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From Securities Regulation Daily, June 9, 2014

Statements on Alzheimer's drug trial results were not misleading

By Rodney F. Tonkovic, J.D.

A Third Circuit panel has affirmed a district court's dismissal of an action against Pfizer, Inc. for failure to state a claim. Two institutional investors alleged that Pfizer made materially false and misleading statements regarding interim clinical trial data for an experimental drug to treat Alzheimer’s disease. The panel concluded that the complaint failed to sufficiently allege any false or misleading statements or that the defendants had a duty to disclose the allegedly omitted information (City Of Edinburgh Council v. Pfizer, Inc., June 6, 2014, Scirica, A.)

Background. The investors brought this action against Pfizer as successor-in-interest to Wyeth, Inc. on behalf of purchasers of Wyeth stock between May 21, 2007, and July 29, 2008. The action arose out of clinical trials for bapineuzumab, an experimental drug for the treatment of mild to moderate Alzheimer’s disease. Phase 1 trials of bapineuzumab were completed in 2006, and Phase 2 trials designed to measure the efficacy of bapineuzumab compared to a placebo were scheduled for completion in 2008.

At issue was a press release dated May 21, 2007, announcing Wyeth's decision to initiate Phase 3 trials in the second half of 2007. According to the complaint, the defendants knew at this time, but did not disclose, that the Phase 2 interim results did not support the decision to initiate the Phase 3 trial. Wyeth disclosed the preliminary Phase 2 results in June 2008, reporting that while the trial failed to meet its objectives and revealed serious safety concerns, the company believed there were some statistically significant benefits among subgroups that supported the decision to proceed with the Phase 3 trial. The final Phase 2 results were revealed during a press conference in July 2008.

Procedural history. In December 2012, the district court found that the investors failed to adequately allege that Wyeth made any materially false or misleading statements or had a duty to disclose any allegedly omitted details. The investors' claims were again dismissed in April 2013 (see Securities Regulation Daily Wrap UpApril 24, 2013). On appeal, the investors asserted that the district court erred in concluding that they failed to allege falsity or that the defendants had a duty to fully disclose material information about the Phase 2 interim results.

The court noted at the outset that three federal courts have considered and dismissed claims arising out of bapineuzumab's development, including the Second Circuit in Kleinman v. Elan Corp. (covered in the Securities Regulation Daily Wrap Up for February 4, 2013). In Kleinman, the Second Circuit affirmed a district court holding that the June 2008 release contained no omissions that would render it false or misleading. The panel also cited two district court cases finding that the respective plaintiffs failed to allege that the May 2007 release contained any misrepresentations.

Falsity. In this case, the panel agreed with the district court's determination that the investors' allegations failed to plead falsity with the particularity required by the PSLRA. The panel said that Wyeth stated in the May 2007 release that the initiation of Phase 3 was based in part on the Phase 2 interim results. In other words, the release accurately reported that the Phase 2 results were just one factor in the decision to proceed with Phase 3. The panel noted further that the May 2007 release made no affirmative statement about the strength of the Phase 2 results, or bapineuzumab’s efficacy or safety, and the investors' arguments to the contrary were based on "a selective reading of the document."

Additionally, allegations by confidential witnesses describing internal disagreement about whether to proceed to Phase 3 did not show falsity. That some employees disagreed with the decision was not sufficient to show that Wyeth's interpretation of the interim results lacked a reasonable basis, the panel stated. Interpretations of clinical data are considered to be opinions that are only actionable if lacking in a reasonable basis, that panel explained.

Next, the panel found that the May 2007 release was not misleading in light of the defendants' prior statements. In late 2006, a Wyeth executive said that Phase 3 would not commence unless the Phase 2 results were "spectacular." The investors maintained that this statement, plus the failure to disclose the poor results, misled the market into believing that the Phase 2 results were at least positive.

The panel concluded that the prior statements, when taken in context, were not misleading. Again, the May 2007 press release did not characterize or discuss the strength of the Phase 2 results, and, moreover, cautioned investors not to draw conclusions until the trial's completion. Regarding the executive's statement, the panel found that it was a forward-looking statement about events that did not come to pass and which did not bind the company to any particular course of action. The adjective "spectacular," the panel said, is also understood by reasonable investors to be puffery.

Duty to disclose. The investors also contended that the defendants' statements triggered a duty to disclose complete material information regarding the Phase 2 interim results. According to the plaintiffs, the duty to disclose arose because: the defendants chose to speak about a material subject to investors; two Wyeth executives allegedly engaged in insider trading; and disclosure was necessary to make defendants’ prior statements not misleading. The panel disagreed, finding no duty to disclose the allegedly omitted information.

The panel first found that the May 2007 release made no affirmative characterizations of the Phase 2 results and thus did not place the strength or nature of the results "in play." Wyeth therefore had no duty to provide additional details about those results. Regarding the allegations of insider trading, the court found that the complaint failed to plead both a predicate violation of the securities laws and facts giving rise to a strong inference of scienter. Finally, the panel found no duty to update the "spectacular" statement. Even if there were a duty, the panel said, the May 2007 release cut off any such duty owing to its explicit caution that investor should draw no conclusions about the Phase 2 interim results. "Had the Phase 2 interim results been spectacular," the panel remarked, "it is reasonable to assume Wyeth would have trumpeted that fact."

The case is No. 13-2314.

Attorneys: Jeffrey A. Almeida (Grant & Eisenhofer) and Gregory M. Castaldo (Kessler Topaz, Meltzer & Check) for City Of Edinburgh Council and ARCA S.G.R.S.P.A. George A. Borden (Williams & Connolly) and Stephen C. Matthews (Porzio Bromberg & Newman) for Pfizer Inc. and Wyeth, Inc.

Companies: City Of Edinburgh Council; Lothian Pension Fund; ARCA S.G.R.S.P.A; Pfizer Inc.; Wyeth, Inc.

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