HERBERT SILVERBERG, Derivatively on Behalf of DENDREON CORPORATION, Plaintiff,
MITCHELL H. GOLD, RICHARD F. HAMM, GREGORY T. SCHIFFMAN, MARK W. FROHLICH, SUSAN B. BAYH, RICHARD B. BREWER, GERARDO CANET, BOGDAN DZIURZYNSKI, DAVID L. URDAL, and DOUGLAS G. WATSON, Defendants, and DENDREON CORPORATION, Nominal Defendant.
Submitted: September 10, 2013
Norman M. Monhait, Esq., Carmella P. Keener, Esq., ROSENTHAL, MONHAIT & GODDESS, P.A., Wilmington, Delaware; Jeffrey S. Abraham, Esq., Philip T. Taylor, Esq., ABRAHAM, FRUCHTER & TWERSKY, LLP; Attorneys for Plaintiff.
Raymond J. DiCamillo, Esq., Kevin M. Gallagher, Esq., RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Norman J. Blears, Esq., Michael L. Charlson, Esq., HOGAN LOVELLS U.S. LLP, Palo Alto, California; Robin Wechkin, Esq., HOGAN LOVELLS U.S. LLP, Issaquah, Washington; Attorneys for the Dendreon Defendants.
PARSONS, Vice Chancellor.
This action arises from officers and directors of a biotechnology company selling various percentages of their interests in the company in the fifteen months following the Food and Drug Administration's (FDA) first approval of a drug treatment developed by the company. The derivative plaintiff alleges that the treatment's high upfront cost, combined with its brief administration period and uncertainty in the medical community regarding whether Medicare and private insurers would provide reimbursement for the new treatment, made physicians reluctant to prescribe the drug to patients. According to the plaintiff, the defendant officers and directors knew of the risks that the potential for such physician reluctance posed to the commercial success of the company's new treatment, yet they failed to disclose this risk to investors, even when that risk manifested itself in the form of lower than expected sales. Instead, the plaintiff avers, the defendants used this nonpublic information impermissibly to sell their shares in the company before the risk became known publicly. When the risk was disclosed in connection with the announcement of revised revenue guidance, a precipitous decline ensued in the value of the company's stock. In essence, the plaintiff alleges that the defendants engaged in insider trading in violation of their fiduciary duties to the company. The plaintiff seeks, among other relief, a declaration that the defendants breached their fiduciary duties and disgorgement of all profits that the defendants obtained through their alleged misconduct.
The defendants have moved to dismiss the complaint in its entirety on the grounds that the plaintiff, without sufficient justification, has failed to make demand upon the company's board.
Having considered the parties' briefs and arguments on the motion, I deny the defendants' motion to dismiss.
A. The Parties
Plaintiff, Herbert Silverberg, is a shareholder of Dendreon Corporation ("Dendreon" or the "Company"), and has held Dendreon stock at all times relevant to this action.
Nominal Defendant, Dendreon, is a biotechnology company that develops and commercializes novel therapeutics for cancer patients. The Company's Board of Directors (the "Board") consists of eleven members, only seven of whom have been named as defendants in this action. At the time Plaintiff filed his derivative complaint (the "Complaint"), Dendreon had only one commercially available drug product, Provenge.
Defendant Richard F. Hamm is the Company's former Executive Vice President, General Counsel, and Secretary. Between April 29, 2010 and July 25, 2011 (the "Relevant Period"), Hamm sold approximately 350, 000 shares of the Company stock (62% of his holdings in the Company) for gross proceeds of $17.9 million.
Defendant Gregory T. Schiffman has been an Executive Vice President of the Company since December 2010 and has served as its CFO since December 2006. During the Relevant Period, Schiffman sold approximately 81, 000 shares of the Company stock (24% of his holdings) for gross proceeds of $4 million.
Defendant Mark W. Frohlich has served as Dendreon's Chief Medical Officer since January 2008 and has served in various other roles with the Company since 2005. During the Relevant Period, Frohlich sold approximately 92, 000 shares of the Company stock (34% of his holdings) for gross proceeds of $4.3 million.
Defendant Mitchell H. Gold is the Company's former President and CEO, and has been a director of the Company since 2002. Gold was previously a defendant in a securities fraud action titled McGuire, et al. v. Dendreon Corporation, et. al., No. 07 Civ. 800 (MJP) (W.D. Wa.), an action related to some of the same stock sales at issue in this case. The plaintiffs in that action alleged, among other things, that Gold engaged in improper insider trading. Gold and the other defendants settled the case for $16.5 million in 2010 after the Court found that the insider trading allegations against Gold were pled adequately. During the Relevant Period, Gold sold approximately 670, 000 shares of the Company stock (71% of his holdings) for gross proceeds of $33.1 million.
Defendant Gerardo Canet has served as a Dendreon director since 1996. During the Relevant Period, Canet sold approximately 13, 000 shares of the Company stock (48% of his holdings) for gross proceeds of $500, 000.
Defendant Bogdan Dziurzynski has been a director of the Company since May 2001. During the Relevant Period, Dziurzynski sold approximately 79, 000 shares of the Company stock (74% of his holdings) for gross proceeds of $3 million.
Defendant David L. Urdal served as Dendreon's Chief Scientific Officer from July 1995 until 2011, and has been a director of the Company since 1995. Urdal also was a defendant in the McGuire action and a party to the settlement agreement that was reached there. During the Relevant Period, Urdal sold approximately 252, 000 shares of the Company stock (30% of his holdings) for gross proceeds of $10.2 million.
For purposes of this motion to dismiss only, Defendants have conceded that director Defendants Gold, Canet, Dziurzynski, and Urdal are "interested directors" and that it would have been futile to present them with a demand that the Company pursue the claims alleged in the Complaint.
Defendant Susan B. Bayh has been a director of the Company since July 2003. During the Relevant Period, Bayh sold approximately 56, 000 shares of the Company stock (77% of her holdings) for gross proceeds of $2.9 million.
Defendant Douglas G. Watson has served as a director of the Company since February 2000. During the Relevant Period, Watson sold approximately 36, 000 shares of the Company stock (58% of his holdings) for gross proceeds of $2 million.
Defendant Richard B. Brewer (who together with Gold, Bayh, Canet, Dziurzynski, Urdal, and Watson, I refer to as the "Director Defendants") has served as a director of the Company since February 2004 and has been the Chairman of the Board since June 2004. During the Relevant Period, Brewer sold approximately 4, 000 shares of the Company stock (19% of his holdings) for gross proceeds of $200, 000.
The parties dispute whether Bayh, Watson, and Brewer are "interested" for purposes of determining demand futility. Because four of the Company's directors are not listed as defendants, and because four of the Company's eleven directors are conceded to be "interested, " the issue of whether Silverberg's failure to make demand in this instance was excused depends on this Court deciding that at least two of Bayh, Watson, and Brewer are "interested."
During the Relevant Period, Defendants sold over $70 million worth of Dendreon stock. Over $56 million (or almost 70% of the aggregate proceeds from sales during the Relevant Period) was sold within a day of Provenge receiving FDA approval.Defendants Bayh, Watson, and Brewer made all of their sales of Dendreon stock between April 29 and May 5, 2010. Whether Bayh, Watson, and Brewer are "interested" in this matter depends on the nonpublic knowledge they had, or can be reasonably inferred to have had, at the time of their respective stock sales. Because that knowledge can be gleaned from events that took place both before and after the April 29 to May 5, 2010 stock sale period, the temporal scope of the "Facts" section of this Memorandum Opinion goes beyond events that occurred before May 5, 2010 and spans the entirety of the Relevant Period.
For much of its existence, Dendreon has focused on the development and commercialization of Provenge, a treatment for advanced prostate cancer. Provenge is a unique immunotherapy. Each individual treatment is made for a specific patient by using cells from that patient's own immune system. A single treatment of Provenge is administered in three separate infusions that occur approximately two weeks apart. Thus, a full course of treatment of Provenge is administered over the span of one month, a relatively short treatment period compared with other cancer drugs. On April 29, 2010, after being developed and tested for approximately fifteen years, Provenge received FDA approval for commercial use. Provenge is the Company's first and only FDA-approved drug. The cost of Provenge was set at $93, 000 for a full course of treatment, or $31, 000 per infusion.
2. The reimbursement environment for Provenge
Provenge was sold using a "buy and bill" policy. Under this policy, physicians prescribing Provenge were required to "purchase" the treatment and then receive reimbursement through Medicare, Medicaid, or private insurance companies. Thus, physicians prescribing Provenge were required to assume the financial risk of not having the cost of the drug reimbursed.
Medicare reimbursement is managed by Medicare administrative contractors ("MACs") in fifteen regions across the country. The MACs have contracts with the Centers for Medicare and Medicaid Services ("CMS"), a government agency, which oversees the national Medicare program. Despite working under the national purview of CMS, each MAC sets its own policies for reimbursement. Since launching Provenge, the Company has succeeded in meeting its goals in terms of receiving favorable reimbursement decisions from both CMS and the various MACs. The Company also has been successful in getting favorable reimbursement decisions from private health insurance companies, which make decisions on an individual company basis and are not bound by the positions taken by CMS and the MACs.
3. The Board's Provenge commercialization discussions before April 29, 2010
Provenge achieved a significant milestone on its path to FDA approval on April 14, 2009, when the Company announced that Provenge's "Phase III" clinical trials had yielded favorable survival results. Approximately one month later, on May 13–14, 2009, during a regularly scheduled meeting, the Board was presented with the commercialization plan for Provenge. The commercialization plan called for an initial (or "Beta") site to be established in each MAC region, and for each Beta site to start with one patient. Once Provenge was approved by the FDA, each site would administer the drug to one patient and file a claim for reimbursement from Medicare. The plan anticipated that the Beta site would have to wait at least thirty days for reimbursement. ...