In re K-V Pharm. Co. Sec. Litig.

IN RE K-V PHARMACEUTICAL COMPANY SECURITIES LITIGATION

No. 4:11CV01816 AGF

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MISSOURI EASTERN DIVISION

DATED: MARCH 27, 2014

MEMORANDUM AND ORDER

This consolidated securities fraud class action is before the Court on Defendants' motion to dismiss Plaintiffs' amended complaint for failure to state a claim. Oral argument was held on the motion on November 25, 2013. For the reasons set forth below, the motion to dismiss shall be granted without prejudice to Plaintiffs' filing a second amended complaint with respect to a limited issue.

BACKGROUND

Defendants are K-V Pharmaceutical Company and three of its officers (collectively, "K-V"). The putative class of Plaintiffs consists of all purchasers of publicly traded securities of K-V between February 14, 2011, and April 4, 2011. This litigation is based on allegedly materially false and misleading statements and omissions made by K-V during the class period regarding K-V's distribution and sale of the prescription medicine Makena.

For purposes of the motion now before the Court, the record establishes the following.¹ K-V is a specialty-branded pharmaceutical marketing company thatprimarily focuses on women's health care. On January 22, 2008, K-V acquired the rights to a drug called Gestiva (formerly known by its generic name 17P), a drug to reduce the risk of pre-term birth for at-risk women. K-V rebranded the drug Makena and applied to the Food and Drug Administration ("FDA") for exclusive sales rights under the Orphan Drug Act ("ODA"). The ODA provides seven years of patent-like exclusive sales rights to manufacturers who win FDA approval for drugs that affect fewer than 200,000 people. The ODA was enacted to encourage drug manufacturers to develop drugs for the treatment of rare diseases or disorders that affect only small patient populations. 21 U.S.C. § 360aa-360ee.

On February 3, 2011, the FDA granted K-V's request for exclusive sales rights for Makena under the ODA. On February 14, 2011, K-V held a conference call with investors and filed a Form 8-K with the Securities and Exchange Commission ("SEC") incorporating the information discussed in the call. At the beginning of the call, K-V stated as follows:

[C]ertain information provided on this conference call may contain various forward-looking statements within the meaning of the [PSLRA] and may be based on or include assumptions concerning the Company's operations, future results and prospects. Such statements may be identified by the use of words such as plan, expect, believe, anticipate, intend, will, should, could, potential and other expressions that indicate future events and trends.

All statements that address expectations or projections about the future, including without limitation statements about . . . the Company's strategy for growth, product development, product launches, regulatory approvals, market position . . . and other financial results are forward-looking statements. These statements involve various risks and uncertainties that could cause our actual results to differ materially from those expressed insuch forward-looking statements. These include the risks and uncertainties under the heading risk factors in our most recent annual report on Form 10-K and other periodic reports filed with the SEC which are available on our website at www.KVPharmaceutical.com and on the SEC's website.

Investors are cautioned not to place undue reliance on such forward-looking statements, as there is no assurance that these matters contained in such statements will occur. The forward-looking statements we make on today's call are based on our beliefs and expectations . . . as of today, February 14, 2011 only. We do not undertake any obligation to revise or update such forward-looking statements.

(Doc. No. 91-2 at 3-4.)

K-V then announced that the FDA had approved Makena. K-V described the benefits this approval would bring to K-V, and K-V's commitment to facilitate access to the drug for all eligible patients. K-V then focused on its plans for the commercialization of Makena, which it hoped would play a key role in K-V's effort to return the company to financial stability and profitability. K-V noted that Makena had been granted "orphan drug status" by the FDA, and informed investors that K-V would charge $1,500 per injection of Makena, and expected that patients would receive approximately 15 to 20 injections for a total of up to $30,000 for treatment.

K-V represented that through a program called Makena Care Connection, it would offer administrative, educational, and financial assistance to patients, stating, "wherever needed, the Makena Care Connection will connect Makena-eligible patients with the appropriate financial and co-pay assistance programs . . . . The Makena Care Connection is fully developed, staffed and ready to process the first Makena prescription." K-V also stated:

We anticipate that some patients may need financial assistance, and we have established a comprehensive patient assistance program to help facilitate access to Makena through the Makena Care Connection. Exemplifying our commitment to patient access, our comprehensive financial assistance program covers both uninsured and insured patients based on income eligibility requirements. Specifically, women with household incomes up to $100,000 will be eligible for financial assistance. And notably, this income level includes approximately 85% of US households.

Id. at 8.

K-V also stated that it anticipated that health insurers and Medicaid would cover the cost of Makena because the costs of a pre-term birth were significantly higher -approximately $51,000. Id.

K-V was asked, "could you talk a little bit more about what the strategy is to get the off-label compounding pharmacies off the market? Is that something you have to do, or is that something the FDA will help you in doing?" K-V responded, in relevant part, as follows:

[W]e believe that the regulations and laws are very clear. I think it's fair to say that compounding pharmacies are not FDA-approved manufacturing facilities and that FDA regulations and state pharmacy laws generally prohibit the distribution of compounded products that are the same or essentially the same as FDA-approved products.

We also believe that compounded pharmacies are aware of these laws and regulations, and our expectation is that they will adhere to them. I think it's also fair to say that, despite the availability of compounded product, there have been moms on the sidelines because of significant logistical and financial barriers to access that are typically associated with non-FDA-approved products.

And I'll just close by saying that everything we have designed around Makena is to remove these barriers and to make sure that we fulfill ourcorporate commitment, which is to make Makena accessible to all eligible patients.

Id. at 13-14.

The same questioner asked: "How many patients, also, do you think you can target in 2011 with this expanded sales force? Do you have an internal goal?" K-V responded:

We certainly believe, in terms of how we are structuring our go-to-market strategy with our sales force and whatnot puts us in a position to reach out to a requisite number of healthcare professionals to surround the major majority of the business opportunities that exist. . . . [W]e have established a clear objective strategically that we believe that this product, Makena, this treatment, is so important that we need to do everything we can to ensure every eligible mom has access and an opportunity to be treated . . . .

Id. at 13.

In response to a question about the $1,500 per-injection price, K-V stated, "we've done a lot of homework around this particular decision. And we believe our pricing approach is supported by a very comprehensive market research plan which included all stakeholders." K-V again stated that it believed that, in light of the high cost of a preterm birth, Medicaid and private insurers would cover the drug at the planned price. Id. at 14-15.

Among the 30 non-exclusive risk factors that K-V listed in the Form 10-K that had been filed on December 23, 2010, and that was referenced at the beginning of the February 14, 2011 conference call, were the following: "new product development and launch, including the possibility that any product launch may be . . . unsuccessful,including with respect to Gestiva™"; "acceptance of and demand for our new pharmaceutical products, including Gestiva™"; "the possibility that any period of exclusivity may not be realized, including with respect to Gestiva™, a designated Orphan Drug"; "the regulatory environment, including regulatory agency . . . actions and changes in applicable law or regulations . . . ."; and "the impact of competitive response to our sales, marketing and strategic efforts, including introduction or potential introduction of generic or competing products against products sold by us . . . including Gestiva™, and including competitive pricing changes." (Doc. No. 91-1 at 4-5.)²

It is undisputed that K-V pursued Makena "as a lifeline" when the company was in distress, and that Makena's success was of critical importance to the company's survival. Plaintiffs allege that K-V had been told by three former high-ranking employees who are confidential witnesses ("CW") in this case, that if Makena were priced at $1,500 per injection, which represented a 14900% increase from the price at which compounding pharmacies had previously offered a version of the drug, the FDA would not enforce K-V's exclusivity rights, and the marketing of Makena would be harmed, as well as its relationships with organizations that were proponents of Makena, such as the March of Dimes.

Plaintiffs also allege that months before the investor conference call, K-V held a session to train its sales representatives to deal with the anticipated negative pushbackrelated to Makena's pricing at $1,500 per injection. According to another CW who was at...