Case Alleging Vanda Pharmaceuticals, Execs Misled Public, Investors Partially Survives Dismissal

On Wednesday Judge Frederic Block of the Eastern District of New York partially denied a motion by Vanda Pharmaceuticals Inc. and four company executives to dismiss a class action that alleged that the defendants knowingly made statements that violated the Securities Exchange Act of 1934 in the marketing of Vanda drugs.

Lead plaintiff Kenneth Gordon argued that biopharmaceutical company Vanda and officials Mihael H. Polymeropoulos, James P. Kelly, Gian Piero Reverberi, and Thomas E. Gibbs made materially misleading and false statements and omissions in the marketing of Vanda drugs Fanapt and Hetlioz, approved by the Food and Drug Administration (FDA) to treat adult schizophrenia and a circadian rhythm disorder predominantly affecting blind individuals, respectively.

Specifically, Gordon claimed that the defendants were promoting Fanapt to children, which was contrary to the FDA’s approval, and that they were marketing Hetlioz to treat conditions other than the specific circadian rhythm disorder, such as more common sleep issues. Gordon also alleged that the company officials prepared false or misleading investor reports.

The defendants moved to dismiss the complaint, arguing that the plaintiff had not sufficiently alleged scienter, material misrepresentations or omissions, or loss causation.

The court agreed that the plaintiff established scienter as to Polymeropoulos and Vanda, shown through the plaintiff’s allegation that Polymeropoulos participated in trainings where Vanda employees were told to market the drugs as treatments outside of what the FDA approved and outside of for whom the drugs are intended to treat.

However, regarding Kelly, Reverberi, and Gibbs, the court found that the plaintiff did not sufficiently allege how these three defendants were involved in the off-label marketing of the drugs, saying that the complainant failed to supply “connective tissue” between the alleged conduct and alleged false statements. The claims against these three individuals were the only to which the court granted dismissal.

The court also found that the plaintiff established the materiality of the alleged misrepresentations or omissions, given that Fanapt sales accumulated “hundreds of millions of dollars” for Vanda during the class period — 40-60% of company revenue during that period, the court explained.

On the loss causation claim, the court sided with the plaintiff, finding that the allegation that information about the purported conduct released in a report by short seller Aurelius Value caused Vanda stock to decline more than 5% met the pleading standard to connect the “relevant economic loss” with a possible “causal connection,” according to the opinion.

The plaintiff is represented by The Rosen Law Firm P.A. The defendants are represented by Paul, Weiss, Rifkind, Wharton & Garrison LLP.