Opinion
No. C 03-4999 MJJ.
January 26, 2005
AMENDED ORDER GRANTING DEFENDANTS' 12(b)(6) MOTION TO DISMISS
INTRODUCTION
Before the Court is Gilead Sciences, Inc. ("Gilead"), John C. Martin, John F. Milligan, Mark L. Perry, Norbert W. Bischofberger, Anthony Carrociolo and William A. Lee's ("Defendants") Motion to Dismiss a federal securities fraud action brought against them by a class consisting of all purchasers of Gilead stock between July 14, 2003 and October 28, 2003. Defendants seek an Order dismissing the Consolidated Amended Class Action Complaint ("Amended Complaint") with prejudice under the heightened pleading requirements of the Private Securities Litigation Reform Act of 1995 ("PSLRA") and pursuant to Federal Rules of Civil Procedure 12(b)(6) and 9(b). For the following reasons, Defendants' motion is GRANTED with leave to amend.
FACTUAL ALLEGATIONS
This motion arises from an Amended Complaint ("Comp.") alleging securities fraud in violation of section 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder against all Defendants, and violation of section 20(a) of the Securities Exchange Act. The Amended Complaint is brought on behalf of a class consisting of all persons who purchased or otherwise acquired Gilead stock between July 14, 2003 and October 28, 2003.
The allegations of Plaintiffs' complaint relate to Gilead's announcement in July 2003 of its financial results for the second quarter of 2003, and the impact its premier product, Viread, had on those results. Viread is a groundbreaking antiretroviral drug used to treat HIV/AIDS that was introduced in 2001. On July 14, 2003, the first day of the class period, Gilead issued a press release entitled "Gilead Sciences Expects Second Quarter 2003 Financial Results Will Exceed Expectations," and stating, "[t]he increase in revenue was driven primarily by strong sales growth of Viread." The press release went on to say that Viread sales increased due to "broader prescribing patterns . . . as well as increases in U.S. wholesaler inventory levels in the second quarter." On the same day, Bloomberg News identified Gilead spokeswoman Amy Flood as stating that "[t]he main reason for the jump in Viread sales is an increase in prescriptions, not inventory stocking."
Two weeks later, on July 31, 2003, Gilead issued a press release containing its final results for the second quarter. Gilead announced that it had net revenues of $230.7 million for the quarter, of which $167 million related to Viread. Gilead went on:
Viread sales growth was primarily driven by higher prescription volume, a significant increase in U.S. wholesaler inventories and a favorable European currency environment compared to the same quarter last year. Gilead estimates that increased stocking by U.S. wholesalers accounted for $25-30 million in Viread sales in the second quarter.
The press release contained warnings regarding the forward-looking statements and stated that the statements were "subject to certain risks and uncertainties, which could cause actual results to differ materially." Statements made during Gilead's earnings call of that same date, as well as on its Form 10-Q filed August 14, 2003, contained similar warnings.
Also on July 31, 2003, Gilead held a conference call with analysts and other investors regarding its financial results. During the call, an officer of Gilead stated:
Of significant note, we believe that a substantial inventory build occurred in U.S. distributor channel during the second quarter as wholesalers anticipated the Viread price increase announced on June 27th. Though difficult to determine the exact figure for this inventory build, we estimate that wholesaler inventories increased by $25 to $30 million during the quarter. . . . Based on the U.S. inventory build up seen in the second quarter, we anticipate Viread sales for the third quarter will be at or below the sales level recognized this second quarter. We expect these inventories to be drawn down to more normal levels during this quarter.
On August 14, 2003, Gilead filed its Form 10-Q for the second quarter of 2003. This form confirmed the previously announced financial results. The Form 10-Q also discussed the inventory buildup: "We estimate that this higher stocking resulted in $25.0 to $30.0 million of additional sales during the second quarter, which may adversely impact sales in the third quarter as wholesalers return to more normal inventory levels and buying patterns." The form 10-Q also disclosed the existence of a July 19, 2003 letter issued by the FDA warning Gilead about certain aspects of its promotional practices of Viread.
On October 28, 2003, Gilead announced its financial results for the third quarter of 2003. Gilead announced net revenues of $194.1 million, and sales of Viread of $115.4 million. At that time, Gilead stated: "After reviewing NDC prescription trends, IMS inventory data and actual Viread sales, Gilead estimates there was approximately $33 to $37 million of inventory reduction by U.S. pharmaceutical wholesalers during the third quarter of 2003 following an equivalent inventory build during the second quarter of 2003." The next day, Gilead's stock dropped $7.46 per share from $59.46 per share to close at $52 per share. Approximately one month later, on December 2, 2003, Gilead's stock price had recovered the entire drop experienced on October 29 and closed at $59.83 per share.
Plaintiffs allege that for the period of at least September 2001 through, and subsequent to, the class period, Gilead engaged in the off-label marketing of Viread. Off-label marketing refers to the use for marketing purposes of information such as the result of clinical studies and other materials on the uses of and the efficacy of an FDA-approved product that has not been approved by the FDA for inclusion in the product's package labeling. Pursuant to FDA guidelines, pharmaceutical manufacturers such as Gilead may only promote an FDA-approved drug consistent with the contents of its FDA-approved package labeling.
Plaintiffs allege that Gilead's off-label marketing activities began as early as September 2001 at Gilead's national sales meeting in Miami. There, sales and marketing employees allegedly were given information regarding Gilead's submission of Viread clinical data and information to the FDA and, with a "wink and a nod," were instructed to use this information to sell Viread even though Viread had yet to be approved by the FDA. The FDA approved Viread in October, 2001. Later, employees allegedly were instructed at numerous regional and national sales meetings by Gilead executives "overtly and covertly," to use off-label information to aggressively promote and sell Viread. At these meetings, employees allegedly would be provided off-label information such as updates on clinical trials of Viread in large group meetings and then told in subsequent smaller meetings to use this information to sell Viread. Defendants Martin, Perry, Lee, Milligan, and Bischofberger allegedly attended one or more of these regional and national sales meetings.
According to the Amended Complaint, Gilead received an Untitled FDA Letter on March 14, 2002, advising the company that its representatives had made false and misleading oral promotional statements at the December 2001 Interscience Conference on Antimicrobial Agents and Chemotherapy conference. According to the Untitled FDA Letter, Gilead falsely and misleadingly promoted Viread by stating that it contained "no toxicities," was "extremely safe," and was "extremely well-tolerated," despite the fact that its boxed warning and Package Labeling advised to the contrary. The Untitled FDA Letter further ordered Gilead to "immediately cease making such violative statements," and required Gilead to submit a written response describing its intent and plans to comply with the FDA's directives. Plaintiff alleges that the false statements were made by Defendant Martin and it was company-wide knowledge that Martin was the cause of the Untitled FDA Letter. On March 21, 2002, Gilead responded stating that it was "commit[ted] to ensure that future violative statements are not made in the promotion of Viread." However, sixteen months later, on July 29, 2003, the FDA issued a second letter, notifying Gilead that it considered certain oral representations made by a Gilead representative at a promotional booth during a conference in April 2003 to be improper. This conference took place during Gilead's second fiscal quarter of 2003, just prior to Defendants' first class period announcement of outstanding Viread sales and financial results which exceeded market expectations. In response to and in compliance with this letter, on November 7, 2003, defendant Martin wrote a correction letter to the conference's attendees.
JUDICIAL NOTICE
In addition to the Motion to Dismiss the Amended Complaint, Defendants have filed a Request for Judicial Notice, and ask the Court to notice a number of documents. Federal Rule of Evidence 201 allows a court to take judicial notice of a fact "not subject to reasonable dispute in that it is . . . capable of accurate and ready determination by resort to sources whose accuracy can not reasonably be questioned." Plaintiffs do not object to the Court's taking judicial notice of the requested documents.
However, Plaintiffs object to Defendants' Motion for Judicial Notice only if Defendants seek to have the Court take judicial notice of the truth of the requested documents. The Court does not restrict its taking of judicial notice in this way.
A. Documents Explicitly Referenced in the Amended Complaint
Initially, Defendants ask the Court to take judicial notice of specified press releases, one news article, and SEC filings explicitly referenced in the Amended Complaint under the "incorporation by reference" doctrine. This doctrine permits the Court to consider documents alleged in a complaint and whose authenticity no party questions, but which are not physically attached to [plaintiffs'] pleading." Branch v. Tunnell, 14 F.3d 449, 454 (9th Cir. 1994). Here, this includes press releases dated July 14 and July 31, 2003, a news article dated July 14, 2003, and Gilead's Form 10-Q filed with the SEC, all of which are attached to the Declaration of Grant Fondo and explicitly referenced in the Amended Complaint. Plaintiffs do not dispute the authenticity of any of these documents, or claim that Defendants documents contain errors. Absent such an argument, incorporation under Branch is warranted.
B. Allegations on Which the Complaint Implicitly Rely
The Court can take judicial notice of Exhibit D because "the Court may take judicial notice of documents on which allegations in the [complaint] necessarily rely, even if not expressly referenced in the [complaint], provided the authenticity of those documents is not in dispute." In re Calpine Corp. Sec. Litig., 288 F. Supp. 2d 1054, 1076 (N.D. Cal. 2003). Plaintiffs necessarily rely upon this conference call because they claim that Defendants perpetuated a fraud on the market with the July 31, 2003 financial announcement and estimated inventory build-up. Therefore, the statements made in the conference call directly relate to the claim of fraud on the market and the transcript reflects information available to the market at the time.
C. Public Filings With the SEC
Defendants ask the Court to take judicial notice of publically available documents that Defendants filed with the SEC. "In a securities action, a court may take judicial notice of public filings when adjudicating a motion to dismiss. . . ." Calpine, 288 F. Supp. 2d at 1076. Accordingly, the Court takes judicial notice of these documents.
The Court refuses to take judicial notice of Ex. O (April 2003 press release), as it does not fit into any of the recognized categories allowing for judicial notice.
LEGAL STANDARDS
A. Rule 12(b)(6)A court may dismiss a complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for either lack of a cognizable legal theory or the pleading of insufficient facts under an adequate theory. Robertson v. Dean Witter Reynolds, Inc., 749 F.2d 530, 533-34 (9th Cir. 1984). When deciding upon a motion to dismiss for failure to state a claim upon which relief can be granted pursuant to FRCP 12(b)(6), a court must take all of the material allegations in plaintiff's complaint as true, and construe them in the light most favorable to plaintiff. Parks School of Business, Inc. v. Symington, 51 F.3d 1480, 1484 (9th Cir. 1995). Moreover, a complaint should not be dismissed unless a plaintiff could prove no set of facts in support of his claim that would entitle him to relief. Id.
In the context of a motion to dismiss, review is limited to the contents in the complaint. Allarcom Pay Television, Ltd. v. General Instrument Corp., 69 F.3d 381, 385 (9th Cir. 1995). When matters outside the pleading are presented to and accepted by the court, the motion to dismiss is converted into one for summary judgment. Where such a conversion takes place, all parties must be given an opportunity to present all material made pertinent to such a motion by Rule 56. In re Pacific Gateway Exchange, Inc. Sec. Lit., 169 F. Supp. 2d 1160, 1164 (N.D. Cal. 2001); see also Fed.R.Civ.P. 12(b). However, matters properly presented to the court, such as those attached to the complaint and incorporated within its allegations, may be considered as part of the motion to dismiss. See Hal Roach Studios, Inc. v. Richard Feiner Co., 896 F.2d 1542, 1555 n. 19 (9th Cir. 1989).
Where a plaintiff fails to attach to the complaint documents referred to in it, and upon which the complaint is premised, a defendant may attach to the motion to dismiss such documents in order to show that they do not support plaintiff's claim. See Pacific Gateway Exchange, 169 F. Supp. 2d at 1164; Branch v. Tunnell, 14 F.3d 449, 44 (9th Cir. 1994), cert denied, 512 U.S. 1219 (1997). Thus, the district court may consider the full texts of documents that the complaint only quotes in part. See In re Stay Electronics Sec. Lit., 89 F.3d 1399, 1405 n. 4 (1996), cert denied, 520 U.S. 1103 (1997). This rule precludes plaintiffs "from surviving a Rule 12(b)(6) motion by deliberately omitting references to documents upon which their claims are based." Parrino v. FHP, Inc., 146 F.3d 699, 705 (9th Cir. 1998).
B. Section 10(b) and Rule 10b-5
Section 10(b) of the Securities Exchange Act provides, in part, that it is unlawful "to use or employ in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the [SEC] may prescribe." 15 U.S.C. § 78j(b).
Rule 10b-5 makes it unlawful for any person to use interstate commerce
(a) To employ any device, scheme, or artifice to defraud.
(b) To make any untrue statement of material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.17 C.F.R. § 240.10b-5
To be actionable under section 10(b) and Rule 10b-5, a plaintiff must allege (1) a misrepresentation or omission; (2) of material fact; (3) made with scienter; (4) on which the plaintiff justifiably relied; (5) that proximately caused the alleged loss. See Binder v. Gillespie, 184 F.3d 1059, 1063 (9th Cir. 1999). Additionally, as in all actions alleging fraud, plaintiffs must state with particularity the circumstances constituting fraud. Fed.R.Civ.P. 9(b).
C. Section 20(a)
Section 20(a) of the Securities Exchange Act ("Exchange Act") provides derivative liability for those who control others found to be primarily liable under the Act. In re Ramp Networks, Inc. Sec. Lit., 201 F. Supp. 2d 1051, 1063 (N.D. Cal. 2002). Where a plaintiff asserts a section 20(a) claim based on an underlying violation of section 10(b), the pleading requirements for both violations are the same. Id.
D. Private Securities Litigation Reform Act
In 1995, Congress enacted the PSLRA to provide "protections to discourage frivolous [securities] litigation." H.R. Conf. Rep. No. 104-369, 104th Cong., 1st Sess. at 32 (1995)) (Nov. 28, 1995). The PSLRA strengthened the pleading requirements of Rules 8(a) and 9(b). Actions based on allegations of material misstatements or omissions under the PSLRA must "specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed." 15 U.S.C. § 78u-4(b)(1).
The PSLRA also heightened the pleading threshold for causes of action brought under Section 10(b) and Rule 10b-5. Specifically, the PSLRA imposed strict requirements for pleading scienter. A complaint under the PSLRA must "state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind." 15 U.S.C. § 78u-4(b)(2). The Ninth Circuit, in interpreting the PSLRA, has held that "a private securities plaintiff proceeding under the [PSLRA] must plead, in great detail, facts that constitute strong circumstantial evidence of deliberately reckless or conscious misconduct." In re Silicon Graphics Inc., 183 F.3d 970, 974 (9th Cir. 1999). If the complaint does not satisfy the pleading requirements of the PSLRA, upon motion by the defendant, the court must dismiss the complaint. See 15 U.S.C. § 78u-4(b)(1).
ANALYSIS
In order to support its claims under the PLSRA, Plaintiffs must first specify a "statement alleged to have been misleading." 15 U.S.C. § 78u-4(b)(1). Plaintiffs argue that statements from four separate incidents attributed to Defendants were false and misleading.
Before engaging in the pertinent legal analysis, the Court deems it necessary to highlight the theory of Plaintiffs' action. In their original complaint, Plaintiffs alleged that Defendants gave a false impression of the true demand for Viread by understating the degree to which drug wholesalers had increased their inventory levels. To that end, Plaintiffs' complaint focused primarily upon Defendants' July 31, 2003, estimate of inventory stocking numbers ($25 to $30 million) and Defendants' revision of those numbers on October 28, 2003 ($30 to $37 million). In fact, nearly all of the statements that Defendants allege were false involve Gilead's public statements regarding its estimate of the impact inventory stocking had on the company's second quarter financial results. This is evidenced by the fact that Plaintiffs' class period began on July 14, 2003 and ended on October 28, 2003.
However, Plaintiffs' Amended Complaint alleged new facts, upon which Plaintiffs now primarily rely. Plaintiffs contend that Defendants engaged in improper off-label marketing of Viread that lead to increased Viread prescriptions. Consequently, Plaintiffs allege that Viread's 2003 second quarter sales report overstated the true demand for the drug. Plaintiff assert that Defendants violated the PSLRA by not disclosing the off-label marketing profits, as these profits were materialadverse facts necessary to make the company's second quarter statement not misleading. In their Opposition to Defendants' Motion to Dismiss, Plaintiffs allege that Gilead's misrepresentations regarding overstocking, in combination with the company's off-label marketing scheme, "support an inference that Defendants knew, or were deliberately reckless in ignoring, that the Company materially understated its reports of sales to wholesalers in Second Quarter 2003."
Initially, Plaintiffs contend that statements from Gilead's press release on July 14, 2003 were false. Specifically, the press release stated that "[t]he increase in revenue was driven primarily by strong sales growth of Viread." The press release went on to state that Viread sales increased due to "broader prescribing patterns . . . as well as increases in U.S. wholesaler inventory level in the second quarter in anticipation of a Viread price increase." On the same day, the Bloomberg News identified Gilead spokeswoman Amy Flood as stating that "[t]he main reason for the jump in Viread sales is an increase in prescriptions, not inventory stocking." Plaintiffs also assert that this statement was false and misleading.
Next, Plaintiffs allege that Gilead's July 31, 2003 press release contained false statements. In the press release, the company stated that "Viread sales growth was primarily driven by higher prescription volume, a significant increase in U.S. wholesaler inventories and a favorable European currency environment. . . . Gilead estimates that increased stocking by U.S. wholesalers accounted for $25-30 million of Viread sales in the second quarter." The press release also stated that the company was "focused on continuing this sales momentum and increasing our market share through robust clinical data and label expansions. . . ." Plaintiffs assert that these statements were false.
Finally, Plaintiffs assert that Gilead's Second Quarter 2003 10-Q contained false statements. Specifically, the company stated that "[t]he increase in product sales is due to the significant increase in the volume of sales of Viread." The Second Quarter 2003 10-Q also stated that "[t]he significant increase in Viread sales is due to increased prescription volume."
Defendants move the Court to dismiss the Amended Complaint with prejudice pursuant to the PSLRA and Federal Rules of Civil Procedure 8(a), 8(e), 9(b), and 12(b)(6) on several grounds. Defendants argue that: 1) Plaintiffs fail to plead facts with the required particularity that Defendants' public statements were false and misleading at the time they were made; 2) the Amended Complaint fails to plead scienter; 3) the Safe Harbor provisions of the Reform Act bars claims based on Defendants' forward looking statements; 4) Plaintiffs fail to plead that defendants Martin, Milligan, Perry, Bischofberger, Carraciolo, and Lee are liable as control persons under section 20(a) of the Exchange Act.
A. Falsity and Scienter
In order to avoid having their action dismissed, Plaintiffs must "plead with particularity either the alleged misleading statements or scienter[.]" In re Fritz Cos. Sec. Litig., 282 F. Supp. 2d 1105, 1112 (N.D. Cal 2003). The Ninth Circuit has articulated the rule as follows:
Because falsity and scienter in private securities fraud cases are generally strongly inferred from the same set of facts, we have incorporated the dual pleading requirements of 15 U.S.C. §§ 78u-4(b)(1) and (b)(2) into a single inquiry. In considering whether a private securities fraud complaint can survive dismissal under Rule 12(b)(6), we must determine whether particular facts in the complaint, taken as a whole, raise a strong inference that defendants intentionally or deliberate recklessness made false or misleading statements to investors. Where pleadings are not sufficiently particularized or where, taken as a whole, they do not raise a "strong inference" that misleading statements were knowingly or deliberate recklessness made to investors, a private securities fraud complaint is properly dismissed under Rule 12(b)(6).Ronconi v. Larkin, 253 F.3d 423, 429 (9th Cir. 2001) (citations and internal quotation marks omitted).
1. Defendants' Misrepresentations Regarding Wholesaler Overstocking
Defendants argue that Plaintiffs have not pointed to any evidence to indicate that any of Defendants' statements regarding wholesaler overstocking were false or misleading. Defendants assert that Gilead's increase in revenues in the second quarter of 2003, was in fact, driven by strong sales of Viread. Defendants also assert that the growth in Viread sales was driven by higher prescription volumes and an increase in wholesaler inventories. Defendant also contend that their estimate of the inventory stocking numbers in July of 2003 ($25 to $30 million) was based on the best available data at the time. In essence, Defendants assert that the statements challenged by Plaintiffs were not false, misleading, or even equivocal, but were in fact entirely true.
Plaintiffs contend that the Amended Complaint adequately details the manner in which Defendants materially understated Viread sales to wholesalers in the July 31 press release. Plaintiffs argue that the "significant shift in wholesaler sales from $25 to $30 million to $33 to $37 million" is strong evidence that Defendants' estimates were misleading. Plaintiffs also argue that the difference between the estimates is "material" and must be considered by the Court. Regarding Defendants' other challenged statements, Plaintiffs assert that given the announced price increase of Viread, Defendants must have known that Gilead's higher second quarter sales figures were related to increased inventory stocking of Viread, and not increased prescription sales.
The Court finds that Plaintiffs have failed to allege any facts inconsistent with the conclusion that Gilead's 2003 second quarter financial reports were made in good faith and based on the best information available at the time. Most importantly, Plaintiffs have not referenced a single document or conversation suggesting Defendants knew that the July 31 estimate of the second quarter inventory stocking numbers was too low at the time the estimate was made public. It is noteworthy that the press release contained only an "estimate" of the increased stocking numbers, and the press release specifically warned investors of Gilead's limited ability to accurately estimate inventory levels. In fact, the press release stated that Gilead was making a "great deal of assumptions" and "rely[ing] on incomplete data" in making the estimate. Moreover, as noted by Defendants, Gilead's revised October estimates regarding increased stocking numbers were not significantly different than the original July estimate. Additionally, Plaintiffs have not alleged facts that would tend to show that the growth in Viread sales was not driven, at least in part, by higher prescription sales. Given these considerations, the Court finds that Plaintiffs have not alleged sufficient facts to demonstrate that any of Defendants' statements regarding wholesaler overstocking were false or misleading at the time the statements were made.
In a similar case to this one, the plaintiffs had alleged that the Company's executives knew that wholesaler purchases of a pharmaceutical company's product in one quarter would lead to overstocking and, therefore, would result in fewer sales in the next quarter, while at the same time defendants were publically projecting strong future sales. Lipton v. Pathogenesis Corp., 284 F.3d 1027 (9th Cir. 2002). The court found that the complaint's reference to internal reports on sales data and patient demand data was insufficient to support a PSLRA claim. Id. at 1036. "Plaintiffs do not mention a specific document relied on by defendants such as a particular report, graph or chart. Nor do they detail with particularity the content of such data." Id. Here, Plaintiffs have not referenced a single internal report on Gilead's sales data that could have provided information (scienter) to Defendants.
2. Off-Label Marketing Scheme
While not conceding the issue of wholesaler stocking, Plaintiffs spend the majority of their Opposition to Defendants' Motion to Dismiss focusing on Gilead's alleged off-label marketing scheme. Plaintiffs allege that the off-label marketing scheme was "the cornerstone of [Gilead's] business." Plaintiffs conclude that Defendants had a duty to disclose the details of the off-label marketing scheme, and the subsequent FDA warning letters, to its investors. According to Plaintiffs, Defendants' off-label marketing enabled the company to create the appearance of increased prescriptions and demand for Viread. As a result, wholesalers were encouraged to stock up on Viread ahead of Gilead's announced price increase. Plaintiffs further allege that Gilead's second quarter sales estimates, including wholesaler stocking, were tainted by the off-label marketing scheme because the marketing "created an artificial and illusory demand for Viread."
Thus, it appears that Plaintiffs are bringing their action pursuant to 15 U.S.C. § 78u-4(b)(1)(B), which instructs Plaintiffs to allege that Defendants "omitted to state a material fact necessary in order to make the statements made, in light of the circumstances in which they were made, not misleading."
Defendants argue that Plaintiffs never allege that anyone at Gilead (including Defendants) actually participated in improper off-label marketing activities. Defendants also contend that Plaintiffs have not shown a connection between Gilead's alleged off-label marketing activities and actual sales of Viread.
The Court initially considers whether Plaintiffs have adequately alleged that Defendants engaged in an illegal off-label marketing scheme. The Amended Complaint states that Plaintiffs' confidential witnesses (CW1 and CW2) attended various meetings at which Gilead's sales and marketing team received specific instructions to market Viread off-label. Specifically, according to the Amended Complaint, CW1 and CW2 attended the 2002 Los Angeles Regional Meeting at which Defendants Meyers, Perry, and Martin were in attendance. A similar meeting took place in Las Vegas during 2003 and Defendants Milligan, Perry, Bischofberger, and Martin were allegedly present. Additionally, a company meeting took place in Orlando during 2003, and CW 1 and CW 2 recall that Defendants Martin, Milligan, Bischofberger, Lee, and Perry were in the room when specific instructions were given to sales and marketing personnel to utilize off-label information to push sales of Viread. Moreover, both CW1 and CW2 attended various other meetings, not attended by Defendants, in which Gilead presenters provided off-label information and encouraged them to use the information to sell Viread.
In addition to the allegations of CW1 and CW2, the Court must consider the FDA letters that were sent to Gilead. The March 14, 2002 letter advised Gilead that its promotional activities were violating the Federal Food, Drug, and Cosmetic Act. These violations arose from "false and misleading oral statements about Viread" made by Viread representatives in Chicago during 2001. The letter advised Gilead to "immediately cease making such violative statements and . . . cease . . . distribution or use of any promotional materials for Viread that contain . . . violative statements." The FDA sent another letter to Gilead on July 29, 2003, and stated that Gilead representatives had "minimized important risk information and broadened the indication for Viread." As a result of these violations, the FDA instructed Gilead to provide the agency with a detailed response regarding its promotional activities of Viread.
Defendants contend that CW 1 and CW 2 never allege that Defendants actually participated in improper off-label marketing activities. Defendants are correct. Indeed, CW1 and CW 2 only allege that Gilead representatives were instructed to engage in such activity, not that such activity actually took place. However, the Court must also consider the FDA letters sent to Gilead. In those letters, the FDA clearly confirms that Gilead representatives were actively engaging in the off-label marketing of Viread with the intent to increase Viread sales. Therefore, when the allegations of CW1 and CW2 are considered in light of the FDA's letters to Gilead, it becomes apparent that Plaintiffs have alleged sufficient facts to raise a strong inference that Defendants' had knowledge of the company's off-label marketing scheme.
Yet, this conclusion does not end the Court's inquiry. Plaintiffs must also establish a connection between the company's off-label marketing activities and the 2003 second quarter reports that Plaintiffs allege were false and misleading. In other words, Plaintiffs must allege that Gilead's off-label marketing scheme was a "material fact" that needed to be disclosed to investors along with the 2003 second quarter sales reports. See 15 U.S.C. § 78u-4(b)(1)(B). Plaintiffs have not carried this burden. Specifically, Plaintiffs have not alleged that any sales of Viread during the second quarter of 2003 were the result of improper off-label marketing activities. In fact, Plaintiffs do not identify a single prescription written for Viread that was allegedly generated by off-label marketing activity. Under the heightened pleading standard required in PSLRA cases, the Court cannot simply assume that Gilead's off-label marketing of Viread necessarily resulted in increased sales of that drug. Instead, Plaintiffs must allege facts to bridge this logical gap. Plaintiffs have failed to do so.
It is noteworthy that the July 29, 2003 warning letter from the FDA was disclosed to the public on August 7, 2003, and referenced in Gilead's second quarter Form 10-Q filed with the SEC on August 14, 2003. Interestingly, the record reveals that the public announcement of the FDA letter did not have an adverse affect on Gilead's stock price. This fact weighs against a finding that Defendants' off-label marketing scheme was a "material fact" requiring disclosure to investors.
Furthermore, even assuming Plaintiffs had alleged that such sales took place, Plaintiffs would also have to allege that those sales were "material" to the 2003 second quarter reports. While Plaintiffs may not be required to detail the impact of Viread's off-label marketing on a sale-by-sale basis, Plaintiffs must allege facts that show a relationship between the off-label marketing of Viread, related sales of Viread, and the manner in which those sales affected Gilead's 2003 second quarter financial reports. Plaintiffs have alleged no such facts.
3. Stock Sales
Plaintiffs also rely on stock sales by the individual Defendants as an indication of their scienter. Generally, stock sale allegations can not raise an inference of scienter unless Plaintiffs allege specific facts showing that the sales were "dramatically out of line with prior trading practices at times calculated to maximize the personal benefit from undisclosed inside information." Silicon Graphics, 183 F.3d at 986. Among the relevant factors for a court to consider are: 1) the amount and percentage of shares sold by insiders; 2) timing of the sales; and 3) whether the sales were consistent with the insider's prior trading history. Id.
Defendant Martin sold 50,000 shares of Gilead stock, 2.62% of his total shares, during the class period. Defendant Bischofberger sold 90,020 shares, 9.47% of his total shares, during the class period. Defendant Perry sold 52,344 shares, 10.95% of his total shares, during the class period. Defendant Lee sold 15,000 shares, 4.03% of his total shares, during the class period. Defendant Milligan sold 11,000 shares, 5.45% of his total shares, during the class period. Defendant Carraciolo sold 324,601 shares, 100% of his total shares, during the class period.
In light of the three factors above, these sales are not sufficiently suspicious to raise an inference of scienter. Other than Mr. Carraciolo, none of the individual defendants sold more than eleven percent of their holdings in Gilead during the class period. See Ronconi, 253 F.3d at 435 (suggesting that sales of 10-17% of holdings was not suspicious). Collectively, the individual defendants sold just over eight percent of their share. Moreover, with the exception of Mr. Carraciolo, the individual defendants sold a roughly proportional number of shares in the third quarter of 2003 (the class period) as in the second quarter of 2003. Such sales are not sufficiently suspicious.
Even though Mr. Carraciolo sold 100% of his shares in Gilead, his sales represent a relatively insignificant portion of the allegedly suspicious sales. It is also relevant that Mr. Carraciolo had become a company officer on July 30, 2003, and thus the Court has no context in which to infer that Mr. Carraciolo's sales were suspicious. See Silicon Graphics, 183 F.3d at 987 ("And although [defendant] had never sold such a large quantity of stock, he had only been with [the company] for a year and had no significant trading history for purposes of comparison.").
Plaintiffs allege that the timing of the stock sales are suspicious because Defendants Perry and Bischofberger sold their stock during the first week of August 2003, before the company disclosed that it had received a warning letter from the FDA. The Court disagrees. These sales represent only a small percentage of the total sales the Plaintiffs allege are suspicious. See Ronconi, 253 F.3d at 435 (stating that when corporate insiders collectively fail to seize a prime opportunity to "gain market advantage from as yet undisclosed bad news," an inference of scienter is negated). Therefore, the Court also does not find the timing of the stock sales suspicious.
4. Allegations as a Whole
In sum, the Amended Complaint "lacks sufficient detail and foundation necessary to meet either the particularity or strong inference requirements of the PSLRA." Silicon Graphics, 183 F.3d at 984. In No. 84 Employer-Teamster Joint Council Pension Trust Fund v. America West Holding Corp., 320 F.3d 920 (9th Cir. 2003), the plaintiffs alleged that officers of America West Airlines had artificially inflated the company's stock prices. In support of their case, the plaintiffs alleged specific omissions and misrepresentations by the company's officers regarding deferred maintenance costs, unsafe maintenance practices, an ongoing investigation by the Federal Aviation Administration, and highly suspicious stock sales, in which most of the individual defendants sold 100% of their shares. Id. at 938-42. Viewing the totality of the allegations, the court held that the plaintiffs "raise[d] a strong inference that Defendants knew that the maintenance problems were ongoing and, thus, that the statements made by America West were false." Id. at 942.
Unlike the situation in America West, Plaintiffs have failed to allege particularized facts that could lead the Court to infer that Defendants knowingly misrepresented the details of Gilead's 2003 second quarter sales numbers. Even when the alleged misrepresentations regarding wholesaler stocking are considered together with the off-label marketing scheme and the challenged stock sales, Plaintiffs have failed to set forth adequate corroborating details and facts to support their allegations under the PSLRA pleading standard. See America West, 320 F.3d at 945 (holding that the allegations must be considered in their totality in determining whether plaintiffs have met the PSLRA standard).
Since Plaintiffs have not met the PSLRA pleading standard, the Court does not need to decide whether Defendants' statements fall within the safe harbor provision under 15 U.S.C. § 78u-5(c)(1)(A) or (B).
RULE 20(a) LIABILITY
Section 20(a) of the Securities Exchange Act provides derivative liability for those who control others found to be primarily liable under the Act. In re Ramp Networks, Inc. Sec. Lit., 201 F. Supp. 2d 1051, 1063 (N.D. Cal. 2002). Where a plaintiff asserts a section 20(a) claim based on an underlying violation of section 10(b), the pleading requirements for both violations are the same. Id.
Here, Plaintiffs assert that the individual Defendants are liable under this section because of an underlying violation of section 10(b). However, because Plaintiffs have failed to adequately plead the underlying 10b-5 violation, the section 20(a) claims must be dismissed as well.
DISMISSAL WITHOUT PREJUDICE
Leave to amend under Federal Rule of Civil Procedure 15 should be liberally granted. "Dismissal with prejudice and without leave to amend is not appropriate unless it is clear . . . that the complaint could not be saved by amendment." Eminence Capital v. Aspeon Inc., 316 F.3d 1048, 1053 (9th Cir. 2003) (error to refuse leave to amend in a securities fraud case to allow plaintiff to plead scienter). Here, it is possible that Plaintiffs could remedy their significant pleading defects in an amended complaint by adding detailed factual support for their allegations of false or misleading statements, and demonstrating that Defendants had the requisite scienter at the time the statements were made. Accordingly, the Court dismisses the Amended Complaint without prejudice. The Plaintiffs should file an amended complaint within thirty (30) days from the date of this Order.
CONCLUSION
After consideration of the Amended Complaint in light of the heightened pleading standards of the PSLRA and the requirements of Federal Rule of Civil Procedure 12(b)(6), the Court GRANTS Defendants' 12(b)(6) motion to dismiss without prejudice.
IT IS SO ORDERED.