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Brennan v. Zafgen Inc.

United States Court of Appeals, First Circuit

April 7, 2017

ZAFGEN, INC.; THOMAS E. HUGHES, Defendants, Appellees. AVIAD BESSLER, individually and on behalf of all others similarly situated; THEODORE J. DALY, Plaintiffs,


          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.

          Before Kayatta, Circuit Judge, Souter, Associate Justice, [*] and Stahl, Circuit Judge.

          STAHL, Circuit Judge.

         Following 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[1] 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.

         Despite 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.


         We 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").

         Zafgen's 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.[2] 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.

         A. Beloranib and the FDA Approval Process

         As part 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.[3] 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. § 312.32(c)(1)(i)(A)).

         At the 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."[4] 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.

         B. Zafgen's Stock Price Declines

         Zafgen's 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.

         C. Zafgen's Disclosures

         Based 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 be dose-related.

         The 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 ...

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