A federal appeals court on Friday revived a securities fraud suit against Pfizer brought by investors who claim the company hid the truth about the outcome of a clinical study on possible side effects of Celebrex, an arthritis drug.
In the suit, Alaska Electrical Pension Fund v. Pharmacia Corp., et al., investors claim that Pharmacia (which has since been acquired by Pfizer) falsely trumpeted the data from the first six months of a study to claim that Celebrex had fewer gastrointestinal side effects than other arthritis drugs.
The truth, the suit alleges, was that Pharmacia knew that results of the full, 13-month study would show no such reduction in side effects.
Pfizer won the first round of the litigation when U.S. District Judge Anne E. Thompson of the District of New Jersey dismissed the suit on statute-of-limitations grounds, finding that investors had "storm warnings" of potential problems with the study as early as February 2001 when the Food and Drug Administration released a critical report.
Now the 3rd U.S. Circuit Court of Appeals has ruled that Thompson imposed too strict a test for gauging the existence of storm warnings.
The FDA report, the appellate court found, revealed only a scientific dispute between the FDA and the company, but did not reveal any evidence of the company's alleged fraud or its scheme to hide a portion of the test results.
Instead, the court found, investors were not made aware of the alleged fraud until August 2001 when the Washington Post reported that Pharmacia had withheld the data of the full study from the Journal of the American Medical Association.
"The totality of the evidence in the public realm as of February 2001 did not indicate a possibility of fraud or even hint at any malfeasance or intentional impropriety; rather, the evidence only supported the view that there existed a legitimate dispute over scientific and statistical models," U.S. Circuit Judge Maryanne Trump Barry wrote.
In alleging securities fraud, Barry said, investors are required to show not only that statements by corporate officers were false, but also that the officers did not genuinely believe the accuracy of their statements.
In Pharmacia's case, Barry said, "no such evidence surfaced until the publication of the Washington Post article which stated that defendants withheld data from JAMA."
Barry, who was joined by Judge Michael A. Chagares and visiting Judge Jane Restani of the Court of International Trade, found that Congress never wanted investors to rush to court over nothing more than a scientific dispute.
"A rule that would place investors on inquiry notice of fraud the moment that the FDA questions the seemingly good faith scientific analysis of a pharmaceutical company would encourage putative plaintiffs to file premature securities suits. In imposing heightened pleading requirements, Congress evinced an intent to discourage such suits," Barry wrote.
Celebrex, the brand name for celecoxib, is an anti-inflammatory drug that is substantially more expensive than many other non-steroidal anti-inflammatory drugs, or NSAIDs.
From the time it was introduced, the makers of Celebrex hoped that it would cause fewer gastrointestinal side effects than the cheaper NSAIDs.
When Pharmacia commissioned a long-term study, its goal was to persuade the FDA to allow Celebrex to be marketed without the standard GI warning label required for other NSAIDs.
But according to the suit, the study was a disappointment because Celebrex did not show the desired reduction in GI side effects as compared to the other drugs studied.
Fearing a decrease in sales and stock price, the suit alleged, Pharmacia set out to distort the results of the study so that it would appear that Celebrex possessed a better GI safety profile.
In April 2000, the suit alleged, Pharmacia released only the results from the first six months of the study, which, divorced from the entire set of data, were "capable of positive construction."
The suit said Pharmacia released the truncated results with great fanfare, declaring that the study "shows that Celebrex has a truly exceptional safety profile" and that "the longterm outcome data paints a clear and compelling picture of Celebrex's safety versus NSAIDs."
Soon after, scientists affiliated with Pharmacia drafted an article based on the truncated results and submitted it for publication in JAMA. But the suit alleged that neither Pharmacia nor the article's authors informed JAMA that the data in the article were incomplete.
The first wave of bad news came on the eve of an FDA hearing when FDA staff members posted a report that recommended no change to Celebrex's label.
The news led to a 9 percent drop in Pharmacia's stock price.
But the suit alleged that Pharmacia continued to issue positive statements about Celebrex's GI safety profile as well as about the chances for a label change, claiming that the study presented a "compelling case" for a label change, and that, because the study was "an extremely rigorous and complex trial," it was difficult for the FDA advisory committee to analyze.
The second wave of bad news came a few months later when the Washington Post reported that Pharmacia had withheld the full study data from JAMA, and quoted JAMA's editor as saying that "a level of trust ... was, perhaps, broken."
Within days, Pharmacia's stock price had dropped 7 percent.
In dismissing the suit, Thompson concluded that the investors had "inquiry notice" of the alleged fraud as soon as the FDA posted its conflicting report and the media and financial analysts took stock of Celebrex's decreased chances of having the GI warning removed.
"Plaintiffs need not have discovered the precise profile of the alleged fraud, nor been prepared to draft a complaint for a lawsuit at the time inquiry notice arises. So long as sufficient 'storm warnings' are on the horizon, inquiry notice may be found to exist," Thompson wrote.
But the 3rd Circuit found that Thompson was imposing too heavy a burden on investors to ferret out fraud from a scientific disagreement.
"The hypothetical reasonable investor need not be a scientific expert," Barry wrote. "To the contrary, the relevant inquiry is whether a reasonable investor of 'ordinary intelligence' would have recognized the available information as indicative of possible fraud."
Barry found that the determination of when an investor has inquiry notice "requires a 'totally objective' analysis that pinpoints the time at which a reasonable investor of ordinary intelligence would have discovered the information demonstrating possible liability and recognized it as a storm warning."
In securities fraud suits, Barry said, inquiry notice requires storm warnings indicating that defendants "acted with scienter."
Pfizer's lawyers -- Jonathan M. Hoff, Jason M. Halper and Joshua R. Weiss of Cadwalader Wickersham & Taft in New York -- argued that the FDA report was clearly a storm warning because it led to a drop in the stock price and that the investing public knew at the time that the clinical study was longer than the six months for which data had been disclosed.
Barry disagreed, saying, "Whatever else those facts may have indicated, they did not provide storm warnings of possible fraud."
The drop in the stock price didn't reveal fraud or even the possibility of fraud, Barry said, but instead could be explained by the fact that the market had been expecting that the FDA would approve a label change.
Likewise, Barry found that the FDA staff reports included no hint of fraud despite using phrases such as "not convincing" and "not valid."
"The staff reports span over 250 pages of highly complex scientific and statistical analysis. These few words and phrases, lacking in accusatory intent and buried like needles in a haystack, could not give rise to storm warnings of fraud," Barry wrote.
The ruling is a victory for attorneys Eric A. Isaacson, Arthur C. Leahy and Matthew P. Montgomery of Coughlin Stoia Geller Rudman & Robbins in San Diego.
Pfizer's lead lawyer, Jonathan Hoff, did not return a call seeking comment.
Copies of the 18-page opinion in Alaska Electrical Pension Fund v. Pharmacia Corp., et al., PICS No. 09-0152, are available from The Legal Intelligencer.