Free Motion to Dismiss - District Court of California - California

Case 4:07-cv-04972-CW

Document 24

Filed 03/07/2008

Page 1 of 34

1 MICHAEL L. CHARLSON (Bar No. 122125)
LAURENCE A. WEISS (Bar No. 164638)

2 ALEXANDER M.R. LYON (Bar No. 211274)
HELLER EHRMAN LLP

3 275 Middlefield Road
Menlo Park, California 94025-3506

4 Telephone: (650) 324-7000
Facsimile: (650) 324-0638

5 [email protected]
[email protected]

6 [email protected] 7 Attorneys for Defendants
THRESHOLD PHARMACEUTICALS, INC.,

8 HAROLD E. "BARRY" SELICK
and JANET I. SWEARSON

9 10 11 12

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA OAKLAND DIVISION JERRY TWINDE, On Behalf of Himself and All ) ) ) Plaintiff, ) ) v. ) ) THRESHOLD PHARMACEUTICALS, INC., ) HAROLD E. "BARRY" SELICK and JANET I. ) SWEARSON ) ) Defendants. ) __________________________________________ ) RAYNOLD L. GILBERT, On Behalf of Himself ) and All Others Similarly Situated, ) ) Plaintiff, ) ) v. ) ) THRESHOLD PHARMACEUTICALS, INC., ) HAROLD E. "BARRY" SELICK and JANET I. ) SWEARSON ) ) Defendants. ) Case No.: 4:07-CV-04972-CW CLASS ACTION DEFENDANTS' NOTICE OF MOTION AND MOTION TO DISMISS PLAINTIFFS' CONSOLIDATED AMENDED COMPLAINT FOR VIOLATION OF THE FEDERAL SECURITIES LAWS; MEMORANDUM OF POINTS AND AUTHORITIES IN SUPPORT THEREOF Hearing Date: Hearing Time: Place: Judge: June 12, 2008 2:00 p.m. Courtroom 2, 4th Floor Hon. Claudia Wilken

13 Others Similarly Situated, 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28

DEFENDANTS' MOTION TO DISMISS CASE NO. 4:07-CV-04972-CW

Case 4:07-cv-04972-CW

Document 24

Filed 03/07/2008

Page 2 of 34

1

NOTICE OF MOTION AND MOTION TO DISMISS

2 TO ALL PARTIES AND THEIR COUNSEL OF RECORD: 3
PLEASE TAKE NOTICE THAT on June 12, 2008, at 2:00 p.m., or as soon thereafter as the

4 matter may be heard by the Court, in the Courtroom of the Honorable Claudia Wilken, defendants 5 Threshold Pharmaceuticals, Inc. ("Threshold" or the "Company"), Harold E. "Barry" Selick, and 6 Janet I. Swearson (collectively "Defendants") will and hereby do move the Court, pursuant to Rules 7 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure and provisions of the Private Securities 8 Litigation Reform Act of 1995 (the "PSLRA"), for an order dismissing, with prejudice, each and 9 every purported claim for relief asserted in the Consolidated Amended Complaint for Violation of 10 the Federal Securities Laws (the "Complaint" or "AC"). Defendants' motion is brought on grounds 11 that the Complaint's allegations fail to state a claim upon which relief can be granted and/or are not 12 pled with the particularity required by Rule 9(b) and the PSLRA. Additionally, some of the 13 statements on which Plaintiffs predicate their purported claims are not actionable under the safe 14 harbor provisions of the PSLRA and/or the bespeaks caution doctrine. Finally, certain claims or 15 portions thereof are barred by the relevant statutes of limitation. 16
Defendants' motion is based on this Notice of Motion and Motion, the attached

17 Memorandum of Points and Authorities, the Declaration of Alexander Lyon in Support thereof, the 18 Request for Judicial Notice, all pleadings and papers filed in this action, oral argument of counsel, 19 and any other matters as may come before the Court. 20 21 22 23 24 25 26 27 28 i
DEFENDANTS' MOTION TO DISMISS CASE NO. 4:07-CV-04972-CW

Case 4:07-cv-04972-CW

Document 24

Filed 03/07/2008

Page 3 of 34

1 2
1.

STATEMENT OF ISSUES TO BE DECIDED Whether Plaintiffs' claims under Sections 11 and 12 of the Securities Act of 1933

3 (Counts I and II) and Section 10(b) of the Securities Exchange Act of 1934 (Count IV) fail to state a 4 claim for relief because they do not allege a material misstatement or omission. 15 U.S.C. 5 §§ 77k, 77l, 78u-4(b)(1); Fed. R. Civ. P. 9(b) & 12(b)(6). 6
2. Whether Plaintiffs' claims under Sections 11 and 12 of the Securities Act of 1933

7 (Counts I and II) and Section 10(b) of the Securities Exchange Act of 1934 (Count IV) fail to state a 8 claim for relief because the alleged misstatements are rendered inactionable by the PSLRA's "safe 9 harbor" and/or the "bespeaks caution" doctrine. 15 U.S.C. §§ 77z-2(c), 78u-5(c); Fed. R. Civ. P. 10 9(b) & 12(b)(6). 11
3. Whether Plaintiffs' claim under Section 10(b) of the Securities Exchange Act of

12 1934 (Count IV) fails to state a claim for relief because it does not plead specific facts that give rise 13 to a strong inference that Defendants acted with scienter. 15 U.S.C. § 78u-4(b)(2); Fed. R. Civ. P 14 9(b) & 12(b)(6). 15
4. Whether Plaintiffs' claims under Sections 11 and 12 of the Securities Act of 1933

16 (Counts I and II) and Section 10(b) of the Securities Exchange Act of 1934 (Count IV), or portions 17 thereof, are barred by the statute of limitations. 28 U.S.C. § 1658(b)(1); 15 U.S.C. § 77m; Fed. R. 18 Civ. P 12(b)(6). 19
5. Whether Plaintiffs' "control person" claims under Section 15 of the Securities Act of

20 1933 (Count III) and Section 20(a) of the Securities Exchange Act of 1934 (Count V) fail to state a 21 claim for relief because the Complaint does not adequately allege primary violations of those Acts. 22 15 U.S.C. §§ 77o, 78t; Fed. R. Civ. P 12(b)(6). 23 24 25 26 27 28 ii
DEFENDANTS' MOTION TO DISMISS CASE NO. 4:07-CV-04972-CW

Case 4:07-cv-04972-CW

Document 24

Filed 03/07/2008

Page 4 of 34

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 IV.
D. C. 1. 2. 3. 4. 2. a. b. b. c. d. III. I. II.

TABLE OF CONTENTS Page INTRODUCTION................................................................................................................. 1 FACTUAL BACKGROUND ............................................................................................... 3 A. B. C. The Defendants.......................................................................................................... 3 The FDA's Drug Approval Process. ......................................................................... 5 Threshold's Development Of TH-070 As A Treatment For BPH. ........................... 6

ARGUMENT ........................................................................................................................ 8 A. B. Legal and Pleading Standards Applicable to Defendants' Motion. ........................ 8 The Complaint Should Be Dismissed Because It Fails to Allege Materially False Statements or Omissions. ........................................................ 10 1. The Allegedly Misleading Statements About The Bari Study.................... 11 a. Defendants Disclosed All Relevant Details of the Bari Study. .............................................................................................. 11 Plaintiffs' Bari Study Claims Are Time-Barred.............................. 12 Threshold Never Said the Bari Study Proved Safety and Efficacy..................................................................................... 13 Threshold Fully Disclosed The Specific Risks Relating to FDA Approval of TH-070........................................................... 14

The Alleged Concealment of Liver Toxicity. ............................................. 16 Potential for Liver Toxicity............................................................. 16 Liver Toxicity Reports From Later TH-070 Clinical Trials................................................................................................ 17

Plaintiffs' Misquotations Cannot Support Claims Of Falsity. .................... 19 Section 10(b) Claims Against The Individual Defendants May Not Be Based On Statements They Did Not Make..................................... 20

Plaintiffs' Allegations Do Not Support a Strong Inference of Scienter. ............... 21 Far From Cogent or Compelling, Plaintiffs' Premise is Nonsensical. ................................................................................................ 21 Plaintiffs' Other Scienter Allegations Are Also Insufficient. ..................... 23

The Control Person Claims Fail For Lack Of A Primary Violation ..................... 24

CONCLUSION ................................................................................................................... 25

iii
DEFENDANTS' MOTION TO DISMISS CASE NO. 4:07-CV-04972-CW

Case 4:07-cv-04972-CW

Document 24

Filed 03/07/2008

Page 5 of 34

1 2 3 4 5 6

TABLE OF AUTHORITIES Page

Cases
Abigail Alliance For Better Access to Developmental Drugs v. von Eschenbach, 495 F.3d 695 (D.C. Cir. 2007) ................................................................................................ 5

Bell Atl. Corp. v. Twombly, ---U.S.---, 127 S. Ct. 1955 (2007) ................................................................................. 3, 9, 10 7

8 Berry v. Valence Tech., Inc., 9 10
175 F.3d 699 (9th Cir. 1999)................................................................................................. 12 Branch v. Tunnell, 14 F.3d 449 (9th Cir. 1994)..................................................................................................... 3

11 Collagenex Pharm., Inc. v. Thompson, 2003 U.S. Dist. LEXIS 12523 (D.D.C. 2003)......................................................................... 6 12 13 Cooper v. Pickett,
137 F.3d 616 (9th Cir. 1997)................................................................................................... 3

14 15
DeMarco v. DepoTech Corp., 149 F. Supp. 2d 1212 (S.D. Cal. 2001) ............................................................................. 3, 17

16 Dura Pharm., Inc. v. Broudo, 544 U.S. 336 (2005) .............................................................................................................. 10 17 18 Employers Teamsters Local Nos. 175 and 505 Pension Trust Fund v. Clorox Co., 19 20
Glen Holly Entm't, Inc. v. Tektronix, Inc., 352 F.3d 367 (9th Cir. 2003)................................................................................................. 14 298 F.3d 893 (9th Cir. 2002)................................................................................................... 9 2006 U.S. Dist. LEXIS 28684 (W.D. Wash. 2006) .......................................................... 6, 24 353 F.3d 1125 (9th Cir. 2004)............................................................................................... 14

21 Gompper v. VISX, Inc., 22 23 Heywood v. Cell Therapeutics, Inc., 24 25
In re Apple Computer, Inc. Sec. Litig., 243 F. Supp. 2d 1012 (N.D. Cal. 2002) ................................................................................ 23 132 F. Supp. 2d 833 (N.D. Cal. 2000) ............................................................................ 10, 22

26 In re Autodesk, Inc. Sec. Litig., 27 28 iv
DEFENDANTS' MOTION TO DISMISS CASE NO. 4:07-CV-04972-CW

Case 4:07-cv-04972-CW

Document 24

Filed 03/07/2008

Page 6 of 34

1 In re Bayer AG Sec. Litig., 2 3 4
2004 U.S. Dist. LEXIS 19593 (S.D.N.Y. 2004) ................................................................... 18 In re Calpine Corp. Sec. Litig., 288 F. Supp. 2d 1054 (N.D. Cal. 2003) ................................................................................ 22

In re Carter-Wallace, Inc., (Carter-Wallace I) 150 F.3d 153 (2d Cir. 1998).................................................................................................. 18 5

6 In re Carter-Wallace, Inc., (Carter-Wallace II) 7 8 9
220 F.3d 36 (2d Cir. 2000).................................................................................................... 18 In re Daou Sys. Inc. Sec. Litig., 411 F.3d 1006 (9th Cir. 2005)....................................................................................... 8, 9, 24

In re DNAP Sec. Litig., 2000 U.S. Dist. LEXIS 13482 (N.D. Cal. 2000)................................................................... 17 10

11 In re ESS Tech., Inc. Sec. Litig., 12 13
2004 U.S. Dist. LEXIS 27203 (N.D. Cal. 2004)................................................................... 20 In re Immune Response Secs. Litig., 375 F. Supp. 2d 983 (S.D. Cal. 2005) ................................................................................... 21

14 In re Impax Labs, Inc. Sec. Litig., 2007 U.S. Dist. LEXIS 52356 (N.D. Cal. 2007)................................................................... 24 15 16 In re Infonet Servs. Corp. Sec. Litig.,
310 F. Supp. 2d 1106 (C.D. Cal. 2003)..................................................................... 13, 14, 16

17 18
In re Intrabiotics Pharms., Inc., 2006 U.S. Dist. LEXIS 56427 (N.D. Cal. 2006)............................................................. 17, 19

19 In re Medimmune, Inc. Sec. Litig., 873 F. Supp. 953 (D. Md. 1995) ........................................................................................... 16 20 21 In re NextCard, Inc. Sec. Litig., 22 23
In re Quarterdeck Office Sys., Inc. Sec. Litig., 1992 U.S. Dist. LEXIS 21411 (C.D. Cal. 1992) ................................................................... 19 115 F. Supp. 2d 1181 (N.D. Cal. 2000) ................................................................................ 24 1995 U.S. Dist. LEXIS 22054 (N.D. Cal. 1995)................................................................... 12 2006 U.S. Dist. LEXIS 16156 (N.D. Cal. 2006)................................................................... 20

24 In re Read-Rite Corp. Sec. Litig., 25 26 In re SciClone Pharms. Sec. Litig., 27 28

In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970 (9th Cir. 1999)....................................................................................... 9, 20, 21

v
DEFENDANTS' MOTION TO DISMISS CASE NO. 4:07-CV-04972-CW

Case 4:07-cv-04972-CW

Document 24

Filed 03/07/2008

Page 7 of 34

1 In re Splash Tech. Holdings Secs. Litig., 2 3 4
160 F. Supp. 2d 1059 (N.D. Cal. 2001) ................................................................................ 10 In re Stac Elect. Sec. Litig., 89 F.3d 1399 (9th Cir. 1996)................................................................................................... 9

In re Syncor Int'l Corp. Sec. Litig., 327 F. Supp. 2d 1149 (C.D. Cal. 2004)................................................................................. 21 5

6 In re Worlds of Wonder Sec. Litig., 7 8 9
35 F.3d 1407 (9th Cir. 1994)......................................................................... 11, 14, 15, 21, 22 Lipton v. Pathogenesis Corp., 284 F.3d 1027 (9th Cir. 2002)............................................................................................... 24

Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940 (9th Cir. 2005)................................................................................................. 14 10

11 Miller v. Pfizer Inc., 12 13
196 F. Supp. 2d 1095 (D. Kan. 2002) ................................................................................. 5, 6 Miller v. Thane Int'l, Inc., 508 F.3d 910 (9th Cir. 2007)................................................................................................... 8

14 Noble Asset Mgmt. v. Allos Therapeutics, Inc., 2005 U.S. Dist. LEXIS 24452 (D. Col. 2005) ...................................................................... 14 15 16 Oppenheim Pramerica Asset Mgt. S.A.R.L. v. Encysive Pharm., Inc.,
2007 U.S. Dist. LEXIS 69121 (S.D. Tex. 2007)................................................................... 21

17 18
Oran v. Stafford, 226 F.3d 275 (3d Cir. 2000).................................................................................................. 18

19 Padnes v. Scios Nova Inc., 1996 U.S. Dist. LEXIS 22858 (N.D. Cal. 1996)................................................................... 16 20 21 Papasan v. Allain, 22 23
Parrino v. FHP, Inc., 146 F.3d 699 (9th Cir. 1998)................................................................................................... 3 38 F. Supp. 2d 1158 (C.D. Cal. 1998)................................................................................... 21 38 F. Supp. 2d 816 (C.D. Cal. 1998)..................................................................................... 14 478 U.S. 265 (1986) .............................................................................................................. 10

24 Pegasus Holdings v. Veterinary Ctrs. of America, 25 26 Plevy v. Haggerty, 27 28

Ronconi v. Larkin, 253 F.3d 423 (9th Cir. 2001)................................................................................................. 24

vi
DEFENDANTS' MOTION TO DISMISS CASE NO. 4:07-CV-04972-CW

Case 4:07-cv-04972-CW

Document 24

Filed 03/07/2008

Page 8 of 34

1 Sandoz Pharm. Corp. v. Richardson-Vicks, Inc., 2 3 4
902 F.2d 222 (3d Cir. 1990).................................................................................................... 5 SEC v. Todd, 2006 U.S. Dist. LEXIS 41182 (S.D. Cal. 2006) ................................................................... 17

Shore v. Costello, 1992 U.S. Dist. LEXIS 21784 (N.D. Cal. 1992)................................................................... 20 5

6 Shuster v. Symmetricom, Inc., 7 8 9
1997 U.S. Dist. LEXIS 14007 (N.D. Cal. 1997)................................................................... 17 Smith v. Network Equip. Tech., 1990 U.S. Dist. LEXIS 18391 (N.D. Cal. 1990)................................................................... 21

Southland Sec. Corp. v. Inspire Ins. Solutions, Inc., 365 F.3d 353 (5th Cir. 2004)................................................................................................. 20 10

11 Steiner v. Hale, 12 13
868 F. Supp. 284 (S.D. Cal. 1994) ........................................................................................ 13 Stoneridge Invest. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. ---, 128 S. Ct. 761 (2008) ......................................................................................... 9

14 Tellabs, Inc. v. Makor Issues & Rights, Ltd., ---U.S.---, 127 S. Ct. 2499 (2007) .......................................................................... 3, 9, 21, 23 15 16 Statutes
§ 77m................................................................................................................................ 14 § 77z-2(b)(2)(D)............................................................................................................... 14 § 78j(b) ............................................................................................................................... 8 § 78p................................................................................................................................. 22 § 78u-4(b)(1), (2).......................................................................................................... 9, 23 § 78u-5(b)(2)(D)............................................................................................................... 14 § 78u-5(c) ......................................................................................................................... 14

17 15 U.S.C. §§ 77k, l(a)(2)..................................................................................................................... 8 18 19 20 21

22 21 U.S.C. § 355 ............................................................................................................................... 5, 6 23 21 U.S.C. § 1658 ............................................................................................................................... 13 24 25 Rules
§ 240.10b-5......................................................................................................................... 8 § 240.16a-1(a)(2) .............................................................................................................. 22 § 240.16a-3(a)................................................................................................................... 22

26 17 C.F.R. § 229.403 .......................................................................................................................... 22 27 28

vii
DEFENDANTS' MOTION TO DISMISS CASE NO. 4:07-CV-04972-CW

Case 4:07-cv-04972-CW

Document 24

Filed 03/07/2008

Page 9 of 34

1 21 C.F.R. § 310 ................................................................................................................................... 5 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 viii
DEFENDANTS' MOTION TO DISMISS CASE NO. 4:07-CV-04972-CW

§ 312 ................................................................................................................................... 5 § 312(e) ....................................................................................................................... 23, 24 § 312.20(c) .......................................................................................................................... 5 § 312.21 .............................................................................................................................. 5 § 312.22 .............................................................................................................................. 5 § 312.32(a) ........................................................................................................................ 18 § 312.32(b)-(d).................................................................................................................. 19 § 312.32(e) ........................................................................................................................ 18 § 314 ............................................................................................................................... 5, 6

Case 4:07-cv-04972-CW

Document 24

Filed 03/07/2008

Page 10 of 34

1 2

MEMORANDUM OF POINTS AND AUTHORITIES Defendants Threshold Pharmaceuticals, Inc. ("Threshold" or the "Company"), its CEO

3 Harold E. "Barry" Selick, and its former CFO Janet I. Swearson, move for an order dismissing 4 Lead Plaintiffs' Consolidated Amended Class Action Complaint. 5 I. 6
INTRODUCTION Threshold is a start-up pharmaceutical company, focused on an innovative but unproven

7 approach for treating certain diseased cells such as cancer cells. Scientists had observed that some 8 tumor cells metabolize glucose faster than normal cells. With a technology it called "Metabolic 9 Targeting," Threshold's plan was to exploit this difference to target drug delivery to diseased cells, 10 which was hoped would result in more effective treatment with fewer side effects. One of 11 Threshold's early attempts to employ this new idea was a drug known as TH-070, an apparently 12 promising treatment for a benign prostate condition. The drug failed in clinical development after 13 extensive testing and the expenditure of tens of millions of dollars when a handful of study patients 14 experienced adverse liver reactions and when review of clinical trial data revealed that the 15 treatment was less effective than had been hoped. 16
Plaintiffs say that the failure of TH-070 was in reality a massive securities fraud. Never

17 mind that investors in Threshold's two public offerings (and those in the aftermarket) were 18 provided registration statements literally brimming over with risk disclosures, including specific 19 disclosures of the most basic risk attendant to any investment in a start-up drug company ­ that the 20 proposed drug ultimately might not prove safe or effective and gain commercial marketing approval 21 from the U.S. Food and Drug Administration ("FDA"). Plaintiffs' fraud-by-hindsight allegations 22 attempt to craft a story that, from even before Threshold became a public company, Defendants (a) 23 misrepresented whether an early-phase study of TH-070, the so-called "Bari Study," demonstrated 24 the drug's safety and efficacy, and (b) somehow knew that TH-070 caused adverse liver-related 25 side effects. But the Bari Study was never portrayed as Plaintiffs assert; the allegations about liver 26 toxicity are sheer fantasy unsupported by any facts; and much of what Plaintiffs suggest was hidden 27 from investors was in fact present in the very documents that Plaintiffs selectively quote. 28 1
DEFENDANTS' MOTION TO DISMISS CASE NO. 4:07-CV-04972-CW

Case 4:07-cv-04972-CW

Document 24

Filed 03/07/2008

Page 11 of 34

1

The Bari Study was the subject of detailed disclosures in both complained-of registration

2 statements and elsewhere. There could be no confusion that Bari was a limited proof-of-concept 3 study that was never intended or portrayed as a definitive safety and efficacy clinical trial. 4 Plaintiffs' contrary contention turns the FDA approval process on its head, positing that the safety 5 and efficacy of a new drug is known at the outset. The entire point of the years-long, multi-million6 dollar process for securing FDA approval is to develop clinical data sufficient to demonstrate safety 7 and efficacy. No investor could reasonably have believed TH-070's safety and efficacy was 8 "proved" by the Bari Study, which was disclosed to be a precursor to future clinical trials. 9
Plaintiffs' Bari Study allegations are, however, more fundamentally flawed. There could

10 have been no confusion about the Bari Study because Threshold made the investigator's report of 11 the study publicly available, including through a May 2005 press release with an internet hyperlink 12 to the full report. Any investor could have done precisely what securities analysts did (and 13 separately reported) ­ read the report and see what the study was and was not. Indeed, nearly all of 14 Plaintiffs' criticisms of the Bari study are lifted ­ some verbatim ­ from the report itself. Thus, any 15 material omission from the registration statement for Threshold's initial public offering ("IPO") 16 (and there was none) was revealed no later than May 2005; investors thereafter could not have been 17 misled. And because the study was made public more than two years before Plaintiffs' lawsuit, 18 claims based on supposed misstatements about the Bari Study are time-barred. 19
Plaintiffs' other focus ­ liver toxicity ­ fares no better. The suggestion that TH-070 was

20 known before 2006 to have adverse liver-related side effects is unsupported by facts alleged in the 21 Complaint. And Plaintiffs' contrary assertions ignore that: 22 23 24 25 26 27
would have adverse side effects of the sort first detected in the Spring of 2006. · · · lonidamine, the active compound in TH-070, had been extensively studied and approved by FDA analog agencies in three European countries for treatment of cancer; liver toxicity in humans was not noted as a problem in the numerous studies of lonidamine prior to the TH-070 clinical trials; and the FDA, having been provided the various prior studies of lonidamine, allowed Threshold to proceed with its Investigational New Drug application ("IND") and its Phase 2 and Phase 3 clinical trials.

In short, Plaintiffs allege no facts (because there are none) that anyone knew or suspected TH-070

28 2
DEFENDANTS' MOTION TO DISMISS CASE NO. 4:07-CV-04972-CW

Case 4:07-cv-04972-CW

Document 24

Filed 03/07/2008

Page 12 of 34

1

Under pleading standards recently explicated by the United States Supreme Court, the

2 Complaint falls far short. Stripped of their unsupported innuendo, misquotations and irrelevant 3 surplusage, Plaintiffs' claims lack any semblance of plausibility or cogency. For example, while 4 Plaintiffs do not allege that Threshold misled the FDA, they never explain why, if the Bari Study 5 was so incompetent and TH-070's toxicity so apparent, the FDA allowed the Company's clinical 6 trials to proceed. Plaintiffs never explain why, if Threshold was so aware that TH-070 would never 7 work, it spent tens of millions of dollars on supposedly hopeless clinical trials. And Plaintiffs never 8 explain why Dr. Selick and Ms. Swearson, supposedly aware that TH-070 would never gain FDA 9 approval, held onto every single share of their Threshold stock through the class period and beyond. 10
Far from the "plausible" fact pleading required under Bell Atl. Corp. v. Twombly, ---U.S.---,

11 127 S. Ct. 1955, 1974 (2007), Plaintiffs' theory requires one to assume not only that Defendants 12 were fraudsters, but that they were also willing to endanger human life. Nothing supports this. 13 And it is all the more fantastic because Defendants were apparently so inept with their fraud that 14 they somehow neglected to enrich themselves, while using the money raised from the Threshold 15 stock offerings for precisely the purpose stated in the registration statements ­ the (supposedly 16 doomed) clinical trials. The Complaint lacks allegations of every accepted touchstone for pleading 17 scienter under the PSLRA and comes nowhere close to presenting the "cogent and compelling" 18 inferences required to state a securities fraud claim. See Tellabs, Inc. v. Makor Issues & Rights, 19 Ltd., ---U.S.---, 127 S. Ct. 2499, 2510, 2513 (2007). It must be dismissed. 20 II. 21 22
FACTUAL BACKGROUND1 A. The Defendants

Plaintiffs bring their claims against Threshold and two of its officers. Threshold was

23 founded in 2001 and is focused on the development of drugs using Metabolic Targeting. AC ¶ 23. 24 Threshold told investors in the registration statement for its IPO that investing in Threshold was 25
This section is drawn from the Complaint's allegations, documents referenced in it and facts that the Court may properly consider in deciding this motion. See Branch v. Tunnell, 14 F.3d 26 449, 453-54 (9th Cir. 1994); DeMarco v. DepoTech Corp., 149 F. Supp. 2d 1212, 1217 (S.D. Cal. 27 2001). Where a complaint references only excerpts of a document, the Court may consider the entire text, Cooper v. Pickett, 137 F.3d 616, 623 (9th Cir. 1997), and documents upon which the 28 complaint necessarily relies, though not explicitly referenced in the complaint, are also appropriately considered by the Court. Parrino v. FHP, Inc., 146 F.3d 699, 706 (9th Cir. 1998).
1

3
DEFENDANTS' MOTION TO DISMISS CASE NO. 4:07-CV-04972-CW

Case 4:07-cv-04972-CW

Document 24

Filed 03/07/2008

Page 13 of 34

1 very risky in part because Metabolic Targeting was "an unproven approach to therapeutic 2 intervention" that had not produced an FDA-approved drug. IPO R.S. at 10; 10/05 R.S. at 9.2 3 Among the conditions to which Threshold sought to apply Metabolic Targeting was benign 4 prostatic hyperplasia ("BPH"), sometimes referred to as enlarged prostate. AC ¶ 2. The condition 5 affects some 52 million men in the United States, Europe and Japan, presenting a large potential 6 market. AC ¶ 40. Threshold's lead drug candidate for BPH was TH-070, which the Company was 7 investigating at the time of its February 2005 IPO. AC ¶¶ 29, 63. Threshold raised $38 million in 8 its IPO, id. ¶ 61, and another $62 million in a follow-on offering in October 2005. Id. ¶ 75. 9 Plaintiffs allege that these funds were used to conduct the studies needed to secure FDA approval of 10 TH-070 and its other drug candidates. Id. ¶ 50. 11
Harold E. "Barry" Selick is Threshold's Chief Executive Officer and a director. AC ¶¶ 1,

12 24. He was also a "venture partner" at Sofinnova Ventures, Inc., an early Threshold investor. Id. 13 ¶ 9. Plaintiffs allege that Dr. Selick signed registration statements for Threshold's two stock 14 offerings, id. ¶ 24, that he spoke during two conference calls with investors, id. ¶¶ 71, 87, and that 15 he was quoted in two Company press releases, id. ¶¶ 100, 117. While Plaintiffs allege that he 16 received salary, bonus and stock options from the Company, id. ¶¶ 5, 145-146, Dr. Selick is not 17 alleged to have sold any Threshold stock during the class period. 18
Finally, Defendant Janet I. Swearson is Threshold's former Chief Financial Officer and

19 Vice President ­ Finance and Administration. Id. ¶¶ 2, 25. Plaintiffs allege that she also signed 20 the two registration statements. Id. ¶ 24. Apart from these facts, details about her salary and other 21 compensation, id. ¶¶ 5, 145-146, and that on a conference call with investors she made a statement 22 about Threshold's expenses that Plaintiffs do not challenge, id. ¶ 86, Plaintiffs make literally no 23
2

The exhibits to the concurrently filed Declaration of Alexander Lyon ("Lyon Dec.") are

24 arranged chronologically. The exhibits most frequently cited in this Memorandum are abbreviated
as follows: "IPO R.S." (Ex. A) refers to the registration statement for Threshold's February 2005 refers to the published results of Threshold's early trial of TH-070 in Bari, Italy; "Fortis" (Ex. F)

25 IPO; "5/19/05 P.R." (Ex. C) refers to a May 19, 2005 Threshold press release; "Bari Study" (Ex. D) 26 refers to an analyst report issued by Fortis Bank on September 20, 2005; "10/05 R.S." (Ex. G)
refers to the registration statement for Threshold's October 2005 follow-on offering; "3/1/06 Tr."

27 (Ex. I) refers to the transcript of a March 1, 2006, investor conference call; "5/11/06 P.R." (Ex. K) 28 May 11, 2006, investor conference call; and "7/17/06 P.R" (Ex. N) refers to a July 17, 2006
Threshold press release.

refers to a May 11, 2006 Threshold press release; "5/11/06 Tr." (Ex. M) refers to the transcript of a

4
DEFENDANTS' MOTION TO DISMISS CASE NO. 4:07-CV-04972-CW

Case 4:07-cv-04972-CW

Document 24

Filed 03/07/2008

Page 14 of 34

1 other substantive allegations about Ms. Swearson. Like Dr. Selick, Ms. Swearson is not alleged to 2 have sold any Threshold stock during the class period. 3 4
B. The FDA's Drug Approval Process

Of course, Threshold could not just begin selling TH-070, or even testing it on patients.

5 Before any drug may be sold in the United States, the manufacturer must demonstrate to experts at 6 the FDA that the drug is safe and effective for its intended use. 21 U.S.C. § 355; see also Miller v. 7 Pfizer Inc., 196 F. Supp. 2d 1095, 1101 (D. Kan. 2002). A proposed new drug cannot be presumed 8 safe and effective. Instead, the FDA has a highly regulated, time-consuming and expensive process 9 that a drug company must follow to demonstrate safety and efficacy. See generally Abigail 10 Alliance For Better Access to Developmental Drugs v. von Eschenbach, 495 F.3d 695, 697 (D.C. 11 Cir. 2007); see also 21 C.F.R. Parts 310, 312 & 314 et seq. At each stage, the FDA is involved, 12 reviewing the scientific data and the proposed protocols to ensure that human trials of a proposed 13 new drug are handled safely and that the trials actually yield meaningful data. 14
The process begins with an IND. Miller, 196 F. Supp. 2d at 1101. The IND application is

15 itself a huge submission, including detailed specifications of the proposed new drug, all relevant 16 previous scientific research, and a proposed protocol for conducting human clinical trials. See 21 17 C.F.R. § 312.21-312.22. It is often an iterative process, with the FDA commenting on the 18 application, and the sponsor modifying the proposed protocol to accommodate the FDA's views. 19 Sandoz Pharm. Corp. v. Richardson-Vicks, Inc., 902 F.2d 222, 226 (3d Cir. 1990) (detailing stages 20 of FDA review). A new drug sponsor may not start clinical trials in the United States without 21 giving the FDA 30 days to review and comment on the IND. 21 C.F.R. § 312.20(c). 22
Clinical investigations are generally divided into three phases. 21 C.F.R. §§ 312.21, 312.22.

23 In the first two, studies are conducted to obtain preliminary evidence of a drug's efficacy and 24 safety. Id. Phase 3 studies are permitted only after evidence from earlier phases suggests a drug's 25 effectiveness and are intended to gather additional information about effectiveness and safety 26 sufficient to permit the FDA to evaluate the drug for commercial approval. Id. 27
Only after the clinical trials and other studies specified in the IND appear successful may a

28 drug company submit a New Drug Application ("NDA") asking that the drug be approved for sale. 5
DEFENDANTS' MOTION TO DISMISS CASE NO. 4:07-CV-04972-CW

Case 4:07-cv-04972-CW

Document 24

Filed 03/07/2008

Page 15 of 34

1 Miller, 196 F. Supp. 2d at 1101-02 (citing 21 C.F.R. § 314). A successful NDA must be supported 2 by "full reports of investigations...[showing] whether or not such drug is safe for use, and whether 3 such drug is effective in use." 21 U.S.C. § 355(b)(1)(A). The studies, data submissions, and 4 analysis required to secure FDA approval routinely take years and cost millions of dollars. See 5 Collagenex Pharm., Inc. v. Thompson, 2003 U.S. Dist. LEXIS 12523, at *3 (D.D.C. 2003). The 6 outcome for any particular drug candidate is anything but certain. 7
Because clinical trials are expensive, it is common for drug companies, particularly new

8 companies like Threshold, to raise public funds to conduct the trials. E.g., Heywood v. Cell 9 Therapeutics, Inc., 2006 U.S. Dist. LEXIS 28684, at *4-*5 (W.D. Wash. 2006) ("developmental 10 stage" pharmaceutical company initiated public offering to finance operations during clinical trials). 11 12
C. Threshold's Development Of TH-070 As A Treatment For BPH

At the time of its IPO, Threshold was conducting a Phase 2 clinical trial of TH-070 in Bari,

13 Italy. IPO R.S. at 3. Threshold told investors that TH-070 offered the "potential to treat 14 symptomatic BPH," id. at 3, 48; however, it warned that "[t]he safety and efficacy of TH-070 for 15 the treatment of symptomatic BPH will need to be demonstrated in subsequent trials." Id. at 3. 16
TH-070: The active agent in TH-070 is lonidamine. AC ¶ 37. Lonidamine had been

17 extensively studied and was approved as a treatment for cancer in three European countries in the 18 mid-1980's. Id. ¶¶ 38-39, 69, 103. By the time of the Bari Study, it had been used to treat cancer 19 for nearly two decades and had been the subject of at least 80 studies involving thousands of 20 patients. AC ¶¶ 39, 51. Known side effects of the drug revealed in these myriad studies were 21 specifically disclosed in Threshold's registrations statements. See IPO R.S. at 10; 10/05 R.S. at 9. 22 Liver toxicity was not among them. 23
The Bari Study: The Bari Study of TH-070, which began in 2004, was "the first study on

24 the use of lonidamine in the treatment of symptomatic BPH." Bari Study at 532; Fortis at 11-12. 25 As the Complaint states, and as Threshold disclosed in its IPO registration statement, the trial was 26 designed to be an open-label (i.e., no placebo) study of 30 patients in each of two dosing arms. AC 27 ¶ 52, IPO R.S. at 48. After receiving "promising interim data" from the first patient group, the 28 second group was not enrolled. AC ¶¶ 56-57; IPO R.S. at 48. At the time of its IPO, Threshold 6
DEFENDANTS' MOTION TO DISMISS CASE NO. 4:07-CV-04972-CW

Case 4:07-cv-04972-CW

Document 24

Filed 03/07/2008

Page 16 of 34

1 anticipated that a report of the Bari trial would be published within a few months. AC ¶ 63. 2
Bari Study Results Are Published And Reported By Threshold: This in fact happened: the

3 investigator's report on the Bari Study was published in May 2005, about three months after the 4 IPO. Threshold announced the report's publication, and summarized it, in a press release dated 5 May 19, 2005. 5/19/05 P.R.; see AC ¶ 74 (alleging June 2005 publication). The online version of 6 the press release included a hyperlink to a website where the study report was available. 5/19/05 7 P.R. The report detailed the findings, noting, among other things, that the trial was a "proof of 8 concept" study without a placebo arm. AC ¶ 66; Bari Study at 532. Based on the study's results, 9 the investigator concluded that TH-070 "may be a safe and effective new therapeutic alternative for 10 the treatment of BPH in patients at high risk of disease progression." Id. at 533 (emphasis added). 11 The investigator further reported that TH-070 "was well tolerated, with no significant therapy12 related side effects" and "no significant changes in serum chemistry except for 1 patient who had a 13 transient 3-fold elevation" of certain liver enzymes. Id. at 531; AC ¶ 78(i). 14
Phase 2 And Phase 3 Trials: In Summer 2005, Threshold initiated two new clinical trials

15 of TH-070. AC ¶ 76. Both trials, a Phase 2 study in the United States and a Phase 3 study in 16 Europe, were designed to evaluate TH-070's safety and efficacy. Id. Both were randomized, 17 placebo-controlled, blinded studies. Id. The registration statement for Threshold's follow-on 18 offering included detailed descriptions of these studies. Id. The main goal of the Phase 2 study was 19 to assess the safety of TH-070 and to measure efficacy at different dosages over 28 days of dosing; 20 it was "not designed to demonstrate statistically significant differences in efficacy as compared to 21 placebo." Id. In contrast, the Phase 3 study was "to assess the safety of TH-070 and to assess its 22 efficacy ... compared to placebo." Id. Threshold told investors that "[a]t the completion of this 23 [Phase 3] study, we expect to be able to determine whether [certain dosing of TH-070] is associated 24 with statistically and clinically meaningful differences compared to placebo and if TH-070 is well 25 tolerated in this setting." Id. Threshold disclosed that it expected results from the trials "by the end 26 of 2006." Id. It added, "[w]e expect that further efficacy and safety clinical trials will be necessary 27 to achieve marketing approval." Id. The studies proceeded into 2006. 28
The FDA Partial Clinical Hold: On May 11, 2006, Threshold announced that the FDA had

7
DEFENDANTS' MOTION TO DISMISS CASE NO. 4:07-CV-04972-CW

Case 4:07-cv-04972-CW

Document 24

Filed 03/07/2008

Page 17 of 34

1 placed a "partial clinical hold" on its TH-070 program in response to reports of abnormal liver 2 enzyme levels in six patients. AC ¶ 102. The Company explained that the abnormalities included 3 three "serious adverse events" ("SAEs") reported from the Phase 3 trial in Europe and three 4 additional observations in other trials. 5/11/06 P.R.; AC ¶ 102. Following the FDA's action, 5 Threshold decided to stop dosing subjects (which had been completed in the Phase 2 study anyway) 6 and to review the available data. 5/11/06 Tr. at 3-4; AC ¶ 102. 7
July 17, 2006 Announcement: On July 17, 2006, Threshold announced that its data review

8 showed that the Phase 2 and Phase 3 trials had not achieved their primary efficacy endpoints. 9 7/17/06 P.R.; AC ¶ 117. Based on the safety and efficacy results of the trials, the Company 10 announced that it would discontinue development of TH-070 for BPH. 7/17/06 P.R.; AC ¶ 117. 11 III. 12 13
ARGUMENT A. Legal And Pleading Standards Applicable To Defendants' Motion

Plaintiffs assert claims under Sections 11 and 12(a)(2) of the Securities Act of 1933, 15

14 U.S.C. §§ 77k, 77l(a)(2), and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 15 promulgated thereunder, 15 U.S.C. § 78j(b), 17 C.F.R. § 240.10b-5. Each claim requires Plaintiffs 16 to allege a material misstatement or omission. In re Daou Sys. Inc. Sec. Litig., 411 F.3d 1006, 17 1014, 1027 (9th Cir. 2005); Miller v. Thane Int'l, Inc., 508 F.3d 910, 916 (9th Cir. 2007). Section 18 10(b) claims also require plaintiff to plead each defendant's scienter. Daou, 411 F.3d at 1014-15. 19
The Supreme Court recently underscored that a complaint must be dismissed unless it

20 contains enough facts to state a claim for relief that is "plausible on its face." Bell, 127 S. Ct. at 21 1974. Merely pleading "labels and conclusions, [or] a formulaic recitation of the elements of the 22 cause of action" is insufficient, even under Rule 8. Id. at 1964-65. Rather, a complaint must 23 contain factual allegations that "raise a right to relief above the speculative level." Id. Thus, where 24 a complaint alleges conduct that is equally consistent with both culpability and innocence, the fact 25 that the plaintiff declares it "culpable" is irrelevant and will not suffice to avoid dismissal. Id. at 26 1964-66, 1970-73. 27
Plaintiffs' claims must also comply with the heightened pleading standards of the PSLRA

28 and Rule 9(b). Under the PSLRA, Plaintiffs' Section 10(b) claim "must specify each statement 8
DEFENDANTS' MOTION TO DISMISS CASE NO. 4:07-CV-04972-CW

Case 4:07-cv-04972-CW

Document 24

Filed 03/07/2008

Page 18 of 34

1 alleged to have been misleading [and] the reason or reasons why the statement is misleading...." 2 15 U.S.C. § 78u-4(b)(1). In addition, where (as here) the complaint premises its Section 11 and 12 3 claims on the same conduct as its Section 10(b) claim, the Section 11 and 12 claims must also be 4 pled with particularity. Daou, 411 F.3d at 1027-28; In re Stac Elect. Sec. Litig., 89 F.3d 1399, 5 1404-05 (9th Cir. 1996). Plaintiffs' effort to plead around this rule, see AC ¶ 59, is unavailing. 6 Stac, 89 F.3d at 1405 n.2 ("nominal efforts" to couch pleading in negligence "are unconvincing 7 where the gravamen of the complaint is plainly fraud and no effort is made to show any other basis 8 for the claims levied in the prospectus."). The basis for all of Plaintiffs' claims is that TH-070 was 9 represented to be safe and effective when Defendants knew the opposite to be true ­ that is, that the 10 representations were fraudulent. AC ¶¶ 66, 71, 88-89, 97 101, 108-09, 115-16. 11
In addition to pleading with particularity why the complained-of statements were false when

12 made, Plaintiffs' 10(b) claims must "state with particularity facts giving rise to a strong inference 13 that the defendants acted" with scienter. 15 U.S.C. § 78u-4(b)(2); Daou, 411 F.3d at 1014-15. In 14 the Ninth Circuit, scienter means "deliberately reckless or conscious misconduct." In re Silicon 15 Graphics, Inc. Sec. Litig., 183 F.3d 970, 974 (9th Cir. 1999) (en banc). 16
In its decision last term in Tellabs, the Supreme Court explained that in deciding a motion to

17 dismiss, "a court must consider plausible nonculpable explanations for the defendant's conduct, as 18 well as inferences favoring the plaintiff." Tellabs, 127 S. Ct. at 2510; see also Gompper v. VISX, 19 Inc., 298 F.3d 893, 897 (9th Cir. 2002) (When evaluating scienter, the court "must consider all 20 reasonable inferences to be drawn from the allegations, including inferences unfavorable to the 21 plaintiffs."). The inferences urged by plaintiff must be "cogent" and "at least as compelling as any 22 opposing inference one could draw from the facts alleged." Tellabs, 127 S. Ct. at 2504-05. 23
These pleading standards, and recent Supreme Court pronouncements, reflect a fundamental

24 concern about the societal and monetary costs associated with unwarranted litigation. Bell, 127 S. 25 Ct. at 1966-67; see also Stoneridge Invest. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. ---, 26 128 S. Ct. 761, 772 (2008) ("allow[ing] plaintiffs with weak claims to extort settlements from 27 innocent companies" could raise cost of doing business, and "shift securities offerings away from 28 domestic capital markets."); Tellabs, 127 S. Ct. at 2504 (securities fraud actions "can be employed 9
DEFENDANTS' MOTION TO DISMISS CASE NO. 4:07-CV-04972-CW

Case 4:07-cv-04972-CW

Document 24

Filed 03/07/2008

Page 19 of 34

1 abusively to impose substantial costs on companies and individuals whose conduct conforms to the 2 law"); Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 347 (2005) (concern with "permit[ing] a 3 plaintiff `with a largely groundless claim to simply take up the time of a number of other people, 4 with the right to do so representing an in terrorem increment of the settlement value...."). 5
In evaluating the Complaint's sufficiency, the Court need not accept legal conclusions

6 asserted as "facts." Bell Atlantic, 127 S. Ct. at 1965 (citing Papasan v. Allain, 478 U.S. 265, 286 7 (1986)). Moreover, the Court may consider not only the Complaint's allegations, but also "other 8 sources courts ordinarily examine when ruling on 12(b)(6) motions to dismiss, in particular, 9 documents incorporated into the complaint by reference, and matters of which a court may take 10 judicial notice." Tellabs, 127 S. Ct. at 2509. 11 12
B. The Complaint Should Be Dismissed Because It Fails To Allege Materially False Statements Or Omissions

To the extent the basis for Plaintiffs' claims can be discerned,3 it appears to be (1) that

13 supposed deficiencies in the design or implementation of the Bari Study provided no basis for 14 Defendants to make any optimistic statements about the prospects of TH-070, and (2) that 15 Defendants concealed evidence of liver toxicity. See AC ¶¶ 64-65, 77-78, 82, 92, 94-95, 102-07, 16 111. On examination, however, the Complaint reveals no actual material misstatements or 17 omissions about TH-070. First, all material facts about the Bari Study that Plaintiffs claim were 18 omitted were in fact disclosed. In addition, Threshold's public statements accurately reflected that 19 TH-070 was at the beginning of the FDA's drug approval process; as such, no investor could 20 reasonably have believed that TH-070 had already been proven safe or effective. To the extent 21 Threshold suggested TH-070 was promising, that optimism was qualified with detailed disclosure 22 of specific risks to the drug's development and commercialization, something courts of this Circuit 23 24 25 26 27 28
Plaintiffs' pleading approach ­ repetitively quoting lengthy excerpts of unclear relevance from Threshold's public disclosures (replete with unexplained highlighting), and then vaguely asserting that "[t]aken as a whole" the statements are misleading for multiple reasons ­ violates Rule 8. Numerous courts faced with labyrinthine securities complaints such as this, which "[leave] it up to defendants and the court to try to figure out exactly what the misleading statements are, and to match the statements with the reasons they are false or misleading," have so held. E.g., In re Autodesk, Inc. Sec. Litig., 132 F. Supp. 2d 833, 841-842 (N.D. Cal. 2000) (rejecting complaint with lengthy quotations from press releases and analyst reports); In re Splash Tech. Holdings Secs. Litig., 160 F. Supp. 2d 1059, 1075 (N.D. Cal. 2001) (court and defendants had no obligation to painstakingly compare lengthy quoted passages to lists of possible reasons the passages were false).
3

10
DEFENDANTS' MOTION TO DISMISS CASE NO. 4:07-CV-04972-CW

Case 4:07-cv-04972-CW

Document 24

Filed 03/07/2008

Page 20 of 34

1 have long held to defeat claims under Sections 11, 12, and 10(b). See, e.g., In re Worlds of Wonder 2 Sec. Litig., 35 F.3d 1407 (9th Cir. 1994). Second, Threshold never withheld any material 3 information regarding the risk of, or incidents involving, liver toxicity. 4 5
1. The Allegedly Misleading Statements About The Bari Study

According to Plaintiffs, Defendants' alleged optimistic statements about TH-070's prospects

6 were not justified based on the Bari Study. Plaintiffs complain that the study was too small, see AC 7 ¶¶ 65(a)-(c), 78(a)-(d), that it lacked a placebo control, id. at ¶¶ 65(a)-(b), (d)-(e), 78(a), (c), (e)-(f), 8 and that it was not adequately designed to assess TH-070's safety or efficacy, id at ¶¶ 65(f), 78(g)9 (h). But these assertions are insufficient to allege securities fraud because (1) Defendants disclosed 10 all relevant details about the Bari Study, including precisely the points Plaintiffs complain of; (2) 11 Defendants did so more than two years before Plaintiffs' claims, rendering them time-barred; (3) 12 Plaintiffs mischaracterize Defendants' statements; and (4) Defendants informed investors of the 13 many risks surrounding TH-070 and Threshold with disclosures that negate Plaintiffs' claims under 14 both the "bespeaks caution" doctrine and the PSLRA's safe harbor. 15 16
a. Defendants Disclosed All Relevant Details Of The Bari Study

To begin, Threshold disclosed in great detail both the scope and results of the Bari Study,

17 including the very elements Plaintiffs say were hidden. See IPO R.S. at 48-49. First, the IPO 18 prospectus itself revealed that the Bari Study was "open-label"4 ­ i.e., that the treatment was not 19 concealed from either the doctor or patient and that no placebo was used ­ that it involved only 30 20 patients, that a planned second group of 30 more patients was not enrolled based on "promising 21 interim data," and that the Company had decided "to initiate a registrational program for TH-070 to 22 treat symptomatic BPH in the first half of 2005." See IPO R.S. at 48-49. The IPO registration 23 statement also made clear the preliminary nature of the Bari Study by noting that "[t]he safety and 24 efficacy of TH-070 for the treatment of symptomatic BPH will need to be demonstrated in 25 subsequent trials," id. at 3, and more generally that "[s]uccess in preclinical testing and early 26
"Open-label" is defined as "being or relating to a clinical trial in which the treatment given to each subject is not concealed from either the experimenters or the subject." Merriam-Webster's 28 Online Dictionary, http://www.merriam-webster.com/dictionary/open%20label (last visited March 6, 2008).
4

27

11
DEFENDANTS' MOTION TO DISMISS CASE NO. 4:07-CV-04972-CW

Case 4:07-cv-04972-CW

Document 24

Filed 03/07/2008

Page 21 of 34

1 clinical trials does not ensure that later clinical trials will be successful," id. at 8. 2
Further, Threshold announced the results of the Bari Study in May 2005 (as it had told IPO

3 investors it would), providing investors a hyperlink and URL to a website that had posted the 4 investigator's report itself. 5/19/05 P.R. at 2. Among other things, that report stated: 5 6 7 8
· · · "This is a `proof of concept' study in which, however, a placebo arm was not used." Bari Study at 532; compare AC ¶¶ 52, 66. "the placebo effect ... may elicit misleading results, if not properly corrected for, especially considering the small number of patients and absence of a blind run-in period." Id.; compare AC ¶¶ 53, 66. "50% of the patients were severely symptomatic." Id.; compare AC ¶ 54.

9 Details regarding the scope and results of the Bari Study were reiterated in the registration 10 statement for Threshold's follow-on offering. See 10/05 R.S. at 46-47. 11
Thus, the only thing actually "omitted" from Threshold's disclosures about the Bari Study

12 was Plaintiffs' disparaging characterization of it, which is inactionable because the underlying facts 13 were disclosed. In re SciClone Pharmaceuticals Sec. Litig., 1995 U.S. Dist. LEXIS 22054, at *2714 *28 (N.D. Cal. 1995) (defendants not required to characterize results of clinical trial where 15 disclosures provided adequate information for investors to form conclusions). 16 17
b. Plaintiffs' Bari Study Claims Are Time-Barred

Even if one could conjure some omission from the IPO Registration Statement concerning

18 the Bari Study, any claims based on that supposed omission are time-barred because Threshold 19 actually disclosed the full Bari Study no later than May 19, 2005. As a result of the many 20 disclosures in the IPO prospectus, in the 5/19/05 press release, and in the investigator's report on 21 the Bari Study that was hyperlinked to that press release, the market knew the facts. Berry v. 22 Valence Tech., Inc., 175 F.3d 699, 703 n.4 (9th Cir. 1999).5 Because Plaintiffs' original complaint 23 24 25 26 27 28
Plaintiffs' conclusory allegation that the report on the Bari Study "was little noticed by the market," AC ¶ 74, is belied by an analyst report cited in the Complaint that clearly demonstrates the market's awareness and evaluation of the facts reported: We caution that the [Bari] trial did not include a placebo run-in (the ongoing trials do include such a run-in), and that the sample size was limited (30 patients at day 28; 25 at day 200). However, as a preliminary proof of concept study, we believe it yielded encouraging data. Fortis at 12. In any event, their assertion is irrelevant as Plaintiffs assert a fraud-on-the-market case. See AC ¶¶ 120-27.
5

12
DEFENDANTS' MOTION TO DISMISS CASE NO. 4:07-CV-04972-CW

Case 4:07-cv-04972-CW

Document 24

Filed 03/07/2008

Page 22 of 34

1 was filed more than two years after these disclosures, on July 5, 2007, Plaintiffs' claims based on 2 the supposed omissions about the Bari Study come too late as a matter of law and must be 3 dismissed. See 28 U.S.C. § 1658(b)(1) (Section 10(b) claim must be brought within two years of 4 discovery); 15 U.S.C. § 77m (Section 11 and 12(a)(2) claims must be brought within one year of 5 discovery); In re Infonet Servs. Corp. Sec. Litig., 310 F. Supp. 2d 1106, 1120-21 (C.D. Cal. 2003) 6 (dismissing Section 11, 12(a)(2) and 10(b) claims on limitations grounds). 7 8
c. Threshold Never Said The Bari Study Proved Safety and Efficacy

To read the Complaint, one would think Threshold had raised money by telling investors

9 that the Bari Study proved TH-070's safety and efficacy, and that FDA approval and commercial 10 success were imminent. This is simply untrue, as even a cursory review of Threshold's registration 11 statements and other disclosures make clear. In fact, Threshold said just the opposite, repeatedly 12 explaining that TH-070 was in the early stages of the process and that there remained much clinical 13 work to do ­ statements that deflate Plaintiffs' claim. See Steiner v. Hale, 868 F. Supp. 284, 288 14 (S.D. Cal. 1994) (dismissing claim against drug company where plaintiffs identified no "confident 15 or unqualified statements that the drug would in fact be successful"). 16
Threshold specifically and repeatedly warned that "the safety and efficacy of TH-070 for the

17 treatment of symptomatic BPH will need to be demonstrated in subsequent trials" and that the 18 Company "expect[ed] that further efficacy and safety clinical trials will be necessary to achieve 19 marketing approval." IPO R.S. at 3; 10/05 R.S. at 2, 48. Indeed, after the full report of the Bari 20 Study was released in May 2005, Threshold said that larger, blinded, placebo-controlled clinical 21 trials were needed "to understand the dose response relationship of TH-070 in men with 22 symptomatic BPH" and "to be able to determine whether the administration [of TH-070] is 23 associated with statistically and clinically meaningful differences compared to placebo and if TH24 070 is well tolerated...." 10/05 R.S. at 47-48. Threshold provided detailed descriptions of these 25 planned studies, projecting results by year-end 2006. Id. No investor with these disclosures could 26 have believed that TH-070's safety and efficacy for the treatment of BPH had already been proven, 27 based on the Bari Study or otherwise. 28 13
DEFENDANTS' MOTION TO DISMISS CASE NO. 4:07-CV-04972-CW

Case 4:07-cv-04972-CW

Document 24

Filed 03/07/2008

Page 23 of 34

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

d.

Threshold Fully Disclosed The Specific Risks Relating To FDA Approval Of TH-070

Even if Defendants' statements concerning TH-070's prospects could be characterized as optimistic, they are inactionable as a matter of law under the "bespeaks caution" doctrine and, with respect to statements made after the IPO prospectus, the PSLRA safe harbor provision.6 The bespeaks caution doctrine allows a court to "rule as a matter of law that defendants' forward-looking representations contained enough cautionary language or risk disclosure to protect the defendant against claims of securities fraud." Livid Holdings Ltd. v. Salomon Smith Barney, Inc., 416 F.3d 940, 948 (9th Cir. 2005) (quoting Stac, 89 F.3d at 1408). The doctrine applies when "optimistic projections coupled with cautionary language...affect[] the reasonableness of reliance on and the materiality of those projections." Id. (quoting Worlds of Wonder, 35 F.3d at 1414). In other words, where a company divulges "abundant and specific disclosures regarding the risks [it faces], as opposed to terse, generic statements, the investing public is on notice of these risks and cannot be heard to complain that the risks were masked as mere contingencies." Plevy v. Haggerty, 38 F. Supp. 2d 816, 832 (C.D. Cal. 1998). Dismissal on the pleadings under the bespeaks caution doctrine is granted upon a showing of "sufficient cautionary language or risk disclosure [such] that reasonable minds could not disagree that the challenged statements were not misleading." Id. (quoting Stac, 89 F.3d at 1409) (internal quotation marks omitted). The PSLRA safe harbor, 15 U.S.C. §§ 77z-2(c), 78u-5(c), provides that forward-looking statements are not actionable if they are accompanied by meaningful cautionary language. Employers Teamsters Local Nos. 175 and 505 Pension Trust Fund v. Clorox Co., 353 F.3d 1125, 1132 (9th Cir. 2004). Statements pertaining to the prospects for FDA approval are forward-looking and subject to the safe harbor. Noble Asset Mgmt. v. Allos Therapeutics, Inc., 2005 U.S. Dist. LEXIS 24452, at *26 (D. Col. 2005). This case is the quintessential example of one that must be dismissed under the bespeaks
6

The PSLRA's safe harbor provision does not apply to statements made in connection with an initial public offering, 15 U.S.C. §§ 77z-2(b)(2)(D), 78u-5(b)(2)(D); however the "bespeaks 27 caution" doctrine does apply to Threshold's IPO prospectus. Infonet, 310 F. Supp. 2d at 1091-92 & 1104 n.20. To the extent any of Defendants' challenged statements consisted of generalized 28 statements of optimism or "puffing," they are not actionable because they are not material. Glen Holly Entm't, Inc. v. Tektronix, Inc., 352 F.3d 367, 379 (9th Cir. 2003).

26

14
DEFENDANTS' MOTION TO DISMISS CASE NO. 4:07-CV-04972-CW

Case 4:07-cv-04972-CW

Document 24

Filed 03/07/2008

Page 24 of 34

1 caution doctrine and the PSLRA safe harbor because Threshold repeatedly disclosed the very risks 2 that Plaintiffs suggest were hidden. See, e.g., id. at *23-27 (statements allegedly exaggerating 3 chances of FDA approval not actionable where disclosures put investors on notice that approval 4 was uncertain). Defendants urge the Court to review Threshold's registration statements to see the 5 extensive risk disclosures included in those documents. IPO R.S. at 8-25; 10/05 R.S. at 7-25. A 6 small sample of the risk disclosures includes: 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
· · · · "While we believe that interim results of our Phase 2 trial for TH-070 suggest it may effectively treat symptomatic BPH, there can be no assurance that our registrational program will confirm our interim results, will show that beneficial results of TH-070 will be sustained beyond 28 days, or will lead to regulatory approval." IPO R.S. at 8; see also IPO R.S. at 9-10. "There can be no assurance that our ongoing clinical trials for symptomatic BPH will confirm results from our Phase 2 trial in Italy, will show that beneficial results of TH-070 will be sustained beyond 28 days, or will lead to regulatory approval." 10/05 R.S. at 7; see also 10/05 R.S. at 8. "TH-070...has been investigated by others as a male contraceptive because of its effects on spermatogenesis, fertility and shrinkage of testes in animals. As a consequence, these may be significant side effects that may or may not be reversible in patients treated with TH-070 for BPH. Clinical studies to investigate these side effects can be lengthy and expensive, and may be required prior to additional Phase 3 efficacy studies for TH-070. Furthermore, in clinical trials involving cancer patients at doses significantly higher than the doses of TH-070 currently being investigated for BPH, muscle and testicular pain have been observed. These side effects or others that could be identified in the course of our clinical trials or that may otherwise be associated with our product candidates may outweigh the benefits of our product candidates. Side effects may prevent or delay regulatory approval or limit market acceptance if our products are approved." 10/05 R.S. at 9; see also IPO R.S. at 10. "All of our product candidates are based on Metabolic Targeting, a therapeutic approach that targets fundamental differences in energy metabolism between normal and certain diseased cells. We have not, nor to our knowledge has any other company received regulatory approval for a drug based on this approach. There can be no assurance that our approach will lead to the development of approvable or marketable drugs." 10/05 R.S. at 9; see also IPO R.S. at 10.

22 Threshold's other public disclosures, including the press releases and conference calls cited by 23 Plaintiffs, all included a PSLRA safe harbor disclosure with reference to more extensive disclosures 24 in the Company's SEC filings ­ precisely as the safe harbor contemplates. See, e.g., 5/19/05 P.R. at 25 2-3; 3/1/06 Tr. at 2-3; 5/11/06 P.R. at 2; 5/11/06 Tr. at 2-3. 26
These disclosures negate Plaintiffs' suggestion that Defendants misled investors as to the

27 substantial risks associated with TH-070's development, and investment in Threshold. As a matter 28 of law, they render Defendants' statements non-actionable. See Worlds of Wonder, 35 F.3d at 15
DEFENDANTS' MOTION TO DISMISS CASE NO. 4:07-CV-04972-CW

Case 4:07-cv-04972-CW

Document 24

Filed 03/07/2008

Page 25 of 34

1 1415-21 (prospectus not misleading where it identified the very risks that ultimately undermined 2 the business); Infonet Servs., 310 F. Supp. 2d at 1091-92 (caut