galena from August 20, 2014 through the end of the Class Period. Id. ¶¶ 41, 130. Defendant Ryan M. Dunlap was the Vice President and CFO of Galena during the Class Period until December 31, 2015. Id. ¶ 43. Defendant Christopher S. Lento was the Senior Vice President of Oncology Commercial Operations at Galena from May 2013 through December 31, 2014. Id. ¶ 43. Defendant Remy Bernarda was the Senior Vice President of Investor Relations at Galena throughout the Class Period. Id. ¶ 44.

In March 18, 2013, Galena acquired the commercial product Abstral (fentanyl) Sublingual Tablets ("Abstral") and announced the product's launch on October 23, 2013. Id. ¶¶ 2-3. Abstral is a powerful opioid narcotic approved by the U.S. Food and Drug Administration ("FDA") as "a sublingual (under the tongue) tablet for the management of breakthrough pain in patients with cancer, 18 years of age or older, who are already receiving, and who are tolerant to, opioid therapy for their persistent baseline cancer pain." Id. ¶¶ 4, 51, 58. This is the only FDA-indicated use forAbstral; using the drug for other indications is considered off-label. Id. ¶¶ 51, 56. While physicians are permitted to prescribe a medication for a legitimate medical off-label purpose, it is illegal for drug companies to promote a product for off-label use. Id. ¶ 59.

Abstral is made from fentanyl, which is reportedly 50 times more potent than heroin and up to 100 times stronger than morphine, making it the most powerful opioid pain medication available. Id. ¶ 48. As a result, Abstral users face a high risk of addiction and dependence. Id. ¶ 48. Abstral is subject to the FDA's TIRF-REMS³ Access Program, which is designed to "mitigate the risks of misuse, abuse, addiction, [and] overdose" for certain "highly addictive and dangerous" TIRF medications. Id. ¶¶ 60-61. Federal law also has anti-kickback provisions that apply to federal healthcare programs, as well as the Sunshine Act, which requires pharmaceutical companies to disclose "transfers of value" to physicians. Id. ¶¶ 62-65.

During the Class Period, Abstral was the only commercial product sold by Galena. Id. ¶ 6. In July 2014, Galena also acquired Zuplenz, a medication used to treat nausea and vomiting, primarily for persons undergoing chemotherapy. Id. However, during the Class Period, Galena did not have any sales of Zuplenz. Id.

On March 3, 2014, Galena announced Galena Patient Services ("GPS"). Id. ¶ 52. GPS was designed to enhance access to Abstral by helping patients with the health benefits investigation and prior authorization processes, the appeals and denials processes, and locating a pharmacy. Id. Galena also kept an internal document, which it circulated on a quarterly basis, that tracked all of the Abstral prescribers in the country along with the amount each prescribed. Id. ¶ 84, Ex. 1.

Plaintiffs allege that two physicians - Drs. Xiulu Ruan and Patrick Couch - accounted for more than 30% of Galena's Abstral revenues. Id. ¶ 66. Both doctors figure prominently in Plaintiffs' case. Drs. Ruan and Couch owned two pain management clinics, as well as a pharmacy attached to one of the clinics, in Alabama. Id. ¶ 67. From the third quarter of 2013 through at least the end of 2014, the doctors were the number one and two prescribers of Abstral in the United States. Id. ¶ 71. Dr. Rho, a "good friend" of Ruan, accounted for another 10% of Abstral revenues. Id. ¶¶ 66 n. 3, 84.

In October 2013 emails between Lento and Dr. Ruan, on which Schwartz was copied, Lento encouraged Ruan to enroll patient's in Galena's "RELIEF" program. Id. ¶ 85. The RELIEF program tracked how Abstral patients were doing with the drug but also paid doctors $500 for every patient who enrolled. Id. Ruan responded that he did not think that he was eligible because he did not treat many cancer patients, but Lento explained that the RELIEF program was open to cancer and non-cancer patients. Id. The two pain management clinics did not treat many cancer patients. Id. ¶ 86.

Executives and representatives from Galena frequently visited the two physicians at one of the clinics. Id. ¶ 87. Schwartz and Lento frequently communicated with Drs. Ruan and Couch and also visited the doctors in person. Id. Schwartz made at least two trips to the clinic, in November 2014 and February 2015, because Ruan demanded the meetings. Id. ¶ 89. Schwartz also directed other high-level Galena employees to visit the physicians regularly. Id. ¶ 90.

In 2014, Galena and the doctors' pharmacy entered into a marketing services agreement also known as a rebate agreement. Id. ¶ 94. Schwartz signed on behalf of Galena. Id. The agreement paid the pharmacy between 8.75 and 20% for each Abstral prescription the pharmacy filled. Id. An Abstral prescription ranged from several thousand dollars up to approximately$10,000. Id. After the rebate agreement took effect, the number of Abstral prescriptions written by the two physicians increased. Id. ¶ 95. In February 2015, Galena wired $97,924 to the pharmacy's bank account; Plaintiff contends that the payment was made pursuant to the rebate agreement. Id. Galena also had rebate agreements with several oncology dispensing clinics, as well as two non-oncology dispensing clinics. Id. ¶ 97.

Beginning in November 2013, Ruan and Couch also bought more than $1.6 million in Galena stock and "sought to manipulate the stock price by driving up Abstral sales." Id. ¶¶ 71, 99. In February 2014, Lento met with the physicians in Alabama because the doctors were upset that Galena's stock price dropped due to stock sales by corporate insiders. Id. ¶ 88. Ruan and Couch demanded that Galena fire its board of directors and its CEO. Id. ¶¶ 88, 109. In March 2014, Ruan emailed Bernarda, copying Lento, requesting a chance to speak with Galena's board. Id. ¶ 106. Ruan explained that he, Couch, and Rho were not only Galena shareholders "but also your clients and customers to some extent." Id. Bernarda responded that the doctors could speak with a board member and that Bernarda would participate by phone. Id. ¶ 107. Ruan explained to Rho that he wanted to push Galena to replace the CEO and indirectly communicate that the physicians were willing to switch to other companies and products because they represented a significant portion of Galena's business. Id. ¶ 108. Ahn, Galena's then-CEO, was ultimately fired. Id. ¶ 88.

Galena also offered for the physicians to attend advisory board meetings. Id. ¶ 98. Couch attended at least one meeting and was reportedly paid $5,000 for his attendance plus expenses; Ruan declined in January 2014 because he did not want to learn inside information that could prevent him from trading his stock. Id. ¶¶ 98, 101. In February 2014, Ruan indicated to Couch that he (Ruan) planned to hold his Galena stock for at least three quarters because he and Couchcould "play a big role" in Abstral. Id. ¶ 103. Both doctors put more patients on Abstral after buying Galena stock. Id. ¶ 105.

The FAC also relies on confidential witnesses ("CW"). CW1 was a Territory Business Manager for Galena from August 2013 to December 2014. Id. ¶ 76. CW1 indicates that he was pushed to see pain specialists, rather than oncologists, and that CW1 felt that this amounted to impermissible off-label marketing. Id. CW2, who was also a Territory Business Manager from April 2014 to April 2015, worked in Ohio, Indiana, and Kentucky. Id. ¶ 77. CW2 was let go for not meeting his/her sales quota, but states that oncologists did not have many pain patients and hospices would not prescribe Abstral due to cost. Id.

CW3, another Territory Business Manager from August 2014 through August 2015, states that Galena pushed its sales force to market to non-oncologists. Id. ¶ 78. CW3 provided a February 5, 2015 email from David Corin, Galena's National Sales Director, which copied Lento. Id. ¶ 79. The email referred to lower Abstral sales in January 2015, and instructed the recipients to remedy the situation. Id. A spreadsheet attached to the email showed Dr. Ruan and Dr. Couch as to the two highest prescribers in the country from the fourth quarter 2013 through the fourth quarter 2014. Id. CW3 continues that Galena circulated Risk Evaluation and Mitigation Strategy ("REMS") reports, which contained information concerning...