Securities Fraud Suit Won’t Stick to Genzyme

(CN) - There is no evidence Genzyme executives intentionally deceived shareholders about its bid to produce the orphan drug Myozyme on a larger scale, the 1st Circuit ruled.

U.S. District Judge George O'Toole presided over the consolidated shareholder class action against Genzyme, which took aim at a series of errors that led to the closure of the drugmaker's plant in Allston, Mass., and seriously delayed approval by the Food and Drug Administration of a license to make its drug Myozyme on a larger scale.

Myozyme is the only drug available for the treatment of Pompe disease, a rare metabolic disorder. Its designation as an orphan drug comes from the fact that pharmaceutical companies like Genzyme would otherwise abandon research of the condition, which affects fewer than 200,000 people in the United States, but for the incentives provided by Congress.

The class would have included anyone who bought shares of Genzyme between October 2007 and November 2009, during which time the company consistently expressed optimism about its application for a license to produce the drug Myozyme in a 2000-liter bioreactor instead of a 160-liter bioreactor. To differentiate the two processes, Genzyme called the drug produced in the larger reactor Lumizyme.

But shareholders said the company kept quiet when it suffered several bioreactor failures, and when the FDA advised the company to make significant changes to its proposed manufacturing process for Lumizyme.

After the third bioreactor failure, Genzyme publicly attributed the failures to the outbreak of a rare virus, a contamination linked to the manufacturing issues previously identified by the FDA.

And in November 2009, the company issued a public notice advising health care providers that vials of all its drugs were found to be contaminated with foreign particles, including steel and non-latex rubber, also because of problems at its Allston plant.

A 2010 lawsuit by the FDA left Genzyme on the hook for a $175 million settlement.

Judge O'Toole nevertheless dismissed the shareholder action, and the Boston-based 1st Circuit affirmed Thursday, finding no evidence that Genzyme executives believed their optimistic statements about Lumizyme's prospects to be misleading.

"The allegations set forth in the complaint fail to convey a cogent and compelling inference of deceitful intent, or reckless disregard of the truth, on the part of defendants," Judge Juan Torruella wrote for the three-judge appellate panel. "Scienter has not been pled, and, accordingly, we affirm the district court's order of dismissal."

Genzye was under no affirmative duty to disclose the bioreactor failures until it discovered their cause, which took several months, but it did inform the market of its tightening product supplies, according to the ruling.

"Under these circumstances, where Genzyme kept the market apprised of supply shortages, we are not compelled to infer that defendants acted with fraudulent intent by taking the time to investigate, and discover, what was essentially unknown to them," the 36-page opinion states.

The panel did, however, note its "discomfort" with O'Toole's refusal to let the shareholders amend their claims.

"We emphatically reiterate that the PSLRA does not require that orders of dismissal be with prejudice," Torruella wrote, abbreviating Private Securities Litigation Reform Act. "This is particularly so in light of the fact that the PSLRA is a tool designed to curb vexatious litigation, not a mechanism for denying bona fide claimants their day in court."

Genzyme was bought by Sanofi-Aventis, a French drugmaker, in 2011 for $20.1 billion.

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