Opinion ID: 3011288
Heading Depth: 2
Heading Rank: 2

Heading: The Withdrawal of Redux and Pondimin

Text: On September 12, 1997, the FDA informed AHP of a survey showing that 92 of 291 fen-phen users had 4 developed heart-valve abnormalities. The next business day, September 15, 1997, AHP announced that it was withdrawing Pondimin and Redux from the market. The same day, AHP issued a press release estimating total lost profits of 14 cents per share for 1997 and 1998 as a result of lost sales of the two drugs, as well as a one-time product withdrawal loss of $200 million to $300 million. On September 15, the day of the withdrawal announcement, the closing price of AHP common stock fell 3 11/16 points, to 73 1/4. On September 16, 1997, a Wall Street Journal article reported that AHP face[s] lawsuits, including one seeking class-action status, from people who claim to have been harmed by the drugs. American Home says it is likely it will face legal action. (App. 103.) Nevertheless, AHP's stock rose slightly for the day. On September 17, 1997, articles in the Wall Street Journal and the New York Times reported that AHP had known about possible heart-valve abnormalities since at least March 1997, and that the company faced substantial personal injury liability exposure. That day, AHP stock suffered a 4 1/4 point decline, to close at 69 15/16. C. AHP's Public Statements During the Class Period. Plaintiffs allege that from March 1, 1997, through September 16, 1997 (the Class Period), AHP made material misrepresentations and omissions regarding the safety of Pondimin and Redux, as well as AHP's knowledge of the heart-valve reports. For example, on March 27, 1997, AHP issued its Annual Report, which contained a statement that Redux, the first prescription weight-loss drug to be cleared by the FDA in more than 20 years, was one of the most successful drug launches ever. (App. 47.) The report contained no reference to either the European or the Mayo data. On April 21, 1997, AHP issued a press release addressing newspaper reports of a death that had been mistakenly attributed to Redux by an FDA official. The press release noted that [s]cientific evidence has shown Redux to be safe and effective when used as indicated. (App. 50.) In addition, in various releases listing Redux and 5 Pondimin's side effects, AHP omitted any mention of heartvalve damage. Plaintiffs also contend that, following the public disclosure of the Mayo data on July 8, 1997, AHP issued further misleading statements that were designed to minimize the impact of that data. Although AHP's statements to the public discussed a possible serious heart valve disorder and an unusual type of serious regurgitant valvular heart disease, AHP failed to disclose that it had been aware of the Mayo data since March 1997, and of the European data since early 1995. (App. 57.) According to plaintiffs, this omission served to materially mislead investors as to AHP's potential exposure to damages from products liability litigation arising out of the two drugs. D. Stock Sales By Individual Defendants. In the period between the March meeting with Mayo and the end of the Class Period, seven of the individual defendants sold a total of $40 million of AHP stock, resulting in profits of $25 million. Plaintiffs allege that these sales were consciously designed to take advantage of AHP's artificially-inflated stock price prior to public disclosure of the heart-valve data. E. The District Court Decision. Plaintiffs filed this securities class action in federal court on September 18, 1997, alleging that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. SS 78j(b) and 78t(a), as well as Rule 10b-5, 17 C.F.R. S 240.10b-5. On January 30, 1998, the plaintiffs filed an Amended Class Action Complaint (the Amended Complaint). Defendants moved to dismiss the complaint, and the District Court granted their motion in its entirety without leave for plaintiffs to amend further. See Oran v. Stafford, 34 F. Supp. 2d 906 (D.N.J. 1999). Finding that plaintiffs had failed to plead any material misstatement or omission under federal securities law, the court noted that on July 8, 1997--halfway through the Class Period--there had been full disclosure of the Mayo 6 data without any appreciable effect on AHP's stock price. As a result, the court concluded, the medical data disclosed by AHP on July 8, 1997 was immaterial as a matter of law. Id. at 911. The court also held that disclosure of the European data and earlier adverse reaction reports would not have materially altered the substance of the July 8 release. In addition, the court held that AHP's failure to disclose when it had first learned of the adverse health data was not a material omission. As to the individual defendants, the District Court held that the Amended Complaint was not pled with sufficient particularity to give rise to the necessary strong inference of scienter required under the PSLRA. Plaintiffs appealed.