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In re Galena Biopharma, Inc. Securities Litigation

United States District Court, D. New Jersey

August 21, 2018



          HON. KEVIN MCNULTY, U.S.D.J.

         The 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.

         I. BACKGROUND[1]

         A. Relevant Parties

         Plaintiffs, 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.

         Plaintiffs 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).

         B. Abstral and Galena Patient Services

         On 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 ¶ 51).[2]

         On 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).

         C. Dr. Ruan and Dr. Couch

         Dr. 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).

         When 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).

         D. Off-Label Promotion and Kickbacks

         Former 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).

         Galena 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).

         C&R 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).

         Galena 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 ¶ 97).

         The 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).

         E. Stock Manipulation

         Drs. 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).

         Drs. 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).

         Ahn, 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).

         F. Inflated and Unsustainable Sales

         According 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).

         G. Statements During the Class Period

         Plaintiffs 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 ¶ 125).

         In an 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).

         On the 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).

         Plaintiffs 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 ¶ 127).

         Also on 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 ¶ 128).

         Ten 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.

         On 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).

         Defendants 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).

         Under 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 ...

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