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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) January 21, 1998
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CENTOCOR, INC.
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(Exact name of registrant as specified in its charter)
Pennsylvania 0-11103 23-2117202
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(State or other (Commission file (IRS Employer
jurisdiction of number) Identification No.)
incorporation)
200 Great Valley Parkway, Malvern, Pennsylvania 19355
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (215) 651-6000
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Not applicable
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(Former name or former address, if changed since last report)
Item 5. Other Events.
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On January 19, 1998, a shareholder of Registrant filed a complaint in the
United States District Court for the Eastern District of Pennsylvania naming
Registrant and David P. Holveck, chief executive officer, as defendants and
claiming a violation of the federal securities laws. In the complaint,
plaintiff seeks to represent a class of those who purchased the stock of
Registrant between December 2, 1997 and December 16, 1997, inclusive, and
charges the defendants with having made false and misleading statements in
connection with earnings forecasts. Plaintiff seeks an order awarding damages
and costs, including counsel fees. Copies of the complaint and Registrant's
press release with regard thereto are filed as exhibits to this Form 8-K.
Item 7. Financial Statements and Exhibits.
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(c) Exhibits:
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(99.1) Press release, dated January 20, 1998.
(99.2) Complaint, Surgener v. Centocor, Inc. et al.,
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C.A. No. 98-260, filed January 19, 1998 (E.D. Pa).
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
CENTOCOR, INC.
Registrant
Dated: January 21, 1998 By: /s/ George D. Hobbs
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George D. Hobbs, Vice President,
Corporate Counsel and
Secretary
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NEWS RELEASE
FOR IMMEDIATE RELEASE CONTACTS:
Bill Newbould (610) 651-6122
Paul Wulfing (610) 889-4422
CENTOCOR RESPONDS TO SHAREHOLDER COMPLAINT
MALVERN, Pa., January 20, 1998 -- Centocor, Inc. (Nasdaq: CNTO) announced today
that a complaint was filed by a shareholder on January 19, 1998 in the United
States District Court for the Eastern District of Pennsylvania naming Centocor
and David P. Holveck, chief executive officer, as defendants and claiming a
violation of the federal securities laws. Plaintiff seeks to represent a class
of those who purchased Centocor stock between December 2, 1997, and December 16,
1997, inclusive, and charges defendants with having made false and misleading
statements in connection with earnings forecasts.
Centocor and Holveck believe the allegations in the complaint are without merit
and intend vigorously to defend them.
Centocor's mission is to develop and commercialize novel therapeutic and
diagnostic products and services that solve critical needs in human health care.
The company concentrates on research and development, manufacturing and market
development, with a primary technology focus on monoclonal antibodies and DNA-
based products.
ANY STATEMENTS RELEASED BY CENTOCOR THAT ARE FORWARD LOOKING ARE MADE PURSUANT
TO THE SAFE HARBOR PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. INVESTORS ARE CAUTIONED THAT FORWARD LOOKING STATEMENTS INVOLVE RISKS AND
UNCERTAINTIES WHICH MAY AFFECT THE COMPANY'S BUSINESS AND PROSPECTS, INCLUDING
ECONOMIC, COMPETITIVE, GOVERNMENT, TECHNOLOGICAL AND OTHER FACTORS DISCUSSED IN
THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.
# # #
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UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF PENNSYLVANIA
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FRED SURGENER, :
individually and on behalf of : CIVIL ACTION
all those similarly situated, : NO. 98-260
:
Plaintiffs, :
:
v. : CLASS ACTION COMPLAINT
:
CENTOCOR, INC. and :
DAVID P. HOLVECK, : JURY TRIAL DEMANDED
:
Defendants. :
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CLASS ACTION COMPLAINT
Plaintiff, by his attorneys, alleges upon information and belief, based in
part on the investigation conducted by his counsel, except as to those
paragraphs relating to plaintiff, his transaction in the stock of Centocor, Inc.
("Centocor" or the "Company") and his suitability to serve as a class
representative, which are alleged on personal knowledge, as follows:
JURISDICTION AND VENUE
1. The claims asserted herein arise under and pursuant to Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 (the "Exchange Act") [15 U.S.C.
(S)(S) 78j(b) and 78t(a)], Rule 1Ob-5 promulgated thereunder by the Securities
and Exchange Commission (the "SEC") [17 C.F.R. (S) 240.1Ob-5], and common law.
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2. This Court has jurisdiction of this litigation pursuant to (S) 27 of
the Exchange Act, as amended [15 U.S.C. (S) 78aa], and 28 U.S.C. (S)(S) 1331,
1337 and 1367.
3. Venue is properly laid in this District pursuant to (S) 27 of the
Exchange Act and 28 U.S.C. (S) 1391(b) and (c). The acts, conduct, and scheme
complained of herein, including the preparation, issuance and dissemination of
materially false and misleading information to the investing public, occurred in
part in this District.
4. In connection with the acts, conduct, and scheme alleged in this
Complaint, defendants, directly and indirectly, used the means and
instrumentalities of interstate commerce, including the mails and telephonic
communications and the facilities of the national securities exchanges.
PARTIES
5. Plaintiff Fred Surgener purchased Centocor common stock during the
Class Period, as set forth more fully on the accompanying certification, and was
damaged thereby.
6. Defendant Centocor, a Pennsylvania corporation, maintains its principal
offices and corporate headquarters at 200 Great Valley Parkway, Malvern, PA
19355-1307. Defendant Centocor develops and manufactures therapeutic and
diagnostic health care products based on monoclonal antibodies technology for
cardiovascular, autoimmune and infectious diseases and cancer. Currently,
Centocor derives virtually all of its revenues from sales of ReoPro, which
Centocor markets through an agreement with
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Eli Lilly and Company ("Lilly"). Centocor derives a small amount of revenues
from sales of Panorox which Centocor markets through an agreement with Glaxo
Wellcome PLC ("Glaxo"). Avakine for the treatment of Crohn's disease and
rheumatoid arthritis is one of Centocor's most significant prospective drugs.
7. Defendant David P. Holveck ("Holveck") is and at all relevant times was
the President and Chief Executive Officer of the Company and a Director of
Centocor. Effective January 1, 1998, Holveck was replaced as President by
Joseph C. Scodari.
THE FRAUDULENT SCHEME AND DEFENDANTS' ROLES
AND RESPONSIBILITIES WITH RESPECT THERETO
8. During the Class Period, the defendants, and each of them, embarked
upon and participated in a plan, scheme and a course of conduct which was
intended to and, throughout the Class Period, did: (i) deceive the investing
public, including plaintiff and the other Class members, regarding, among other
things, the business, financial condition, performance, and prospects of
Centocor; (ii) artificially inflate and maintain the market price of the
Company's stock and (iii) cause plaintiff and the other members of the Class to
purchase the Company's stock at artificially inflated prices. In furtherance of
the foregoing unlawful plan, scheme and course of conduct, defendants, among
other acts of deception, issued or caused to be issued, during the Class Period,
a series of false and misleading public statements, as described herein, which
operated as a fraud and deceit upon the market for the Company's stock,
plaintiff and the other members of the Class.
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9. Each of the defendants participated directly in the wrongs complained
of herein. In addition, by reason of, among other things, his positions as the
principal executive officer and a director of the Company, defendant Holveck is
a "controlling person" of the Company within the meaning of Section 20(a) of the
Exchange Act and had the power and influence, and exercised the same, to cause
the Company to engage in the unlawful conduct complained of herein. Because of
his positions of control and authority, defendant Holveck, throughout the Class
Period, was able to, and did, directly or indirectly control the conduct of the
Company's business, as well as the contents of the public statements issued by
or on behalf of the Company.
10. As an officer and director of a publicly-held company, defendant
Holveck, at all times relevant hereto, had a duty to disseminate timely,
accurate, truthful, and complete information with respect to the Company's
business, operations, products, financial condition, performance and future
prospects, so that among other things, the market price of the Company's stock
would be based on truthful, accurate and complete information. As hereinafter
alleged, defendant Holveck violated these specific duties and obligations.
11. As direct participants in the wrongs complained of herein, each
defendant is jointly and severally liable or proportionately liable for the
damages suffered by plaintiff and other purchasers of Centocor's common stock
during the Class Period.
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PLAINTIFF'S CLASS ACTION ALLEGATIONS
12. Plaintiff brings this action as a class action pursuant to Federal
Rules of Civil Procedure 23(a) and 23(b)(3) on behalf of a class (the "Class")
of all persons who purchased Centocor common stock on the open market during the
period from December 2, 1997 through December 16, 1997 inclusive (the "Class
Period"), and who were damaged thereby. Excluded from the Class are: the
defendants herein; members of the immediate family of defendant Holveck; any
parent, subsidiary, affiliate, officer, or director of defendant Centocor; any
entity in which any excluded person has a controlling interest; and the legal
representatives, heirs, successors and assigns of any excluded person.
13. The members of the Class are so numerous that joinder of all members
is impracticable. While the exact number of Class members is unknown to
plaintiff at the present time and can only be ascertained from books and records
maintained by Centocor and/or its agent(s), plaintiff believes that there are,
at a minimum, thousands of members of the Class located throughout the United
States. As of November 3, 1997 there were more than 70 million shares of
Centocor common stock outstanding. During the Class Period, more than eight
million shares of Centocor common stock were actively traded on the NASDAQ
National Market.
14. Plaintiff will fairly and adequately represent and protect the
interests of the members of the Class. Plaintiff has retained competent counsel
experienced in class and securities
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litigation and intends to prosecute this action vigorously. Plaintiff is a
member of the Class and does not have interests antagonistic to, or in conflict
with, the other members of the Class.
15. Plaintiff's claims are typical of the claims of the members of the
Class. Plaintiff and all members of the Class purchased Centocor's common stock
during the Class Period at artificially inflated prices and have sustained
damages arising out of the same wrongful course of conduct.
16. Common questions of law and fact exist as to all members of the
Class and predominate over any questions solely affecting individual members of
the Class. Among the questions of law and fact common to the Class are:
(a) Whether the federal securities laws were violated by defendants'
acts and omissions as alleged herein;
(b) Whether defendants participated in and pursued the common course
of conduct and fraudulent scheme complained of herein;
(c) Whether the statements disseminated to the investing public,
including purchasers of Centocor stock, during the Class Period omitted and/or
misrepresented material facts about the business, financial condition,
performance, and prospects of Centocor;
(d) Whether defendants acted knowingly or recklessly in omitting to
state and/or misrepresenting material facts;
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(e) Whether the market price of Centocor's common stock during the
Class Period was artificially inflated due to the non-disclosures and/or
misrepresentations complained of herein; and
(f) Whether plaintiff and the other members of the Class have
sustained damages and, if so, the appropriate measure thereof.
17. A class action is superior to other available methods for the fair and
efficient adjudication of this controversy since, among other things, joinder of
all members of the Class is impracticable. Furthermore, as the damages suffered
by individual Class members may be relatively small, the expense and burden of
individual litigation make it virtually impossible for many Class members
individually to seek redress for the wrongful conduct alleged. Plaintiff does
not foresee any difficulty in the management of this litigation that would
preclude its maintenance as a class action.
18. Plaintiff will rely, in part, upon the presumption of reliance
established by the fraud-on-the-market doctrine in that, among other things:
(a) Defendants made public misrepresentations or failed to disclose
material facts during the Class Period;
(b) The omissions and misrepresentations were material;
(c) The common stock of the Company traded in an efficient market;
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(d) The misrepresentations alleged would tend to induce the market to
misjudge the value of the Company's common stock; and
(e) Plaintiff and the other members of the Class purchased Centocor's
common stock between the time the defendants failed to disclose or
misrepresented material facts and the time the true facts were disclosed,
without knowledge of the omitted or misrepresented facts.
19. Based upon the foregoing, plaintiff and the other members of the Class
are entitled to a presumption of reliance upon the integrity of the market for,
at least, the purpose of class certification, as well as for ultimate proof of
their claims on the merits. Plaintiff will also rely, in part, upon the
presumption of reliance established by a material omission.
20. The names and addresses of the record owners of the shares of
Centocor common stock purchased during the Class Period are available from
Centocor and/or its transfer agent(s). Notice can be provided to purchasers of
Centocor common stock by a combination of published notice and first class mail
using techniques and forms of notice similar to those customarily used in class
actions arising under the federal securities laws.
STATUTORY SAFE HARBOR
21. The statutory safe harbor provided for forward looking statements
under certain circumstances does not apply to any of the allegedly false
statements pleaded in this Complaint. The statements are historical or present
tense statements. To
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the extent that any of the statements were "forward-looking statements," none of
the statements was accompanied by meaningful cautionary statements identifying
important factors that could cause actual results to differ materially from the
statements made. To the extent that the statutory safe harbor might otherwise
apply to any statements pleaded herein because they are "forward-looking," the
defendants are liable for those statements because at the time each of those
statements was made, the speaker knew the statement was false and the statement
was authorized and/or approved by an executive officer of Centocor who knew that
those statements were false when made.
DEFENDANTS' SCHEME
22. Centocor's stock reached a 1997 high of $53 on October 14, 1997 in the
days before defendants were due to release Centocor's Third Quarter results for
the period ended September 30, 1997. Defendants knew that Centocor's Third
Quarter results would be below market expectations, and with the release of the
disappointing third quarter results on October 20, 1997, Centocor's stock fell
to $47-1/8 and then to $45-7/8 on October 21, 1997. Centocor's level of earnings
of $0.06 per share in the Third Quarter was primarily the result of
disappointing sales of ReoPro, Centocor's principal drug. Analysts, including
C.L. Copithorne at Prudential Securities, commented that Centocor's share of
Lilly's ReoPro end-market sales was declining sooner than anticipated.
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23. Thereafter, defendants sought to reinforce the market's belief that
Centocor would experience a substantial surge in earnings per share in the
Fourth Quarter of 1997, ended December 31, 1997, despite Centocor's
disappointing Third Quarter results. For the first three quarters of fiscal
1997, defendants had reported that Centocor's earnings per share were:
1st Quarter - $.05
2nd Quarter - $.01
3rd Quarter - $.06
Defendants' motive for convincing the market that Centocor would experience a
surge in Fourth Quarter earnings was, inter alia, to overcome the negative
effect of Centocor's disappointing Third Quarter results on Centocor's stock
price, and to enable Centocor to proceed with the $40 million initial public
offering ("IPO") for its unit, Centocor Diagnostics, Inc., at the highest price
possible. Defendants filed the Registration Statement for the IPO on October
20, 1997, the day of the release of Centocor's disappointing Third Quarter
results. The share price for the IPO was dependent, in part, upon Centocor's
market price.
24. Thus, in October, defendants began telling the market, through
defendants' comments and guidance to major securities analysts, that Centocor
would earn $0.50 per share for fiscal 1997, having earned $0.12 per share for
the first three quarters of 1997. Defendants explained to securities analysts
that the principal portion of the $0.38 per share that Centocor would earn in
the fourth quarter of 1997 was the result of an
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approximate $27.5 million payment Centocor would receive in the Fourth Quarter
1997 when it signed the agreement with its European partner to market Avakine
outside of the U.S. Avakine was currently in clinical trials for treatment of
Crohn's disease and rheumatoid arthritis. Centocor told the market that it had
completed the Phase III clinical trial of Avakine for Crohn's disease and that
the new drug application ("NDA") would be filed with the FDA by the end of 1997.
Defendants also told the market that Centocor had completed the Phase II
clinical trial of Avakine for rheumatoid arthritis and was about to release the
results. Centocor, consistent with its experience in having signed agreements
with the major drug companies Lilly and Glaxo to market ReoPro and Panorox,
respectively, had told the market previously that it would sign with a European
partner to market Avakine. Now, defendants told the market that it would
receive an even larger than previously indicated up-front payment in the Fourth
Quarter from the marketing partner upon the signing of the agreement in the
Fourth Quarter of 1997.
25. ReoPro had been a Centocor success story and was the principal
source of Centocor's current revenues and profits. Defendants, in Centocor's
1996 Annual Report, filed on April 11, 1997, focused attention on Avakine as
Centocor's next success story and stated that they would follow the route taken
with ReoPro to produce similar financial rewards from Avakine. Defendants
stated:
In the clinical area, [Avakine] has shown remarkable and consistent
promising results
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in early trials for both Crohn's and rheumatoid arthritis. Our
clinical development will move to its final stages for both
indications in 1997 and 1998. As with ReoPro, we are looking for a
narrow initial Crohn's indication for approval, followed by a broader
Crohn's label and a Rheumatoid Arthritis claim. Our clinical
development coincides with this "first to market" business strategy.
* * *
Centocor's first-to-market strategy that has proven so effective with
ReoPro will be utilized once again with [Avakine]. [Avakine] is now
entering Phase III clinical trials in Crohn's disease, an inflammatory
bowel disorder believed to affect more than 250,000 Americans in its
moderate-to-severe form. But [Avakine] is positioned to serve an even
larger market given its potential usefulness in treating severe
rheumatoid arthritis.
The progress of [Avakine] through clinical trials has more than met
expectations. Phase II trials in Crohn's disease were concluded
successfully in 1996, and the response rate following a single
treatment was an encouraging 65%.
26. As defendants knew would happen, the securities analysts reacted
very favorably to defendants' October 1997 statements (made after the October
20, 1997 release of the disappointing Third Quarter earnings), as alleged in
paragraph 24, that Centocor would receive $27.5 million in the then current
quarter upon the Fourth Quarter signing of the agreement with its marketing
partner for Avakine. For example, on October 21, 1997, C.L. Copithorne, at
Prudential Securities Inc., stated that "a higher anticipated up-front payment
for the license of [Avakine] for rheumatoid arthritis to a third party should
more than offset
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lower ReoPro revenues. The higher valuation placed on Immunex's competing . . .
product . . . in a recent license agreement with American Home Products supports
expectations of a $25 - $30 million up-front payment for Avakine." Prudential
projected that, as a result, Centocor would earn $0.53 in the fourth quarter of
1997.
27. Also on October 21, 1997, J.U. Alsenas, the securities analyst at
Furman Selz LLC, issued a report on Centocor in which he stated:
We have increased our estimate for 4Q97 to $0.38 from $0.36 (leaving
FY 1997 unchanged at $0.50) as the company has now guided analysts to
expect a milestone payment from a potential Avakine marketing partner
of approximately $27.5 million, up from our previous estimate of $23.0
million.
28. On October 22, 1997, J.R. Swarz, a securities analyst at Credit
Suisse First Boston Corporation, also issued a report projecting earnings of
$0.50 per share for 1997, stating that:
Centocor expects to sign a joint venture agreement for Avakine (cA2)
in the fourth quarter and record contract revenues of $25-$30 million
in the fourth quarter.
The analyst went on to state that "[a] major European partner for selling the
drug in Europe will be announced in the fourth quarter."
29. Defendants' statements had their intended effect, and the price of
Centocor stock was up $3.125 to close at $49 on October 22, 1997. The price of
Centocor common stock continued to rise based on defendants' comments.
Centocor's stock price
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closed at $52-1/8 on November 7, 1997, virtually back up to its 1997 record high
before Centocor had released its disappointing 1997 third quarter results.
30. Having overcome the negative effect on Centocor's stock price of
Centocor's release of disappointing third quarter earnings and having kept the
IPO alive, defendants faced their next hurdle: overcoming the release of less
than stellar results from the Phase II clinical trial of Avakine for rheumatoid
arthritis. On Sunday, November 9, 1997, defendants issued a news release on the
presentation of the Phase II clinical trial of Avakine for rheumatoid arthritis
to the American College of Rheumatology Meeting in Washington, D.C. Defendants
attempted to put the best light on the disappointing results. The news release
stated that the results "suggest that Avakine (TM) . . . provides a novel
strategy for the treatment of rheumatoid arthritis." The release further stated
that Centocor planned to complete enrollment by the end of 1997 in its Phase III
clinical trial for Avakine for rheumatoid arthritis. However, on Monday,
November 10, 1997, after the Phase II presentation at the American College of
Rheumatology Conference in Washington, D.C., Centocor common stock plunged
almost 12 dollars to a low of $40-7/8 on reports that the Avakine trial showed
that Avakine increases the likelihood of the patient contracting lymphoma, thus
raising serious safety concerns about Avakine. In addition, the test data from
the Phase II results raised concerns that Avakine elicits an immune response
against
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the drug, thereby negating its purported efficacy. These concerns were noted by
various analysts including Edmund Debler at Menta and Isaly and Rachel Leheny at
Hambrecht & Quist. Merrill Lynch downgraded Centocor's stock.
31. Defendants, again, went to the market in furtherance of their scheme
to inflate the price of Centocor shares. Defendants' motive was not only to
facilitate closing on the IPO for Centocor Diagnostics, but also now to convince
the market that Avakine was, in fact, the winner drug which would yield
significant profits to Centocor in the near term, before FDA approval, through
the $27.5 million up front payment by the European marketing partner Centocor
said would be signed up in the fourth quarter, and in the long term, due to
Avakine's efficacy in combating both Chron's Disease and rheumatoid arthritis.
32. In a conference call with securities analysts late Monday, November
10, 1997, after the Phase II presentation at the Rheumatology Conference and
after Centocor's stock price plunged, Centocor told analysts that lymphoma rates
among rheumatoid arthritis and Crohn's disease patients taking Avakine were in
line with rates among patients not taking the drug. Centocor also stated in the
conference call that there was no difference in infection rates and antibody
responses among Avakine and control patients and placebo patients. Centocor
reiterated that it planned to submit the NDA for Avakine to the FDA before the
end of 1997 for approval to treat Chron's disease and,
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thereafter, to submit the drug for approval to treat rheumatoid arthritis.
33. With the prospects for Avakine being a clear "home-run" clouded,
Centocor's stock price languished despite defendants' conference call with
securities analysts. In the meantime, the IPO was still in registration.
34. Defendants, in desperation, seized upon the opportunity of their
presentation at the prestigious BankAmerica Robertson Stephens Medical
Conference held on December 2, 1997 in New York to salvage the IPO and Avakine's
efficacy and safety profile, and to bolster Centocor's stock price. With only
four weeks left in the year, defendant Holveck told the conference that for 1997
Centocor expected to reach net income of $0.50 per share on estimated revenue of
$220 million. Thus, although Centocor had earned only $0.12 through the Third
Quarter of 1997, defendant Holveck led analysts to believe at this late date in
the quarter that Centocor still would earn $0.38 in the Fourth Quarter. As
defendant Holveck and the analysts knew, the only way Centocor could attain
these results was for Centocor to sign up its European marketing partner for
Avakine and receive the $27.5 million up front payment that Centocor, as alleged
above, had previously told analysts Centocor would receive. To reinforce the
market's perception, created by defendants' prior statements, that Avakine was a
profit maker and that defendants' faith in Avakine's efficacy and safety profile
continued unabated, defendant Holveck further stated at the conference that
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net income estimates of $0.96 per share for 1998 and $1.77 per share for 1999
were "well within Centocor's reach and certainly within its scope." In support
of these earnings estimates, defendant Holveck reiterated that Centocor planned
to file with the FDA by the end of 1997 the NDA for Avakine for treating Chron's
disease and that the Phase III trial for Avakine for rheumatoid arthritis was
ongoing and the NDA was expected to be filed in late 1998 or early 1999. With
respect to the marketing of Avakine, defendant Holveck said nothing to correct
or change Centocor's earlier statements concerning the signing of a European
marketing partner and receipt of an up-front payment of $27.5 million in the
fourth quarter of 1997. Defendant Holveck added that Centocor had decided to
carry Avakine to market in the U.S. on its own and would build a sales force of
45 to sell Avakine as a treatment for Chron's disease and would build a similar
sales force to market the drug for rheumatoid arthritis.
35. Centocor's stock price rose thereafter as the securities analysts
and the market reacted to defendants' statements at the December 2 medical
conference. Defendant Holveck made another public appearance on Thursday,
December 11, 1997 and the Dow Jones News Service reported at 5:04 p.m. on
December 12, 1997 that a Centocor spokesman stated that Centocor had not yet
signed with its partner to market Avakine outside the U.S. However, Centocor's
stock dropped significantly on Friday, December 12, 1997, apparently over
concerns about a competing anti-rheumatoid drug from Hoechst AG and, as one
analyst, Heather
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Morris at Janney Montgomery Scott, Inc., hypothesized, concerns that Holveck did
not yet announce the signing of the European marketing partner. The stock price
of Centocor rebounded on Monday, December 15, 1997, however, and securities
analysts continued their earnings forecasts for Centocor for 1997 based upon
defendants' earlier statements to them, as alleged in paragraphs 24-28, 30, 32
and 34 hereof.
36. With only two weeks remaining in the year, defendants knew the
market would expect the announcement of the receipt of the $27.5 million with
each remaining day and defendants knew they would not be signing any agreement
in 1997 which would entitle Centocor to receive $27.5 million in 1997. Unable
to withhold the truth from the market any longer, Centocor shocked the market
with its announcement at 4:28 p.m. on December 16, 1997 that it would not sign a
European marketing partner for Avakine in 1997 and that negotiations would
continue into 1998. The financial impact on Centocor's fourth quarter and full
1997 year were devastating, shrinking 1997 per share income to $0.20 from $0.50
and fourth quarter per share income to $0.08 from $0.38. In explanation,
defendant Holveck, owning up to the fact that Centocor's previous guidance to
analysts and the market was for 1997 per share net income of $0.50, stated:
While we're disappointed we were unable to complete a deal this year,
we remain committed to reaching an agreement that will be in the best
interests of our shareholders. Without the benefit of an up-front
payment in the fourth quarter for the international marketing rights
for Avakine, however,
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earnings for 1997 will fall short of the consensus estimates.
37. On the same day, Centocor announced that it was postponing the IPO due
to "market conditions."
38. The market's reaction was swift. On extraordinary volume, Centocor's
stock price fell 17% from $37-7/8 on December 16, 1997 to close at $31-1/2 on
December 17, 1997.
COUNT I
AGAINST ALL DEFENDANTS FOR VIOLATION OF
SECTION 10(b) OF THE EXCHANGE ACT AND SEC RULE 1Ob-5
39. Plaintiff repeats and realleges each and every allegation contained in
each of the foregoing paragraphs as if fully set forth in full herein.
40. This Count is asserted against all defendants and is based upon
Section 10(b) of the Exchange Act, 15 U.S.C. (S) 78j(b), and Rule 1Ob-5
promulgated thereunder by the SEC.
41. During the Class Period, defendants, singly and in concert, directly
or indirectly, engaged in a common plan, scheme, and unlawful course of conduct
pursuant to which they knowingly or recklessly engaged in acts, transactions,
practices, and courses of business which operated as a fraud and deceit upon
plaintiff and the other members of the Class, and made various deceptive and
untrue statements of material facts and omitted to state material facts
necessary in order to make the statements made, in light of the circumstances
under which they were made, not misleading to plaintiff and the other members of
the Class. The purpose and effect of said scheme, plan, and unlawful course
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of conduct was to induce plaintiff and the other members of the Class to
purchase Centocor common stock during the Class Period at artificially inflated
prices.
42. During the Class Period, defendants, pursuant to said scheme, plan,
and unlawful course of conduct, knowingly and recklessly issued, caused to be
issued, participated in the preparation and issuance of deceptive and materially
false and misleading statements to the investing public as particularized above
in paragraph 34.
43. Such statements were materially false and misleading in that, among
other things, they misrepresented or omitted: (a) the status of Centocor's
negotiations with a European marketing partner for Avakine; (b) the ability of
Centocor to sign an agreement with a European marketing partner for Avakine and
receive a $27.5 million up-front payment in the fourth quarter of 1997; (c) the
ability of Centocor to attain earnings per share of $0.50 in 1997; and (d) the
ability of Centocor to achieve the earnings projections of $0.96 per share for
1998 and $1.77 per share for 1999 made by defendant Holveck on December 2, 1997.
Defendants' statements alleged in paragraph 34 were false and misleading because
Centocor would not be able to sign a European marketing agent for Avakine in the
fourth quarter of 1997 on terms satisfactory to Centocor and which would
generate a fourth quarter 1997 payment to Centocor of approximately $27.5
million due, in part, to the efficacy and safety concerns arising out of the
Phase II trial data (as
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alleged in paragraph 30 hereof) and concerns over the Hoescht's competing anti-
rheumatoid drug (as alleged in paragraph 35 hereof). These factors impact the
potential market size and value of Avakine and have a significant bearing on the
terms of and proceeds from any marketing agreement Centocor could sign with a
European marketing partner. For these reasons, defendant Holveck's earnings
projections for 1998 and 1999 did not have a reasonable basis. In addition,
defendants knew, at the time they made their statements on December 2, 1997,
that the only way Centocor could earn $0.50 per share for 1997 (with only four
weeks remaining in the year) was by receiving an up-front payment of
approximately $27.5 million from a European partner which, for the reasons
stated herein, defendants knew would not occur or defendants knew from their
negotiations was in serious jeopardy of not occurring. At no time during the
Class Period did defendants disclose the true status of their negotiations or
the likelihood that Centocor would or would not sign a European marketing
partner and receive $27.5 million in 1997 or correct their misleading statements
made on December 2, 1997 or correct their pre-class period statements alleged in
paragraphs 24-28, 30 and 32 hereof.
44. At all relevant times, defendants had actual knowledge that the
statements complained of herein in paragraph 34 were materially false and
misleading as set forth herein and intended to deceive plaintiff and the other
members of the Class. In the alternative, the defendants acted in reckless
disregard
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for the truth in that they failed or refused to ascertain and disclose such
facts as would have revealed the materially false and misleading nature of the
statements complained of herein in paragraph 34 although such facts were readily
available to defendants. Said facts and omissions of defendants were committed
willfully or with reckless disregard for the truth. In addition, defendants
knew or recklessly disregarded that material facts were being misrepresented or
omitted as alleged herein.
45. Information showing that the defendants acted knowingly or with
reckless disregard for the truth is peculiarly within defendants' knowledge and
control. However, the following facts, among others, indicate a strong
inference that defendants acted with scienter:
(a) Defendants had full knowledge of the status of the negotiations
they were having with the European marketing partner, including, without
limitation, the terms being discussed and rejected by the European partner and
the amount and timing of the up-front payment. Based on that information,
defendants knew that they did not disclose the relevant factors concerning
Centocor's ability to sign, and the likelihood of Centocor signing a European
marketing partner and receiving a $27.5 million up-front payment in the fourth
quarter of 1997.
(b) Defendants had the motive to misrepresent the status and signing
of the European marketing partner for Avakine and receipt of the $27.5 million
up-front payment in the fourth quarter of 1997 because:
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(i) they wanted to complete the $40 million IPO for Centocor's
wholly owned unit in order to receive needed funds to develop the business and
they knew that if the market price for Centocor dropped substantially the IPO
would be in jeopardy; and
(ii) they wanted to put to rest concerns over the safety, efficacy,
marketability and profit potential of Avakine and they knew that if a European
marketing partner for Avakine was not signed up promptly and in advance of the
NDA filing for Avakine for Crohn's disease and in advance of the Phase III
clinical trial results for Avakine for rheumatoid arthritis, the market would
question the safety, efficacy and future earning potential of the drug, which
was critical to Centocor's future revenue, earnings growth, financial condition
and prospects.
46. As a result of the dissemination of the false and misleading
statements set forth above, the market price of Centocor common stock was
artificially inflated during the Class Period. In ignorance of the false and
misleading nature of the representations described above and the deceptive and
manipulative devices and contrivances employed by defendants, plaintiff and the
other members of the Class relied to their detriment on the integrity of the
market price of the stock in purchasing Centocor common stock. Had plaintiff and
the other members of the Class known of the materially adverse information
misrepresented or not disclosed by defendants, they would not
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have purchased Centocor common stock at the artificially inflated prices that
they did.
47. As a result of the inflation of the prices of Centocor common stock
during the Class Period caused by defendants' material misrepresentations and
omissions, plaintiff and the other members of the Class have suffered
substantial damages as a result of the wrongs alleged.
48. By reason of the foregoing, defendants, directly or indirectly,
violated the Exchange Act and Rule 1Ob-5 promulgated thereunder in that they:
(a) employed devices, schemes, and artifices to defraud;
(b) made untrue statements of material facts or omitted to state
material facts necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading; and/or
(c) engaged in acts, practices, and a course of business which
operated as a fraud and deceit and a scheme to defraud upon plaintiff and the
other members of the Class in connection with their purchases of Centocor common
stock during the Class Period.
COUNT II
AGAINST DEFENDANT HOLVECK FOR
VIOLATION OF SECTION 20(a) OF THE EXCHANGE ACT
49. Plaintiff repeats and realleges each and every allegation contained in
each of the foregoing paragraphs as if fully set forth herein.
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50. Defendant Holveck, by virtue of his offices and specific acts
described above, was, at the time of the wrongs alleged herein, a controlling
person of Centocor within the meaning of Section 20(a) of the Exchange Act.
51. Defendant Holveck had the power and influence and exercised the same
to cause Centocor to engage in the conduct and practices complained of herein in
violation of Section 10(b) of the Exchange Act and Rule 1Ob-5.
52. By reason of the conduct by the Company alleged in Count I of the
Complaint, defendant Holveck is liable to plaintiff and to the other members of
the Class for the substantial damages which they suffered in connection with
their purchases of Centocor common stock during the Class Period.
COUNT III
NEGLIGENT MISREPRESENTATION
AGAINST DEFENDANTS
53. Plaintiff repeats and reallege each and every allegation contained in
paragraphs 1 through 48 as if fully set forth in full herein, except for those
paragraphs or portions of those paragraphs which allege knowing or fraudulent
conduct by defendants.
54. Defendants made and participated in the making of factual
representations to plaintiff and the other members of the Class by means of
public statements, as set forth above. Such material representations were
materially false and misleading and omitted to state material facts necessary in
order to make the statements made not misleading. Such material
misrepresentations
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and omissions were a result of the negligence and carelessness of each
defendant.
55. Plaintiff and other Class members relied upon the material
misrepresentations and/or the integrity of the market in purchasing the stock of
Centocor at the prices paid. Such reliance and the fact that defendants'
negligence would result in damages to the Class were reasonably foreseeable by
defendants.
56. The direct and proximate cause of the misrepresentations and omissions
of material facts set forth above was the negligence and carelessness of the
defendants.
57. At the time of said material misrepresentations, plaintiff and the
Class members were ignorant of their falsity and believed them to be true. In
reliance on said misrepresentations and/or upon the superior knowledge and
expertise of defendants and/or the integrity of the market and in ignorance of
the true facts, plaintiff and other Class members were induced to and did trade
in stock of Centocor at inflated prices. Had plaintiff and the other Class
members known the true facts, they would not have taken such action.
58. As a direct and proximate result of defendants' careless and negligent
conduct in violation of the duties owed to plaintiff and other Class members,
plaintiff and each Class member suffered damages in an amount to be determined
at trial.
JURY DEMAND
59. Plaintiff demands a trial by jury on all issues.
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WHEREFORE, plaintiff, on behalf of himself and the members of the
Class, prays for judgment as follows:
A. declaring this action to be a proper class action and certifying
plaintiff as the representative of the Class under Rule 23 of the Federal Rules
of Civil Procedure;
B. awarding compensatory damages in favor of plaintiff and the
other members of the Class against all defendants for the damages sustained as a
result of the wrongdoing of defendants, together with interest thereon;
C. awarding plaintiff and the Class their costs and expenses
incurred in this action including reasonable allowance of fees for plaintiff's
attorneys, and experts, and reimbursement of plaintiff's expenses; and
D. granting such other and further relief as the Court may deem just
and proper.
Dated: January 19, 1998 SAVETT FRUTKIN PODELL & RYAN, P.C.
By: /s/ Robert P. Frutkin
------------------------------
Stuart H. Savett
Robert P. Frutkin
Barbara A. Podell
325 Chestnut Street, Suite 700
Philadelphia, PA 19106
(215) 923-5400
LAW OFFICES BERNARD M. GROSS, P.C.
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By: /s/ Deborah R. Gross
-----------------------
Deborah R. Gross
1500 Walnut Street
Sixth Floor
Philadelphia, PA 19102
(215) 561-3600
Attorneys for Plaintiff
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AFFIDAVIT OF PLAINTIFF FRED SURGENER
------------------------------------
1. I, Fred Surgener, have reviewed the Complaint;
2. I did not purchase the securities that are the subject of the
Complaint at the direction of plaintiff's counsel or in order to participate in
any private action arising under this title;
3. I am willing to serve as a class representative and provide
testimony at deposition and trial if necessary;
4. I purchased on December 12, 1997, 100 shares of Centocor common
stock at $35 3/4 per share.
5. During the previous three years, I have not been involved in any
class actions.
6. I will not accept any payment for serving as a class
representative beyond my pro rata share of any recovery, except as ordered or
approved by the Court with respect to an award for reasonable costs and expenses
(including lost wages).
I declare under penalty of perjury that the foregoing is true and
correct. Executed this 15 day of January, 1998, at
/s/ Fred Surgener
-------------
FRED SURGENER
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