The opinion of the court was delivered by: Chesler, District Judge
THIS DOCUMENT RELATES TO: THE CONSOLIDATED SECURITIES ACTION
This securities fraud action revolves around rofecoxib, the prescription arthritis medication that had been sold by Defendant Merck & Co., Inc. ("Merck") as Vioxx from May 1999 to September 30, 2004, when it was withdrawn from the market due to safety concerns. Vioxx, a non-steroidal anti-inflammatory drug ("NSAID"), was touted as superior to other NSAIDs, such as aspirin and naproxen, because it did not have adverse gastrointestinal ("GI") side effects. To summarize the drug's relevant mechanism in simple terms: Vioxx worked to relieve pain by selectively inhibiting the COX-2 enzyme without suppressing COX-1, which helps maintain protective GI mucus as well as affects blood clotting. Traditional NSAIDs, in contrast, inhibit both enzymes and are thus associated with adverse GI effects, including serious perforations. The matter before the Court concerns Merck's motion to dismiss the Corrected Consolidated Fifth Amended Class Action Complaint (the "Complaint") pursuant to Federal Rule of Civil Procedure 12(b)(6).*fn1
Plaintiffs in this putative class action are persons and entities who acquired Merck stock between May 21, 2009 and October 29, 2004 (the "Class Period").*fn2 They maintain that Merck overstated the commercial viability of Vioxx by deliberately, or at the very least recklessly, downplaying the possible link between Vioxx and an increased risk of heart attack or other cardiovascular ("CV") events. According to the Complaint,*fn3 Merck had evidence strongly indicating a Vioxx-heart attack link even before the product was introduced into the market. The Complaint further alleges that the evidence mounted throughout the Class Period, particularly upon the conclusion of Merck's own large-scale trial known as "VIGOR"*fn4 in March 2000, which compared GI outcomes for users of Vioxx versus naproxen. Yet, throughout the Class Period, Merck stood behind the safety of Vioxx and reassured the public that, in its view, Vioxx was not prothrombotic but rather naproxen was cardioprotective. Plaintiffs contend that Merck's misstatements of fact and belief regarding its purported "blockbuster" drug Vioxx artificially inflated the stock price, the value of which fell sharply when the truth about Vioxx's safety profile began to emerge.
The procedural history of this case preceding this motion is significant and bears recounting. Upon Merck's earlier motion, this Court had dismissed the Corrected Consolidated Fourth Amended Class Action Complaint as time-barred. On Plaintiffs' appeal of this Court's April 12, 2007 Order of dismissal, the Third Circuit reversed this Court's ruling and thereafter issued its mandate remanding the matter on October 27, 2008. On remand to this Court, Plaintiffs filed the instant Complaint on March 10, 2009, and Defendants moved to dismiss it on or about May 1, 2009. Shortly thereafter, the Supreme Court granted Defendants' petition for a writ of certiorari seeking review of the Third Circuit's ruling on the statute of limitations issue. Upon stipulation by the parties, this Court stayed proceedings in the district court pending adjudication of the appeal before the Supreme Court. On April 27, 2010, the Supreme Court affirmed the Third Circuit's decision. Accordingly, the stay of this action was lifted, and the parties proceeded to complete briefing on the instant motion to dismiss.
Similar to the previous pleading, the currently operative Complaint in this multi-districted securities class action contains six counts, asserting various claims under the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. 78a, et seq., (2000), and the Securities Act of 1933 ("Securities Act"), 15 U.S.C. 77a, et seq., (2000). The factual background has been set forth at length in the three opinions issued in connection with the earlier motion to dismiss. As the Court writes for the parties only, it will not repeat the narrative here.
The issue before the Court on a Rule 12(b)(6) motion to dismiss "is not whether plaintiff will ultimately prevail but whether the claimant is entitled to offer evidence in support of the claims." In re Burlington Coat Factory Sec. Litig., 114 F.3d 1410, 1420 (3d Cir. 1997) (quoting Scheuer v. Rhodes, 416 U.S. 232, 236 (1974)). To make that determination, the Court must employ the standard of review articulated by the Supreme Court in Bell Atlantic Corp. v. Twombly and Ashcroft v. Iqbal. A complaint will survive a motion under Rule 12(b)(6) only if it states "sufficient factual allegations, accepted as true, to 'state a claim for relief that is plausible on its face.'" Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (quoting Bell Atlantic v. Twombly, 550 U.S. 544, 570 (2007)). The plausibility standard will be met if the complaint "pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. (citing Twombly, 550 U.S. at 556.) While the complaint need not demonstrate that a defendant is probably liable for the wrongdoing to meet the pleading standard of Federal Rule of Civil Procedure 8(a), allegations that give rise to the mere possibility of unlawful conduct will not do. Iqbal, 129 S.Ct. at 1949; Twombly, 550 U.S. at 557.
This case, of course, is a securities fraud action. The Private Securities Litigation Reform Act of 1995 ("PSLRA") imposes certain heightened pleading requirements on claims brought pursuant to Exchange Act § 10(b) and the statute's implementing regulation Securities and Exchange Commission ("SEC") Rule 10b-5, and these will be set forth below in the discussion of Plaintiffs' Rule 10b-5 claim. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 320-21 (2007) (noting that prior to the enactment of the PSLRA, the pleading standard of Rule 9(b) governed the sufficiency of a complaint for securities fraud). Apart from the requirements of the PSLRA made specifically applicable to certain claims under the Exchange Act, the pleading standard is heightened by Federal Rule of Civil Procedure 9(b) insofar as any claim is based on allegations of fraudulent conduct. In re Suprema Specialties, Inc. Sec. Litig., 438 F.3d 256, 270 (3d Cir. 2006) (holding that when acts of fraud form the basis of a Securities Act claim, the sufficiency of the claim must be evaluated under Rule 9(b)); Burlington Coat Factory, 114 F.3d at 1417 (holding that Rule 9(b) has been "rigorously applied in securities fraud cases"). Rule 9(b) requires plaintiffs to plead "the circumstances constituting the fraud . . . with particularity." Fed.R.Civ.P. 9(b); see also Tellabs, 551 U.S. at 320 (noting that prior to the enactment of the PSLRA, the pleading standard of Rule 9(b) governed the sufficiency of a complaint for securities fraud).
In evaluating a Rule 12(b)(6) motion to dismiss for failure to state a claim, a court must consider the complaint in its entirety. Tellabs, 551 U.S. at 322. It is also proper to consider "documents incorporated into the complaint by reference, and matters of which the court may take judicial notice." Id.
I. Scope of Wrongdoing On Which Plaintiffs Base Their Claims: Defendants' Judicial Estoppel Argument Before engaging in an analysis of the Complaint's factual allegations vis-a-vis the
elements of the various Exchange Act and Securities Act claims asserted, the Court must first resolve a dispute between the parties as to what wrongdoing properly underlies Plaintiffs' claims. In their brief, Plaintiffs identify three categories of statements and omissions as giving rise to their claim: (1) misrepresentations concerning the safety profile of Vioxx; (2) misleading characterization of Merck's espousal of the naproxen hypothesis; and (3) misrepresentations regarding lack of internal data at Merck indicating that Vioxx was prothrombotic. Defendants argue that the doctrine of judicial estoppel bars Plaintiffs from proceeding on any predicate other than their allegation that Merck falsely presented the naproxen hypothesis as its opinion concerning the VIGOR results.
The Court holds that Plaintiffs' claim will not be limited based on judicial estoppel. The doctrine of judicial estoppel applies only where a litigant has taken a legal position that is "clearly inconsistent" with an earlier position, has succeeded in persuading a court in accepting the earlier position and has or would derive an unfair advantage from having courts accept the inconsistent positions. New Hampshire v. Maine, 532 U.S. 742, 750 (2001). Judicial estoppel focuses on preserving the integrity of the judicial system, as opposed to the relationship between parties. Delgrosso v. Spang and Co., 903 F.2d 234, 241 (3d Cir. 1990). Thus, the Supreme Court has observed that "[a]bsent success in a prior proceeding, a party's later inconsistent position introduces no risk of inconsistent court determinations and thus poses little threat to judicial integrity." New Hampshire v. Maine, 532 U.S. at 750-51 (internal quotation and citation omitted). For the reasons that follow, the Court concludes that it has not been presented with a situation which threatens the integrity of the judicial system and which warrants finding Plaintiffs estopped from seeking relief for any of the alleged misrepresentations and omissions alleged in the Complaint. In other words, the Court will evaluate the sufficiency of the Complaint on its merits and permit the claims to surmount this Rule 12(b)(6) motion assuming the factual allegations of the Complaint properly and adequately plead violations of Rule 10b-5 and other securities laws.
At oral argument, Merck stressed the disingenuous nature of Plaintiffs' "pivot and turn" maneuver. (See, e.g., 7/12/11 Tr. at 91-93.) According to Merck, Plaintiffs succeeded in rehabilitating their time-barred action by making an appellate argument that altered or, at the very least, truncated the securities fraud claim to consist of Merck's allegedly falsely held belief in the naproxen hypothesis, then returned to the district court to litigate their action alleging misrepresentation of belief and fact. Merck maintains that to accept Plaintiffs' current inconsistent position that the claim does in fact impugn Merck's representations of fact as to Vioxx's CV safety profile, not just its opinion statements, would allow Plaintiffs to benefit unfairly from molding their claims and theories depending on the exigencies and/or opportunities at a given stage of the litigation.
Merck correctly points out that on appeal, Plaintiffs argued that the district court had evaluated the timeliness of Plaintiffs' claim based on its misunderstanding of their theory of wrongdoing. In particular, Plaintiffs took the position that the gravamen of their fraud claim is that Merck misled investors by proffering an opinion (the naproxen hypothesis) that it did not honestly hold. In contrast, the district court had "analyzed whether Merck misrepresented the fact that the results of the VIGOR study could support multiple hypotheses (i.e., that naproxen lowers the risk of CV events or that Vioxx raises the risk)." In re Merck, 543 F.3d 150, 166 (3d Cir. 2008). It is clear from the Third Circuit's published opinion deciding the appeal that its analysis of the issue before it -- the timeliness of Plaintiffs' securities fraud claim under the inquiry notice standard of accrual -- was indeed based on its conclusion that the gravamen of the fraud claim consisted of Merck's misrepresentation that it believed in the naproxen hypothesis. Merck, 543 F.3d at 167. It held that the "asserted basis of [Plaintiffs'] claims is that Merck defrauded investors by proposing and reasserting the naproxen hypothesis at the same time that it knew the hypothesis was false." Id. Thus identifying the claim at issue, the Court of Appeals applied the then-valid inquiry notice standard of determining when the claim accrued. It held that the district court incorrectly concluded that Plaintiffs were on inquiry notice on or before October 9, 2001 because, as of that date, there was no indication (or "storm warnings") that Merck did not believe the naproxen hypothesis. Id. at 172.
Notwithstanding Merck's argument that Plaintiffs prevailed on appeal by shifting the gravamen of their claim, the Court does not discern that Plaintiffs have taken a "clearly inconsistent" position in crafting and pursuing the currently operative Complaint. The gravamen of the Complaint's securities fraud claims is, indeed, the allegedly fraudulent presentation by Merck of the naproxen hypothesis as its opinion concerning adverse CV event data. It continues to form the core of the securities fraud action before the Court. Merck has tried, unsuccessfully, to persuade the Court that by emphasizing the opinion-based gravamen of the wrongdoing alleged, Plaintiffs should be understood to have represented to the Court of Appeals that Merck's statement of belief in the naproxen hypothesis constituted the exclusive basis of their claims. Alleged misrepresentations by Merck about Vioxx's CV safety, including those made even before the VIGOR results were available, were at issue in the Fourth Amended Complaint, just as they are in the instant Complaint. Plaintiffs argued on appeal that this Court misread the Fourth Amended Complaint to challenge Merck's promotion of the naproxen hypothesis as proven fact rather than as what the company thought was the more likely explanation for VIGOR's negative CV data. Merck, in essence, urges this Court to interpret that position as an abandonment of their fact-based claims, but there is no reason to construe Plaintiffs' appellate arguments regarding the nature of the alleged naproxen hypothesis misrepresentation as a repudiation of other statements Plaintiffs claimed violated securities fraud laws.
Moreover, Merck's judicial estoppel argument engages in little to no substantive analysis of the Supreme Court's opinion concerning the timeliness of Plaintiffs' Rule 10b-5 claim. Plaintiffs did not ultimately prevail in their appeal on grounds that the district court had mischaracterized what was actionable about Merck's naproxen hypothesis statements. The Supreme Court reviewed the Court of Appeals' decision on writ of certiorari, and though it affirmed the ruling that Plaintiffs' claim was not time-barred, it did so on markedly different grounds. The Supreme Court adopted the Third Circuit's characterization of the claim as challenging Merck's false representation of its belief in the naproxen hypothesis. In re Merck, 130 S.Ct. 1784, 1792 (2010). However, its statute of limitations analysis was not concerned with whether or not Plaintiffs were on inquiry notice as to Merck's alleged lack of belief in the naproxen hypothesis. The Supreme Court essentially rejected the inquiry notice standard underpinning the Third Circuit's analysis of the timeliness of Plaintiffs' securities fraud claim. It concluded that the limitations period for a securities fraud claim is not initiated when a plaintiff is on inquiry notice of either a defendant's intent or the facts underlying the misrepresentation. Id. at 1797-98. Rather, it explicitly held that a securities fraud claim does not accrue until a "plaintiff discovers or a reasonably diligent plaintiff would have discovered 'the facts constituting the violation' including scienter -- irrespective of whether the actual plaintiff undertook a reasonably diligent investigation." Id. at 1798.
Considering the crux of the Supreme Court's decision -- which applied the discovery rule of § 1658(b)(1) to Rule 10b-5 securities fraud claims and held that "the facts constituting the violation" necessarily entails discovery of facts relating to scienter, an essential element of the violation -- it cannot be said that Plaintiffs derived a benefit from their position that Merck's wrongdoing consisted of its promotion of a false belief. The Supreme Court concluded that, in the context of claims under Exchange Act Section 10(b), the entire concept of inquiry notice (applied by the district court and by the Third Circuit on appeal) at most served as a starting point for determining when a diligent plaintiff would have commenced an investigation, not the point at which the plaintiff did discover or would have discovered the facts constituting the violation. The Supreme Court's ultimate resolution of the statute of limitations issue turned not on any particular litigation theory espoused by Plaintiffs but rather on the point at which any securities fraud claim may be deemed to have ripened. Regardless of the accurate characterization of Plaintiffs' securities fraud claim, the standard adopted by the Supreme Court had not been applied by either this Court or the Court of Appeals in considering the timeliness of the claim. Had the appeal of this Court's April 12, 2007 Order of dismissal concluded with the Court of Appeals' reversal of that decision, Merck might very well have had a much stronger argument for holding Plaintiffs estopped from seeking relief for any alleged act of securities fraud other than the claim as depicted before the Third Circuit. Even so, however, the Court would have approached the question with restraint, given its doubts that Plaintiffs have taken inconsistent positions.
Restraint is, indeed, always the prudent course when considering whether to apply judicial estoppel, given its punitive nature. The Third Circuit has been clear that judicial estoppel is a harsh sanction, which the Court should not impose unless other, less drastic measures are inadequate to address a party's misconduct. Klein v. Stahl GMBH & Co. Maschinefabrik, 185 F.3d 98, 108-110 (3d Cir. 1999). The doctrine should not be invoked solely because a party has taken positions that are irreconcilably inconsistent; rather, "judicial estoppel is unwarranted unless the party changed his or her position 'in bad faith -- i.e., with intent to play fast and loose with the court.'" Krystal Cadillac-Oldsmobile GMC Truck, Inc. v. Gen. Motors Corp., 337 F.3d 314, 319 (3d Cir. 2003) (quoting Montrose Medical Group Participating Savings Plan v. Bulger, 243 F.3d 773, 779 (3d Cir. 2001)); see also Klein, 185 F.3d at 111 (stressing that application of judicial estoppel sanction requires, at a minimum, a district court to find both inconsistency and bad faith). Here, the Court's exercise of its inherent sanctioning power would simply not be a fitting remedy. The Court sees no evidence of bad faith by Plaintiffs. It has not been persuaded that Plaintiffs' litigation strategy has threatened the integrity of the judicial system or otherwise been implemented to gain unfair advantage.
The Court, in short, will not preclude Plaintiffs from seeking a determination of the claims pled on their merits when the threshold requirements justifying judicial estoppel have not been met.
II. Exchange Act Securities Fraud Claim
Under Section 10(b) of the Exchange Act, a person or entity may not "use or employ, in connection with the purchase or sale of any security, . . . any manipulative or deceptive device or contrivance in contravention of [SEC] rules and regulations." 15 U.S.C. § 78j(b). SEC Rule 10b-5(b), in turn, makes it unlawful to "make any untrue statement of material fact or to omit to state a material fact in order to make the statements made, in light of the circumstances under which they were made, not misleading." 17 C.F.R. § 240.10b-5(b). A private cause of action for damages sustained as the result of a violation of Section 10(b) and Rule 10b-5 requires the plaintiff to establish the following six elements:
(1) a material misrepresentation or omission;
(2) scienter, i.e., a wrongful state of mind;
(3) a connection with the purchase or sale of a security;
(4) reliance, also known as "transaction causation" in cases involving public securities markets;
(6) loss causation, i.e., a causal connection between the material misrepresentation and the loss.
Dura Pharms., Inc. v. Broudo, 544 U.S. 336, 341-42 (2005); see also McCabe v. Ernst & Young, LLP, 494 F.3d 418, 424 (3d Cir. 2007).
The PSLRA imposes heightened pleading requirements on the first and second elements identified above. To survive a motion to dismiss, the complaint must (1) "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed" and (2) "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. §§ 78u-4(b)(1) & (2); 15 U.S.C. § 78u-4(b)(3)(2) ("In any private action arising under this chapter, the court shall, on the motion of any defendant, dismiss the complaint if the requirements of [15 U.S.C. §§ 78u-4(b)(1) & (2)] are not met.").
Merck's motion challenges the sufficiency of the securities fraud claim as to the pleading of a material misrepresentation or omission, scienter, loss causation and reliance. Each of these elements will be analyzed in turn.
A. Material Misrepresentation or Omission
To violate Rule 10b-5, a statement or omission must be "misleading as to a material fact." Basic, Inc. v. Levinson, 485 U.S. 224, 238 (1988) (emphasis in original). A misrepresentation or omission is material if there is a "substantial likelihood that the disclosure . . . would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." Id. at 231-32 (quoting TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). This action involves numerous statements and omissions made by Merck about Vioxx spanning a period of over five years. They are set forth in the Complaint in paragraphs 223 through 380. For purposes of this analysis concerning whether the first element of a Rule10b-5 claim is satisfied, it is not necessary to identify each allegedly offending statement. Rather, to assist the Court in evaluating whether the statements or non-disclosures are actionable, Plaintiffs divide the allegedly misleading statements and omissions into three categories.
The first group consists of a number of promotional statements made by Merck about Vioxx in the time period commencing on May 21, 1999, when Merck announced Food and Drug Administration ("FDA") approval of the drug, to March 2000, immediately prior to the announcement of the VIGOR trial results. These "Pre-VIGOR" statements generally touted Vioxx's strong commercial performance as a result of, among other things, its "exceptional product profile" (January 26, 2000 press release) and "product profile for . . . safety" (March 22, 2000 press release). (Compl., ¶¶ 237, 240.) Other statements, including the May 21, 1999 press release announcing FDA approval, stated that the "most common side effects reported in clinical trial with VIOXX were upper respiratory infection, diarrhea and nausea." (Id., ¶ 223.)
The second group consists of statements made beginning on March 27, 2000, when the VIGOR results were publicized, through August 2004, that is, just prior to the withdrawal of Vioxx from the market. The VIGOR study, as extensively discussed in previous opinions, was Merck's large GI outcomes clinical trial which demonstrated that patients taking Vioxx experienced four times as many heart attacks and other adverse CV events than patients taking naproxen. Merck's March 27, 2000 press release announcing these results attributed them to the purported cardioprotective property of naproxen. In relevant part, the press release stated:
In addition, significantly fewer thromboembolic events were observed in patients taking naproxen in this GI outcomes study, which is consistent with naproxen's ability to block platelet aggregation. This effect on these events had not been observed previously in any clinical studies for naproxen. VIOXX, like all COX-2 selective medicines, does not block platelet aggregation and therefore would not be expected to have similar effects.
An extensive review of safety data from all other completed and ongoing clinical trials, as well as the post-marketing experience with VIOXX, showed no indication of a difference in the incidence of thromboembolic events between VIOXX, placebo and comparator NSAIDs. Further analyses are ongoing, and final results of the GI outcomes study with VIOXX will be presented at peer-reviewed medical meetings this year. (Id., ¶ 244.)
The Complaint alleges that these statements and variations thereof were reiterated by Merck throughout the time period from the announcement of the VIGOR results to the withdrawal of Vioxx. These statements were made in SEC filings, press releases and remarks quoted in news publications. For example, an April 10, 2001 press release expressed Merck's confidence "in the comprehensive data that support the excellent gastrointestinal and overall safety profile of VIOXX." (Id., ¶ 280.) A May 29, 2001 press release stated: "In response to news and analyst reports of data the Company first released a year ago, Merck & Co., Inc. today reconfirmed the favorable cardiovascular safety profile of VIOXX." (Id., ¶ 286.) Defendant Scolnick, then President of Merck Research Laboratories, was quoted in an October 9, 2001 New York Times article as stating, with regard to the two acknowledged interpretations of the VIGOR study's CV results, that "It [Merck] found no evidence that Vioxx increased the risk of heart attacks" and that "the likeliest interpretation of that data is that naproxen lowered the thrombotic event rate." (Id., ¶ 302.) On November 5, 2003, the Wall Street Journal published a letter written by Defendant Kim, Scolnick's successor, responding to an article reporting on adverse CV findings made in a non-Merck study and reaffirming Merck's belief in the safety of Vioxx.
That letter criticized the study producing the adverse data and stated, among other things, as follows:
Merck stands behind the safety of Vioxx based on the results of numerous randomized, controlled clinical trials.
Finally, it should be noted that Merck has previously announced it is conducting large prospective, randomized placebo-controlled clinical trials that, when added to the extensive data from clinical trials already available, will provide an even more comprehensive picture of the cardiovascular safety profile of Vioxx. (Id., ¶ 358.) As late as August 2004, just over a month before Vioxx was withdrawn from the market for its increased risk for CV events, Merck was reassuring the market of the drug's safety. On August 25, 2004, Bloomberg News reported the results of a study conducted by Kaiser Permanente, which found that there was a statistically significant difference in heart attack risk between users of Vioxx and users of Celebrex. (Hereinafter, the Court will refer to the study as the "Kaiser Study.") The next day, Merck issued a public statement criticizing the Kaiser study, noting that Merck "strongly disagrees" with its conclusions and stating: "Based on all of the data that are available from our clinical trials, Merck stands behind the efficacy and safety, including cardiovascular safety, of VIOXX." (Id., ¶ 374.)
The third group of alleged misrepresentations consists of statements made on September 30, 2004 concerning Vioxx's withdrawal from the worldwide market on that date. Plaintiffs allege that Merck was forced to withdraw the drug abruptly upon the recommendation of an External Safety Monitoring Board ("ESMB") overseeing the APPROVe study, another Vioxx clinical trial. According to the Complaint, APPROVe data again showed an increased risk of adverse CV events in patients taking Vioxx. Merck's Chief Executive Officer Gilmartin made a number of statements in connection with the withdrawal, including that it "would have been possible to continue to market Vioxx with labeling that would incorporate the new data" and that the APPROVe study's adverse CV data "was totally unexpected." (Id., ¶ 379.)
1. The Pre-VIGOR Statements
The Court finds that many of the pre-VIGOR statements as alleged constitute actionable misrepresentations.*fn5 Plaintiffs maintain that in making these statements, Merck introduced the subject of Vioxx's safety profile and then violated its duty to speak fully and truthfully on that subject by failing to disclose material information suggesting a link between Vioxx and increased CV events. Plaintiffs' theory of liability finds support in securities fraud jurisprudence. See Oran, 226 F.3d at 286 (holding that under securities laws, there is an affirmative duty to disclose when there has been an "inaccurate, incomplete, or misleading prior disclosure."); In re Bristol-Myers Squibb Sec. Litig., 2005 U.S. Dist. LEXIS 18448, at *63 (D.N.J. Aug. 6, 2005). "Some statements, although literally accurate, can become through their context and manner of presentation, devices which mislead investors. For that reason, the disclosure required by the securities laws is measured not by literal truth but by the ability of the material to accurately inform rather than mislead prospective buyers." McMahon & Co. v. Wherehouse Ent't, 900 F.2d 576, 579 (2d Cir. 1990). Once a defendant makes an affirmative statement or characterization about its business, it puts that subject "in play" and assumes a duty, under the securities laws, to speak truthfully about that subject. Shapiro v. UJB Fin. Corp., 964 F.2d 272, 282 (3d Cir.1992), rehearing en banc denied, July 7, 1992; cf. Matrixx Initiatives, Inc. v. Siracusano, 131 S.Ct. 1309, 1322 (2011) (noting that "companies can control what they have to disclose under [§ 10(b) and Rule 10b-5(b)] by controlling what they say to the market.").
(holding that accurate reports of past earnings and general statements of optimism for the future are not actionable).
Merck has not moved to dismiss the Rule 10b-5 claim, or any portion thereof, on grounds that the claim is based on statements that do not bear on Vioxx's safety profile. The Court therefore need not express an opinion at this time on the actionability of such statements. Nevertheless, the Court considers it important to note the breadth of misrepresentations set forth in the Complaint. Its holding and analysis with regard to the sufficiency of the securities fraud claim, based on both pre- and post-VIGOR statements, are limited to the statements discussed and the matters raised by the parties.
The Pre-VIGOR statements, Plaintiffs argue, were rendered misleading in that they would appear to a reasonable investor to reveal complete information about the subject of Vioxx's safety and side effects yet were not truthful in light of undisclosed, negative information in Merck's possession. In particular, Plaintiffs point to an internal analysis from February 1998 comparing the incidence of serious CV problems in patients taking Vioxx in a clinical osteoarthritis trial to patients taking a placebo in other non-Vioxx related large clinical trials conducted by Merck (hereinafter, the "February 1998 Analysis"). The February 1998 Analysis observed an increased risk of serious adverse CV events in trial participants taking Vioxx as compared to a placebo, with a greater than double risk in female participants. (Compl., ¶ 117.) In pleading that pre-VIGOR statements as to Vioxx's safety were materially misleading, Plaintiffs also point to numerous internal communications at Merck discussing as early as 1997 a concern about the possible prothrombotic qualities of Vioxx, based on data gathered in 1996's Protocol 023 study. According to the Complaint, that data indicated that the selective inhibition of the COX-2 enzyme (the mechanism by which Vioxx alleviated inflammation without adverse GI effects) upset the body's natural balance between prostacyclin (a chemical which inhibits clotting) and thromboxane (a chemical which promotes clots). (Id., ¶¶ 98-114.) Plaintiffs aver that the discussions reflect that based on Protocol 023's implications, Merck decided to postpone a large-scale clinical trial to study GI outcomes of Vioxx until after FDA approval, fearing that the study might confirm a Vioxx-heart attack link and "kill the drug." (Id., ¶¶ 104-110.)
Under well-established securities fraud jurisprudence, the question the Court must ask is whether the information Merck failed to disclose was material, that is, whether there is "a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." Matrixx, 131 S.Ct. at 1318 (quoting Basic, 485 U.S. at 231-32). Relying on the Third Circuit's opinion in Oran, Merck has argued that undisclosed information about the possibility of a link between Vioxx and thrombotic events, as indicated by Protocol 023, the hypothesis concerning the prostaclycin-thromboxane imbalance, and the February 1998 Analysis, cannot as a matter of law be considered material because the information did not conclusively establish a causal connection between the drug and such adverse effects. See Oran, 226 F.3d at 283-84. Oran, however, addressed a situation in which the defendant drug company had not made affirmative mischaracterizations about the safety of its product, but rather made an accurate assertion that the FDA had found that it had an "acceptable safety profile." Id. at 285. Thus, the Oran court concluded that the defendant did not have an affirmative duty to disclose to investors data from adverse events reports suggesting a link between the drug and heart valve disorders. Id. at 283-85. Here, Plaintiffs have alleged that Merck's positive statements about Vioxx's commercial success in light of its "exceptional safety profile" were misleading for failure to completely and accurately represent information known to Merck about the drug. Moreover, insofar as Oran concluded that the withheld information was immaterial as a matter of law because it failed to show a statistically significant risk of an adverse effect on heart valve health, it is factually distinct from this case, in which the non-disclosed information goes beyond adverse event reports. The Court recognizes that, indeed, mere adverse event data does not necessarily alter the total mix of information about the drug's safety, as such information by itself does not shed light on whether the drug in question is causing the event. Matrixx, 131 S.Ct. at 1321. However, Merck's position -- that the lack of data supporting a conclusive link between Vioxx and heart attacks precludes the undisclosed information from meeting the materiality standard -- is belied by the Supreme Court's recent discussion of materiality in Matrixx.
Like the case at bar, Matrixx was a securities fraud class action arising from an alleged failure to disclose material information regarding a possible link between a pharmaceutical cold remedy, Zicam, and anosmia, a condition in which the user loses his sense of smell. Id. at 1313. The Court rejected the defendant's argument that, given the absence of information showing a statistically significant incidence of the adverse event, the undisclosed adverse events reports categorically could not be considered material to investors. Id. at 1318-19. The Court stressed the fact-intensive, contextual inquiry that underlies the materiality standard, noting that in some cases "reasonable investors would have viewed reports of adverse events as material even though the reports did not provide statically significant evidence of a causal link." Id. at 1321. It further emphasized that whether non-disclosure was actionable under the securities laws was also very much a function of what information a company had chosen to communicate to the market. The Court reasoned that § 10(b) and Rule 10b-5(b) require disclosure "only when necessary 'to make . . . statements made, in the light of the circumstances under which they were made, not misleading.'" Id. (quoting 17 C.F.R. § 240.10b-5(b)). Applying these principles and Basic's total mix standard, the Matrixx court held that plaintiffs had adequately pleaded materiality because the withheld information -- which consisted mainly of reports from medical professionals concerning patients who had lost their sense of smell as well as a study based on those findings -- plausibly indicated a reliable causal link between Zicam and anosmia. Id. at 1322. The Court found that assuming the facts of the complaint to be true, a reasonable investor would have viewed this information as having altered the total mix of information available in light of the pharmaceutical company's representations to the market that revenues were going to rise even though it had "information indicating a significant risk to its leading revenue-generating product." Id. at 1323. Moreover, the Court noted that the defendant company had publicly declared the safety of its product to be well-established, but it "had evidence of a biological link between Zicam's key ingredient and anosmia, and it had not conducted any studies of its own to disprove that link." Id.
Here, this Court must likewise conclude that the Complaint alleges a material misrepresentation as to the pre-VIGOR statements promoting Vioxx as safe. As alleged, Merck made such statements in spite of information from its own internal analyses that patients taking Vioxx versus a placebo experienced a greater incidence of adverse CV events. The Complaint further avers that the data in particular showed that women taking Vioxx had more than twice as many CV events than women in the placebo group, a statistically significant increase. Reading them together, the factual allegations reflect that Merck also had a serious concern about a possible causal relationship between Vioxx and CV events based on the prostacyclinthromboxane imbalance data gathered in a clinical trial it performed ...