In re Philip Morris Int'l Inc. Sec. Litig.

437 F.Supp.3d 329

IN RE PHILIP MORRIS INTERNATIONAL INC. SECURITIES LITIGATION

No. 18-CV-08049 (RA)

United States District Court, S.D. New York.

Signed February 4, 2020

OPINION & ORDER

RONNIE ABRAMS, United States District Judge:

Lead Plaintiffs Union Asset Management Holding AG and Teamsters Local 710 Pension Fund bring this class action against Defendants Philip Morris International Inc. ("Philip Morris" or the "Company"), André Calantzopoulos, Martin G. King, Patrick Picavet, Jacek Olczak, Manuel C. Peitsch, and Frank Lüdicke (collectively, the "Individual Defendants") alleging that, from July 26, 2016 through April 18, 2018, they committed securities fraud in violation of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10(b)-5. Plaintiffs allege that Defendants made false and misleading statements to the U.S. Food and Drug Administration ("FDA") about clinical trials Philip Morris conducted in connection with its Modified Risk Tobacco Product Application for a smoke-free electronic device entitled iQOS, as well as about the performance of iQOS in Japan.

Before the Court is Defendants' motion to dismiss Plaintiffs' Consolidated Amended Class Action Complaint pursuant to Federal Rules of Civil Procedure 9(b) and 12(b)(6) and the Private Securities Litigation Reform Act. For the reasons that follow, Defendants' motion is granted.

BACKGROUND

I. Factual Background

Except where otherwise noted, the following facts are drawn from Plaintiffs' Consolidated Amended Class Action Complaint (the "CAC"), Dkt. 92, and are assumed to be true for purposes of this motion. See Stadnick v. Vivint Solar, Inc. , 861 F.3d 31, 35 (2d Cir. 2017).

A. The Parties

Lead Plaintiffs Union Asset Management Holding AG and Teamsters Local 710 Pension Fund represent all persons and entities, other than Defendants, who purchased or otherwise acquired the publicly traded securities of Philip Morris from July 26, 2016 through April 18, 2018 (the alleged "Class Period").

Defendant Philip Morris is a Virginia company that manufactures and sells cigarettes, other tobacco products, and other nicotine-containing products. CAC ¶ 22. Defendant André Calantzopoulos has served as Philip Morris's Chief Executive Officer since May 8, 2013 and previously served as the Company's Chief Operating Officer. Id. ¶ 23. Defendant Martin G. King has served as Philip Morris's Chief Financial Officer since January 1, 2018 and previously served as President of the Company's Asia Region. Id. ¶ 24. Defendant Patrick Picavet has served as Philip Morris's Director of Medical Affairs since February 2017 and was responsible for the planning and execution of the Company's scientific studies on its smoke-free products. Id. ¶ 25. Picavet previously served as the Company's Director of Clinical Assessment from August 2014 through January 2017. Id. Defendant Jacek Olczak has served as Philip Morris's Chief Operating Officer since January 1, 2018 and previously served as the Company's Chief Financial Officer during the Class Period until his appointment as Chief Operating Officer. Id. ¶ 26. Defendant Manuel C. Peitsch served as Philip Morris's Chief Scientific Officer for Reduced-Risk Products during the Class Period. Id. ¶ 27. Defendant Frank Lüdicke was Philip Morris's Chief Medical Officer during the Class Period and oversaw clinical trials for the Company's smoke-free products. Id. ¶ 28.

B. Development of IQOS as an Alternative to Traditional Cigarettes

As Philip Morris's sales of traditional cigarettes have declined in recent years, the Company has invested over $4 billion in the development of smoke-free alternatives. Id. ¶¶ 3, 32. These products, known as reduced-risk products ("RRPs") are marketed as presenting a lower health risk than traditional cigarettes. Id. ¶ 3. In September 2017, Philip Morris announced it had pledged up to $1 billion to launch a foundation dedicated to eliminating smoking worldwide. Id. ¶ 33. Upon making this announcement, Defendant Calantzopoulos told the Financial Times that "[o]ur efforts are squarely focused on ultimately replacing cigarettes with smoke-free products, by offering the millions of men and women who continue to smoke a better alternative. We are standing at the cusp of a true revolution." Id. Philip Morris's website similarly states, "We're building PMI's future on smoke-free products that are a much better choice than cigarette smoking." Id. ¶ 34.

Philip Morris's flagship RRP, "iQOS," is an electronic device that heats specially designed tobacco units to release a flavorful nicotine-containing vapor without combustion, fire, ash or smoke. Id. ¶ 35. iQOS contains three main components: a heated tobacco unit (called HEETS or HeatSticks), an iQOS holder and a charger. Id. iQOS was first introduced in the city of Nagoya, Japan in late 2014 and launched nationwide in Japan in the spring of 2016. Id. ¶ 38. During the Class Period, Japan was the only country in which iQOS was available nationwide. Id. Philip Morris promoted iQOS in Japan as a less harmful product than conventional cigarettes. Id. ¶ 39. This approach helped persuade Japanese officials to classify the iQOS device differently than traditional cigarettes, resulting in a lower tax rate and exempting it from ordinances banning smoking in public places. Id. ¶¶ 39-41.

C. Philip Morris's Modified Risk Tobacco Product Application and Claims Regarding its Clinical Studies

Philip Morris faced a more demanding regulatory landscape in the United States than in Japan. Id. ¶ 42; Mem. in Supp. of Defs.' Mot. to Dismiss ("Defs.' MTD"), Dkt. 109, at 3. Pursuant to the Family Smoking Prevention and Tobacco Control Act ("Tobacco Control Act"), Pub. L. No. 111–31, 123 Stat. 1776 (2009), codified at 21 U.S.C. § 387 et seq. , Philip Morris was required to obtain FDA approval to sell iQOS in the United States and to market it as a Modified-Risk Tobacco Product ("MRTP")—a product that presents a lower risk of tobacco-related disease and less harm than traditional tobacco products. CAC ¶ 42. In December 2016, Philip Morris submitted its Modified-Risk Tobacco Product Application ("MRTPA") and requested orders to market iQOS as both a reduced-risk tobacco product and reduced-exposure tobacco product under Section 911(g)(1) and Section 911(g)(2) of the Federal Food, Drug, and Cosmetic Act ("FD&C Act"), codified at 21 U.S.C. § 387k(g). CAC ¶¶ 45, 46. Section 911(g)(1) of the FD&C Act provides that the FDA may issue a modified risk market order for a tobacco product if the applicant satisfies a two-prong test. See 21 U.S.C. § 387k(g)(1). The applicant must demonstrate that the product "as it is actually used by consumers, will (A) significantly reduce harm and the risk of tobacco-related disease to individual tobacco users; and (B) benefit the health of the population as a whole taking into account both users of tobacco products and persons who do not currently use tobacco products." Id.

Philip Morris made three claims in support of its application for an MRTP marketing order:

Claim 1 under § 911(g)(1): "Switching completely from cigarettes to the iQOS system can reduce the risks of tobacco-related diseases."

Claim 2 under § 911(g)(1): "Switching completely to iQOS presents less risk of harm than continuing to smoke cigarettes."

Claim 3 under § 911(g)(2): "Switching completely from cigarettes to the iQOS system significantly reduces your body's exposure to harmful and potentially harmful chemicals."

Id. ¶ 48.

Philip Morris outlined the steps it took to assess whether iQOS poses less risk of harm or disease than conventional cigarettes, including conducting eight "clinical studies with adult smokers according to the principles of Good Clinical Practice" in the U.S., Europe, and Japan between 2013 and 2015. Id. ¶¶ 50, 63. Good Clinical Practice ("GCP") is an "international ethical and scientific quality standard for designing, conducting, recording and reporting trials that involve the participation of human subjects." Id. ¶ 56. FDA guidelines provide that clinical studies should adhere to GCP. Id. ¶ 66. Philip Morris repeatedly emphasized its compliance with GCP. See, e.g. , id. ¶¶ 50, 54, 167, 173, 175, 218, 236, 240, 249, 255. Philip Morris published its studies on ClinicalTrials.gov, a U.S. government database managed by the National Institute of Health, id. ¶ 53, and represented that its clinical studies supported its claims under both §§ 911(g)(1) and (g)(2) of the FD&C Act. Id. ¶ 51. For example, the Company stated that the results of its clinical trials on iQOS "provide evidence to substantiate both a reduced risk claim ... and a reduced exposure claim," and the "totality-of-the evidence presented," including the results of its clinical studies, "demonstrates that smokers who completely switch from cigarette smoking to THS should have a significant reduction in harm and the risk of tobacco-related diseases." Id. ¶ 54.¹

On February 14, 2017, Philip Morris filed its Form 2016 10-K, which stated, inter alia , that the results from the iQOS studies "are generally consistent with the expected direction of change and indicate that switching completely to IQOS led to an overall improvement of clinical risk markers affected by smoking after only three months." Id. ¶¶ 197-200, 317. The following day, Calantzopoulos sold 35,000 shares of his personally held Philip Morris stock for proceeds of nearly $3.6 million. Id. ¶¶ 316-17.

In May 2017, the FDA formally accepted and filed the Company's MRTPA for substantive scientific review. Id. ¶ 45.

D. Reuters Article and Koval's Allegations Regarding Deficiencies in Clinical Studies

On December 20, 2017, Reuters released an investigative report detailing "irregularities" in the clinical studies underpinning the Company's FDA application for iQOS. Id. ¶ 7; McDonough Decl. Ex. 12 ("Reuters Article"). Reuters interviewed six of the eleven principal investigators responsible for five of the eight clinical trials as well as Tamara Koval, a former Philip...