Frater v. Hemispherx, PICS Case No. 14-0110 (E.D. Pa. Jan. 23, 2014) Yohn, J. (26 pages).

U.S. DISTRICT COURT - EASTERN

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CIVIL PROCEDURE - CLASS ACTION

Class Action • Motion to Dismiss • FDA

Frater v. Hemispherx, PICS Case No. 14-0110 (E.D. Pa. Jan. 23, 2014) Yohn, J. (26 pages).

The U.S. District Court for the Eastern District of Pennsylvania denied defendants' motion to dismiss for failure to state a claim.

Plaintiffs were shareholders or former shareholders of Hemispherx. They filed claims for securities fraud against Hemispherx and three of its senior officers. Hemispherx developed and marketed pharmaceutical products. A drug called Ampligen was its flagship drug, which had not yet been approved by the FDA.

Plaintiff alleged Hemispherx and its senior officials made numerous public statements that concealed and/or misrepresented information which suggested Hemispherx was not likely to succeed in obtaining approval for Ampligen. Defendants moved to dismiss, contending plaintiffs had failed to state a claim.

Hemispherx pursued FDA approval of Ampligen as a treatment for chronic fatigue syndrome. It conducted a clinical trial in 1990 and 1991. However, that trial deviated from its pre-specified protocol on several ways, including a failure to determine a statistical analysis plan until after the study was unblinded, changing the length of the trial, excluding some of the participants from the data, and using some participants' best performances and others' worst performances when evaluating the quality-of-life test. In 1997, Hemispherx began a second clinical trial, which also deviated from its protocol by making changes to the trial parameters during the study, failing to establish controls to avoid false positives, failing to calculate results in accordance with the protocol, and abandoning the statistical analysis technique specified in the protocol.

In 2007, Hemispherx filed an application for approval of Ampligen with the FDA. The FDA rejected it and Hemispherx resubmitted its application in 2008. The FDA sent Hemispherx notice that it would not be approving Ampligen. Hemispherx allegedly did not have funds to conduct another clinical trial, so it attempted to demonstrate the safety and efficacy of this drug by reanalyzing the results of the second trial. It published an article in a trade journal called PLoS One, which is advertised as a peer-reviewed journal, but publishes over two-thirds of its submissions and typically accepts a publication fee from authors. That article put forth a new analysis of the second clinical study which concluded Ampligen yielded statistically significant benefits, although it did not mention departures from protocol in the study. Hemispherx issued a press release regarding the article, emphasizing PLoS One was "peer-reviewed."

In a June 2012 meeting, FDA officials told Hemispherx that using post-hoc analyses of previous data would be unusual to provide evidence of drug efficacy. Hemispherx issued a press release on its plan to resubmit the application for Ampligen, but did not mention the FDA's feedback about the approach the company intended to use. Hemispherx resubmitted its application, which was later denied by the FDA. Upon announcement of the FDA's decision, the value of Hemispherx stock dropped precipitously.

The court held that the facts as a whole gave rise to a strong inference of scienter and that plaintiffs had alleged sufficient facts regarding misrepresentations by defendants. Defendants claimed their statements were based on belief or optimism and not actionable, but the court disagreed. The fact that Hemispherx stock dropped significantly in value after the FDA announced its decision was evidence of materiality.