United States District Court, D. New Jersey
IN RE GALENA BIOPHARMA, INC. SECURITIES LITIGATION
KEVIN MCNULTY, U.S.D.J.
plaintiffs have filed a class-action complaint alleging
securities fraud against Galena Biopharma, Inc.
("Galena") and several of its officers or key
employees. The complaint alleges that the defendants failed
to make appropriate disclosures under Item 303 of Regulation
S-K and therefore committed securities fraud. Now before the
court are defendants' motions to dismiss the complaint.
For the reasons expressed herein, those motions are granted
without prejudice to the submission of a second amended
complaint within 30 days.
holders of Galena common stock, allege that they suffered
damages because of defendants' violations of securities
laws. (AC ¶¶ 34-38). They bring a class action on
behalf of all persons and entities that acquired Galena
securities from August 11, 2014 through January 31, 2017 (the
"Class Period"). (AC ¶ 1). Defendants are
Galena and several officers or key employees of Galena.
sue Mark J. Ahn ("Ahn"), who was the President,
CEO, and a Director at Galena until his resignation effective
August 20, 2014; Mark W. Schwartz ("Schwartz"), who
was Galena's COO from 2011 until his appointment as CEO,
and who was President and CEO from August 20, 2014 through
the end of the Class Period; Ryan M. Dunlap
("Dunlap"), who was the Vice President and CFO of
Galena until his resignation effective December 31, 2015;
Christopher S. Lento ("Lento"), who was the Senior
Vice President of Oncology Commercial Operations at Galena
from around May 2013 through December 31, 2015; and Remy
Bernarda ("Bernarda"), who was Senior Vice
President of Investor Relations at Galena throughout the
Class Period. (AC ¶¶ 40-44).
Abstral and Galena Patient Services
October 3, 2013, Galena launched a new product-Abstral
(fentanyl) sublingual tablets. (AC ¶ 47). Abstral is an
opioid pain medication associated with a high risk of
addiction and dependence. (AC ¶ 48). Abstral is
indicated by the FDA only for "the management of
breakthrough pain in cancer patients 18 years of age and
older who are already receiving and who are tolerant to
around-the-clock opioid therapy for their underlying
persistent cancer pain." (AC ¶ 51). Prescriptions
written for any other purposes are deemed
"off-label." (AC ¶
March 3, 2014, Galena launched "Galena Patient
Services" ("GPS"), a program designed to
facilitate individuals obtaining prescriptions and
reimbursements for Abstral. (AC ¶ 52). Mr. Ahn,
President and CEO of Galena, stated that GPS's goal was
"to make prescribing and receiving Abstral as simple as
possible." (AC ¶ 52).
Dr. Ruan and Dr. Couch
Xiulu Ruan and Dr. John Patrick Couch jointly owned and
operated two pain-management clinics and a pharmacy. (AC
¶¶ 65-66). These two doctors almost exclusively
prescribed Abstral on an off-label basis for neck, back, and
joint pain. (AC ¶ 68). Thirty percent of Galena's
Abstral revenues were generated by these two doctors. (AC
¶¶ 65-66). Defendants Schwartz and Lento visited
these doctors several times during the Class Period and
allegedly encouraged them to prescribe Abstral off-label. (AC
¶ 65). Drs. Ruan and Couch purchased $1.6 million worth
of stock in Galena and sought to manipulate Galena's
stock price by inflating Abstral's sales. (AC ¶ 69).
Galena's stock price dropped, Drs. Ruan and Couch
demanded that Galena fire the board of directors, replace the
CEO, and change its leadership. (AC ¶ 87). One Galena
employee claims that their demands were taken seriously
because they were the highest Abstral prescribers and were
"important individuals for Galena." (AC ¶ 87).
Galena's then-CEO, Mr. Ahn, was fired around this time.
(AC ¶ 87). Drs. Ruan and Couch have since been convicted
on several criminal charges related to their practices in
relation to Abstral. (AC ¶ 71).
Off-Label Promotion and Kickbacks
employees of Galena state that Galena executives
"pushed" salespeople to promote Abstral off-label.
(AC ¶¶ 75-77). For instance, an anonymous Galena
employee was told to "visit" doctors who prescribed
Abstral's competitor and "chase those
prescriptions." (AC ¶ 79). These doctors were
mostly primary care doctors and thus the employee perceived
that he or she was "being challenged to go
off-label." (AC ¶ 79).
allegedly encouraged doctors, including Dr. Ruan, to enroll
non-cancer patients (i.e., off-label users) in Galena's
RELIEF program, which tracked how patients responded to
Abstral. (AC ¶ 84). The RELIEF program paid doctors $500
for every patient that enrolled. (AC ¶ 84).
Pharmacy, which was owned by Drs. Ruan and Couch, partnered
with Galena on a "rebate agreement." (AC ¶
93). Galena would pay C&R Pharmacy a certain percentage
for the Abstral prescriptions they sold. (AC ¶ 93). The
patients of Drs. Ruan and Couch frequently obtained Abstral
from C&R Pharmacy. (AC ¶ 94). Galena wired $97, 924
to C&R Pharmacy's Wells Fargo bank account on
February 18, 2015, likely in connection with the rebate
agreement. (AC ¶ 95). According to plaintiffs, the
rebate was in reality a payment to Drs. Ruan and Couch for
prescribing Abstral. (AC ¶ 94).
invited Drs. Ruan and Couch to attend Galena's Advisory
Board Meetings. (AC ¶ 97). Dr. Couch attended at least
one meeting and was paid $5, 000, plus expenses. (AC ¶
97). Dr. Ruan did not attend these meetings, allegedly out of
concern that he might hear inside information that would
prevent him from freely trading his Galena stock. (AC ¶
Department of Justice ("DOJ") investigated Galena
regarding kickback allegations. A DOJ press release said the
RELIEF program was "nominally designed to collect data
on patient experiences with Abstral, but acted as a means to
induce the doctors to prescribe Abstral." (AC ¶
84). Galena resolved the kickback allegations by paying more
than $7.55 million to the government. (AC ¶ 72).
Ruan and Couch purchased more than $1.6 million in Galena
stock. (AC ¶ 99). Defendants were allegedly aware that
these doctors were trading in Galena stock while trying to
inflate Abstral sales by over-prescribing the medication. (AC
¶ 99). Dr. Ruan sent an email to defendant Lento
confirming that he had recently purchased Galena stock. (AC
¶ 100). Emails between Drs. Ruan and Couch state that
they could "play a big role" in helping
Abstral's market share grow. (AC ¶ 102).
Ruan, Couch, and Rho (a friend of Dr. Ruan) spoke with the
Galena board of directors. (AC ¶ 105). Ruan told Rho
that "[t)he purposes of this talk is to express our
opinion to push them to replace their CEO" and "to
give them the impression that if they do not do it, we will
switch to other Cos and its products altogether ...."
(AC ¶ 107). Dr. Ruan implied that the board members
would listen to them because "as you know very well,
they know who we are...." (AC ¶ 107). "Since
[we ...] are all shareholders of the [sic] and together we
represent a very significant portion of their business, we
have a better chance of making it if [we] team up together to
get this done." (AC ¶ 107). Dr. Ruan also emailed
defendants Bernarda and Lento, stating that he agreed
"with many of other share holders that the executive
team and BOD need to be replaced ASAP." (AC ¶ 108).
Dunlap, and Bernarda were defendants in a securities-fraud
action, In re Galena Biopharma Securities
Litigation, No. 3:124-cv-367-SI (D. Or.). The plaintiffs
in that action alleged that Galena and certain officers paid
third-party newsletters to promote Galena stock without
disclosing that those newsletters were in fact paid
promotions. Galena's stock price had nearly quadrupled
and Galena investors reaped approximately $16 million in
profits when these they sold their shares. The parties
reached a settlement with the SEC under which defendant Ahn
disgorged $677, 250 in profits, paid prejudgment interest of
$67, 181, and paid a civil penalty of $600, 000. Galena
agreed to pay a civil penalty of $200, 000. (AC ¶ 111).
Inflated and Unsustainable Sales
to the complaint, the defendants knew that Abstral's
sales were overwhelmingly driven by Drs. Ruan and Couch's
prescribing Abstral for off-label purposes. (AC ¶¶
113). Defendants allegedly knew, or should have known, that
"Abstral sales largely supported by two pain management
doctors prescribing inordinately large amounts of Abstral to
non-cancer patients could not be sustained given the
government's aggressive oversight of prescription
opioids." (AC ¶¶ 112-16, 119).
Statements During the Class Period
propose a Class Period that begins on August 11, 2014. (AC
¶ 125). On that day, Galena issued a press release
entitled "Galena Biopharma Reports Second Quarter 2014
results." (AC ¶ 125). For the first half of 2014,
Galena reported $4.5 million in net revenue, $2.3 million of
it earned in the second quarter. By comparison, for the first
half of 2013, the company had reported no net revenue. (AC
August 11, 2014 press release, the company noted:
"With the recent acquisition of our second approved
product, Zuplenz, Galena now has two commercial products and
three clinical assets in development, providing our
shareholders a stratified and diversified pipeline as we look
to enhance cancer care and treat its often debilitating
side-effects," said Mark J. Ann, Ph.D., President and
Chief Executive Officer. "We are excited for the second
half of the year as we continue to advance all of our
programs.... Commercially, we continue to gain traction with
Abstral, and we have begun preparations for the launch of
Zuplenz in early 2015."
(AC ¶ 125).
same date, August 11, 2014, Galena filed its quarterly Form
10-Q with the SEC. The 10-Q, signed by defendants Ahn and
Dunlap, confirmed Galena's financial results for the
first half of the year, as announced in the press release.
(AC ¶ 126).
allege that, in those August 11, 2014 statements, defendants
violated their duty of disclosure. (AC ¶ 127). According
to plaintiffs, defendants knew, but omitted to disclose, that
it was reasonably likely that Galena's sales could not be
sustained and thus Galena's reported financial results
were likely not indicative of future performance. (AC ¶
August 11, 2014, Galena held an earnings conference call for
the quarter that ended June 30, 2014. (AC ¶ 128).
Defendants Schwartz, Dunlap, Ahn, and Bernarda participated
in the call. On this call, Schwartz stated that Galena was
experiencing "continued product expansion" and had
a "stable business foundation." (AC ¶ 128). He
attributed this to "first, ensuring availability,
reimbursement, and insurance coverage; second, optimizing our
Patient Assistance program; third, strengthening our
distribution and our wholesale partnerships; and finally,
continued development of our prescriber base." (AC
days later, on August 21, 2014, Galena announced that
defendant Schwartz had been named CEO, replacing defendant
Ahn. (AC ¶ 130). Plaintiffs claim that Ahn was
"forced out" because of his involvement in the
insider trading scandal. (AC ¶ 130); see
subsection I.E, supra.
September 25, 2014, Galena held a press conference that was
attended by defendants Schwartz, Dunlap, and Bernarda. (AC
¶ 131). Defendant Schwartz stated,
"Our strategy is focused on targeting oncology patients
treated by both pain medicine specialists and oncologists,
thus remaining true to the overall mission of the Company. We
recognize that our approach of primarily targeting oncology
practices has resulted in a slow, but a consistent growth
pattern that we believe will result in a viable and strategic
business in the long term."
(AC ¶ 131).
made similar statements in a November 3, 2014 press release;
November 3, 2014 earnings conference call; Form 10-Q filed
with the SEC on November 5, 2014; March 5, 2015 press
release; March 5, 2015 earnings conference call; Form 10-K
filed with the SEC on March 5, 2015; May 7, 2015 press
release; May 7, 2015 Form 10-Q; and May 7, 2015 earnings
conference call. (AC ¶¶ 133-45).
the "Risk Factors" section of the March 5, 2015
Form 10-K, Galena disclosed:
The FDA strictly regulates the promotional claims that may be
made about prescription drug products. In particular, a drug
product may not be promoted for uses that are not approved by
the FDA as reflected in the product's approved labeling,
although the FDA does not regulate the prescribing practices
of physicians. The FDA and other agencies actively enforce
the laws and regulations prohibiting the promotion of
off-label uses, and a company that is found to have
improperly promoted off-label uses may be subject to
significant liability, including substantial monetary
penalties and criminal prosecution.
... If we are not able to achieve and maintain regulatory
compliance, we may not be permitted to market our products,
which would adversely affect our ability to generate ...