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Frater v. Hemispherx Biopharma, Inc.

United States District Court, Third Circuit

January 23, 2014

STEPHANIE FRATER, Individually and On Behalf Of All Others Similarly Situated, Plaintiffs,


WILLIAM H. YOHN, Jr., District Judge.

This is a consolidated class action in which plaintiffs are shareholders or former shareholders of Hemispherx Biopharma, Inc. ("Hemispherx"). Plaintiffs claim securities fraud under § 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 thereunder against Hemispherx; its President and Chairman of the Board Dr. William A. Carter; its Medical Director and Chief Medical Officer David Strayer; and its Senior Advisor Wayne Pambianchi. They further claim Hemispherx and Carter violated § 20(a) of the Exchange Act. The plaintiffs purport to represent all persons other than defendants who purchased or acquired Hemispherx common stock on the open market between March 14, 2012 and December 20, 2012, inclusive.

The subject of this litigation is the regulatory approval process of Ampligen, Hemispherx's flagship drug which the Food and Drug Administration ("FDA") had not yet approved for market as of the class period. The consolidated amended complaint ("complaint") alleges that, during the class period, Hemispherx and its senior officials made numerous public statements that concealed and/or misrepresented information indicating Hemispherx was not likely to succeed in obtaining Ampligen approval.

Before the court is the defendants' motion to dismiss, which contends plaintiffs have failed to state a claim under § 10(b) and Rule 10b-5. The defendants further contend that, to the extent the plaintiffs have failed to state a claim under § 10(b), they have also failed to state a claim under § 20(a).

Drawing all inferences in the plaintiffs' favor, one may reasonably infer from the complaint that the defendants made statements that were misleading and/or omitted information necessary to avoid their being misleading, as well as strongly infer the defendants knew this or were reckless if they did not know this. The inference of scienter emerges from numerous, detailed allegations of specific information known to the defendants but not disclosed. The allegations are thus sufficient to state a claim, and the defendants' motion will be denied.

I. Background[1]

A. The FDA New Drug Approval Process

Under 21 U.S.C. § 355, companies may market a pharmaceutical product in the United States only after submitting a new drug application ("NDA") to the FDA and receiving the FDA's approval. See 21 U.S.C. § 355. The FDA may approve a drug for market only where there is (a) sufficient information to determine the drug is safe to use as proposed, and (b) substantial evidence the drug will have the effect it is purported to have when used as proposed. § 355(d)(4)-(5).

Where a company seeks to sponsor a previously untested drug for FDA approval, the company is responsible for undertaking clinical investigation to demonstrate the drug's safety and effectiveness. See 21 C.F.R. § 312.21. This includes the design, conduct, and analysis of clinical trials. See id . When a sponsor believes that clinical investigation has produced the substantial evidence of safety and efficacy required by § 355(d)(4)-(5), it may then file an NDA with the FDA based on that evidence. Even then, the FDA will only review the NDA if it is sufficiently complete to permit the FDA to conduct a substantive review on the merits of the application. If the FDA chooses to conduct the review, under the Prescription Drug User Fee Act ("PDUFA"), it has 180 days from the date of a filing to either approve the drug or send the sponsor a confidential statement of the FDA's reasons for denying the application. This confidential statement is known as a Complete Response Letter ("CRL"). If the sponsor receives a CRL, it may resubmit the NDA at a later date.[2]

Prior to the 180-day deadline for approving the drug candidate, the FDA may elect to convene an advisory panel to make technical recommendations related to an application and/or to publicly comment on any controversies relating to the drug candidate. Such an advisory committee meeting is the only occasion on which the FDA is permitted to publicly communicate concerns about an NDA.

B. Hemispherx

Hemispherx is a Philadelphia-based, development-stage pharmaceutical company with one drug that generates significant revenues: Ampligen. Ampligen was developed by Carter in the 1970s while a university researcher, and, since at least 1988, Hemispherx has pursued FDA approval of Ampligen as a treatment for chronic fatigue syndrome ("CFS").

Hemispherx is a public company and its stock is traded on a national exchange.

C. Ampligen Trials

In 1990 and 1991, Hemispherx conducted a placebo-controlled, proof-of-concept trial for Ampligen known as AMP 502. With AMP 502, Hemispherx aimed to demonstrate Ampligen improved participants' quality-of-life and physical endurance. The trial, however, deviated from its pre-specified protocol in at least six ways: (1) failing to determine a statistical analysis plan until after the study was unblinded; (2) switching from a 48-week trial to a 24-week trial mid-stream, without proof that the switch did not violate the study blind; (3) including only 92 participants in the trial instead of 100 participants as specified; (4) excluding an additional seven participants in evaluating the data from the endurance test; (5) using some participants' best performances and others' worst performances when evaluating the quality-of-life test; and (6) failing to demonstrate that there were no participants in the trial who the trial protocol required to be excluded. According to the complaint, Hemispherx was aware of these flaws and the possibility that they compromised the study's statistic and scientific validity.

In 1997, Hemispherx began a second placebo-controlled clinical trial of Ampligen, this one known as AMP 516. AMP 516 was designed as a 40-week trial with twin primary goals of showing Ampligen improved patients' quality-of-life and physical endurance. Like AMP 502, the AMP 516 trial deviated from its protocol, including: (1) changes to trial parameters over the course of the study; (2) failing to establish controls that would avoid reporting false positive results; (3) failing to calculate results in accordance with the trial protocol; (4) failure of the study blind; and (5) abandoning the statistical analysis technique specified in the protocol when it failed to demonstrate Ampligen improved participants' endurance. Meanwhile, under any analysis, AMP 516 failed to demonstrate Ampligen improved participants' quality-of-life. Some participants in AMP 516 were included in a 24-week continuation study known as AMP 516C, in which participants received Ampligen even if they had received placebos in AMP 516. A comparison between the results for patients who received placebos in AMP 516 but Ampligen in AMP 516C and the results for patients who received Ampligen in AMP 516 tended to show Ampligen was ineffective.

D. The First Ampligen Application and Hemispherx Response

In October 2007, based on the findings of AMP 502 and AMP 516, Hemispherx submitted the first Ampligen NDA. The FDA refused to consider the application, however, citing clerical errors and/or facial discrepancies in Hemispherx's report. In April 2008, Hemispherx resubmitted the initial Ampligen NDA, and this time the FDA accepted it for review.

In November 2009, [3] after a period of review, the FDA sent Hemispherx a CRL explaining it would not be approving Ampligen. On December 1, 2009, Hemispherx issued a press release purporting to represent the explanation the FDA had given for denying the application. According to that press release, the CRL communicated the FDA determined "the two primary clinical studies submitted with the NDA did not provide credible evidence of efficacy of Ampligen and recommend[ed] at least one additional clinical study which shows a convincing effect and confirms safety in the target population."

Despite Hemispherx's awareness (1) of methodological problems with AMP 502 and AMP 516, (2) the FDA's determination that AMP 502 and AMP 516 did not produce credible evidence of Ampligen's efficacy, and (3) the FDA's specific recommendation in the CRL to pursue an additional clinical study, Hemispherx focused its post-CRL attention on reanalyzing the AMP 502 and AMP 516 trial results. These efforts first turned on finding a "biomarker" for Chronic Fatigue Syndrome, so as to better facilitate determining whether AMP 502 and AMP 516 participants actually suffered from Chronic Fatigue Syndrome rather than an alternative source of a similar set of symptoms. As of January 2012, however, multiple attempts by Hemispherx to find a biomarker for CFS had failed, such that biomarker-based assessment of Ampligen's effect in AMP 502 and AMP 516 was not an option.

By this point, Hemispherx allegedly lacked sufficient resources to conduct a new clinical trial. Instead, its options apparently limited, Hemispherx continued to attempt to demonstrate the safety and efficacy of Ampligen through reanalysis of the AMP 516 data. On March 14, 2012- the first day of the class period-Hemispherx published an article written by Hemispherx executives including Carter and Strayer in an open-source, online trade journal called PLoS One. Although advertised as a peer-reviewed journal, PLoS One publishes over 2/3 of submissions and typically accepts a publication fee of over $1, 000 from authors. Addressing AMP 516's empirical bonafides, the article stated "the design of the study, including endpoint, and the statistical method used to define efficacy were all reviewed by the FDA prior to receipt of FDA authorization for the initiation of the study." Substantively, the PLoS One article put forth a new analysis of the AMP 516 data that concluded Ampligen yielded statistically significant benefits for a number of defined subgroups within the trial, as measured by both endurance and quality-of-life metrics. The new analysis also concluded these findings were further supported by the data from the AMP 516C continuation group.

The PLoS One article did not mention AMP 516's numerous departures from its protocol or the possibility they may have compromised the empirical validity of the trial's results. Nor did it address the fact that the results of the new analysis differed from the results of the previous AMP 516 analysis, which, as the FDA communicated to Hemispherx in its 2009 CRL, did not demonstrate that Ampligen was effective. Moreover, plaintiffs allege the analysis contained in the PLoS One article was the product of cherry-picking subgroup-specific data, such that its conclusions were the product of pro-Ampligen manipulation. The PLoS One article did not refer to and did not discuss these alleged analytic defects, either.

On March 19, 2012, Hemispherx issued a press release trumpeting the article's findings. In it, Hemispherx emphasized that PLoS One was "peer-reviewed."

E. The Second Ampligen Application

March 14, 2012-the first day of the class period and the day the PloS One article was publishedalso saw Hemispherx announce in an SEC filing that it was planning to resubmit the Ampligen NDA. According to the announcement, Hemispherx "believe[d] that continued efforts to understand existing data and to advance the development of new data and information, will ultimately support a refiling of the NDA." Thus began Hemispherx's second appeal to the FDA for approval of Ampligen. Because Hemispherx had not developed new data since AMP 516, the decision to proceed with a near-term refiling meant that, in practice, the viability of application would depend on Hemispherx's reanalysis of AMP 502 or AMP 516.

Approximately one week later, on March 22, 2012, Carter and Strayer hosted a conference call for investors regarding the Ampligen NDA. Discussing the decision to proceed with resubmission, Strayer stated there was "no need for a CFS biomarker to get Ampligen approval." Carter, meanwhile, expressed confidence that Hemispherx's new analysis of AMP 516 would be sufficient to answer the concerns the FDA expressed in the CRL. When an investor challenged Carter on the basis that the FDA had urged Hemispherx to perform a new trial, Carter referred to an intervening statute amending the PDUFA process-The Food and Drug Administration Safety and Innovation Act ("FDASIA"). According to Carter, FDASIA "expanded the basis for accelerated approval under the conditional approval process." Notwithstanding Carter's characterizations, the complaint alleges FDASIA adjusted the timetable ...

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