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In re Northfield Laboratories

September 25, 2007

IN RE NORTHFIELD LABORATORIES, INC. SECURITIES LITIGATION


The opinion of the court was delivered by: Judge George M. Marovich

MEMORANDUM OPINION AND ORDER

Lead plaintiffs the Paul H. Shield, M.D. Inc. Money Purchase Plan and the Paul H. Shield, M.D. Inc. Profit Sharing Plan filed a consolidated class action complaint on behalf of a purported class of shareholders of defendant Northfield Laboratories, Inc. ("Northfield"). In the complaint, plaintiffs assert claims against defendants Northfield, Steven A. Gould, M.D. ("Gould") and Richard E. DeWoskin ("DeWoskin"). In Count I, plaintiffs assert that defendants violated § 10(b) of the Securities Exchange Act of 1934 (the "Act"), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. 240.10b-5. In Count II, plaintiffs assert against DeWoskin and Gould a "control person" claim for violation of § 20(a) of the Act. Defendants Gould and Northfield have filed a joint motion to dismiss the claims against them. Defendant DeWoskin has also filed a motion to dismiss the claims against him. For the reasons set forth below, the Court grants both motions and dismisses without prejudice plaintiffs' complaint.

I. Background

For purposes of a motion to dismiss, the Court takes as true the allegations in plaintiffs' complaint. The following facts come from plaintiffs' complaint.

To date, no company has managed to bring a blood substitute to market. Such a product could save the lives of those who have suffered severe blood loss when actual blood is unavailable. Part of the difficulty in developing a blood substitute is that the oxygen-carrying hemoglobin molecules are dangerous when not contained within red blood cells. Outside of red blood cells, hemoglobin molecules can constrict blood vessels, inflame blood vessel walls and cause clotting.

Despite these difficulties, many, including the United States Army, have attempted to develop oxygen-carrying blood substitutes. Thus far, no one has been successful. For example, Baxter International, Inc. ("Baxter") spent some $500 million attempting to develop a blood substitute. Baxter halted a Phase III trial of its blood substitute after determining that the death rate was 46% for patients given its blood substitute after blood loss, as compared to 17% for patients who received blood transfusions. The latest attempt at developing a blood substitute has been by Northfield.

Northfield was founded in 1985 by defendants DeWoskin and Gould. Northfield's primary purpose is to research and develop a hemoglobin-based blood substitute to treat life-threatening blood loss. DeWoskin served as Chairman and CEO from 1985 to July 2002. Gould has been Northfield's Chairman and CEO since July 2002.

Since its founding, Northfield has worked on the research and development of a blood-substitute called PolyHeme. PolyHeme is a hemoglobin-based, oxygen-carrying blood substitute that is compatible with all blood types. Northfield manufactures PolyHeme by extracting hemoglobin molecules from outdated human blood, chemically modifying the hemoglobin into a polymerized form of hemoglobin and incorporating the polymerized hemoglobin into a solution, which can then be administered to humans. The polymerization process is intended to avoid the harmful effects that hemoglobin can have outside of red blood cells.

PolyHeme, Northfield's only product, has not been approved for sale. Northfield has raised operating money via public offerings of shares in the company. Since its initial public offering in 1994, Northfield has raised $194 million by offering its shares to the public.

PolyHemestudies

At some point, Northfield conducted a study in which it compared two sets of hospital trauma patients who had lost blood. The first set of patients were Jehovah's Witnesses, who refused blood transfusions. The second set of patients received PolyHeme. The study showed a clinical benefit for those who received PolyHeme as compared to those who received nothing.

The clinical trial that is at the heart of this lawsuit began in 1998. That is when Northfield began what it called the Acute Normovelemic Hemodilution ("ANH") trial. The point of the ANH trial was to try to solve a problem for elective surgery patients. Typically, a patient can try to avoid the use of donated blood by banking up to two units of his or her own blood before a surgery. Typically, when a patient banks those two units of blood, the patient is injected with a colloid solution (which does not contain hemoglobin) to replace the blood. The goal of the ANH study was to see if a patient could bank three times as much of his or her own blood (six units) by replacing the blood with PolyHeme.

In the ANH study, participants were divided into two groups. In the study group, each participant banked six units of blood (which is about 60% of an individual's blood volume), and that blood was replaced with six units of PolyHeme. In the control group, each participant banked three units of blood, and that blood was replaced with a colloid solution. The original plan was to enroll 240 patients in the study. After the troubling results in the Baxter trial of its blood substitute, however, the United States Food and Drug Administration ("FDA") requested that the number of patients in the ANH trial be increased to 600.

The ANH study never got that far. An independent data monitoring committee looked at the interim results after 120 patients had been enrolled. They found that 54% of the patients in the PolyHeme group suffered adverse events, relative to 28% in the control group. The difference was found to be statistically significant, i.e., the difference was not a result of randomness. In addition, the independent data monitoring committee found that 10 of the 81 patients who received PolyHeme had suffered heart attacks while no one in the control group had. (The complaint does not assert that the heart attack finding was statistically significant.)

Northfield closed the ANH trial in October 2000.

Statements about PolyHeme

On April 17, 2001, Northfield issued a press release. Northfield stated that prior clinical trials demonstrated "the life-sustaining capability of PolyHeme in the setting of life-threatening blood loss when blood may be unavailable." The release also stated that PolyHeme was the "only blood substitute undergoing clinical trials that has been tested at large enough dosages to be considered a substitute for acute blood loss in trauma and surgical settings."

August 2001 Annual Report

On August 3, 2001, Northfield filed with the SEC its 10-K annual report for the year ending May 31, 2001. In that annual report, Northfield stated:

We are presently conducting clinical trials of PolyHeme at multiple locations in the United States. Our clinical trials include the infusion of PolyHeme in trauma and emergency surgical applications as well as in elective surgical procedures. The observations in the trials continue to demonstrate the potential clinical utility of PolyHeme in the treatment of urgent blood loss. Both our trauma trials and elective surgery trials involved high dosage and rapid infusion of PolyHeme in situations that are life-threatening and where massive blood loss routinely occurs. We believe that this application addresses the largest worldwide clinical need and has the greatest market opportunity.

***

Clinical studies to date demonstrate the life-sustaining capacity of PolyHeme when used as treatment for massive, life-threatening blood loss in lieu of blood.

***

We are also conducting clinical trials of PolyHeme in elective surgical applications at multiple locations in the United States. . . . While the use of PolyHeme in our elective surgery trials is the same as that for trauma--high dose, rapid infusion for acute blood loss--the clinical endpoint for these trials is the elimination of the use of banked blood.

We believe these trials are producing important results. Due to the complexity of the clinical protocol, however, patient accrual is progressing slowly, as previously reported. As a result, we are considering instituting additional elective surgery trials with different protocols to more broadly and rapidly confirm PolyHeme's capability as an alternative to blood in critical care situations. We intend to terminate our current elective surgery protocol after the BLA is filed and focus on these additional trials. We believe our clinical trials may continue throughout the regulatory review process.

In its August 3, 2001 annual report, Northfield also stated:

THE MARKET

We estimate that approximately 12 million units of blood were transfused in the United States in 2000 of which approximately 7.2 million units were administered to patients suffering the effects of acute blood loss. Patient charges for the units of blood used in the United States in 2000 for the treatment of acute blood loss exceed $2 billion. The transfusion market in the United States consists of two principal segments. The acute blood loss segment, which comprises approximately 60% of the transfusion market, includes transfusions required in connection with trauma, surgery and unexpected blood loss. The chronic blood loss segment represents approximately 40% of the transfusion market and includes transfusions in connection with general medical applications and chronic anemias.

PolyHeme is intended for use in the treatment of acute blood loss. The two principal clinical settings in which patients experience acute blood loss are urgent use in trauma, emergency surgery and other unexpected blood loss, and elective use in planned surgery. For trauma and emergency surgical procedures, the immediate availability and universal compatibility of PolyHeme are expected to provide significant advantages over transfused blood by avoiding the delay and opportunities for error associated with blood typing. The major benefit of PolyHeme in elective surgery is expected to be increased transfusion safety for patients and health care professionals.

The same day that Northfield issued its annual report, it also issued a proxy supplement. In that supplement, Northfield stated:

Our trials continue in three different areas. Our primary focus remains the trials in urgent blood loss at doses of up to 20 units, equivalent to two complete blood volumes. The other trials in elective surgery at a dose of six units, and compassionate use for life-saving therapy also continue. The important safety observations are that none of the adverse effects historically associated with other hemoglobin solutions have been identified by our clinical studies. . . . We are pleased with the response of both scientific and lay audiences to these results. Northfield issued another proxy supplement on August 16, 2001. It stated:

We are pleased with the results from our clinical studies and believe the safety and efficacy data that we will present to the FDA are compelling.

Northfield issued a press release on August 28, 2001. In that press release, Northfield stated, among other things:

"PolyHeme provides a remarkable clinical benefit, and represents more than 16 years of product development, clinical studies and data analysis. More importantly, it addresses a large market opportunity and fills an important clinical need. . . ." said De Woskin.

Dr. Steven A. Gould, president, said, "The data from our clinical trials demonstrate that PolyHeme will support life in seriously injured, bleeding patients in the virtual absence of circulating red blood cells, and thereby improve survival in situations when blood cannot be used. We believe these results demonstrate the ability of PolyHeme to effectively and safely transport oxygen. . . . PolyHeme is the only blood substitute that has been safely infused rapidly and at large enough dosages to be considered a substitute for acute blood loss in trauma and surgical settings."

Also in August 2001, Northfield sought FDA approval of PolyHeme for use with respect to life-threatening blood loss. On August 28, 2001, Northfield announced that it had applied to the FDA for approval, based on the comparison between the use of PolyHeme and the experience of Jehovah's Witnesses who had refused blood transfusions. On November 19, 2001, Northfield announced that the FDA rejected its application. Northfield stated that the FDA was concerned about the broad nature of the proposed use, the validity of the control group (the Jehovah's Witnesses) and the trial design. Then-CEO DeWoskin stated that "[o]ur outlook for the commercialization of our product, PolyHeme, for use in urgent, massive blood-loss situations, remains as positive as ever . . . Results from our clinical data are remarkable."

Autumn 2001

Northfield continued to make statements about PolyHeme in the fall of 2001. On August 29, 2001, the Boston Globe quoted a Northfield spokesperson as stating that "final-stage clinical trials, involving elective surgery patients and trauma patients, are ongoing." On September 4, 2001, Northfield issued a press release, in which it quoted DeWoskin as saying, "Our trial results document a very compelling clinical benefit that we believe provides substantial evidence of safety and efficacy required by the FDA." During the same time period, Gould was asked whether there were "any serious adverse events documented that were considered directly related to PolyHeme." Gould answered, "The answer to that is a strong--no."

On September 5, 2001, the Boston Globe quoted DeWoskin as saying the ANH surgery trial was still ongoing.

On October 11, 2001, Northfield issued another press release. This time, Gould commented on PolyHeme's safety record. He reported no "evidence" of blood vessel constriction and no renal, pancreatic, gastrointestinal or cardiac dysfunction. He added that the company had encountered no "serious product-related adverse events."

On December 21, 2001, the company issued another press release. In it, DeWoskin stated, "Our outlook for the commercialization of our product, PolyHeme, for use in urgent, massive blood-loss situations, remains as positive as ever. . . . Results from our clinical trial data are remarkable." Several months later, on May 15, 2002, Northfield issued another press release. In the May release, Northfield stated, among other things:

We have infused up to 20 units in massive hemorrhage situations and have accumulated substantial evidence of safety and efficacy. . . . Northfield Laboratories, founded in 1985, is a leading developer of an oxygen-carrying blood substitute. Its product, PolyHeme, is the only blood substitute undergoing clinical trials that has been tested at large enough dosages to be considered a substitute for acute blood loss in trauma and surgical settings.

August 2002 Annual Report

A few months later, on August 9, 2002, Northfield filed with the SEC its 10-K annual report for the year ending May 31, 2002. In that annual report, Northfield stated, among other things:

Northfield Laboratories Inc. believes it is a leader in the development of a safe and effective alternative to transfused blood for use in the treatment of acute blood loss. . . . Clinical studies to date indicate that PolyHeme carries as much oxygen, and loads and unloads oxygen in the same manner, as transfused blood. Infusion of PolyHeme also restores blood volume. Therefore, PolyHeme should be effective as an oxygen-carrying resuscitative fluid in the treatment of hemorrhagic shock resulting from extensive blood loss.

***

We have conducted clinical trials of PolyHeme at multiple locations in the United States. Our clinical trials included infusion of PolyHeme in trauma and emergency surgical applications, in elective surgical procedures, and as life-saving therapy in situations of compassionate use. The observations in these trials have demonstrated the potential clinical utility of PolyHeme in the treatment of urgent blood loss and life-threatening hemoglobin levels. Our trials have involved high dosage and rapid infusion of PolyHeme in situations that are life-threatening and where massive blood loss routinely occurs. We believe that this application addresses the largest world-wide clinical need and has the greatest market opportunity. . . .

***

PolyHeme is intended for use in the treatment of acute blood loss. Clinical studies to date indicate that PolyHeme carries as much oxygen, and loads and unloads oxygen in the same manner, as transfused blood. Infusion of PolyHeme also restores blood volume. Therefore, PolyHeme should be effective as an oxygen-carrying resuscitative fluid in the treatment of hemorrhagic shock resulting from extensive blood loss. Clinical studies to date demonstrate the life-sustaining capacity of PolyHeme when used as treatment for massive, life-threatening blood loss in lieu of blood.

***

THE MARKET

We estimate that approximately 12 millions units of blood were transfused in the United States in 2001, of which approximately 7.2 million units were administered to patients suffering the effects of acute blood loss. Patient charges for the units of blood used in the United States in 2001 for the treatment of acute blood loss exceed $2 billion. The transfusion market in the United States consists of two principal segments. The acute blood loss segment, which comprises approximately 60% of the transfusion market, includes transfusions required in connection with trauma, surgery and unexpected blood loss. The chronic blood loss segment represents approximately 40% of the transfusion market and includes transfusion in connection with general medical applications and chronic anemias.

PolyHeme is intended for use in the treatment of acute blood loss. The two principal clinical settings in which patients experience acute blood loss are urgent use in trauma, emergency surgery and other unexpected blood loss, and elective use in planned surgery. For trauma and emergency surgical procedures, the immediate availability and universal compatibility of PolyHeme are expected to provide significant advantages over transfused blood by avoiding the delay and opportunities for error associated with blood typing. The major benefit of PolyHeme in elective surgery is expected to be increased transfusion safety for patients and health care professionals.

***

CLINICAL TRIALS

We have conducted clinical trials of PolyHeme at multiple locations in the United States. Our clinical trials included infusion of PolyHeme in trauma and emergency surgical applications, in elective surgical procedures, and as life-saving therapy in situations of compassionate use. The observations in these trials have demonstrated the potential clinical utility of PolyHeme in the treatment of urgent blood loss and life threatening hemoglobin levels. Our trials have involved high dosage and rapid infusion of PolyHeme in situations that are life-threatening and where massive blood loss routinely occurs. We believe that this application addresses the largest world-wide clinical need and has the greatest market opportunity.

***

ELECTIVE SURGICAL APPLICATIONS

We have also conducted clinical trials of PolyHeme in elective surgical applications at multiple locations in the United States. Our clinical protocol for these trials was a randomized controlled study in which elective surgical patients were infused with up to six units of PolyHeme (three liters containing 300 grams of hemoglobin). The majority of elective surgical procedures require the infusion of six units or less of blood.

While the use of PolyHeme in our elective surgery trials was the same as that for trauma--high dose, rapid infusion for acute blood loss--the clinical endpoint for these trials was the eliminations of the use of banked blood. Due to the complexity of the clinical protocol, however, patient accrual progressed slowly. As a result, we closed the elective surgery protocol after our BLA was submitted. We anticipate other potential trials in elective surgery in the future.

Urban Trauma Trial

In October 2002, Northfield announced that it had submitted to the FDA a protocol for a new study. The point of the new study (the "Urban Trauma trial") was to test the efficacy and safety of PolyHeme in treating patients with severe blood loss under circumstances where blood was not available, i.e., before they reach the hospital.

An immediate difficulty in such a study is that it is impossible for a such a patient--who is in shock from severe blood loss--to provide informed consent to participate in the trial. In such circumstances, the FDA allows an exception to its usual informed consent requirements. Under the exception, members of the community must be provided disclosures about the risks and benefits of the study so that they can make informed decisions about whether to opt-out of the study ahead ...


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