1 consolidated class action complaint 08/12/2013

Case 1:13-cv-00365-JS Document 29 Filed 08/12/13 of 56 PageID #: 244

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE

In re INCYTE CORPORATION ) Consolidated SHAREHOLDER LITIGATION ) C.A. No. 1:13-cv-00365-JRS

) ) CLASS ACTION

This Document Relates To: ) )

ALL ACTIONS. ) DEMAND FOR JURY TRIAL

CONSOLIDATED CLASS ACTION COMPLAINT


By and through their undersigned counsel, Lead Plaintiff City of Lakeland Employees

Pension Plan (“Plaintiff”) alleges the following against Defendants Incyte Corporation (“Incyte”

or the “Company”), Paul A. Friedman (“Friedman”), Patricia S. Andrews (“Andrews”), and

Richard S. Levy (“Levy”) (collectively, “Defendants”), upon personal knowledge as to those

allegations concerning Plaintiff and, as to all other matters, upon the investigation of counsel,

which included, without limitation: (a) review and analysis of public filings made by Incyte and

other related parties and non-parties with the U.S. Securities and Exchange Commission

(“SEC”); (b) review and analysis of press releases and other publications disseminated by certain

of the Defendants and other related non-parties; (c) review of news articles and shareholder

communications; (d) review of other publicly available information concerning Incyte, the other

Defendants, and related non-parties; (e) consultation with experts; and (f) interviews with factual

sources, including individuals formerly employed by Incyte and other industry participants.

I. SUMMARY OF THE ACTION

1. This is a federal securities class action against Incyte and certain of its officers for

violations of the federal securities laws. Plaintiff brings this action under Sections 10(b) and

20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) on behalf of itself and all

persons or entities who purchased or acquired shares of Incyte (the “Class”) between April 26,

2012 and August 1, 2012, inclusive (the “Class Period”). Plaintiff alleges that, during the Class

Period, Defendants engaged in a fraudulent scheme to artificially inflate the Company’s stock

price by misrepresenting and concealing information regarding the commercialization and

patient usage of the Company’s only FDA-approved drug, Jakafi (ruxolitinib). As a result of this

fraud, as more fully described below, shareholders suffered millions of dollars in losses.

2. Incyte was founded in 1991 and is a biopharmaceutical company that develops

and commercializes small molecule drugs for treatment of various diseases, particularly in the

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areas of oncology and inflammation. Although Incyte has been working to develop various drug

candidates, its first and only commercially available product is Jakafi. Jakafi was first

synthesized by Incyte in 2005 and is intended to improve symptoms of patients with

myelofibrosis, a severe, life-threatening bone marrow disease.

3. Following the development of Jakafi, Incyte conducted several clinical trials of

the drug, which were used to seek approval from the U.S. Food and Drug Administration

(“FDA”). These clinical trials demonstrated significant improvements in certain symptoms

associated with myelofibrosis ( e.g. , reductions of enlarged spleen) and exhibited patient

discontinuation (a.k.a. drop-out rates) approximating 14% at the 24-week mark and 18% at the

48-week mark. Notably, Incyte’s clinical studies excluded the severely-ill patient population –

those patients with a platelet count below 100,000 and a projected life span of six months or less.

4. After Incyte received FDA approval for Jakafi in November of 2011, and

following significant market and clinical research, the Company immediately launched the drug

for sale. While the FDA approved Jakafi for treatment of intermediate or high-risk

myelofibrosis, Defendants recognized that, initially, the drug’s core patient group would be the

severely-ill patient population. This was due to the fact that myelofibrosis was a slow

developing disease that evidenced few symptoms at the outset, leading physicians to treat the

disease with a “wait and see” approach and only consider employing Jakafi when a patient

reached more advanced stages.

5. Unbeknownst to the market, during the Class Period, the Company was

experiencing heightened discontinuation of Jakafi among its core patient group of severely-ill

patients who had not participated in clinical studies. These discontinuation rates, which were a

critical metric of the drug’s performance, were higher than those evidenced in the Company’s

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studies. This increased drop-out rate was due to patient deaths and serious side effects

experienced by these patients. Moreover, the dosage originally prescribed for this patient group

was too high and not well tolerated, ultimately leading to a drug label update. In short, as

Defendants would later admit, the discontinuation rates they had cited in clinical studies were

“unrealistic.”

6. Defendants were intimately aware of the heightened discontinuation rates

associated with Jakafi. As they acknowledged, they had conducted significant market research

for years in advance of the release of the drug and continuously evaluated patient usage of the

drug through frequent surveys and constant feedback from the sales force. Additionally, the

Company produced reports related to patient deaths on a monthly basis and Defendants

Friedman, Andrews, and Levy received Discontinuation Rate Reports which tracked

discontinuation rates for actual (non-clinical) patients.

7. Despite this, throughout the Class Period, Defendants misled the market by

repeatedly touting Incyte’s clinical studies as a benchmark for patient usage and discontinuation

of the drug, instead of revealing the much higher discontinuation rates actually witnessed in the

commercial market. Moreover, when specifically questioned about discontinuation rates,

Defendants represented that they had no information evidencing that discontinuation rates would

be higher than they experienced in clinical studies, when in fact they did have such information

and failed to disclose it to investors. In such a way, Defendants endeavored to protect market

perception of their only product and succeeded in artificially inflating Incyte’s stock price.

Taking full advantage of this artificial inflation, Defendants Friedman and Levy disposed of

significant quantities of Incyte common stock for proceeds in excess of $5.7 million. Likewise,

other Company insiders sold their shares for proceeds in excess of $7 million.

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8. Ultimately, just one quarter later, when Defendants issued Incyte’s second quarter

2012 financial results on August 2, 2012, they revealed for the first time that patient

discontinuations of Jakafi were much higher than experienced in clinical trials due to patient

deaths and serious side effects amongst the severely ill patient group. Analysts were shocked by

this rapid turn of events, noting the discontinuation rate as a “key concern” and stating that the

“sentiment and momentum around the INCY story just turned on a dime.”

9. As a result of Defendants’ announcements, and resulting analyst commentary,

Incyte’s stock price plummeted approximately 26%, falling from a close of $24.92 on August 1,

2012 to close at $18.48 on August 3, 2012, on unusually high trading volume, causing millions

in investor losses.

II. JURISDICTION AND VENUE

10. 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 by the

SEC, 17 C.F.R. §240.10b-5. This Court has jurisdiction over the subject matter of this action

pursuant to 28 U.S.C. §1331 and Section 27 of the Exchange Act, 15 U.S.C. §78aa.

11. 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 false and misleading statements and

omissions were made in or issued from this District. Incyte’s principal executive offices are

located at Experimental Station, Route 141 & Henry Clay Road, Building E336, Wilmington,

Delaware 19880, and many of the acts and transactions giving rise to the violations of law

complained of occurred in this District.

12. In connection with the challenged conduct, Defendants, directly or indirectly,

used the means and instrumentalities of interstate commerce, including, but not limited to, the

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United States mails, interstate telephone communications, and the facilities of the national

securities markets.

III. PARTIES

A. Plaintiff

13. Plaintiff was appointed to serve as Lead Plaintiff in this action by Order of this

Court dated June 26, 2013 [D.I. 22]. As shown in its certification filed with the Court on May 6,

2013 [D.I. 12-1] and incorporated herein, Plaintiff purchased Incyte common stock at artificially

inflated prices during the Class Period and suffered an economic loss when true facts about the

commercialization and patient usage of the Company’s only FDA-approved drug, Jakafi

(ruxolitinib), were disclosed and the stock price resultantly declined.

B. Defendants

14. Defendant Incyte is a Delaware corporation with principal executive offices

located in Wilmington, Delaware. Incyte is a biopharmaceutical company focused on the

discovery, development and commercialization of proprietary small molecule drugs. Incyte’s

only commercial product is, and at all relevant times was, Jakafi, a drug approved by the FDA in

November 2011 for the treatment of intermediate or high-risk myelofibrosis, a life-threatening

bone marrow disorder.

15. Defendant Friedman is, and at all relevant times was, President and Chief

Executive Officer (“CEO”) of Incyte and a member of Incyte’s Board of Directors. During the

Class Period, while Incyte common stock was artificially inflated, Defendant Friedman sold

225,000 shares of his Incyte common stock at a price of $22.56 per share for insider trading

proceeds of more than $5 million.

16. Defendant Andrews was Executive Vice President and Chief Commercial Officer

(“CCO”) of Incyte at all times during the Class Period. Defendant Andrews departed from

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Incyte on August 29, 2012, shortly after the Class Period and Defendants’ revelation of truth

regarding the fraudulent scheme alleged herein.

17. Defendant Levy is, and at all relevant times was, Executive Vice President and

Chief Drug Development and Medical Officer of Incyte. During the Class Period, while Incyte

common stock was artificially inflated, Defendant Levy sold 30,000 shares of his Incyte

common stock at a price of $22.95 per share for insider trading proceeds of nearly $700,000.

18. Defendants Friedman, Andrews, and Levy are collectively referred to herein as

the “Individual Defendants.”

19. During and prior to the Class Period, the Individual Defendants, as senior

executive officers of Incyte, were privy to confidential and proprietary information concerning

Incyte, its operations, finances, financial condition, and present and future business prospects.

The Individual Defendants also had access to material adverse non-public information

concerning Incyte and its core product Jakafi, as discussed in detail below. Because of their

positions with Incyte, the Individual Defendants had access to non-public information about

Incyte’s business, finances, products, markets, and present and future business prospects via

access to internal corporate documents, conversations, and connections with other corporate

officers and employees, attendance at management and/or board of directors meetings and

committees thereof, and via reports and other information provided to them in connection

therewith. Because of their possession of such information, the Individual Defendants knew or

recklessly disregarded that the adverse facts specified herein had not been disclosed to, and were

being concealed from, the investing public.

20. The Individual Defendants are liable as direct participants in the wrongs

complained of herein. In addition, the Individual Defendants, by reason of their status as senior

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executive officers, were “controlling persons” within the meaning of Section 20(a) of the

Exchange Act and had the power and influence to cause the Company to engage in the unlawful

conduct complained of herein. Because of their positions of control, the Individual Defendants

were able to, and did, directly or indirectly, control the conduct of Incyte’s business.

21. The Individual Defendants participated in the drafting, preparation, and/or

approval of the various public and shareholder and investor reports and other communications

complained of herein and were aware of, or recklessly disregarded, the misstatements contained

therein and omissions therefrom, and were aware of their materially false and misleading nature.

Because of their executive and managerial positions with Incyte, each of the Individual

Defendants had access to the adverse undisclosed information about Incyte’s business prospects,

financial condition, and performance as particularized herein, and knew, or recklessly

disregarded, that these adverse facts rendered the positive representations made by or about

Incyte and its business issued or adopted by the Company materially false and misleading.

22. The Individual Defendants, because of their positions of control and authority as

officers of the Company, were able to, and did, control the content of the various SEC filings,

press releases, and other public statements pertaining to the Company during the Class Period.

Each Individual Defendant was provided with copies of the documents alleged herein to be

misleading prior to or shortly after their issuance and/or had the ability and/or opportunity to

prevent their issuance or cause them to be corrected. Accordingly, the Individual Defendants are

responsible for the accuracy of the public reports and releases detailed herein and are therefore

primarily liable for the representations contained therein.

23. Each of the above officers of Incyte, by virtue of his or her high-level position

with the Company, directly participated in the management of the Company, was directly

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involved in the day-to-day operations of the Company at the highest levels, and was privy to

confidential proprietary information concerning the Company and its business, operations,

financial condition, and product commercialization, as alleged herein. These Defendants were

involved in drafting, producing, reviewing, and/or disseminating the false and misleading

statements and information alleged herein, were aware, or recklessly disregarded, that these false

and misleading statements were being issued regarding the Company and omitted material

adverse facts regarding the Company, and approved or ratified these statements and failed to

disclose these facts, in violation of the federal securities laws.

24. As senior executive officers and as controlling persons of a publicly traded

company whose common stock was, and is, registered with the SEC pursuant to the Exchange

Act, and was, and is, traded on the NASDAQ Stock Market (“NASDAQ”) and governed by the

federal securities laws, the Individual Defendants had a duty to promptly disseminate accurate

and truthful information with respect to Incyte’s financial condition and performance, growth,

operations, financial statements, business, products, markets, management, earnings, and present

and future business prospects, and to correct any previously issued statements that had become

materially misleading or untrue so that the market price of Incyte’s securities would be based

upon truthful and accurate information. The Individual Defendants’ misrepresentations and

omissions during the Class Period violated these specific requirements and obligations.

25. The Individual Defendants are liable as participants in a fraudulent scheme and

course of conduct that operated as a fraud or deceit on purchasers of Incyte’s publicly traded

securities by disseminating materially false and misleading statements and/or concealing material

adverse facts. The scheme deceived the investing public regarding the commercialization and

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patient usage of Jakafi, and the intrinsic value of Incyte common stock, causing Plaintiff and

other members of the Class to purchase Incyte common stock at artificially inflated prices.

26. Defendants are liable for: (i) making false statements; and/or (ii) failing to

disclose adverse facts known to them about Incyte. Defendants’ fraudulent scheme and course

of business that operated as a fraud or deceit on purchasers of Incyte common stock was a

success, as it: (i) deceived the investing public regarding the commercialization and patient usage

of Incyte’s core product Jakafi; (ii) artificially inflated the price of Incyte common stock; and

(iii) caused Plaintiff and other members of the Class to purchase Incyte common stock at inflated

prices.

IV. SUBSTANTIVE ALLEGATIONS 1

A. Confidential Witnesses

27. Plaintiff’s allegations herein concerning the falsity of Defendants’ statements and

the scienter of the Company and the Individual Defendants are based upon, in part, interviews

with numerous witnesses, including former employees of Incyte and other industry participants.

These witnesses provided information regarding the various methods employed by Defendants in

furtherance of their scheme to defraud Incyte shareholders. These witnesses 2 included:

(a) The former Territory Business Manager, who was employed with Incyte

from July 2011 until June 2012. In this capacity, he was one of seven territory business

managers who reported to Regional Business Director Andrew Slay (“Slay”)

1 The background information in this section derives from Incyte’s Forms 10-K for the fiscal years ended December 31, 2011 and December 31, 2012, filed with the SEC on February 22, 2012 and February 21, 2013, respectively.

2 All confidential witnesses are identified in the masculine to protect their identities.

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(b) The former Senior Manager of Oncology Therapeutics, who was

employed from January 2011 until April 2012. As of November 2011, this former employee

reported to Director of Commercial, Kevin Harris and was responsible for analyzing molecules

in the Company’s Research and Development (“R&D”) “pipeline.” This included interfacing

with the Discovery Team, which is a subset within R&D, as well as the Medical Team, which

included physicians and those involved in clinical trials, in order to assist in the development of

these molecules for commercial exploitation.

(c) The former Vice President of Clinical Safety and Pharmacovigilance, who

worked at Incyte from September 2011 until February 2013. In this capacity, he reported to

Defendant Levy, who reported to Defendant Friedman.

(d) A former employee with advertising agency Harrison & Star, which was

responsible for assisting Incyte with its Jakafi product launch.

B. Background of the Company

28. Incyte was founded in 1991 and is a biopharmaceutical company headquartered in

Wilmington, Delaware. Incyte employs approximately 400 individuals and conducts its drug

discovery, research, development, and marketing activities at its Wilmington headquarters.

Incyte describes its business as “the discovery, development and commercialization of

proprietary small molecule drugs to treat serious unmet medical needs,” focusing primarily in the

areas of oncology and inflammation. Since 2003, Incyte has explored ways to inhibit enzymes

called janus associated kinases (JAKs) that reside within cells. These enzymes control certain

biological functions, and contribute to symptoms experienced by patients with various diseases.

C. Myelofibrosis and Jakafi

29. While Incyte is working to develop various drug candidates, its first and only

commercially available product is the drug ruxolitinib known as “Jakafi.” Jakafi is an oral JAK

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inhibitor first synthesized by Incyte in 2005 to improve symptoms for patients with

myelofibrosis. Myelofibrosis is a severe, life-threatening bone marrow disease afflicting

between 16,000 and 18,500 patients in the U.S. Myelofibrosis disrupts the body’s normal

production of blood cells, resulting in extensive scarring to bone marrow, leading to severe

anemia, weakness, fatigue, and often, an enlarged spleen and liver. 3 Myelofibrosis is a type of

chronic leukemia that can occur on its own (primary myelofibrosis) or as a result of another bone

marrow disorder (secondary myelofibrosis). Id. Myelofibrosis has a poor prognosis and limited

treatment options. 4 According to the Company, Jakafi is indicated for treatment of patients with

intermediate or high-risk myelofibrosis. Id.

30. In advance of approval by the FDA, Incyte tested Jakafi in three phases of clinical

trials. The results of two of the Phase III trials known as “COMFORT-I” and “COMFORT-II”

were used to seek FDA approval. According to Incyte, these clinical trials “demonstrated that

patients treated with Jakafi experienced significant reductions in splenomegaly (enlargement of

the spleen).” The COMFORT-I study also demonstrated improvements in symptoms such as

abdominal discomfort, pain under the left ribs, an early feeling of fullness, night sweats, bone

and muscle pain and itching. Most patients taking a placebo in these studies experienced

worsening of these same parameters. The COMFORT-I study, conducted in the U.S., had a

discontinuation rate of 14% at the 24-week mark, and the COMFORT-II study, conducted in

Europe, had a drop-out rate of 18% at the 48-week mark. Moreover, Defendants represented that

in a separate Phase II study started in 2007, the median duration of treatment was about three

3 See Myelofibrosis, Mayo Clinic, http://www.mayoclinic.com/health/myelofibrosis/DS00886 (last visited Aug. 12, 2013).

4 Incyte, About Jakafi, http://www.incyte.com/jakafi/about (last visited Aug. 12, 2013).

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years. Significantly, these studies did not include severely ill patients, those patients having a

projected lifespan of six months or less.

31. On June 6, 2011, Incyte submitted a New Drug Application (“NDA”) to the FDA,

seeking the approval of Jakafi for the treatment of myelofibrosis. On November 16, 2011,

following a priority review of Incyte’s NDA, the FDA approved Jakafi for the treatment of

intermediate or high-risk myelofibrosis. As such, Jakafi became the first myelofibrosis drug

approved by the FDA.

D. As It Begins to Commercialize Jakafi, Incyte Struggles to Achieve Sales to Intermediate Patients

32. Immediately following FDA approval, Incyte launched Jakafi for sale. The first

patient received Jakafi commercially on November 23, 2011. However, sales were slow from

the outset. The sales group under Regional Business Director Slay struggled to close Jakafi sales

with physicians. Indeed, one former employee explained that the group only managed to achieve

“onesie twosie prescriptions.” From the time of the launch until his departure, he estimated that

he had written 25 prescriptions, which he characterized as being a lackluster result and similar to

what most of his counterparts were achieving. Moreover, this former employee stated “the

uptick in my territory was not going very well” and the Company appeared to be missing the

benchmarks it had sought and publicly reported.

33. As another former employee explained, Incyte did not have a sound basis to

project substantial sales from any patients who had less-than-severe symptoms. This former

employee relayed that a fundamental principle in medicine is that physicians must “do no harm.”

In the oncological field, the above code of conduct is oftentimes applied as a “wait and see”

approach to treatment. This is because hematology-related illnesses — and specifically

myelofibrosis — were indolent diseases, which develop slowly and incrementally over time, and

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evidence few symptoms at the outset. As a result, it is a long-standing and widely-accepted

medical practice for physicians to evaluate symptoms of these types of diseases over time, assess

possible treatments, and eventually initiate treatment, based on what has come to light through

the prolonged “wait and see” approach.

34. Many, if not most, physicians monitoring intermediate myelofibrosis patients ( i.e. ,

less-severe), would not immediately prescribe Jakafi (or apply other treatment, for that matter) at

the outset. Rather, these doctors would review and assess, and only later prescribe the drug if the

treatment was a good option given a particular patient’s health/condition. With respect to

myelofibrosis, which is typically a slow growing type of disease, most doctors choose to treat the

symptoms (at least in the first phases), rather than the disease itself. Treating symptoms would

likely entail inexpensive over-the-counter medication, versus the much more costly option of

treating the disease with a prescription like Jakafi. While Jakafi had been approved for less-

severe patients, one former employee stated: “Just because you’ve got that approval [for

intermediate patient treatment], doesn’t mean that’s what physicians are going to do, when

technically, that goes against how they have been trained.”

35. This was corroborated by another former employee who explained that the “wait

and see” approach was a “common feature of the natural history of myelofibrosis.” It is

commonly accepted medical practice for doctors of slow progressing/indolent diseases like

myelofibrosis, to evaluate a patient over the course of several months, if not longer. As he

explained, “sometimes even for the first several years, not uncommonly maybe even up to three,

four, five years, no treatment is really given. The patient just visits the doctor on a quarterly or

monthly basis to check on how the spleen size is progressing . . . whether they’re developing any

worsening systemic symptoms.” He added, “It’s only when patients begin to get more

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symptomatic, in what’s called more advanced intermediate stages, that drug treatment becomes

employed.”

E. Jakafi’s Discontinuation Rates Were a Critical Metric of Its Performance

36. As a result of the “wait and see” approach employed by physicians in treating

myelofibrosis, after its release, Jakafi was prescribed to the severely ill patient population, who

had enlarged spleens and very burdensome symptoms. Accordingly, at Jakafi’s launch, the

Company targeted Jakafi to this patient group, who had not participated in its clinical studies.

This was confirmed by a former employee with advertising agency Harrison & Star, which was

responsible for assisting Incyte with its Jakafi product launch, and targeted their advertising of

the drug to the severely ill patient group.

37. Thus, tracking the persistence, or, on the flip side, discontinuation rates, of Jakafi

amongst Incyte’s severely ill population group was critical. This was particularly true where

Jakafi was a new drug offering, and, prior to and during the Class Period, the Company had not

yet issued guidance with respect to Jakafi sales. As a result, investors were heavily focused on

data with respect to patient usage of the drug and repeatedly inquired into discontinuation rates

on quarterly earnings calls. Indeed, as Defendants admitted, persistency on the drug (the flip

side of discontinuation) was the most important metric impacting demand and revenue. See, e.g. ,

(November 1, 2012 earnings conference call, Jim Daly (“Daly”), the Executive Vice President

and Chief Commercial Officer of Incyte, stated that “ persistency, that is the single most

important lever from our perspective going forward in order to increase overall demand. And

we are focused on that very diligently, and we are seeing early indications of improvement .”);

(November 27, 2012 Piper Jaffray Healthcare Conference, Daly stated that “ [t]he point of single

greatest leverage we have on the revenue line right now is to increase persistency over time . ”)

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Defendants were thus motivated to downplay high discontinuation rates amongst the Company’s

key patient group in order to garner positive market perception of Jakafi.

F. Defendants Knew That Severely Ill Patients Were Dropping Off Jakafi, but Failed to Disclose Increased Discontinuation Rates to the Market

38. While during the Class Period, Defendants continued to tout their clinical studies

as benchmarks for the patient usage and discontinuation of Jakafi, internally Defendants knew

that discontinuation rates by their actual patient population (severely ill patients) were much

higher than in reported clinical studies. As one former employee explained, with initial

prescriptions going to more severe patients who had a higher likelihood of passing away, there

was also a higher probability that prescriptions for these more severe patients would not be

sustainable due to patient death. Indeed, as another former employee recalled, his own sales

performance, as well as those of his colleagues, suggested that many patients were in fact

ceasing further use after an initial prescription had been filled. This former employee explained

that “once you go on the prescription, you should stay on it for at least six months.”

Accordingly, this former employee expected to see an incremental increase of prescriptions

being written over several months, where new patients began the treatment and existing patients

(who started treatment in earlier months) would receive refill prescriptions. However, his

numbers were not consistent but were “jumping all over the place.” The lack of such an

incremental increase suggested that many patients were not getting refills, but were instead

dropping out of treatment, in part due to patient death.

39. Another former employee explained that the Company produced reports related to

patient deaths on a monthly basis and that the Company’s Clinical Safety group began tracking

actual patient deaths “pretty intently” as of December 2011/January 2012. This former employee

stated that “[i]t was pretty clear, perhaps there were more deaths than management might have

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expected .” In fact, Defendant Levy informed this former employee that the reason for the

unexpectedly high death rate was that more seriously ill patients were being treated in practice

than in clinical trials, and these more severe patients were prone to dying, given their advanced

stages. The Company also tracked discontinuation rates and sales volume and maintained data

on both intermediate-level risk patients as well as more severe patients. The Company’s

commercial department also generated Discontinuation Rate Reports for actual (non-trial)

patients, which were made available to Defendants Friedman, Andrews, and Levy.

40. Further, Defendants themselves acknowledged carefully tracking patient usage of

Jakafi and symptoms on a frequent basis. For example:

~ Defendant Friedman stated on January 9, 2012, at the J.P. Morgan Healthcare Conference, that Defendants had conducted their first market research survey, including approximately 50 Hematologists/Oncologists, shortly after the approval of Jakafi, and had exchanges with physicians at the American Society of Hematology regarding the drug.

On the February 15, 2012 earnings conference call, Defendant Levy admitted that the Drug Safety Organization reports to him regarding drug tolerability.

On March 13, 2012, at the Barclays Capital Global Healthcare Conference, Defendant Andrews stated that the Company has launch trackers which track 50 hematologists/oncologists as to patient usage every two weeks or every month . Moreover, Defendant Andrews emphasized the market research that Incyte conducted with respect to Jakafi, stating that: “unlike a lot of small companies who focus in so much on just trying to get their drugs through the development process, Incyte actually early on did focus in on what the commercial opportunity would be. So for example, I was hired three years before the drug was approved, and even though we had some difficult financial times during that, we actually always put the money that we needed to into market research to understand what this market looked like, and we did a lot of that .”

On the April 26, 2012 earnings conference call, Defendant Andrews stated that prior to the Company’s launch of Jakafi in November, they had conducted market research regarding the drug. Since that time, the Company also conducted a “series of market research surveys with hematologist oncologists” and received feedback from the Company’s

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field force . Moreover, she acknowledged that the Company’s tracing surveys were conducted every two weeks or every month since the Company got approval and involved interviews with 50 hematologist/oncologists.

On June 19, 2012, at the Wells Fargo Health Care Conference, Defendant Andrews stated: “The launch is shaping up very much as we expected. As Brian alluded to, we’ve done a significant amount of research prior to – about three years ago is when we started. And that’s a long lead time for small companies. Even though some of the times between when I was hired and when we got approved were tough financially, we always put the resources we needed into understanding the market and market dynamics. So when we did get approved, we were very ready for it. And, consequently, I would say launch is going very much as we expected. The prescribers are who we expected they would be. . . . And performances has also been good. Our first quarter was very robust. And we see that as a good sign of launch and the uptake and the preparation that went into it.”

At Canaccord Genuity’s Global Growth Conference on August 15, 2012, just after the end of the Class Period, Defendant Andrews admitted that they were receiving data on patients who got a prescription but were too ill to take Jakafi and that the customer service area was tracking data on discontinuations and the reasons for them ( e.g. , entering hospice).

41. Despite being fully informed as to unexpectedly high discontinuation rates among

severely ill patients who were Jakafi’s core consumers, Defendants failed to disclose this to the

market in an effort to protect the perception of their key product. Instead, as further detailed

below, Defendants misled the market as to its true discontinuation rates among the severely ill

patient group, stating, for example:

With respect to “early patient dropouts,” Defendant Andrews stated that “there’s really been nothing that we hadn’t anticipated, because we had done, really, an extensive amount of market research . So I think that it’s very much meeting our expectations in how we thought things would happen.” April 26, 2012 earnings conference call. ¶49;

When specifically asked whether there had been anything “anecdotal about patients dropping off the drug earlier than you would have expected,” Defendant Andrews responded: “ No. No, there hasn’t been .” April 26, 2012 earnings conference call. ¶50; and

Defendant Andrews stated that “ [w]e don’t have anything at the moment, which would lead me to think that [discontinuation rates] would be

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significantly different from what we saw in the [clinical] studies that I cited .” June 6, 2012 Goldman Sachs Global Healthcare Conference. ¶61.

Defendants’ false and misleading statements and omissions caused the price of Incyte stock to be

artificially inflated during the Class Period.

42. Ultimately, just one quarter later, the Company revealed that patient

discontinuations of Jakafi were much higher than Defendants had led investors to believe

because Jakafi consumers, severely ill patients who had not participated in clinical trials, were

dropping off the medication due to patient death and serious side effects.

43. Analysts were dismayed by Defendants’ August 2nd revelations, which stood in

stark contrast to their previous disclosures, noting:

“heightened uncertainty around Jakafi’s launch trajectory and the long-term drop-out rate of [patients] on [the] drug” Aug. 2, 2012 J.P. Morgan Analyst Report;

“[a]n initial high discontinuation rate is a key concern ” and the “step-down in new [patient] adds also bears close scrutiny” Aug. 3, 2012 Morgan Stanley Analyst Report; and

~ “2Q [was] marred by high discontinuations ” and that “[b]oth 2Q results and 2012 guidance fell short of investor expectations which were built on a belief that strong 1Q sales could continue, but neglected to recognize the extent of the discontinuation rate which was qualified as occurring in primarily advanced patients” Aug. 3, 2012 JMP Securities Analyst Report.

44. Defendants’ announcements, coupled with resulting analyst commentary, shocked

the market, causing Incyte’s stock price to decline approximately 26% over the next two trading

days on unusually high trading volume, causing millions in investor losses. While investors

suffered, Defendants Friedman and Levy capitalized on their fraud, executing conspicuously

well-timed stock sales for more than $5.7 million in combined proceeds, while other insiders

unloaded stock for more than $7 million in combined proceeds. Notably, as Defendants would

19


later admit, the clinical discontinuation rates that they had touted as a benchmark for

discontinuation rates during the Class Period were “unrealistic.”

V. DEFENDANTS’ FALSE AND MISLEADING CLASS PERIOD STATEMENTS

45. The Class Period begins on April 26, 2012, when the Company issued a press

release announcing its first-quarter 2012 financial results, which was also filed with the SEC on

Form 8-K the same day. In the press release, Defendant Friedman stated that the “early response

to Jakafi is encouraging” and that the Jakafi launch was “proceeding well.” These comments

were misleading because the “encouraging” early response touted by Defendant Freidman was

plagued by alarming numbers of patients discontinuing the use of Jakafi, at rates higher than the

clinical results Incyte had previously disclosed.

46. Defendant Friedman also conveyed that physicians were prescribing Jakafi

“primarily for their more severely ill patients,” yet failed to mention the high number of

discontinuations endemic to such severely ill patient population, many of whom could not handle

the side effects of Jakafi or died shortly after Jakafi was prescribed. Instead, Defendant

Friedman suggested that this was merely a temporary phenomenon because Jakafi prescriptions

were expected to expand to less severely ill patients as doctors became more familiar with Jakafi

and its benefits.

47. Also, on April 26, 2012, Defendants hosted a conference call with analysts to

discuss the Company’s first-quarter 2012 financial results. In the opening remarks, Defendants

Friedman and Andrews touted the success of the Jakafi launch. As in the press release, both

Defendants asserted that the launch was “going well” and neglected to mention any adverse

implications of a patient population dominated by severely ill patients, instead portraying this as

20


a fleeting trend that would likely change once physicians became comfortable with prescribing

Jakafi to less severely ill patients.

48. Moreover, Defendant Andrews affirmatively touted positive feedback from

physicians regarding patient use of Jakafi (“physicians who have tried Jakafi are impressed by

how quickly the product works and how dramatically it improves the debilitating symptoms and

splenomegaly that affect so many patients with [myelofibrosis]”). These comments were

misleading because they suggested an absence of negative feedback regarding patient use of

Jakafi when, in reality, Defendants had received, but failed to disclose, feedback that Jakafi use

was being curtailed by high discontinuation rates. This trend squarely contradicted the relatively

low discontinuation rates that Incyte had disclosed previously, which derived from clinical

studies. However, Defendant Andrews gave the distinct impression that actual discontinuation

rates were consistent with the clinical rates, instead of disclosing the true information known to

Defendants: “To summarize, the first full quarter of the launch has gone well. Most of our

assumptions regarding initial patient use , physician mix, payer acceptance, and patient access

are close to what we anticipated .”

49. During the question-and-answer session that followed, an analyst specifically

asked Defendants if there was “anything in the early commercial trends or the physician

feedback that you have been surprised by,” and if there was “anything you can say about early

patient dropouts or maybe the general tolerability of the drug as you’re getting in the real world.”

Defendant Andrews responded:

So no, there’s really been nothing that we hadn’t anticipated, because we had done, really, an extensive amount of market research. So I think that it’s very much meeting our expectations in how we thought things would happen. Possibly initial uptake was a little bit faster than we thought, but that aside – and then, as far as early tolerability of the drug, which we know is very tolerable, but how is it in the real world, it would be too early for us to have significant insight

21


into that. You know, the drug’s not been on the market that long, and most patients would have done one or two months of therapy at most. But we have a high level of confidence, based on the results from the clinical trials, that this is a well tolerated drug.

50. Following up on this response, the analyst bluntly asked Defendant Andrews, “ So

there’s been nothing anecdotal about patients dropping off the drug earlier than you would

have expected? ” In no uncertain terms, she responded, “ No. No, there hasn’t been . ”

51. Another analyst asked Defendants to “talk about your estimate for duration of

therapy for patients on Jakafi.” Defendants provided vague answers that simply referenced prior

clinical studies, and provided no indication that the duration of therapy might be shorter than the

previously disclosed clinical results due to the higher discontinuation rates that were already

being experienced in the field. Defendant Andrews responded, “So [myelofibrosis] is a chronic

disease, and Jakafi is a chronic medicine, so we would expect, just as we saw in the clinical

trials, that many patients who go on drug do, in fact, stay on it for many years. ” Defendant

Levy added, “So in the Phase 2 study, which is the longest use, which started in 2007, data was

presented at [the American Society of Hematology] this past year by Dr. Verstovsek showing

that, at that point, the median duration of treatment was about three years .”

52. Defendant Andrews was similarly vague when asked to “provide any color on

what you’re seeing in terms of Jakafi dose reduction.” Instead of providing information on any

dose reductions attributable to the Jakafi discontinuations experienced in the field, Defendant

Andrews responded, “It’s really too early in the launch to have much insight into dose reduction”

and “it would be too early for us to be able to read into” any changes in dosage.

53. Defendant Andrews also noted that adding new patients would take time and thus

“our growth rates for new prescribers and new patients may be more gradual than what we saw

in the first quarter,” but failed to add that overall growth rates were already being hurt by patient

22


discontinuations, notwithstanding any actual or projected slowdown in the addition of new

prescribers or patients. Defendant Andrews reinforced the misleading nature of this comment

when an analyst asked, “[t]he slower growth rate that you’re talking about going forward, it does

not sound like that’s a trend that you have already seen, say, towards the end of the first quarter

or the early second quarter. That’s just something that you’re guessing is going to happen in

some future quarter?” Defendant Andrews responded, “That’s the right way to interpret it.”

54. In addition, the Company’s first-quarter 2012 Form 10-Q, which was filed with

the SEC on April 26, 2012, disclosed revenues and other financial aspects of the Jakafi launch,

but failed to disclose the true nature of the commercialization and patient usage results, trends,

and prospects of Jakafi, as alleged herein.

55. Moreover, Defendant Friedman signed a certification stating that he reviewed the

Form 10-Q and that it “does not contain any untrue statement of a material fact or omit to state a

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

such statements were made, not misleading with respect to the period covered by this report,”

and executed a certification pursuant to the Sarbanes-Oxley Act of 2002 (“SOX”) that the Form

10-Q “fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange

Act of 1934,” and that “the information contained in the [Form 10-Q] fairly presents, in all

material respects, the financial condition and results of operations of Incyte.”

56. Analysts reacted positively to Defendants’ statements regarding the Jakafi launch,

with many raising Jakafi sales estimates, increasing their valuation of Incyte stock, or rating

Incyte’s stock a “buy” or “overweight.” For example:

(a) In a report dated April 26, 2012, J.P. Morgan noted that Jakafi was “off to

a fantastic start,” “well ahead of expectations,” and selling “much better than anticipated.” As a

23


result, J.P. Morgan significantly raised Incyte sales, earnings, and stock price estimates, and

reiterated its “overweight” rating of Incyte stock. J.P. Morgan stated that higher Jakafi sales

would be expected “even if we were to assume NO new [patient] adds in [the second quarter of

2012],” indicating their belief, fueled by Defendants’ statements, that existing patients and

physicians were responding well to the drug.

(b) On April 26, 2012, Cowen and Company issued a report titled “Jakafi

Blows Through Expectations.” Cowen and Company called Jakafi “one of the more promising

new drugs in biotech” and anticipated that Incyte shares would “outperform as investors gain

confidence in the drug’s sizeable commercial potential.” Cowen and Company also more than

doubled its 2012 Jakafi sales estimates.

(c) Canaccord Genuity issued an April 26, 2012 report raising its Jakafi

revenue estimates, reiterating its “buy” rating of Incyte stock, and increasing its price target on

Incyte stock.

(d) On April 27, 2012, ThinkEquity LLC increased its 2012 Jakafi sales

estimates “[b]ased on Jakafi’s early adoption and physician feedback” and reiterated its “buy”

rating of Incyte stock.

(e) Also, on April 27, 2012, Wells Fargo issued a report increasing its Incyte

stock valuation range and raising its Incyte sales and earnings estimates.

57. As a result of Defendants’ misleading statements regarding the success of the

Jakafi launch, and the resulting positive commentary by Incyte analysts, the price of Incyte stock

rocketed 18% , from a closing price of $19.40 on April 25, 2012 to an artificially inflated closing

price of $22.94 on April 27, 2012, on unusually high trading volume.

24


58. For the reasons stated above in the Substantive Allegations section, and as further

detailed herein, Defendants’ statements made in the Company’s first-quarter 2012 earnings

release dated April 26, 2012, first-quarter 2012 Form 10-Q filed on April 26, 2012, and earnings

conference call held on April 26, 2012, which touted the success of the Company’s Jakafi launch

and led the market to believe that dropout rates were in line with clinical studies, were materially

false and misleading when made or omitted material facts to make such statements not false and

misleading, because:

(a) At Jakafi’s launch, the core patient group for this drug was severely ill

patients due to the slow-developing nature of myelofibrosis, which led physicians to employ a

“wait and see” approach to its treatment, only using a drug like Jakafi when patients approached

advanced intermediate stages (see, e.g. , ¶¶4, 33-36);

(b) the Company’s touted clinical studies had little to no application to

severely ill patients who had not participated in those studies and thus were an “unrealistic”

benchmark for patient usage and discontinuation rates among that patient population ( see, e.g. ,

¶¶3, 5, 30, 80);

(c) the dosage information that the Company had originally suggested was too

high for the Company’s severely ill patient population with lower platelet counts, causing

increased discontinuation rates (lack of persistency) among this core patient group ( see, e.g., ¶¶5,

73, 76, 79);

(d) Defendants knew through, or recklessly disregarded, extensive market

research, discontinuation reports, and constant monitoring that discontinuation rates were higher

than expected due to patient death and serious side effects ( see, e.g. , ¶¶6, 38-40, 48-50, 59, 62,

64, 73);

25


(e) the increase in discontinuations at the same time that new patient additions

were only increasing minimally led to a slowdown in net patient additions ( see, e.g. , 1132-35,

43, 71);

(f) the Company’s first-quarter 2012 Form 10-Q was materially false and

misleading because it failed to disclose (in violation of Item 303 of regulation S-K) these

materially adverse conditions to the market ( see 1 54); and

(g) the SOX certification executed by Defendant Friedman included the

misleading representation that the Form 10-Q did contain untrue statements or material

omissions, when in reality, Defendants knew but failed to disclose that the Company’s true drop-

out rates were significantly higher than clinical studies and that the studies were not reflective of

actual performance (see ¶55).

59. On May 15, 2012, Defendants Friedman and Andrews participated in the Bank of

America Merrill Lynch Health Care Conference. In the opening remarks, Defendant Friedman

stated that “[w]e are encouraged by these first-quarter [Jakafi] sales, as well as the feedback from

the field force.” Defendant Friedman acknowledged that “most of the patients receiving Jakafi

thus far tend to have more severe symptoms and larger spleens” but that the use of Jakafi would

steadily expand to patients with less advanced disease over time. However, Defendant Friedman

failed to mention any feedback Incyte had received regarding high patient discontinuation rates,

exacerbated by a patient population skewed heavily toward the severely ill.

60. An audience member later pressed Defendants on this subject, asking, “Can you

talk about your earlier experience with duration of therapy and dropout rates with Jakafi in the

first four or five months?” Rather than disclose the high discontinuations being experienced in

the field, Defendant Andrews misleadingly claimed that “it’s really too early to talk about

26


discontinuations or adherence to therapy” but directed listeners to the more favorable

discontinuation rates experienced in clinical trials: “But I do refer you to the clinical trials where

COMFORT-1, which was the US study, had a discontinuation rate due to any cause of 14% at

the 24-week mark, and COMFORT-2 . . . which was the European study at the 48-week mark,

[which] had an 18% dropout rate. . . .” While Defendant Andrews acknowledged that

discontinuations in the real world might be higher than the clinical studies, attributable to the

severely ill patient population and the fact that “patients are sometimes less motivated or

followed less closely when they are in the real world,” she downplayed these comments by

suggesting that higher-than-expected discontinuations were a possibility, rather than a trend

Incyte was already experiencing, and by stating, “I would expect that discontinuations would

decline and [ad]herence would increase just because the patient population becomes healthier.”

61. On June 6, 2012, Defendant Andrews spoke at the Goldman Sachs Healthcare

Conference. When asked about discontinuation rates, Defendant Andrews misrepresented to the

audience that it was “way too early to have a sense of discontinuation rate or compliance in the

real world, but we do look to our clinical trial data to inform what we believe is likely to

happen,” and “[w]e don’t have anything at the moment, which would lead me to think that

[discontinuation rates] would be significantly different from what we saw in the [clinical]

studies that I cited .” Defendant Andrews noted that, while discontinuation rates might

“temporarily” increase as a result of the severely ill patient population, “[a]s we move into [a

healthier] patient population, actually the reverse might occur and you might see less

discontinuations.”

62. The next day, on June 7, 2012, Defendant Friedman, Defendant Levy and David

Hastings, Executive Vice President and Chief Financial Officer of Incyte, took part in the

27


Jefferies Global Healthcare Conference. During the opening remarks, Defendant Levy touted the

positives of the Jakafi launch, stating that Defendants were “encouraged by first-quarter sales as

well as the feedback from the field” regarding the usage of Jakafi. A Jefferies analyst later

asked, “[b]ut this whole notion of sicker patients going on to the drug initially, can you help us

understand if that was just an early bolus phenomenon and at this stage do patients who are

going on to [the] drug look more like the clinical trial population?” In response, a Company

representative sought to dispel any notion that Jakafi’s predominantly severely ill patient

population presented any problems or surprises during the commercial launch of Jakafi, and

made no mention of the higher-than-expected discontinuations attributable to such patient

population, which were known to Defendants at the time:

Let me try to answer that. What we expected to see when the drug was first approved was a higher proportion of patients who were too sick to get into the trial but were waiting for [the] drug. And we did see that; a lot of that has washed through. Product is growing nicely and steadily, just as Pat Andrews and her marketing team had predicted from the work that they did and are still doing in market surveys. So we really haven’t had any surprises in that regard. We think that as physicians have good experiences with the drug – and I have to say, we get reports back from the field. We haven’t gotten any bad reports back that physicians have been upset with the drug or have a bad experience , but we get quite a few reports about how remarkable the drug has functioned and how surprised they are when they put a patient on with the rapidity and the degree of improvement that they see in their patients. And so that is going to predispose those physicians over time to put the less sick patients on [the] drug.

63. Defendants Andrews and Levy also took part in the Wells Fargo Health Care

Conference on June 19, 2012. A Wells Fargo analyst asked whether there had been “any

surprises, positive or negative” regarding the Jakafi launch. Defendant Andrews responded that

the “launch is going very much as we expected.” She added that the phenomenon of more

severely ill patients on Jakafi was “to be expected” and that Defendants were seeing those

patients experience a “very clear benefit” that “occur[red] very quickly.” Defendants Andrews

28


and Levy maintained this misleadingly positive tone throughout the conference, and made no

mention at all of the high Jakafi discontinuations being experienced in the field.

64. On July 12, 2012, Defendant Levy participated in the JMP Securities Healthcare

Conference. In his opening remarks, Defendant Levy reiterated the position that “the launch of

Jakafi is going well” and that Defendants were “pleased” with feedback from physicians

regarding the use of Jakafi in the field. When asked “how many patients have stayed on [Jakafi]

therapy over time,” Defendant Levy responded, “I recall that 50% of the patients at [the clinical

study] at MD Anderson were still on study after three years. And both in COMFORT-I and at

MD Anderson it was about close to 90% after one year and close to 80% after two years.” He

added, “I think that is probably an ideal in terms of how long patients will stay on therapy. But

as we get to a patient population that is not as advanced [with illness] as the first patients who

came on, I think we would start to approach those numbers.” These comments were misleading

because, contrary to the positive physician feedback and rosy clinical results cited by Defendant

Levy, the commercial launch of Jakafi had already revealed high patient discontinuation rates

that exceeded clinical results.

65. As a result of Defendants’ additional misleading statements at the above series of

healthcare conferences, Incyte stock continued to rise an additional 9% from April 27, 2012 to

close at an artificially inflated price of $24.92 on August 1, 2012, the day prior to Defendants’

announcement of the Company’s second-quarter 2012 financial results. During this time period,

Defendants Friedman and Levy and a number of other Incyte officers and directors cashed in on

these artificially inflated prices, lining their pockets with close to $13 million in combined

proceeds from unusual and suspicious insider trading.

29


66. For the reasons stated above in the Substantive Allegations section, and as further

detailed herein, Defendants’ statements issued during the Company’s healthcare conferences

held on May 15, June 6, June 7, June 19, and July 12, 2012, which led the market to believe that

discontinuation rates were in line with clinical studies, were materially false and misleading

when made or omitted material facts to make such statements not false and misleading, because:

(a) At Jakafi’s launch, the core patient group for this drug was severely-ill

patients due to the slow-developing nature of myelofibrosis, which led physicians to employ a

“wait and see” approach in the early stages of its treatment, only using a drug like Jakafi when

patients approached advanced intermediate stages ( see, e.g. , ¶¶4, 33-36);

(b) the Company’s touted clinical studies had little to no application to

severely ill patients who had not participated in those studies and thus were an “unrealistic”

benchmark for patient usage and discontinuation rates among that patient population ( see, e.g. ,

¶¶3, 5, 30, 80);

(c) the dosage information that the Company had originally suggested was too

high for the Company’s severely-ill patient population with lower platelet counts, contributing to

increased discontinuation rates (lack of persistency) among this core patient group ( see, e.g., ¶¶5,

73, 76, 79);

(d) Defendants knew through, or recklessly disregarded, extensive market

research, discontinuation reports, and constant monitoring that discontinuation rates were higher

than expected due to patient death and serious side effects ( see, e.g. , 116, 38-40, 48-50, 59, 62,

64, 73); and

30


(e) the increase in discontinuations at the same time that new patient additions

were only increasing minimally led to a slowdown in net patient additions ( see, e.g. , 1132-35,

43, 71).

VI. THE TRUTH IS REVEALED

67. On August 2, 2012, investors learned the truth about Jakafi usage trends and

prospects when Defendants announced Incyte’s second-quarter 2012 financial results. During a

conference call with analysts, Defendant Andrews described certain factors “that we think are

relevant to the launch, as well as the ultimate use of Jakafi.” She explained that some of the

earliest patients prescribed Jakafi were so severely ill that they would not have been eligible for

Incyte’s Phase III clinical trials (COMFORT I and COMFORT II) because such trials excluded

patients with a life expectancy less than six months. Defendant Andrews then revealed that the

discontinuation rates observed in those trials (14% at 24 weeks and 18% at 48 weeks), which

Defendants had misleadingly touted throughout the Class Period, reflected only “ the low end of

the discontinuation rates we are likely to see commercially .”

68. In the question-and-answer session that followed, surprised analysts repeatedly

questioned Defendants about the higher-than-expected discontinuation rates revealed during the

call. Defendants responded with a series of evasive, contradictory responses, and urged analysts

“not to over-focus in on discontinuations at this time.” On one hand, Defendants stuck to their

mantra that it was “too early” to discern any meaningful information regarding discontinuations,

and instead referred to dated clinical studies that showed lower discontinuation rates than Incyte

had experienced commercially. On the other hand, Defendants contradicted this position by

admitting that they did have meaningful commercial data on discontinuations, which enabled

them to state that actual discontinuation rates were on the “low end” of the clinical rates that

Defendants had disclosed previously. Specifically, Defendant Andrews reiterated that “ we

31


would expect [clinical discontinuation rates] to be probably the low end of what we see

commercially .” Defendant Friedman added, “[a]nd I think what Pat [Andrews] has said is that

you would expect, when we do finally asymptote to a more or less steady-state discontinuation

rate, it is going to be probably slightly higher than the 14% to 18%, which is what you would

expect out in the field as opposed to a controlled trial. ”

69. During the question-and-answer session, Defendants also disclosed the reasons

for such high discontinuations, further elaborating on the challenges facing Incyte’s

commercialization of Jakafi. In one exchange Defendant Friedman acknowledged that “ we had

people discontinue because they died ” given Jakafi’s predominant usage by severely ill patients

with short life expectancies. Separately, Defendant Andrews disclosed that serious side effects

of Jakafi also were fueling discontinuations:

I would say the discontinuations – again, it is hard to be more granular but anecdotally coming back from physicians – there have been certainly some patients who are very severely ill who went on drug and their discontinuations are because they were just so advanced. But there is also some discontinuations for anemia or from bicytopenia .

70. Defendant Andrews also disclosed that Jakafi’s predominant usage by severely ill

patients, which fueled Jakafi’s high discontinuation rates, had a tangible effect on the financial

guidance Defendants were issuing regarding full-year 2012 sales of Jakafi:

And I will just add that one of the factors that are driving our guidance range is the time it will to take for us to evolve from the use of Jakafi in the more severely ill patients that Paul [Friedman] was referencing, to the less severely ill, specifically the moderate-to-mild [myelofibrosis] patients with any degree of splenomegalian conditions.

71. Despite Defendants’ attempts to downplay their surprising news regarding Jakafi

discontinuations, the market and analysts recognized the true meaning and importance of these

revelations. In the wake of this news, analysts issued reports citing the discontinuations as a

32


serious problem and source of doubt with respect to Incyte’s commercialization of Jakafi. For

example:

(a) In a report dated August 2, 2012, J.P. Morgan called Incyte’s earnings call

a “mess” and a cause of “ample confusion . . . regarding the dropout rate and the rate of new

[patient] adds” and “heightened uncertainty around Jakafi’s launch trajectory and the long-

term drop-out rate of [patients] on [the] drug ,” while Incyte’s sales guidance for the remainder

of 2012 “created more questions than answers.” J.P. Morgan added that “ sentiment and

momentum around the INCY story just turned on a dime ” and “we are disappointed in how

today’s events transpired and do not expect an immediate turnaround .”

(b) Piper Jaffray issued an August 2, 2012 report lowering its price target for

Incyte stock to take into account “a slowdown in net patient adds ( i.e., increase in dropout rates),

in-line with new guidance.”

(c) In a report dated August 3, 2012, titled “2Q: Jakafi Patient Trends

Concern Us,” Morgan Stanley stated that “ [a]n initial high discontinuation rate is a key

concern ” and lowered its price target for Incyte stock. Morgan Stanley also noted that second-

quarter net Jakafi sales “disappointed high Street expectations,” that Incyte’s sales guidance

implied only “modest [quarter-over-quarter] growth,” and that the “step-down in new [patient]

adds also bears close scrutiny.”

(d) JMP Securities released an August 3, 2012 report stating that Incyte’s

second quarter was “ marred by high discontinuations ” and that “[b]oth 2Q results and 2012

guidance fell short of investor expectations which were built on a belief that strong 1Q sales

could continue, but neglected to recognize the extent of the discontinuation rate which was

qualified as occurring in primarily advanced patients.”

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72. Defendants’ August 2nd revelations regarding the Jakafi discontinuations

immediately caused the Company’s stock price to plummet. In just one trading day, the stock

was punished by approximately 22% , falling from a close of $24.92 on August 1, 2012 to a close

at $19.57 on August 2, 2012 on abnormally high trading volume (approximately ten times the

average daily trading volume over the preceding ten days). As the market absorbed the news, the

stock continued to fall an additional 5% to close at $18.48 on August 3, 2012 on abnormally high

trading volume. Incyte investors lost millions as a result of this massive sell-off.

VII. POST-CLASS PERIOD REVELATIONS

73. In the months following the Class Period, Defendants continued to reveal the

nature and extent of the heightened Jakafi discontinuations that Defendants had witnessed since

the very beginning of the Jakafi launch. For example, at Cannacord Genuity’s Global Growth

Conference on August 15, 2012, Defendant Andrews admitted that “ in the early months [of the

Jakafi launch] and even into the second quarter ” Defendants’ experiences were “skewed” by

the number of severely ill patients prescribed Jakafi. Further, she acknowledged that Defendants

had received specific information regarding the discontinuations of such patients, including data

showing that some of them could not even use Jakafi after it was prescribed:

We can see in some of our data that a number of patients who got a script never actually took the drug; that is how ill they were. We see in reports from our customer service area – you know, patient entered hospice as reasons for discontinuation. We see a lot of that.

Defendant Andrews added that dosing for the severely ill patient group was “more complicated”

and that Incyte planned to submit new study results to the FDA in order to add dosing

information for such patients to the drug label.

74. During the August 15, 2012 conference, Defendant Andrews also elaborated on

the discrepancies between Incyte’s clinical study results and actual commercial results. She

34


stated that the discontinuation rates experienced in the Phase III clinical trials (COMFORT-I and

COMFORT-II) merely represented “the low-end under any circumstance commercially just

because commercially patients are not as – they don’t stay on drug as long as they do in clinical

trials as a general rule.” She added this was “ maybe particularly so ” for patients prescribed

Jakafi during the first six or seven months after the launch and that she was “not as confident”

that 50% of such patients would use Jakafi for a duration of three years, contrary to the results of

a Phase II clinical study (M.D. Anderson).

75. On August 29, 2012, the Company filed a form 8-K with the SEC announcing the

departure of Defendant Andrews. The Company noted that in connection with her departure, she

may receive severance compensation consistent with the severance provisions of her offer letter,

as well as reimbursement of COBRA premiums for up to 12 months and outplacement

assistance.

76. Thereafter, at the September 12, 2012 Morgan Stanley Healthcare Conference,

Defendant Friedman acknowledged that the discontinuation rate had been higher because the

drug was initially being prescribed to severely ill patients who had either passed away or could

not tolerate higher doses of the drug that were originally prescribed. Moreover, he claimed that

“we have a dose now that can handle sicker people” as a result of a study conducted in severely

ill patients (platelets less than 100,000) following the Jakafi launch, and that Defendants had sent

the study results to the “FDA for an update on the label.”

77. On October 22, 2012, the Company issued a press release announcing that Daly

joined Incyte as Executive Vice President and Chief Commercial Officer, reporting to Defendant

Friedman, and would assume responsibility for Incyte’s commercial organization, including

sales, marketing, and business development.

35


78. Thereafter, at the November 15, 2012 Jeffries Global Healthcare Conference,

Defendant Friedman revealed that Defendants were now targeting a one-year discontinuation

rate of 20% to 30% for relatively healthier patients above 100,000 platelets (who would have

been eligible to participate in Incyte’s clinical studies) and suggested that the discontinuation rate

was even higher for sicker patients: “The people who are 50,000 to 100,000 have a lower life

expectancy, and even if we dose them optimally, I don’t think their duration of therapy will be

as long as the less sick people , because even if we have a survival improvement they’re not

going to live as long.”

79. Moreover, at the November 27, 2012 Piper Jaffray Healthcare Conference, Daly

admitted that following the launch, the Company did not have dosing information for how to

manage the severely-ill patients (platelets less than 100,000).

80. Further, on an August 1, 2013 earnings conference call, Daly admitted that the

discontinuation rates from the Company’s clinical trials that Defendants had touted as a

benchmark for discontinuation rates during the Class Period were “unrealistic.” Indeed, he

stated:

Now if you look at the Phase II COMFORT-I, COMFORT-II you had a 14% discontinuation rate at six months 18% and at 12 months, that’s probably an unrealistic hurdle, but having a 20% to 30% discontinuation rate at the end of 12 months we think that’s achievable and we are working towards that goal.

Moreover, Defendant Levy elaborated that the fact that very sick patients were not included in

clinical trials made it really hard to “absolutely meet those numbers.”

VIII. LOSS CAUSATION

81. As detailed throughout and further herein, Defendants’ fraudulent scheme

artificially inflated Incyte’s stock price by misrepresenting and concealing the true nature of

Jakafi patient usage trends and results, including the facts that: (a) at Jakafi’s launch, the core

36


patient group for this drug was severely ill patients due to the slow-developing nature of

myelofibrosis, which led physicians to employ a “wait and see” approach in the earlier stages of

treatment, only using a drug like Jakafi when patients approached advanced intermediate stages;

(b) the Company’s touted clinical studies had little to no application to severely ill patients who

had not participated in those studies and, thus, were an “unrealistic” benchmark for patient usage

and discontinuation rates among that patient population; (c) the dosage information that the

Company had originally suggested was too high for the Company’s severely-ill patient

population with lower platelet counts, causing increased discontinuation rates (lack of

persistency) among this core patient group; (d) Defendants knew through, or recklessly

disregarded, extensive market research, discontinuation reports, and constant monitoring that

discontinuation rates were higher than expected due to patient death and serious side effects; and

(e) the increase in discontinuations at the same time that new patient additions were only

increasing minimally led to a slowdown in net patient additions. Defendants’ false and

misleading statements and omissions, individually and collectively, concealed the true business

prospects of Jakafi (Incyte’s core business product), resulting in Incyte’s stock being artificially

inflated until, as indicated herein, the relevant truth about Jakafi’s usage and discontinuation

rates was revealed. While each of these misrepresentations and omissions was independently

fraudulent, they were all motivated by Defendants’ desire to artificially inflate Incyte’s stock

price and the image of its future business prospects to give the market the false notion that Jakafi

consumers were discontinuing their usage of Jakafi at rates similar to those experienced during

clinical trials, when Defendants knew that actual discontinuation rates were much higher. These

false and misleading statements and omissions, among others, had the intended effect of

preventing the market from learning the full truth and keeping the Company’s stock price

37


artificially inflated throughout the Class Period. Indeed, Defendants’ false and misleading

statements and omissions had the intended effect and caused, or were a substantial contributing

cause of, Incyte’s stock trading at artificially inflated levels, reaching as high as $26.30 during

the Class Period.

82. The true picture about Incyte’s core product – Jakafi – emerged on August 2,

2012, when the Company announced its second quarter 2012 financial results. Defendants

revealed that patients were discontinuing the use of Jakafi at rates higher than the clinical results

that Incyte had previously disclosed, largely attributable to serious side effects and death rates

among Jakafi’s primarily advanced, severely-ill patient population.

83. When Incyte provided the market with these revelations, it was an indication to

the market that Defendants’ prior Class Period statements were false and misleading. As a result

of the information revealed to the market on August 2, 2012, the market cast doubt on the

veracity of Defendants’ prior statements, causing Incyte’s stock to immediately drop $5.35 per

share, or approximately 22%, from a close of $24.92 on August 1, 2012 to a close of $19.57 on

August 2, 2012, on abnormally high trading volume, as the market reacted to the news disclosed

by the Company during its presentation of second quarter 2012 financial results. The stock

continued to fall an additional $1.09 per share, or approximately 5%, to close at $18.48 on

August 3, 2012, on abnormally high trading volume, as the market continued to digest the news.

The market’s negative reaction to Incyte’s August 2, 2012 revelations is demonstrated in the

following stock chart:

38


12000000

10000000

8000000

6000000

4000000 Cl)

2000000

0

27

25

23 Volume

21 Price 0

19

17

15

8/1/2012 8/2/2012 8/3/2012 Date

84. The rapid decline in Incyte’s stock price by approximately 26% from August 1

through August 3, 2012 was the direct result of the nature and extent of the revelations made to

investors and the market regarding the adverse patient discontinuation trends affecting the

Company’s only commercial drug, Jakafi, which had been concealed or misrepresented by

Defendants’ scheme and misstatements. Thus, the revelation of truth at the close of the Class

Period, as well as the resulting clear market reaction, support a reasonable inference that the

market understood that Incyte’s prior statements were false and misleading. In sum, as the truth

about Defendants’ prior misrepresentations and concealments was revealed, the Company’s

stock price quickly sank, the artificial inflation came out of the stock, and Plaintiff was damaged,

suffering true economic losses.

85. The timing and magnitude of Incyte’s stock price decline from August 1 through

August 3, 2012 negates any inference that the losses suffered by Plaintiff were caused by

changed market conditions, macroeconomic or industry factors, or Company-specific facts

unrelated to Defendants’ fraudulent conduct. This point is evidenced by the chart below, which

demonstrates the clear divergence of Incyte’s stock price from the aggregate stock price of

39


Incyte’s peer group of biotechnology and pharmaceutical companies 5 as the revelation of the

truth became known to the market. Moreover, the chart below clearly illustrates that

Defendants’ false and misleading statements beginning on April 26, 2012, caused artificial

inflation in Incyte’s stock price, which caused it to rise significantly above its peer index. As is

evident below, this artificial inflation swiftly dissipated upon Defendants’ revelations on August

2, 2012, causing Incyte’s stock price to fall and remain below its peer index.

Incyte vs. Proxy Peer Group (PEER)

150

140

130

120 0

110

100 0 Z 90

80

70

60

J JJ

o o 0 0

'- U) C) IqI

C\I C\I c)

o o 0 0 0 0 0

C) IqI IqI U) CD

INCY PEER

o o 0 0 0

00 - U) C) rZz- - .- 04 CO

N- 00 00

86. The economic loss, i.e. , damages, suffered by Plaintiff was a direct and proximate

result of Defendants’ scheme and misrepresentations and omissions that artificially inflated

Incyte’s stock price and the subsequent significant decline in the value of Incyte’s stock when

the truth concerning Defendants’ prior misrepresentations and fraudulent conduct entered the

market place.

5 Incyte has identified this peer group of companies as a benchmarking reference in its public filings. See, e.g. , Proxy Statement filed with the SEC on April 18, 2012.

40


IX. ADDITIONAL SCIENTER

87. The Individual Defendants acted with scienter in that they knew or recklessly

disregarded that the public documents and statements issued or disseminated in the name of the

Company were materially false and misleading, and knowingly or recklessly substantially

participated or acquiesced in the issuance or dissemination of such statements or documents as

primary violators of the federal securities laws.

88. The Individual Defendants, by virtue of their receipt of information reflecting the

true facts regarding Incyte, its operations, and its business practices, their control over and/or

receipt of Incyte’s materially misleading misstatements and/or their associations with the

Company that made them privy to confidential proprietary information concerning Incyte and its

core product Jakafi, were active and culpable participants in the fraudulent scheme alleged

herein. The Individual Defendants knew and/or recklessly disregarded the falsity and misleading

nature of the information, which they caused to be disseminated to the investing public. The

ongoing fraud as described herein could not have been perpetrated without the knowledge and/or

recklessness and complicity of personnel at the highest level of the Company, including the

Individual Defendants.

89. Defendant Friedman also undertook the affirmative obligation to obtain

knowledge in order to ensure the Company’s disclosures to the market were truthful by

executing SOX certifications (see ¶55).

90. These facts, in conjunction with the additional indicia of scienter detailed below,

collectively support a strong inference of each Individual Defendant’s scienter.

A. The Commercialization of Jakafi Was Incyte’s Core Operation

91. As further detailed above in ¶¶2, 14, and 29, during the Class Period, Jakafi was

Incyte’s only commercial product (which it had been developing for six years), and the

41


commercialization of Jakafi was therefore the core operation of Incyte. The Company also

believes that the drug may have potential as a treatment for other cancers and thus is important to

the future business prospects of Incyte. Notably, Jakafi is also subject to a collaboration

agreement with Novartis International Pharmaceutical Ltd, in which Incyte is eligible to receive

development milestones of up to approximately $1.1 billion and double digit royalties from

product sales outside the United States. Therefore, patient usage and discontinuation of Jakafi

were of critical importance to the Company’s core business product/function.

92. During the Class Period, the Individual Defendants were high-ranking officers

(i.e. , CEO, CCO, and Chief Drug Development and Medical Officer) who were heavily involved

with, and had day-to-day responsibilities concerning, the Company’s commercialization of

Jakafi. Accordingly, through the receipt of internal reports and involvement with daily

operations, the Individual Defendants were intimately aware of the true nature and prospects of

the Company’s commercialization of Jakafi and repeatedly touted the successful launch and

performance of this product. As a result, as Incyte’s most senior executives, the Individual

Defendants knew, or, at a minimum were severely reckless in not knowing, about Jakafi’s

discontinuation rates, particularly among the Company’s core population of severely-ill patients,

which significantly impacted a core operation. By choosing to speak about Incyte’s patient

usage and discontinuation rates, the Individual Defendants led investors to believe that they had

knowledge, and/or had acquired knowledge, of these rates and were speaking truthfully.

B. The Individual Defendants Tracked Patient Usage and Discontinuation of Jakafi

93. As detailed above, the Individual Defendants had intimate knowledge of Jakafi’s

patient usage, discontinuation rates, and patient deaths. See ¶¶6, 38-40, 48-50, 59, 62, 64, 73.

Discontinuation reports were made available to the Individual Defendants, and the Company

42


regularly tracked patient usage and deaths. Id. Moreover, Defendants themselves admitted to

conducting extensive market research prior to the launch of Jakafi, and tracking Jakafi on a

frequent basis through market research surveys and the Company’s field force after the launch.

See ¶¶6, 40, 49-50, 59, 62, 64. This further demonstrates that, throughout the Class Period,

Defendants closely monitored, and possessed knowledge of, Jakafi’s discontinuation rates,

patient deaths, and usage.

C. The Individual Defendants’ Suspicious Insider Trading

94. While in possession of non-public adverse information regarding the true patient

usage and discontinuation rates of Jakafi – the Company’s core product – Defendants Friedman

and Levy took full advantage of the artificial inflation of Incyte’s stock price caused by their

misrepresentations and omissions. In fact, during the Class Period, these Individual Defendants

disposed of a combined 255,000 shares of common stock for proceeds greater than $5.7 million .

95. Indeed, on April 27, 2012, Defendant Levy sold 30,000 shares of Incyte common

stock at an artificially inflated price of $22.95 per share, for total proceeds of $688,500.

Defendant Levy’s stock sale was unusual and suspicious in timing because it was made the next

day after Defendants issued their first quarter financial results, heavily touting the progress of the

Jakafi launch and patient usage of the drug, which artificially inflated the stock price. In

addition, Defendant Levy’s stock sale was unusual and suspicious in amount in that he liquidated

more than 6% of his common stock holdings.

96. Additionally, on May 7, 2012, Defendant Friedman sold 225,000 shares of Incyte

common stock at an artificially inflated price of $22.56 for total proceeds of $5,076,000.

Defendant Friedman’s stock sale was unusual and suspicious in amount in that he liquidated

more than 11% of his common stock holdings. Defendant Friedman’s sale was also unusual and

suspicious in timing because it was executed at a time calculated to maximize his personal

43


benefit from the artificial inflation of Incyte’s stock price. Defendant Friedman’s trade came less

than two weeks after the Company issued its first quarter earnings results, touting the progress of

the Jakafi launch and patient usage of the drug. Significantly, Defendant Friedman had never

sold any Incyte stock prior to his Class Period sale described above.

97. In addition to the unusual and suspicious sales of Defendants Friedman and Levy,

a number of other Incyte officers and directors sold Incyte shares during the Class Period at

fraud-induced, artificially inflated prices, for collective proceeds of over $7 million , as detailed

in the chart below:

Name Title Date Shares Sold Price Proceeds

Laurent Vice President, 01-May-2012 13,976 $22.70 $317,255 Chardonnet Finance and 02-Jul-2012 36,666 $24.15 $885,484

Treasurer 05-Jul-2012 27,300 $25.11 $685,503

05-Jul-2012 2,214 $25.12 $55,616

05-Jul-2012 5,586 $25.10 $140,209

05-Jul-2012 600 $25.13 $15,078 Paula J. Executive Vice 11-May-2012 147,389 $23.22 $3,422,373 Swain President, Human

Resources Eric H. Executive Vice 14-May-2012 100 $23.12 $2,312 Siegel President and 14-May-2012 56,666 $23.12 $1,310,118

General Counsel 14-May-2012 715 $23.11 $16,524 Paul A. Director 16-May-2012 5,000 $23.55 $117,750 Brooke Roy A. Director 24-May-2012 20,000 $22.27 $445,400 Whitfield

TOTAL $7,413,622

X. PRESUMPTION OF RELIANCE

98. Plaintiff is entitled to a presumption of reliance under Affiliated Ute v. United

States , 406 U.S. 128 (1972), because the claims asserted herein are primarily predicated upon

omissions of material fact which there was a duty to disclose. Specifically, Plaintiff is entitled to

44


a presumption of reliance throughout the Class Period because, as more fully alleged above, the

Defendants failed to disclose material information regarding the Company’s increased

discontinuation rates and lack of persistency among the Company’s core patient group, as well as

the fact that the Company’s clinical studies were not a realistic benchmark for the performance

of Jakafi amongst its actual patient population.

99. Plaintiff also is entitled to a presumption of reliance under the fraud-on-the-

market doctrine for Defendants’ material misrepresentations, because the market for Incyte’s

publicly traded securities was open, well-developed, and efficient at all times. As a result of

these materially false and misleading statements, Incyte’s publicly traded securities traded at

artificially inflated prices during the Class Period. Plaintiff and other members of the Class

purchased or otherwise acquired Incyte’s publicly traded securities relying upon the integrity of

the market price of those securities and the market information relating to Incyte, and have been

damaged thereby.

100. At all relevant times, the market for Incyte’s securities was an efficient market for

the following reasons, among others:

(a) Incyte’s stock met the requirements for listing and was listed and actively

traded on the NASDAQ, a highly efficient and automated market;

(b) As a regulated issuer, Incyte regularly made public filings with the SEC,

including its Forms 10-K, Forms 10-Q, and related press releases;

(c) Incyte regularly communicated with public investors via established

market communication mechanisms, including through regular disseminations of press releases

on the national circuits of major newswire services and through other wide-ranging public

45


disclosures, such as communications with the financial press, and other similar reporting

services; and

(d) Incyte was followed by several securities analysts employed by major

brokerage firms, such as Morgan Stanley, Piper Jaffray, J.P. Morgan, and JMP Securities, among

others, who wrote research reports that were distributed to the brokerage firms’ sales force and

the public at large. Each of these reports was publicly available and entered the public

marketplace.

101. As a result of the foregoing, the market for Incyte’s securities promptly digested

current information regarding Incyte from all publicly available sources and reflected such

information in the prices of Incyte’s securities.

102. Under these circumstances, all purchasers of Incyte’s securities during the Class

Period suffered similar injury through their purchase of Incyte’s securities at artificially inflated

prices and a presumption of reliance applies.

103. At the times they purchased or otherwise acquired Incyte’s securities, Plaintiff

and other members of the Class were without knowledge of the facts concerning the wrongful

conduct alleged herein and could not reasonably have discovered those facts. As a result, the

presumption of reliance applies.

104. In sum, Plaintiff will rely, in part, upon the presumption of reliance established by

the fraud-on-the-market doctrine in that:

(a) Defendants made public misrepresentations during the Class Period;

(b) The misrepresentations were material;

(c) The Company’s securities traded in an efficient market;

46


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

to misjudge the value of the Company’s securities; and

(e) Plaintiff and the other members of the Class purchased the Company’s

securities between the time Defendants misrepresented material facts and the time the true facts

were disclosed, without knowledge that the facts were misrepresented.

XI. NO SAFE HARBOR

105. The federal statutory safe harbor providing for forward-looking statements under

certain circumstances does not apply to any of the allegedly false and misleading statements

pleaded in this complaint. Many of the specific statements pleaded herein were not identified as

“forward-looking statements” when made. To the extent there were any forward-looking

statements, there were no meaningful cautionary statements identifying important factors that

could cause actual results to differ materially from those in the purportedly forward-looking

statements. Indeed, the risk warnings that may have been provided by Defendants in their Class

Period statements, including boiler-plate statements that the commercial success of Jakafi

depends on the number of patients that may be treated with Jakafi, the acceptance of Jakafi by

patients and the healthcare community, and the view of Jakafi as therapeutically effective and

safe relative to cost and any alternative therapies, as well as statements that side effects and other

problems experienced by patients from the use of Jakafi could encourage physicians to stop or

lessen the frequency of Jakafi prescriptions, were not meaningful, were themselves false and

misleading, and did not shield Defendants from liability on the basis that such statements were

“forward-looking.”

106. Alternatively, to the extent that the statutory safe harbor does apply to any

forward-looking statements pleaded herein, Defendants are liable for those false and misleading

forward-looking statements because, at the time each of those forward-looking statements were

47


made, as detailed above in the Substantive Allegations section, the particular speaker knew that

the particular forward-looking statement was false or misleading and/or the forward-looking

statement was authorized and/or approved by an executive officer of Incyte who knew that those

statements were false or misleading when made. Moreover, to the extent that Defendants issued

any disclosures designed to “warn” or “caution” investors of certain “risks,” those disclosures

were also false and misleading since they did not disclose that Defendants were actually

engaging in the very actions about which they purportedly warned and/or had actual knowledge

of material adverse facts undermining such disclosures.

XII. PLAINTIFF’S CLASS ACTION ALLEGATIONS

107. Plaintiff brings this action as a class action pursuant to Federal Rule of Civil

Procedure 23(a) and (b)(3) on behalf of a Class consisting of all those who purchased or

otherwise acquired the publicly traded common stock of Incyte between April 26, 2012 and

August 1, 2012, inclusive, and who were damaged thereby. Excluded from the Class are

Defendants, the officers and directors of the Company, at all relevant times, members of their

immediate families and their legal representatives, heirs, successors, or assigns, and any entity in

which Defendants have or had a controlling interest.

108. Because Incyte has millions of shares of stock outstanding and because the

Company’s shares were actively traded on the NASDAQ, members of the Class are so numerous

that joinder of all members is impracticable. According to Incyte’s SEC filings, as of shortly

before the close of the Class Period, Incyte had approximately 130 million shares outstanding.

While the exact number of Class members can only be determined by appropriate discovery,

Plaintiff believes that Class members number at least in the thousands and that they are

geographically dispersed.

48


109. Plaintiff’s claims are typical of the claims of the members of the Class because

Plaintiff and all of the Class members sustained damages arising out of Defendants’ wrongful

conduct complained of herein.

110. Plaintiff will fairly and adequately protect the interests of the Class members and

has retained counsel experienced and competent in class actions and securities litigation.

Plaintiff has no interests that are contrary to, or in conflict with, the members of the Class it

seeks to represent.

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

adjudication of this controversy since joinder of all members is impracticable. Furthermore, as

the damages suffered by individual members of the Class may be relatively small, the expense

and burden of individual litigation make it impossible for the members of the Class to

individually redress the wrongs done to them. There will be no difficulty in the management of

this action as a class action.

112. Questions of law and fact common to the members of the Class predominate over

any questions that may affect only individual members in that Defendants have acted on grounds

generally applicable to the entire Class. Among the questions of law and fact common to the

Class are:

(a) whether Defendants violated the federal securities laws as alleged herein;

(b) whether Defendants’ publicly disseminated press releases and statements

during the Class Period omitted and/or misrepresented material facts;

(c) whether Defendants failed to convey material facts or to correct material

facts previously disseminated;

49


(d) whether Defendants participated in and pursued the fraudulent scheme or

course of business complained of herein;

(e) whether Defendants acted willfully, with knowledge or severe

recklessness, in omitting and/or misrepresenting material facts;

(f) whether the market prices of Incyte’s securities during the Class Period

were artificially inflated due to the material nondisclosures and/or misrepresentations

complained of herein; and

(g) whether the members of the Class have sustained damages as a result of

the decline in value of Incyte’s stock when the truth was revealed and the artificial inflation came

out, and, if so, what is the appropriate measure of damages.

COUNT I

FOR VIOLATIONS OF SECTION 10(b) OF THE EXCHANGE ACT AND RULE 10b-5 PROMULGATED

THEREUNDER AGAINST ALL DEFENDANTS

113. Plaintiff repeats and realleges the allegations set forth above as though fully set

forth herein. This claim is asserted against all Defendants.

114. During the Class Period, Incyte and the Individual Defendants, and each of them,

carried out a plan, scheme and course of conduct which was intended to and, throughout the

Class Period, did: (i) deceive the investing public, Plaintiff, and the other Class members, as

alleged herein; (ii) artificially inflate and maintain the market price of Incyte’s publicly traded

securities; and (iii) cause Plaintiff and the other members of the Class to purchase Incyte’s

publicly traded securities at artificially inflated prices. In furtherance of this unlawful scheme,

plan, and course of conduct, Incyte and the Individual Defendants, and each of them, took the

actions set forth herein.

50


115. These 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 Company’s securities in an effort to

maintain artificially high market prices for Company’s securities in violation of Section 10(b) of

the Exchange Act and Rule 10b-5. These Defendants are sued as primary participants in the

wrongful and illegal conduct charged herein. The Individual Defendants are also sued as

controlling persons of Incyte, as alleged below.

116. In addition to the duties of full disclosure imposed on Defendants as a result of

their making affirmative statements and reports, or participating in the making of affirmative

statements and reports to the investing public, they each had a duty to promptly disseminate

truthful information that would be material to investors in compliance with the integrated

disclosure provisions of the SEC as embodied in SEC Regulation S-X (17 C.F.R. §210.01, et

seq .) and S-K (17 C.F.R. §229.10, et seq .) and other SEC regulations, including accurate and

truthful information with respect to the Company’s operations, sales, product marketing and

promotion, financial condition, and operational performance so that the market prices of the

Company’s publicly traded securities would be based on truthful, complete, and accurate

information.

117. Incyte and the Individual Defendants, individually and in concert, directly and

indirectly, by the use, means, or instrumentalities of interstate commerce and/or of the mails,

engaged and participated in a continuous course of conduct to conceal adverse material

information about the commercialization and patient usage of Jakafi as specified herein.

51


118. These Defendants each employed devices, schemes, and artifices to defraud,

while in possession of material adverse non-public information and engaged in acts, practices,

and a course of conduct as alleged herein in an effort to assure investors of Incyte’s value and

performance and continued substantial sales, financial, and operational growth, which included

the making of, or the participation in the making of, untrue statements of material facts about the

commercialization and patient usage of Jakafi and omitting to state material facts necessary in

order to make the statements made about the commercialization and patient usage of Jakafi not

misleading in light of the circumstances under which they were made, as set forth more

particularly herein, and engaged in transactions, practices, and a course of business which

operated as a fraud and deceit upon the purchasers of Incyte’s securities during the Class Period.

119. The Individual Defendants’ primary liability and controlling person liability arise

from the following facts, among others: (i) the Individual Defendants were high-level executives

at the Company during the Class Period; (ii) the Individual Defendants, by virtue of their

responsibilities and activities as senior executive officers, were privy to, and participated in, the

creation, development, and reporting of the Company’s internal sales, marketing, and product

commercialization plans, projections, and/or reports; (iii) the Individual Defendants enjoyed

significant personal contact and familiarity with, were advised of, and had access to other

members of the Company’s management team, internal reports, and other data and information

about the commercialization and patient usage of Jakafi at all relevant times; and (iv) the

Individual Defendants were aware of the Company’s dissemination of information to the

investing public which they knew or recklessly disregarded was materially false and misleading.

120. Each of the Defendants had actual knowledge of the misrepresentations and

omissions of material facts set forth herein, or acted with severely reckless disregard for the

52


truth, in that each failed to ascertain and disclose such facts, even though such facts were

available to each of them. Such Defendants’ material misrepresentations and/or omissions were

done knowingly or with deliberate recklessness and for the purpose and effect of concealing

information regarding the commercialization and patient usage of Jakafi from the investing

public and supporting the artificially inflated price of its securities. As demonstrated by the

Individual Defendants’ misstatements and omissions throughout the Class Period regarding the

commercialization and patient usage of Jakafi, the Individual Defendants, if they did not have

actual knowledge of the misrepresentations and omissions alleged, were reckless in failing to

obtain such knowledge by deliberately refraining from taking those steps necessary to discover

whether those statements were false or misleading.

121. As a result of the dissemination of the materially false and misleading information

and failure to disclose material facts, as set forth above, the market prices of Incyte’s securities

were artificially inflated during the Class Period. In ignorance of the fact that market prices of

Incyte’s publicly traded securities were artificially inflated, and relying directly or indirectly on

the false and misleading statements made by Defendants, or upon the integrity of the market in

which the securities trade, and/or on the absence of material adverse information that was known

to, or disregarded with deliberate recklessness by, Defendants but not disclosed in public

statements by Defendants during the Class Period, Plaintiff and the other members of the Class

acquired Incyte’s securities during the Class Period at artificially high prices and were damaged

thereby, as evidenced by, among others, the stock price declines above.

122. At the time of said misrepresentations and omissions, Plaintiff and the other

members of the Class were ignorant of their falsity and believed them to be true. Had Plaintiff

and the other members of the Class and the marketplace known of Incyte’s fraudulent practices,

53


the true nature and prospects of Jakafi, or Incyte’s true intrinsic value, which were not disclosed

by Defendants, Plaintiff and the other members of the Class would not have purchased or

otherwise acquired their Incyte publicly traded securities during the Class Period; or, if they had

acquired such securities during the Class Period, they would not have done so at the artificially

inflated prices which they paid.

123. By virtue of the foregoing, Incyte and the Individual Defendants have each

violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder.

124. As a direct and proximate result of Defendants’ wrongful conduct, Plaintiff and

the other members of the Class suffered damages in connection with their respective purchases

and sales of the Company’s securities during the Class Period, as evidenced by, among others,

the stock price declines discussed above, when the artificial inflation was released from Incyte’s

stock.

COUNT II

FOR VIOLATIONS OF SECTION 20(a) OF THE EXCHANGE ACT AGAINST THE INDIVIDUAL DEFENDANTS

125. Plaintiff repeats and realleges the allegations set forth above as though fully set

forth herein. This claim is asserted against the Individual Defendants.

126. The Individual Defendants acted as controlling persons of Incyte within the

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

positions with the Company, participation in, and/or awareness of, the Company’s operations,

and/or intimate knowledge of the Company’s fraudulent practices and the Company’s actual

results and future prospects, 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

54


false and misleading. The Individual Defendants were provided with, or had unlimited access to,

copies of the Company’s reports, press releases, public filings, and other statements alleged by

Plaintiff to be misleading prior to and/or shortly after these statements were issued and had the

ability to prevent the issuance of the statements or cause the statements to be corrected.

127. In addition, the Individual Defendants had direct 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.

128. As set forth above, Incyte 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

controlling positions, the Individual Defendants are liable pursuant to Section 20(a) of the

Exchange Act. As a direct and proximate result of the Individual Defendants’ wrongful conduct,

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

the Company’s securities during the Class Period, as evidenced by, among others, the stock price

declines discussed above, when the artificial inflation was released from Incyte’s stock.

PRAYER FOR RELIEF

WHEREFORE, Plaintiff, on its own behalf and on behalf of the Class, prays for relief

and judgment, as follows:

(a) Declaring that this action is a proper class action and certifying Plaintiff as

class representative pursuant to Rule 23 of the Federal Rules of Civil Procedure and Plaintiff’s

counsel as Class Counsel for the proposed Class;

(b) Awarding compensatory damages 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;

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

incurred in this action, including attorneys' fees and expert fees; and

(d) Such other and further relief as the Court deems appropriate.

JURY TRIAL DEMANDED

Plaintiff hereby demands a trial by jury.

DATED: August 12, 2013

Jack Reise (pro hac vice) Stephen R. Astley (pro hac vice) Elizabeth A. Shonson (pro hac vice) ROBBINS GELLER RUDMAN

120 E. Palmetto Park Road, Suite 500 Boca Raton, FL 33432 Telephone: 561/750-3000 Fax: 561/750-3364 [email protected] [email protected] [email protected]

PRICKETT, JONES & ELLIOTT, P.A.

By: MIe1 Hanr2tha1*EJ/No.4) Patil A. Fioravii Jr. BaW 3808) J. Clayton Athey (DE Bar No. 4378) 1310 North King Street Wilmington, DE 19801 Telephone: 302/888-6500 Fax: 302/658-8111 [email protected] [email protected] [email protected]

Liaison Counselfor Lead Plaintiff Lead Counsel for Lead Plaintiff

Robert Sugarman Pedro A. Herrea SUGARMAN & SUSSKIND 100 Miracle Mile, Suite 300 Coral Gables, FL 33134 Telephone: 305/529-2801 Fax: 305/447-8115

Additional Counsel for Lead Plaintiff

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1 consolidated class action complaint 08/12/2013

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