LIONEL Z. GLANCY # MICHAEL GOLDBERGsecurities.stanford.edu/filings-documents/1028/ITMN03-01/...Actimmune during the first quarter of 2003 -- a key piece of information relied on by

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LIONEL Z. GLANCY # 134180PETER A. BINKOW #173848MICHAEL GOLDBERG # 18 8669SUSAN KUPFER # 141724GLANCY BINKOW & GOLDBERG LLP1801 Avenue of the Stars, Suite 31 1Los Angeles , Californ ia 90067, andTelephone : (310) 201-9150Facsimile : (310) 201-916 0

Attorneys for Lead Plaintiff Lance A. Johnson[Additional Counsel Appear on Signature Page]

UNITED STATES DISTRICT COURTFOR THE NORTHERN DISTRICT OF CALIFORNIA

In re INTERMUNE SECURITIESLITIGATION .

Master File No. C 03-2954 SI

CLASS ACTION

This Document Relates To :

All ActionsJury Trial Demanded

SECOND AMENDED AND CONSOLIDATED CLASS ACTIONCOMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAW S

BASIS OF THE ALLEGATION S

1 . Lead Plaintiff alleges the following based upon the investigation of his counse l

(except for those allegations pertaining to Lead Plaintiff, which are based upon his personal

knowledge) . The investigation included a review of United States Securities and Exchange

Commission ("SEC") filings by InterMune, Inc . ("InterMune" or the "Company"), as well as

regulatory filings and reports, securities analysts' reports, press releases, transcripts of InterMun e

conference calls with analysts, other public statements issued by InterMune and the individual

defendants, media reports about InterMune and its products, internal documents of InterMune

and its employees and former employees obtained from former employees, and interviews wit h

CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES LAWS

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former employees . The specific sources upon which Lead Plaintiff relies are identified

throughout this First Amended Consolidated Class Action Complaint ("Complaint" )

NATURE OF THE ACTION

2. Lead Plaintiff brings this action on behalf of himself and all purchasers of th e

common stock of InterMune between January 7, 2003, and June 11, 2003, inclusive (the "Class

Period") . Lead Plaintiff alleges that during the Class Period the named defendants as identified

below knowingly, or with deliberately reckless ignorance, made false and misleading statements

regarding InterMune's "lead product," Actimmune, which is used primarily off-label fo r

treatment of a fatal lung disease, and also regarding InterMune's sales, sales force, and business

strategy . As a result, the market price of InterMune stock was artificially inflated during the

Class Period, and Lead Plaintiff and other class members were damaged by defendants' wrongful

conduct .

3 . As detailed below, Lead Plaintiff alleges, among other things, that defendant s

made material misrepresentations to the market regarding the number of patients taking

Actimmune during the first quarter of 2003 -- a key piece of information relied on by investors

for a number of reasons, including because it was the key indicator of future sales revenues and,

therefore, the reasonableness of any guidance by InterMune regarding those future revenues .

Defendants misrepresented the number of patients taking Actimmune, and thereby also

communicated an impression that the number of such patients was continuing to grow, when in

fact, the number had begun to shrink . Defendants also made misleading statements regarding

whether it was meeting revenue projections .

4. Defendants also misrepresented the response of the relevant portion of th e

medical community to the data resulting from key clinical trials of Actimmune . The luke-warm

or outright negative response of many doctors to this data, which was not disclosed until the end

of the Class Period, was one of several reasons why the number of patients taking Actimmune

stopped growing, and even shrank, as compared with the quarter before the start of the Class

Period.

CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECURITIES

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5 . Related to these deceptions, defendants also concealed and misrepresented th e

true status of InterMune's sales force, which, during the first quarter of 2003, was being

downsized, both intentionally and unintentionally, and which, for a number of reasons detailed

below was suffering from a breakdown of morale . Defendants also concealed that during the

first quarter, InterMune was cutting back its efforts to educate doctors about Actimmune . The

reduction and disarray of the work-force and the cut-back in InterMune's efforts to educate

doctors about Actimmune were among the factors resulting in the cessation of growth, and acts

shrinkage, of the number of patients taking Actimmune .

6 . Finally, defendants also misled investors about the fact that , in violation of Foo d

and Drug Administration ("FDA") regulations, InterMune was actively "marketing" Actimmune

for use with JPF, sending its sales force into pulmonologists' offices for the primary purpose of

selling the drug for such use, pressuring and incentivizing their sales force to violate FD A

regulations, and not merely using their sales force to service doctors who were prescribing

Actimmune for IPF based on their own spontaneous responses to presentations of clinical data

about Actimmune in journals and at professional conferences .

7. The above-referenced misrepresentations began just before the commencement of

the Class Period on January 7, 2003, and snowballed as the Class Period progressed , until finally ,

on June 11, 2003, the truth was at least partially disclosed .

8. As a result of defendants' misrepresentations and material omissions the price of

InterMune's stock was artificially inflated throughout the Class Period, when Lead Plaintiff and

members of the Class purchased shares of that stock, and continues to be inflated even now .

Right after the end of the Class Period, when the truth was finally at least partially disclosed, the

stock plummeted by more than eight dollars per share, the minimum amount by which Lead

Plaintiff and the Class members were damaged .


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JURISDICTION AND VENUE

9 . The claims alleged herein arise under and pursuant to Sections 10(b) and 20 of

Securities Exchange Act of 1934 (the "Exchange Act"), 15 U.S.C. §§ 78j(b) and 78t , and Rule

1Ob-5 promulgated thereunder , 17 C.F.R. § 240.1 Ob-5 .

10. The jurisdiction of this Court is based on Section 27 of the Exchange Act, as

amended, 15 U .S .C. §78aa, and 28 U.S.C. §1331 (federal question) .

11 . Venue is proper in this judicial district pursuant to Section 27 of the Exchange

Act and 28 U .S.C. §§ 1391(b) . Many of the acts and transactions giving rise to the violations o f

law complained of herein, including the preparation and dissemination to the investing public of

materially false and misleading information, occurred in this judicial district . InterMune

maintains its executive offices at 3280 Bayshore Boulevard , Brisbane , CA 94005 .

12. In connection with the acts, transactions and conduct alleged herein, defendant s

directly and indirectly used the means and instrumentalities of interstate commerce, including the

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

exchange and market .THE PARTIES

13 . Lead Plaintiff, Lance A. Johnson, purchased shares of InterMune securities

the Class Period, as set forth in the his certification previously filed with this Court an d

incorporated herein by reference, at prices that were artificially inflated as a result of defendants'

unlawful conduct alleged herein, and has been damaged thereby .

14. Defendant InterMune is a Delaware corporation that maintains its principal

offices in Brisbane, California . The Company is a biopharmaceutical company focused on

developing and commercializing products for the treatment of serious pulmonary, infectious and

hepatic diseases. As of May 9, 2003, the Company had 31,761,594 outstanding shares of

common stock. The Company's common stock trades on the NASDAQ Exchange (the

"NASDAQ") .

15. Defendant W . Scott Harkonen, M .D. ("Harkonen") served as a member of th e

InterMune Board from the Company's inception until September 25, 2003, and as Chairman of


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the Board from January 2000 until May 2003 . Harkonen was also InterMune's Chief Executive

Officer ("CEO") and President, from the Company's inception until June 30, 2003 . Harkonen

has an M .D . and an M.B .A., and he was previously employed at, among other places, Univax

Biologics as Vice President of Medical and Regulatory Affairs . According to the Company' s

proxy statement dated April 8, 2003, during 2002, Harkonen received a salary of $350,000, a

bonus of $225,000, "and stock options to purchase 180,000 shares of the Company's common

stock at an exercise price of $43 .66 per share ." At the close of trading on the last day before the

beginning of the Class Period, InterMune's stock was trading at $27 .62; therefore, Harkonen

could not have exercised his options unless the price of InterMune's stock had risen thereafter .

16. As announced on January 30, 2003, in an InterMune press release, on that day ,

because InterMune's Senior Vice President of Sales and Marketing had resigned, Harkonen

essentially became the acting Senior Vice President of Sales and Marketing, while also

continuing to serve as CEO . Harkonen continued as the acting Senior Vice President of Sales

and Marketing throughout the Class Period, as shown by his statement during a conference call

with analysts on June 12, 2003, that the company still had "an active search for a new head of

sales and marketing ."

17. Defendant Sharon Surrey-Barbari ("Surrey-Barbari") was at all relevant time s

InterMune's Chief Financial Officer ("CFO") and Senior Vice President of Finance an d

Administration.

NON-PARTY SOURCE S

18 . As expressly noted in specific instances, infra, Lead Plaintiff relies for certain

allegations upon a number of former InterMune employees .

19. Joan Gallagher was employed by InterMune as a sales representative fro m

December 2001 through June 2003 . Prior to working for InterMune, Gallagher worked for

fourteen years as a sales representative for two other pharmaceutical companies . In December

2002, after a full year as a sales representative for InterMune, Gallagher was given an Overall

Rating and Overall Sales Performance Rating of "Exceeds Standards," or a "2" on a five-point


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scale, with one being the highest possible score. Starting in January 2003, Gallagher was

expected, as part of her job, to follow up with pulmonologists who were prescribing Actimmune

and to specifically market Actimmune to pulmonologists for use with IPF. Therefore, Gallagher

was given the same documents and instructions that were given to the other sales representatives

who were expected to market Actimmune, she attended the same meetings, she participated in

discussions among such sales representatives concerning their experiences in trying to perform

their job duties and concerning trends among doctors prescribing Actimmune, and, to the extent

that they did not involve illegal marketing, she performed her job duties regarding Actimmune .

As explained infra, InterMune concedes that marketing Actimmune for use with IPF is illegal .

According to Gallagher, she refused to market Actimmune illegally, and, for that reason, on June

13, 2003, was discharged by InterMune . On March 17, 2004, Gallagher filed suit against

InterMune, Harkonen, and two other InterMune managers, in federal court in Pennsylvania,

alleging that she had been wrongfully terminated in violation of public policy .

20. Joyce Ohlgren, who is a resident of Minnesota , was an InterMune sale s

representative from January 1, 2002, through April 2003 . She was part of the sales force during

the Class Period, when all sales representatives were instructed how to follow up with doctors

who prescribed Actimmune and with their patients and how to market Actimmune for JPF . She

resigned from her job at InterMune because she objected to the company's illegal marketing of

Actimmune for IPF . Currently she is a sales representative for Corixa, a developer o f

immunotherapeutics .

21 . Confidential Source Number 1 was a sales representative for InterMune in th e

western part of the U.S ., including, but not limited to, during the entire Class Period, when all

sales representatives were instructed how to follow up with doctors who prescribed Actimmune

and with their patients and how to market Actimmune for IPF . She was fired after she voiced

objections to her regional sales manager, the national sales manager and the human resources

department regarding InterMune's marketing of Actimmune for IPF .


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22 . Confidential Source Number 2 was a member of the InterMune marketing tea m

(which includes sales managers, sales representatives, national account managers, product

managers and medical liaisons), including, but not limited to, during the entire Class Period . As

a member of the marketing team, he participated in meetings with pulmonologists, meetings with

the InterMune sales force that was expected to market Actimmune for use with IPF, meetings

with one or more InterMune regional sales managers, and meetings with both regional sales

managers and the national sales manager, including meetings where sales representatives' duties

and experiences regarding the marketing of Actimmune for IPF and following up with doctors

who prescribed Actimmune and with their patients were discussed .

23 . Confidential Source Number 3 was a sales representative for InterMune in it s

Northeast region, from December 2001 through early 2003 . Prior to working at InterMune, he

I had twenty years of experience in pharmaceutical sales . During the first quarter of 2003, he was

asked by his regional sales manager to market Actimmune for use with IPF, but he refused to do

so, and he eventually resigned . In the meantime, Confidential Source number 3 participated in

meetings where the sales force was instructed in its duties regarding selling Actimmune for IPF

and following up with doctors who prescribed Actimmune and their patients, and met and talked

with other members of the sales force, including the regional and national sales managers .

24. Confidential Source Number 4 was a sales representative for InterMune in th e

Midwest, for a year, ending shortly before the beginning of the Class Period . Prior to working

for InterMune, he had been a pharmaceutical sales representative for 20 years . He admits that

while working for InterMune, he "pitched" Actimmune for use with IPF to as many as 130

pulmonologists .

CLASS ACTION ALLEGATIONS

25 . Lead Plaintiff brings this action as a class action pursuant to Federal Rules o f

Civil Procedure 23(a) and (b)(3) on behalf of a class consisting of all persons who purchased

InterMune common stock during the Class Period and who were damaged thereby (the "Class") .


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Excluded from the Class are the Company, its current and former officers and directors and all

members of their immediate families, the Company's affiliates, legal representatives, heirs,

predecessors, successors and assigns, and any entity in which the Company has a controlling

interest or of which the Company is a parent or subsidiary .

26. The members of the Class are located in geographically diverse areas and are so

numerous that joinder of all members is impractical . The Company has over 31 million shares a

common stock outstanding, and approximately 109 million shares were traded during the Class

Period. While the exact number of Class members is unknown to the Lead Plaintiff at this time ,

and can only be ascertained through appropriate discovery, Lead Plaintiff believes there exist, at

a minimum, over one thousand members of the Class .

27 . Common questions of law and fact exist as to all members of the Class and

predominate over any questions affecting solely individual members of the Class. Among the

questions of law and fact common to the Class are :

a. Whether defendants engaged in acts or conduct in violation of the federa l

securities laws as alleged herein;

b. Whether defendants failed to disclose information alleged herein to b e

material , the omission of which, rendered certain statements materially misleading ;

c. Whether defendants acted knowingly or recklessly in making materially

false and misleading statements or in failing to correct such statements upon learning that the y

were materially false and misleading during the Class Period ;

d. Whether the market price of the Company's common stock during the

Class Period was artificially inflated because of defendants' conduct complained of herein ; and

e. Whether members of the Class have sustained damages and, if so, th e

proper measure of damages .

28 . Lead Plaintiff's claims are typical of the claims of the members of the Class

because Lead Plaintiff and members of the Class all sustained damages arising out of defendants '

wrongful in violation of federal law as complained of herein .


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29. Lead Plaintiff will fairly and adequately protect the interests of the members of

the Class and has retained counsel competent and experienced in class and securities litigation .

Lead Plaintiff has no interests antagonistic to or in conflict with those of the Class.

30 . A class action is superior to other available methods for the fair and efficien t

adjudication of this controversy since joinder of all members of the Class is impractical .

Furthermore, because the damages suffered by individual Class members may be relatively

small, the expense and burden of individual litigation make it impossible for the Class members

individually to redress the wrongs done to them . There will be no difficulty in the management

of this action as a class action .

Fraud on the Market Presumption

31 . Lead Plaintiff will rely, in part, upon the presumption of reliance established by th e

fraud-on-the-market doctrine in that :

a. Defendants made public misrepresentations or failed to disclose material

facts regarding InterMune's financial prospects and circumstances during the Class Period;

b. the omissions and misrepresentations were material ;

c. the market for the Company's stock was efficient, including, without

limitation, because the Company's stock traded at all relevant times on the NASDAQ, an

efficient and open market , and as reflected by the fact that the price of the Company's stock

quickly reacted to the release of material new information about the Company and its busines s

prospects ;

d. the misrepresentations and omissions alleged were such as would have

tended to induce a reasonable investor to misjudge the value of the Company' s securities; and

e. Lead Plaintiff and the members of the Class, without knowledge of the

misrepresented facts, purchased InterMune securities between the time defendants failed t o

disclose and/or misrepresented material facts and the time the truth was partially or fully

disclosed .


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32. The Company is followed by numerous market makers including Banc o f

America Securities, Bear Steams and Morgan Stanley .

33 . As a regulated issuer, InterMune was required to and did file periodic reports

I the SEC .

34. InterMune regularly communicated with public investors via established market

mechanisms, including through the regular dissemination of press releases on the national

circuits of major newswire services and through other wide-ranging public disclosures .

35 . Based upon the foregoing, all purchasers of InterMune shares during the Class ar e

entitled to a presumption of reliance upon the integrity of the market .

The Safe Harbor Provision is Inapplicable

36 . The statutory safe harbor provided for forward-looking statements under certai n

circumstances does not apply to any of the allegedly false statements pleaded in this complaint .

Most of the statements alleged to be false and misleading herein relate to then-existing facts and

conditions . In addition, to the extent certain of the statements alleged to be false may b e

characterized as forward-looking, they were not adequately identified as "forward-looking

statements" when made, there were no statements made with respect to any of those representations

forming the basis of the complaint that actual results "could differ materially from those projected,"

and there were no meaningful cautionary statements identifying the factors that could cause actual

results to differ materially from those in the purportedly forward-looking statements . Alternatively,

to the extent that the statutory safe harbor applies to any forward-looking statements pleaded herein,

defendants are liable for those false forward-looking statements because at the time each of those

forward-looking statements was made, the particular speaker had actual knowledge that the

particular forward-looking statement was materially false or misleading, and/or the forward-looking

statement was authorized and/or approved by an executive officer of InterMune who knew that

those statements were false when made .


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SUBSTANTIVE ALLEGATION S

BACKGROUND

InterMune's Business StrateZy and Financial Result s

37 . According to InterMune's Annual Report on Form 10-K for the fiscal year ended

December 31, 2002, certified by Surrey-Barbari on March 28, 2003, and filed with the Securities

and Exchange Commission on March 31, 2003 (the "10-K"), InterMune was incorporated i n

Delaware on March 23, 2000 .

38 . As stated in the 10-K, InterMune is a "biopharmaceutical company" whose

strategy is to "grow our product revenues by . . . developing and commercializing new products

[for] unmet medical needs ." In other words, InterMune does not necessarily create o r

manufacture a drug that it markets ; rather, it licenses rights to develop and market the drug or

acquires its patent from another company, and then attempts to develop and market the drug for E

new use that will meet some need not being satisfied by other currently available medication .

39. According to the 10-K, InterMune "contract[s] with qualified third-party

manufacturers to produce [ its] products and product candidates," and sells its products " ]

to specialty pharmacies and to distributors who resell them to hospitals, pharmacies and

physicians ."

40. According to the 10-K, the company's "lead product" is Actimmune, whic h

I InterMune has "the right to develop and commercialize " for certain uses in the United States and

Canada, under "exclusive licenses" from Genentech, Inc . Genentech holds the patent fo r

"interferon gamma-lb, the active ingredient in Actimmune . "

41 . The "Consolidated Statement of Operations" provided in the 10-K shows that ,

since its incorporation, InterMune's revenues have come almost exclusively from sales of

Actimmune, and that those sales increased steadily from year to year, by huge percentage

increases, until the beginning of the Class Period . Thus, in the year of its incorporation, 2000,

InterMune's only revenues came from sales of Actimmune, which totaled approximatel y

$11 million. Revenues from sales of Actimmune increased to approximately $36 million i n


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2001, and $106 million in 2002 . These revenues from sales of Actimmune accounted fo r

approximately 91 % of InterMune's total revenues in 2001, and 94% in 2002 .

42. As disclosed in InterMune's Form 10-Q for the quarter ended June 30, 2004 ,

InterMune has never had a profitable quarter . Moreover, the 10-K shows that in each year prior

to the Class Period, the size of InterMune's net loss increased . Nevertheless, shortly before the

start of the Class Period, on October 24, 2002, Surrey-Barbari stated during a conference call

with analysts that "[a]chieving profitability remains one of the Company's primary strategic

goals ." In a press release dated August 28, 2002, InterMune told investors that it expected to

reach profitability in 2004.

The Price of InterMune 's Stock Depends on the Level of Salesand Potential Sales of Actimmune for Off-Label Use With IPF

43 . Because of the overwhelming centrality of Actimmune sales to InterMune' s

financial health, the price of InterMune's stock depends on the market's perception of

Actimmune sales growth . As stated in a Morgan Stanley analysts' report written by, among

others, Caroline L . Copithorne, and published on April 4, 2002 (the "Morgan Stanley Report"),

"[w]e expect Actimmune to be the primary driver of InterMune's stock . . . . [D]espite

[InterMune's] broad pipeline, it appears investors are focused on Actimmune for the near term."

44. Although Actimmune has been approved for certain uses by the Food and Drug

Administration, the overwhelming majority of Actimmune sales are for a use that has never been

approved by the Food and Drug Administration ("FDA") . Thus, the 10-K states that Actimmune

has been "approved by the [Food and Drug Administration ("FDA")] for the treatment of two

rare congenital disorders" (emphasis added), but its " most significant near-term opportunity" is

for a different use, namely, for "treatment of idiopathic pulmonary fibrosis" ("IPF") . "[IPF] is a

disease characterized by progressive scarring, or fibrosis, of the lungs, which leads to their

deterioration and destruction . "

45 . As the 10-K states , although Actimmune has not been approved by the FDA fo r

treatment of IPF, and although InterMune may not solicit sales of Actimmune for such a


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purpose, nevertheless, "[p]hysicians may prescribe legally available drugs for uses that are not

described in the products' labeling and that differ from those tested by [InterMune] and appro x

by the FDA," and, in fact, "physicians are prescribing Actimmune for the treatment of [IPF] . "

46. One reason why some physicians may be willing to prescribe Actimmune for IP F

even though the FDA has not yet been persuaded to approve such a use is that, as stated in th e

10-K, IPF is fatal -- "the median life span for patients suffering from idiopathic pulmonary

fibrosis is approximately 2 .8 years from the time of diagnosis" -- and "currently there is no FDA

approved effective treatment ." Moreover, as stated in the Morgan Stanley Report, "conventional

therapies in this indication are ineffective . "

47. The same reason may explain why some patients are willing to try, and some

insurance companies are willing to reimburse, Actimmune treatments for IPF, despite the fact

that according to a Legg Mason analysts' research report, written by, among others, Edward H.

Nash, and published on July 1, 2003 (the "Legg Mason Report"), Actimmune treatment for one

IPF patient for one year costs $50,000 .

48. According to a Bear Stearns research report, written by, among others, Hayley

Xuereb, and published on November 26, 2002 (the "Bear Stearns Report"), "[l]ittle attention was

paid to Actimmune until 1999," when a "small study" appeared to show positive results for IPF

patients, and then "off-label sales took off. "

49. According to the Legg Mason Report, "[t]he overwhelming majority of

[InterMune's Actimmune revenues in 2002] was generated from treating IPF, an off-label

indication ."

50. Thus, not only does the price of InterMune 's stock depend on the market' s

perception of Actim.mune ' s sales growth and sales potential ; but also, more specifically , the pri

of InterMune's stock depends on the market's perception of Actimmune's sales and sales

potential as a treatment for IPF. According to the Bear Stearns Report, which was published jus t

before the beginning of the Class Period, "appreciation in InterMune shares will be drive n


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largely by increased acceptance of Actimmune for the treatment of IPF , as evidence by

increasing growth in Actiznmune sales . "

51 . The market's perception of Actimmune' s sales potential is also influenced by the

I results from clinical trials being conducted by InterMune in its efforts to gain FDA approval for

use of Actimmune with IPF, because with such approval InterMune would be able to explicitly

market Actimmune for use with IPF . Thus, the Morgan Stanley Report stated that "investors

[will be] focusing on both Actimmune sales growth . . . and the [clinical trial] results and

regulatory progress in IPF ."

The Importance of, and Defendants' Knowledge of, Patient Numbers

52. Near term, the best predictor of the quantity of Actimmune sales , and therefore

the key factor that affects the price of InterMune's stock, is the number of patients receiving the

drug, because for each patient who begins a course of treatment, InterMune can expect to earn

$50,000 per year, as long as the treatment continues . Thus, during a conference call with

analysts on April 29, 2003, Keith Katkin, InterMune's Vice President of Pulmonary Marketing

said, "I ask you to focus on the underlying patient demand increase and not the actual revenues

that were reported ." Thus too, after the Class Period, on June 11, when InterMune issued a press

release correcting its revenue projections, it explained that it was doing so because it had

corrected the previously announced number of patients taking Actimmune .

53. For this reason, InterMune made a practice of reporting the number of patient s

taking Actimmune, as it did during conference calls with analysts on October 24, 2002, February

19, 2003 and April 29, 2003, and predicting quarterly increases in the numbers, as it did during

the conference call on October 24, 2002 . In turn, analysts based their stock price predictions on

such patient number announcements, as did a Wachovia Securities analyst report, written by

Martin D . Auster and published on May 18, 2003, which stated that "we continue to predict a

fairly healthy revenue ramp for Actimmune . . . based on our belief that InterMune can continue

to add 200-300 patents/quarter through the end of 2004 ."


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54. Because of the importance of patient numbers to InterMune's business and t o

investors, Harkonen and Surrey-Barbari knew at all times, or were deliberately reckless in no t

knowing, the exact number of patients taking Actimmune .

55 . According to Gallagher and Confidential Sources Numbers 1 and 2, each of the m

learned from discussions with their regional sales managers and the national sales manager, Ji m

Shaffer, that, (1) regardless of who ultimately filled a specific prescription for Actimmune ,

InterMune required each prescribing doctor to send the initial prescription to InterMune' s

primary distributor, Priority Health Care Corporation ("Priority"), (2) Priority was required to

record each shipment of Actimmune to a specific patient or care-giver and (3) Priority was

required to send weekly reports to InterMune listing all doctors who had prescribed Actimmune

and all patients for whom each such doctor had written a prescription (with each patient being

identified by the number assigned to the patient by Priority), as well as noting, for each

prescription, whether the prescription had been filled and shipped .

56. According to Confidential Source Number 1, she was told by her regional sales

director to focus her selling efforts on doctors who had written the most prescriptions fo r

Actimmune, and that she should use the weekly reports received from Priority to determin e

which doctors had written the most prescriptions .

57. The fact that all prescriptions were initially repo rted to Priority is suppo rted by

the prescription form that, according to Gallagher and Confidential Source Number 1, was given

to all doctors who wanted to write a prescription for Actimmune . Gallagher and Confidential

Source Number I have each provided Plaintiff's attorneys with examples of this form . The form

is titled "ACTIMMUNE ACCESS HOTLINE : Patient Referral/Mediction Request Form ." The

form contains only a single phone number, and a single fax number to be used when submitting

the form . Plaintiff's attorney has confirmed that the numbers are Priority's by calling the phone

number. Confidential Source Number 1 has also provided Plaintiff's attorneys with an e-mail

from her regional sales manager, Christa Belardi, dated January 18, 2003, which states "Here i s


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the Actimmune Referral form. ALL Actimmune RXs must go on this form and ALL are faxe d

to the central hub (number on form) ."

58. The existence of the weekly reports is confirmed by the fact that Gallagher an d

Confidential Source 2 have each provided Plaintiffs attorneys with examples of these reports,

including an example for the week of April 28, 2003 . Each report is titled "Representative

Reimbursement Referral Report ." ("Reimbursement Report") . As shown by the Reimbursement

Report for the week of April 28, 2003, the report contains a column of physician names which,

according to Gallagher and Confidential Sources 1 and 2, represent the physicians who had

written Actimmune prescriptions . Next to each physician's name are patient identification

numbers, assigned by Priority, which, according to Gallagher and Confidential Sources 1 and 2,

represent the patients for whom the given doctor had written Actimmune prescriptions . As

indicated by headings in the report, next to each such patient identification number is the date

when the prescription was received by Priority, the zip code of the location of the patient, an

indication as to whether the prescription has been filled and shipped, the InterMune sales

representative who is responsible for the zip code in which the patient is located, and the

InterMune regional sales manager who supervises the sales representative . The report is divided

into separate sections with each section listing the prescriptions that have been assigned to one

particular distributor . As explained by Confidential Source Number 2, a particular distributor

may be assigned to fill a particular prescription based on who the third-party payor is for that

particular patient and whether that third-party payor has a relationship with that particular

distributor .

59. As explained by Gallagher and Confidential Source Number 2, the words in the

official title of the Reimbursement Report are derived from the fact that a "referral" is a

prescription, a "representative" is a sales representative, and it is a "reimbursement" report

because the prescription cannot be filled and shipped until reimbursement has been arranged,

usually with a third-party payor . Therefore, the indication in the report regarding whether th e


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prescription has been shipped is also an indication as to whether an agreement for re i

has been obtained .

60. Keeping a record of whether reimbursement has been obtained is especiall y

important because a year's worth of the drug costs $50,000, and a prescription is not likely to be

paid for unless a third-party payor agrees to reimburse the distributor . For this reason the reports

are often simply referred to as "reimbursement reports," as evidenced by e-mails that circulate

the reports, copies of which have been provided to Plaintiff's attorneys by Confidential Source

One. Moreover, the Reimbursement Reports were circulated within InterMune as attachments to

e-mails from Darren Cline, as Gallagher and Confidential Sources 1 and 2 have each confirmed .

Cline's job title, as stated on examples of e-mails from Cline reviewed by Plaintiffs attorney, is

"Senior Director, Reimbursement and Public Policy." (emphasis added )

61 . According to Gallagher and Confidential Sources 1 and 2, the Reimbursemen t

Reports were circulated to every sales representative .

62. The accuracy of the Reimbursement Reports was bolstered by the fact that,

according to Gallagher, it was the duty of every sales representative to follow up on the

information provided by Priority regarding patients within that sales representative's assigned

zip codes, in order to, among other things, make sure that the information was accurate and

complete. According to Gallagher, based on her own experience and her conversations with

other sales representatives, it was standard practice for sales representatives to confirm the

information received from Priority by, among other things, obtaining copies of the prescriptions

from the doctors who wrote them. According to Gallagher, it was also the duty of every sales

representative to call Priority at least once a week, to find out, among other things, if patients

previously taking Actimmune were still on the drug .

63. According to Gallagher and Confidential Source Number 2, it was part of th e

sales representative's job to try to help obtain reimbursement approval for prescriptions that ha d

been written, and therefore they would use the Reimbursement Reports to determine whic h


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prescriptions were still waiting for such approval, and in so doing would help to find any

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inaccuracies in the reports .

64 . That Priority was providing comprehensive patient -specific information to

InterMune is further supported by the fact that, according to Gallagher, except during a brief

hiatus that ended on March 14, 2003, whenever Priority received a prescription for Actimmune,

it would e-mail information about the prescription directly to the InterMune sales representative

responsible for the zip code in which that patient was located .

65 . Gallagher has provided Plaintiff's attorneys with an e-mail from her regiona l

manager, Chad Patton, to the sales representatives that he supervised, dated March 17, 2003, that

attaches an example of an e-mail from a Priority employee to an InterMune sales representative .

The Priority employee is Khadij a Mohammed, the InterMune sales representative is S . Brown,

the e-mail is dated March 14, 2003, and the e-mail provides the date of a "referral," the name of

the physician, and the patient number, city, state and zip code of the patient . The e-mail from

Patton states

This is what you should receive every time a new patient enters thePriority. Please be sure to follow up with the doctor's office tolet them know the fax i .e ., the prescription] has been received,follow-up with any questions they might have and let them knowyou will be helping them manage this process .

The e-mail from Patton demonstrates not only that Priority was expected to report every

Actimmune prescription to InterMune, but also, that InterMune's sales representatives were

expected to immediately become involved with the doctor and patient, so that the sales

representatives were in a position to verify whether the information received from Priority was

accurate. Moreover, to the extent that Priority might have failed to report one or more

Actimmune prescriptions and the relevant InterMune sales representatives failed to discover the

omissions, the result would have been an undercount of patients on Actimmune, not the inflated

count that InterMune disseminated to the public during the Class Period .


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66. The Reimbursement Reports were reviewed by Harkonen, as is indicated by a

2 statement that Harkonen made during the October 24, 2002, conference call . During that call, a

questioner asked

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what, if any, changes have taken place in the reimbursement picture? . . . LatelyPriority Health Care . . . were saying that . . . they had seen an improvement in thereimbursement picture . I'm wondering if you have expe rienced that or seen thatyourselves ?" (emphasis added) .

67. Harkonen personally responded as follows :

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We've been working very closely with . . . people at Priority Health Care and thetrend is very positive and reimbursement continues to improve on the private payerperspective . So to the extent that again, we are receiving information from Priority,the trend is very positive .

Given the way that the question was phrased -- asking for personal knowledge --, given that

Harkonen chose to answer the question -- despite the presence on the conference call of a

number of other InterMune representatives --, and given Harkonen's statement that he knew the

trend shown by the information received from Priority, it is clear that Harkonen himself was

reviewing the information regarding reimbursement, and that information, as demonstrated

supra, was being provided to InterMune in the Reimbursement Reports .

68 . A second indication that Harkonen reviewed the Reimbursement Reports, an d

which also shows that Surrey-Barbari reviewed the Reimbursement Reports, is that Harkonen

and Surrey-Barbari have each certified that they designed procedures to "ensure" that

information such as is contained in the Reimbursement Reports was made known to them

personally . Thus, InterMune's Form I OQ for the quarter ending March 31, 2003, contains two

certifications signed on May 13, 2003, pursuant to Section 302(a) of the Sarbanes-Oxley Act,

one signed by Harkonen, and the other signed by Surrey-Barbari . Each of these certifications

states, in relevant part :


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4. The registrant's other certifying officers and I are responsiblefor establishing and maintaining disclosure controls and

others within those entities , particularly during the period in whichthis quarterly report is being prepared .

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(emphasis added). Identical certifications are also contained in InterMune's 1 OK for the year

ending December 31, 2002, and were signed by Harkonen and Surrey-Barbari on March 27,

2003. Thus, according to Harkonen and Surrey-Barbari's own testimony, they had "ensure[d]"

that they were personally receiving all material information known internally at InterMune .

69. The "material" information referred to by these certifications includes the

Reimbursement Reports, because the SEC filings that contained these cert ifications also

contained revenue projections, which should have been based on patient numbers derived fro m

the Reimbursement Reports, InterMune's most accurate source for such numbers .

70. A third indication that Harkonen was reviewing the Reimbursement Repo rts, and

thus knew the exact number of patients taking Actimmune, is that, from January 30, 2003,

through the end of the Class Period, Harkonen was the acting Senior Vice President of Sales and

Marketing . Because the Reimbursement Reports provided information on both patient numbers

and the rate of reimbursement for prescriptions, the Reimbursement Reports were the single moss

important document in Harkonen's area of responsibility . Harkonen either reviewed these

reports religiously, or else he was deliberately reckless in failing to do so .

The Importance of, and Defendants ' Knowledge of, Doctors' Attitude s

71 . While patient numbers are the best short-term predictor of Actinunune 's sales

growth, long-term, the best predictor of Actimmune's sales growth is the changing attitudes of

pulmonologists toward using Actimmune with IPF. Such attitudes are crucial, first, because, in

the absence of FDA approval of Actimmune for use with IPF, it is up to each doctor to decide on

his or her own whether to prescribe the drug for such use, and, secondly, because doctors'

reactions to clinical trial results provide some indication of whether FDA approval will be more

or less likely. Thus, during the conference call on February 19, 2003, when asked by an analyst

what would need to happen in order for InterMune's revenues to increase, Katkin responded that

"your question really revolves around physician adoption and the rate at which physicia n


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adoption occurs." Thus too, after the Class Period, during the June 12 conference call, when

InterMune announced that there had been a downturn in its revenues, Harkonen attributed the

downturn to a negative reaction by doctors to the prior release of information, in November 2002

and early January 2003, regarding the results of clinical trials of Actimmune treatment of IPF .

72 . For this reason, Defendants, and especially Harkonen, knew at all times her e

relevant, in precise terms, whether or not pulmonologists were receptive to prescribin g

J Actimmune for IPF. Thus, during the October 24, 2002 conference call, an InterMune compan y

representative stated that

[w]e are very familiar with attitudes of physicians . . . . [w]e have a pretty good feelfor which physicians would use a product like Actimmune for . . . pulmonary fibrosis .

73. InterMune had at least two good reasons for trumpeting its familiarity with

"attitudes of physicians" about Actimmune .

74. First, InterMune had a large sales force that was constantly in contact with th e

doctors who comprised the potential market for Actimmune . As stated in the 10-K,

"[p]ulmonologists are physicians who treat diseases of the lung," and InterMune has "a sales and

marketing organization to support the approximately 8,000 pulmonologists . . . practicing in the

United States ." As further stated in the 10-K, as of January 2003, InterMune "had placed 80

specialists into the field to educate physicians regarding the safe and appropriate use of

[Intermune's] products ." According to the Gallagher, InterMune 's sales representatives are

referred to within the company as "specialists . "

75. Thus, as noted in an article by Adam Feuerstein published in TheStreet .com on

March 6, 2002, during a conference call with analysts :

InterMune executives acknowledged that to meet the Actimmunesales goal for 2002, the company's field reps would be making50,000 personal `detail' visits to the offices of approximately 6,800U.S . pulmonologists this year . That works out to about sevenvisits per doctor just to educate them about Actimmune .

(emphasis added) .


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76. According to the Gallagher and Confidential Sources 1 and 2, at all times durin g

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the Class Period, every sales representative had a one-on-one telephone call with his or her

regional director at least once a week, to report on, among other things, the willingness of the

doctors that the representative had visited to prescribe Actimmune for IPF . In addition, each

regional sales director had a conference call collectively with all of the sales representatives in

the region to discuss similar questions, once a month . Moreover, Jim Schaffer, the national sales

manager, had conference calls collectively with all of the regional sales directors, at least once a

week. As stated in an InterMune press release, dated March 23, 2001, Schaffer reported directly

to the Senior Vice President of Sales and Marketing, which means that, after January 30, 2003,

Shaffer reported directly to Harkonen . Therefore, Harkonen knew at all times, or was

deliberately reckless in not knowing, about the willingness or unwillingness of specific doctors,

and doctors in general, to prescribe Actimmune for IPF .

77 . For example, according to Gallagher, during January 2003, it was discussed

among the sales force that Dr . David Zisman, who was then at the University of Pennsylvania ,

and who had one of the largest number of patients taking Actimmune for IPF of any doctor i n

United States, was reducing the number of his patients for whom he was prescribing

78. Second, as Harkonen stated after the Class Period, during the June 12 conferenc e

call, InterMune's most important "interaction with the physician community" was at "medical

conferences ." At the most important medical conference relevant here, the November 5 annual

meeting of the American College of Chest Physicians ("CHEST"), as detailed infra, in

paragraphs 107-111, Harkonen himself was present and, indeed, was among the InterMune

employees who made a presentation about Actimmune to the conference, as Plaintiff's attorneys

have been informed by an administrator in the "Annual Meetings" department of the American

College of Chest Physicians . Therefore, Harkonen was intimately familiar with the reactions of

the relevant physician community to InterMune's presentation at CHEST .


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Defendants' Illegal Solicitation of Actimmune Sales for IPF

79 . As stated in the 10-K, "[t]he FDA actively enforces regulations prohibitin g

promotion of off-label uses . . . . Failure to comply with these requirements can result in

regulatory enforcement action by the FDA, which would have an adverse effect on [InterMune's]

revenues , business and financial prospects ." Pursuant to the Food Drug and Cosmetic Act, 21

U.S .C. 301 et seq ., and the FDA' s regulations promulgated thereunder , pharmaceutical

companies and their sales representatives are restricted to a passive role when interacting with

physicians regarding off-label uses .

80. According to Kristin Davis, Regulatory Counsel of the FDA 's Division of Dru g

Marketing, Advertising and Communications, the FDA's regulations restrict a sales

representative's activities as follows : Unless a doctor makes an unsolicited request for

information regarding an off label use, the sales representatives may do nothing more than

provide the doctor with certain educational materials, such as peer reviewed journal articles

discussing clinical trial results, that have previously been submitted by the manufacturer to the

FDA. Moreover, visiting a doctor's office, armed exclusively with such materials, raises an

inference that the visit is for an improper purpose of selling the drug . Still further, even if a

doctor makes an unsolicited request for information, the sales representative must respond in a

completely objective manner and, for example, may not in any way characterize clinical trial

results. In order to comply with these regulations, most manufacturers prohibit their sales

representatives from doing anything more than forwarding inquiries by physicians to the

manufacturer's medical specialists .

81 . According to Gallagher and Confidential Sources Numbers 2 and 3, InterMune' s

own regulatory affairs specialists instructed InterMune's sales representatives that they were not

supposed to respond to inquiries without first obtaining written confirmation of the inquiry from

the physician. According to Confidential Source Number 2, InterMune's regulatory affair s

specialists told sales representatives that the only response that they were permitted to make to a


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physician's inquiry about using Actimmune with IPF was to read the physician a pre-approved

I informational document prepared by InterMune .

82 . Nevertheless, in violation of FDA regulations and the statutes under which thos e

egulations are promulgated, and contrary to the instructions of InterMune's own regulator y

affairs personnel, Defendants took steps that they knew and intended would result in their sale s

force disregarding FDA regulations and illegally soliciting sales of Actimmune for use with IPF .

83 . According to Gallagher, and Confidential Sources Numbers 1, 2, 3, and 4 ,

InterMune's sales representatives were ranked, and their pay and bonuses were directly tied to,

the number of Actimmune prescriptions and sales that they were able to generate . Harkonen

knew this because he was the acting Senior Vice President of Sales and Marketing .

Surrey-Barbari knew this because she was the Senior Vice President of Finance and

Administration .

84. Also as confirmed by Gallagher, Ohlgren and Confidential Sources Numbers 1, 2

and 3, on January 16, 2003, during InterMune's annual meeting of its sales force, Keith Katkin,

InterMune's Vice President of Pulmonary Marketing announced that the sales goal for

Actimmune for 2003 was $180 million, and that this translated into 4 new IPF patients per month

per sales representative. This goal required the sales force to achieve an even higher rate of sales

of Actimmune than had been achieved in 2002, when nearly all of the Actimmune sales were for

IPF.

85. These allegations are supported by a print-out of a slide show presented at the

January 16, 2003, meeting, copies of which have been provided to Plaintiff's attorneys by both

Gallagher and Confidential Source Number 2, shows that one of the slides is titled "2003 Goals,"

and that it further states "Achieve $180 million in Actimmune sales" and has an arrow showing

that this level of sales translates to "1 [new] patient per week per [sales representative] . "

86. According to Gallagher and Confidential Sources 1, 2 and 3, InterMune's sale s

I I representatives could not influence their "ranking" and thereby their pay and bonuses, and coul d


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not meet the sales goal announced by Katkin, except by flouting the FDA regulations tha t

sales representatives to an essentially passive role regarding off-label uses .

87 . According to Confidential Source Number 1, Jim Shaffer, InterMune's Nationa l

Sales Manager, also made a presentation at the January 16, 2003, meeting, at which he showed a

slide of a sales aide that had been provided to InterMune by an advertising consultant, for us e

when selling Actimmune, that was an illustration of a hangman's noose, and implied that sale s

representatives were to communicate to pulmonologists that IPF is lethal and that Actimmune i s

the patient's only hope . Thus, the message to sell Actimmune by dramatically characterizing ,

I rather than merely reporting, clinical facts had been sent to the sales force .

88 . Gallagher witnessed the intended result of Defendants' policy of motivating

aggressive off-label selling in the Spring of 2003, when she accompanied her regional sales

manager, Chad Patton, to the office of Dr . Gilbert D'Alonza, at Temple University Hospital . In

complete contravention of FDA regulations, Patton initiated a conversation regarding the use of

Actimmune for IPF, characterized Actimmune as an "effective" treatment, and put a positive

spin on his description to the doctor of clinical trial results .

89. Ohlgren also witnessed the intended result of Defendants' policy during earl y

2003, when she accompanied another InterMune sales representative, named Becky, to the office

of Dr. Jeanne M. Nelson, in Coon Rapids, Minnesota . Ohlgren, who had previously worked in

the part of the sales force not devoted to selling Actimmune, had been sent along with Becky to

learn the proper procedure . Again, in complete contravention of FDA regulations, Becky

discussed clinical trial results for Actimmune treatment of IPF with the doctor's nurse, and when

the nurse indicated that she did not understand a relatively objective description of the trial data,

proceeded to characterized the trial data for the nurse by saying that it showed that Actimmune

"impacts survival" -- a gross and misleading oversimplification .

90. Confidential Source Number 4 admits that during the year ending right before th e

Class Period, he himself "pitched" Actimmune for use with IPF to approximately 130 doctors ,


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I having entered the doctors' offices for no other purpose except to sell Actimmune, in clear

contravention of FDA regulations .

91 . Gallagher and Confidential Source Number 2 confirm that both Harkonen an d

Surrey-Barbari attended the meeting on January 16, 2003, heard Katkin's speech, and sai d

nothing to contradict or qualify it . Confidential Sources Numbers 1 and 3 confirm that

heard the speech and said nothing to contradict or qualify it .

92. Harkonen and Surrey-Barbari knew that sales representatives could not meet th e

quota announced by Katkin, and that sales representatives could not affect their compensation by

raising the number of Actimmune sales that they generated, except by exceeding the limits on

off-label marketing imposed by the FDA, because the passive conduct concerning off-label

prescriptions to which sales representatives are limited by the FDA regulations makes it

essentially impossible for sales representatives to influence the rate at which physicians write

such prescriptions, and because, after CHEST, it was clear that doctors would not write new

prescriptions for Actimmune treatments of IPF based only on objective presentations of the

clinical data.

93 . As a former vice president of regulatory affairs at another company, Harkone n

knew that violating FDA regulations is illegal, or was deliberately reckless in not so knowing .

94. Indeed, according to Ohlgren, Katkin's speech followed a presentation by a

consultant regarding limits on off-label marketing, which was videotaped, but when Katkin

began his speech, the videotape was turned off, which shows that Defendants knew that Katkin's

speech, and the policy that it put into effect, was intended to produce a result that violated FDA

regulations .

95 . Defendants' knowledge that they were encouraging illegal conduct is also shown

by other efforts of theirs to hide the conduct . According to Gallagher, Ohlgren and Confidential

Sources Numbers 1, 2 and 3, at the meeting on January 16t, 2003, sales representatives were told

by their regional sales managers that when they made visits to pulmonologists, they were to

record them in InterMune's computer system as calls for the purpose of selling Amphotec (an


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anti-fungal medication for use with Hepatitis C), and not for the purpose of selling Actimmune .

According to Confidential Source Number 2, during the Class Period, the company software into

which information about the purpose of a sales call was required to be entered did not even have

an option for recording the purpose as being for the sale of Actimmune ; the only choice was to

record such a visit as being for the purpose of selling Amphotec . Moreover, this limitation was

implemented despite the fact that, according to Ohlgren, who specialized in selling Amphotec,

Amphotec is not prescribed by pulmonologists in their offices, but rather, by infectious disease

specialists in hospitals .

96 . Similarly, according to Gallagher and Confidential Source Number 1, InterMun e

sales representatives were told by their regional sales managers that if they took a pulmonologis t

out to dinner, it should be documented as an Amphotec dinner .

97. These requirements to act deceptively were obviously imposed company-wide ,

since Gallagher and Confidential Source I were located in regions on the opposite sides of the

country, and Ohlgren was located in the northern MidWest . Such company-wide requirements

on the sales force could not have been imposed without the knowledge of Harkonen, who, from

January 30, 2003, forward was the Senior Vice President of Sales and Marketing . Therefore,

Harkonen knew, or was deliberately reckless in not knowing, that his sales force was being

ordered to disguise illegal promotion of Actimmune for use with IPF .

98. On May 27, 2004, Gallagher filed suit against InterMune , Harkonen and two

other InterMune mangers , in the Eastern District of Pennsylvan ia , in a case captioned Gallagher

v. InterMune, Inc . , et al . 04 CV 1200 (LHP) (MFA). In her suit Gallagher alleges that

InterMune , Harkonen and the other defendants in her suit "pressured Gallagher to engage in

illegal marketing activities with respect to off-label uses of Actimmune ," "discharged [her]

because she refused to engage in illegal activities as directed by [the defendants in her suit],"

"engaged in deceptive practices to disguise [InterMune ' s] unlawful off-label marketing of

Actimmune ," and "actively and deceptively marketed Actimmune for IPF and required the sales

force to do the same . . . [d]espite the illegality of such practices . "


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Intermune 's Disappointing Attempt to ObtainFDA Approval for Actimmune Treatment of IPF

99 . As stated in the 10-K, approval of a drug by the FDA for a specific use usuall y

requires successful completion of "three phases of clinical studies : Phase I, 11 and Ill. The FDA

may require . . . Phase IV studies ." Thus, without a successful Phase III clinical trial, InterMun e

would not be able to obtain FDA approval for use of Actimmune with IPF .

100. Without FDA approval, InterMune would never be able to legally market

Actimmune for use with IPF, and if Phase III trials produced negative results, even those

physicians who initially were willing to prescribe Actimmune "off label" might become

unwilling to do so. Therefore, as also stated in the 10-K, without a Phase III trial sufficiently

successful to satisfy the FDA, "[InterMune] may abandon the development of Actimmune for

treatment of [IPF] . "

101 . As stated in the 10-K, preliminary data from InterMune's Phase III trial o f

Actimmune for IPF first became available in August 2002, and InterMune "continued to follow

patients in the [Phase III] study for three to five additional months ."

102. On August 28, 2002, before the market opened for trading, InterMune issued a

press release admitting that preliminary data from the company's Phase III trial of Actimmune

failed to meet the trial's primary goal of demonstrating "progression-free survival," but also

asserting that the preliminary data "demonstrate a significant survival benefit in patients with

mild to moderate disease," and concluding that Actimmune "is the first treatment ever to show

any meaningful clinical impact in this disease in rigorous clinical trials ." The press release went

on to state that "[w]e believe these results will support use of Actimmune and lead to peak sales

in the range of $400 - $500 million per year, enabling us to achieve profitability in 2004 as

planned." Later that year, A Bear Stearns research report written by H. C. Xuereb, among

others, and published on November 2, 2002, noted that the "current company guidance of peak

sales of $400 million to $500 million . . . assumes no FDA approval ."

103 . Also on August 28, 2002, Bloomberg news service reported Harkonen' s

that "[s ]ales of Actimmune in the first half of 2002 were $40 million, as much sales [as] for al l


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12001 [and that r]esults from the study reported today could raise this year's sales to $10 0

million . "

104. On August 28, 2002, the price of InterMune shares rose approximately 2 6

I percent .

105 . On October 24, 2002, InterMune issued a press release that quoted Harkonen a s

stating that "Actimmune continues to be the primary driver of our revenue growth . "

106. Also during the October 24, 2002 conference call, David Corey, Senior Vice

President of Sales and Marketing, stated that "we currently have just over 2500 patients on

[Actimmune] therapy and plan to finish the year with just over 3000 patients ."

107 . In an InterMune Press Release on October 24, 2002, the company announced that

the results of its Phase III clinical trial of Actimmune for IPF would be presented at the CHEST

meeting on November 5, 2002 . This was probably the most important event in InterMune's

history up to that point, because, as stated by James E . Pennington, M.D., InterMune's Executive

Vice President of Medical and Scientific Affairs, who was quoted in a story carried by

PRNewswire on October 31, 2002, "[t]his will be the first opportunity for a large number of

U.S.-based pulmonologists to hear this important data first-hand . "

108. After the CHEST conference, in late November 26, 2002, a Bear Steams Repo rt

I noted that "InterMune recently reported Phase III Actimmune data in IPF and presented top-lin e

data at the European Respiratory Society and [CHEST] . We believe that these meetings served

as ideal forums to increase physician awareness of the results ." (emphasis added) .

109. The results of the CHEST presentation were , in fact, disappointing . Much later,

during a conference call on the morning of June 12, 2003, Harkonen would admit that "at the

[CHEST] Meeting in November of 2002, the presentation of our Phase I II clinical trial data was

ambiguous and difficult to interpret ." Indeed, as stated by a Wachovia Securities analyst report ,

written by, among others , Martin D . Auster, and published on June 12, 2003, InterMune' s

"[m]anagement conceded this morning that the reaction to the Actimmune data at CHEST was

largely mixed ."


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110 . On January 6, 2003, after the close of trading, InterMune reported "preliminar y

survival data from the follow-up observation period of its completed Phase III clinical trial o f

Actimmune for the treatment of idiopathic pulmonary fibrosis (IPF) ." This follow-up data

supplemented the data previously presented at CHEST .

111 . From InterMune's perspective, the results of the follow-up study were even wors e

than the results presented at CHEST . As analyzed by a Morgan Stanley analyst and reported b y

Bloomberg News on January 7, 2003, "Actimmune's advantages in patients with a deadly lung

disease appeared to lessen over time in [the] follow-up study ." InterMune's prior claim that the

drug produced at least a limited "survival benefit" for at least a limited group of patients was

now in serious doubt . As Harkonen later admitted, after the Class Period, at the June 12

conference call :

At the [CHEST] meeting in November 2002, the presentation ofour phase 3 clinical trial data was ambiguous and difficult tointerpret. When combined with the follow-up survival datareleased in January of this year and our inability to promote thesedata we believe that many physicians questioned themeaningfulness of the survival benefit .

112. On January 7, 2003, The Dow Jones News Service noted that InterMune dropped

[$]5 .41, or 19.6%, to [$]22 .21, as analysts said the company's follow-up studies on Actimmune .

. . didn't support the benefit suggested by initial trials of the drug ."

The Disintegration of InterMune's Sales Force and Defendants' Knowledge About I t

113. As Katkin said at the February 19, 2003, conference call, the quantity of

Actimmune sales depends on "the rate at which physician adoption occurs ." In turn, that rate

depends on the size and motivation of InterMune's sales force, as well as on other "educational"

outreach aimed at pulmonologists . Following the disappointing experience at CHEST, and

continuing through the first quarter of 2003, InterMunes's sales force and marketing efforts

began to disintegrate .

114. First, InterMune intentionally downsized its sales force .


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115 . According to the Gallagher, Ohlgren and Confidential Sources Numbers 1, 2, an d

3, prior to December 2002, InterMune's sales force was divided in two parts . One part was

comprised of what were called "immunology specialists ." These were the sales representatives

who called on pulmonologists . The other part was comprised of what were called "infectious

disease/oncology specialists" (ID/0 specialists") . The ID/O specialists did not call on

pulmonologists . Pursuant to a reorganization, effective in January 2003, the two parts of the

sales force were merged, all sales representatives were henceforth referred to as "clinica l

specialists," and all of them were now expected, among other things, to sell Actimmune t o

pulmonologists for IPF.

116. InterMune 's Form 10-Q for the quarter ending March 31, 2003, certified by

Surrey-Barbari on May 13, 2003, and filed with the SEC on May 14, 2003 (the "First Quarter 10,

Q"), refers to a "decrease in spending in the quarter in 2003, when compared to the same period

in 2002 . . . attributable primarily to the consolidation and realignment of our sales an d

marketing team in 2003 . "

117 . According to the Gallagher, the lay-offs actually occurred prior to Christmas o f

2002, though InterMune made no public disclosure as to the lay-offs or the reorganization until

May 2003 . At least seven sales representatives, or "specialists," were laid off in December 2002,

including Carl Parker, Mary Lyn Quader, Kimberly Griffo, Kathy Reilly, Scott Brown, Ruben

Martinez, and Lawrence Briody .

118. Second, because InterMune became concerned that its illegal marketing strateg y

had become too blatant, the company began to send conflicting signals that demoralized the sales

force . According to Gallagher, shortly before the end of 2002, sales representatives were told by

Jim Shaffer to stay out of pulmonologists' offices entirely until further notice . Although sales

representatives were sent back into pulmonologists offices at the January 16, 2003, meeting, at

the same meeting, Defendants had the regional sales managers tell the sales force to disguise

their marketing of Actimmune for IPF as marketing of Amphotec, while at the same time

providing the sales force with a presentation by InterMune's regulatory affairs personnel that


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stressed the need to comply with FDA regulations . All this was at the same time that, with

Harkonen's and Surrey-Barbari's blessings, Katkin was telling sales representatives that each

one of them was expected to sell Actimmune for use by at least one new IPF patient every week,

a goal that, again, could only be achieved by active marketing of the drug for treatment of IPF,

rathere than passive and reactive educational efforts, and while, according to Gallagher and

Confidential Sources 1, 2 and 3, regional sales managers were exhorting their subordinates to

increase their Actinunune sales . These contradictory instructions were among the factors that lec

to mass resignations, as detailed infra .

119. Third, according to Gallagher and the Confidential Sources Numbers 1, 2 and 3 ,

f the merger of the two parts of the sales force caused a great deal of dissatisfaction among th e

sales representatives . According to Gallagher, virtually all of those who previously had not been

required to sell Actimmune were dissatisfied with their new duty to engage in illegal solicitation

of Actimmune sales for treatment of IPF. Ohlgren and Confidential Source Number 3 each say

that he or she resigned because of his or her dissatisfaction with such new duties . Confidential

Source Number 1 says she was terminated because of her refusal to violate FDA regulations

marketing Actimmune . According to Confidential Source Number 3, "between 10 to 15

employees left because of off-label selling demands," including Philip Wilkes, a regional sales

director. According to Confidential Source Number 2, unhappiness about being required to

market Actimmune off-label caused the resignations of Theresa Lukey and Shannon Erickson .

120. At the same time, sales representatives who previously had engaged in suc h

illegal solicitations were disappointed by having to share the benefits of their illegal activities ,

namely, bonuses for high sales, with a new group of sales representatives .

121 . According to the Gallagher, for the reasons described in the preceding

while the sales force consisted of 80 members at the beginning of January, after the undisclosed

layoffs, sales representatives resigned at a constant rate in each of the succeeding months so that,

by June, the sales staff was down to 60 members . Confidential Source Number 2 estimates that

even earlier, by the end of the first quarter of 2003, InterMune had lost 30% of its sales force .


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As Katkin, Vice President of Pulmonary Marketing, would tardily and euphemistically admit at

J the June 12, conference call, "we've had some turnover in the sales force . "

122. Already, by January 30, 2003, one sales representative , Michael Walker, had

I resigned, and the positions of two other sales representatives , Chad Patton and Greg Ellias, had

been left open when those two representatives were promoted to fill the positions of two regional I

I sales directors who had resigned during December 2002 . In addition, at least one of the medica l

science liasons who accompany sales representatives when they visit pulmonologists , Lisa Self,

had resigned during January 2003 .

123 . Fourth, according to a Wachovia Securities analyst report , written by, amon g

others, Martin D. Auster, and published on June 11, 2003, "InterMune sharply curtailed it s

educational efforts during the first few months of 2003 . Disappointing survival data from the

extension of the Phase III trial presented in January were a contributing factor . "

124. As acting Senior Vice President of Sales and Marketing, Harkonen knew about

the changes in the size of the sales force and the cut-back in expenditures to educate doctors

about Actimmune, or was deliberately reckless in not knowing about them . Although every

manager may not know every detail of the business of his company, it is not possible for the

manager who is in charge sales and marketing to be ignorant of significant changes in the size o f

his sales force and budget, unless his ignorance is the result of deliberate recklessness .

125. Harkonen also knew about the changes to InterMune's sales force, or wa s

deliberately reckless in not knowing about them, because, as stated in an InterMune press

release, dated May 13, 2003, the Senior Vice President of Human Resources, whose

responsibilities included "staffing, compensation and benefits [and] employee relations . . . "

reported directly to Harkonen .

126. Surri-Barbari also knew about the changes in the sales force, or was deliberatel y

reckless in not knowing about them, because the steady departure of sales representatives would

have affected InterMune's level of salary, benefit and severance payments, of which she had to b e

aware by reason of her duties as Senior Vice President of Finance and Administration .


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FALSE AND MISLEADING STATEMENTSAND OMISSIONS DURING THE CLASS PERIOD

Doctors' Responses

127 . At the conference call on February 19, 2003 , Katkin stated that "everything that

I came out of [CHEST] was very positive for the organization ." This statement was uttered by

Katkin, but, because it was made by an InterMune officer during an InterMune conference call i t

is a group published statement that is also attributable to senior officers such as Harkonen and

Surrey-Barbari . Moreover, it is also attributable to Harkonen and Surrey-Barbari because each

of them was present as an InterMune spokesperson during the conference call and did not say

anything to contradict Katkin's statement .

128. This statement was originally an oral statement, but, like every other statemen t

alleged herein to have been made during an InterMune conference call, the statement was

transcribed and subsequently made available to the public as pa rt of a wri tten transcript of the

conference call . According to Thompson CCBN, one of the companies that provides such

transc ripts to the public , the transcripts are usually available within hours of the conference call .

129. On February 20, 2003, the price of InterMune's stock rose 5%, to $20 .04 .

130. Katkin's statement was false, because, as Harkonen would later admit during the

I June 12 conference call, Actimmune sales had been adversely affected becaus e

[a]t the [CHEST] meeting in November 2002, the presentation ofour phase 3 clinical trial data was ambiguous and difficult tointerpret. When combined with the follow-up survival datareleased in January of this year and our inability to promote thesedata we believe that many physicians questioned themeaningfulness of the survival benefit .

131 . Harkonen knew at the time when Katkin made his statement that the statemen t

was false . Harkonen himself had been at CHEST, and had even been one of InterMune' s

presenters at CHEST. Therefore Harkonen had known since the CHEST conference that "th e

presentation of our phase 3 clinical trial data was ambiguous and difficult to interpret ." As


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by a June 12, 2003, Wachovia Securities report, "[InterMune's m]anagement conceded this

morning that the reaction to the Actimmune data at CHEST was largely mixed ."

132. Moreover, through its sales force, InterMune, and therefore Harkonen, who was

in charge of the sales force by the time of Katkin's statement on February 19, 2003, and who at

all relevant times was the immediate supervisor of Jim Shaffer, the national sales manager,

would have picked up comprehensive information about doctors' responses to the CHEST

presentation no later than December . Thus, when an InterMune spokesperson was asked at the

October 24, 2002, press conference to identify individual doctors who were willing to prescribe

Actimmune for IPF, the spokesperson replied that he would "have a much better insight into

physicians prescribing attitudes post Chest . . . . in December ."

133 . Harkonen is also responsible for a second misleading statement regarding doctors '

1 attitudes .

134. On January 7, 2003, the price of InterMune's stock dropped 19 .6% in reaction to

the announcement of the results of the follow-up study from InterMune's Phase III trial of

Actimmune use with IPF .

135. However, the price of Intermune 's stock would have fallen even further if not fo r

I the fact that Harkonen made a misleading statement to the press about doctors' reactions to th e

new data .

136. On January 7, 2003, Bloomberg News reported an interview with Harkonen

regarding the significance of the new data :

"The market was hoping the survival numbers would improve, andthere's disappointment they didn't," said InterMune [CEO] ScottHarkonen, in an interview . Still "whenever you can show anapparent survival benefit for patients who have an inevitably fataldisease, doctors say they're happy."

(emphasis added)

137. Harkonen's statement was intended to mislead the public into thinking that ,

although InterMune's stock price had dropped because survival numbers did not improve ,


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market, "say they're happy . "

138 . Harkonen's statement was false, and Harkonen knew at the time when he made

the statement that it was false, because, as Harkonen would later admit ,

[a]t the [CHEST] meeting in November 2002, the presentation ofour phase 3 clinical trial data was ambiguous and difficult tointerpret . When combined with the follow-up survival datareleased in January of this year and our inability to promote thesedata we believe that many physicians questioned themeanin fulness of the survival benefit .

139. Harkonen already knew at the time of CHEST that doctors were not happy . Si

the data from the follow-up study was even more disappointing than the data presented a t

CHEST, there could not have been any reason for Harkonen to believe that the follow-up dat a

had suddenly made the doctors happy .

140. Moreover, as Harkonen admitted in his June 12 statement, the follow-up dat a

destroyed any assumption that Actimmune provided a meaningful survival benefit, therefore he

knew upon the release of the follow-up data that, contrary to his statement on January 7, 2003 ,

the data did not "show an apparent survival benefit . "

illegal Marketing of Actimmune for Use With IPF

141 . InterMune's 10-K, signed on March 28, 2003, and filed on March 31, 2003, state s

that "Actimmune will not be marketed for [IPF or certain other] diseases before 2006, if at all ."

This statement is attributable to both Harkonen and Surrey-Barbari, first because Surrey-Barbari

signed the 10-K, and Harkonen and Surrey-Barbari each certified the truth of the statements in

the 10-K, and, second, because statements in the 10-K are group published statement s

attributable to senior officers such as Harkonen and Surrey-Barbari .

142. Thus, while investors had reason to know that InterMune's revenues were derived

almost entirely from prescriptions for Actimmune, they were led to believe that doctors wer e

spontaneously writing such prescriptions based on their positive reactions to clinical trial result s

which they learned about at professional conferences such as CHEST, or from professiona l


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journals , and not as a result of high-pressure selling tactics on the part of InterMune's sales

representatives .

143 . This statement was false, because, as detailed above, before and after thi s

statement was made, InterMune had a policy of encouraging the marketing of Actimmune for

use with IPF in a manner that violated FDA regulations .

144. This misleading statement inflated InterMune's stock in two different ways . First,

it inflated InterMune's stock because investors would be less likely to buy stock in InterMune if

it was violating the FDA regulations . The inflation resulting from this factor is still embodied in

InterMune's stock price, since Defendants have never admitted their illegal activities . Second, it

inflated InterMune's stock by helping to mislead investors about the favorability of doctors'

responses to Actimmune. This second kind of inflation was removed when Harkonen admitted,

at the conference call on June 12, 2002, that doctors were less enthusiastic about Actimmun e

than he had previously claimed .

145 . Harkonen and. Surrey-Barbari knew at the time of the 10-K that the statement wa s

false because they heard Katkin's speech at the January 16, 2003, meeting, setting a sales quota

that sales representatives could not meet without violating FDA regulations .

146. Harkonen also knew at the time of the 10-K that the statement was false because ,

as Senior Vice President of Sales and Marketing, he knew about the requirement that sales

representatives disguise their illegal marketing efforts, and he knew that the sales force was

being motivated to sell illegally by the fact that their pay was tied to the level of thei r

Actimmune sales .

Sales Force Disintegratio n

147. On January 30, 2003, with the downsizing of InterMune's sales force alread y

underway, but not disclosed to investors, InterMune issued a press release announcing that David

A. Cory, Senior Vice President of Sales, was "leaving his post . . . to pursue other opportunities"

and that no replacement had yet been named, although Harkonen would be taking on Cory's job

CLASS ACTION COMPLAINT FOR VIOLATIONS OF FEDERAL SECU RITIES

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duties in addition to his own . The market immediately reacted to this news by reducing the price

at which Intermune's stock was trading, within one day, by approximately 7.5% .

148 . However, the price of Intermune's stock would have fallen even further if not fo r

a misleading statement made by Harkonen in the same press release issued on January 30, 2003 .

Coupled with his announcement about Corey's departure, Harkonen added that

InterMune now has an extraordinary sales force and a team ofseasoned marketing professionals who are spearheading efforts toeducate physicians about InterMune's products .

149. This statement in the January 30, 2003, press release falsely implied a positive

change in sales force staffing, and made gross omissions . Harkonen did not say anything about

the lay-offs in December, he did not say anything about the resignations from the sales force in

January, and he did not say anything about InterMune's cut-back on its expenditures to "educate

physicians," all of which were unknown to the public .

150. Moreover, the false implication of a positive change in sales force staffing wa s

bolstered by the fact that InterMune's 1 OQ, filed in November 2002, stated that "selling, general

and administrative expenses" for the past nine months had increased 91 % over the same period

during the previous year, and "[w]e anticipate that selling, general and administrative expenses

will continue to increase."

151 . Harkonen' s statement in the January 30, 2003, press release was therefore false

omission, and he knew it was false at the time when he made it, because he already knew abou t

the downsizing of the sales force and the January resignations .

152. A second misleading statement about the sales force was made in the l OK, which

was required to cover the period only up through December 2002, but which went so far as to

make a statement about subsequent events, stating that "as of January 2003, we had placed 80

specialists into the field to educate physicians ." This suggested that InterMune still had at least

80 sales representatives during the first quarter of 2003, when, in fact, the number was already

fewer than 80, and was shrinking . Between the beginning of the first quarter and the end of

March 2003, at least eleven "specialists" had resigned or announced they would soon b e


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resigning, including Michael Walker, Cheryl Ann Wist, Joyce Ohlgren, John Schwarz, Julie

Glick, Mary Ordal, Deborah Roth, Brenda What, Holt Robinson, Michael Smith, and Kim Leas

In addition, two specialists, Chad Patton and Greg Ellias, were promoted to fill the positions of

two regional sales directors who had resigned in December 2002, which left two more empty

specialist positions . And still further, at least two medical science liasons, Lisa Self and Suzam

Sadler, who, along with the specialists, had had the job of visiting pulmonologists, resigned

between the beginning of the first quarter of 2003 and the end of February .

153 . The misleading nature of the statement that there were 80 specialists in the fiel d

"as of January 2003" was bolstered by the fact that the 10-K also stated that "[w]e believe that

selling, general and administrative expenses will increase [during 2003] as a result of the

anticipated expansion of our administrative staff and increased marketing and selling expenses

for our approved products, and the expenses associated with the expansion of our operations ."

The statement encouraged investors to believe that expenses associated with sales were

increasing during the first quarter, when, in fact, as referred to above, the First Quarter 10-Q la

disclosed that there had been a decrease in such spending during the first quarter "attributable

primarily to the consolidation and realignment of our sales and marketing team in 2003 ."

154. The statement in the 10-K about there being 80 specialists in the field as of

January 2003 is attributable to both Harkonen and Surrey-Barbari, because Surrey-Barbari

signed the 10-K, Surrey-Barbari and Harkonen each certified the truth of the statements in the

10-K, and statements in the 10-K are group published statements attributable to senior officers

such as Harkonen and Surrey-Barbari .

155. Harkonen and Surrey-Barbari knew that the statement in the 10-K was misleading

at the time when it was made , for the reasons explained s upra, in paragraphs 124-26.

156 . InterMune did not reveal the downsizing and reorganization of its sales force

it did so in a press release on April 29, 2003, under the cover of false rosy statements about

revenues .


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157. InterMune never revealed that there had been mass resignations from its sale s

force, although at the June 12, 2003, conference call, Katkin admitted, euphemistically, tha t

"we've had some turnover in the sales force ."

158 . Harkonen is also responsible for a third misleading statement that was misleadin €

both regarding doctors' negative reactions to clinical data and also regarding InterMune's

cut-back on spending to educate doctors .

159. During the February 19, 2003, conference call, Katkin stated ,

[t]here's still a lot of education that can be done at the communitylevel, as a lot of physicians still are not familiar with [theActimmune] data; so, we look forward to opportunities to share thedata with them in 2003

160. This statement falsely implied that doctors had reacted favorably to the dat a

I presented at CHEST and to the follow-up study data, and that therefore InterMune eager to shar p

the same data with still more doctors .

161 . This statement is attributable to Harkonen because it was a group-published

statement attributable to senior offices such as Harkonen, and because Harkonen was presen t

during the February 19, 2003, conference call and did not contradict Katkin' s statement .

162. Harkonen knew during the February 19, 2003, conference call that Katkin' s

I statement was misleading because, as detailed supra, Harkonen knew by then that doctors had

not reacted favorably to the data presented at CHEST, that the follow-up data was even worse foi

InterMune than the data presented at CHEST, and that, as a Wachovia Securities analyst report,

written by, among others, Martin D . Auster, and published on June 11, 2003, would disclose,

"InterMune sharply curtailed its educational efforts during the first few months of 2003 .

Disappointing survival data from the extension of the Phase III trial presented in January were a

contributing factor."

Patient Numbers

163 . On April 1, 2003, Adam Feuerstein, writing in TheStreet .com, reported that the

"[t]he April issue of the American Journal of Respiratory and Critical Care Medicine carries a

I case report detailing four European patients with advanced IPF who died from respiratory failur e


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after being treated with Actimmune . . . . Although not conclusive, there is ample evidence to

suggest that Actimmune was the cause of the severe side-effects seen in the patients ." The

market immediately responded to this news, with the price of InterMune's stock falling

approximately 3% on April 2, 2003, and another 8% on April 3, 2003 .

164 . The price of InterMune's stock was now under serious pressure . On Sunday,

April 27, 2003, an article in the New York Times by Andrew Pollak noted that "[i]nvestors wil l

be closely watching InterMune's first-quarter results, to be announced on Tuesday [April 29 ,

2003] ."

165 . During a conference call April 29, 2003, Surrey-Barbari stated that "[c]urrently ,

we estimate that over 3,300 patients are on Actimmune ." Then, when a caller asked, "did you

say 3,300 patients on Actimmune at the quarter?" Surrey-Barbari answered, "yes ." During the

same call, Keith Katkin stated "we did add 300 patients during the first quarter . . . . the 300 new

patients that we added is right on track with our current projections ." In a previous conference

call, on February 19, 2003, Katkin had stated that "[w]e exited 2002 with 3,000 patients on the

drug." Therefore Katkin's statement emphasized, in precise terms, that 3,300 patients were

taking Actimmune as of April 29, 2003 .

166. The statements made during the April 29 conference call by both Surrey -Barbari

I and Katkin are attributable to both Harkonen and Surrey-Barbari, first, because the statement s

are group-published statements and therefore attributable to InterMune's senior officers

including both Harkonen and Surrey-Barbari, and, second, because both Harkonen and

Surrey-Barbari were present during the call as spokespersons for InterMune and did not

contradict any of the statements . In addition, of course, Surrey-Barbari is responsible for the

statements that she herself uttered .

167 . The market immediately reacted to these patient numbers, and to revenue

numbers based on these patient numbers that had been announced in a press release issued righ t

before the conference call . For three straight days after April 29, the price of InterMune's stock

rose approximately 5% each day, rising a total of 23% by the end of May 2, 2003, on a volum e


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of almost five million shares traded during the three days , and ending at a price of $23 .75 on

May 2, 2003. Moreover, the price of the stock continued moving higher during the next month .

168. The statements about patient numbers, attributable to both Harkonen an d

Surrey-Barbari, made during the April 29, 2003 conference call, were false . Thus, in a June 11,

2003, press release, InterMune announced that it had now made "a correction of the Company's

April 291h projection [sic] of approximately 3,300 patients on Actimmune therapy as of the end

of the first quarter down to approximately 2,900 patients on Actimmune therapy during the first

quarter . "

169 . The falsity of the numbers announced during the April 29, 2003, conference cal l

is also shown by the fact that prior to the April 29, 2003, conference call, Jim Shaffer,

InterMune's national sales manager, complained to Steven Rosenfield, InterMune's general

counsel, that the patient numbers being announced to the public did not have an adequate basis,

and that Steven Rosenfield then attempted to obtain written approval for publicizing the numbers

from all of InterMune's vice presidents in sales and marketing, but the vice presidents rejected

his request. This allegation is made by Gallagher, who was given the information by an

InterMune manager who reported directly to one of the vice presidents who was asked by

Rosenfield to approve the numbers .

170. Harkonen and Surrey-Barbari knew at the time of the April 29 conference cal l

that the statements about patient numbers attributable to them were false, or else were

deliberately reckless in not so knowing, because, as detailed s upra at paragraphs 66-70, they

reviewed the Reimbursement Reports, and the Reimbursement Reports provided InterMune with

accurate patient numbers on a weekly basis . Moreover, the first quarter, to which the patient

numbers announced on April 29 referred, had ended approximately one month prior to when the

false statements were made, on April 29 .

171 . Harkonen also knew at the time of the April 29, 2003, conference call that the

statements about patient numbers were false and misleading, or else was deliberately reckless i n

not so knowing, because, as acting Senior. Vice President of sales and marketing, he was


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involved in Rosenfield's unsuccessful attempt to obtain approval for the numbers from the vic e

presidents in sales and marketing .

172. Moreover, if, as Harkonen claimed during the June 12 conference call, the patient

numbers announced during the April 29, 2003, conference call had been derived not from the

Reimbursement Reports, but rather, from InterMune's sales of Actimmune to its distributors,

then Harkonen and Surrey-Barbari misled investors by failing to caution them that th e

announced numbers were not based on the most accurate source of information available t o

InterMune . As Harkonen later admitted , during the June 12, 2003 , conference call, there are

"inherent inaccuracies in trying to generate these patient numbers " from InterMune 's shipments

to distributors .

Revenues

173 . In a press release on April 29, 2003, Harkonen stated that "[w]e are on track to

achieve our revenue projections for the year ."

174. In a press release on June 11, 2003, InterMune "revised its full-year revenue

guidance" downward, based on "a correction of the Company's April 29 projection [sic] o f

approximately 3,300 patients on Actimmune . "

175 . The statement in the June 11, 2003, press release shows that InterMune's revenue

projections were based on its patient numbers, as well as showing that Harkonen's statement in

the April 29, 2003, press release about being "on track" to meet the projections was false .

176. Because, as detailed supra, Harkonen knew at the time of the April 29, 2003,

conference call that the patient numbers announced during that call were false, therefore, he also

knew at the time of the April 29, 2003, press release that the revenue projection referenced in

that press release was not supportable and that InterMune was not "on track" to meet it .

The Truth is Partially Reveale d

177. Under study at InterMune during this time was a new antibiotic for use in skin

infections known as Oritavancin . By June 2003, InterMune had some positive results to report

regarding an advanced study of Oritavancin . On June 11, 2003, InterMune was ready t o


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announce the positive news regarding Oritavancin . Therefore, Harkonen, Surrey-Barbari, and

InterMune chose this moment to partially disclose the truth about its troubles with Actimmune

sales, hoping that the effect of the bad Actimmune news on InterMune's stock price would be

counter-acted by the good news regarding Oritavancin, and, in any event, probably realizing that

they could not continue to allow their misrepresentations to go uncorrected any longer .

178 . On June 11, 2003, after the close of trading , InterMune dropped its bombshell on

the market by announcing what InterMune had known since November 2002 but had refused t o

reveal, namely, that Actimmune's market acceptance was seriously slowing and that its revenues

I were not growing at the rate that was previously stated . Thus, InterMune issued its June 11 ,

2003, press release that made "a correction of the Company's April 29`h projection of

approximately 3,300 patients on Actimmune therapy as of the end of the first quarter down to

approximately 2,900 patients on Actimmune therapy during the first quarter," and announced

that it had "revised its full-year 2003 revenue guidance, which was stated in its April 29, 2003

press release. For Actimmune product sales, full-year guidance was revised from $160-$180

million to $135-$150 million," and total revenues were also revised down accordingly .

179. The next morning, at the June 12, 2003, conference call before the market opene d

for trading, analysts were incredulous at InterMune's claim to have made such a larg e

overstatement of patient numbers by reason of an innocent mistake . Ronald Renaud, analyst fo r

Bear Stearns stated:

I am having a lot of difficulty understanding how you guys canmiss - miss this number of patients? We are not talking about acancer population or rheumatoid arthritis population where thereare hundreds of thousands of patients . We are talking abouthundreds of patients here .

180. On June 12, 2003, InterMune stock price plummeted from the previous day' s

close of $25 .20 per share to $16.74, on a volume of nearly 18 million shares, the second highest

one-day volume since InterMune went public in early 2000 .

181 . Even after this drop, the price of InterMune's stock may have continued to b e

partially inflated because defendants never fully disclosed either the resignations and firings tha t


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strategy, or the company's strategy of marketing InterMune for IPF in violation of FDA

regulations and policy.

182. Moreover, the price drop on June 12, 2003, that resulted from the partia l

disclosure likely would have been larger if the partial disclosure had not been paired with release

of the above-referenced good news concerning Oritavancin . Therefore, the amount of price

inflation resulting from the previously misrepresented facts that were partially disclosed on June

12, 2003, was likely larger than the price drop on that date .

183 . At the June 12 conference call before the beginning of trading, Harkonen tried t o

excuse the misrepresentations in the April Press Release and April Conference Call by implying

falsely that InterMune had been merely deducing the number of patients taking Actimmune from

the amount of inventory shipped to distributors, and that InterMune now realized that thi s

"methodology" had "inherent inaccuracies," and that, furthermore, "InterMune's interaction with

the physician community is limited due to the fact that interferon gamma is not approved by the

FDA." Even if these explanations had been true -- and, as explained above, they were not true --

they would have demonstrated intentional recklessness by InterMune, Harkonen and Surrey-

Barbari in previously representing to the public that they knew physicians were responding

positively to the most recent clinical data about Actimmune treatment of IPF, and that they knew

the number of patients taking Actimmune .

184. In a June 12, 2003, article in TheStreet .com, Adam Feuerstein wrote that

"[InterMune's] management has buried itself in quite a credibility crater," and added that :

[n]ow, the company admits that demand for Actimmune is flatbecause doctors have concerns about the equivocal nature of thedata supporting Actimmune use in IPF patients. In the past, thecompany has insisted that doctors love the data and are increasingtheir use of the drug .

185. Similarly, in a June 12, 2003, article in the Dow Jones Newswires, Am y

Braunschweiger quoted Banc of America Securities analyst Michael King's statement that "[l ]

night's announcement [by InterMune] calls into question management credibility . "


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186. Defendants' statements in the April 29, 2003 , press release and during the Apri l

29, 2003, conference call had serious misled investors . Thus, on May 13, 2003, at a time when

the market had believed InterMune's representations that 3,300 patients were already on

Actimmune, a Wachovia Securities analysts' report, written by, among others, Martin D . Auster,

had noted that Actimmune was on track to deliver $180 million in Actimmune sales - the upper

end of InterMune's 2003 guidance - "[s]hould the current run rate of 1,200 annual net patient

adds be sustained ." Similarly, a Wachovia Securities analyst report, written by Martin D . Auster

and published on May 18, 2003, stated that "we continue to predict a fairly healthy revenue ramp

for Actimmune . . . based on our belief that InterMune can continue to add 200-300

patients/quarter through the end of 2004 ." Meanwhile, InterMune, Harkonen and Surrey-Barbari

knew when they made their misrepresentations in February, April and May of 2003, that

InterMune was currently losing 400 Actimmune patients a year rather than ainin 1,200 per

year, a loss that is diagramed in a Wachovia Securities analyst report by, among others, Martin

D. Auster, published on June 12, 2003 .

187 . Moreover, InterMune, Harkonen and Surrey-Barbari knew, for reasons describe d

above, that doctors were becoming less receptive to the data from clinical trials and that the

impression of their receptivity had always been exaggerated by the effects of InterMune's illegal

selling strategy, that InterMune had cut back on its education-related expenditures, and that the

sales force was in a state of turmoil and disorganization, each of which could only have a

negative impact on sales growth .

188 . On June 30, 2003, InterMune issued a press release announcing that Harkonen

had resigned as President and CEO, "effective immediately . "

189. After the filing of this lawsuit, nearly the entire senior management of InterMune

either resigned or was terminated, including Surrey-Barbari, Katkin, Jim Shaffer (National Sale s

Director), Stephen Rosenfield (Executive V .P. of Legal Affairs), James E. Pennington

(Executive Vice President of Medical and Scientific Affairs), Randall Kaye (Vice President o f


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Medical Affairs), and the entire legal department that existed during the Class Period ha s

resigned, except for one patent lawyer .

DEFENDANTS' MISREPRESENTATION S

190. In knowing, or with respect to statements of current or historical fact, knowing o r

intentionally reckless disregard of the truth, defendants issued and/or participated in the issuance

of materially false and misleading statements and financial information to the investing public, a

particularized above . These representations were materially false and misleading in that they

falsely stated and/or failed to disclose material and adverse facts about the significance of data

from clinical trials for Actimmune treatment of IPF, physicians' responses to the data and their

willingness to prescribe Actimmune for treatment of IPF, the number of patients actually

receiving Actimmune treatments, whether InterMune was "on track" to meet its previously

announced revenue projections, the level of educational support the Company was providing for

the product in the first and second quarters of 2003, the shrinking size and increasing confusion

and unhappiness of the Company's sales force, and InterMune's strategy of marketing

Actimmune for use with IPF, in violation of FDA regulations .

DEFENDANTS' SCIENTE R

191 . Defendants' false representations and material omissions were made with scienter

in that defendants knew, or, with respect to statements of current or historical fact, knew or wer e

intentionally reckless in disregarding whether, their statements were false or misleading :

a. For the reasons detailed, supra, including in paragraphs 71-78, 130-32 ,

Harkonen knew when Katkin made his statement , on February 19, 2003, concerning doctors'

reactions to InterMune 's presentation at CHEST (see, supra , 11127-28), a statement that is also

attributable to Harkonen himself, that the statement was false and misleading , or else Harkonen

was deliberately reckless in not knowing it was false and misleading .

b. For the reasons detailed , supra , including in paragraphs 110-12, 131-32 ,

138-140, Harkonen knew when he made his statement on January 7, 2003 , concerning doctors


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being "happy" with the "follow-up" data ( see, supra, ¶ 136), that this statement was false and

misleading, or else Harkonen was deliberately reckless in not knowing it was false an d

misleading .

c . For the reasons detailed , supra, including in paragraphs 83-84 , 91-97, 145- 1

46, Harkonen and Surrey-Barbari knew when the 10-K was signed and filed on March 28, 2003 ,

and March 31, 2003, that the statement in the 10-K that InterMune was not marketin g

Actimmune for IPF ( see, supra , ¶ 141), a statement that is attributable to both Harkonen and

Surrey-Barbari, was false and misleading, or else Harkonen and Surrey-Barbari were delibe i

reckless in not knowing it was false and misleading .

d. For the reasons detailed, supra, including in paragraphs 116-25, 151,

Harkonen knew when he made his statement on January 30, 2003, concerning there having been a

positive change in the composition of InterMune 's sales force (see, sup, ¶ 148 ), that the statement

was false and misleading, or else Harkonen was deliberately reckless in not knowing it was fals e

and misleading .

e . For the reasons detailed, supra, including in paragraphs 114-26, Harkonen

and Surrey-Barbari knew when the 10-K was signed and filed that the statement in the 10- K

implying that InterMune had 80 sales representatives during the first quarter of 2003 see, supra ,

¶¶152-54), a statement that is attributable to both Harkonen and Surrey-Barbari, was false and

misleading, or else Harkonen and Surrey-Barbari were deliberately reckless in not knowing it wa s

false and misleading.

f. For the reasons detailed, supra, including in paragraphs 110-12, 124, 131-32 ,

138-40, 162, Harkonen knew when Katkin made his statement during the February 19, 2003,

conference call concerning InterMune looking forward to sharing with more doctors its data from

clinical trials of Actimmune treatments for IPF see, supra, ¶¶ 159-61), a statement that is

attributable to Harkonen, that the statement was false and misleading, or else Harkonen was

deliberately reckless in not knowing that it was false and misleading .

CLASS ACTION COMPLA INT FOR VIOLATI O NS OF FEDERAL SECURITIES

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g. For the reasons detailed, supra, including in paragraphs 66-70, 169-72 ,

Harkonen and Surrey-Barbari knew when Surrey-Barbari and Katkin made their statements during

the April 29, 2003, conference call, concerning patient numbers (see, supra , IT 165-66), that the

statements, which are attributable to both Harkonen and Surrey-Barbari, were false and misleading ,

I or else Harkonen and Surrey-Barbari were deliberately reckless in not knowing the statements were I

I false and misleading.

h. For the reasons detailed, supra, including in paragraphs 174-76, Harkonen

knew when the April 29, 2003, press release was issued, that his statement in the press release that

InterMune was "on track to achieve [its] revenue projections for the year" (see, supra, ¶ 173), was

false and misleading, or else Harkonen was deliberately reckless in not knowing the statement wa s

false and misleading.

COUNT I

Against All Defendants For Violations ofSection 10(b) of the Exchange Act and Rule 10b-5

192 . Lead Plaintiff incorporates by reference and realleges each of the foregoing

paragraphs .

193 . During the Class Period, defendants, individually and in concert, as part of a plan ,

scheme, and course of conduct, pursuant to which they knowingly or with deliberate

recklessness, as to statements of current or historical fact, or knowingly with respect to any

statements that may be deemed forward-looking, engaged in acts, transactions, practices, and

courses of business which operated as a fraud upon Lead Plaintiff and other members of the

Class, and made various untrue and deceptive statements of material fact and omitted to state

material facts necessary in order to make the statements made, in light of the circumstances

under which they were made, not misleading to Lead Plaintiff and other Class members . The

purpose and effect of this scheme was to induce Lead Plaintiff and the Class to purchase

InterMune common stock at artificially inflated prices .


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194. During the Class Period, defendants, pursuant to their plan, scheme and unlawfu l

course of conduct, made, or caused to be made material false statements and/or omissions to th e

I investing public as described above .

195. Defendants knew and, with respect current or historical facts, knew and/o r

intentionally recklessly disregarded whether, the foregoing statements were false . Because of

their positions and the other specific reasons alleged above, the individual defendants had acces s

to non-public information detailed above .

196 . Throughout the Class Period, InterMune acted through the individual defendants ,

each of whom it portrayed and represented to the press and public as a valid representative . The

willfulness, motive, knowledge, and recklessness of the individual defendants is therefore

imputed to InterMune, which is primarily responsible for the securities law violations of the

individual defendants while acting in their official capacity as Company representatives, or, in

the alternative, which is liable for the acts of the individual defendants under the doctrine of

respondeat superior.

197 . Lead Plaintiff and the other members of the Class relied upon statements th e

integrity of the market in InterMune's common stock, which was, unbeknownst to Lead Plaintif f

and the other members of the Class, adversely affected by the above acts and practices ,

misrepresentations and material omissions . Had the adverse facts defendants concealed been

properly disclosed, InterMune's stock would not have sold at the artificially inflated prices it did

during the Class Period.

198. The value of InterMune common stock declined materially upon public disc

of the truth concerning the Company's financial circumstances, including its financial prospects,

which previously had been misrepresented or concealed, as alleged in this complaint . Lead

Plaintiff and other members of the Class have suffered substantial damages as a result of the

wrongs alleged herein.

199. By reason of the foregoing, defendants violated Section 10(b) of the Exchang e

Act and Rule I Ob-5 promulgated thereunder .


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COUNT II

Violation of Section 20(a) of the Exchange Act(Against Defendants Harkonen and Surrey-Barbari)

200. Plaintiff repeats and realleges each and every allegation contained above as i f

fully set forth herein.

201 . Defendants Harkonen and Surrey-Barbari each acted as a controlling person of

InterMune within the meaning of Section 20(a) of the Exchange Act as alleged herein . By virtue

of their high-level positions, and participation in and/or awareness of InterMune's operations

and/or intimate knowledge of the specific events alleged herein, defendants Harkonen and

Surrey-Barbari had the power to influence and control and did influence and control, directly o r

indirectly, the decision-making of InterMune, including the content and dissemination of th e

various statements and omissions which Lead Plaintiff contends were false and misleading .

202. As set forth above, InterMune violated Section 10(b) and Rule I Ob-5 by its act s

and omissions as alleged in this Complaint . By virtue of their positions as controlling persons of

InterMune, defendants Harkonen and Surrey-Barbari are each liable pursuant to Section 20(a) o f

the Exchange Act . As a direct and proximate result of Harkonen and Surrey-Barbari's wrongful

exercise of, or failure to properly exercise, their positions as control persons, Lead Plaintiff and

the other members of the Class suffered damages in connection with their purchases o f

InterMune's common stock during the Class period .

WHEREFORE , Lead Plaintiff, on his own behalf and on behalf of the Class, prays fo r

judgment as follows :

A. Declaring this action to be a proper class action maintainable pursuant to Rule 23

of the Federal Rules of Civil Procedure and certifying the Court-appointed Lead Plaintiff as class

representative under Rule 23, and Court-appointed Lead Counsel as counsel for the Class ;

B . Awarding Lead Plaintiff and the Class compensatory damages against al l

defendants, jointly and severally, for all damages sustained as a result of defendants '


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wrongdoing, in an amount to be proven at trial, together with appropriate prejudgment interest at

the maximum rate allowable by law ;

C . Awarding Lead Plaintiff and the Class their costs and expenses for this litigation

including reasonable attorneys' fees and other disbursements ; and

D . Granting such other and further relief as this Court deems to be just and proper .

Dated: August 23, 2004

GLANCY BINKOW & GOLDBERG LLPLionel Z. Glancy #134180Peter A . Binkow #173848Michael Goldberg #188669Susan Kupfer #1417241801 Ave . of the Stars Suite 311Los Angeles, Califo rnia 90067Tel: (310 ) 201-9150Fax: (310) 201-9160

GOODKIND LABATON RUDOFF& SUCHAROW LL P

Is/ Richard T . JoffeIra A. SchochetRichard T . Joffe Pro Hac Vice100 Park AvenueNew York, New York 10017Tel: (212) 907-0700Fax : 818-0477

ROY JACOBS & ASSOCIATESRoy L. Jacobs60 East 42nd Street46`x' FloorNew York, NY 10165Tel: (212) 867-1156Fax: (212) 504-834 3

Attorneys for Lead Plaintiff


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PROOF OF SERVICE BY MAIL

I, the undersigned, say :

I am a citizen of the United States and am employed in the office of a member of the Bar ofthisCourt . I am over the age of 18 and not a party to the within action. My business address is 1801 Avenueof the Stars, Suite 311, Los Angeles, California 90067 .

On August 23, 2004, I served the following :

1 SECOND AMENDED AND CONSOLIDATED CLASS ACTION COMPLAINT FORVIOLATIONS OF FEDERAL SECURITIES LAWS

on the parties shown below by placing a true copy thereof enclosed in a sealed envelope with postagethereon fully prepaid in the United States mail at Los Angeles, California .

SEE SERVICE LIST

Executed on August 23, 2004, at Los Angeles, California.

I certify under penalty of perjur ZiRann oing is true and correct .

PROOF OF SERVICE -INTERMUNE LITIGATIO N

proof.Daniel C. Rann48 .wpd Page 1

SERVICE LISTIntermune Litigatio n

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For The Plaintiffs

Kimberly EpsteinPatrick CoughlinEli R. GreensteinLerach Coughlin Stoia & Robbins LLP100 Pine Street, Suite 2600San Francisco , CA 94111Telephone: (415) 288-4545Facsimile: (415) 288-4534

William S . LerachDarren RobbinsLerach Coughlin Stoia & Robbins LLP401 "B" Street Suite 1600San Diego, California 92101Telephone: (619) 231-1058Facsimile: (619) 231-742 3

Samuel RudmanDavid RosenfeldCauley Geller Bowman Coates

& Rudman , LLP200 Broadhollow Road , Suite 406Melville, NY 11747Telephone : (631) 367-7100Facsimile: (631) 367-1173

Mark TopazSchiffrin & Barroway, LLP3 Bala Plaza East Suite 400Bala Cynwyd, Pennsylvania 19004Telephone: (610) 667-7706Facsimile: (610) 667-7056

Francis M . GregorekWolf, Haldenstein , Adler,Freeman & Herz, LLPSymphony Towers, 750 B Street , Suite 2770San Diego , CA 9210 1Telephone: (619) 239-4599Facsimile: (619) 234-4599

Betsy C . ManifoldWolf, Haldenstein, Adler,Freeman & Herz, LLPSymphony Towers, 750 B Street, Suite 2770San Diego, CA 9210 1Telephone: (619) 239-4599Facsimile: (619) 234-459 9

Francis A . Bottini, Jr .Rachele RickertWolf Haldenstein AdlerFreeman & Herz750 B Street , Suite 2770San Diego , CA . 92101Telephone: (619) 239-4599Facsimile: (619) 234-4599

Charles J . PivenLaw Offices of Charles J . PivenThe World Trade Center401 East Pratt St Ste 2525Baltimore, MD 21202Telephone: (410) 332-0030Facsimile: (410) 685-1300

Guri AdemiSheptim AdemiAdemi & O'Reilly, LLP3620 Easy Layton AvenueCudahy, Wisconsin 53110Telephone: (414) 482-8000Facsimile: (414) 482-800 1

Robe rt S. GreenGreen & Jigarjian LLP235 Pine Street , 15" FloorSan Francisco , CA 94104Telephone : (415) 477-6700Facsimile : (415) 477-6710

Jeffrey M. NortonWechsler Harwood LLP488 Madison Avenu eNew York, New York 10022Telephone: (212) 935-7400Facsimile : (212) 753-3630

Richard JoffeGoodkind, Labaton, Rudoff

& Sucharow, L.L.P .100 Park AvenueNew York, New York 10017Telephone: (212) 907-0863Facsimile: (212) 818-0477

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Roy L. JacobsRoy Jacobs & Associates60 East 42nd Street46th FloorNew York, NY 10165Telephone: (212) 867-1156Facsimile: (212) 504-8343

For The Defendants

William S. FreemanCooley Godward LLP5 Palo Alto Sq ., 4`h Floor, 3000 El Camino RealPalo Alto, CA 94306-215 5Telephone: (650-843-5037Facsimile : (650) 857-0663

William S. FreemanCooley Godward LLPOne Maritime Plaza, Suite 2000San Francisco, CA 94111-3580Telephone : (415) 693-2000Facsimile: (415) 951-3699

Documents

LIONEL Z. GLANCY # MICHAEL GOLDBERGsecurities.stanford.edu/filings-documents/1028/ITMN03-01/...Actimmune during the first quarter of 2003 -- a key piece of information relied on by