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Patel v. Seattle Genetics, Inc.

United States District Court, W.D. Washington, Seattle

October 18, 2017

SAMIT PATEL, Individually and on Behalf of All Other Persons Similarly Situated, Plaintiff,
v.
SEATTLE GENETICS, INC., CLAY B. SIEGALL, TODD E. SIMPSON, and JONATHAN DRACHMAN, Defendants.

          ORDER GRANTING DEFENDANTS' MOTION TO DISMISS AND GRANTING IN PART REQUEST FOR JUDICIAL NOTICE

          RICARDO S. MARTINEZ CHIEF UNITED STATES DISTRICT JUDGE

         I. INTRODUCTION

         This matter comes before the Court on Defendants' Motion to Dismiss, Dkt. #22, and Defendants' Request for Judicial Notice, Dkt. #24. Defendants argue that the Consolidated Amended Complaint (“CAC”), Dkt. #18, fails to adequately plead its securities claims. Defendants rely in part on documents outside the pleadings. In Response, Plaintiff argues that the CAC is adequate to satisfy the pleading standards of Rule 12(b)(6), the Private Securities Litigation Reform Act (“PSLRA”), and Rule 9(b). Plaintiff also argues that documents not referenced in the CAC should either not be considered or acknowledged only for their authenticity. See Dkt. #26. For the reasons stated below, the Court GRANTS Defendants' Motion to DISMISS and GRANTS IN PART Defendants' Request for Judicial Notice. The Court will grant leave for Plaintiff to file a second consolidated amended complaint.

         II. BACKGROUND [1]

         This is a putative class action filed on behalf of persons or entities who purchased or otherwise acquired Seattle Genetics, Inc.'s common stock between October 27, 2016, and December 27, 2016, both dates inclusive (the “Class Period”), seeking to pursue remedies under §§10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”). Lead Plaintiff Carl Johnson, individually and on behalf of all other persons similarly situated, bring this action against Seattle Genetics and the individual defendants Clay B. Siegall, Todd E. Simpson, and Jonathan Drachman.

         Seattle Genetics is a development stage biopharmaceutical company traded on the NASDAQ exchange under the symbol “SGEN.” Seattle Genetics has a type of cancer treatment known as an antibody-drug conjugate (“ADC”) under development, specifically the drug SGN-CD33A, which uses antibodies to target specific antigens on the surface of cancerous cells, and deliver locally strong anticancer agents that would be too toxic to administer otherwise. Seattle Genetics' trials of SGN-CD33A focused on developing the drug to treat a type of blood cancer called Acute Myeloid Leukemia (“AML”).

         SGN-CD33A is the successor to an earlier ADC developed by the pharmaceutical company Pfizer known as Mylotarg (Gemtuzumab ozogamicin). Mylotarg was manufactured and marketed by Pfizer from 2000 to 2010 as a treatment for AML. In June 2010, Pfizer withdrew Mylotarg from the market at the request of the FDA because an advanced stage clinical trial demonstrated that the fatal rate of treatment-related toxicity was significantly higher than standard chemotherapy with no corresponding benefit to cancer patients.

         Plaintiff alleges that throughout the Class Period, Defendants repeatedly claimed that SGN-CD33A had a superior design and more advanced ADC technology than Mylotarg, allowing it to kill cancerous cells effectively without the toxicity that doomed the earlier drug. Specifically, throughout the Class Period, Defendants allegedly claimed SGN-CD33A did not share the toxic side effects of Mylotarg, and touted the absence of liver disease in clinical trials, while omitting that internal information disseminated to Defendants and others within Seattle Genetics unquestionably demonstrated that SGN-CD33A caused liver toxicity (hepatotoxicity).

         Plaintiff lists several sources of information available to Defendants indicating that SGN-CD33A posed a high risk of hepatotoxicity. See CAC at ¶¶ 5, 38-47. This information in part comes from a confidential witness working for Seattle Genetics, “CW1.” CW1 has seventeen years of experience in the biotechnology industry, and served as the Senior Environmental Health and Safety Engineer at Seattle Genetics from March 2015 to February 2017. CW1's responsibilities included, e.g., coordinating with Seattle Genetics' in-house toxicologist to prepare Safety Data Sheets that listed specific levels of toxicity associated with each organ in the human body. The CAC indicates that CW1 communicated his concerns about the toxicity of SGN-CD33A to his superiors but not the named defendants directly.

         Plaintiff provides several examples of allegedly materially false and misleading statements made by Defendants to investors regarding SGN-CD33A. See Id. at ¶¶ 48-57. Generally speaking, these statements speak positively of SGN-CD33A's promise as a treatment but omit that SGN-CD33A had known risks of liver toxicity, and that as a result, a number of patients exposed to SGN-CD33A in clinical trials were experiencing serious adverse hepatotoxic events.

         On December 27, 2016, the FDA placed a full clinical hold on Seattle Genetics' Phase I/II trial of SGN-CD33A administered to stem cell transplant patients (“Stem Cell Phase I/II”). The FDA also placed partial clinical holds on two other Phase I trials of SGN-CD33A administered in combination with chemotherapy regimens in AML patients. Seattle Genetics issued a press release that same day stating that the trials subject to partial clinical holds would not enroll new patients, and that existing patients could continue to participate if they signed a revised consent form. The press release noted that six patients in the trials had been identified with hepatotoxicity, with “four fatal events, ” and that these six patients were out of more than 300 patients in the clinical trials. CAC at ¶ 58. Plaintiff does not plead exactly when these hepatoxic events occurred, whether before or after the allegedly misleading statements above, and has stated in briefing that this information has not been revealed by Defendants. See Dkt. #25 at 12.

         On this news, Seattle Genetics' stock price declined by $9.50 per share, or by over 15%, to close at $52.36 on December 27, 2016. That same day, Credit Suisse analyst Kennen McKay lowered the Company's price target by $10, and remarked that the announcement was surprising given that Defendants had created the impression that SGN-CD33A had unique technology to “avoid the [toxicity] pitfalls” of Mylotarg. CAC at ¶ 9.

         On March 6, 2017, the Company announced that it would abandon the Stem Cell Phase I/II trial and would adopt substantial risk mitigation measures to address hepatotoxicity in all other trials of SGN-CD33A. With these hepatotoxicity risk mitigation measures in place, the FDA lifted the partial clinical holds it had placed on two other Phase I trials.

         On January 10, 2017, Plaintiff filed the initial complaint in this case. Dkt. #1. On April 7, 2017, the Court entered an Order appointing a lead plaintiff and approving the lead plaintiff's selection of counsel. Dkt. #8. On June 6, 2017, the lead plaintiff filed the Consolidated Amended Complaint (“CAC”). Dkt. #18. the CAC alleges violations of §§10(b) and 20(a) of the Exchange Act and violation of SEC Rule 10b-5. Plaintiff names certain individual defendants in addition to Seattle Genetics. Defendant Siegall is Seattle Genetics' co-founder, President, Chief Executive Officer and Chairman of the Board of Directors. Defendant Simpson was Seattle Genetics' Chief Financial Officer during the relevant period. Defendant Drachman was Seattle Genetics' Chief Medical Officer and Executive Vice President, Research and Development during the relevant period.

         III. DISCUSSION

         A. ...


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