FIRE AND POLICE PENSION ASSOCIATION OF COLORADO; CITY OF AUSTIN POLICE RETIREMENT SYSTEM, Plaintiffs, Appellants, and KARSE SIMON, individually and on behalf of all others similarly situated; ARLENE SIMON, individually and on behalf of all others similarly situated; OKLAHOMA POLICE PENSION AND RETIREMENT SYSTEM; CITY OF HOLLYWOOD (FL) EMPLOYEES' RETIREMENT FUND; TULARE COUNTY EMPLOYEES' RETIREMENT ASSOCIATION; ORLANDO POLICE PENSION FUND, Plaintiffs,
ABIOMED, INC.; MICHAEL R. MINOGUE; ROBERT L. BOWEN, Defendants, Appellees
As Amended February 25, 2015.
[Copyrighted Material Omitted]
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS. Hon. F. Dennis Saylor, IV, U.S. District Judge.
Patrick T. Egan, with whom Kristin J. Moody, Daryl DeValerio Andrews, Berman DeValerio, Robert D. Klausner, and Klausner, Kaufman, Jensen & Levinson were on brief, for appellants.
John D. Donovan, Jr., with whom Daniel V. Ward, Matthew Mazzotta, Elizabeth D. Johnston, Dara A. Reppucci, and Ropes & Gray LLP were on brief, for appellees.
Before Lynch, Chief Judge, Souter,[*] Associate Justice, and Selya, Circuit Judge.
LYNCH, Chief Judge.
Not all claims of wrongdoing by a company make out a viable claim that the company has committed securities fraud. This case is an example.
Institutional investors, asserting claims on behalf of a putative class of purchasers of the stock of defendant Abiomed, Inc., brought suit against Abiomed and two of its officers, Michael Minogue and Robert Bowen, alleging that all defendants committed securities fraud in violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5; and that the individual defendants violated section 20(a) of the Act, 15 U.S.C. § 78t(a). The alleged misleading statements and omissions concerned Abiomed's flagship product, a micro heart pump called the Impella Recover LP 2.5. The complaint alleges that defendants told investors that its policy was to avoid off-label marketing of the Impella 2.5, when in fact defendants " were orchestrating and engaged in widespread off-label market promotion." And when the Food and Drug Administration (FDA) initiated inquiries into the company's marketing tactics, defendants told investors that it was " cooperating" with the agency and " working to resolve [a] few discrete issues," when in fact the company was " trivializing the concerns" and " continuing to off-label market."
The district court dismissed the complaint on the ground that plaintiffs had not pleaded facts giving rise to a " 'cogent and compelling'" inference of scienter, as is required under the Private Securities Litigation Reform Act of 1995 (" PSLRA" ), Pub. L. No. 104-67, 109 Stat. 737. Simon v. Abiomed, Inc., No. 12-12137-FDS, 37 F.Supp.3d 499, 2014 WL 1413638 (D. Mass. Apr. 10, 2014) (citation omitted).
We affirm. The district court correctly held that the pleadings are insufficient to establish the requisite inference of scienter. Even assuming that plaintiffs plausibly alleged that defendants made false or misleading statements which had a material effect on Abiomed's stock price -- a matter that is far from clear -- plaintiffs have not sufficiently alleged that defendants made those statements with the " conscious intent to defraud or 'a high degree of recklessness.'" ACA Fin. Guar. Corp. v. Advest, Inc., 512 F.3d 46, 58 (1st Cir. 2008) (quoting Aldridge v. A.T. Cross Corp., 284 F.3d 72, 82 (1st Cir. 2002)).
I. Factual Background
We draw the following statement of facts from plaintiffs' Amended Class Action Complaint and from materials defendants filed in the district court in support of their motion to dismiss.
A. The Parties
Defendant Abiomed is a Massachusetts-based company employing approximately 150 people which develops, manufactures, markets and sells medical devices designed for circulatory support. Minogue is Abiomed's CEO, and Bowen is its CFO. Plaintiffs are a class of entities and individuals who purchased Abiomed stock from August 4, 2011, to October 31, 2012 (the " Class Period" ).
The allegations in the complaint are based in part on interviews with confidential witnesses who are former employees of Abiomed. Confidential Witness 1 (" CW1" ) " worked in a clincial/surgical support position as a clinical representative from March 2011 until April 2012." According to CW1, Abiomed employees were in close proximity to one another, and Minogue and Bowen were very " hands-on" leaders.
The Impella 2.5, " a percutaneous micro heart pump with an integrated motor and sensors" that " can pump up to 2.5 liters of blood per minute," is Abiomed's most important product. In fiscal year (FY) 2012, 85% of Abiomed's revenues came from sales of Impella products, and " most" of that revenue came from the sales of the Impella 2.5. The Impella 2.5's main competitor is the intra-aortic balloon pump (IABP), which is much cheaper and more widely used than the Impella 2.5.
B. The FDA's Regulation of Medical Devices
The FDA regulates the labeling and marketing of medical devices pursuant to the Food, Drug, and Cosmetics Act (FDCA). Under section 510(k) of the FDCA, the agency can " clear" a device that is substantially equivalent in safety and effectiveness to an existing approved device and thereby allow the device to be used for the same intended purposes. The FDA may also grant an investigational device exemption (" IDE" ) to a company to allow it to use a device in a clinical study to test its safety and efficacy.
Under FDA regulations, a company is not allowed to market a device for a use for which it has not been approved -- that is, an " off-label" use. However, the FDA does not prohibit physicians and hospitals from off-label use of medical devices, and a medical device company is allowed to respond to unsolicited requests from physicians
for information regarding off-label uses of the company's products. FDA regulations also prohibit a company with an IDE from representing that the device is safe and effective for the purpose for which it is being tested.
C. The Protect II and Recover II Studies
In August 2007, Abiomed received an IDE from the FDA that allowed it to begin a clinical trial comparing the performance of the Impella 2.5 to that of the IABP during high-risk percutaneous coronary interventions (" PCIs" ), commonly known as angioplasties (the " Protect II Study" ). The study's purpose was to measure major adverse events suffered by patients 30 days after the PCI procedure.
On December 6, 2010, Abiomed terminated the Protect II Study after finding that the Impella 2.5 did not achieve superior outcomes compared with the IABP at the 30-day endpoint. However, Abiomed continued to collect and analyze data from the study, and the study eventually yielded " exploratory" results " suggesting a possible benefit for the device at 90 days." The study was published in September 2012 in Circulation, a peer-reviewed medical journal.
In March 2008, Abiomed received an IDE for a second study (the " Recover II Study" ) designed to compare the Impella 2.5 to the IABP in hemodynamically unstable patients undergoing a PCI due to an acute myocardial infarction (" AMI" ), more commonly known as a heart attack. The Recover II Study was suspended in September 2009 and eventually terminated due to insufficient enrollment.
D. 510(k) Clearance for the Impella 2.5, the Alleged " Pervasive" Scheme of Off-Label Marketing, and the FDA's Response
In June 2008, pursuant to the 510(k) process, Abiomed received clearance from the FDA to market and commercially distribute the Impella 2.5 for partial circulatory support for up to six hours. Under FDA regulations, to repeat, Abiomed was not permitted to market or promote the Impella 2.5 for any other use. Plaintiffs allege that defendants flouted these regulations and " engage[d] in widespread improper promotion and marketing of the Impella 2.5." They make the following specific allegations in support of that claim.
1. The January 2010 Untitled Letter
On January 28, 2010, the FDA sent Abiomed an Untitled Letter objecting to certain of Abiomed's activities promoting the Impella 2.5. Untitled Letters are intended to address alleged regulatory violations that do not meet the threshold for regulatory significance warranting a Warning Letter. They " do not include a warning that a company's failure to take prompt corrective steps could lead to an enforcement action." Simon, 2014 WL 1413638, at *3 n.2 (citing U.S. Food & Drug Admin., Regulatory Procedures Manual: Advisory Actions, 2004 WL 3363386, at *24 (2010)).
The FDA stated that Abiomed had improperly " promot[ed] the Impella 2.5 for high risk PCI and AMI" and represented that the Impella 2.5 was superior to the IABP in those uses. Essentially, in the FDA's view, Abiomed's promotional materials represented that the device was effective for uses for which it was being tested under the Protect II and Recover II IDEs, which constituted a violation of FDA regulations.
Abiomed responded to the FDA letter on March 4, 2010, stating that it " now recognize[d]" that the challenged promotions
had made improper efficacy claims and that it would revise its marketing materials in order to remove the offending statements. Abiomed also represented that it had " strengthened its review process" for promotional materials.
The FDA viewed this response as inadequate, however, and Abiomed made further changes to its advertisements and reviewed its marketing materials and website to ensure that " there were no other materials" beyond those identified by the FDA that made improper safety or efficacy claims. On April 20, 2010, the FDA wrote Abiomed stating that its " response appear[ed] adequate" and that no further action was necessary. Abiomed did not publicly disclose this correspondence with the FDA at that time.
2. The June 2011 Warning Letter
Over a year later, on June 10, 2011, the FDA issued an official Warning Letter to Abiomed stating that the company's " marketing materials continued to improperly compare the Impella 2.5 to the IABP and promote the device for non-cleared uses." A Warning Letter is a step above an Untitled Letter in the FDA's enforcement hierarchy. It communicates that the FDA believes the regulated entity has committed a violation of regulatory significance but does not commit the FDA to taking enforcement action. Simon, 2014 WL 1413638, at *3 n.2 (citing U.S. Food & Drug Admin., Regulatory Procedures Manual: Advisory Actions, 2004 WL 3363386, at *1-2 (2010)).
The Warning Letter criticized an Abiomed magazine advertisement that pictured a hand puncturing a red balloon and suggested that the Impella 2.5 was superior to the IABP " for circulatory support in the Cath lab." The FDA's letter also complained about the Abiomed slogan, " Recovering Hearts, Saving Lives," which the FDA stated would require a study under an IDE " to evaluate whether the device could salvage heart tissue and muscle."  Finally, the agency took issue with a claim at a conference of cardiovascular physicians that the Impella could improve hemodynamics and ...