Mallen v. Alphatec Holdings, Inc.

861 F.Supp.2d 1111

Stephanie MALLEN, individually and on behalf of all others similarly situated; and Fresno County Employees' Retirement Association, FCERA, Plaintiffs,

v.ALPHATEC HOLDINGS, INC.; Dirk Kuyper; Peter C. Wulff; Mortimer Berkowitz, III; Healthpoint Capital Partners, LLP; Healthpoint Capital Partners II, LLP; John H. Foster; James R. Glynn; Stephen J. Hochschuler; Siri S. Marshall; R. Ian Molson; Jefferies & Company, Inc.; Canaccord Adams Inc.; Cowen and Company, LLC; Lazard Capital Markets, LLC; and Stephen E. O'Neil, Defendants.

Case No. 10–cv–1673 BEN (MDD).

United States District Court, S.D. California.

March 22, 2012.

David Nathan Lake, Law Offices of David N. Lake, APC, Encino, CA, Lionel Z. Glancy, Glancy Binkow and Goldberg, Los Angeles, CA, Julie G. Reiser, Steven J. Toll, Cohen Milstein Sellers & Toll PLLC, Washington, DC, for Plaintiffs.

Peter A. Wald, Latham & Watkins LLP, San Francisco, CA, Colleen Carlton Smith, Latham and Watkins, San Diego, CA, Michele Dianne Johnson, Latham and Watkins LLP, Costa Mesa, CA, Nina F. Locker, Steven Guggenheim, Jessica Leigh Snorgrass, Joni L. Ostler, Wilson Sonsini Goodrich and Rosati, Palo Alto, CA, John F. Batter, III, John J. Butts, Nolan James Mitchell, Wilmer Cutler Pickering Hale and Dorr LLP, Boston, MA, Randall R. Lee, Wilmer Cutler Pickering Hale and Dorr LLP, Los Angeles, CA, for Defendants.

ORDER GRANTING THE HEALTHPOINT DEFENDANTS', THE UNDERWRITER DEFENDANTS', AND THE ALPHATEC DEFENDANTS' MOTIONS TO DISMISS

ROGER T. BENITEZ, District Judge.

This is a putative securities class action brought by Stephanie Mallen, individually and on behalf of all others similarly situated, seeking to recover for Defendants' alleged violations of the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”). In brief, Plaintiffs allege that Defendants engaged in a scheme to inflate the price of Alphatec Holdings, Inc., so that they could profit financially, by acquiring a rival company with the promise to the investors that the acquisition would lead to immediate synergies and increased revenues. Over several weeks following the acquisition, although integration delays and other setbacks were allegedly becoming apparent, Defendants trumpeted the consolidated company's ability to meet the forecasted revenue guidance. When the company finally announced that it had experienced certain setbacks and, as a result, had to revise its revenue guidance by 15%, the stock price plummeted overnight.

Presently before the Court are motions to dismiss brought by three groups of Defendants: (1) HealthpointCapital Partners, L.P., HealthpointCapital Partners II, L.P., Mortimer Berkowitz, III, John H. Foster, R. Ian. Molson, and Stephen E. O'Neil (collectively, the “Healthpoint Defendants”); (2) Canaccord Adams, Inc., Jefferies & Company, Inc., Cowen and Company, LLC, and Lazard Capital Markets (collectively, the “Underwriter Defendants”); and (3) Alphatec Holdings, Inc., Dirk Kuyper, Peter C. Wulff, Stephen J. Hochschuler, James R. Glynn, and Siri S. Marshall (collectively, the “Alphatec Defendants”). Plaintiffs filed a consolidated opposition to the motions to dismiss, and Defendants filed three separate reply briefs. Having considered the parties' arguments, and for the reasons set forth below, the Court GRANTS the motions to dismiss.

BACKGROUND

I. Factual background¹

Defendant Alphatec is a publicly traded spinal implant company that designs, manufactures,and markets products for the surgical treatment of spine disorders. Dirk Kuyper is Alphatec's President and Chief Executive Officer (“CEO”). Peter Wulff is Alphatec's Senior Vice President and, during the class period, was also Alphatec's Chief Financial Officer (“CFO”) and Treasurer. Mortimer Berkowitz, HI is the Chairman of Alphatec's Board of Directors. Stephen E. O'Neil is the Chairman of Alphatec's Compensation Committee. At all the relevant times, these four individual Defendants, together with Defendants James Glynn, Siri Marshall, Stephen Hochschuler, III, John H. Foster, and R. Ian Molson, made up Alphatec's nine-person Board of Directors.

Defendant Healthpoint is a research-based private equity firm that invests in orthopedic and dental device businesses. It is compromised of two limited partnerships, HealthpointCapital Partners, L.P. and HealthpointCapital Partners II, L.P. Since March 2005, Healthpoint has been a substantial investor in Alphatec. Defendants Berkowitz, Foster, Molson, and O'Neil are outside Alphatec directors affiliated with Healthpoint, serving on Healthpoint's Board of Managers. Defendant Hochschuler, another Alphatec director, serves as a medical consultant to Healthpoint.

This action arises out of Alphatec's acquisition of Scient'x, S.A., a French spinal products company. Prior to the acquisition, Scient'x was Healthpoint's investment. In June 2004, Healthpoint acquired a 33% interest in Scient'x, which it increased to 95% in November 2007. Plaintiffs allege that Scient'x was an unprofitable investment for Healthpoint, and therefore Defendants Berkowitz and Foster, who were simultaneously on Alphatec's Board of Directors and Healthpoint's Board of Managers, orchestrated Healthpoint's sale of Scient'x to Alphatec. On December 17, 2009, Alphatec announced that it had entered into a definitive agreement to acquire Scient'x for 24 million shares of Alphatec common stock, valued at approximately $118 million.² ( See Decl. of Colleen C. Smith ISO Alphatec Defs.' MTD (“Smith Decl.”), Exh. 7, at 182 [Doc. No. 44–3]; see also CAC ¶¶ 47–48 [Doc. No. 24].) Alphatec announced the completion of its acquisition of Scient'x on March 29, 2010. Following the acquisition, having exchanged its Scient'x shares for Alphatec shares, Healthpoint became the majority stockholder of Alphatec with a 55% ownership interest.

In announcing the acquisition, Alphatec projected 2010 pro forma full-year revenues for the combined company in a range of $220 million to $225 million, and pro forma full-year 2010 adjusted earning before deduction of interest, taxes, and amortization (“EBITDA”) in a range of $32 million to $35 million (hereinafter, “2010 revenue guidance”). (Smith Decl., Exh. 7, at 182.) Alphatec reaffirmed the 2010 revenue guidance on numerous occasions, including in its February 23, 2010 earnings press release; in its March 29, 2010 announcement of the completion of Scient'x acquisition; in its April 12, 2010 announcement of preliminary first quarter 2010 results; and in its May 10, 2010 announcement of final first quarter 2010 results. On April 12, 2010, Alphatec released its preliminary first quarter results, reporting quarterly revenues of approximately $38.4 million, an increase of 25.6% from first quarter 2009, and a sequential increase of 5.0% over fourth quarter 2009. (Decl. of Lionel Z. Glancy ISO Lead Pl.'s Opp. to Defs.' MTDs (“Glancy Decl.”), Exh. 1, at 1–7 [Doc. No. 54–1].)

On April 16, 2010, the first day of Plaintiffs' alleged class period, Alphatec announced a public offering in which Alphatec and Healthpoint each would sell up to 9.2 million shares of Alphatec common stock. In the Prospectus Supplement announcing the offering, Alphatec stated, inter alia:

On March 26, 2010, we completed the acquisition of Scient'x S.A., or Scient'x, a global medical device company based in France that designs, develops and manufactures surgical implants to treat disorders of the spine. Scient'x distributes products through its direct sales force in France, Italy and the U.K., and distributes products through independent distributors in more than 45 additional countries....

....

We have already begun to realize synergies from the Scient'x acquisition. Our OsseoFix Spinal Fracture Reduction System is now being sold in six countries and will be launched through Scient'x's direct sales organizations in France, Italy and the UK in the second quarter of 2010. We also expect to offer products in additional countries during 2010 as a result of our expanded international sales channel. As a result of the Scient'x acquisition we have also added 19 distribution agents in the U.S., which we believe represents an addition of approximately 40 sales representatives. In addition, we expect to achieve up to $5 million in cost savings in 2010 by reducing overlapping operations of the two countries.

The combined entity has unaudited pro forma combined 2009 revenue of $182.4 million, reflecting approximately 25% year-over-year growth. Based on preliminary financial data, we expect to report record consolidated quarterly revenues for Alphatec Holdings, Inc. of approximately $38.4 million for the first quarter of 2010, an increase of 25.6% from the $30.6 million reported for the first quarter 2009, and a sequential increase of 5.0% over fourth quarter 2009 revenues of $36.6 million. These revenue results remain subject to review by our independent registered public accounting firm in accordance with Statement on Accounting Standards No. 100. We expect that our first quarter 2010 revenues will be the eleventh consecutive quarter of record revenues. In addition, we anticipate that our revenues throughout the balance of 2010 will continue to grow, driven by the inclusion of Scient'x revenues, cross-selling opportunities between Alphatec and Scient'x, the increased global scale of our distribution and marketing efforts, and the approval and launch of up to 15 innovative products into the U.S. and/or E.U. markets.

(Smith Decl., Exh. 13, at 703.) ³ The Prospectus was incorporated into the Registration Statement previously filed with the Securities Exchange Commission (“SEC”) on February 12, 2010. The offering closed on April 21, 2010, with Alphatec and Healthpoint each selling 9.2 million shares at $5.00 per share, for a total of $46 million each. None of the individual Defendants sold any shares during the offering. As a result of the April 16, 2010 offering, Healthpoint's...