class action complaint v. kv pharm

8/3/2019 Class Action Complaint v. KV Pharm

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UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF MISSOURI

HOICHI CHEONG, Individually and On Behalf ofAll Others Similarly Situated,

Plaintiff,

vs.

K-V PHARMACEUTICAL COMPANY,GREGORY J. DIVIS, JR. and SCOTT GOEDEKE,

Defendants.

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CIVIL ACTION NO. 11-1905

CLASS ACTION COMPLAINT

JURY TRIAL DEMANDED

Plaintiff, Hoichi Cheong (Plaintiff), alleges the following based upon the investigation

of Plaintiffs counsel, which included, among other things, a review of defendants public

documents, conference calls and announcements, United States Securities and Exchange

Commission (SEC) filings, wire and press releases published by and regarding K-V

Pharmaceutical Company (K-V or the Company) and securities analysts reports and

advisories about the Company. Plaintiff believes that substantial additional evidentiary support

will exist for the allegations set forth herein after a reasonable opportunity for discovery.

NATURE OF THE ACTION AND OVERVIEW

1. This is a federal class action on behalf of purchasers of the securities of K-V, who

purchased or otherwise acquired K-V securities between February 14, 2011 and April 4, 2011,

inclusive (the Class Period), seeking to pursue remedies under the Securities Exchange Act of

1934 (the Exchange Act).

2. K-V is a specialty branded pharmaceutical company with a primary focus in the

area of womens healthcare. The Companys three operating segments are branded products,

specialty generics and specialty raw materials. The Companys branded pharmaceutical

Case: 4:11-cv-01905-RWS Doc. #: 1 Filed: 11/02/11 Page: 1 of 26 PageID #: 1


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operations are conducted through its subsidiary Ther-Rx Corporation (Ther-Rx), while generic,

non-braded operations are conducted through its subsidiary ETHEX Corporation (ETHEX).

3. The Company and its subsidiaries have a history of illicit conduct. For example,

in 2009, K-V, Ther-Rx and ETHEX entered into a consent decree for producing and distributing

adulterated and unapproved drugs. Under this decree, K-V was prohibited from making or

shipping drugs until the Company received approval to do so from the U.S. Food and Drug

Administration (FDA). The following year, ETHEX pleaded guilty to two felony counts of

criminal fraud for failing to report to the FDA that it was producing oversized tablets that had the

potential to harm patients. As a result, former K-V Chairman Marc Hermelin (Hermelin) was

banned from participating in federal health programs, including Medicaid and Medicare.

Hermelin was also ordered to serve a 30-day jail sentence, to pay a $1 million fine and to forfeit

$900,000. Nonetheless, Hermelin was still a significant director and shareholder of K-V, thus

creating the possibility that K-V could also be banned from participating in federal health

programs. At the same time, K-V was running low on cash and had started to lay off workers.

4. During this time, the defendants started to focus on the drug Makena

(hydroxyprogesterone caproate, 17P in generic form), a prescription hormone (progestin)

injection intended for pregnant women who have delivered a preterm child in the past (in other

words, an early delivery). Makena is utilized by pregnant women to lower the risk of having

another preterm childbirth. For reference, 17P was initially approved by the FDA in 1956, and

was manufactured by Bristol-Myers Squibb until 2000 (who at that time ceased production for

commercial reasons). After the production cessation in 2000, the only producers of 17P were

pharmacies that would custom make the drug in small quantities (known as compounding

pharmacies). Generally, women were charged between $10 and $20 per injection of 17P, or



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about $200 to $400 for the 20-week recommended course of treatment. Meanwhile, a 2003

study confirming the effectiveness of 17P caused demand for the drug to skyrocket.

5. The Orphan Drug Act (ODA) allows for seven years of exclusive sales rights to

manufacturers who obtain FDA approval for drugs that treat a disorder affecting fewer than

200,000 people in the U.S. The purpose of the ODA is to encourage pharmaceutical companies

to develop drugs for diseases and conditions that have a relatively small market.

6. 17P, due to its age, did not have patent protection. As such, K-V requested that

the FDA grant 17P (rebranded as Makena) orphan drug status under the ODA. K-V was

successful with this request, and thereafter conducted a clinical trial of Makena. Subsequently,

K-V received FDA approval on February 4, 2011 to manufacture and sell the drug. At that point,

it was clear that K-V had the exclusive right to market Makena, but there was ambiguity as to

whether compounding pharmacies would be allowed to continue to make and sell 17P. Almost

immediately after receiving FDA approval to sell and market Makena, the defendants increased

the price of the drug from $10-$20 per injection to an astounding $1,500 per injection. Whereas

patients had become accustomed to paying between $200 and $400 for a 20 week course of

treatment, following K-Vs price increase that same course of treatment now cost between

$15,000 and $30,000.

7. Throughout the Class Period, the defendants assured investors that the Company

had programs in place to ensure that every eligible patient would have access to Makena,

including financial assistance for both insured and uninsured patients. Further, the defendants

assured investors that compounding pharmacies would be prohibited from making 17P, meaning

that every dose of 17P would have to be purchased from K-V. The implication was that this

would prove to be a financial windfall for the Company.



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8. However, on March 17, 2011, things began to unravel. On that day, two U.S.

Senators announced that they had sent a letter to the Federal Trade Commission (FTC)

requesting a formal investigation into potential anticompetitive conduct arising out of the FDA

granting Makena orphan drug status and K-Vs subsequent decision to increase the price of

Makena by 150-fold. The Senators also stated that the Companys actions would result in

diminished access to appropriate health care for women, and would result in increased preterm

births due to patients inability to afford treatment.

9. K-V has a dual share structure of common stock, and both the Class A common

stock and the Class B common stock (also referred to as series A stock and series B stock) are

listed and traded on the NYSE. Upon the release of the above news, shares of the Companys

series A stock fell $1.14 per share, or over 11 percent, to close on March 18, 2011 at $8.50 per

share, on heavy trading volume. Similarly, the Companys series B stock declined

approximately $1.15 per share, or over 11 percent, to close on March 18, 2011 at $8.58 per

share.

10. Approximately one week later, the March of Dimes Foundation (March of

Dimes) sent a letter to the defendants requesting that K-V significantly reduce the price of

Makena, adjust the patient assistance program to ensure adequate coverage of all patients, and

establish a method for reporting to stakeholders on the Companys patient assistance program to

ensure that it was meeting needs. Additionally, the March of Dimes asked for a justification

from K-V for the drugs price increase based upon the Companys investment in Makena,

savings to the health care system, or other appropriate methodology.

11. On March 30, 2011, the FDA announced that, in spite of defendants assertions to

the contrary, the agency did not intend to take enforcement action against pharmacies that

compound 17P.



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12. On this news, shares of the Companys series A stock fell $1.46 per share, or over

20 percent, to close on March 30, 2011 at $5.65 per share, on unusually heavy trading volume.

Similarly, the Companys series B stock fell $1.46 per share, or over 20 percent, to close on

March 30, 2011 at $5.70 per share, on heavy trading volume.

13. On April 1, 2011, the defendants announced that, among other things, they were

reducing the price of Makena by nearly 55 percent, to $690 per injection.

14. On this news, shares of the Companys series A stock fell an additional $0.60 per

share, or over 10 percent, to close on April 1, 2011 at $5.39 per share, on heavy trading volume.

Similarly, shares of the Companys series B stock fell approximately $0.56 per share, or over 9

percent, to close on April 1, 2011 at $5.37 per share, on heavy trading volume.

15. On April 4, 2011, an article published inBloombergrevealed that even with the

price reduction, many physicians would still not recommend Makena to their patients, believing

the cost of the drug to be too high. One physician spoke of the hostility generated by K-Vs

initial pricing of the drug, as well as the fact there was no guarantee that a patient or an insurance

company would pay for Makena (meaning that a physician would have to assume financial

responsibility for inventory if they bought the drug from K-V).

16. Upon these revelations, shares of the Companys series A stock fell an additional

$0.39 per share, or over 7 percent, to close on April 4, 2011 at $5.00 per share, on heavy trading

volume. Similarly, shares of the Companys series B stock declined approximately $0.34 per

share, or over 6 percent, to close on April 4, 2011 at $5.03 per share.

17. The Complaint alleges that, throughout the Class Period, defendants failed to

disclose material adverse facts about the Companys financial well-being, business operations,

and prospects. Specifically, defendants failed to disclose or indicate the following: (1) that the

FDA had not in fact granted K-V exclusive distribution rights over hydroxyprogesterone



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caproate; (2) that the Company had not expanded access of Makena in any meaningful way to

low-income and at-risk groups; (3) that the exorbitant $1,500 per injection price of Makena

would reduce the availability of the drug to physicians and patients and decrease meaningful

demand; (4) that the Company lacked adequate internal and financial controls; and (5) that, as a

result of the foregoing, the Companys statements about Makenas price, distribution program

and the likelihood of financial success for the Company were lacking in any reasonable basis

when made.

18. As a result of defendants wrongful acts and omissions, and the precipitous

decline in the market value of the Companys securities, Plaintiff and other Class Members

suffered damages.

JURISDICTION AND VENUE

19. The claims asserted herein arise under and pursuant to Sections 10(b) and 20(a) of

the Exchange Act, (15 U.S.C. 78j(b) and 78t(a)), and Rule 10b-5 promulgated thereunder (17

C.F.R. 240.10b-5).

20. This Court has jurisdiction over the subject matter of this action pursuant to

Section 27 of the Exchange Act (15 U.S.C. 78aa) and 28 U.S.C. 1331.

21. Venue is proper in this District pursuant to Section 27 of the Exchange Act, 15

U.S.C. 78aa and 28 U.S.C. 1391(b). Many of the acts and transactions alleged herein,

including the preparation and dissemination of materially false and misleading information,

occurred in substantial part in this District. Additionally, K-Vs principal executive offices are

located within this District.

22. In connection with the acts, conduct and other wrongs alleged in this Complaint,

defendants, directly or indirectly, used the means and instrumentalities of interstate commerce.



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PARTIES

23. Plaintiff, Hoichi Cheong, as set forth in the accompanying certification,

incorporated by reference herein, purchased K-V securities at artificially inflated prices during

the Class Period and has been damaged thereby. Exhibit A.

24. Defendant K-V is a Delaware corporation with its principal executive offices

located at One Corporate Woods Drive, Bridgeton, Missouri.

25. Defendant Gregory J. Divis, Jr. (Divis) was, at all relevant times, the

Companys President and Chief Executive Officer (CEO), as well as President of Ther-Rx.

26. Defendant Scott Goedeke (Goedeke) was, at all relevant times, the Senior Vice

President of Marketing and Market Access at Ther-Rx.

27. Defendants Divis and Goedeke are collectively referred to hereinafter as the

Individual Defendants. The Individual Defendants, because of their positions with the

Company, possessed the power and authority to control the contents of K-Vs reports to the SEC,

press releases and presentations to securities analysts, money and portfolio managers and

institutional investors, i.e., the market. Each defendant was provided with copies of the

Companys reports and press releases alleged herein to be misleading prior to, or shortly after,

their issuance and had the ability and opportunity to prevent their issuance or cause them to be

corrected. Because of their positions and access to material non-public information available to

them, each of these defendants knew that the adverse facts specified herein had not been

disclosed to, and were being concealed from, the public, and that the positive representations

which were being made were then materially false and misleading. The Individual Defendants

are liable for the false statements pleaded herein, as those statements were each group-

published information, the result of the collective actions of the Individual Defendants.



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SUBSTANTIVE ALLEGATIONS

Background

28. K-V is a specialty branded pharmaceutical company with a primary focus in the

area of womens healthcare. The Companys three operating segments are branded products,

specialty generics and specialty raw materials. The Companys branded pharmaceutical

operations are conducted through its subsidiary Ther-Rx, while generic, non-braded operations

are conducted through its subsidiary ETHEX.

29. The Company and its subsidiaries have a history of illicit conduct. For example,

in 2009, K-V, Ther-Rx and ETHEX entered into a consent decree for producing and distributing

adulterated and unapproved drugs. Under this decree, K-V was prohibited from making or

shipping drugs until the Company received approval to do so from the FDA. The following year,

ETHEX pleaded guilty to two felony counts of criminal fraud for failing to report to the FDA

that it was producing oversized tablets that had the potential to harm patients. As a result, former

K-V Chairman Hermelin was banned from participating in federal health programs, including

Medicaid and Medicare. Hermelin was also ordered to serve a 30-day jail sentence, to pay a $1

million fine and to forfeit $900,000. Nonetheless, Hermelin was still a significant director and

shareholder of K-V, thus creating the possibility that K-V could also be banned from

participating in federal health programs. At the same time, K-V was running low on cash and

had started to lay off workers.

30. During this time, the defendants started to focus on the drug Makena

(hydroxyprogesterone caproate, 17P in generic form), a prescription hormone (progestin)

injection intended for pregnant women who have delivered a preterm child in the past (in other

words, an early delivery). Makena is utilized by pregnant women to lower the risk of having

another preterm childbirth. For reference, 17P was initially approved by the FDA in 1956, and



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was manufactured by Bristol-Myers Squibb until 2000 (who at that time ceased production for

commercial reasons). After the production cessation in 2000, the only producers of 17P were

pharmacies that would custom make the drug in small quantities (known as compounding

pharmacies). Generally, women were charged between $10 and $20 per injection of 17P, or

about $200 to $400 for the 20-week recommended course of treatment. Meanwhile, a 2003

study confirming the effectiveness of 17P caused demand for the drug to skyrocket.

31. The ODA allows for seven years of exclusive sales rights to manufacturers who

obtain FDA approval for drugs that treat a disorder affecting fewer than 200,000 people in the

U.S. The purpose of the ODA is to encourage pharmaceutical companies to develop drugs for

diseases and conditions that have a relatively small market.

32. 17P, due to its age, did not have patent protection. As such, K-V requested that

the FDA grant 17P (rebranded as Makena) orphan drug status under the ODA. K-V was

successful with this request, and thereafter conducted a clinical trial of Makena. Subsequently,

K-V received FDA approval on February 4, 2011 to manufacture and sell the drug. At that point,

it was clear that K-V had the exclusive right to market Makena, but there was ambiguity as to

whether compounding pharmacies would be allowed to continue to make and sell 17P. Almost

immediately after receiving FDA approval to sell and market Makena, the defendants increased

the price of the drug from $10-$20 per injection to an astounding $1,500 per injection. Whereas

patients had become accustomed to paying between $200 and $400 for a 20 week course of

treatment, following K-Vs price increase that same course of treatment now cost between

$15,000 and $30,000.



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Materially False and Misleading

Statements Issued During the Class Period

33. The Class Period begins on February 14, 2011. On this day, the Company held a

conference call with analysts and investors. During the call, the Individual Defendants spoke of

expanded patient access to Makena, and touched upon the FDA regulation of compounding

pharmacies that would potentially compete with the Company with respect to Makena. The

Individual Defendants stated, in relevant part:

[Goedeke]: Our Companys commercial team has spent years preparing for thismoment; and we, too, are ready to join the fight against pre-term births. Prior toFDA approval of Makena, mothers who could benefit from therapy facedsignificant barriers to accessing treatment due to the absence of a commerciallyavailable FDA-approved product. Our Company has carefully studied how tobest remove these barriers and built our go-to-market strategy to ensure that weare in position to help fulfill the promise of Makena by facilitating access to thiscrucially important medication for every eligible patient.

* * *[Divis]: In fact, its not unusual for a pre-term birth to cost several hundredthousands of dollars or more. FDA-approved Makena helps fulfill critical unmetneeds for the high-risk population of women who have experienced a singletonspontaneous pre-term birth. As noted earlier, prior to FDA approval of Makena,women who could benefit from therapy that may reduce the risk of pre-term birthface significant barriers to access due to the absence of a commercially available,FDA-approved product. Because of these barriers, many eligible moms have beenon the sidelines.

As we have outlined, our Company recognizes the importance of addressingthese barriers and is committed to helping fulfill the promise of Makena byensuring access for every eligible patient. Makena has been designated orphandrug status by FDA; and, as an orphan drug, the Makena-eligible population ofwomen is relatively small but very important. Makena is used for a relativelyshort and well-defined period during pregnancy to help give babies the time theyneed to develop in the womb.The list price of Makena will be $1500 per injection; injections are administered

weekly starting between 16 and 20 weeks of gestation and continuing until 37weeks of gestation or delivery, whichever comes first. We believe that, onaverage, patients will receive approximately 15 to 20 injections.

Based on the eligible patient population, which has been estimated in theliterature to be approximately 140,000 patients annually and given that pre-term birth can be very costly to a health plan, we anticipate that commercialpayers and state Medicaid programs will cover and reimburse Makena. We do



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note that many of our payer partners have a distinguished history in workingtoward prevention of pre-term birth as part of their ongoing corporate socialresponsibility and quality improvement initiatives, and the cost of prematurity canbe very high. Makena can help offset some of those costs.

Our Company understands that pre-term birth is a complex, multi-factorial issue,and we are committed to working in concert with stakeholders to help ensure thatall eligible patients have access to this crucially important medication. We

anticipate that some patients may need financial assistance, and we haveestablished a comprehensive patient assistance program to help facilitate accessto Makena through the Makena Care Connection.

Exemplifying our commitment to patient access, our comprehensive financialassistance program covers both uninsured and insured patients based onincome eligibility requirements. Specifically, women with household incomes upto $100,000 will be eligible for financial assistance. And notably, this income

level includes approximately 85% of US households.

In summary, Makena represents a significant advance for a very important groupof women, moms with a singleton pregnancy who have a history of a singletonspontaneous pre-term birth. For the first time, their healthcare providers have an

FDA-approved treatment supported by a comprehensive access program to helprevive hope for their next pregnancy.

* * *[Analyst]: [C]ould you talk a little bit more about what the strategy is to get theoff-label compounding pharmacies off the market? Is that something you have todo, or is that something the FDA will help you in doing? How many patients,also, do you think you can target in 2011 with this expanded sales force? Do youhave an internal goal? Is there anything you could share with us about thatinternal goal?

[Divis]: Thanks for your question, Tim. Ill take the latter question briefly, andthen Ill let one of our colleagues address the compounding question.

We certainly believe, in terms of how we are structuring our go-to-marketstrategy with our sales force and whatnot puts us in a position to reach out to arequisite number of healthcare professionals to surround the major majority of the business opportunities that exist. We have done a lot of research to understandwho they are and where they are, and obviously we have been in many of theseoffices for the last 10-plus years as a company in womens healthcare.

So we believe we have a good handle of the physician audience and the targetaudience and who are the treaters for the Makena-eligible patient population.We are not in a position right now to give guidance in terms of patients that weexpect to have initiated and initiate therapy in the coming year. However, we have

established a clear objective strategically that we believe that this product,Makena, this treatment, is so important that we need to do everything we can to



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ensure every eligible mom has access and an opportunity to be treated, shouldthey decide with their healthcare professional to be treated.

With regards to compounding, I will let Scott Goedeke make a few comments onthat.

[Goedeke]: Thanks, Greg. Hello, Tim, appreciate your question. Tim, we believethat the regulations and laws are very clear. I think its fair to say that

compounding pharmacies are not FDA-approved manufacturing facilities andthat FDA regulations and state pharmacy laws generally prohibit thedistribution of compounded products that are the same or essentially the sameas FDA-approved products.

We also believe that compounded pharmacies are aware of these laws andregulations, and our expectation is that they will adhere to them. I think its alsofair to say that, despite the availability of compounded product, there have been

moms on the sidelines because of significant logistical and financial barriers toaccess that are typically associated with non-FDA-approved products.

And Ill just close by saying that everything we have designed around Makenais to remove these barriers and to make sure that we fulfill our corporatecommitment, which is to make Makena accessible to all eligible patients.[Emphasis added.]

34. This news caused the price of K-V shares to skyrocket. On February 14, 2011,

after the above statement, K-V series A stock closed at $6.53 per share, an increase from the

previous trading day of $2.15 per share, or over 49%. Similarly, K-V series B stock closed at

$6.40 per share, an increase of $1.98 per share, or nearly 45%

35. On February 17, 2011, the Company sent a letter to compounding pharmacists.

The letter was noted by the market, and stated the following, in relevant part:

It is our understanding that your pharmacy compounds human prescription drugs,including hydroxyprogesterone caproate injection. Now that Makena is

commercially available as the first and only FDA-approved hydroxyprogesteronecaproate injection manufactured at a cGMP-facility, compounded, unapprovedformulations of hydroxyprogesterone caproate injection should no longer be made by compounding pharmacies. Indeed, as articulated by the FDA in numerousenforcement actions, FDA has stated that it views compounded drugs to be newdrugs within the meaning of 21 U.S.C. 321 (p), and as such, they may not beintroduced into interstate commerce without FDA approval. Although FDA will

exercise its enforcement discretion with respect to certain pharmacycompounding practices, this discretion does not extend to compounding of



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copies or essentially copies of commercially available FDA-approved products.Therefore, although compounding of hydroxyprogesterone caproate injectionmay have, in the past, been subject to FDA enforcement discretion, continuingto compound this products after FDA-approval of Makena renders thecompounded product subject to FDA enforcement for violating certain

provisions of the Federal Food, Drug and Cosmetic Act, as well as FDAguidance. [Emphasis added.]

36. The price of K-V shares continued to rise. On February 18, 2011, K-V series A

stock closed at $9.86 per share, an increase from the previous trading day of $1.28 per share, or

nearly 15%. Similarly, K-V series B stock closed at $9.87 per share, an increase of $1.29 per

share, or over 15%.

37. On March 1, 2011, the Company issued a press release entitled K-V

Pharmaceutical Company Announces $200 Million Private Debt Offering. Therein, the

Company stated, in relevant part:

K-V Pharmaceutical Company (NYSE: KVa/KVb) (the Company) announcedtoday that it intends to offer $200 million of senior secured notes due 2015 (theNotes) in a private placement, subject to market conditions.

The Notes will be offered only to accredited investors pursuant to Regulation D

under the Securities Act of 1933, as amended (the Securities Act). The Noteshave not been registered under the Securities Act or any state or other securitieslaws and may not be offered or sold in the United States absent registration or anapplicable exemption from registration requirements of the Securities Act andapplicable state securities laws.

The Company intends to use the net proceeds from the offering of the Notes torepay in full the Companys outstanding obligations under its credit agreementwith U.S. Healthcare I, L.L.C. and U.S. Healthcare II, L.L.C. (including thepayment of related premiums) and terminate the related future loan commitments,to establish an escrow reserve for one year of interest payments on the Notes and

for general corporate purposes.

38. The statements contained in 33 and 35 were materially false and misleading

when made because defendants failed to disclose or indicate the following: (1) that the FDA had

not in fact granted K-V exclusive distribution rights over hydroxyprogesterone caproate; (2) that



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the Company had not expanded access of Makena in any meaningful way to low-income and at-

risk groups; (3) that the exorbitant $1,500 per injection price of Makena would reduce the

availability of the drug to physicians and patients and decrease meaningful demand; (4) that the

Company lacked adequate internal and financial controls; and (5) that, as a result of the

foregoing, the Companys statements about Makenas price, distribution program and the

likelihood of financial success for the Company were lacking in any reasonable basis when

made.

The Truth Begins to Emerge

39. On March 17, 2011, U.S. Senators Amy Klobuchar and Sherrod Brown issued a

press release pertaining to a letter they had sent to the FTC concerning K-V and Makena. The

letter set forth, in relevant part:

U.S. Senators Amy Klobuchar (D-MN) and Sherrod Brown (D-OH) today sentFederal Trade Commission Chairman Jon Leibowitz a letter urging the agency tolaunch an investigation into potentially anti-competitive behavior after a drugtreatment used for high-risk pregnancies dramatically increased in cost. The drug,commonly known as Makena, is a weekly injection of progesterone meant toprevent pre-term labor in pregnant women and has been safely administered byU.S. pharmacies in the past at a cost of between $10 and $20 per injection. Afterthe Missouri-based drug company KV Pharmaceutical was granted orphanstatus for its version of the drug, the cost reportedly rose to $1,500 per injection 150 times the original cost.

This is a proven and affordable drug that has been around for over 50 years. Itscritical that we make sure this company isnt taking advantage of its orphan-drugdetermination to monopolize the market and engage in price gouging at theexpense of pregnant women, Klobuchar said. At a time when rising prices forprescription drugs are stretching the budgets of middle-class families, we must bevigilant in stopping practices that would limit access to vital medicines.

KV created an overnight monopoly for this lifesaving drug and thenproposed raising the price by 14,900 percent, Brown said. Last week, I calledon KV Pharmaceuticals to immediately reconsider their decision, but to thisdate the company continues to defend this astronomical price increase. Price-gouging is never acceptable, particularly not when it undermines public healthand fleeces taxpayers. Families deserve an investigation.



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Last week, Brown sent a letter to KV Pharmaceutical urging the company toreverse course on the price increase for Makena. Brown called on the company tomaintain access to the critical drug to stem an increase in premature births.

The drug first came to the market over 50 years ago and it has recently been used

to help prevent early births in women who have a history of spontaneous pre-termdeliveries. The price increase not only threatens to restrict individual access to thedrug, it also places a heavy burden on state Medicaid programs, which cover amajority of high-risk pregnancies in this country.

The full text of the letter is pasted below:

* * *

Dear Chairman:

I am writing to request that the Federal Trade Commission initiate a formalinvestigation into any potential anticompetitive conduct arising out of KV

Pharmaceuticals actions regarding a dramatic 150-fold increase in price that thecompany has applied to a proven progesterone treatment.

17-hydroxyprogesterone caproate, sold by KV Pharmaceutical under the nameMakena, is a weekly injection of a form of progesterone meant to prevent pretermlabor in high-risk pregnant women. This drug, which first came to market over 50years ago, has recently been used to help prevent early births to women who had ahistory of spontaneous preterm deliveries. Prior to KV Pharmaceuticals actions,this product was mixed by compound pharmacies and administered safely for $10to $20 per injection. Due to the product being given orphan drug status, KV Pharmaceutical has potentially created an anticompetitive market and has

indicated they will dramatically increase the cost per injection to $1,500.

While I understand the Food and Drug Administration (FDA) is working toensure that drugs marketed and sold in the United States are safe and effective,I

am concerned that KV Pharmaceutical is taking advantage of FDAs approvalof Makena and orphan drug determination to achieve rights as the sole source forthis limited use of progesterone, leading to a monopolization of treatments toaddress preterm labors.

I appreciate KV Pharmaceuticals attempt to provide financial assistance to help purchase Makena. However, the financial assistance is not sufficient and doesnot extend to certain groups of women. In additional to significant costs toindividuals, this price increase will place a heavy burden on state Medicaid programs, which cover a majority of high-risk pregnancies. I am extremelyconcerned that KV Pharmaceuticals actions will result in diminished access toappropriate health care for women and result in increased preterm births.[Emphasis added.]



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11 percent, to close on March 18, 2011 at $8.50 per share, on heavy trading volume. Similarly,

the Companys series B stock declined approximately $1.15 per share, or over 11 percent, to

close on March 18, 2011 at $8.58 per share.

41. On March 23, 2011, the March of Dimes sent a letter to Defendant Divis, which

was also published and disseminated to the market. The letter stated, in relevant part:

Dear Mr. Divis:

Thank you for your letter of March 17th. I am pleased to learn that you arelistening carefully to stakeholder concerns about list price, patient access, and

cost to payers. Thank you for considering additional steps to ensure that Makenais available to all eligible women, and for convening stakeholders from the Marchof Dimes, the American College of Obstetricians and Gynecologists, theAmerican Academy of Pediatrics, and the Society for Maternal Fetal Medicinenext week.

In advance of that meeting, I want to go on record that March of Dimes expectsTher-Rx to come to the table with substantive commitments including:

1) A significant reduction in the list price of Makena.

2) Adjustments to the patient assistance program to ensure

adequate coverage of all patients, insured, uninsured and underinsured.

3) A method for reporting on a regular basis to stakeholders on the patient assistance program to ensure that it is meeting needs in a timelyand adequate way.

4) A justification or rationale for your pricing based on yourinvestment in the product, savings to the health care system, or otherappropriate methodology, which you are prepared to make public.

Without these elements, I do not believe that Makena can succeed in the currentmarketplace environment, and as a result, at-risk women will be denied accessto a safe and effective treatment to reduce preterm delivery. Therefore if you areunable to make a clear commitment to significantly address the above issues atthe meeting, the March of Dimes will need to pursue alternative strategies forensuring that this proven intervention to prevent preterm birth is made available toall medically eligible pregnant women, and we will step away from ourlongstanding and productive corporate relationship with Ther-Rx. Thank you foryour consideration of this critical matter. [Emphasis added.]



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42. Then, on March 30, 2011, the Company issued a press release entitled Ther-Rx

Corporation Commits to Take Action Regarding Makena Pricing. The press release revealed,

in relevant part:

Ther-Rx Corporation takes very seriously the public concerns raised regarding thelist price of Makena. We are committed to ensuring that this significant, FDA-approved medication is covered at an affordable cost and accessible to all womenwho are prescribed Makena. We are finalizing solutions to the concerns, and willannounce them by the end of the week.

* * *To remove financial barriers to access, Ther-Rx established and has activated apatient financial assistance program (PAP) that not only reduces the total out-of-pocket costs for qualified patients, but eliminates out-of-pocket costs entirely

for patients whose financial need is greatest. The level of assistance alreadyexceeds many federal program guidelines for healthcare subsidies. Based onthe feedback the company has received, we are currently exploring additionalways to help provide affordable access for all patients who are prescribedMakena. This includes the expansion of the existing patient assistance program.

Specialty injectable products like Makena are not typically carried by retailpharmacies. To make the process of prescribing and obtaining Makena as easy as possible for healthcare providers and patients, Ther-Rx established the MakenaCare Connection, a comprehensive program for patients and healthcare providers that provides administrative, financial, and treatment support forMakena patients in one single point of contact. The Makena Care Connection isactively processing prescriptions for Makena, and is already facilitating access tothe financial assistance program for patients in financial need.

It is our commitment that every woman who is prescribed Makena will haveaffordable access to this FDA-approved and FDA-monitored therapy. [Emphasisadded.]

43. That same day, the FDA issued a press release entitled FDA Statement on

Makena. This press release set forth, in relevant part:

FDA understands that the manufacturer of Makena, KV Pharmaceuticals, has sentletters to pharmacists indicating that FDA will no longer exercise enforcementdiscretion with regard to compounded versions of Makena. This is not correct.

In order to support access to this important drug, at this time and under thisunique situation, FDA does not intend to take enforcement action against

pharmacies that compound hydroxyprogesterone caproate based on a valid prescription for an individually identified patient unless the compounded



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products are unsafe, of substandard quality, or are not being compounded inaccordance with appropriate standards for compounding sterile products. Asalways, FDA may at any time revisit a decision to exercise enforcementdiscretion. [Emphasis added.]


20 percent, to close on March 30, 2011 at $5.65 per share, on unusually heavy trading volume.

Similarly, the Companys series B stock fell $1.46 per share, or over 20 percent, to close on

March 30, 2011 at $5.70 per share, on heavy trading volume.

45. On April 1, 2011, the Company issued a press release entitled Ther-Rx

Corporation Takes Action to Further Ensure High-Risk Women Are Able to Access FDA-

Approved Makena. Therein, the Company revealed, in relevant part:

As part of its ongoing efforts to ensure that high-risk women have access to FDA-approved Makena instead of unapproved, unregulated compounded drugs, Ther-Rx Corporation, a subsidiary of K-V Pharmaceutical Company (NYSE:KVa/KVb) (the Company), announced today important initiatives to reduce thecost of Makena (hydroxyprogesterone caproate injection) and encouragestakeholders to provide timely access to this important FDA-approvedmedication. Effective immediately, Ther-Rx has:

Reduced the list price of Makena by nearly 55 percent, to $690 perinjection;

Will offer supplemental rebates that, in conjunction with the list pricereduction and the standard Medicaid rebate of 23.1 percent, will resultin a substantially reduced cost per injection for state Medicaid agenciescompared to list price. This will help ensure that every woman who isprescribed Makena regardless of her ability to pay has the comfort ofknowing a medication that has been rigorously reviewed by FDA forsafety and efficacy is available to her;

Capped the costs for a full course of therapy to a maximum of three vials(15 injections) for contracted health insurance plans and state Medicaidagencies; and

Expanded the Companys patient assistance program for patients whoare prescribed this important medication by removing income caps toqualify for financial assistance. 85 percent of patients will pay $20 orless per injection for FDA-approved Makena, and patients whose financial need is greatest would receive FDA-approved Makena at noout-of-pocket cost.



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Under the new pricing structure, the Company believes that the use of Makena byeligible patients will deliver net cost savings to Medicaid programs and privateinsurance plans in year one, based on third-party economic modeling of costsassociated with the condition.

Ensuring access to an FDA-approved sterile, injectable medication,manufactured under mandatory strict quality controls, is in the best interests of allhigh-risk women, said Greg Divis, Chief Executive Officer, K-V PharmaceuticalCompany and President, Ther-Rx Corporation. We understand the concerns thatkey stakeholders raised under our original pricing structure. We also recognize thecurrent budget challenges facing state Medicaid programs and other payers. Inconjunction with our substantial reduction in price, it is our sincere hope that allcommitted stakeholders will take appropriate action to provide timely access tothis important FDA-approved medication. [Emphasis added.]

46. On this news, shares of the Companys series A stock fell an additional $0.60 per

share, or over 10 percent, to close on April 1, 2011 at $5.39 per share, on heavy trading volume.

Similarly, shares of the Companys series B stock fell approximately $0.56 per share, or over 9

percent, to close on April 1, 2011 at $5.37 per share, on heavy trading volume.

47. On April 4, 2011,Bloombergpublished an article entitled KV Pharmas Reduced

Makena Price Wont Sway Some Physicians. The article quoted University of Texas professor

and division chief of maternal-fetal medicine George Saad as stating that the Company lowered

the price but it is still too high. He pointed out that capped at fifteen doses a pregnancy, Makena

could cost up to $7,000 after discounts. Arnold Cohen, professor and chairman of the

department of OBGYN at Albert Einstein Medical Center in Philadelphia, stated that there was

hostility towards K-V as a result of the Companys initial pricing of Makena, along with a barrier

to using Makena as there is already a cheaper alternative that the FDA stands behind (i.e. 17P

from compounding pharmacies). He further stated, If I have a choice, lets say this [$1,500

pricing] never happened and [K-V] came out and said Makena is going to be priced at $50 for an

injection, I think most of us would have been ok with that. Baha Sibail, professor of clinical

obstetrics and gynecology at the University of Cincinnati, similarly pointed out that at current



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prices, if a physician were to buy Makena, the physician would have to assume the responsibility

for that inventory, as there is no guarantee a patient or insurance company will pay for it.

48. On these revelations, shares of the Companys series A stock fell an additional

$0.39 per share, or over 7 percent, to close on April 4, 2011 at $5.00 per share, on heavy trading

volume. Similarly, shares of the Companys series B stock declined approximately $0.34 per

share, or over 6 percent, to close on April 4, 2011 at $5.03 per share.

PLAINTIFFS CLASS ACTION ALLEGATIONS

49. Plaintiff brings this action as a class action pursuant to Rule 23 of the Federal

Rules of Civil Procedure on behalf of all persons who purchased K-V securities during the Class

Period (the Class). Excluded from the Class are defendants, directors and officers of K-V and

their families and affiliates.

50. The members of the Class are so numerous that joinder of all members is

impracticable. The disposition of their claims in a class action will provide substantial benefits

to the parties and the Court. According to the Companys Form 10-Q filed with the SEC on

August 9, 2011, K-V had over 48 million shares of series A stock and over 11 million shares of

and series B stock outstanding, owned by thousands of persons.

51. There is a well-defined community of interest in the questions of law and fact

involved in this case. Questions of law and fact common to the members of the Class which

predominate over questions which may affect individual Class members include:

(a) Whether the Securities Exchange Act was violated by defendants;

(b) Whether defendants omitted and/or misrepresented material facts;

(c) Whether defendants statements omitted material facts necessary in order

to make the statements made, in light of the circumstances under which

they were made, not misleading;



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(d) Whether defendants knew or recklessly disregarded that their statements

were false and misleading;

(e) Whether the prices of K-V securities were artificially inflated; and

(f) The extent of damage sustained by Class members and the appropriate

measure of damages.

52. Plaintiffs claims are typical of those of the Class because plaintiff and the Class

sustained damages from defendants wrongful conduct.

53. Plaintiff will adequately protect the interests of the Class and has retained counsel

who are experienced in class action securities litigation. Plaintiff has no interests which conflict

with those of the Class.

54. A class action is superior to other available methods for the fair and efficient

adjudication of this controversy.

LOSS CAUSATION/ECONOMIC LOSS

55. Defendants wrongful conduct, as alleged herein, directly and proximately caused

the economic loss suffered by Plaintiff and the Class. The price of K-Vs securities significantly

declined when the misrepresentations made to the market, and/or the information alleged herein

to have been concealed from the market, and/or the effects thereof, were revealed, causing

investors losses. As a result of their purchases of K-V securities during the Class Period,

plaintiff and other members of the Class suffered economic loss, i.e., damages, under the federal

securities laws.

SCIENTER ALLEGATIONS

56. During the Class Period, the defendants had both the motive and opportunity to

commit fraud. They also had actual knowledge of the misleading nature of the statements they

made or acted in reckless disregard of the true information known to them at the time. In so



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doing, the defendants participated in a scheme to defraud and committed acts, practices and

participated in a course of business that operated as a fraud or deceit on purchasers of K-Vs

securities during the Class Period.

57. Additionally, as set forth in 37, supra, during the Class Period, and with the

Companys securities trading at artificially inflated prices, the Company sold $200 million worth

of senior secured notes, the proceeds of which were used in large part to pay K-Vs debts.

Applicability of Presumption of Reliance:

Fraud on the Market Doctrine

58. Plaintiff will rely 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 Companys securities traded in an efficient market;

(d) The misrepresentations alleged would tend to induce a reasonable investor

to misjudge the value of the Companys securities; and

(e) Plaintiff and other members of the Class purchased K-V securities

between the time defendants misrepresented or failed to disclose material

facts and the time the true facts were disclosed, without knowledge of the

misrepresented or omitted facts.

59. At all relevant times, the market for K-V securities was efficient for the following

reasons, among others: (a) as a regulated issuer, K-V filed periodic public reports with the SEC;

and (b) K-V regularly communicated with public investors via established market

communication mechanisms, including through regular disseminations of press releases on the



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major news wire services and through other wide-ranging public disclosures, such as

communications with the financial press, securities analysts and other similar reporting services.

NO SAFE HARBOR

60. Defendants verbal Safe Harbor warnings accompanying its oral forward-

looking statements (FLS) issued during the Class Period were ineffective to shield those

statements from liability.

61. The defendants are also liable for any false or misleading FLS pleaded because, at

the time each FLS was made, the speaker knew the FLS was false or misleading and the FLS

was authorized and/or approved by an executive officer of K-V who knew that the FLS was

false. None of the historic or present tense statements made by defendants were assumptions

underlying or relating to any plan, projection or statement of future economic performance, as

they were not stated to be such assumptions underlying or relating to any projection or statement

of future economic performance when made, nor were any of the projections or forecasts made

by defendants expressly related to or stated to be dependent on those historic or present tense

statements when made.

FIRST CLAIM

Violation of Section 10(b) of The Exchange Act and Rule 10b-5

Promulgated Thereunder Against All Defendants

62. Plaintiff repeats and realleges each and every allegation contained above as if

fully set forth herein.

63. During the Class Period, K-V and the Individual Defendants carried out a plan,

scheme and course of conduct which was intended to and, throughout the Class Period, did: (i)

deceive the investing public, including Plaintiff and other Class members, as alleged herein; and

(ii) cause Plaintiff and other members of the Class to purchase K-V securities at artificially



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inflated prices. In furtherance of this unlawful scheme, plan and course of conduct, these

defendants, and each of them, took the actions set forth herein.

64. K-V and the Individual Defendants: (i) employed devices, schemes, and artifices

to defraud; (ii) made untrue statements of material fact and/or omitted to state material facts

necessary to make the statements not misleading; and (iii) engaged in acts, practices, and a

course of business which operated as a fraud and deceit upon the purchasers of the Companys

securities in an effort to maintain artificially high market prices for K-V securities in violation of

Section 10(b) of the Exchange Act and Rule 10b-5. These defendants are sued either as primary

participants in the wrongful and illegal conduct charged herein or as controlling persons.

SECOND CLAIM

Violation of Section 20(a) of

The Exchange Act Against the Individual Defendants

65. Plaintiff repeats and realleges each and every allegation contained above as if

fully set forth herein.

66. The Individual Defendants acted as controlling persons of K-V within the

meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-level

positions, and their ownership and contractual rights, participation in and/or awareness of the

Companys operations and/or intimate knowledge of the false financial statements filed by the

Company with the SEC and disseminated to the investing public, the Individual Defendants had

the power to influence and control and did influence and control, directly or indirectly, the

decision-making of the Company, including the content and dissemination of the various

statements which Plaintiff contends are false and misleading. The Individual Defendants were

provided with or had unlimited access to copies of the Companys reports, press releases, public

filings and other statements alleged by Plaintiff to be misleading prior to and/or shortly after



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these statements were issued and had the ability to prevent the issuance of the statements or

cause the statements to be corrected.

67. In particular, each of the Individual Defendants had direct and supervisory

involvement in the day-to-day operations of the Company and, therefore are presumed to have

had the power to control or influence the particular transactions giving rise to the securities

violations as alleged herein, and exercised the same.

68. As set forth above, K-V and the Individual Defendants each violated

Section 10(b) and Rule 10b-5 by their acts and omissions as alleged in this Complaint. By virtue

of their positions as controlling persons, the Individual Defendants are liable pursuant to Section

20(a) of the Exchange Act. As a direct and proximate result of these defendants wrongful

conduct, Plaintiff and other members of the Class suffered damages in connection with their

purchases of the Companys securities during the Class Period.

WHEREFORE, Plaintiff prays for relief and judgment, as follows:

(a) Determining that this action is a proper class action under Rule 23 of the

Federal Rules of Civil Procedure;

(b) Awarding compensatory damages and equitable relief in favor of Plaintiff

and the other Class members against all defendants, jointly and severally,

for all damages sustained as a result of defendants wrongdoing, in an

amount to be proven at trial, including interest thereon;

(c) Awarding Plaintiff and the Class their reasonable costs and expenses

incurred in this action, including counsel fees and expert fees; and

(d) Such other and further relief as the Court may deem just and proper.

JURY TRIAL DEMANDED

Plaintiff hereby demands a trial by jury.



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Dated: November 2, 2011 Respectfully submitted,

By: /s/ Don R. LolliDYSART TAYLOR COTTERMcMONIGLE & MONTEMORE, P.C.Don R. Lolli MOBar#56263MOPatrick J. Kaine MOBar#43959MO4420 Madison AvenueKansas City, MO 64111(816) 931-2700(816) 931-7377 [email protected]@dysarttaylor.com

KESSLER TOPAZ

MELTZER & CHECK, LLPD. Seamus [email protected] M. [email protected] O. [email protected] King of Prussia RoadRadnor, PA 19087(610) 667-7706(610) 667-7056 (fax)

Attorneys for Plaintiff


class action complaint v. kv pharm

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