____________________________________ IN RE CEPHALON SECURITIES    LITIGATION  ____________________________________

: : : :

CIVIL ACTION NO. 96-CV-0633

 

 
 

JOHN G. HARKINS, JR. (04441) ELEANOR MORRIS ILLOWAY (40632) DAVID J. CREAGAN (70904) Harkins Cunningham 1800 One Commerce Square 2005 Market Street Philadelphia, PA 19103-7042 (215) 851-6700 Attorneys for Defendants CEPHALON, INC., FRANK BALDINO, JR., and MICHAEL F. MURPHY

Dated: April 16, 1997
 

TABLE OF AUTHORITIES

II. ARGUMENT

A. The Court May Properly Consider The Transcript Of The June 7 FDA Advisory Committee Meeting On The Motion To Dismiss

B. In Accusing Defendants Of Fraud, Plaintiffs Refuse To Acknowledge The Pleading Requirements Of Rule 9(b) And The Reform Act

C. Plaintiffs Cannot Make Defendants' Arguments About Data Analysis Go Away By Misstating Them

D. The Averments In The Complaint Do Not Make Out Claims

1. Plaintiffs' Allegations Concerning The North American Trial Do Not Satisfy The Particularity Requirements Of Rule 9(b) And The Reform Act

2. The Averments Of The Complaint Fail To State A Claim Based On The European Trial

3. Plaintiffs Have No Claim After January 19, 1996

4. The Complaint's Averments Concerning Peripheral Neuropathies Do Not State A Claim

E. The Complaint Does Not Adequately Plead Scienter

F. Plaintiffs' Section 20(a) Claim Must Be Dismissed

G. Under Pennsylvania Law, Plaintiffs' Negligent Misrepresentation Claim Must Be Dismissed

CASES
Acito v. IMCERA Group, Inc., 47 F.3d 47 (2d Cir. 1995)

Anderson v. Clow, [1994-1995 Tr. Binder] Fed. Sec. L. Rep.
(CCH) ¶ 98,367, 1994 WL 525256 (S.D. Cal. June 29, 1994),
aff'd, 89 F.3d 1399 (9th Cir. 1996), cert. denied,
117 S. Ct. 1105 (1997)

Brug v. Enstar Group, Inc., 755 F. Supp. 1247
(D. Del. 1991)

Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343 (1988)

Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930
(2d Cir.), cert. denied, 469 U.S. 884 (1984)

DiLeo v. Ernst & Young, 901 F.2d 624 (7th Cir.),
cert. denied, 498 U.S. 941 (1990)

Elkind v. Liggett & Myers, Inc., 635 F.2d 156
(2d Cir. 1980)

Friedberg v. Discreet Logic, Inc., No. Civ. A. 96-11232-EFH,
1997 WL 109228 (D. Mass. Mar. 7, 1997)

Gross v. Summa Four, Inc., 93 F.3d 987 (1st Cir. 1996)

In re Apple Computer Sec. Litig., 886 F.2d 1109
(9th Cir. 1989), cert. denied, 496 U.S. 943 (1990)

In re Craftmatic Sec. Litig., 890 F.2d 628 (3d Cir. 1990)

In re Crystal Brands Sec. Litig., 862 F. Supp. 745
(D. Conn. 1994)

In re Cypress Semiconductor Sec. Litig., No. C-92-20048-RMW,
Fed. Sec. L. Rep. (CCH) ¶ 97,060,
1992 WL 394927 (N.D. Cal. Sept. 23, 1992)

In re Delmarva Sec. Litig., 794 F. Supp. 1293
(D. Del. 1992)

In re Donald J. Trump Casino Securities Litigation,
7 F.3d 357 (3d Cir. 1993), cert. denied,
510 U.S. 1178 (1994)

In re Donald J. Trump Casino Securities Litigation,
793 F. Supp. 543 (D.N.J. 1992), aff'd, 7 F.3d 357
(3d Cir. 1993), cert. denied, 510 U.S. 1178 (1994)

In re Herley Sec. Litig., 161 F.R.D. 288 (E.D. Pa. 1995)

In re MedImmune, Inc. Sec. Litig., 873 F. Supp. 953
(D. Md. 1995)

In re ML-Lee Acquisition Fund II, L.P. Sec. Litig.,
848 F. Supp. 527 (D. Del. 1994)

In re Regeneron Pharmaceuticals Sec. Litig.,
[1995 Tr. Binder] Fed. Sec. L. Rep. ¶ 98,637
(S.D.N.Y. Mar. 10, 1995)

In re Seagate Technologies II Sec. Litig., [1989 Tr. Binder]
Fed. Sec. Law. Rep. (CCH) ¶ 94,502, 1989 WL 222969
(N.D. Cal. May 3, 1989)

In re Tseng Labs, Inc., No. 93-2756, Fed. Sec. L. Rep.
¶ 99,074, 1996 WL 122628 (E.D. Pa. Mar. 19, 1996)

In re Westinghouse Sec. Litig., 90 F.3d 696 (3d Cir. 1996)

In re Westinghouse Sec. Litig., 832 F. Supp. 948
(W.D. Pa. 1993), aff'd in part and rev'd on part on
other grounds, 90 F.3d 696 (3d Cir. 1996)

In re Worlds of Wonder Sec. Litig., 35 F.3d 1407
(9th Cir. 1994), cert. denied, 116 S. Ct. 185 (1995)

Mallozzi v. Zoll Medical Corp.,
[Current Transfer Binder] Fed. Sec. L. Rep.
(CCH) ¶ 99,236 (D. Mass. Mar. 5, 1996)

Marksman Partners, L.P. v. Chantal Pharmaceutical Corp.,
927 F. Supp. 1297 (C.D. Cal. 1996)

McCarthy v. C-Cor Elec., Inc., 909 F. Supp. 970
(E.D. Pa. 1995), reconsid. granted in part on other
grounds, 929 F. Supp. 199 (E.D. Pa. 1996)

Mill-Mar, Inc. v. Statham, 420 A.2d 548 (Pa. Super. Ct. 1980),
appeal dismissed, 452 A.2d 1017 (Pa. 1982)

Myles v. Midcom Communications, Inc., No. C96-614D, slip op.
at 14 (W.D. Wash. Nov. 19, 1996), 

Pache v. Wallace, No. 93-5164, Fed. Sec. L. Rep. ¶98,643,
1995 WL 118457 (E.D. Pa. Mar. 20, 1995, aff'd without op.,
72 F.3d 123 (3d Cir. 1995), aff'd, 107 F.3d 8
(3d Cir. 1997)

Padnes v. Scios Nova, Inc., No. C 95-1693 MHP,
1996 WL 539711 (N.D. Cal. Sep. 18, 1996)

Pension Benefit Guaranty Corp. v. White Consolidated
Industries, Inc., 998 F.2d 1192 (3d Cir. 1993),
cert. denied, 510 U.S. 1042 (1994)

Raab v. General Physics Corp., 4 F.3d 286 (4th Cir. 1993)

Romani v. Shearson Lehman Hutton, 929 F.2d 875
(1st Cir. 1991)

Schwartz v. Novo Indus., 658 F. Supp. 795 (S.D.N.Y. 1987)

Scottish Heritable Trust, PLC v. Peat Marwick Main & Co.,
81 F.3d 606 (5th Cir.), cert. denied, 117 S. Ct. 182
(1996)

Seville Industrial Machinery Corp. v. Southmost Machinery
Corp., 742 F.2d 786 (3d Cir. 1984),
cert. denied, 469 U.S. 1211 (1985)

Shapiro v. UJB Finan. Corp., 964 F.2d 272 (3d Cir.),
cert. denied, 506 U.S. 934 (1992)

Shields v. Citytrust Bancorp., Inc., 25 F.3d 1124
(2d Cir. 1994)

Sirota v. Solitron Devices, Inc., 673 F.2d 566 (2d Cir.),
cert. denied, 459 U.S. 838 (1982)

Strassman v. Fresh Choice, Inc., No. C-95-20017 RPA,
1995 U.S. Dist. LEXIS 19343, (N.D. Cal. Dec. 7, 1995)

Suna v. Bailey Corp., No. 96-1138, Fed. Sec. L. Rep. (CCH)
¶99,421, 1997 U.S. App. LEXIS 3564
(1st Cir. Feb. 26, 1997)

Vosgerichian v. Commodore Int'l, 862 F. Supp. 1371
(E.D. Pa. 1994)

Williams v. Discovery Day School, 924 F. Supp. 41
(E.D. Pa. 1996)

Zeid v. Kimberley, 930 F. Supp. 431 (N.D. Cal. 1996)
 

OTHER AUTHORITIES

Fed. R. Civ. P. 9(b)

Fed. R. Civ. 12(b)(1)

Fed. R. Civ. 12(b)(6)

Restatement (Second) of Torts § 552, § 552(2)(a) (1977)

Securities Exchange Act of 1934 § 10(b) (codified as
amended at 15 U.S.C. § 78j(b) (1994))

Rule 10b-5, 17 C.F.R. § 240.10b-5 (1996)

Private Securities Litigation Reform Act of 1995,
Pub. L. No. 104-67, 109 Stat. 737, codified at
15 U.S.C.A. §§ 78u-4, 78u-5 (West Supp. 1997)

21 C.F.R § 314.125(b)(4) (1996)

28 U.S.C. § 1367(c) (1996)

Lawrence M. Friedman et al., Fundamentals of Clinical Trials
Ch. 16, at 284 (3d ed. 1996)

Physicians' Desk Reference at 2199 (1997)

Stuart J. Pocock, Clinical Trials: A Practical Approach
205 (1983)
 

I. INTRODUCTION

Defendants Cephalon, Inc., Dr. Frank Baldino, Jr., and Dr. Michael F. Murphy respectfully submit this Reply Memorandum in further support of their Motion to Dismiss the Consolidated Class Action Complaint (the "Complaint") pursuant to Federal Rules of Civil Procedure 12(b)(6), 9(b) and 12(b)(1). Defendants' motion seeks dismissal of the Complaint because plaintiffs have not met the heightened pleading burdens imposed upon them by the Private Securities Litigation Reform Act of 1995 (the "Reform Act").¹ They fail to plead, with the requisite specificity, facts setting forth why statements made by defendants were false and misleading when made; and they fail to plead adequate support for the scienter element of their securities claims.

The allegations of plaintiffs' Complaint break down into four categories, each of which was addressed in detail in defendants' opening memorandum ("Def. Mem."):

1) claims relating to the North American clinical trial of Myotrophin in connection with ALS, the results of which were first announced on June 12, 1995 (see Compl. ¶¶ 31-41, 46-60, 64, 69-71, 75);

2) claims relating to the results of the European clinical trial of Myotrophin in connection with ALS, first announced on October 31, 1995 (see Compl. ¶¶ 42-43, 74, 76, 78-81, 82(i)-(iii), 82(vi)-(vii), 83-84, 86-88);

3) claims relating to the time period between January 19, 1996 (when Cephalon announced that the FDA would require more information about the European ALS trial) and June 7, 1996, when the FDA's Advisory Panel met and recommended that Myotrophin be distributed to patients under a Treatment IND (see Compl. ¶¶ 86-87); and

4) claims relating to the potential use of Myotrophin in connection with so-called peripheral neuropathies (see Compl. ¶¶ 19-23, 51, 60, 65).

In the balance of their brief, plaintiffs:

• Pay only occasional attention to the new pleading requirements under the Reform Act and continue to argue fraud almost entirely by hindsight (notwithstanding protestations to the contrary);
• Try to obscure defendants' position by misstating their arguments;
• Spend most of their energies attacking Cephalon's disclosures concerning secondary clinical and trial endpoints which plaintiffs themselves contend are not important;
• Fail completely to demonstrate that statements made by Cephalon concerning the North American trial were false or misleading when made (indeed they remain true to this date);
• Fail to set forth facts sufficient to show that statements made by Cephalon concerning the European trial were false and misleading when made;
• Fail to specify any statement by Cephalon concerning peripheral neuropathies which was allegedly false or misleading;
• Address the post-January 19, 1996 period as merely an extension of the earlier time periods, ignoring the impact of Cephalon's statement on January 19 disclosing the FDA's concerns, which produced a sharp decline in the price of Cephalon stock; and
• Fail to make a convincing argument as to why they have met the heightened Reform Act standard for pleading scienter.

II. ARGUMENT

In the pages which follow, we address plaintiffs' arguments in two ways. First, several overarching points deserve response. These include whether the Court can consider the transcript of the June 7, 1996 FDA Advisory Committee Meeting in ruling on defendants' motion, the nature of the changes made by the Reform Act, and some arguments made by plaintiffs which are based on misstatements of defendants' position. Thereafter, we focus on the averments in the Complaint and their insufficiency under the applicable legal standards.

A. The Court May Properly Consider The Transcript Of The June 7 FDA Advisory Committee Meeting On The Motion To Dismiss

Our decision will not undermine the rationale underlying Rule 12(b)(6)'s requirement that a motion to dismiss be converted to a summary judgment motion if a court considers matters outside the pleadings. The reason that a court must convert a motion to dismiss to a summary judgment motion if it considers extraneous evidence submitted by the defense is to afford the plaintiff an opportunity to respond. . . . When a complaint relies on a document, however, the plaintiff obviously is on notice of the contents of the document, and the need for a chance to refute evidence is greatly diminished.

The fact is that time after time plaintiffs ask the Court to consider the transcript for their own purposes. In both the Complaint and their memorandum, plaintiffs repeatedly refer to what was said at the June 7 Meeting, of which the transcript is the official record, and cite to the transcript itself to support their claims. (See Compl. ¶¶ 36-43, 82, 88; Pl. Mem. at 7-14, 26, 29, 32-33, 35-38, 45-48, 51, 53-56, 59-65, 67, 71, 91 n.33, 92, 94-96, 100-03, 110-11, 126, 136.) Defendants attached the transcript as an exhibit to their motion precisely because plaintiffs, in their Complaint, referred so often to what was allegedly said at the June 7 Meeting.³

Plaintiffs now go so far as to say that "the vast majority of the true facts about the studies of Myotrophin were not revealed until the June 7 meeting" (Pl. Mem. at 107); and they admit that Sands Point and George filed their Consolidated Amended Complaint only "after their counsel attended the June 7 meeting" and reviewed the results with their own consultants. (Pl. Mem. at 136.) Indeed, plaintiffs assert that the present Complaint "was the first opportunity six of the plaintiffs had to assert claims based on th[e] shocking revelations and confessions" of the June 7 Meeting. (Id.) Plaintiffs thus effectively acknowledge that the "facts" which supposedly render Cephalon's earlier statements false or misleading are "facts" which emerged at the June 7 Meeting, not "facts" contemporaneous with the alleged misrepresentations or omissions.

In short, plaintiffs try to have it both ways. They argue that the Court may not consider the transcript because their claims are not "based" on the transcript in the narrow sense that plaintiffs do not claim that statements by Cephalon at the June 7 Meeting are actionable. (See Pl. Mem. at 68-69.) But plaintiffs then repeatedly use excerpts from the transcript of that meeting in their attempts to demonstrate defendants' alleged fraud. Under all the circumstances, the Court virtually must consider the transcript to assess what is before it.⁴

B. In Accusing Defendants Of Fraud, Plaintiffs Refuse To Acknowledge The Pleading Requirements Of Rule 9(b) And The Reform Act

Plaintiffs cannot escape their burden by arguing that the Court must deem the factual allegations of their Complaint to be "true." (See Pl. Mem. at 66-68, 78-79.) Of course, well-pleaded facts must be taken as true for purposes of a Rule 12 motion; but that proposition does not relieve plaintiffs of their responsibility to plead facts sufficient to meet the standards of Rules 12(b)(6) and 9(b) and the Reform Act. See Zeid v. Kimberley, 930 F. Supp. 431, 434 (N.D. Cal. 1996) ("Merely making general conclusory allegations of fraud, and then reciting a list of neutral facts, is not sufficient" to satisfy Rule 9(b)). Moreover, the proposition does not extend to the absurd length suggested by plaintiffs, who argue, for example, that facts not alleged in the Complaint must not exist. Plaintiffs even seem to sweep into their theoretical Rule 12 framework the notion that the Court must assume as adequate and true conclusory averments of fraud and various conclusions of law (such as whether a statement or omission was material). Plaintiffs are not entitled to any of these assumptions.

Even under pre-Reform Act law, plaintiffs fail to satisfy Rule 9(b). Seville Industrial Machinery Corp. v. Southmost Machinery Corp., 742 F.2d 786 (3d Cir. 1984), cert. denied, 469 U.S. 1211 (1985), upon which plaintiffs rest their contention that the Complaint adequately pleads fraud under Rule 9(b) (Pl. Mem. at 13-14, 77), lends them no support. In Seville, the allegations of fraud were found to be sufficient because plaintiffs went beyond merely reciting "date, place or time" and "identif[ied] with great specificity" the subject of the alleged fraud. Id. at 791 & n.6. Given the specificity of the averments in that case, the court merely noted in passing that allegations of "date, place or time" may fulfill the requirements of Rule 9(b) but were not the only way of doing so. Id. at 791.

Subsequent Third Circuit decisions, such as In re Donald J. Trump Casino Securities Litigation, 7 F.3d 357 (3d Cir. 1993), cert. denied, 510 U.S. 1178 (1994), shed further light on the particularity requirement of Rule 9(b).⁶ In Trump, the Third Circuit ruled in a securities action that allegations that an appraisal report was fraudulent did not satisfy the particularity requirements of Rule 9(b) where the complaint failed to allege what appraisal method the defendants should have used, how the method they did use departed from the correct approach, and that defendants "recognized or should have recognized the unreasonableness" of their appraisal method. Id. at 373 n.17. Further, the court refused to assume for the purposes of Rule 12(b)(6) the truth of the complaint's allegation that Donald Trump's personal fortune was exaggerated, because that allegation was not specific enough to satisfy Rule 9(b). Id. at 374 n.19 ("We cannot, however, assume this allegation to be true -- as is the normal practice under Rule 12(b)(6) -- because it is insufficiently specific to satisfy Rule 9(b).")⁷

In this case, plaintiffs do not sufficiently allege fraud. In effect, they ask the Court to assume that when a statement made in 1995 about the interpretation of the results of a clinical trial is different from a statement made in 1996 about the interpretation of the results of that clinical trial, the difference demonstrates fraud. Pleading fraud under Rule 9(b) and the Reform Act cannot be based upon such an assumption.

C. Plaintiffs Cannot Make Defendants' Arguments About Data Analysis Go Away By Misstating Them

Defendants' motion is not based, as plaintiffs contend, on the obviously silly notion that the result of a given mathematical calculation in a given statistical analysis varies over time. That is not this case and plaintiffs know it. In this case, plaintiffs cannot and do not adequately plead fraud stemming from Cephalon's choice of which statistical analysis to apply to the data from the Myotrophin trials. The choice of which statistical method to use is a question of judgment, and different methods can and do yield different results when applied to the same data.⁸

As the June 7 Meeting transcript shows, honest differences of opinion did exist concerning how to apply even a specified type of analysis to a given data set. For example, though the protocol for the North American trial specified that covariate analysis be used to analyze the data, the protocol did not specify precisely how to conduct that analysis. Dr. Feeney, presenting the FDA's overall favorable view of the results of the North American trial at the June 7 Meeting, noted that covariate analysis was the primary protocol-specified analysis for that trial and the European trial. He then stated:

The method for selecting the covariates was basically to look at from a preselected list of covariates, to look at the results of the trial and examine which covariates had the most predictive value.

In retrospect, we had to think that this method of selecting covariates had the potential to increase the chance for a false positive result, so that we chose to create non-covariate analyses, which we consider better analyses, but we will present the results for both covariate and non-covariate analyses for both trials.

It is evident that the statistical analysis of data is not an unvarying, mechanical process that requires only a computer and a software package, as plaintiffs would have the Court believe. As stated by the FDA's Dr. Temple (speaking of the European trial):

No one would say that any given analysis or the one that was done is obviously wrong, foolish, unprecedented, or anything like that. The point is that it is one of a variety of analyses that are plausible, and once the data are in hand, it gets very hard to say how exactly one makes the judgment about which one to choose.

The transcript of the June 7 Meeting thus makes crystal clear that the issues surrounding interpretation of the Myotrophin clinical trial results involve matters of judgment. And for this reason, plaintiffs cannot survive defendants' motion merely by asserting that Cephalon's statements concerning the results of data analyses made in June 1995 and in October 1995 differed from statements made at the June 7, 1996 Meeting. It is not fraud to select a method of analysis -- and consequently arrive at results and conclusions -- different from what others, including the FDA, might choose. See MedImmune 873 F. Supp. at 966.¹⁰ A fortiori, it cannot, as a matter of law, be a material misrepresentation or omission to announce accurately the results of such analyses.

D. The Averments In The Complaint Do Not Make Out Claims

1. Plaintiffs' Allegations Concerning The North American Trial Do Not Satisfy The Particularity Requirements Of Rule 9(b) And The Reform Act

A review of the subparts of paragraph 70 of the Complaint, where plaintiffs' allegations concerning the North American trial are collected, exposes their deficiencies. Plaintiffs first state that Cephalon announced on June 12, 1995 that the p value for the comparison of the high dose Myotrophin group to the placebo group in the North American trial was 0.01. (Compl. ¶¶ 47, 70(a).)¹² It is then alleged that the reported p value of 0.01 "materially overstated the statistical significance of the results." (Id. ¶ 70(a).) The Complaint does not state why or how defendants misrepresented the results of their own analysis or why defendants must have known at the time that 0.01 was incorrect. Instead, the Complaint merely recites a statement by an FDA physician at the June 7, 1996 FDA Advisory Committee meeting, giving the results from a different statistical approach to this same endpoint. (Id. ¶ 70(a).)

As noted previously, the fact that different statistical methods produce different results is unremarkable and does not amount to a showing of fraud.¹³ Moreover, the FDA's analysis was performed long after Cephalon's June 12, 1995 and August 1, 1995 disclosures. Plaintiffs have not alleged, nor could they, how an FDA physician's statement in June 1996 rendered the earlier disclosures by the company false or misleading at the time they were made. Plaintiffs have not come close to pleading fraud with the specificity demanded by Rule 9(b).¹⁴

Plaintiffs go on to allege that Cephalon's "representations that Myotrophin produced a survival benefit were materially misleading by reason of the failure to disclose the fact that during the study period the mortality rate of Myotrophin-treated patients was higher than the mortality rate of patients who received a placebo." (Id. ¶ 70(b).) The Complaint contains no averments, however, which state how the mortality rate renders the statement about a survival benefit misleading and why defendants knew that.¹⁵

Plaintiffs also contend that Cephalon's statements regarding a survival benefit for Myotrophin-treated patients in the North American trial were materially misleading because they were "based on a retrospective analysis of a self-selected group." (Id. ¶ 70(b).) But this is precisely how Cephalon itself described the analysis in the passage of the Prospectus recited in plaintiffs' Complaint. (See id. ¶ 64). There is no inconsistent statement by Cephalon to which plaintiffs can point.

Continuing in Paragraph 70(c), plaintiffs claim that "according to the FDA the difference in survival was not statistically significant." Plaintiffs point to what they claim were statements allegedly made at the June 7 Meeting (Pl. Mem. at 95). However, the cited portion of the transcript of the June 7 Meeting does not support this averment. A bald assertion of this sort, without more, cannot satisfy the pleading requirements of Rule 9(b) and the Reform Act.

Plaintiffs' allegations concerning average deterioration in the Appel scores of high-dose Myotrophin-treated patients, (id. ¶ 70(d)), also on their face fail to state a claim. Plaintiffs cannot create a securities law violation based on Cephalon's use of an arithmetical average by arguing that some patients' deterioration rates were higher and some were lower than the stated average. (See Def. Mem. at 21-22.) The securities laws do not require defendants to disclose the obvious fact that an "average" score is by definition derived from the addition of individual scores -- some of which fall below and others above the arithmetical average. See Raab v. General Physics Corp., 4 F.3d 286, 291 (4th Cir. 1993) (there is no duty to disclose information that is common knowledge).

The Complaint also alleges that defendants' "failure to disclose the fact that any effect of Myotrophin in the North American trial was limited to patients with rapidly progressing ALS" concealed "that, at best, treatment with Myotrophin would benefit only some of the patients with ALS." (Compl. ¶ 70(d).) Here again, the Complaint alleges no contemporaneous facts that would show that the alleged omission was misleading at the time, especially in light of the fully-disclosed trial design.¹⁶

Contrary to plaintiffs' assertion (Compl. ¶ 70(e); Pl. Mem. at 98-99), defendants' alleged failure to disclose the result of the comparison in the rate of increase in Appel scores between the combined high and low dose Myotrophin treated patients and the placebo patients did not render defendants' representations about the North American trial materially misleading. Cephalon disclosed that the comparison between high dose Myotrophin patients and placebo was statistically significant and that the comparison between low dose and placebo was not. (Compl. ¶ 47.) Cephalon's June 12 press release did not address the combined dose data because it had no clinical relevance. In the clinic, there is no such thing as a "combined dose." A patient receives only one dose of a drug at a given time.

Most importantly, the Complaint does not explain why the alleged omission concerning the combined dose data rendered Cephalon's statements about the North American trial false or misleading when made. This may be because the FDA decided that the comparison of the combined dose to placebo did reach statistical significance,¹⁷ or because plaintiffs realize that the subject has no real importance.¹⁸ Whatever the reason, the plaintiffs fail to meet the pleading standard.

In the subsequent paragraph of the Complaint (¶ 70(f)), plaintiffs again resort to hindsight. Plaintiffs focus on another discussion from the June 7 Meeting where Cephalon explained to the Advisory Panel that, in retrospect, it had realized "that the patient characteristic used to stratify randomization in the trial, the patients' Appel scores at the time they were assigned to treatment groups, is not predictive the rate [sic] of their disease progression." (Id.) Plaintiffs do not allege, however, that Cephalon knew that it was unreasonable to have selected the randomization criteria at the time the study was commenced. Ignoring the obvious reality that companies learn about measurement tools and diseases by conducting studies, plaintiffs once again simply point to something said at the June 7 Meeting that had not been mentioned by Cephalon earlier and claim that the omission was fraud.

The averments of the Complaint concerning Cephalon's statement about the Sickness Impact Profile ("SIP") data in the North American trial (Compl. ¶ 70(g)) suffer from similar defects. An FDA official's opinion that "the SIP is insufficiently sensitive to measure disease progression" (id. ¶ 70(g)(i)) does not render defendants' representation that the SIP scores confirmed "the slower decline in life style in patients treated with high dose Myotrophin," (id. ¶ 70(g)), misleading. It represents one person's opinion (indeed, one not widely shared), rather than a fact; and the Court is not required to convert opinions and interpretations into facts in its 12(b)(6) deliberations. Absent pleading of the necessary facts, this claim also fails to pass the pleading threshold.¹⁹

Similarly, even if it were true that "the difference in the physical subset of SIP scores between the high dose Myotrophin and placebo groups was not statistically significant," (id. ¶ 70 (g)(ii)), plaintiffs do not aver how that rendered anything defendants said misleading. The Complaint does not allege that defendants ever said that the difference was statistically significant. Similarly, the Complaint does not aver how the alleged "fact" that "there was very little difference in time-to-event if death is included as an event and placebo patients with very high pre-treatment Appel scores are excluded from the analysis," (id. ¶ 70(g)(iii)), makes Cephalon's statements about slower decline in life style false or misleading when made.

Finally, plaintiffs do not attempt to address how the "facts" alleged render the defendants' statements that the results of the North American trial were "'spectacular'" false or misleading when made, or why those "facts" deprived defendants of a "reasonable basis" for expressing those opinions. (Id. ¶ 70(h).)²⁰

In sum, none of plaintiffs' alleged "facts" about the North American study satisfies the particularity requirement of Rule 9(b) and the Reform Act and their North American claims should be dismissed. The Complaint does not adequately allege that Cephalon's statements about the trial were false or misleading when made. Subsequent debate about various aspects of Cephalon's study methodology or analysis does not render the company's earlier statements false or misleading. Indeed, the FDA reached the same overall conclusion as did Cephalon -- the North American trial showed a statistically significant treatment effect, no matter what analytic method was applied.²¹ That conclusion formed the basis for approval of the T-IND for Myotrophin in June 1996 and it is more than enough to defeat plaintiffs' inadequately pleaded claims about the trial.

2. The Averments Of The Complaint Fail To State A Claim Based On The European Trial

Plaintiffs try to get around their fatal problem by arguing that Cephalon "confessed" at the June 7 Meeting that it had earlier misrepresented the results and that arithmetic does not lie. (See, e.g., Pl. Mem. at 101 and n.35.) There is no doubt that the FDA reached different conclusions than Cephalon and that Cephalon, following the FDA's method of analysis, agreed at the June 7 Meeting that applying the FDA's choice of methods led to different results. There is, however, no "confession" anywhere in the discussion at the June 7 Meeting and, to the contrary, the FDA recognized that Cephalon had earlier reached different conclusions.²³ Those differences do not, as a matter of law, support an allegation of fraud. See MedImmune, 873 F. Supp. at 966. And plaintiffs' choice of words does not demonstrate otherwise.²⁴

Plaintiffs also allege, without the requisite factual basis, that Cephalon's 1995 statements about the results of the European trial, and its "'hopeful[]'" projections for FDA marketing approval, were false or misleading "in light of the clinical trial data already received and analyzed as set forth herein, and Cephalon's communications with the FDA to that date." (Compl. ¶ 84.) None of these "facts" concerning the European trial, however, satisfies the particularity requirement of Rule 9(b).²⁵

Specifically, the Complaint avers that Cephalon's statements that the European trial results "'confirmed' the results of the North American trial and that there was 'remarkable consistency' in the results of the two trials were materially misleading." (Compl. ¶ 82(a).) First, the Complaint alleges that the European trial failed to achieve any of its "specified objectives." (Id. ¶ 82(a)(i).) Plaintiffs offer no support for this allegation, however, beyond the FDA's concerns about the Myotrophin European trial, concerns which led to Cephalon's January 19, 1996 announcement. (Id. ¶ 86.) The ultimate source of plaintiffs' claim is the discussion at the June 7 Meeting where, the Complaint alleges, "[b]oth the FDA and the Committee expressed the view that the European trial did not demonstrate an effect of Myotrophin on patients with ALS or confirm the results of the North American trial." (Id. ¶ 88.) There is no dispute about this colloquy -- none whatsoever -- but that does not establish that Cephalon must have been misrepresenting the truth when it made its earlier statements in 1995 about its analysis of the European trial.

Second, the Complaint avers that a secondary endpoint of the European trial -- the comparison of the rates of increase of Appel scores of Myotrophin-treated and placebo patients "when measured by the same statistical analysis that was used in the North American trial or the analysis that had been specified by the Company for the European trial" -- was not statistically significant. (Compl. ¶ 82(a)(ii).) This averment fails to state a claim because the Complaint does not allege that Cephalon ever represented that there was statistical significance in the European results when measured by the same statistical analysis that was used in the North American trial. The second part of the averment likewise fails to state a claim for the same reason as paragraph 82(a)(i), namely, it is based entirely on impermissible hindsight.

Indeed, all of plaintiffs' remaining allegations of fraud regarding the European trial, (Compl. ¶¶ 82(a)(iii)-(vii)), are based on hindsight. Plaintiffs allege no facts which, as of late October or early November 1995, would have contradicted defendants' announcements concerning the principal results of the European trial. (See Compl. ¶¶ 42-43, 74-83.) Rather, plaintiffs rely solely on the hindsight provided by the June 7 FDA Meeting. (See Compl. ¶¶ 42, 82(vi)-(vii).) That they cannot do. DiLeo, 901 F.2d at 627; In re Donald J. Trump Casino Sec. Litig, 793 F. Supp. 543, 557 (D.N.J. 1992), aff'd, 7 F.3d 357 (3d Cir. 1993), cert. denied, 510 U.S. 1178 (1994); Schwartz v. Novo Indus., 658 F. Supp. 795, 799 (S.D.N.Y. 1987); In re MedImmune, 873 F. Supp. at 966.

3. Plaintiffs Have No Claim After January 19, 1996

This leaves plaintiffs with only one theory to support a prolonged class period -- that prior actionable statements were not sufficiently corrected by January 19, 1996. But because the earlier statements made by the defendants were not actionable, either through a failure to plead misrepresentations with the requisite particularity or a failure to plead scienter, no basis exists for any liability after January 19.

Plaintiffs attempt to support their theory by arguing that "[h]ad the January [1996] announcement cured the earlier misrepresentations, then the market price of Cephalon common stock would not have fallen even further in June of 1996, when the FDA panel recommended approval of the T-IND, an event that defendants claim was positive." (Pl. Mem. at 110.) Plaintiffs fail to mention, however, that the closing price of Cephalon stock increased from $23.00 per share on June 6, 1996, to $23.25 per share on Monday, June 10, 1996 and to $24.125 per share on June 11, 1996. The stock thereafter did decline and then rose again; but plaintiffs cannot claim that the news of the June 7 Meeting was greeted by a market collapse. It was not. The fact that the price dropped below $23.00 per share later in June does not establish a link between the June 7 Meeting and the subsequent decline. Cf. Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930, 943 & n.23 (2d Cir.) ("but for" allegations fail to establish proximate loss causation as required for legally sufficient § 10(b) and Rule 10b-5 claims), cert. denied, 469 U.S. 884 (1984)).

4. The Complaint's Averments Concerning Peripheral Neuropathies Do Not State A Claim

These types of reports assume that a drug works in the indications for which financial projections are made; they do not predict the results of a study. In any event, the fact that plaintiffs do not understand this fundamental point is not a basis for maintaining a securities fraud case against Cephalon.²⁸

Finally, plaintiffs cite no specific support for their theory of a dramatic reduction in analysts' expectations of sales of Myotrophin. To this day, several analysts predict sales in the vicinity of $300 million, just as they did before the June 7 Meeting. Plaintiffs' claim is contradicted by the same public record on which they rely for their assertion that Wall Street had significant expectations for Myotrophin's use in peripheral neuropathies before June 7. All of plaintiffs' peripheral neuropathy averments should be dismissed.

E. The Complaint Does Not Adequately Plead Scienter

the complaint shall, with respect to each act or omission alleged to violate this chapter, state with particularity facts giving rise to a strong inference that the defendant acted with the required state of mind.

Plaintiffs attempt to bottom scienter on defendants' alleged motive to drive up the price of Cephalon stock. They make three types of allegations: 1) prior to June 12, 1995, Cephalon was in financial straits and needed to raise capital through a public offering of stock (Compl. ¶¶ 26-28, 62-67; Pl. Mem. at 12, 116-18, 123); 2) Cephalon faced competition in the market for ALS drugs from rival producers (Compl. ¶¶ 24-25; Pl. Mem. at 117-18); and 3) there was "insider trading" by one of the individual defendants (Compl. ¶¶ 7, 9, 61; Pl. Mem. at 119-25).

With respect to the financial need of Cephalon, the Complaint imputes motivation for defendants' alleged misrepresentations to 1) Cephalon's desire to raise capital in the public markets, "as it did in August 1995 on the strength of the reported results of the North American trial of Myotrophin, announced in June 1995" (Compl. ¶ 28; see also id. ¶¶ 62-63, 66-67); and 2) Cephalon's "increasing losses and capital expenditures, [which] would shortly exhaust its available cash reserves" and put it out of business. (Compl. ¶ 27.) Plaintiffs gloss over, however, that the same Prospectus which they cite in the Complaint reports that, as of March 31, 1995, Cephalon had over $100 million in cash, cash equivalents and investments, without including the anticipated $74,656,000 in net proceeds from the public offering. (Prospectus, Def. Mem. Ex. B, at 7.)³⁰ Even if the company continued to lose money at the same rate (Prospectus, Def. Mem. Ex. B, at 23), it was clearly not in imminent danger of using up its cash reserves had the public offering not taken place.

In any event, under Second Circuit case law, allegations that defendants wish to maintain or increase the value of the company's stock are insufficient to raise the required "strong" inference of scienter. See, e.g., Shields v. Citytrust Bancorp., Inc., 25 F.3d 1124, 1130 (2d Cir. 1994) (ruling that scienter may not be predicated on assertion that defendants are motivated to overstate a corporation's prospects so as to benefit from the higher stock prices). Every company wants to see the price of its stock go up and every company that may want to raise money by a public offering wants a higher price. This type of everyday motive cannot serve to distinguish cases not involving fraud from those involving fraud.

This same point has been repeated more recently under the Reform Act. In Marksman Partners, L.P. v. Chantal Pharmaceutical Corp., 927 F. Supp. 1297 (C.D. Cal. 1996), the court rejected allegations of scienter based on the theory that the defendant company's improper accounting increased the value of its stock thereby enabling it to complete a private placement at an inflated price. Id. at 1312. The court held that "'[a]llegations of motive that are generally held by similarly positioned executives and companies . . . are insufficient'" to plead fraud. Id. at 1310 (citations omitted).

Plaintiffs also argue that Cephalon was motivated to use fraud to increase its stock price because of competitive pressures arising from the FDA's imminent approval of Rhone-Poulenc Rorer's ALS drug, Rilutek, and from Amgen/Regeneron's experimental ALS compound (called "BDNF"). (Compl. ¶¶ 24-25; Pl. Mem. at 117-18.) Facts of public record belie that allegation.

First, the decision to initiate a BDNF Phase III ALS trial was not made public until after the announcement of the results of Cephalon's North American Phase III trial of Myotrophin and could not have influenced Cephalon's view of the North American trial. (See "Amgen-Regeneron Partners to Progress to Phase III Trials of BDNF in Lou Gehrig's Disease," Business Wire, June 26, 1995, at 1, available in LEXIS, Genmed Library, Curnws File (attached hereto as Ex. G).)³¹ Second, the FDA did not grant marketing approval to Rilutek until after Cephalon's announcement of its European trial results. (See "Riluzole Approved by U.S. Food and Drug Administration for Treatment of Lou Gehrig's Disease," PR Newswire, Dec. 12, 1995, at 1, available in LEXIS, Genmed Library, Curnws File (attached hereto as Ex. H).) In fact, the primary endpoint of the Rilutek studies, i.e., the difference in survival times between patients receiving Rilutek and those receiving placebo, was not statistically significant "when evaluated by the analysis specified in the study protocol," although "the difference was found to be significant by another appropriate analysis." (See Physicians' Desk Reference at 2199 (1997) (cited in Pl. Mem. at 25 concerning Rilutek label).)

Plaintiffs' allegations of "insider trading" to support their motive theory cannot survive analysis. Only "unusual insider trading activity during the class period may permit an inference of bad faith and scienter." Acito v. IMCERA Group, Inc., 47 F.3d 47, 54 (2d Cir. 1995).³² In this case, Dr. Murphy sold no stock and Dr. Baldino's "sales" were a relatively small portion (18.7%) of his total holdings of Cephalon stock.³³ The fact that defendants retained significant stock ownership defeats any inference of scienter. Id.; In re Worlds of Wonder Sec. Litig., 35 F.3d 1407, 1425 (9th Cir. 1994) (the fact that individuals who engaged in insider trading retained most of their holdings in the company tended to rebut any inference of scienter), cert. denied, 116 S. Ct. 185 (1995); see also In re Cypress Semiconductor Sec. Litig., No. C-92-20048-RMW, Fed. Sec. L. Rep. (CCH) ¶ 97,060, at p. 94,697, 1992 WL 394927 (N.D. Cal. Sept. 23, 1992) (fact that one of four named defendants did not sell stock during the class period weakened plaintiffs' claim that the defendants artificially inflated the value of the company's stock in order to sell their shares at a profit).

Any inference of scienter with respect to the North American trial cannot be based on these securities transactions and the North American trial averments must be dismissed as a result. Moreover, no inference of scienter could logically be drawn for any period after these transactions, including the period during which disclosures were made concerning the European trial.³⁴

The alternative Second Circuit test offers no help to plaintiffs. Their so-called circumstantial evidence (actually no more than hindsight) is simply insufficient to raise a strong inference of conscious fraud. That defendants' positive evaluation of the results of the North American trial, announced in June 1995, was followed seven months later by the announcement of the FDA's concerns about whether the European study results supported the findings from the North American trial is not evidence of scienter concerning the North American trial. Similarly, the FDA's concerns and disagreement, expressed in 1996, with the evaluation of the results of the European trial as described by Cephalon in October 1995, does not raise a strong inference that defendants knew in October 1995 that there was no reasonable basis for their interpretation of the European trial results. See In re MedImmune, 873 F. Supp. at 966 (finding that plaintiffs pleaded no facts supporting an inference of scienter; "[s]imply to aver that the [FDA] Advisory Committee, based on theoretical (not to say inappropriate) statistical concerns, eventually challenged the company's opinion, is not to say that Defendants should have had knowledge of the theoretical statistical limitations on their assumptions").

In this regard, defendants' motion to dismiss is not, as plaintiffs contend (Pl. Mem. at 58), based on an assertion that plaintiffs' claims derive from disagreements between Cephalon and the FDA. Rather, defendants' motion is based on the fact that Cephalon made no statements concerning the Myotrophin trials that were false or misleading when made, and that the FDA's later, differing interpretations of the results of those studies do not render Cephalon's earlier statements false or demonstrate scienter on Cephalon's part. Cephalon's researchers may (and do) legitimately differ with the approach taken or recommended by competitors or the FDA. That is not evidence of scienter. See In re MedImmune, 873 F. Supp. at 966.³⁵

F. Plaintiffs' Section 20(a) Claim Must Be Dismissed

G. Under Pennsylvania Law, Plaintiffs' Negligent Misrepresentation Claim Must Be Dismissed

In addition, Count III of the Complaint should be dismissed for failing, on its face, to satisfy all of the other elements of Section 552 of the Restatement, including that which limits liability to losses incurred "by the person or one of a limited group of persons for whose benefit and guidance [the defendant] intends to supply the information or knows that the recipient intends to supply it." Restatement (Second) of Torts § 552(2)(a) (emphasis added). As courts that have interpreted this provision of the Restatement have held, all potential and actual investors in a company's common stock cannot form the "limited group" required by the Restatement, and plaintiffs' claim must consequently fail. See In re Westinghouse Sec. Litig., 832 F. Supp. 948, 988 (W.D. Pa. 1993) ("Where a corporation does not and cannot know the identity of the recipients of its disclosures at the time those disclosures are made, liability under Section 552(2) does not obtain."), aff'd in part and rev'd on part on other grounds, 90 F.3d 696 (3d Cir. 1996); see also Scottish Heritable Trust, PLC v. Peat Marwick Main & Co., 81 F.3d 606, 611-13 (5th Cir.), cert. denied, 117 S. Ct. 182 (1996); In re ML-Lee Acquisition Fund II, L.P. Sec. Litig., 848 F. Supp. 527, 555-56 (D. Del. 1994); In re Delmarva Sec. Litig., 794 F. Supp. 1293, 1306, 1310-11 (D. Del. 1992); Brug v. Enstar Group, Inc., 755 F. Supp. 1247, 1258 (D. Del. 1991).

Moreover, Pennsylvania has not adopted the fraud-on-the-market theory of reliance for negligent misrepresentation claims. In re Herley, 161 F.R.D. at 292. As plaintiffs have failed to allege any facts that would support claims of individual reliance, Count III of the Complaint is legally insufficient.

Count III must therefore be dismissed.

III. CONCLUSION

For all the foregoing reasons, and for the reasons set forth in defendants' opening memorandum in support of their motion to dismiss, defendants respectfully request that the Complaint and each count thereof be dismissed with prejudice.
 

Respectfully submitted,             /s/ ____________________________ JOHN G. HARKINS, JR. (04441) ELEANOR MORRIS ILLOWAY (40632) DAVID J. CREAGAN (70904) Harkins Cunningham 1800 One Commerce Square 2005 Market Street Philadelphia, PA 19103-7042 (215) 851-6700 Attorneys for Defendants CEPHALON, INC., FRANK BALDINO, JR., and MICHAEL F. MURPHY

Dated: April 16, 1997
 

¹Private Securities Litigation Reform Act of 1995, Pub. L. No. 104-67, 109 Stat. 737, codified at 15 U.S.C.A. §§ 78u-4, 78u-5 (West Supp. 1997).

²Even before the Reform Act, courts had to be "especially rigorous" regarding the factual support for securities fraud claims "to minimize the chance 'that a plaintiff with a largely groundless claim will bring a suit and conduct extensive discovery in the hopes of obtaining an increased settlement, rather than in the hopes that the process will reveal relevant evidence.'" Romani v. Shearson Lehman Hutton, 929 F.2d 875, 878 (1st Cir. 1991) (citations omitted).

³Plaintiffs' argument that defendants may not use the transcript as "evidence" (Pl. Mem. at 16, 75-76) is a red herring because defendants are not citing the transcript as "evidence." Defendants are simply making apparent the sources of plaintiffs' hindsight-based attacks on Cephalon's disclosures. Plaintiffs' further contention that the transcript is inaccurate is another red herring. (Pl. Mem. at 76 & Ex. B.) Plaintiffs point to only one alleged inaccuracy, one concerning a statement to which defendants have made no reference. (Id.)

⁴See In re MedImmune, Inc. Sec. Litig., 873 F. Supp. 953, 957 n.3 (D. Md. 1995) ("In connection with the Motion to Dismiss, the parties have submitted the transcript of the [FDA] Advisory Committee hearing as well as numerous other documents to the Court. The Court considers these documents inasmuch as they are referred to in the Consolidated Amended Complaint and relied upon by Plaintiffs in bringing the action.") (emphasis added).

⁵See 15 U.S.C.A. § 78u-4(b)(1); see also Friedberg v. Discreet Logic, Inc., No. Civ. A. 96-11232-EFH, 1997 WL 109228, at *5 (D. Mass. Mar. 7, 1997) (stating that the Reform Act "makes the pleading standard in securities fraud cases more rigorous than Rule 9(b) requirements").

⁶See, also, In re Westinghouse Sec. Litig., 90 F.3d 696, 710-13 (3d Cir. 1996); Shapiro v. UJB Finan. Corp., 964 F.2d 272, 284-85 (3d Cir.), cert. denied, 506 U.S. 934 (1992); In re Craftmatic Sec. Litig., 890 F.2d 628, 645-46 (3d Cir. 1990).

Plaintiffs' assertion that Trump "has absolutely nothing to do with Rule 9(b)," (Pl. Mem. at 78), is belied by the decision itself. See 7 F.3d at 373 n.17, 374 n.19.

⁷See also Zeid, 930 F. Supp. at 434 (a "plaintiff does not state a claim for securities fraud merely by asserting that a company's revelation of bad news means that 'earlier, cheerier' statements must have been false").

⁸To quote from one of plaintiffs' favorite sources (Pl. Mem. at 3-4, 28-29, 97 n.34):

This chapter ["Issues in Data Analysis"] will focus on some issues in the analysis of data that seem to cause confusion in the medical research community. Some of the proposed solutions are straightforward; others are judgmental. They reflect a viewpoint developed by the authors and colleagues in many collaborative efforts over two decades. Whereas some have taken similar positions, others have opposing views on several issues.

⁹See In re MedImmune, 873 F. Supp. at 966 ("Medical researchers may well differ over the adequacy of given testing procedures and in the interpretation of test results.").

¹⁰See also Zeid, 930 F. Supp. at 438 (plaintiffs do not adequately plead fraud where they fail to "sufficiently specify any reasons why Defendants' statements were misleading when they were made . . . [and] [i]nstead, . . . rely on . . . subsequent disclosure[s] to create an inference that Defendants deliberately deceived the public").

¹¹The decision in MedImmune is instructive. In that case, the Court dismissed portions of the complaint, ruling that plaintiffs did not plead with enough specificity that defendants' statements about drug efficacy were false or misleading. Plaintiffs alleged only that the FDA Advisory Committee was not convinced of efficacy. In support of its ruling, the Court noted that defendants had "developed data which they believed supported their conclusions." 873 F. Supp. at 965-66. For this same reason, many of plaintiffs' allegations of fraud concerning the North American trial are insufficient under Rule 9(b).

¹²The primary endpoint or objective of the North American trial was to compare the rate of disease progression among treatment and placebo groups. The primary outcome measure in the North American trial was a comparison of the slopes of the data as an indication of the rate of disease progression. (See Tr., Def. Mem. Ex. A, at 38.) All other endpoints or measures, and thus all of the allegations of the Complaint except paragraphs 38 and 70(e), concern secondary endpoints and measures.

¹³See Gross v. Summa Four, Inc., 93 F.3d 987, 995 (1st Cir. 1996) (plaintiff failed to allege fraud with the requisite particularity where plaintiff tried to establish that a disclosure was fraudulent when made based on a document written five weeks after the disclosure); DiLeo v. Ernst & Young, 901 F.2d 624, 628 (7th Cir.) (Rule 9(b) requires courts to dismiss complaints that do not plead facts that would "separate fraud from the benefit of hindsight"), cert. denied, 498 U.S. 941 (1990).

¹⁴Even if reliance on hindsight were permissible as a basis for pleading fraud, the p value of 0.027, alleged to be the result described by an "FDA physician" at the June 7 FDA Meeting, (Compl. ¶ 70(a)), is itself statistically significant. The difference between 0.027 and 0.01 was due to the different type of analysis performed by the FDA (i.e., a "covariate analysis without covariates," (Tr., Def. Mem. Ex. A, at 50), versus the protocol specified covariate analysis used by Cephalon, (id. at 114-15)), a fact that plaintiffs choose to ignore. Both results -- Cephalon's and the FDA's -- are statistically significant and the difference is immaterial.

¹⁵The survival rate and the incidence of mortality are not the same thing. See Friedman, supra note 8, at 223. The latter measures the number of deaths; the former measures when patients die.

¹⁶Indeed, the FDA subsequently concluded that the high-dose Myotrophin treatment group demonstrated a treatment effect which was not limited to patients with rapidly progressing ALS. (See Tr., Def. Mem. Ex. A, at 58 ("you don't really need to focus on the upper strata in 1200 [the North American trial] because the overall results seem to favor high dose Myotrophin over placebo."))

¹⁷The FDA concluded that the comparison reached statistical significance at P=0.05. (See Tr., Def. Mem. Ex. A, at 50, 115.)

¹⁸The p value only indicates "the probability that an observed difference may have occurred by chance. It conveys information about the level of doubt, not the magnitude of clinical importance of this difference." Friedman, supra note 8, at 335. Another treatise cited in plaintiffs' memorandum, at pages 28 and 64-65, makes the same point. See Stuart J. Pocock, Clinical Trials: A Practical Approach 205 (1983) ("It is common practice to focus on certain specific significance levels [such as P < 0.05]. . . . The choice of such levels is entirely arbitrary and has no mathematical or clinical justification . . . . In particular, P < 0.05 has become unduly emphasized as the level needed to declare a positive finding . . . . In practice, one must recognize that there is precious little difference between P=0.06 and P=0.04.").

¹⁹Moreover, since plaintiffs' allegations regarding SIP scores rely entirely on the statement by Dr. Hoberman, of the FDA, at the June 7 Meeting (Compl. ¶¶ 39, 70(g)(i)), they represent another case of attempting to plead fraud by hindsight.

²⁰Words such as "rather spectacular" are not a statement of fact or a prediction of future performance, but rather a non-actionable expression of opinion based on the fact that no other drug had ever shown an effect in slowing the progression of ALS. See McCarthy v. C-Cor Elec., Inc., 909 F. Supp. 970, 975 (E.D. Pa. 1995), reconsid. granted in part on other grounds, 929 F. Supp. 199 (E.D. Pa. 1996). That opinion remains valid today.

²¹See Dr. Feeney, Tr., Def. Mem. Ex. A, at 59 ("So where are we with regards to the efficacy of Myotrophin? Our conclusion is that in Study 1200 [North American Study], a difference between high dose Myotrophin and placebo that favored the Myotrophin was demonstrated").

²²There is a fundamental flaw in plaintiffs' claims as a matter of logic. Cephalon knew, under FDA procedures, that all of its analyses would be reviewed by the FDA and an Advisory Committee, the latter in a public setting. There was no conceivable reason for Cephalon intentionally to misstate the results of its own analysis.

²³Plaintiffs' reliance on Sirota v. Solitron Devices, Inc., 673 F.2d 566 (2d Cir.), cert. denied, 459 U.S. 838 (1982), is misplaced. (Pl. Mem. at 14 & n.12.) Plaintiffs' theory is evidently that defendants' alleged "confessions" at the June 7 Meeting establish scienter. Unlike the defendants in Sirota, however, who were government contractors that disclosed prior overstatements of income to the United States Renegotiation Board, 673 F.2d at 569, Cephalon did not "confess" to any misrepresentations at the June 7 Meeting. On the contrary, at that meeting Cephalon maintained the correctness of its conclusions regarding both trials, a stance the FDA itself acknowledged. (See Dr. Leber, Tr., Def. Mem. Ex. A, at 22-23: "[I]n the course of looking over this evidence, we were unable to reach the same conclusion as the firm [Cephalon] in regard to whether or not [the European trial] was a confirmatory trial. In face [sic], we viewed [the European trial] -- and to this day do -- as a study which fails to confirm the results of [the North American trial]. That is the [FDA] Division's view. The firm [Cephalon] takes a different stance. They have been able to conduct analyses based not upon the initial [sic] described in the protocol, which convinced them that the trial at worst is not contradictory and at best is supportive.")

²⁴The securities laws do not require companies to disclose every possible alternative analysis or test that could be applied to a given set of data. As the court recognized in Padnes v. Scios Nova, Inc., No. C 95-1693 MHP, 1996 WL 539711 (N.D. Cal. Sep. 18, 1996), "[t]he securities laws do not impose a requirement that companies report only information from optimal studies, even if scientists could agree on what is optimal. Nor do they require that companies who report information from imperfect studies include exhaustive disclosures of procedures used, including alternatives that were not utilized and various opinions with respect to the effects of these choices on the interpretation of the outcome data." Id. at *5.

²⁵Hopes and expectations are not actionable. See McCarthy, 909 F. Supp. at 977; Raab, 4 F.3d at 290; Strassman v. Fresh Choice, Inc., No. C-95-20017 RPA, 1995 U.S. Dist. LEXIS 19343, at *14 (N.D. Cal. Dec. 7, 1995 ("courts have routinely held that vague or amorphous statements of optimism are not actionable on the theory that reasonable investors do not consider them important in making an investment decision"); cf. In re Tseng Labs, Inc., No. 93-2756, Fed. Sec. L. Rep. ¶ 99,074, at p. 94,422, 1996 WL 122628 at *7 (E.D. Pa. Mar. 19, 1996) (plaintiffs failed to show that defendant lacked a reasonable basis for his statement when made because, inter alia, "'[o]n its face, the word "expects" limits [a] statement's potential to mislead.'") (quoting Pache v. Wallace, No. 93-5164, Fed. Sec. L. Rep. ¶98,643, 1995 WL 118457, at *3 (E.D. Pa. Mar. 20, 1995, aff'd without op., 72 F.3d 123 (3d Cir. 1995)), aff'd, 107 F.3d 8 (3d Cir. 1997).

²⁶The FDA can reject an NDA if it is incomplete. See 21 C.F.R. § 314.125(b)(4) (1996). It is public knowledge, however, that the Myotrophin NDA has, in fact, been accepted for filing by the FDA and the Advisory Committee will consider it on May 8, 1997.

²⁷The only Cephalon statement cited by plaintiffs is a statement by Dr. Baldino indicating that the marketing opportunity for Myotrophin goes beyond ALS. That comment is unexceptional and the point made has been evident for years.

²⁸Moreover, as defendants pointed out in their opening memorandum, analysts' statements are not attributable to Cephalon unless shown to have been adopted by Cephalon. See e.g., Elkind v. Liggett & Myers, Inc., 635 F.2d 156, 163 (2d Cir. 1980) (a company may be held liable as a primary wrongdoer only if it has so "entangled itself" with an analyst's report that the report may be attributed to the company); Vosgerichian v. Commodore Int'l, 862 F. Supp. 1371, 1378 (E.D. Pa. 1994) (plaintiff had not "alleged facts . . . sufficient to support a primary liability claim under section 10(b)" against an accounting firm even where the misrepresentations at issue were made by a company after it had consulted and been assisted by the accounting firm).

²⁹As stated in defendants' initial memorandum, it would appear from the legislative history of the Reform Act that Congress intended the Reform Act to embody a pleading standard even more stringent than the Second Circuit's. (Def. Mem. at 47-48 & n.14); see also Friedberg, 1997 WL 109228, at *9 n.2 ("In light of the fact that the PSLRA has eliminated recklessness, this Court is of the opinion that [pleading fraud based on] conscious behavior can now only take the form of circumstantial evidence indicating intent to defraud or knowledge of the falsity.").

³⁰Similarly, the Complaint cites to an August 8, 1995 Cephalon press release reporting the company's second quarter results in support of its argument. (Compl. ¶ 68.) That same press release reveals, however, that at the end of the second quarter, Cephalon had $96,810,000 in cash and investments --without the proceeds from the offering. ("Cephalon Reports Second Quarter Results" at 2 (Aug. 8, 1995) (attached hereto as Ex. F.)

³¹As a matter of interest, the BDNF Phase III trial did not demonstrate a statistically significant treatment effect.

³²See also Anderson v. Clow, [1994-1995 Tr. Binder] Fed. Sec. L. Rep. (CCH) ¶ 98,367 at 90,524, 1994 WL 525256, at *16 (S.D. Cal. June 29, 1994) ("'insider trading, standing alone, may not give rise to an inference of scienter'") (citation omitted), aff'd, 89 F.3d 1399 (9th Cir. 1996), cert. denied, 117 S. Ct. 1105 (1997); In re Seagate Technologies II Sec. Litig., [1989 Tr. Binder] Fed. Sec. Law. Rep. (CCH) ¶ 94,502 at 93,204, 1989 WL 222969, at *9 (N.D. Cal. May 3, 1989) ("the fact that corporate insiders sold stock does not in itself state a cause of action under Rule 10b-5"); In re Apple Computer Sec. Litig., 886 F.2d 1109, 1117-18 (9th Cir. 1989)(sale of only a portion of holdings not indicative of scienter), cert. denied, 496 U.S. 943 (1990).

³³As of March 1, 1996, Dr. Baldino owned 414,103 shares and exercisable options, and had another 186,500 unexercisable options. (See Cephalon, 1996 Proxy Statement, Def. Mem. Ex. E, at 25.) Plaintiffs allege that he sold 75,613 shares on June 22, 1995 and 1,875 on August 9, 1995. (Compl. ¶ 61.) The total of number of shares "sold" by Dr. Baldino, 77,488, is 18.7% of 414,103.

³⁴Plaintiffs argue that "sales during one part of a class period demonstrate sufficient motive throughout the class period." (Pl. Mem. at 124-25.) But the cases plaintiffs cite do not support that proposition. In both, there was an independent basis for scienter after the last "insider" sale. In Mallozzi v. Zoll Medical Corp., [Current Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 99,236 (D. Mass. Mar. 5, 1996), "the complaint adequately allege[d] scienter" through July 1994, though the last insider trade was in November 1993, because plaintiffs had, in very specific terms, alleged a series of intentional misstatements of fact after the last trade that could independently support an inference of scienter. Id. ¶ 99,236, at 95,285. In re Regeneron Pharmaceuticals Securities Litigation, [1995 Transfer Binder] Fed. Sec. L. Rep. ¶ 98,637, at 91,913 (S.D.N.Y. Mar. 10, 1995), ruled that plaintiffs produced enough evidence about the existence of scienter to preclude summary judgment where they presented circumstantial evidence of defendants' knowledge plus actual documentary evidence of the motive to raise the stock price for an upcoming offering. Plaintiffs in the case at bar cannot raise an inference of scienter for the period ending June 6, 1996 by reference to Dr. Baldino's transaction in June 1995.

Common sense dictates that an offering by a company or trading by an insider cannot be motivated by an event, in this case the results of the European trial, that is unknown at the time of the offering or trading. If plaintiffs' theory prevailed, insiders and issuers could never trade or issue stock lest their actions be imputed to future events that are not, and could not be, known at the time of the trade or offer. Here, Cephalon's offering or Dr. Baldino's trades cannot demonstrate motive, and hence scienter, with respect to the European trial and post-January 19, 1996 period, because the results of that trial were not unblinded, nor was the analysis begun, until September 1995. Cf. Suna v. Bailey Corp., No. 96-1138, Fed. Sec. L. Rep. (CCH) ¶99,421, 1997 U.S. App. LEXIS 3564, at *19 (1st Cir. Feb. 26, 1997) (affirming trial court's dismissal with prejudice under Rule 9(b) of second amended complaint where, inter alia, "[plaintiffs] offer no factual support for their conclusory allegations that [defendant] knew that . . . production problems would arise at a plant it was not even operating at the time the [allegedly fraudulent] Prospectus was issued").

³⁵Plaintiffs also argue that their allegations of "multiple factors" motivating fraud "combined, demonstrate a strong inference of scienter." (Pl. Mem. at 124.) Combining allegations that, standing alone, do not raise a strong inference of scienter cannot magically create such an inference. See Myles v. Midcom Communications, Inc., No. C96-614D, slip op. at 14 (W.D. Wash. Nov. 19, 1996) ("While the Court recognizes that facts creating a strong inference of scienter will usually come from the complaint as a whole rather than from any single paragraph, it is nonetheless true that if none of the parts raise an inference of scienter then neither does the whole.") (attached hereto as Ex. I).

³⁶Once plaintiffs' federal securities claims are dismissed, the Court has no reason to retain supplementary jurisdiction over plaintiffs' state law claim. 28 U.S.C. § 1367(c); Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343, 350 (1988); Williams v. Discovery Day School, 924 F. Supp. 41, 45 (E.D. Pa. 1996).

I hereby certify that on April 16, 1997, copies of the foregoing Reply Memorandum of Law In Further Support of Defendants' Motion to Dismiss The Consolidated Class Action Complaint and accompanying exhibits were served on the parties listed below:

By Federal Express and Facsimile Mark C. Rifkin, Esquire Greenfield & Rifkin LLP 800 Times Building Ardmore, PA 19003 Marian P. Rosner, Esquire Wolf Popper Ross Wolf   & Jones, L.L.P. 845 Third Avenue New York, New York 10022   By Hand Delivery Sherrie R. Savett, Esquire Berger & Montague, P.C. 1622 Locust Street Philadelphia, PA 19103                 /s/ ___________________________ DAVID J. CREAGAN