Case 1:13-cv-03116-LGS Document 53 Filed 10/01/13 Page 1 of 40
UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
) ) l3Civ.3116(LGS) IN RE DELCATH SYSTEMS, INC. SECURITIES ) CoccecA. LITIGATION ) AMENDED CLASS ACTION ) COMPLAINT
) JURY TRIAL DEMANDED
Lead Plaintiff the Delcath Systems Group, Inc. ("Plaintiff'), individually and on behalf of all other persons similarly situated, by its undersigned attorneys, for its Amended Class Action
Complaint against defendants, alleges upon personal knowledge as to itself and its own acts, and upon information and belief as to all other matters, based on, inter alia, the investigation conducted by and through its attorneys, which included, among other things: a review of the defendants' public documents; conference calls and announcements made by defendants;
Securities and Exchange Commission ("SEC") filings; wire and press releases published by and regarding Delcath Systems Inc. ("Delcath" or the "Company"); securities analysts' reports and advisories about the Company; and information readily obtainable believes that substantial additional evidentiary support will exist for the after a reasonable opportunity for discovery.
NATURE OF THE ACTION
1. This is a securities fraud class action on behalf of a] purchased or otherwise acquired the securities of Delcath during the period from April 21, 2010 through and including September 13, 2013 (the "Class Period"), seeking to pursue remedies under the Securities Exchange Act of 1934 (the "Exchange Act"). This class action is brought under Sections 10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§ 78j(b) and 78t(a); and SEC
Rule lOb-S promulgated thereunder by the SEC, 17 C.F.R. § 240.1Ob-5. Case 1:13-cv-03116-LGS Document 53 Filed 10/01/13 Page 2 of 40
under Sections 10(b) and 20(a) of the Exchange Act, 15 U.S.C. §§ 78j(b) and 78t(a); and SEC
Rule 10b-5 promulgated thereunder by the SEC, 17 C.F.R. § 240.10b-5.
2. At the outset of the Class Period, Defendants sought approval from the FDA of
Delcath’s New Drug Application (“NDA”) for a chemosaturation system with melphalan (the
“Melblez Kit”) intended for the treatment of patients with cancer of the eye or skin that causes metastases in the liver (referred to as “unresectable ocular or cutaneous melanoma metastatic to the liver”). This was Delcath’s sole potential drug product, and the Company’s fortunes were inexorably linked to obtaining timely approval for its sale.
3. Throughout the Class Period, Defendants issued materially false and misleading statements regarding the Melblez Kit, which misled investors. In particular, Defendants: 1) failed to disclose the severe toxicity caused by treatment with the Melblez Kit which resulted in the deaths of 7% of the patients treated versus zero deaths in the non-drug group during the study; 2) failed to disclose that nearly 24% of the patients treated with the Melblez Kit suffered Serious
Adverse Events; 3) failed to disclose that, after the FDA initially rejected the filing of the
Melblez Kit NDA, the Company refiled the NDA with a different filter (critical to reducing toxicities) without having performed clinical trials thereon; and 4) therefore misled investors regarding the “strength” of the clinical results and severity of the side effects as compared to other treatment options given the foregoing.
4. On February 22, 2011, the Company announced that it had received a “Refusal to
File” letter from the U.S. Food & Drug Administration (“FDA”) for its Melblez Kit NDA.
According to the Company, the letter “requested information involving manufacturing plant inspection timing, product and sterilization validations and additional safety information ... as well as additional statistical analysis clarification.”
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5. Nevertheless, the Company continued to tout the strength of the clinical trial data
and express its confidence in the future of the Melblez Kit even with the substitution of the new
filter, untested on humans, in the resubmitted NDA in 2012.
6. On April 30, 2013, FDA staff published briefing documents ahead of a meeting by the Oncologic Drugs Advisory Committee (“ODAC”) on May 2, 2013. The briefing
documents concluded, among other things, that “substantial evidence of effectiveness in
adequate and well controlled clinical trials utilizing the proposed drug-device combination product and a favorable benefit risk profile is required for approval.” Moreover, the briefing
documents revealed that a staggering 7% of the 122 patients treated with the Melblez Kit died as
a result of the treatment.
7. On this news, Delcath shares declined $0.558 per share or over 40%, to close at
$0.832 per share on April 30, 2013.
8. On May 2, 2013, the Company announced that the ODAC voted 16 to 0 against
approval finding that benefits of treatment with Delcath’s Melblez Kit did not outweigh the risks
associated with the procedure.
9. On this news, Delcath shares declined $0.3326 per share or nearly 42%, to close
at $0.46 per share on May 3, 2013.
10. On September 13, 2013 the Company announced that it had received a Complete
Response Letter (“CRL”) from the FDA declining to approve the Melblez Kit and requesting a
new trial to using overall survival as the primary efficacy outcome measure and which
demonstrates that the clinical benefits of Melblez Kit outweigh its risks. The CRL also required
the Company to conduct a new trial to test the product “the Company intends to market,” i.e., the
Melblez Kit with the new filter, previously untested on humans.
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11. That same day, the Company also announced the termination of Delcath Chief
Executive Officer, Defendant Eamonn P. Hobbs.
12. Delcath shares continued their decline from $0.37 per share to $0.34 cents, a drop of 8.1%.
13. As a result of Defendants’ wrongful acts and omissions, and the precipitous declines in the market value of the Company’s securities, Plaintiff and other Class members have suffered significant losses and damages.
JURISDICTION AND VENUE
14. The claims asserted herein arise under Sections 10(b) and 20(a) of the Exchange
Act, 15 U.S.C. §§ 78j(b) and 78t(a), and SEC Rule 10b-5 promulgated thereunder by the SEC,
17 C.F.R. § 240.10b-5.
15. This Court has jurisdiction over the subject matter of this action pursuant to 28
U.S.C. §§ 1331 and 1337 and Section 27 of the Exchange Act, 15 U.S.C. § 78aa.
16. Venue is proper in this District pursuant to Section 27 of the Exchange Act, 15
U.S.C. § 78aa and 28 U.S.C. § 1391(b). Many of the acts and transactions alleged herein, including the preparation and dissemination of materially false and misleading information, occurred in substantial part in this District.
17. In connection with the challenged conduct, defendants, directly or indirectly, used the means and instrumentalities of interstate commerce, including, but not limited to, the United
States mails, interstate telephone communications and the facilities of the national securities markets.
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PARTIES
18. Plaintiffs purchased Delcath securities during the Class Period, and suffered
damages as a result of the federal securities law violations and false and/or misleading statements
and/or material omissions alleged herein.
19. Defendant Delcath is a Delaware corporation with its principal executive offices
located at 600 Fifth Avenue, 23 rd Floor, New York, New York 10020. Delcath claims to have
developed a system to isolate the liver from the circulatory system and to administer
chemotherapy and other therapeutic agents directly to the liver. This system filters patients’ blood removing most of the harmful chemotherapy agents lessening the side-effects of the
treatment. The aggregate number of shares of Delcath securities outstanding as of March 7,
2011 is approximately 43 million shares. Delcath common stock is listed on the NASDAQ
Stock Market (“Nasdaq”) under the ticker “DCTH.”
20. Defendant Eamonn P. Hobbs (“Hobbs”) was at all relevant times the
Company’s President, Chief Executive Officer (“CEO”) and a director on the Company’s Board
of Directors.
SUBSTANTIVE ALLEGATIONS
Background
21. Delcath is a specialty pharmaceutical and medical device company focused on
oncology. According to the Company’s 10-Ks, from inception, the Company has directed its
research efforts solely towards the development and clinical study of the Melblez Kit. This drug
delivery device is designed to administer high dose chemotherapy and other therapeutic agents to
the liver to treat two types of cancer causing metastases in the liver -- unresectable metastatic
ocular or cutaneous melanoma occurring exclusively or predominantly in the liver -- while
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controlling the systemic exposure of those agents through use of a filter. The device is designed
to first isolate the circulatory system of the liver, infuse the liver with chemotherapeutic agent,
and then filter the highly toxic melphalan from the blood prior to returning it to the patient’s bloodstream. The Melblez Kit system is intended to address many of the limitations of
traditional treatments by permitting the delivery of much higher doses of chemotherapeutic drugs
directly to the liver while minimizing the systemic exposure of such drugs.
22. The device portion of the Melblez Kit consists of clamps, tubes and most
importantly a filter that isolates a patient's liver from rest of the bloodstream. Once the liver is blocked off, it is bathed in very high doses of the chemotherapy melphalan to kill tumors. The
filter is supposed to remove the melphalan from the patient before it can escape the liver, enter
the bloodstream and cause severe side effects or death. The filter is one of the key components
of the device, as the purpose of filtration is to extract melphalan from circulation to reduce
systemic exposure and mitigate the systemic toxicity of melphalan.
The FDA Approval Process for the Melblez Kit
23. Before the Company can market the Melblez Kit in the United States, it has to
obtain FDA approval of the drug and apparatus under a §505(b)(2) New Drug Application
(“NDA”)
24. The FDA requires rigorous scientific testing to ensure that a drug is safe and
effective for its intended use before the Agency will permit it to be marketed in the United
States. Before considering approval of a drug for its indicated use, the Agency requires a
“sponsor” to submit a NDA for consideration, which contains data from clinical trials, preclinical
studies, and manufacturing information that supports the product’s safety and efficacy. 21 U.S.C.
355(b); 21 CFR 314.50(d).
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25. Clinical testing typically involves a three-phase process:
Phase 1 clinical trials are conducted in a small number of volunteers or patients to
assess the early tolerability and safety profile, and the pattern of drug absorption, distribution and
metabolism;
Phase 2 clinical trials are conducted in a limited patient population afflicted with a
specific disease in order to assess appropriate dosages and dose regimens, expand evidence of
the safety profile, and evaluate preliminary efficacy;
Phase 3 larger scale, multicenter, well-controlled clinical trials are conducted on patients with a specific disease to generate enough data to statistically evaluate the efficacy and
safety of the product for approval, as required by the FDA, to establish the overall benefit-risk
relationship of the drug and to provide adequate information for the labeling of the drug.
26. According to FDA regulations, the FDA must be notified no later than 15 days
after learning of a “serious adverse drug experience,” which includes any reaction that is fatal,
life threatening, or requires in-patient hospitalization or prolongs hospitalization. If it is an
“unexpected” reaction, the FDA must be notified by telephone, facsimile transmission, or in
writing, within 7 calendar days of the receipt of that information. A complete written report
must follow within 8 calendar days.
The Melblez Phase III Trial
27. In February 2010, the Company concluded its randomized Phase III multi-center
study of the Melblez Kit. The Phase III clinical trial was subject to the terms and conditions of
the Cooperative Research and Development Agreement (CRADA), between the Company and
the National Cancer Institute (NCI). The Phase III trial was conducted under an FDA Special
Protocol Assessment (SPA) and was conducted at centers throughout the United States.
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28. In the trial, patients were randomly assigned to either receive treatments with
melphalan using the Melblez Kit (the “drug group”), or to receive best alternative care (the
“control group”). Patients assigned to the drug group were eligible to receive up to six cycles of
treatment at approximately four to six week intervals. Patients assigned to the control group were permitted to cross-over into the drug group if they showed signs of disease progression (referred
to as “radiographic documentation of hepatic disease progression”). A majority of the control
group patients did in fact cross over to the drug group. The primary endpoint of the study was
hepatic progression free survival, i.e. , to slow the progression of the metastases in the liver.
Secondary objectives of the study were to determine the response rate, safety, tolerability and
overall survival.
29. Throughout Phase III, the Company used the “Clark filter” (a/k/a Generation 1 or
Gen 1 filter) in the Melblez Kit. This was a change from the “Asahi” filter which had been used
during all of Phase I and a portion of the Phase II trial. The Company conducted bench testing of
the Clark filter (a combination of in vitro testing and what is referred to as “PK parameters”) before using it in the clinical trials. However, that testing failed to uncover critical differences between the Asahi and Clark filters. Ultimately, those differences, which pertained to the
efficiency of the filter at removing toxicities from the blood before returning it to general
circulation in the patient, caused severe reactions in 24% of patients and death in 7% of patients
in the drug group during the trial. There were no deaths in the control group during the trial.
This ultimately led to the FDA Advisory Panel’s decision to recommend rejection of the Melblez
Kit NDA and to the FDA’s issuance of a Complete Response Letter rejecting the NDA and
requesting a new trial.
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The Refusal to File Letter
30. On December 22, 2010, Delcath submitted its §505(b)(2) New Drug Application
(NDA) to the FDA.
31. The FDA refused to accept the application. Less than two months later, on
February 18, 2011 the FDA issued a Refusal to File letter to Delcath informing it of major
deficiencies in its NDA including incomplete information on serious adverse reactions
(hospitalizations, deaths on study), and incomplete quality information (Manufacturing and
Controls).
32. However, when Delcath issued a press release announcing the Refusal to File
letter four days later, on February 22, 2011, it did not mention the missing information regarding
hospitalizations and deaths.
The Second NDA Submission
33. Thereafter, Delcath developed its own filter, the Generation 2 (“Gen 2”) filter,
which it hoped would be more effective at filtering toxicities than the Clark filter. On August 15,
2012, seventeen months after the Refusal to File, Delcath resubmitted the Melblez Kit NDA, purporting to address the missing items identified in the February 18, 2011 Refusal to File letter.
However, although the trial data submitted with the refiled NDA reflected use of the Clark filter,
Delcath sought approval of the device with the Gen 2 filter. Delcath did so without conducting
clinical trials on patients with the new Gen 2 filter (which would have been very costly and time
consuming). Equally important, Defendants never told investors of the implications regarding
the decision to seek approval without testing the altered device on patients.
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The Advisory Panel Meeting
34. Pursuant to FDA regulations, the FDA is authorized to convene an Advisory
Panel consisting of industry experts to opine on the advisability of approval of a NDA. The FDA
exercised this option with respect to the Melblez Kit, and scheduled an ODAC meeting for May
2, 2013 (the “ODAC Meeting”). The Panel’s recommendation is advisory in nature, and the final
decision on whether to approve the Melbelz Kit NDA rests solely with the FDA.
35. On April 30, 2013, in advance of the ODAC Meeting, the FDA Staff published its
Briefing Documents detailing its findings regarding the Melblez Study. Its conclusions were
scathing. The Briefing Documents publicly revealed for the first time that 7% of Phase III study participants treated with the Melblez Kit died. None of the patients that received “best
alternative care” instead of the Melblez Kit died during the trial. Many others treated with the
Melblez Kit suffered severe adverse reactions. The FDA Staff concluded that the Clark filter
used in the Phase III trial did not work well enough. Too many patients experienced severe side
effects, discontinued treatment or died from what appeared to be melphalan-related toxicity.
36. The FDA Staff also took Delcath to task for never conducting a clinical study on
humans of the new, Gen 2 filter. Delcath had merely submitted the Gen 2 filter as a
manufacturing change in the Melblez Kit NDA. The FDA Staff’s Briefing Materials made clear
that it would not consider approval of the Melblez Kit with the Gen 2 filter unless the Company
tested it in a clinical trial.
37. Specifically the Briefing Documents stated:
All eight deaths in clinical trials occurred in patients who received melphalan treatment with the Delcath Hepatic Delivery System containing the Clark filter in the cycle immediately preceding death. These deaths were clustered in four of the 52 filter lots used in Studies 1 and 2.
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In NDA 201848, Delcath has requested to market an iteration of the Delcath Hepatic Delivery System containing a new filter, referred to as the GEN 2 filter. No clinical trial data have been submitted to support the safety or efficacy of this device. A series of in vitro and in vivo animal bridging studies submitted in the application are summarized in table 22 below.
Delcath argues that non-clinical studies are sufficient to support marketing of a device that includes a new filter; however, similar studies did not identify factors which caused the clinically important increase in toxicity seen in the Asahi-to-Clark transition. Therefore, these non-clinical studies are insufficient alone to safely bridge the marketing of a device containing a new filter, and clinical trial safety data are necessary to support an approval. In addition, the impact of a filter change on the efficacy of this drug-device combination product is unknown and its efficacy must be established in a randomized clinical trial.
(Emphasis added).
38. At the ODAC Meeting the FDA Staff conveyed its unequivocal view that the
Melblez Kit caused far more harm than benefit:
The clinical benefit of this antitumor activity is uncertain in light of the trend toward overall survival detriment. We must remember that antitumor activity does not always translate into clinical benefit, which is really what defines efficacy. The risks of Melblez Kit treatment are substantial and life-threatening , and a REMS program cannot eliminate inherent toxicities of Melblez Kit treatment.
ODAC Tr., 284:2-11 (emphasis added).
There are specific, life-threatening adverse reactions of Melblez Kit treatment, and the incidence of deaths due to adverse reactions was 7 percent in the clinical trials. There are also risks of stroke and a heart attack associated with the severe hypotension encountered during the procedure, and the characterization of the cardiac toxicity of Melblez Kit treatment is incomplete due to the lack of routine monitoring of troponin elevation and heart function. Furthermore, the degree and duration of bone marrow suppression is disproportionate to the claimed filtration efficiency of the kit. Other notable risks include hepatic injury, hemorrhage, and gastrointestinal perfusion.
Id. at 293:11-22; 294:1-3.
Overall, 7 percent of the 122 patients in whom Melblez Kit treatment was attempted died as a result of treatment-related adverse reactions. Three deaths occurred due to hepatic failure, and in at least two of these patients, the tumor
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burden was greater than 50 percent of the liver, and the combination of a low hepatic reserve and a high exposure to melphalan may account for the patients' demise. There are 3 patients who died due to bone marrow toxicity, and 2 patients died due to gastrointestinal toxicity.
Id. at 295:8-19.
To summarize, the change in filter manufacturer that occurred during study 2 was associated with a worsening of the observed safety profile of Melblez Kit treatment. The increase in the incidence and severity of adverse reactions was not predicted by PK parameters or by a battery of in vitro tests, as the PK parameters of the two different filtration components appeared technically equivalent based on the limited PK studies that were done. Because of the lack of adequate nonclinical bridging studies that can capture how a change in key component of the device alters the safety profile of the kit, any new iteration of the Delcath Hepatic Delivery System must be supported by adequate and controlled clinical trials demonstrating a favorable benefit/risk profile of the device.
Id. at 309:10-22; 310:1-5.
In addition, in the integrated safety population, treatment with Melblez Kit resulted in a 7 percent incidence of deaths due to adverse reactions; 4 percent incidence of stroke; 2 percent reported incidence of myocardial infarction in the setting of an incomplete cardiac risk assessment; a greater than 70 percent incidence of grade 4 bone marrow suppression with a median time of recovery of greater than 1 week; and an 18 percent incidence of febrile neutropenia, along with the additive risk of hepatic injury, severe hemorrhage, and gastrointestinal perforation.
To conclude, Melblez Kit treatment is associated with antitumor activity. But again, as we must always remember, activity does not always mean clinical benefit. Melblez Kit treatment is associated with fatal and life-threatening adverse reactions that occur despite careful patient selection and extensive pre- and peri-procedural steps to prevent these adverse reactions from happening. Therefore, a REMS 1 program would not be expected to improve the Melblez Kit benefit/risk profile in the postmarket setting.
Id. at 311:12-22; 312:1-12 (Emphasis added).
39. The ODAC Panel agreed with the FDA Staff’s concerns and were similarly
critical in their remarks. For example, Dr. Mikkael Sekeres, stated:
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What's concerning about the device is that we're also seeing what is potentially a detriment in overall survival advantage of 35 percent. And as FDA has pointed out, when you add up the toxic death rate along with serious adverse events, including cerebral vascular events, myocardial infarction, and acute renal failure, it totals 24 percent of patients who either die as a result of this therapy or who have very serious complications. ***
So we have a progression-free survival advantage of 3 months in a limited patient data set. We also have a risk of causing significant, very significant, harm or even death in almost 25 percent of these people immediately. And is that an acceptable risk/benefit analysis? I just can't imagine how I would sit down with a patient and try to walk them through this, and in the end say, "And there's also a risk that actually this may truncate your survival compared to other approaches."
Id. at 399:8-18.
40. Other ODAC members voiced similar concerns.
Dr. Sato:
So therefore, my major concern is significant toxicity compared to the other available treatment in Europe and in United States.
Id. at 374:2-4.
Dr. Hwu:
It is not surprising that the benefit of this local regional therapy could not translate into the benefit of the prolonged survival because there is substantial toxicity associate with this treatment. If you have 7 percent of the death rate and also the 40 percent of the patient that has to discontinue the treatment that because the toxicity, that's close to 50 percent, and it would be very difficult to translate that into the survival benefit.
Id. at 394:7-16.
Dr. Buzdar:
One thing which is very clear and there is no disagreement, that there is some nonsignificant increased risk of death.
And also, the sponsor says these patients had a performance status of A Matter of Record zero. So here these patients were totally asymptomatic. You are treating -- you are adversely affecting their survival, and in some patients, you are changing their lifestyle 180 degrees if a patient develops myocardial infarct, or patient has a
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stroke, or patient perforates the bowel. Even though they might be only for 3 to 5 days in the hospital, but if you have a perforated bowel, you may get antibiotic for 3 to 5 days in the hospital but you may get antibiotic for another 2 weeks or 3 weeks or sometimes 4 weeks, depending what is the infectious organism which was identified. I think the key thing that we have to look at is are we making the patients who were asymptomatic more symptomatic and adversely affecting the survival? Is this something which we need to offer to the patients?
Id. at 397:18-22; 398:1-19.
Over here, quality of life, if you measured by any yardstick, would be worse after the intervention than no intervention because these patients have zero performance status at start, and subsequently some died while you did therapy. They might have lived for another several months. And in the end, you have reduced their lifespan by 35 percent across the board, even though it is not statistically significant. So here we all agree there is no option available. But the option which we are offering to the patient is, we're going to make your quality of life much worse and you may die 35 percent -- your risk is increased by 35 percent of dying before the nature disease does you in.
Id. at 402:14-22; 403:1-6.
Dr. Pazdur:
This level of toxicity -- and here again, we have dealt with many therapies that do not have good options -- but this level of toxicity, where you have a 7 percent death rate, a 4 percent stroke rate, a 2 percent myocardial infarction rate, a 5 percent GI perforation rate, a 6 percent grade 3 to 4 hemorrhage rate, and 70 percent of the patients developing grade 4 neutropenia, is unprecedented as far as the amount of toxicity.
Id. at 405:20-22; 406:1-6.
One of the precedents here, and I think this is to echo what Dr. Buzdar was saying, is do no harm. And that's a basic premise of medicine. We all hope for better therapies here. But our issue here on the table is, are we actually harming people in an attempt to do good?
Id. at 407:5-11.
Ms. Chauhan:
...when a therapy is more toxic than the disease, we have to think very, very carefully about that .
Id. at 408:2-4.
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41. The ODAC Panel voted unanimously, 16-0, against approval of the Melblez Kit.
In so doing, the Panel universally stated that the grave risks here simply and greatly outweighed any benefits.
Defendants’ False and Misleading Statements
42. On April 21, 2010, the Company issued a press release entitled, “Delcath Phase
III Trial Results Exceed Primary Endpoint Expectations.” The press release stated the following in relevant part:
Delcath Systems, Inc., a development stage, oncology-focused, specialty pharmaceutical and medical device company, announced that its Phase III National Cancer Institute (NCI)-led multi-center clinical trial has successfully met the study’s primary endpoint of extended hepatic progression-free survival (hPFS) in patients with melanoma metastases to the liver based on an independently corroborated intent-to-treat analysis. Comparing treatment with the Delcath PHP SystemTM with melphalan to Best Alternative Care (BAC), based on independent core lab review of patient scans, the statistical analysis revealed that the PHP patients had a statistically significant longer median hPFS of 214 days compared to 70 days in the BAC arm (p=0.001). This reflects a 144-day prolongation of hPFS over that of BAC control arm, with less than half the risk of progression and/or death in the PHP group compared to the BAC group (Hazard Ratio = 0.46). *** “We believe that these data support that the Delcath PHP System may provide a significantly better treatment option for patients suffering from melanoma metastases in the liver,” said Eamonn P. Hobbs, President and CEO of Delcath. “With the treatment arm having a median hPFS of more than three-fold that of the control arm, we easily exceeded our expectations of clinical trial success. This is a major step forward in our plan to introduce what we believe is an effective treatment for patients who currently have very few viable options.”
43. The foregoing statements were false and misleading because:
a. While touting the Phase III trial results, Defendants failed to disclose that 7% of
the patients tested has died as result of toxicities associated with the use of the
Melblez Kit, and that at least 24% suffered SAEs;
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b. Defendants’ statements that the Melblez Kit provided a “significantly better
treatment option,” which omitted any mention of the 7% death rate and 24% SAE
rate in the drug group for patients suffering from melanoma metastases in the
liver, misled investors regarding the strength of the trial data and likelihood of
FDA approval.
44. Indicative of the materially misleading nature of the foregoing statements, the following day, buoyed by the Company’s positive representations touting the clinical trial results for Melblez, equity analysts reported a positive outlook for the drug/device. For example, in a
Wedbush Analyst Report, dated April 22, 2010, Wedbush awarded a rating of "Outperform," set a target price of nearly twice its then current share price, and predicted prompt approval of
Melblez by the FDA based on the Company's press release.
45. On June 5, 2010, the Company issued a press release entitled, “Delcath Highlights
Phase III Trial Results Presented at ASCO.” The press release touted the results of the Phase III trial and further stated in relevant part.
"We are obviously very pleased with these results," said Eamonn P. Hobbs, President and CEO of Delcath. " This study supports our belief that chemosaturation via PHP has potential life-extending benefits as a treatment for patients suffering with terminal, metastatic disease in the liver . Our rolling submission to the FDA is underway, and we are extremely excited by the future of this promising new treatment."
(Emphasis added).
46. These statements were false and misleading for the reasons set forth in ¶ 43 supra.
47. Defendants’ misleading statements continued to dupe investors and analysts alike.
A few days later, on June 11, 2010, a Canaccord Analyst Report with a Buy rating on Delcath highlighted management's bullish view on Melblez's prospects, stating:
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Management believes that PHP will receive labeling for both ocular and cutaneous melanoma based on discussion with FDA at the March pre-NDA meeting. Trial investigators reported no treatment result differences between ocular and cutaneous patients.
Management believes the PHP (percutaneous hepatic perfusion) procedure will be embraced by clinicians. Management notes that these liver cancer patients have typically failed medical treatments and are sent to surgical oncologists for management. Our research indicates that the gold standard treatment – surgical resection – can only be performed in ~20% of cases for various reasons. Thus management notes these patients have few, if any options. Anecdotally, management reports that surgeons, oncologists and interventional radiologists after seeing the Phase III data have expressed excitement at the prospects of PHP as a new procedure for their patients with unresectable liver metastases. Management did state that oncologists who are just concerned with delivering pills and IV were not as interested in PHP. The company believes based on its conversations with clinicians that the system will be used off-label for colorectal, primary liver cancer and neuroendicrine patients.
***
Regulatory approval expectations: The company continues to expect to receive FDA approval by mid-2011 ...
(Emphasis added).
48. On June 15, 2010, during a “Business Update Call” with analysts, Defendant
Hobbs stated the following:
First, is progression free survival primary end point enough for potential FDA approval? The answer to this question is yes.
49. The foregoing statements were false and misleading for the reasons set forth in ¶
43 supra. In addition, Defendants misled investors into believing that the progression free survival primary end point sufficed for FDA approval even though it did not. Indeed, this is evidenced by the FDA’s September 13, 2013 Complete Response Letter, described in more detail below, which demanded a new trial with overall survival as the primary end point.
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50. In a July 29, 2010 earnings call for the second quarter of 2010, Defendants once again represented the trial data as “robust” and “excellent,” assuring analysts that confidence levels had increased with regard to the Melblez Kit. Specifically, Defendant Hobbs stated:
I would definitively say our confidence level has increased. With the amount of noise that was associated with the ASCO presentation, we certainly went, we did a deep dive into our database and a deep dive into our future customer base to make sure that all our channel checks were still showing the same. And we came away from that really very, very comfortable, even more comfortable that we had a very robust trial with excellent data...
51. The foregoing statements were false and misleading for the reasons set forth in ¶
43 supra.
52. On December 22, 2010, the Company issued a press release entitled, “Delcath
Completes New Drug Application Submission to the FDA for the Chemosaturation Delivery
System,” which not only announced the filing of the NDA but also referenced the “strength” of its Phase III as a basis for optimism about the approval process. The press release stated in relevant part the following:
"Our team has achieved a significant milestone with the filing of our NDA," said Eamonn P. Hobbs, CEO & President of Delcath Systems. "We believe that our application is comprehensive and complete, and we are optimistic that it will be accepted for review by the FDA. Considering the limitations of current treatment options, we believe the chemosaturation system can offer hope to patients with metastatic melanoma in the liver. We have requested priority review of our NDA by the FDA, which if granted could result in a 6-month review of the application. Priority review is granted by the FDA to those products that address significant unmet medical needs or have the potential to provide significant improvement compared to marketed products. With the strength of our Phase III data , we believe that our application meets the FDA's criteria for priority review."
53. The foregoing statements were false and misleading for the reasons set forth in ¶
43 supra.
54. On February 22, 2011, the Company announced that it had received a “refusal to file” letter from the FDA for its proprietary chemosaturation system. Specifically, the “FDA’s
18 Case 1:13-cv-03116-LGS Document 53 Filed 10/01/13 Page 19 of 40
letter requested information involving manufacturing plant inspection timing, product and sterilization validations and additional safety information ...” The press release did not reveal that the missing “safety information” included toxicity related adverse reactions and deaths occurring during the study. Thereafter, Delcath shares plummeted $4.29 or 38%, to close at
$7.01 per share.
55. However, confirming the misleading nature of management’s assurances regarding the “strength” of the Phase III trial data and that the refusal to file letter would not impede its approval efforts, equity analysts continued to report a positive outlook for the Melblez
Kit. For example, a February 22, 2011 Canaccord Analyst Report stated :
The “refusal to file” decision (details later in this report) is not a referendum on the clinical data or approvability of the system, but instead speaks to the intense scrutiny under which the FDA views NDA filings – namely in terms of logistical and administrative necessities, in which DCTH’s filing clearly fell short. While we are disappointed with the RTF letter in light of management’s bullish sentiment heading into this 60-day decision, we think the company should be able to address the FDA’s requests without the need for any additional clinical work. To wit, from a clinical perspective, we remain optimistic CSS will receive NDA approval, noting the robust data from the Phase III trial in addition to Melpahlan’s orphan drug status. We would accumulate shares at current levels.
56. In the Company’s 10-K for the year ended December 31, 2010, signed by
Defendant Hobbs and filed on March 8, 2011, the Company reiterated its optimism regarding the strength of the Phase III trial data. The 10-K also stated:
The side effects caused by the drug used in our clinical trials, melphalan, are similar to the side effects associated with delivery of melphalan by traditional methods.
57. These statements were false and misleading for the reasons set forth in ¶ 43 supra.
They were additionally false and misleading because the side effects caused by the Melblez Kit during the clinical trial in fact surpassed other available treatments. Indeed, this remained true
19 Case 1:13-cv-03116-LGS Document 53 Filed 10/01/13 Page 20 of 40
even three years later when ODAC Panel member Dr. Pazdur noted that the side effects caused by the Melblez Kit during the Phase III trial were unprecedented:
This level of toxicity -- and here again, we have dealt with many therapies that do not have good options -- but this level of toxicity, where you have a 7 percent death rate, a 4 percent stroke rate, a 2 percent myocardial infarction rate, a 5 percent GI perforation rate, a 6 percent grade 3 to 4 hemorrhage rate, and 70 percent of the patients developing grade 4 neutropenia, is unprecedented as far as the amount of toxicity .
58. During a March 14, 2011 Roth Capital Partners OC Growth Stock Conference,
Defendant Hobbs once again underplayed the importance of the Refusal to File letter and
expressed confidence regarding the prospects for future approval. Specifically, Defendant
Hobbs stated:
So all that being said, we think we are in good shape to weather the current bump in the road that we received with the FDA, which amounts we believe to be a slight delay in FDA approval.
59. These statements were false and misleading for the reasons set forth in ¶¶ 43, 57
supra.
60. Management’s assurances regarding the side effects gave comfort to analysts. An
April 12, 2011 Canaccord Analyst Report stated:
The company believes, based on discussion with FDA, that its revised data submission will be sufficient. We questioned whether there is any risk to the company in revisiting the data. Management does expect to find some additional adverse events but nothing material and, importantly, no different types of AEs. Management also believes, based on discussion with the principal investigators, that all of the necessary data has been captured in the patients’ records and that the investigators have the necessary consent to re-examine those records. (Emphasis added). In June 6, 2011 and August 4, 2011 reports, Wedbush also reiterated its positive view of the Melblez Kit as a result of management statements.
61. On September 23, 2011, the Company issued a press release entitled, “Delcath
Announces Updated Efficacy Results From Phase 3 Trial of Chemosaturation for Melanoma
20 Case 1:13-cv-03116-LGS Document 53 Filed 10/01/13 Page 21 of 40
Metastases in the Liver Presented at European Multidisciplinary Cancer Congress.” The press release reiterated the positive results of the Phase III trial and also stated the following in relevant part:
"The additional 12 months of data and extended survival for a significant percentage of the treated patients confirm our belief that chemosaturation may provide a significantly better option than the few treatments presently available for patients with melanoma metastases in the liver," said Eamonn P. Hobbs, President and CEO of Delcath. "The hepatic PFS, overall PFS and response rate are consistent with past investigator assessments and highly statistically significant. We are encouraged by the data presented in Stockholm today."
62. These statements were false and misleading for the reasons set forth in ¶¶
43, 57 supra.
63. On a November 7, 2011 earnings call for the third quarter of 2011, Defendant
Hobbs expressed confidence regarding the safety data from the Melblez Kit trial. Specifically,
Defendant Hobbs stated:
Based on the new data that has been entered and monitored to-date, our team is gaining more and more confidence about the quality and quantity of the additional safety data being collected. At the end of this process, we are confident that we will be able to present to the FDA the additional safety data in the format that they have requested.
64. These statements were false and misleading for the reasons set forth in ¶¶
43, 57 supra.
65. In its 10-K for the year ended December 31, 2011, filed on March 6, 2012 and signed by Defendant Hobbs, the Company reiterates its statements regarding the strength of the
Phase III data and further states:
Controls Toxicities—Our Phase III clinical trial demonstrated that the Delcath chemosaturation system is capable of extracting on average 72% of the chemotherapy agent administered to the liver, which reduces the exposure of healthy tissue and organs to the effects of these chemotherapeutic agents. ***
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As a result, the Company believes that our clinical research will show the treatment effectively reduces the number of cancer cells in the liver and may help to control the disease in the liver, leading to better clinical outcomes . ***
The side effects caused by the drug used in our clinical trials, melphalan, are similar to the side effects associated with delivery of melphalan by traditional methods.
66. These statements were false and misleading for the reasons set forth in ¶¶
43, 57 supra.
67. On a March 9, 2012 earnings call for the fourth quarter of 2011, Defendant Hobbs
once again represented its conviction that it had addressed all of the issues raised in the “Refusal
to File” letter pertaining to the safety data in response to a question about its pre-NDA meeting
with the FDA. Specifically, Defendant Hobbs stated:
We came out of the meeting with a very good feeling that we had addressed all the RTF issues and had formatted the safety data in a way that was optimized for FDA to understand it and query and audited as efficiently as possible. *** We left that meeting really eager to get the NDA to them. [The FDA] asked us when we were going to file, which is always a good sign and they seemed very eager to get the application.
68. These statements were false and misleading for the reasons set forth in ¶¶
43, 57 supra.
69. Based on management’s statements regarding the strength of the data and the progress of the approval process, equity analysts continued to express optimism about Delcath's
likelihood for gaining FDA approval for the Melblez Kit. For example, in a Cowen and Co.
Analyst Report, dated March 12, 2012, Cowen stated:
Delcath confident on the U.S. NDA re-file. Delcath had a pre-NDA meeting with the FDA on Jan. 12 and received the minutes 30 days later. The management team is very pleased with the outcome and feels that they addressed all the issues
22 Case 1:13-cv-03116-LGS Document 53 Filed 10/01/13 Page 23 of 40
raised by the RTF response from the FDA. Delcath is confident that the NDA re- file is on track and is comfortable with submission by the end of 2Q12.
70. On August 15, 2012, the Company issued a press release entitled, “Delcath
Submits New Drug Application For Proprietary Chemosaturation System To The U.S. Food And
Drug Administration.” The press release indicated to investors that Delcath could obtain approval of Melblez with the Gen 2 filter even though that filter had not been tested in clinical trials. The press release stated the following in relevant part:
"Our team has achieved a significant milestone with the filing of our NDA," said Eamonn P. Hobbs, President and CEO of Delcath Systems. "We believe that our chemosaturation system provides the opportunity to satisfy a high unmet medical need to treat patients with unresectable metastatic melanoma in the liver. We also believe including our Generation 2 filter in the CMC module represents the fastest regulatory review path for the Generation 2 system, and that it is in the best interest of U.S. patients that we accelerate the potential availability of Generation 2."
"We have requested priority review of our NDA by the FDA. Assuming the NDA is accepted and that priority review is granted, our expected Prescription Drug User Fee Act (PDUFA) date would be in February of next year. Based upon the strength of our Phase 1, 2 and 3 data , along with the limited treatment options available for patients with unresectable melanoma metastases in the liver, we believe that our application meets the FDA's criteria for priority review."
71. These statements were false and misleading for the reasons set forth in ¶¶
43, 57 supra. They were additionally false and misleading because they failed to disclose that: 1) the Company had included the Gen 2 filter in the CMC section of the NDA in order to convince the FDA to overlook the high toxicity death and adverse reaction rate caused by the Clark filter during Phase III testing; and 2) there was a high risk the FDA would not approve the Melblez Kit NDA with the Gen 2 filter given that the Gen 2 filter had not undergone clinical testing.
72. On October 15, 2012, the Company issued a press release announcing the FDA’s acceptance of the Melblez Kit NDA.
23 Case 1:13-cv-03116-LGS Document 53 Filed 10/01/13 Page 24 of 40
73. On December 5, 2012, the Company issued a press release entitled,
“Delcath Provides Update on NDA Submission for its Chemosaturation System.” The press release announced that based on its discussions with the FDA it would now limit
the indication for Melblez to unresectable metastatic ocular melanoma given that 90% of
trial participants had ocular melanoma, not cutaneous melanoma. The press release
stated the following in relevant part:
Although the Company's Phase 3 trial demonstrated a very positive signal in patients with liver dominant cutaneous melanoma, based upon a recommendation from the FDA, Delcath has decided to focus the Company's NDA indication on the treatment of patients with unresectable metastatic ocular melanoma in the liver. This decision is primarily due to the fact that 90% of the patients enrolled in the Company's Phase 3 trial had ocular melanoma metastases to the liver and the statistically significant efficacy data generated in the trial for this disease. Additionally, FDA-approved treatment options have evolved significantly for metastatic cutaneous melanoma over the past several years, while treatment options for unresectable metastatic ocular melanoma continue to be lacking. Given these facts, the Company believes that its data in ocular melanoma metastases in the liver, coupled with the large unmet need for treatments for this disease, presents the most compelling case for the Company's NDA. The Company hopes that a timely approval of its Chemosaturation system will represent an important step to bring benefits to those cancer patients afflicted with the disease.
74. These statements were false and misleading for the reasons set forth in ¶¶
43, 57, 71 supra.
75. On March 13, 2013, the Company filed its 10-K for the year ended December 31,
2012, signed by Defendant Hobbs. The 10-K stated in relevant part:
Minimizes Toxicities —Our Phase 3 clinical trial demonstrated that the Generation One version of the CHEMOSAT/Melblez Kit system was capable of extracting on average 72% of the chemotherapy agent administered to the liver, which reduces the exposure of healthy tissue and organs and minimizes the toxic effects of these chemotherapeutic agents. The Generation Two version of the CHEMOSAT/Melblez Kit system has demonstrated reduced systemic toxicities and impact to blood components in initial commercial use.
***
24 Case 1:13-cv-03116-LGS Document 53 Filed 10/01/13 Page 25 of 40
The most advanced application for which the CHEMOSAT/Melblez Kit system was evaluated is treatment of metastatic melanoma in the liver. The CHEMOSAT/Melblez Kit system isolates the liver from the patient’s general circulatory system, allowing for infusion of highly concentrated doses of chemotherapeutic drugs directly to the isolated liver. The CHEMOSAT/Melblez Kit system then captures and diverts the flow of blood exiting the liver, which contains high doses of chemotherapeutic agents. The blood passes through proprietary filters located outside of the body that remove the majority of the chemotherapeutic agents from the blood before reintroducing it to the patient’s general circulatory system. The chemotherapeutic agent remaining in the bloodstream after filtration is a fraction of the infused drug, resulting in manageable toxicities.
***
The side effects caused by the drug used in our clinical trials, melphalan, are similar to the side effects associated with delivery of melphalan by traditional methods.
76. These statements were false and misleading, and lacked a reasonable basis for the reasons set forth in ¶¶ 43, 57, 71 supra.
The Truth Fully Emerges
77. On April 30, 2013, FDA staff published briefing documents on its website for the
Company’s Melblez Kit for the upcoming ODAC meeting on May 2, 2013. The briefing documents concluded the following in relevant part:
Substantial and severe toxicity was identified in all three trials with a toxic death rate of 7%. FDA-identified toxic deaths consisted of hepatic failure (n=3), gastrointestinal hemorrhage (n=1), streptococcal sepsis in the setting of bone marrow failure (n=1), bone marrow failure (n=1), gastric perforation (n=1), and hemorrhagic brain lesions in the setting of bone marrow failure and neutropenic fever (n=1). The serious adverse reactions arising from Melblez Kit treatment were severe hypotension during treatment procedure (despite patients receiving vigorous pretreatment hydration and aggressive vasopressor support during the
procedure), prolonged and severe marrow suppression in ? 80% of patients, Grade 3-5 infections in 23%, Grade 3-5 hemorrhage in 6%, Grade 3-4 elevations in transaminases or bilirubin in ≥ 20%, gastrointestinal perforation or ulceration due to reflux of melphalan into the gastrointestinal branches of the hepatic artery, and severe electrolyte abnormalities requiring close monitoring post-procedure.
25 Case 1:13-cv-03116-LGS Document 53 Filed 10/01/13 Page 26 of 40
During the clinical development program of the Melblez Kit, an increase in the risk of serious and fatal toxicities was identified following device modifications involving the hemoperfusion filter cartridge component. In exploratory safety analyses, the FDA medical officer identified clinically important differences in the adverse reaction profile in subgroups treated with the devices containing one of the two hemoperfusion filter cartridges in clinical trials. Based on additional exploratory analyses, there appear to be lot-by-lot differences in the risk of fatal adverse reactions. It is FDA’s conclusion that differences in the clinical adverse reaction profile were not predicted by bench testing and that Delcath has not identified the critical quality attributes correlate with the changes in the incidence and severity of clinically important adverse reactions. Until the critical quality attributes are defined and validated, FDA will require clinical testing to support approval of modifications of the device for changes in the hemoperfusion filter cartridge component, to characterize the risks of such changes *** Deaths Due To Treatment Related Adverse Reactions Overall, 7% of the 122 patients in whom Melblez Kit treatment was attempted died as a result of treatment related adverse reactions. ***
There are unavoidable, life-threatening risks of hypotension-associated stroke and myocardial infarction, bone marrow suppression, hemorrhage, hepatic failure, and gastrointestinal perforation associated with Melblez Kit treatment. Despite careful selection of patients and rigorous training of those who performed the procedure in the clinical trials, there was a high treatment related mortality rate that in the best-case scenario would be replicated in the post marketing setting. Although the proposed REMS may assure that new treatment teams will be taught the procedure and be properly certified, there is no basis for concluding that the outcomes will be superior to those observed in clinical trials, that is, that the adverse reaction profile will be better. The REMS program is designed to mitigate the severe risks of Melblez Kit treatment but cannot be expected to eliminate toxicities inherent to this treatment. In addition to the serious risks identified in the review of this application, it is important to include the number of days that the patient is expected to be hospitalized in determining the risk-benefit profile.
78. The FDA Staff also made clear in its briefing materials that it would not approve the Melblez Kit with the new Gen 2 filter unless Delcath conducted another clinical trial:
In NDA 201848, Delcath has requested to market an iteration of the Delcath Hepatic Delivery System containing a new filter, referred to as the GEN 2 filter.
26 Case 1:13-cv-03116-LGS Document 53 Filed 10/01/13 Page 27 of 40
No clinical trial data have been submitted to support the safety or efficacy of this device...
Delcath argues that non-clinical studies are sufficient to support marketing of a device that includes a new filter; however, similar studies did not identify factors which caused the clinically important increase in toxicity seen in the Asahi-to- Clark transition. Therefore, these non-clinical studies are insufficient alone to safely bridge the marketing of a device containing a new filter, and clinical trial safety data are necessary to support an approval. In addition, the impact of a filter change on the efficacy of this drug-device combination product is unknown and its efficacy must be established in a randomized clinical trial.
***
The substantial increase in the incidence and severity of the adverse reactions seen in patients treated with the Melblez kit using the Clark filter as compared to the Asahi filter was not predicted by the battery of in vitro tests or by the limited PK data collected in the clinical trials.
FDA concludes that other, unidentified factors caused the increase in toxicity observed in the change from Asahi to Clark filters. Therefore, any new filter introduced as a new component of the device (Delcath Hepatic Delivery System) for this combination product must be evaluated in a clinical trial in order to have confidence in the safety profile of that iteration of the Melblez Kit. (emphasis added).
79. Realizing this likely meant game over for the Melblez Kit, investors sent Delcath shares plummeting $0.558 per share or over 40%, to close at $0.832 per share on April 30, 2013.
80. On May 2, 2013, the Company announced that the ODAC Panel voted 16 to 0 with no abstentions against approval finding that the benefits of treatment with Delcath’s
Melblez Kit did not outweigh the risks associated with the procedure.
81. On this news, Delcath shares declined $0.3483 per share or over 44%, to close at
$0.4443 per share on May 3, 2013.
27 Case 1:13-cv-03116-LGS Document 53 Filed 10/01/13 Page 28 of 40
82. Thereafter, on June 26, 2013, Delcath announced plans to reduce its U.S. work force by another 20% and named a new head of its both its global and research and development operations. As of that date, Delcath had 92 employees.
83. On September 13, 2013, the Company issued a press release announcing its receipt of a Complete Response Letter from the FDA declining to approve the Melblez Kit.
Specifically, the press release stated:
A CRL is issued by the FDA when the review of a file is completed and questions remain that precludes approval of the NDA in its current form. The FDA comments included a statement that Delcath must perform another "well- controlled randomized trial(s) to establish the safety and efficacy of Melblez Kit using overall survival as the primary efficacy outcome measure," and which "demonstrates that the clinical benefits of Melblez Kit outweigh its risks." In addition to the FDA requirement to conduct an additional clinical trial(s) using the product the Company intends to market, Delcath is evaluating the other requirements contained in the letter, and will review potential regulatory paths forward with the FDA.
84. That same day, the Company issued another press release announcing that “The employment of Eamonn P. Hobbs as President and Chief Executive Officer with the Company was terminated as of September 10, 2013.”
85. As a result, Delcath shares continued their decline from $0.37 per share to $0.34 cents, a drop of 8.1%.
ADDITIONAL SCIENTER ALLEGATIONS
86. Defendants’ knowledge or reckless disregard of the risks inherent in the Melblez
Kit NDA is evidenced by the following:
(a) Throughout the Class Period, Delcath employed less than 100 employees
(according to 10-Ks Delcath filed, it had 17 employees as of December 31, 2009;
47 employees as of December 31, 2010; 80 employees as of December 31, 2011,
28 Case 1:13-cv-03116-LGS Document 53 Filed 10/01/13 Page 29 of 40
and 92 employees as of December 31, 2012). As three members of Delcath’s core
management in such a small company, the compelling inference is that Defendant
Hobbs knew about the high incidence of deaths and toxicity related side effects
during the trial as a result of the transition to the Clark filter;
(b) The Melblez Kit was the Company’s only product so the Company’s financial
future depended upon getting the Melblez Kit NDA resubmitted and approved;
(c) Defendants knew that approval depended on proving to the FDA that the benefits
of the Melblez Kit outweighed the harm it caused, including severe adverse
reactions and deaths;
(d) Defendants knew that after switching from the Asahi filter to the Clark filter,
patients treated with the Melblez Kit in the Phase III portion of the clinical trial
experienced a whopping 7% death rate along with a host of other toxicity related
severe adverse reactions resulting in hospitalizations (whereas no deaths were
experienced in the traditional treatment arm);
(e) Defendants knew that the FDA’s refusal in 2011 to permit filing of the first
Melblez NDA was because of missing safety data including hospitalizations and
deaths on study;
(f) Defendants were aware of, and so concerned about the considerable toxicities
resulting from use of the Melblez Kit with the Clark filter, that they sought to
substitute the new Gen 2 filter for approval in the NDA despite having done no
clinical testing thereon for purposes of the NDA resubmitted in 2012;
29 Case 1:13-cv-03116-LGS Document 53 Filed 10/01/13 Page 30 of 40
(g) Defendants knew there was a high risk the FDA would not approve the Melblez
Kit with the Gen 2 filter because the FDA unequivocally requires rigorous clinical
testing of drugs and devices before it will consider approval of a NDA;
(h) As set forth in more detail below, in briefing materials made available prior to an
Oncologic Drug Advisory Committee (“ODAC”) meeting, and at the ODAC
meeting itself, FDA staff made clear that the FDA would not entertain approval of
the Gen 2 filter as part of the Melblez Kit absent a clinical trial to test that filter,
particularly because, as Defendants well knew, in vitro testing had previously
failed to detect critical differences in the efficiency of the Clark filter (used in part
of Phase II and all of Phase III) versus the Asahi filter (used in Phase I and part of
Phase II), yet the Clark filter had resulted in significantly higher deaths and SAEs
than anticipated from the in vitro risk profile. As such, there was no reasonable
basis for Defendants to believe that the FDA would simply accept yet another
substituted filter (the Gen 2) on the assumption that it would reduce the toxicities
experienced with the Clark filter);
(i) Defendants knew, or recklessly disregarded, that the resubmitted NDA showed a
risk profile that did not justify any minimal benefit that the Melblez kit conferred.
87. Defendants’ knowledge or reckless disregard of the risks inherent in the Melblez
Kit NDA is further evidenced by the statements of Confidential Witnesses:
(a) Confidential Witness (“CW”) 1, was a Research Development Technician in
Delcath’s Research and Development Department at the Queensbury, NY facility
from August 2010 to January 2013. CW1 reported to Tom Delcourt, Senior
Product Development Engineer. According to CW1, employees from the Quality
30 Case 1:13-cv-03116-LGS Document 53 Filed 10/01/13 Page 31 of 40
and Regulatory departments expressed frustration to CW1 about Defendant
Hobbs’ decision not to conduct additional clinical trials using the Gen 2 filter in
the Melblez kits prior to submitting the NDA to the FDA. CW1 stated that they
were being pushed by upper management because they wanted to get the NDA
through as quickly and cheaply as possible. Though the internal regulatory staff
recommended a trial for the Gen 2 filter, management would not consider it
because it cost too much money. According to CW1, upper management “tried to
pull a fast one over the FDA” and were thinking they wouldn’t need to do a
clinical trial because of the Gen 2 filter if they simply represented it as an
improvement over the Gen 1 filter;
(b) CW2 was a Senior Director of Global Reimbursement and Health Economics for
Delcath Systems from May 2010 to April 2011. CW2 worked at the New York
headquarters and reported to Agustin Gago, the Executive Vice President of
Global Sales. Gago reported to CEO Eamonn P. Hobbs. CW2 told CW2’s
superiors at Delcath, Agustin Gago, the Executive Vice President of Global Sales,
John Purpura, EVP of Regulatory Affairs; and Dr. Krishna Kandarpa, the EVP of
Research and Development, that the Company should conduct additional trials
using the Gen 2 filter or medical directors would not agree to use it. Purpura told
CW2 that they would have to take the issue up with Defendant Hobbs because
“everything we did had to get the CEO’s blessing.” Both CW2 and CW2’s
superiors knew that for Delcath to conduct a costly new clinical trial, Defendant
Hobbs would have to raise more money;
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(c) CW3, a Senior Manager of Regulatory Affairs at Delcath from March 2012 to
October 2012, reported to Mikhail Yefimenko, Senior Director, Regulatory
Affairs. According to CW3, the Company should have conducted a new trial to
test the Gen 2 filter given that it was such a substantial change to the kit.
However, CW3 noted that Defendant Hobbs would not agree to any suggestion to
conduct a new trial given the cost and time required. CW3 also stated that
Defendant Hobbs would not want to conduct a new trial because of how investors
would react to a decision to disregard the data from the previous trial and start
again;
(d) CW4, a Senior Vice President of Marketing and Sales at Delcath from November
2010 to July 2011, expressed similar concern over the Company’s decision not to
test the Gen 2 filter on humans. Indeed, CW4 stated that CW4 left Delcath
because CW4 did not agree with the Company’s decision not to test the Gen 2
filters in clinical trials with humans before attempting to sell it in their Melblez
Kit.
CLASS ACTION ALLEGATIONS
88. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil
Procedure 23(a) and (b)(3) on behalf a Class of all persons who purchased or acquired Delcath securities during the Class Period (the “Class”). Excluded from the Class are defendants herein, the officers and directors of the Company, at all relevant times, members of their immediate families and their legal representatives, heirs, successors or assigns, and any entity in which defendants have or had a controlling interest.
32 Case 1:13-cv-03116-LGS Document 53 Filed 10/01/13 Page 33 of 40
89. The members of the Class are so numerous that joinder of all members is
impracticable. Throughout the Class Period, Delcath securities were actively traded on the
Nasdaq. While the exact number of Class members is unknown to Plaintiff at this time and can be ascertained only through appropriate discovery, Plaintiff believes that there are thousands of
members in the proposed Class. Record owners and other members of the Class may be
identified from records maintained by Delcath or its transfer agent and may be notified of the pendency of this action by mail, using the form of notice similar to that customarily used in
securities class actions.
90. Plaintiff’s claims are typical of the claims of the members of the Class as all
members of the Class are similarly affected by defendants’ wrongful conduct in violation of
federal law that is complained of herein.
91. Plaintiff will fairly and adequately protect the interests of the members of the
Class and has retained counsel competent and experienced in class and securities litigation.
Plaintiff has no interests antagonistic to or in conflict with those of the Class.
92. Common questions of law and fact exist as to all members of the Class and predominate over any questions solely affecting individual members of the Class. Among the
questions of law and fact common to the Class are:
a. whether the federal securities laws were violated by defendants’ acts as alleged herein; b. whether statements made by defendants to the investing public during the Class Period misrepresented material facts about the business and prospects of Delcath; c. whether defendants acted knowingly or recklessly in issuing false and misleading financial statements; d. whether the prices of Delcath securities during the Class Period were artificially inflated because of the defendants’ conduct complained of herein; and
33 Case 1:13-cv-03116-LGS Document 53 Filed 10/01/13 Page 34 of 40
e. whether the members of the Class have sustained damages and, if so, the proper measure of damages.
93. A class action is superior to all other available methods for the fair and efficient
adjudication of this controversy since joinder of all members is impracticable. Furthermore, as
the damages suffered by individual Class members may be relatively small, the expense and burden of individual litigation make it impossible for members of the Class to individually
redress the wrongs done to them. There will be no difficulty in the management of this action as
a class action.
94. Plaintiff will rely, in part, upon the presumption of reliance established by the
fraud-on-the-market doctrine in that:
• defendants made public misrepresentations or failed to disclose material facts during the Class Period;
• the omissions and misrepresentations were material;
• Delcath securities are traded in efficient markets;
• the Company’s shares were liquid and traded with moderate to heavy volume during the Class Period;
• the Company traded on the Nasdaq, and was covered by multiple analysts;
• the misrepresentations and omissions alleged would tend to induce a reasonable investor to misjudge the value of the Company’s securities; and
• Plaintiff and members of the Class purchased and/or sold Delcath securities between the time the defendants failed to disclose or misrepresented material facts and the time the true facts were disclosed, without knowledge of the omitted or misrepresented facts.
Based upon the foregoing, Plaintiff and the members of the Class are entitled to a presumption of
reliance upon the integrity of the market.
34 Case 1:13-cv-03116-LGS Document 53 Filed 10/01/13 Page 35 of 40
CLAIMS FOR RELIEF COUNT I (Against All Defendants For Violations of Section 10(b) And Rule 10b-5 Promulgated Thereunder)
95. Plaintiff repeats and realleges each and every allegation contained above as if
fully set forth herein.
96. This Count is asserted against defendants and is based upon Section 10(b) of the
Exchange Act, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder by the SEC.
97. During the Class Period, defendants engaged in a plan, scheme, conspiracy and
course of conduct, pursuant to which they knowingly or recklessly engaged in acts, transactions, practices and courses of business which operated as a fraud and deceit upon Plaintiff and the
other members of the Class; made various untrue statements of material facts and omitted to state
material facts necessary in order to make the statements made, in light of the circumstances
under which they were made, not misleading; and employed devices, schemes and artifices to
defraud in connection with the purchase and sale of securities. Such scheme was intended to,
and, throughout the Class Period, did: (i) deceive the investing public, including Plaintiff and
other Class members, as alleged herein; (ii) artificially inflate and maintain the market price of
Delcath securities; and (iii) cause Plaintiff and other members of the Class to purchase Delcath
securities at artificially inflated prices. In furtherance of this unlawful scheme, plan and course
of conduct, defendants, and each of them, took the actions set forth herein.
98. Pursuant to the above plan, scheme, conspiracy and course of conduct, each of the
defendants participated directly or indirectly in the preparation and/or issuance of the quarterly
and annual reports, SEC filings, press releases and other statements and documents described
above, including statements made to securities analysts and the media that were designed to
35 Case 1:13-cv-03116-LGS Document 53 Filed 10/01/13 Page 36 of 40
influence the market for Delcath securities. Such reports, filings, releases and statements were
materially false and misleading in that they failed to disclose material adverse information and
misrepresented the truth about Delcath’s finances and business prospects.
99. By virtue of their positions at Delcath, defendants had actual knowledge of the
materially false and misleading statements and material omissions alleged herein and intended
thereby to deceive Plaintiff and the other members of the Class, or, in the alternative, defendants
acted with reckless disregard for the truth in that they failed or refused to ascertain and disclose
such facts as would reveal the materially false and misleading nature of the statements made,
although such facts were readily available to defendants. Said acts and omissions of defendants
were committed willfully or with reckless disregard for the truth. In addition, each defendant
knew or recklessly disregarded that material facts were being misrepresented or omitted as
described above.
100. Information showing that defendants acted knowingly or with reckless disregard
for the truth is peculiarly within defendants’ knowledge and control. As the senior managers
and/or directors of Delcath, the Individual Defendants had knowledge of the details of Delcath
internal affairs.
101. The Individual Defendants are liable both directly and indirectly for the wrongs
complained of herein. Because of their positions of control and authority, the Individual
Defendants were able to and did, directly or indirectly, control the content of the statements of
Delcath. As officers and/or directors of a publicly-held company, the Individual Defendants had
a duty to disseminate timely, accurate, and truthful information with respect to Delcath’s only product- the Melblez Kit. As a result of the dissemination of the aforementioned false and
misleading reports, releases and public statements, the market price of Delcath securities was
36 Case 1:13-cv-03116-LGS Document 53 Filed 10/01/13 Page 37 of 40
artificially inflated throughout the Class Period. In ignorance of the adverse facts concerning the
Melblez Kit which defendants concealed, Plaintiff and the other members of the Class purchased
Delcath securities at artificially inflated prices and relied upon the price of the securities, the
integrity of the market for the securities, and/or upon statements disseminated by defendants and
were damaged thereby.
102. During the Class Period, Delcath securities were traded on an active and efficient
market. Plaintiff and the other members of the Class, relying on the materially false and
misleading statements described herein, which the defendants made, issued or caused to be
disseminated, or relying upon the integrity of the market, purchased shares of Delcath securities
at prices artificially inflated by defendants’ wrongful conduct. Had Plaintiff and the other
members of the Class known the truth, they would not have purchased said shares, or would not
have purchased them at the inflated prices that were paid. At the time of the purchases by
Plaintiff and the Class, the true value of Delcath securities were substantially lower than the prices paid by Plaintiff and the other members of the Class. The market price of Delcath
securities declined sharply upon public disclosure of the facts alleged herein to the injury of
Plaintiff and Class members.
103. By reason of the conduct alleged herein, defendants knowingly or recklessly,
directly or indirectly, have violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.
104. As a direct and proximate result of defendants’ wrongful conduct, Plaintiff and
the other members of the Class suffered damages in connection with their respective purchases
and sales of the Company’s securities during the Class Period.
37 Case 1:13-cv-03116-LGS Document 53 Filed 10/01/13 Page 38 of 40
COUNT II (Violations of Section 20(a) of the Exchange Act Against The Individual Defendants)
105. Plaintiff repeats and realleges each and every allegation contained in the foregoing paragraphs as if fully set forth herein.
106. During the Class Period, the Individual Defendants participated in the operation and management of Delcath, and conducted and participated, directly and indirectly, in the conduct of Delcath’s business affairs. Because of their senior positions, they knew the adverse non-public information about Delcath’s misstatement of income and expenses and false financial statements.
107. As officers and/or directors of a publicly owned company, the Individual
Defendants had a duty to disseminate accurate and truthful information with respect to the
Melblez Kit, and to promptly correct any public statements issued by Delcath which had become materially false or misleading.
108. Because of their positions of control and authority as senior officers, the
Individual Defendants were able to, and did, control the contents of the various reports, press releases and public filings which Delcath disseminated in the marketplace during the Class
Period concerning the Melblez Kit. Throughout the Class Period, the Individual Defendants exercised their power and authority to cause Delcath to engage in the wrongful acts complained of herein. The Individual Defendants therefore, were “controlling persons” of Delcath within the meaning of Section 20(a) of the Exchange Act. In this capacity, they participated in the unlawful conduct alleged which artificially inflated the market price of Delcath securities.
109. By reason of the above conduct, the Individual Defendants are liable pursuant to
Section 20(a) of the Exchange Act for the violations committed by Delcath.
38 Case 1:13-cv-03116-LGS Document 53 Filed 10/01/13 Page 39 of 40
PRAYER FOR RELIEF
WHEREFORE, Plaintiff demands judgment against defendants as follows:
A. Determining that the instant action may be maintained as a class action under Rule 23 of the Federal Rules of Civil Procedure, and certifying Plaintiff as the Class representative;
B. Awarding compensatory damages in favor of Plaintiff and the other class members against all Defendants, jointly and severally, for all damages sustained as a result of
Defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;
C. Awarding Plaintiff and the other members of the Class prejudgment and post-judgment interest, as well as their reasonable attorneys' fees, expert fees and other costs; and
D. Awarding such equitable, injunctive or other relief as this Court may deem just and proper.
DEMAND FOR TRIAL BY JURY
Pursuant to Rule 38(b) of the Federal Rules of Civil Procedure, Plaintiff hereby demands trial by jury of all issues that may be so tried.
Dated: September 18, 2013 Respectfully Submitted, POMERANTZ GROSSMAN HUFFORD DAHLSTROM & GROSS, LLP
By: Marc)/ ross JaspkS. Cowart Tamar. A. Weinrib 600 Third Avenue, 20th Floor New York, New York 10016 Telephone: (212) 661-1100 Facsimile: (212) 661-8665
39 Case 1:13-cv-03116-LGS Document 53 Filed 10/01/13 Page 40 of 40
POMERANTZ GROSSMAN HUFFORD DAHLSTROM & GROSS, LLP Patrick V. Dahlstrom 10 South LaSalle Street, Suite 3505 Chicago, IL 60603 Phone: 312-377-1181 Fax: 312-377-1184
BRONSTEIN GEWIRTZ & GROSSMAN LLP Peretz Bronstein 60 E. 42nd Street, Suite 4600 New York, New York 10165 Telephone: (212) 697-6484 Facsimile: (212) 697-7296
Counsel for Plaintiff
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