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From Securities Regulation Daily, February 24, 2014

Complaint fails to allege that drug company concealed discrepancy between trial and post-launch data

By Rodney F. Tonkovic, J.D.

A securities fraud class action against a biopharmaceutical company was dismissed for failure to plead fraud with sufficient particularity. The district court found that the complaint failed to allege with the required particularity that the company concealed a discrepancy between trial data and data from after the commercial launch of a drug. The court granted the plaintiff's request for leave to amend (In re Incyte Shareholder Litigation, February 21, 2014, Sanchez, J.).

Background. Incyte Corp. is a biopharmaceutical company that makes a drug called Jakafi. Jakafi is used to treat myelofibrosis, a life-threatening bone marrow disease. Jakafi was approved by the FDA and launched for sale in November 2011.

The trials for Jakafi excluded severely ill patients or those with a low projected life-span. The clinical trials for Jakafi also documented patient discontinuation rates, meaning the rates at which the patients stopped using the drug for any reason. According to the complaint, after Jakafi was approved, a heightened discontinuation rate emerged. Many of the patients taking Jakafi during the launch period suffered from advanced stages of myelofibrosis, so the heightened discontinuation rates reflected patient deaths or other serious side effects.

The plaintiffs alleged that Incyte misled the market during the class period by touting the clinical studies as a benchmark. Further, by misrepresenting Jakafi's usage trends and results and concealing the discontinuation rates, the defendants artificially inflated Incyte's stock price. The plaintiff's claims were based on a series of statements made during conferences and in press releases that , among other comments, noted the belief that discontinuation rates would not be significantly different from the trials.

The truth about the discontinuation rates was allegedly revealed during an analyst call following the issue of Incyte's second quarter 2012 financial results. Here, a company officer indicated that a higher discontinuation rate was expected as the drug began to be used commercially. After this announcement, Incyte's stock price dropped by 27 percent in two days. The company later admitted that the discontinuation rates from the clinical trials were "unrealistic."

Misrepresentations. The plaintiff asserted that the defendants misled the market by representing that Jakafi’s actual discontinuation rates during the class period were equal to the rates observed during the clinical trial. The court found that the complaint adequately identified the alleged false statements, but fell short in pleading with particularity why each statement was false or misleading. The court concluded that the complaint failed to plead particularized facts showing that the defendants actually represented that Jakafi's discontinuation rates during the class period matched those during the trials or that there was concrete data showing that the discontinuation rates in practice were higher than the trial rates.

First, the court found that while Incyte suggested that the clinical trials could serve as a reference point, the statements came with caveats to the effect that it was too early to tell what the discontinuation rates would be in practice.  The defendants not only qualified their statements on the discontinuation rates, but also described in detail why in-practice rates might not be consistent with the trial rates, the court said. For example, Incyte repeatedly acknowledged that severely ill patients, who were excluded from the trials, were a significant subset of Jakafi users during the class period, but noted that sales would grow as healthier patients began using the drug.

The complaint also failed to show that any data existed during the class period showing that Incyte actually experienced heightened discontinuation rates. According to the court, the plaintiff alleged the existence of "discontinuation reports" showing discontinuation rates that were significantly different than those experienced during the trials. The plaintiff, however, failed to provide any particularized facts regarding the generation of the reports and the information they contained. Additionally, the plaintiff's confidential sources were concededly not in a position to possess information about the alleged discrepancy in discontinuation rates.

The court accordingly found that the complaint failed to adequately state a claim for fraud under the Exchange Act. The plaintiff's claims were dismissed without prejudice and leave to amend was granted.

The case is No. 13-365.

Attorneys: Michael Hanrahan (Prickett, Jones & Elliott, P.A.) for City of Lakeland Employees Pension Plan. David John Teklits (Morris, Nichols, Arsht & Tunnell LLP) for Incyte Corp.

Companies: City of Lakeland Employees Pension Plan; Incyte Corp.

MainStory: TopStory DelawareNews FraudManipulation

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