TERRY BRENNAN; RON KENNER; KEVIN KOZIATEK; JEFFREY BUTERBAUGH; DRAGON GATE MANAGEMENT, LTD; VINCENT RAMPE, Plaintiffs, Appellants,
ZAFGEN, INC.; THOMAS E. HUGHES, Defendants, Appellees. AVIAD BESSLER, individually and on behalf of all others similarly situated; THEODORE J. DALY, Plaintiffs,
FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF
MASSACHUSETTS [Hon. F. Dennis Saylor, IV, U.S. District
Jeffrey C. Block, with whom Joel A. Fleming, Block &
Leviton LLP, Jacob A. Goldberg, Gonen Haklay, and The Rosen
Law Firm, P.A. were on brief, for appellants.
Deborah S. Birnbach, with whom Kevin P. Martin, Adam Slutsky,
Kate MacLeman, Joshua Bone, and Goodwin Procter LLP were on
brief, for appellees.
Kayatta, Circuit Judge, Souter, Associate Justice,
and Stahl, Circuit Judge.
a significant drop in the share price of Zafgen, Inc., a
biopharmaceutical developer based in Boston, Massachusetts,
its investors brought a securities fraud class action suit
against the company and its Chief Executive Officer, Dr.
Thomas Hughes ("defendants"), pursuant to Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, 15
U.S.C. §§ 78j(b) and 78(t)(a), and Securities and
Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5.
The investors' complaint focuses on several allegedly
misleading statements made by the defendants regarding
Zafgen's anti-obesity drug Beloranib. Specifically, the
complaint alleges that the defendants disclosed some, but not
all, of the thrombosis-related adverse events that occurred
during Beloranib's clinical trials. The investors claim
that these partial disclosures caused Zafgen's common
stock to trade at artificially-inflated prices -- prices that
plunged after a clinical patient taking Beloranib died and
the Food and Drug Administration ("FDA") placed the
drug on a partial clinical hold.
these allegations, the district court granted the
defendants' motion to dismiss, concluding that the
investors' complaint did not contain facts giving rise to
a "cogent and compelling" inference of scienter as
required under the Private Securities Litigation Reform Act
of 1995 ("PSLRA"). Brennan v.
Zafgen, Inc., 199 F.Supp.3d 444, 471 (D. Mass. 2016)
(quoting Tellabs, Inc. v. Makor Issues
& Rights, Ltd., 551 U.S. 308, 324 (2007)). We agree,
and therefore affirm.
recite the facts as alleged in the complaint, supplemented by
certain "materials [the] defendants filed in the
district court in support of their motion to dismiss."
Fire & Police Pension Ass'n of Colo.
v. Abiomed, Inc., 778 F.3d 228, 232 (1st
Cir. 2015); see also Watterson v.
Page, 987 F.2d 1, 3 (1st Cir. 1993) (noting that
courts, when ruling on a motion to dismiss in securities
fraud cases, often consider "documents the authenticity
of which are not disputed by the parties, " along with
"official public records; . . . documents central to
plaintiffs' claim[s]; [and] documents sufficiently
referred to in the complaint").
stated goal is "to significantly improv[e] the health
and well-being of patients affected by obesity and complex
metabolic disorders." To that end, Zafgen has focused
its efforts on developing Beloranib, a drug aimed at
combating these conditions. Hughes, as Zafgen's Chief
Executive Officer, oversaw Beloranib's clinical testing.
While doing so, Hughes also steered Zafgen towards its
initial public offering ("IPO"), which the company
completed on June 19, 2014. The current dispute arises from
the intersection of these two strategic endeavors.
Beloranib and the FDA Approval Process
of the development process, the FDA requires that any new
drug "go through a series of clinical trials before it
can be approved for marketing and sales in the United
States." N.J. Carpenters Pension & Annuity
Funds v. Biogen IDEC Inc., 537 F.3d
35, 39 (1st Cir. 2008) (citation omitted). After a
pharmaceutical developer finishes its initial testing of a
drug on animals, it must then "submit an application
to the FDA for approval to test the drug on humans."
Id.; see also 21 C.F.R. § 312.20. If
the FDA approves that request, human testing begins.
Typically, such testing consists of three phases of clinical
trials. Biogen IDEC, 537 F.3d at 39;
see also 21 C.F.R. § 312.21. Each phase
"requires the company to test the drug on a broader
population and results in more stringent monitoring and
evaluation." Biogen IDEC, 537 F.3d at 39.
Throughout the course of these trials, "the drug company
must report to the FDA and to all participating physicians
any serious and unexpected adverse drug experiences that
occur." Id. (citing 21 C.F.R. §
time the investors first brought this suit, Zafgen had
conducted three Phase I trials, four Phase II trials, and one
Phase III trial. The investors' complaint, however,
concentrates on Zafgen's ZAF-201 trial, a Phase II trial
that consisted of 160 patients and lasted from August 2012 to
May 2013. From this group of 160 patients, Zafgen treated 122
of them with Beloranib. As the ZAF-201 trial progressed, four
of the patients given Beloranib suffered adverse
"thrombotic, " or blood-clotting, events of varying
severity. Third-party clinical investigators classified two
of these adverse events as "superficial" and the
other two as "serious." Zafgen disclosed the two
serious adverse events in advance of its IPO, noting their
occurrence in its April 18, 2014 Form S-1 Registration
Statement. The company did not, however, directly disclose
the two superficial adverse events at that time.
Zafgen's Stock Price Declines
share price began to decline in October 2015. On October
12th, Zafgen's share price closed at $34.76. By the close
of trading the next day, Zafgen's share price had dropped
to $15.75. On October 14th, Zafgen announced that a patient
in its ongoing Phase III trial had died, and confirmed on
October 16th that the patient had been treated with
Beloranib, not a placebo, and that the FDA had placed
Beloranib on a partial clinical hold. During a conference
call held that same day, Dr. Dennis Kim, Zafgen's Chief
Medical Officer, likewise informed analysts that a total of
six adverse thrombotic events had occurred throughout the
course of Beloranib's clinical testing: two in the
company's ongoing clinical trials and four in the
completed ZAF-201 trial. Dr. Kim's comments marked the
first time that Zafgen or any of its representatives had
informed its investors of the two superficial adverse
thrombotic events that had occurred in the ZAF-201 trial. By
the close of trading on October 16th, Zafgen's share
price plummeted to $10.36 per share, a nearly 51% decline
from the previous day's closing price.
on these events, the investors brought a class action suit
against Zafgen and Hughes. The complaint asserted claims on
behalf of a putative class consisting of all persons who
purchased or otherwise acquired Zafgen common stock between
June 19, 2014, the date of Zafgen's IPO, and October 16,
2015, the date the company announced the FDA's partial
clinical hold. In the complaint, the investors claimed that
the defendants made false or misleading statements concerning
the results of the ZAF-201 trial, to wit:
• As severely obese patients are at an increased risk
for cardiovascular disease, we measured systemic biomarkers
of cardiovascular disease risk, including low density
lipoprotein cholesterol, HDL, CRP, triglycerides and blood
pressure in trial participants, to determine
[B]eloranib's impact on such biomarkers. The results of
these biomarker measurements in this trial, as summarized
below, suggest that [B]eloranib treatment does not increase
the risk of cardiovascular disease and may be associated with
reduced cardiovascular disease risk.
• There were no deaths or any SAEs ["serious
adverse events"] deemed to be possibly, probably, or
definitely related to [B]eloranib, although there were two
serious thrombotic adverse events which, while not attributed
to [B]eloranib treatment, may point to the utility of
assessment of prior history of thrombotic events in patients
enrolled in subsequent trials and added vigilance for Aes
related to blood clotting during future clinical trials. The
most commonly reported TEAEs ["treatment-emergent
adverse events"] were gastrointestinal disorders, mainly
nausea, diarrhea, or vomiting, nervous system disorders,
mainly dizziness, and psychiatric disorders, mainly insomnia,
sleep disorder, or abnormal dreams. TEAEs were generally mild
in severity and transient. Other frequently reported TEAEs
were headaches and injection site bruising/itching, although
the incidences were comparable to placebo and not observed to
investors alleged that Zafgen made these statements (and
others that used substantially similar language) in ten
different documents, all of which Hughes signed. These
disclosures, the investors maintained, were materially
misleading because "the FDA considers the
frequency/rate of adverse events in determining
whether a drug is causing those adverse events, "
meaning that the defendants should have disclosed even the
superficial adverse thrombotic events. Similarly, the
investors alleged that "[a]t all times during the Class
Period, [d]efendants knew -- or ...