United States District Court, D. New Jersey
In re DR. REDDY'S LABORATORY LIMITED SECURITIES LITIGATION
MEMORANDUM AND ORDER
G. SHERIDAN, U.S.D.J.
Dr. Reddy's Laboratories, Ltd. (Dr. Reddy's), Dr.
Reddy's Laboratories Inc. (Dr. Reddy's USA), Abhijit
Mukherjee, Satish Reddy, Saumen Chakraborty, and G. V. Prasad
(collectively, Defendants), bring this motion to dismiss
Plaintiff's Amended Consolidated Class Action Complaint
(“Amended Complaint” or “AC”) in its
entirety for lack of standing and failure to state a claim.
(ECF No. 47).
allegations in this complaint arise under 15 U.S.C. §
78j(b), 78t(a), and 17 C.F.R. § 240.10b-5. Therefore,
this Court has jurisdiction pursuant to 15 U.S.C. § 78aa
and 28 U.S.C. § 1331. On May 9, 2018, Defendant filed
this motion to dismiss the Amended Complaint. (ECF No. 47).
Public Employees' Retirement System of Mississippi
provides retirement benefits to Mississippi public employees,
and manages approximately $27.1 billion on behalf of
beneficiaries. The Amended Complaint alleges Plaintiff
purchased securities “at artificially inflated prices
during the Class Period and was damaged upon revelation of
the alleged corrective disclosures.” (AC at ¶ 53).
Plaintiff purchased Dr. Reddy's securities between March
30, 2016 and April 6, 2016. (Declaration of Joel B. Strauss
in Support of the Motion to Appoint Lead Plaintiff (Strauss
Decl.), ECF No. 12, Ex. A, Certification of Jacqueline H.
Ray, Ex. A, Mississippi PERS' Transactions in Dr.
Reddy's Securities). However, the Amended Complaint
defines the class period as November 27, 2014 through
September 15, 2017. (AC at p. 1).
Dr. Reddy's is an Indian pharmaceutical manufacturing
company with a United States headquarters in New Jersey. (AC
at ¶ 54). Dr. Reddy's securities are traded on the
New York Stock Exchange. (Id.). Defendant Dr.
Reddy's, USA, is a wholly owned United States subsidiary
of Dr. Reddy's that “is primarily engaged in
developing, manufacturing, and marketing generic
pharmaceuticals and [active pharmaceutical ingredients] in
the United States.” (Id. at ¶ 55).
Defendant G.V. Prasad was the Chief Executive Officer and
co-chairman of Dr. Reddy's during the class period.
(Id. at ¶ 56). Defendant Saumen Chakraborty was
the Chief Financial Officer and President of Dr. Reddy's
during the class period. (Id. at ¶ 58).
Defendant Abhijit Mukherjee was the Chief Operating Officer
of Dr. Reddy's during the class period. (Id. at
¶ 60). Satish Reddy was co-chairman of Dr. Reddy's
during the class period. (Id. at ¶ 62). All of
the individual Defendants are alleged to have had
“actual power and influence over Dr. Reddy's and
the statements made by Dr. Reddy's.” (Id.
at ¶ 53, 55, 57, 59).
Reddy's allegedly misrepresented that it met mandatory
manufacturing quality standards when it did not. This misdeed
was in violation of the U.S. Federal Food, Drug and Cosmetic
Act (FD&C Act) which prohibits the import of
“adulterated” drugs. See 21 U.S.C. § 331(a);
(AC at ¶ 1). Plaintiff asserts that Defendants are
subject to current good manufacturing practices (cGMP) which
sets minimum standards for safely manufacturing drugs by
outlining general rules for all aspects of drug manufacture
including facilities, personnel, equipment, drug components
and containers, production, packaging, labeling, and record
keeping. (AC at ¶ 2). Dr. Reddy's compliance with
cGMP came into question after investors learned that the FDA
observed nine potential violations at Dr. Reddy's
manufacturing facility Unit VI, one of the largest
facilities, in November 2014. (Id. ¶ 3). Dr.
Reddy's and other corporate executives falsely assuaged
the market's fears and downplayed the potential impact on
manufacturing by stating in the June 17, 2015 annual report
that “[a]ll of the [Dr. Reddy's] facilities are
designed in accordance with and are compliant with current
Good Manufacturing Practice requirements.”
to Plaintiff, the fraud began to unravel in November 2015
when the Food and Drug Administration (FDA) publicly issued a
Warning Letter (the “Warning Letter”) that
described three of Dr. Reddy's manufacturing facilities
as suffering from “recurrent” and
“long-standing failures, ” with some violations
dating back to 2008. (Id. at ¶ 4). The Warning
Letter questioned Dr. Reddy's ability “to achieve
overall compliance with CGMP” and concluded, “It
is apparent that [Defendants] have not implemented a robust
quality system at [Dr. Reddy's] sites.”
(Id. at Exhibit 5). The FDA “strongly
recommend[ed]” that Defendants “evaluate global
manufacturing operations to ensure compliance with CGMP
regulations and requirements, comprehensively and
immediately.” (Id. ¶ 4).
the receipt of the November 2015 Warning Letter, Defendants
allegedly continued to fraudulently downplay the impact of
their purported compliance-related efforts on ongoing
manufacturing. (Id. at ¶ 5). In February and
July 2016, Defendants disclosed that production had been
slowed as a result of the remediation. (Id.). In an
October 25, 2016 earnings call, Defendants also touted that
they had “done [their] part of it in terms of
completing all the remediation activities.”
(Id. at ¶ 263).
between February 27 and March 8, 2017, the FDA re-inspected
the three facilities under the Warning Letter and again found
problems at all three facilities. (Id. at ¶ 6).
One facility - Unit VII - was particularly problematic; the
FDA's internal Establishment Inspection Report regarding
the early 2017 inspection “found that numerous items
had not been corrected” and during the inspection
“repeated instances of employees providing false or
misleading statements [were] discussed with firm
management.” (Id. at ¶¶ 6, 321).
the summer of 2017, a string of disclosures revealed just how
little Dr. Reddy's had accomplished in its purportedly
“network wide” remediation. (Id. at
¶ 7). In August 2017, the German equivalent of the FDA
rescinded Dr. Reddy's compliance certificate for a whole
new facility, Unit II, which had not been implicated by the
Warning Letter. (Id.). Similarly, in September 2017,
the FDA found more observations of potential non-compliance
at a facility based in the United Kingdom. As a result of
these disclosures, the price of Defendants' U.S.-traded
securities dropped over 50% from their pre-Warning Letter
class period high. (Id.). Plaintiff alleges that
investors were damaged by Defendants' materially false
and misleading statements throughout the class period
concerning: (i) Dr. Reddy's compliance with manufacturing
quality regulations, including cGMP; (ii) the scope and
severity of the FDA's observations of non-compliance;
(iii) the company's purported progress getting back into
compliance; and (iv) the extent to which getting back into
compliance would impact ongoing production. (Id. at
Reddy's, like all pharmaceutical manufacturers, has a
non-delegable duty to ensure that the drugs and
pharmaceutical ingredients it produces are safe, effective,
and in compliance with the regulations in the jurisdictions
in which they are sold. (Id. at ¶ 9). For drugs
sold in the United States, the regulatory regime is premised
on the cGMP, which are promulgated by the FDA and codified in
the Code of Federal Regulations (21 C.F.R. Parts 210 and
211). (Id. at ¶ 9). Plaintiff alleges that Dr.
Reddy's routinely violated fundamental precepts of the
cGMP. (Id. at ¶ 10). For example, when errors
or discrepancies in the manufacture of a drug are discovered
during the quality control testing phase - such as the
accidental production of a batch of super- or sub-potent
drugs - the manufacturer must “thoroughly”
investigate and identify the cause of the error.
(Id.); See 21 C.F.R. § 211.192. The FDA
allegedly found numerous instances where Dr. Reddy's
management knew about deviations and errors in the production
of drugs at three of its largest and most important
facilities yet took no action to investigate the cause of the
error or to correct it. (Id.).
in 2012 through the start of the class period, Dr.
Reddy's management oversaw a dramatic increase in the
volume of production at the company's manufacturing
facilities, including those at the center of this action.
(Id. ¶ 12). However, a well-placed confidential
witness and former Dr. Reddy's employee, identified as
“CW 1, ” who had firsthand information of Dr.
Reddy's manufacturing facilities in India, stated that
the ramp up in production output led to increased quality
problems and delays. (Id.). As a result, significant
pressure was put on the quality teams to cut corners and
release batches of products from the review cycle without
performing adequate quality assurance or control.
November 2014, after performing an unannounced on-site
inspection of Unit VI, one of Dr. Reddy's largest
manufacturing facilities, the FDA caught Dr. Reddy's
shirking on its responsibility to follow the cGMP and other
mandatory regulations used to ensure drug safety.
(Id. at ¶ 13). They communicated that they
observed nine objectionable instances of potential
non-compliance. (Id.). For example, Dr. Reddy's
allegedly had manipulated and deleted quality control testing
data using a quality control laboratory that was not
disclosed to the FDA. (Id.). Dr. Reddy's had
used the undisclosed lab to test and retest batches of
pharmaceutical products that had failed quality control until
they successfully passed muster. (Id.). The FDA
privately communicated these observations to Defendants in a
November 21, 2014 FDA Form 483 Notices of Inspectional
Observations. (Id. at ¶¶ 13, 120).
start of the class period, on November 27, 2014, investors
learned of the FDA's observations of potential
non-compliance at Unit VI from an online industry publication
named In-Pharmatechnologist.com and an Indian publication
named the Deccan Chronicle. (Id. at ¶¶ 14,
214, 224). Nevertheless, that same day, Defendants
immediately issued a press release
“clarification” and commented in the industry
publication. (Id. at ¶¶ 14, 158, 214).
They acknowledged receipt of the FDA Form 483, but then
inaccurately assuaged investors' fears, claiming
“there is no implication on manufacturing, ” and
that they were “confident it [wouldn't] lead to any
further enforcement.” (Id. at ¶¶ 14,
covering Dr. Reddy's apparently did not believe the FDA
Form 483 would adversely affect the company. (Id. at
¶¶ 15, 221). The next day, November 28, 2014, an
analyst named IndiaNevish issued a report stating:
“[Dr. Reddy's] has clarified that these
observation[s] would not have any material impact on
company's operation or consolidated results . . . . We
find non-stoppage of production from facility under
observation to be positive for [Dr. Reddy's] as it
implies [Dr. Reddy's] following norms to comply with
USFDA regulation.” (Id. ¶¶ 15, 221).
The report was available on publications including Bloomberg
INNS, Thomson First Call, Reuters, and Factiva INDIV.
(Id. at ¶ 221 n.6).
Reddy's went on to privately receive at least two more
FDA Form 483s for two other manufacturing facilities in India
in January and March 2015. (Id. at ¶ 16).
Together, the thirty-three observations at three different
facilities depicted a pervasive pattern of: (1) neither
recording nor maintaining quality control testing data; (2)
failing to investigate the cause of failing quality control
test results; and (3) failing to mitigate the risks of
microbiological contamination. (Id.).
receiving these two additional FDA Form 483s, Defendants
allegedly knowingly misled investors by claiming that they
were in full compliance with cGMP. (Id. at ¶
17). For example, on June 17, 2015, Defendants claimed in
their annual report for the year ended March 31, 2015, that
“[a]ll of the facilities are designed in accordance
with and are compliant with” the cGMP. (Id.).
on July 30, 2015, Defendants falsely claimed that their
compliance issues were “pretty much a one site specific
issue” and that they had “comprehensively
addressed almost all the observations raised” despite
having received two additional FDA Form 483s for two separate
facilities and, according to the FDA, having proposed
woefully inadequate corrective actions. (Id. at
¶ 18 (emphasis omitted)). Plaintiff contends that
Defendants failed to fix the problems at their manufacturing
facilities - despite claiming they had - and the FDA
escalated its enforcement by issuing the November 2015
Warning Letter to Defendant Reddy. (Id. at ¶
19). The Warning Letter had revealed that Dr. Reddy's
manufacturing quality problems were not an isolated
“one site specific issue, ” but rather, a pattern
of cross-facility, persistent violations. Multiple violations
dating back to 2008 and multiple observations from the FDA
Form 483s remained uncorrected. (Id.; see AC at
Exhibits 2 (March 6, 2015 Form 283), 3 (January 31, 2015 Form
283), 4 (November 21, 2014 Form 483), 5 (November 2015
the Warning Letter memorialized portions of Defendants'
responses to the FDA following their receipt of the three FDA
Form 483s. (AC at ¶ 20). The FDA's descriptions of
these responses show that Defendants knew about the specific
non-compliant conditions at the same time they claimed that
all manufacturing facilities were “compliant”
with the cGMP. (Id.).
instance, in a December 15, 2014 letter responding to the FDA
Form 483 issued to Unit VI in November 2014, Defendants
attempted to justify their use of an undisclosed quality
control lab to test and retest products until they passed,
while only recording passing results. (Id. at ¶
21). According to the FDA, Defendants' response
“acknowledged that [their] analysts failed to document
and start investigating [out-of-specification] results”
in the undisclosed quality control lab. (Id.).
However, the November 2015 Warning Letter concluded that
eleven months after the December 2014 letter, Defendants
still had “not assessed how [their] reliance on the
incomplete and inaccurate data generated by the [custom
quality control] laboratory” affected the quality of
the facility's products. (Id.) Defendants'
late 2014 and early 2015 acknowledgments in their responses
to the FDA establish their knowledge that the statements were
false and misleading. (Id.).
on these observations and others, the Warning Letter
concluded: “Several violations are recurrent or
represent long-standing failures to adequately resolve
significant manufacturing quality problems. It is apparent
that you have not implemented a robust quality system at your
sites.” (Id. at ¶ 22, Ex. 5, Warning
Letter at 9).
Street analysts covering Dr. Reddy's were surprised by
the Warning Letter. A Morgan Stanley analyst stated,
“Hitherto, only one site, which is located at
Srikakulam [(Unit VI)] was perceived to be under FDA risk;
warning letters to two additional sites is
disappointing.” (Id. at ¶ 21). Equirus
echoed the surprise: “While we knew about the
Srikakulam facility issues, we never knew about the
seriousness of observations at the other plants - mainly as
management commentary was very optimistic in the quarterly
calls. This clearly is significantly against our expectations
. . . .” (Id. at ¶ 23).
November 6, 2015, Dr. Reddy's issued a press release
publicly acknowledging that it had received the Warning
Letter, marking the first time the market learned of same.
(Id. at ¶¶ 198, 248, 291). Dr. Reddy's
American Depositary Shares (“ADSs”) dropped 18%.
(Id. at ¶ 24). When reports in the media first
circulated on November 27, 2015, Dr. Reddy's ADSs dropped
an additional 5.6%. (Id. at ¶ 24).
instead of acknowledging the significant impact that an
“organization-wide” “revamp [of their]
quality systems and processes” to “fully comply
with the cGMP quality standards across all of [their]
facilities” would have on production, Defendants
claimed on November 9, 2015 that they had
“de-risked” the three facilities subject to the
Warning Letter and there would be minimal impact on
manufacturing. (Id. at ¶ 25). As part of the
remediation, Defendants promised to engage an outside
consultant to perform a “third party assessment of
[their] quality systems and evaluate [their] global
manufacturing operations to ensure compliance with CGMP
regulations” as required by the FDA. (Id. at
November 5, 2015, Defendants hired Lachman Consultants
Services, Inc. (“Lachman”), a consulting firm
that specializes in responding to FDA warning letters.
(Id. at ¶¶ 26, 61). According to CW 1,
Lachman came in after Dr. Reddy's received the Warning
Letter; due to Dr. Reddy's extended review process and
Lachman's subsequent review, Dr. Reddy's batch
releases slowed down by as much as 66%, and management was
fully aware of this slow down. (Id. ¶ 27).
three months after receiving the Warning Letter, on February
9, 2016, Defendants had to admit, contrary to their earlier
public statements, that Dr. Reddy's was indeed
experiencing manufacturing delays due to the remediation,
causing the price of Dr. Reddy's ADSs to drop almost 6%.
(Id. at ¶ 28).
then falsely claimed these delays were essentially a one-time
occurrence and manufacturing was “back on track.”
(Id. at ¶ 29). However, on July 26, 2016, Dr.
Reddy's revealed that the company's remediation
efforts had once again substantially delayed production at
the impacted facilities. (Id.). As a result of this
news on July 26, 2016, the price of Dr. Reddy's ADSs
dropped an additional 15%. (Id.).
alleges that in addition to misleading the market about
production delays caused by the remediation, Defendants
misled the market about their progress in remediating the
company's non-compliance. (Id. at ¶ 30). On
May 12, 2016, Defendants claimed that they believed that
“most of [their] commitments to the [FDA] will be over
by the end of [May 2016].” (Id.). Similarly,
Defendants claimed on July 26, 2016, that they had completed
up to 98% of their commitments to the FDA. (Id.).
However, at the time of these statements, Defendants knew
they had not corrected the problems at the three facilities
under the Warning Letter, nor had they completed a network
wide revamp of the company's compliance processes.
March 8, 2017, the market further learned the true state of
Dr. Reddy's purported “system wide”
remediation efforts when news broke that Dr. Reddy's had
failed the FDA's re-inspection of Unit VII, receiving
thirteen FDA observations in a March 8, 2017 Form 483.
(Id. at ¶ 31; Exhibit 7). This news revealed
the falsity of Defendants' claims that, since July 2016,
they had basically addressed all of the FDA concerns and were
merely awaiting re-inspection. (Id. at ¶ 31).
Based on the news, the price of Dr. Reddy's ADSs fell
once again, this time by more than 5% over two days.
days later, on March 21, 2017, additional information about
the failed re-inspection came to light following an economic
news channel's report that “US FDA finds repeat
observations from 2015 warning letter. Failed to maintain
complete data to ensure compliance.” (Id. at
¶ 35). The news of five repeat observations from the
Warning Letter continued to reveal the falsity of
Defendants' claims that they had fully addressed the
FDA's concerns. (Id. at ¶ 32).
the subsequently-released Unit VII establishment inspection
report, dated April 4, 2017, which accompanied the Form 483,
made clear that management knowingly took no action
concerning, among other things, more than 1, 200
documentation errors from May 2016 to October 2016 in
violation of cGMP. (Id. at ¶ 32; Exhibit 9).
Consequently, the price of Dr. Reddy's ADSs took another
hit, falling more than 6%. (Id. at ¶ 32).
a string of disclosures during the summer of 2017 fully
revealed just how little Dr. Reddy's had accomplished in
its purportedly “network wide” remediation.
(Id. at ¶ 33). On August 10, 2017, the company
revealed that a German regulator would not renew a cGMP
compliance certificate for a manufacturing facility that was
entirely separate from the facilities under the Warning
Letter. (Id.). After investors learned about the
revocation of a compliance certificate at the new facility,
the price of Dr. Reddy's ADSs fell almost 6% from its
previous close. (Id.). Similarly, on September 15,
2017, Dr. Reddy's disclosed that the company had been
advised of new FDA observations of potential non-compliance
at a United Kingdom manufacturing facility. (Id.).
the truth was fully and finally revealed on September 15,
2017, the value of Dr. Reddy's ADSs had dropped to $33.78
from its class period high of $65.25 just before the issuance
of the November 2015 Warning Letter. (Id. at
¶¶ 34, 297). From its class period high just before
the issuance of the Warning Letter, Dr. Reddy's ADSs had
fallen a staggering 50.17% in value. (Id.).
Plaintiff has set forth twenty-two individual misstatements
upon which the complaint is based:
• Misstatement 1: In an online publication named
In-Pharmatechnologist.com dated November 27, 2014, a Dr.
Reddy's spokesperson commented that the Form 483
observations by the FDA “were largely related to
procedural and other compliances of the plant system”;
“there is no implication on manufacturing and at this
stage production continues as normal.” The spokesperson
also stated she was “confident that it [wouldn't]
lead to any further enforcement.” (AC at ¶ 214-15
• Misstatement 2: Dr. Reddy's posted a clarification
on November 27, 2014, on the Bombay Stock Exchange website
clarifying a news article, which stated:
The Company clarified stating that the company had received
some inspectional observations from the U.S. FDA after their
visit to their API manufacturing facility in Srikakulam
district of Andhra Pradesh. The company is committed to
respond to the agency within stipulated timelines with their
remedial plans and start implementing the necessary measures
immediately. At this stage, it has no implication on any
activity at the plant. Hence, these are not expected to be
material to the Company[']s operations or consolidated
(AC at ¶ 216 (emphasis omitted)).
• Misstatement 3: During a January 29, 2015 earnings
call to address “Q3 FY 2015, ” Defendant
Mukherjee engaged in the following conversation:
Analyst: A quick question on Srikakulam [(Unit VI)]. My
understanding has been that over the last few years, FDA
generally does not stop product approvals with the 483s. It
requires a warning letter, so why is that for you FDA has
taken that stance?
Abhijit Mukherjee: . . . [I]f your question is a direct
question that whether we will be [getting a] warning letter,
I do not know. That is not our expectation. We have responded
comprehensively to the nine observations [regarding
Srikakulum]. We are sending an update as we speak and let us
see how that pans out.
. . . .
Analyst: So just a personal thought and since it is very
important for everyone, so therefore I am just pressing on
that. Sir observations such as readings falling out of
specifications being recorded as falling within the
specifications, does it not really border on the lines of
data integrated issues, what is really our internal
assessment on observations such as these?
Abhijit Mukherjee: So what is available and you read are the
observation by FDA. What you do not have access to are the
rationale and the reasoning and the answers on this. So what
I am telling you is that we have answered fairly
comprehensively on most of these. Are not there insights and
learning? - Yes there are insights and learning but we have
answered fairly comprehensively to more of the observations.
Per se if you read the observations it does not give you the
(AC at ¶ 225 (emphases omitted)).
• Misstatement 4: During a July 30, 2015 earnings call
to address “Q1 FY 2016, ” Defendant Mukherjee
engaged in this exchange:
Analyst: So per se, the 483 issue does not like really stop
you from getting on the other ANDAs, right?
Mukherjee: By no means. This is pretty must one site specific
issue. A huge amount of organizational effort is standing for
us everywhere where we are. Taking this is a drive to see how
else we could more train, more do IT backup.
(AC at ¶ 228 (emphasis omitted)).
• Misstatement 5: On December 26, 2014, Defendants
posted a clarification on the Bombay Stock Exchange in
response to a report that Canada had placed an import
restriction on the Unit VI facility. It stated:
The Exchange had sought clarification from Dr. Reddy's
Laboratories Ltd. with respect to news article appearing in
Asian Age on December 26, 2014, titled “DRL under
health Canada Scanner.”
. . . Our products continue to meet intended quality
standards, and we believe that, our APIs and Finished drug
products manufactured using these APIs pose no risk to the
health and safety of the Canadian people. The Company is
working with the agency for a satisfactory resolution of the
matter. At this stage, it has no implication on any activity
at the plant and hence, these are not expected to be material
to the Company's operation or consolidated results.
(AC at ¶ 230 (emphases omitted)).
• Misstatement 6: In Dr. Reddy's May 12, 2015 Annual
Report for 2014-2015, Defendants stated that their
“focus on innovation-led affordability gives our
customers access to the most complex active ingredients,
while maintaining a consistent global quality
(AC at ¶ 231 (emphasis omitted)).
• Misstatement 7: On June 17, 2015, Defendants filed
their Form 20-F for the year ending March 31, 2015; it
Quality. We are fully dedicated to quality and have robust
quality processes and systems in place at our developmental
and manufacturing facilities to ensure that every product is
safe and of high quality. In addition, we have integrated
“Quality by Design” to build ...