bruce hofmann, et al. v. philip laughlin, et al. 04-cv...
TRANSCRIPT
U
&4ICTO12S7SJLT
ED STATES DISTRICT COURT
BRUNO HOFMANN, Individually And ) CIVIL ACTION NO.
On Behalf of All Others Similarly Situated, )} CLASS ACTION COMPLAIN''
Plaintiff, FOR VIOLATIONS OFFEDERAL SECURITIES LAVE 3
VS . )
JURY TRIAL DEMANDEDPHILIP LAUGHLIN, MICHAE LSABOLINSKI, ALBERT ERANI, DONNA A+"" J~DG ti
U ?
ABELLI LOPOLITO , JOHN J. ARCARI , .HERBERT M . STEIN , ALAN ADES, ~`+ AvUN..~BERNARD A. MARDEN , ALAN W. TUCK, S JMM",,AO NS !SSUFDNOVARTIS PHARMA AG and ; ~~~~L~ 4,1PRICEWATERHOUSECOOPERS LLP, P M_
Defendants . ..
Plaintiff has alleged the following based upon the investigation of plaintiff's co nsel ,
which included a review of SEC filings by Organogenesis, as well as regulatory filing ; and
reports, securities analysts' reports and advisories about the Company, press releases and A her
public statements issued by the Company, and media reports about the Company, and pl,, .intiff
believes that substantial additional evidentiary support will exist for the allegations set :orth
herein after a reasonable opportunity for discovery .
INTRODUCTION & OVERVIEW
1 . This is a federal class action on behalf of purchasers of the securities o f
Organogenesis, Inc . ("Organogenesis" or the "Company") between November 15, 1999 an d
January 30, 2002, inclusive (the "Class Period"), seeking to pursue remedies under the Securitie s
Exchange Act of 1934 (the "Exchange Act") .
2. Throughout the Class Period, Organogenesis was a Company with only one
commercially available product -- Apligraf, a skin replacement therapy used for severe skin
wounds. Thus, while Organogenesis has acquired other technologies, virtually all of the
Company's revenues were at all times generated from the sale of Apligraf . Apligraf is desc -ibed
by Organogenesis as having a structure similar to human skin and is described as a "skin
construct ." The product's human skin-like properties allow this product to be used by doctc :s to
aid in the healing of certain types of skin ulcers, and other epidermal injuries .
3 . At all times throughout the Class Period, defendants were well aware tht the
Company's business model was entirely dependent upon their ability to mass-produce Af . .igraf
and market it to physicians as an "off-the-shelf," cost-effective product that doctors could i : e on
patients absent hospitalization. Thus, while the Company encountered some difficult) :Hs in
manufacturing and marketing Apligraf during the first half of 1999, by the inception of the .lass
Period, defendants assured investors :
(a) that Organogenesis maintained the expertise and ability to manuf, . ;.ture
sufficient quantities of Apligraf so that it was foreseeable that the Company could ac I sieve
economies of scale and achieve profitability through the sales of only this product ;
(b) that the Company maintained marketing agreements with partners sr :h as
Novartis, which would allow Organogenesis to obtain the marketing support necessary ti sell
sufficient quantities of Apligraf, while at the same time retaining enough of the revenue sl I it in
these deals to fund operations and achieve profitability ; and
(c) that between the Company's marketing agreements with Novarti ; and
others, and through other foreseeable sources of available debt and equity, Organogenesis . culd
foreseeably achieve profitability and sufficiency .
2
4. Thus, by the inception of the Class Period, while it was fully disclosed tl at the
Company would need to raise additional funding at some point in the future to in . rease
production and distribution, throughout this time, defendants consistently reporter that
Organogenesis had the necessary funding in place to allow it to achieve the Company's ; :,fated,
foreseeable near-term objectives . In fact, according to the Company's 1999 Form 10-K filed
with the SEC on or about 3/29/00, Organogenesis stated that, future capital compriii, :-d of
product sales, research and development support payments and debt and equityfinancing; ~, will
be sufficient to fund future operations.
5 . Thus, throughout the Class Period, plaintiff and other members of the Clas! : were
led to believe that Organogenesis was able to manufacture Apligraf in sufficient quantitif .;, and
that other sources of funding were available such that the Company would be able to ac sieve
profitability in the foreseeable near-term . Defendants consistently reported that Organoge iesis'
results were "consistent with the transition in progress from a research focused compan, to a
research based operating company with a novel medical product in introduction phase .,' : and
that the Company had necessary and available funding sources, from foreseeable sales o~ debt
and equity to both private and public investors which would allow the Company to ac l sieve
defendants' plan for sufficiency . Central to this plan, also was a key agreement with No,, - ;irtis,
Organogenesis' Apligraf marketing partner, which purportedly allowed defendants to acc~'ss at
least $20 million through the exercise of a "put" option . This agreement purportedly 1,,-ould
allow defendants to raise this money at any time, and thereby maintain a large mega-n [lion
"safety net" for the Company .
6. The purported ability of the Company to be able to sell stock to Novartis wa! also
a critical part of Organogenesis' financing plans, because it should have allowed defenda : : is to
3
raise sufficient funds as needed -- including a purported $20 million equity put optior -- in
addition to any other necessary sources of debt or equity financing available to the Con,pany .
Again, this financing was also very important to investors, because it provided a pur : orted
"safety net" for Organogenesis -- a reserve of cash which defendants could allegedly acce : :. as a
last resort . The Novartis put agreement was, therefore, during the Class Period, a critical p :trt of
defendants' announced plan to achieve profitability and to avoid bankruptcy .
7. At all times during the Class Period, therefore, Organogenesis represented :hat it
was able to make Apligraf commercially available in a cost effective manner which, even if the
Company was forced to incur losses at the early stages of development, would flow
Organogenesis to ramp up production and soon be able to fund operations from ;ales .
Defendants consistently represented both prior to and during the Class Period, the Compan,- was
sufficiently well funded to carry out defendants' business plan .
8 . Unbeknownst to investors, however, throughout the Class Period, the Cori .pany
was suffering from a host of undisclosed adverse factors which were negatively impacti ig its
business and which would cause it to report declining financial results, materially less th, .ii the
market expectations defendants had caused and cultivated . In particular:
• At all times during the Class Period, it was not true that defendants could ac : sieveprofitability through the sale of Apligraf under the terms, or even the revised terms, A theNovartis marketing agreement, which did not provide Organogenesis with enough f therevenues or profits provided through such Apligraf sales to offset the extremely higa : costof production or to offset other undisclosed manufacturing problems such as def -ctiveproducts and recalls .
• Throughout the Class Period, undisclosed problems related to the manufr ;tuneand marketing of Apligraf was leading to even higher costs and further red .i .cingprofitability . Manufacturing problems and delays were retarding production scair andmarketing issues were reducing sales . As investors would only learn following the : :'lassPeriod, the Company's own sales force was encountering resistance throughout thafi timeconcerning the cost and complexity of its products and the actual and/or perc ;riveddifficulties in physician reimbursement for Apligraf .
4
• Throughout the Class Period, Organogenesis was underfunded and there v is noreasonable basis to report that the Company could foreseeably fund oper : :tionsthroughout the Class Period, based on available sources of loans, debt and/or equity gales .Moreover, as defendants were well aware but failed to disclose, it was not true tr ;E .t theCompany could force Novartis to provide the full complement of its fundi ig asdefendants consistently represented, as certain undisclosed conditions e~i fisted .Organogenesis could not meet conditions precedent to Novartis' requirement to pi- :?videat least $10 million of its purported commitment to Organogenesis . It was not trL i :. thatother sources of funding remained available to defendants so as to preserve corl gyrateviability.
• Throughout the Class Period, defendants failed to disclose that high rnanagi :rnentturn-over at the Company was having and would continue to have a disruptive eff :i,t onthe operations and oversight of Organogenesis, such that it was also not foreseea : :le atany time during the Class Period that Organogenesis would be able to ac sieveprofitability in the near-term or to attain guidance sponsored and/or endors4 :1 bydefendants .
Isclose, As a result of the aforementioned adverse conditions which defendants fai ;d tothroughout the Class Period, defendants lacked any reasonable basis to ~ :laim
that Organogenesis was operating according to plan, that sufficient sources of fu : :.dingwere achieved and/or available to Organogenesis or that the Company could maintainprofitability or even remain a viable entity in the foreseeable near-term .
9. Defendants were motivated to and did conceal the true operational and fin : racial
condition of Organogenesis, and materially misrepresented and failed to disclose the cond i :ions
that were adversely affecting Organogenesis throughout the Class Period, because it er . :.bled
insiders, including certain defendants, to sell over 6 .2 million shares of Company stock r Ld/or
securities valued at over $68 .8 million, prior to any proper disclosure to the market.
10 . Defendants' scheme also, ultimately, allowed Erani and Ades and their f .mily
members to improperly acquire the remaining assets of Organogenesis through a leve : aged
buyout through bankruptcy proceedings -- after defendants' actions drove the Compan into
bankruptcy and after they sufficiently interfered with these proceedings so as to guarantee : that
Erani and Ades and their family members acquired total domination and control over wha I was
left of Organogenesis . Thus, through their illegal and improper actions which ultimately U arced
the Company into Chapter 11, defendants not only were able to wipe out the equity interest of al l
5
of the Company's outside shareholders, but they were also able to renegotiate their agre :!men t
with Novartis -- which as defendants knew or recklessly disregarded throughout the 1 'lass
Period, was causing the Company to lose money on every unit sale of Apligraf
JURISDICTION AND VENUE
11 . The claims asserted herein arise under and pursuant to Sections 10(b) and 2( :a) of
the Exchange Act [15 U . S.C. §§ 78j (b) and 78t(a)] and Rule lOb-5 promulgated thereuncl .r by
the United States Securities and Exchange Commission ("SEC") [17 C .F.R. § 240 .1Ob-5] .
12. This Court has jurisdiction over the subject matter of this action pursuant l0 2 8
U.S.C . §§ 1331 and 1337, and Section 27 of the Exchange Act [15 U . S.C. § 78aa] .
13 . Venue is proper in this District pursuant to Section 27 of the Exchange Ac I , and
28 U.S .C. § 1391(b) . Organogenesis maintains its principal place of business in this Distri i : t and
many of the acts and practices complained of herein occurred in substantial part in this Disti ct .
14 . In connection with the acts alleged in this complaint, defendants, direc .I y or
indirectly, used the means and instrumentalities of interstate commerce , including, bi, l not
limited to, the mails, interstate telephone communications and the facilities of the na : :oval
securities markets .
PARTIES
15. Plaintiff Bruno Hofmann, as set forth in the accompanying certific tion,
incorporated by reference herein, purchased the common stock of Organogenesis at artifi, :ially
inflated prices during the Class Period and has been damaged thereby .
16. Non-party Organogenesis is a Delaware corporation with its principal plzi i : e of
business at 150 Dan Road , Canton , MA 02021 . Organogenesis designs , manufactures and sell s
medical products containing living cells and/or natural connective tissue, including living issu e
6
replacements, cell-based organ asset devices and other tissue-engineered products . The
Company's lead product, Apligaf living skin construct, is promoted as being the only pi oduct
containing living human cells to gain FDA marketing approval in the United States .
17. Defendant NOVARTIS PHARMA AG ("Novartis") is a Swiss I-ease d
pharmaceutical and drug company, which throughout the Class Period was the purported
marketing partner of the Company and a principal shareholder in Organogensis, holding as nany
as 2.88 million shares, or more than 6% of the Company's shares issued and outstanding c wring
that time. As a result of the Company's bankruptcy filing and the transcripts related th ;Teto,
investors have now learned that Novartis worked with Organogenesis to artificially inflate sales
forecasts, as well as failing to issue any corrective statements concerning its commitmcat to
provide funding to the Company, which commitment defendants materially mischaractcrized
throughout the Class Period .
18 . Defendant PRICE WATERHOUSECOOPERS LL P
("PricewaterhouseCoopers") was, throughout the Class Period, the purported independent
auditors of the Company. During this time PricewaterhouseCoopers provided year-end repc ;-ts
which certified the Company's financial statements and its cash position, and consistently f : led
to alert investors to the fact that, at no time during the Class Period, did the Company have t ie
ability to fund operations through product sales, or that Organogenesis was actually losing
money on each sale of Apligraf. It was only after the end of the Class Period, after the Comb : any
had finally disclosed that it was impossible to fund operations with product sales that
PricewaterhouseCoopers finally, belatedly, issued a "going concern opinion" on the Compar ii --
an opinion which should have been in place since the inception of the Class Period .
7
19. Defendant PHILIP LAUGHLIN ("Laughlin") was during the relevant p xiod,
President and a Director and member of the Company' s Executive Committee of Org anoge i Lesis .
Defendant Laughlin assumed these positions immediately prior to the inception of the ..lass
Period , on or about , October 5 , 1999 and later , on or about, January 1, 2001 also assume :1 the
role of Chief Executive Officer. Defendant Laughlin retained these positions of powe i . and
control over the Company until his sudden and unexpected departure announced on or :i .bout
May 16, 2001 . During the Class Period, defendant Laughlin signed the Company ' s SEC fi I ings,
including , but not limited to, Organogenesis ' Form(s) 10-K and/or the materially false : and
misleading Registration Statements and joint Proxy/Prospectus issued in connection with th .- sale
and offering of stock by the Company and certain "Selling Shareholders " (as defined L ,rein
infra) .
20. Defendant MICHAEL SABOLINSKI ("Sabolinski ") was during the i :i1ass
Period, President, Chief Executive Officer and a member of the Board of the Company, h wing
assumed those positions on or about May 16, 2001, upon the resignation of defendant Lau, : .hlin .
Prior to assuming the aforementioned positions and also during the Class Period, defe idant
Sabolinski also served as the Company's Senior Vice President Medical and Regulatory A Hairs .
Defendant Sabolinski abandoned his position at the Company on or about April 5, 2002, after
less than one year after assuming the leadership of Organogenesis . During the Class Pc :-iod,
defendant Sabolinski signed the Company's SEC filings, including, but not limite :I to,
Organogenesis' Form(s) 10-K and/or the materially false and misleading Registration Stater : i .ents
and joint Proxy/Prospectus issued in connection with the sale and offering of stock b, the
Company and certain "Selling Shareholders" (as defined herein infra) .
8
21 . Defendant ALBERT ERANI ("Erani") was during the relevant period, a mi : tuber
of the Board of the Company and on or about January 1, 2000 assumed the role of Chairn~an of
the Board of Organogenesis . Defendant Erani served as Chairman of the Board of the Cot, ipany
until his sudden and unexpected departure on or about January 4, 2002 . During the ;lass
Period, defendant Erani signed the Company's SEC filings, including, but not limitrid to,
Organogenesis' Form(s) 10-K and/or the materially false and misleading Registration State :cents
and joint Proxy/Prospectus issued in connection with the sale and offering of stock t ,r the
Company and certain "Selling Shareholders" (as defined herein infra) .
22 . Defendant ALAN ADES ("Ades") was nominated and appointed Chai man ,
President and Chie Executive Officer of the Company following the end of the Class Peri : .id on
or about October 2002 . Defendant Ades is the cousin of defendant Erani, and was .I so a
member of the group of investors who took the Company private through a leveraged acqui Ation
in bankruptcy. Defendant Ades was an active participant in the fraud alleged herein . It ha: been
reported that defendant Ades, with the aid and complicity of other defendants named h ; -rein,
acted to assure that other interested parties were not able to successfully participate iii the
ultimate sale of the Company and that defendant Ades, with the aid and complicity of . ther
insiders, was then able to acquire the Company for a lower price, further depriving investor • of a
return on their investment in Organogenesis .
23 . Defendant DONNA ABELLI LOPOLITO ("Lopolito") was during the rel, .,vant
period, Chief Financial Officer and Vice President - Finance and Administratic ; L of
Organogenesis . During the Class Period, defendant Lopolito signed the Company's SEC fi I :.ngs,
including, but not limited to, Organogenesis' Form(s) 10-K and/or the materially falst - and
misleading Registration Statements and joint Proxy/Prospectus issued in connection with the sal e
9
and offering of stock by the Company and certain "Selling Shareholders" (as defined ]I---.rein
infra) .
24. Defendant JOHN J. ARCARI ("Arcari") was during the relevant period, ~ .i hief
Financial Officer and Vice President - Finance and Administration of Organogenesis, r ; ,ving
replaced defendant Lopolito on or about April 30, 2000 . Defendant Arcari served i i :i the
aforementioned positions until his sudden and unexpected departure on or about May 14, : :.002 .
During the Class Period, defendant Arcari signed the Company's SEC filings, including, b A not
limited to, Organogenesis' Form(s) 10-K and/or the materially false and misleading Regist ~rtion
Statements and joint Proxy/Prospectus issued in connection with the sale and offering of stc ~ ::k by
the Company and certain "Selling Shareholders" (as defined herein infra) .
25 . Defendant HERBERT M . STEIN ("Stein") was at the inception of the ' :;lass
Period , Chairman of the Board and Chief Executive Officer, until his resignation on or :about
January 1 , 2000 . Upon his retirement from the aforementioned positions, defendant Stein
remained at the Company as a member of the Board and Chairman Emeritus . During the i ..lass
Period defendant Stein made materially false and misleading statements about the Cony i pany
and/or filed to disclose material information necessary to make such statements not alse .
During the Class Period , defendant Stein also signed the Company' s SEC fi lings, includin, : :, but
not limited to, Organogenesis ' Form(s) 10-K and/or the materially false and misle :ding
Registration Statements and joint Proxy/Prospectus issued in connection with the sal c and
offering of stock by the Company and certain "Selling Shareholders " (as defined herein infrc ) .
26. Defendant ALAN W. TUCK ("Tuck") was during the Class Period , . .'hief
Strategic Officer of the Company . During the Class Period, defendant Tuck also ~ aade
materially false and misleading statements and/or signed the Company's SEC filings , inch :ling,
10
but not limited to, Organogenesis' Form(s) 10-K and/or the materially false and misle ;i .ding
Registration Statements and joint Proxy/Prospectus issued in connection with the salli . and
offering of stock by the Company and certain "Selling Shareholders" (as defined herein infra , ) .
27. Defendant BERNARD A. MARDEN ("Marden") was, during the Class Peri~)d, a
director of the Company and one of its private investors . During the Class Period, defe i - .dant
Marden also made materially false and misleading statements and/or signed the Company' ., SEC
filings, including, but not limited to, Organogenesis' Form(s) 10-K and/or the materially false
and misleading Registration Statements and joint Proxy/Prospectus issued in connection wi ii the
sale and offering of stock by the Company and certain "Selling Shareholders" (as defined L .rein
infra) .
28 . The defendants referenced above in ¶¶ 19 - 27 are referred to herein zi ; : the
"Individual Defendants . "
29 . Because of the Individual Defendants' positions with the Company, or rel i :ions
with Company insiders, they had access to the adverse undisclosed information abo t it s
business, operations, products, operational trends, financial statements, markets and preser : and
future business prospects via access to internal corporate documents (including the Comp :iny's
operating plans, budgets and forecasts and reports of actual operations compared thereto),
conversations and connections with other corporate officers and employees, attendan .-e at
management and Board of Directors meetings and committees thereof and via reports and ether
information provided to them in connection therewith and/or otherwise actively participai ~ : d in
the fraudulent scheme alleged herein .
30. It is appropriate to treat the Individual Defendants as a group for ple : .ding
purposes and to presume that the false, misleading and incomplete information conveyed 1i i th e
11
Company's public filings, press releases and other publications as alleged herein a] . ., the
collective actions of the narrowly defined group of defendants identified above . Each : f the
defendants, by virtue of their high-level positions with the Company and/or relations wit h
company insiders, directly participated in the management of the Company, was di ectl y
involved in the day-to-day operations of the Company at the highest levels and was pr :' 'y to
confidential proprietary information concerning the Company and its business, operas ions ,
products, growth, financial statements, and financial condition, as alleged herein z id/o r
otherwise actively participated in the fraudulent scheme alleged herein . Said defendants were
involved in drafting, producing, reviewing and/or disseminating the false and misle :i .ding
statements and information alleged herein, were aware, or recklessly disregarded, that the fals e
and misleading statements were being issued regarding the Company, and approved or rz :ified
these statements, in violation of the federal securities laws .
31 . As officers and controlling persons of a publicly-held company whose cor Amon
stock was, and is , registered with the SEC pursuant to the Exchange Act, and was traded c n th e
American Stock Exchange (the "AMEX"), and gove rned by the provisions of the frJeral
securities laws, the Individual Defendants each had a duty to disseminate promptly, accural ; : and
truthful information with respect to the Company's financial condition and performance, gr iwth,
operations, financial statements, business, products, markets, management, earnings and pii :;sent
and future business prospects, and to correct any previously-issued statements that had be ; :ome
materially misleading or untrue , so that the market price of the Company's publicly-t ade d
securities would be based upon truthful and accurate information . The Individual Defenc pmts '
misrepresentations and omissions during the Class Period violated these specific requires i :lent s
and obligations .
12
32. The Individual Defendants participated in the drafting, preparation, id/or
approval of the various public and shareholder and investor reports and other communic~ : Lions
complained of herein and were aware of, or recklessly disregarded, the misstatements cons :lined
therein and omissions therefrom, and were aware of their materially false and misleading nature
and/or otherwise actively participated in the fraudulent scheme alleged herein . Because oil their
Board membership and/or executive and managerial positions with Organogenesis, each F th e
Individual Defendants had access to the adverse undisclosed information about Organoge esis'
business prospects and financial condition and performance as pa rticularized herein and kne v (or
recklessly disregarded ) that these adverse facts rendered the positive representations made :)y or
about Organogenesis and its business issued or adopted by the Company materially fals : and
misleading and/or otherwise actively participated in the fraudulent scheme alleged herein .
33 . The Individual Defendants , because of their positions of control and authority as
officers and/or directors of the Company, or relations with officers and/or directors, were a ale t o
and did control the content of the various SEC filings, press releases and other public state is Lents
pertaining to the Company during the Class Period . Each Individual Defendant was pro ' ided
with copies of the documents alleged herein to be misleading prior to or shortly after their
issuance and/or had the ability and/or opportunity to prevent their issuance or cause them .o be
corrected. Accordingly, each of the Individual Defendants is responsible for the accuracy,i f the
public reports and releases detailed herein and is therefore primarily liable for the represent ; ddons
contained therein and/or otherwise actively participated in the fraudulent scheme alleged her i ::in .
34. Each of the defendants is liable as a participant in a fraudulent scheme and c ; :•urse
of business that operated as a fraud or deceit on purchasers of Organogenesis common sto . k by
disseminating materially false and misleading statements and/or concealing material a&,'ers e
13
facts. The scheme: (i) deceived the investing public regarding Organogenesis' business,
operations, management and the intrinsic value of Organogenesis common stock ; (ii) enabliA the
defendants and Company insiders to sell over $68 .8 million worth of Company stock to inv . :stors
during the Class Period . Of this amount, defendants sold over 5 .78 million shares r ~' th e
Company's securities in a series of public stock offerings, private equity offerings and othe debt
and/or equity sales of Organogenesis stock for proceeds of over $68 .3 million; and (iii) c :iused
plaintiff and other members of the Class to purchase Organogenesis securities at artifa i .:ially
inflated prices .
PLAINTIFF'S CLASS ACTION ALLEGATION S
35 . Plaintiff brings this action as a class action pursuant to Federal Rule of Civil
Procedure 23(a) and (b)(3) on behalf of a Class, consisting of all those who purchas ; :d or
otherwise acquired the securities of Organogenesis between November 15, 1999 and Janua y 30,
2002 inclusive (the "Class") and who were damaged thereby . Excluded from the Cla: . ; are
defendants, the officers and directors of the Company, at all relevant times, members of their
immediate families and their legal representatives, heirs, successors or assigns and any ens ty in
which defendants have or had a controlling interest .
36 . The members of the Class are so numerous that joinder of all membi : :-s i s
impracticable. Throughout the Class Period, Organogenesis common shares were actively t : ided
on the AMEX . As of November 2, 2001, the Company had over 37.0 million shares issue :I and
outstanding . While the exact number of Class members is unknown to plaintiff at this tim : ., and
can only be ascertained through appropriate discovery, plaintiff believes that there are hur ; :.reds
or thousands of members in the proposed Class . Record owners and other members of the L'lass
may be identified from records maintained by Organogenesis or its transfer agent and m : .y be
14
notified of the pendency of this action by mail, using the form of notice similar to that
customarily used in securities class actions .
37. Plaintiff's claims are typical of the claims of the members of the Class is al l
members of the Class are similarly affected by defendants' wrongful conduct in violati : :n of
federal law that is complained of herein .
38 . Plaintiff will fairly and adequately protect the interests of the members r " the
Class and has retained counsel competent and experienced in class and securities litigation .
39 . Common questions of law and fact exist as to all members of the Clas an d
predominate over any questions solely affecting individual members of the Class . Amor :; the
questions of law and fact common to the Class are :
(a) whether the federal securities laws were violated by defendants' ai : is as
alleged herein ;
(b) whether statements made by defendants to the investing public durir :; the
Class Period misrepresented material facts about the business, operations and managemt, it o f
Organogenesis ; and
(c) to what extent the members of the Class have sustained damages ar,, a the
proper measure of damages .
40. A class action is superior to all other available methods for the fair and of ' . ;;ient
adjudication of this controversy since joinder of all members is impracticable. Furthermo e, as
the damages suffered by individual Class members may be relatively small, the expensc - and
burden of individual litigation make it impossible for members of the Class to indivic rally
redress the wrongs done to them . There will be no difficulty in the management of this acti ; :,n as
a class action.
15
SUBSTANTIVE ALLEGATION S
Background
41 . The Company_ Organogenesis was organized as a Delaware corporation in . .985,
and its principal offices are located at 150 Dan Road , Canton , Massachusetts 0 : :021 .
Organogenesis describes itself as a "tissue engineering firm" that designs, develop :: and
manufactures medical products containing living cells and/or natural connective tissue. For
Organogenesis, tissue engineering involves developing and manufacturing medical prc I ducts
containing actual living human cells .
42. Operations . Prior to the inception of the Class Period, Organogenesis app ; :ared
to be a Company with a very unique product, but a Company which was research-centri . and
which had little product manufacturing experience . Complicating matters, the Company's rain
product, Apligraf a "tissue replacement" therapy, discussed in more detail below, was diffic i :[It to
manufacture and required very specialized manufacturing procedures and techniques . As
evidence of the difficulties associated with Apligraf production surfaced during mid-199', the
Company was forced to recall several lots of Apligraf -- accounting for more than 10'-0 of
monthly production at that time -- for contamination reasons .
43. In addition to manufacturing issues, the marketing of Apligraf was also dii I icult
because, until early in the Class Period, Apligraf had not been approved for Medica . . or
Medicaid reimbursement -- leaving doctors with a vast array of red tape to get reimbursed fi i :- the
product. The manufacture and marketing of Apligraf proved so difficult that in the year pr . r to
the inception of the Class Period, sales of Apligraf were well below expectations. In fact, i'hen
the Company reported fiscal year 1998 results in March of 1999, Organogenesis rep . : rted
Apligraf sales of only $335,000 -- well below product sales of $1 .3 million that defendant : had
16
guided the market to expect . The result of these lower than expected sales was larger losse :, and
by the end of 4Q:98 the Company posted a loss of $0 .19 per share .
44. Moreover, as a result of these difficulties, during 1999, defendants reporter less
than consistent sales of Apligraf, but the trend overall, bolstered by defendants' guii I ,ince ,
appeared bullish . While sales in July 1999 dipped I 1 % below June sales, combined sales c I win g
those two months of over 1200 Apligraf units appeared to confirm defendants' represent .lions
that the Company was heading towards profitability . These increased sales, however, stiff I lef t
Organogenesis behind defend ants ' oft-repeated goal of being operationally profitable by 4 x . :99 ,
which would require sales of approximately 8,000 units per month at that time .
45. The manufacturing and marketing problems which limited the sale of AI .igraf
also raised issues concerning the funding of the Company and its ability to remain in opera ions
long enough to achieve profitability. In this regard, while the Company initially had issue( ver y
aggressive predictions , forecasting operational break-even by 4Q:99 and full funding b:1- that
time, by the inception of the Class Period, defendants had already revised these expectatiori : ; and
had taken a longer-term view towards profitability . By the inception of the Class Period, , id at
all times thereafter, however, defendants consistently reported that sufficient sources of fu din g
were available and that Organogenesis received or would receive sufficient profits from sa :,s of
Apligraf that the Company still expected to achieve profitability in the foreseeable near-ter n
46 . Funding Representations . Thus, by the inception of the Class Period, wl ile it
was fully disclosed that the Company would need to raise additional funding at some point a i th e
future to increase production and distribution, by this time and consistently thereafter, defen slant s
reported that Organogenesis had the necessary funding in place to allow it to achieve ; the
Company's stated, foreseeable near-term objectives . In fact, according to the Company's .999
17
Form 10-K, filed with the SEC on or about March 29, 2000, Organogenesis stated that, " utur e
capital comprised of product sales, research and development support payments and del - t an d
equity financings will be sufficient to fund future operations into 2001," and additional si : urces
could be relied on to fund operations thereafter.
47. Moreover , according to statements made by defend ants and filed with the SEC ,
while there could be "no assurance" that additional funding might not be req sired ,
Organogenesis' funding was already in place and sufficient . According to defendants, 1 : y the
inception of the Class Period, the Company was sufficiently funded barring only unfoii :.-seen
circumstances, unplanned contingencies, "delays," or unexpected "changes," such s, ; the
following :
• Delays in obtaining regulatory approvals of products, and timing of pi ductlaunches;
• Delays in commercial acceptance and reimbursement when product lau ~ :.chesoccur ;
• Changes in the progress of research and development programs ; and
• Changes in the resources devoted to outside research collaborations or prc ects,self-funded projects, proprietary manufacturing methods and advanced technologies .
48 . Thus, throughout the Class Period, defendants led investors to believe tha t
Organogenesis was able to manufacture Apligraf in sufficient quantities and that other sour :ics of
funding were available such that the Company would be able to achieve profitability i : :. the
foreseeable near-term . Defendants consistently reported that the Company had necessar. - and
available funding sources, from foreseeable sales of debt and equity to both private and j .iblic
investors which would allow Organogenesis to achieve defendants' plan for sufficiency . G : iitral
to this plan, was a key agreement with Novartis, Organogenesis' Apligraf marketing pa :ner,
which purportedly allowed defendants to access at least $20 million through the exercise of a
18
"put" option . This agreement purportedly would allow defendants to raise this money i .i . any
time, and thereby maintain a mega-million dollar "safety net" for the Company .
49 . Apligraf. As stated above, throughout the Class Period, Apligraf w~ , :, the
Company's only commercially available product . While Organogenesis has acquired ethe r
technologies, most if not all of the Company 's revenues were at all times generated from th,- sal e
of Apligraf. Apligraf has a structure similar to human skin and is described as a 'ski n
construct." The product's human skin-like properties allow this product to be used by docl : : rs to
aid in the healing of certain types of skin ulcers, and other epidermal injuries .' At all - .imes
throughout the Class Period, defendants were well aware that the Company's business r :.odel
was entirely dependent upon its ability to mass-produce Apligraf and market it to physici,, .iis as
an "off-the-shelf," cost-effective product that doctors could use on patients t :)sent
hospitalization .
50 . By the inception of the Class Period, Apligraf was approved by the FD - ', fo r
marketing in the United States for the treatment of venous leg ulcers and was pending apl oval
for diabetic leg ulcers . At that time and during the Class Period, Apligraf was a regi,,I :ered
trademark of Novartis, the Company's Apligraf marketing partner . At all times during the ."lass
Period, this marketing agreement with Novartis was consistently touted by defendants as a l ey to
the Company's profitability . According to defendants' consistent representations, the marl „ting
agreement with Novartis (both prior to and following the time of its revision) pro ''ided
Organogenesis with enough of the revenue split generated through Apligraf sales to allo ' th e
' According to Organogenesis, Apligraf has an organized, two-layered structure, much li Leskin, and features the key components of skin - the lower dermal cells (fibroblasts), the upperepidermal cells (keratinocytes) and its keystructural protein (collagen) . Unlike human skin,however, Apligraf does not contain structures such as blood vessels, hair follicles and sweat gl ridsor other cell types .
19
Company to grow operations and achieve profitable growth in the foreseeable near-term . 'T'hus,
by the inception of the Class Period, defendants represented that Apligraf sales were suff ;ient .
That impression was substantially reinforced when the Novartis agreement was alh :redly
amended during the Class Period to provide even more revenues to the Company .
51 . In addition to simply marketing Apligraf, Novartis was also a significant ow ier o f
Organogenesis shares, and during the Class Period owned as many as 2.8 million Cor parry
shares -- or over 6% of Organogenesis shares issued and outstanding . Novartis had acqui i ,-d its
shares in the Company through several private equity investments, as well as through curtain
funding agreements which purportedly allowed Organogenesis to sell stock to Novartis at prices
predetermined and at the election of the Company.
52. The purported ability of the Company to be able to sell stock to Novartis wa . : also
purportedly a critical part of Organogenesis' financing, because it should have al], fwed
defendants to raise money whenever necessary, up to $20 million in additional equity fines i Lcing
to any other necessary sources of debt or equity financing available to the Company . Again i„ this
financing was also very important to investors, because it provided a purported "safety nee" for
Organogenesis -- a reserve of cash which defendants could allegedly access as a last resort, The
Novartis put agreement was, therefore, during the Class Period, a critical part of defen+l ;rnts'
announced plan to achieve profitability and to avoid bankruptcy ,
53. At all times during the Class Period, therefore, Organogenesis represented iI . tat it
was able to make Apligraf commercially available in a cost-effective manner which, even 1 f the
Company was forced to incur losses at the early stages of development, would llow
Organogenesis to ramp up production and soon be able to fund operations from ales .
20
Defendants consistently represented both prior to and during the Class Period, the Compan, . was
sufficiently well funded to carry out defendants' business plan .
54. Unbeknownst to investors, however, throughout the Class Period, the Cori pany
was suffering from a host of undisclosed adverse factors which were negatively impacti ig it s
business and which would cause it to report declining financial results, materially less th, : .ii the
market expectations defendants had caused and cultivated . In particular :
• At all times during the Class Period, it was not true that defendants could at sieveprofitability through the sale of Apligraf under the terms, or even the revised terms, if theNovartis marketing agreement, which did not provide Organogenesis with enough if therevenues or profits provided through such Apligraf sales to offset the extremely higl costof production or to offset other undisclosed manufacturing problems such as def :,-,tiveproducts and recalls .
• Throughout the Class Period, undisclosed problems related to the manuf intureand marketing of Apligraf was leading to even higher costs and further red i .cingprofitability . Manufacturing problems and delays were retarding production scab andmarketing issues were reducing sales . As investors would only learn following the ;lassPeriod, the Company's own sales force was encountering resistance throughout that timeconcerning the cost and complexity of its products and the actual and/or perc : :iveddifficulties in physician reimbursement for Apligra £
• Throughout the Class Period, Organogenesis was underfunded and there w .is noreasonable basis to report that the Company could foreseeably fund oper, ii :ionsthroughout the Class Period, based on available sources of loans, debt and/or equity ales .Moreover, as defendants were well aware but failed to disclose, it was not true th t theCompany could force Novartis to provide the full complement of its fundir ~ g asdefendants consistently represented, as certain undisclosed conditions ex i 3ted .Organogenesis could not meet conditions precedent to Novartis' requirement to prvideat least $10 million of its purported commitment to the Organogenesis . It was no : truethat other sources of funding remained available to defendants so as to preserve corl :)rateviability .
• Throughout the Class Period, defendants failed to disclose that the highmanagement turn-over at the Company was having and would continue to h., .'ie adisruptive effect on the operations and oversight of Organogenesis, such that it wa ; alsonot foreseeable at any time during the Class Period that Organogenesis would be all le toachieve profitability in the near-term or to attain guidance sponsored and/or endorse ; I bydefendants .
• As a result of the aforementioned adverse conditions which defendants fail ;~d todisclose, throughout the Class Period, defendants lacked any reasonable basis to [aim
21
that Organogenesis was operating according to plan, that sufficient sources of fu idingwere achieved and/or available to Organogenesis or that the Company could ma iitainprofitability or even remain a viable entity in the foreseeable near-term .
55 . Defendants were motivated to and did conceal the true operational and fins i ::icial
condition of Organogenesis, and materially misrepresented and failed to disclose the ac Vers e
conditions that were adversely affecting Organogenesis throughout the Class Period, beca ;i .se it
enabled defendants and Company insiders to sell over 6 .2 million shares of Company :,cock
and/or securities valued at over $68 .8 million, prior to any disclosure to the market .
Defendants' Materially False and MisleadingStatements Made Durin the Class Perio d
56 . "Puzzle" Nears Completion . The Class Period begins on November 15, 999 .
On that day, Organogenesis published a release on Business Wire announcing financial r . suits
for the third quarter of 1999, the period ending September 30, 1999. For 3Q:99 Organogciiesis
reported total revenues of $946,000, equal to a net loss of $0 .21 per share, compared to a ne : loss
of $0.25 per share the prior quarter . According to the release, total expenses for 3Q :99 were
$7 .426 million, including one-time technology acquisition charges of $900,000, compares I to a
sequential loss of $8 .527 million. This release also quoted defendant Stein, as follows :
Apligraf is a revolutionary technology development to provide significantadvantages in wound healing . Alpigraf is FDA approved, well-received byphysicians and can be a highly cost-effective therapy for many patients . Thekey remaining piece of the puzzle is gaining broad, standardizedreimbursement. . . .
A subsequent release, dated 12/2/99, reported that Apligraf sales reached 755 units in 11/9
957. Following the publication of the Company's earnings announcement, the pr ::e of
Organogenesis rallied -- trading from a low of $6 . 81 per share on November 15, 1999, to , above
$12.30 per share on December 2, 1999 .
22
58. S50 Million ShelfRegistration . Taking full advantage of the artificial inflation
in the price of Organogenesis stock caused by the publication of defendants' false and mat( rially
misleading statements, defendants raced to the market to register for sale at least $50 mill )n in
mixed securities in a "shelf registration ." The shelf registration would allow the Company -I o sell
up to 3 million shares of common stock either directly or through convertible securities t the
sole discretion of the Company .
59 . On January 13, 2000, defendant Laughlin presented at the Hambrecht & Quist
Annual Healthcare Conference held in San Francisco, California, where he reiterated fi : rmer
guidance and where he further conditioned investors to believe that the Company was ope Iting
according to plan . The following day, January 14, 2000, defendant Laughlin also provi :led a
widely circulated interview, with The Wall Street Transcript, during which he also represcirted,
in part, that "we're not concerned that we won't ultimately be successful," despite the far that
the adoption of Alpigraf had, to that point, "gone slower than we'd like." (Emphasis added)
60. 3Q :99 Form 10-Q. On or about February 14, 2000, defendants filed wit I i th e
SEC the Company's financial results for 3Q :99, the period ended September 30, 1999, pui, :uant
to its Form 10-Q signed by defendants Laughlin and Lopolito . The Company's 3Q :99 Fors 110-
Q contained the same materially false and misleading financial information as had previ : :,usly
been announced on December 15, 1999, in addition to the following :
61 . Basis of Presentation :
The accompanying unaudited consolidated financial statements ofOrganogenesis Inc ., have been prepared in accordance with generallyaccepted accounting principles for interim financial information and withthe instructions to Form 10-Q and Article 10 of Regulation . . . . In theopinion of management, the accompanying consolidated financialstatements include all adjustments , consisting of normal recurringadjustments, necessary for a fair presentation of the financial position,
23
results of operations and changes in cash flows for the periodspresented. . . . [Emphasis added] .
62. In addition to the foregoing, Organogenesis' 3Q :99 Form 10-Q also charact( : ized
rising costs during 3Q :99 as one-time events and predicted that costs would foreseeably rf :nain
in line with guidance, as follows :
Production costs exceeded product sales due to the start-up costs of newproduct introduction and the high costs associated with low volumeproduction . We expect production volume to increase and our margins toimprove . We expect to continue to expand manufacturing operations andadvance the product pipeline during the remainder of 1999 and into 2000 .[Emphasis added . ]
Regarding the $6.2 million payment for the conversion of the Series C convertible preJ ;;rred
shares, the 3Q:99 Form 10-Q reported the existence of this payment, but it did not identi ' the
recipients .
63 . The statements contained in Organogenesis' November 15, 1999 releast and
those statements made by defendants to analysts, investors and the press during the p .:riod
November 13 - 14, 1999, referenced above, were each materially false and misleading whe n
made, and were known by defendants to be false or were recklessly disregarded as such th( :eby,
for the following reasons , among others :
(a) At all times during the Class Period, it was not true that defendants ~ : Duld
achieve profitability through the sale of Apligraf under the terms, or even the revised tern : 3, of
the Novartis marketing agreement, which did not provide Organogenesis with enough c !'the
revenues or profits provided through such Apligraf sales to offset the extremely high cc .;t of
production or to offset other undisclosed manufacturing problems such as defective product . ; and
recalls ;
(b) That, at all times during the Class Period, unbeknownst to inve tors ,
pursuant to the terms of the Novartis sales and distribution agreement, the Company was lsing
24
money on each sale of Apligraf, such that it was impossible to achieve profitability or open :e the
Company without the constant and never-ending need to raise money to fund operations ;
(c) Throughout the Class Period, undisclosed problems related ti th e
manufacture and marketing of Apligraf were leading to even higher costs and further reel icing
profitability. Manufacturing problems and delays were retarding production scale and marl .Jrting
issues were reducing sales. As investors would only learn following the Class Perio : , the
Company's own sales force was encountering resistance throughout that time due to the co : : : and
complexity of its products and the actual and/or perceived difficulties in phy ; .ician
reimbursement for Apligraf;
(d) Throughout the Class Period, Organogenesis was underfunded and her e
was no reasonable basis to claim that the Company could foreseeably fund operations throu : ;bout
the Class Period, based on available sources of loans, debt and/or equity sales . Moreov : :r, as
defendants were well aware but failed to disclose, it was not true that the Company could :orce
Novartis to provide the full complement of its funding as defendants consistently represent . d, as
certain undisclosed conditions existed which Organogenesis could not meet . These cond :lions
were precedent to Novartis' requirement to provide at least $10 million of its purl :)rted
commitment to Organogenesis . Thus, it was not true that other sources of funding rem :i ined
available to defendants so as to preserve corporate viability ;
(e) Throughout the Class Period, defendants failed to disclose the Comp : iny' s
high management turn-over which had and would continue to have a disruptive effect o i :L the
operations and oversight of Organogenesis, such that it was not foreseeable at any time dl siring
the Class Period that Organogenesis would be able to achieve profitability in the near-te n or
meet the projections sponsored and/or endorsed by defendants ; and
25
(f) As a result of the aforementioned adverse conditions which defer slant s
failed to disclose, throughout the Class Period, defendants lacked any reasonable basis to ~ :lairn
that Organogenesis was operating according to plan, that sufficient sources of funding were
achieved and/or available to Organogenesis or that the Company could maintain profitabi,L ty or
even remain a viable entity in the foreseeable near-term .
64 . $9.4 Million Equity Sale. One month later, on February 24, 2000, with
Organogenesis stock trading at almost $17 .00 per share, defendants issued a release annou i :.cing
that Organogenesis had completed the sale of over 688,000 shares of common stock for ;ross
proceeds of $9.4 million. According to defendants, this was a remarkable accomplishment ;!riven
that it allowed them to raise more money than defendants had originally planned - and
presumably placed Organogenesis in a position of having more money than needed to .; iilfill
defendants' near-term objectives . According to the Company's release, defendants' purl :irted
"goal" had been to raise $6.2 million but the offering priced at $14 per share was over-
subscribed . This placement raised the total number of Organogenesis shares outstanding tc 31 .3
million from 30.6 million .
65. At the time of this offering, the Company stated that proceeds from the s ;:il .e of
these shares would enable, among other things, the retirement of $6 .2 million in preferred ; lock .
Defendants created the impression that the redemption of Organogenesis' preferred stocl was
necessary to bolster the Company's debt and equity ratings . The Company's February 24, :'.000
release quoted defendant Tuck, who exhibited a complete knowledge of Organoge i-Isis'
financial and operational performance, stating that, "The completion of this shelf-ofil i :-ring
removes any concern among the investment community about the retirement of our $6.2
26
million of preferred stock." No disclosure was made as to the identity of the owners of these
retired preferred shares .
66. Moreover, the following day, February 25, 2000, defendants also issued a r :-lease
announcing that they had raised an additional $1 .4 million through the sale of an add: .ional
100,000 shares to satisfy an additional over-subscription commitment . This sale broug it the
total February 2000 Offering proceeds to over $10 .8 million, and the total number of :Iiares
issued and outstanding to 31 .4 million .
67. $16 Million In Equity Sales . Taking further advantage of the artificial ini I atio n
in the price of Organogenesis stock defendants' misrepresentations and omissions had cause .A, on
March 9, 2000, defendants sold another 300,000 shares of Organogenesis common stc :,k at
approximately $17.60 per share in a private-placement, thereby realizing another $5.27 m Ilion .
Including this latest offering, the Company had issued a total of 1 .088 million shares in les . than
20 days in combined placements valued at over $16 million .
68 . On March 7, 2000, shares of the Company rallied to a Class Period high of ove r
$22.37 per share on substantial volume of over 1 .5 million shares, driven by managen ii,- nts'
optimistic guidance , and the false and misleading assurances that the Company was ope ,sting
according to plan -- capable of achieving pro fitability in the near-term -- and that the Con i pany
had raised enough money to fund operations . Within days, however, on March 13, : .000,
defendant Stein suddenly and unexpectedly announced that he was resigning from the Bo< : d of
the Company. Defendant Stein had only accepted the position of Chairman Emeritus c I .' the
Board in J anuary 2000 , after resigning as Chairman and Chief Executive Officer effi ;dive
January 1 , 2000 . At the time of his resignation , no disclosure was made regardini! the
27
Company's inability to generate sufficient funds from operations or sources of debt or eqI ty to
allow Organogenesis to achieve profitability, or to foreseeably remain as a viable business .
69. On or about March 21, 2000, as President and CEO of Organogenesis, deft dant
Laughlin showcased a presentation of the Company at the New York Society of Seci irities
Analysts 4tl' Annual Health Care Conference, held in New York City .
70. $6.2 Million Series C Redemption . Consistent with defendants' irlie r
announcement, on March 27, 2000, Organogenesis issued a release which reporter that
defendants had opted to use at least $6 .2 million of its recently raised cash to pay fi ir the
redemption of the Company's outstanding Series C convertible preferred stock . According Io the
Company's release, the Series C convertible stock had a mandatory conversion date of Mari Hi 26,
2000, but these shares were redeemable in either common stock or cash, at the opti in of
Organogenesis. The Company's release did not reveal why the cash election was chos . n by
Organogenesis or who received the cash payments as a result of this redemption .
71 . 4Q and FY:99 Results . On March 31, 2000, Organogenesis issued a rc,ease
published on Business Wire which purported to announce financial results for the fourth q . .arter
and year end 1999 . According to the Company, results for 4Q and FY:99 were "consisten , with
the transition in progress from a research focused company to a research based open, ,rting
company with a novel medical product in introduction phase," in addition to statin :! . the
following :
For the year ended December 31, 1999, revenue from product sales torelated party and others was $1 .8 million, compared with $1 . 1 million in1998 . Total revenues were $3.6 million for 1999 , compared with $9 .0million in 1998, which included $6 .8 million in milestone payments fromNovartis Pharma AG. Total expenses ( including manufacturing, researchand development , and general and administrative costs ) were $31 .9 millionin 1999 , compared with $23 .0 million in 1998 . Net loss was $0 .93 per share
28
(or $28 .4 million) for 1999 compared with a net loss of $0 .48 per share (or$14.0 million) for 1998 .
The increase in expenses was primarily due to: strengthening ouremployee base through additions to our production, research and supportteams; costs to support publication studies and other sponsored programs, aswell as increased activities in our corporate communications and businessdevelopment functions; interest expense on the convertible debt issued lastMarch; expanding our production and warehouse capacity whileconsolidating our administrative space ; and the acquisition of intellectualproperty and assets from Baxter Healthcare Corporation . [Emphasis added . ]
In addition to the foregoing, defendant Laughlin also used this release to condition invest ors to
believe that the Company was operating according to plan and was actually taking st( :)s to
reduce operating costs, as follows :
Prior to the US commercialization of Apligraf, our corporate focus neededto be on supporting the validity of the product concept through solidresearch, clinical trials and manufacturing consistency . . . . Now, as sales ofApligraf begin to develop, our focus must include driving down per unitmanufacturing costs through the development and implementation ofmore efficient methods of production. At the same time, we are continuingto support other programs in our pipeline - the VITRIX(TM) living softtissue replacement product, the vascular graft, the liver assist device -important to our longer term growth . [Emphasis added .]
72. FY:99 Form 10-K. The same day, March 31, 2000, Organogenesis also filed
with the SEC its financial results for full year 1999, pursuant to Form 10-K signs :1 by
defendants Laughlin, Erani and Lopolito, among others . In addition to repeating many c 7 the
same misrepresentations made in the Company's release, the 1999 Form 10-K also stated that,
Organogenesis "believe[s] that future capital comprised of product sales, research and
development support payments and debt equity financings will be sufficient to fund J : tore
operations into 2001 . " Following the filing of Organogenesis' 2000 Form 10-K, shares r F the
Company traded as high as $12.60 per share on March 31, 2000 .
73 . The statements made by defendants and contained in the Company's 3/ : 1/00
release and 1999 Form 10-K, reproduced herein supra, were each materially false and
29
misleading and were know by defendants to be false at that time, or were recklessly disre€ trde d
as such for the reasons stated herein in ¶ 63, supra .
74. Stein Stock Registration . Taking full advantage in the artificial inflation i th e
price of Organogenesis which defendants' false statements had caused, on or about Apr . .l 21,
2000, defendant Stein caused the Company to file with the SEC a Registration State : anent
allowing him to register for sale over 732,000 shares of his personally held Organogenesis ; Lock .
The Registration Statement, signed by defendants Laughlin, Lopolito and Erani, among c hers,
stated in part the following :
CALCULATION OF REGISTRATION FE E
Title ofsecurities to be ProposedAmount of maximum Proposedregistered Amount to be maximumregistration fee registered offering price agreateCommon Stock,5.01 par value 732,423 $9.4375 $6,912,242 .1 0$1,824.83
This Prospectus is part of a Registration Statement we filed with theSecurities and Exchange Commission for registration of up to 732,423shares of Common Stock for sale by the selling stockholder listed on page12 of this prospectus .
Each of the shares to be sold either were issued upon the exercise of optionsheld by the selling stockholder . The selling stockholder may offer hiscommon stock through transactions on the American Stock Exchange ; inprivate transactions at current market prices; or at negotiated prices .
We will not receive any of theproceeds from the selling stockholder's saleof his common stock.
30
USE OF PROCEED S
We will receive no net proceeds from the sale of the common stock . Allproceeds will be realized by the selling stockholder.
SELLING STOCKHOLDE R
The selling stockholder, Herbert M. Stein, is offering shares which havebeen acquired by him upon the exercise of options granted under a stockoption grant. Mr. Stein previously served as Chairman and Chief ExecutiveOfficer of the Company until his retirement on December 31, 1999 and as amember of the Board of Directors of the Company until March 17, 2000 .The following table lists the selling stockholder and other informationregarding beneficial ownership of the common stock by the sellingstockholder as of March 29, 2000 :
Number of Shares Number of Shares Percentage of C lass toBeneficially Owned Number of Shares Beneficially Owned be Beneficially Owne d
Name Prior to the Offering Being Offered After Offering After Q : rfering
Herbert M . Stein 2,086,597 723,423 1,363,174 4.0'
This registration represented almost half of defendant Stein 's personal holdings (exci .i .ding
approximately 1 .1 million shares of common stock held by H .M. Stein Associates to 'i :, .hich
defendant Stein disclaims beneficial ownership) .
75 . 1Q : 00 Results . On May 11, 2000 , Organogenesis issued a release publish . :d on
Business Wire which purported to announce financial results for the first quarter .'000 .
Defendants again stated that the Company's quarterly results were "consistent wit] the
Company's ongoing transition from being a research company to being a research- eased
operating company," in addition to stating the following :
Revenue from product sales to related party and others were $646,000 forthe first quarter of 2000 compared with $543,000 for the fourth quarter of1999. The growth in product revenue was due to increased sales ofApligraf(R) to Novartis . Total revenues were $1,084,000 for the firstquarter of 2000 compared with $1,015,000 for the fourth quarter of 1999 .Total costs and expenses were $7,770,000 for the first quarter of 2000compared with $9,368,000 for the fourth quarter of 1999, which hadincluded disproportionately higher occupancy and financing costs . Net loss
31
was $0 .21 per share (or $6,686,000) for the first quarter of 2000 comparedwith $0.27 per share (or $8,353,000) for the fourth quarter of 1999 .
The first quarter of 2000 product revenues of $646,000 compare with$318,000 for the first quarter of 1999 . The total revenues of $1,084,000compare with $679,000 for the same quarter in 1999 and the total costs andexpenses of $7,770,000 compare with $6,605,000 for the same quarter in1999. The net loss of $0 .21 per share (or $6,686,000) compares with a netloss of $0.19 per share (or $5,926,000) for the same quarter in 1999 .
This release also quoted defendant Laughlin, as follows :
Key to Apligrafsales development are two factors: obtaining approval fordiabetic foot ulcers and gaining standardized Apligraf reimbursement. . .The Advisory Panel's recommendation earlier this week is a keyachievement towards the diabetic foot ulcer indication . We are equallycommitted to gaining standardized reimbursement for Apligraf. [Emphasisadded . ]
76. 1Q :00 Form 10 -Q . On or about May 15, 2000, defendants filed with the SE 1 .: the
Company's financial results for 1 Q :00, the period ended March 31, 2000, pursuant to Form 10-Q
signed by defendants Laughlin and Arcari . The Company's I Q:00 Form 10-Q contains d the
same materially false and misleading financial information as had previously been announc . :d on
May 11, 2000, in addition to reporting, in part, the following :
Basis of Presentatio n
The accompanying unaudited consolidated financial statements ofOrganogenesis Inc . have been prepared in accordance with generallyaccepted accounting principles for interim financial information and withthe instructions to Form i 0-Q and Article 10 of Regulation S-X. . . . In theopinion of management, the accompanying consolidated financialstatements include all adjustments , consisting of normal recurringadjustments, necessary for a fair presentation of the financial position,results of operations and changes in cash flows for the periodspresented. . . .
Costs and Expenses
Cost of product sales: Cost of product sales was $1,191,000 for the threemonths ended March 31, 2000, compared to $603,000 for the same perio d
32
in 1999, due to increased unit sales of Apligraf to Novartis . Cost of productsales includes the direct costs to manufacture and package Apligraf and anallocation of our production related indirect costs . Cost of product salesexceeded product sales due to the start-up costs of new product introductionand the high costs associated with low volume production. We expectproduction volume to increase and our margins to improve . We expect tocontinue to expand production operations during 2000 . [Emphasis added . ]
77_ The statements made by defendants and contained in the Comp any ' s 5i .1100
release and IQ:00 Form 10-Q, reproduced herein supra, were each materially falst : and
misleading and were known by defendants to be false at that time, or were recklessly disreg ;irded
as such for the reasons stated herein in ¶63, supra.
78 . On or about June 14, 2000, as President and Chief Executive Offic ;:r of
Organogenesis , defendant Laughlin showcased a presentation of the Company at the A rinual
Sachs Healthcare Conference in Laguna Niguel, CA .
79 . On June 20, 2000 , Organogenesis issued a release which announced that the FDA
had given final approval of Apligraf treatment for diabetic foot ulcers in addition to its pre -,ious
indication of venous leg ulcers . While no changes had been made to Apligraph for this n . ;irket
application, the FDA indication purportedly allowed Organogenesis to expand its market h e to
include this second group of foot ulcer sufferers . On this news, Organogenesis stock tract, :rd as
high as $12.75 per share in intra-day trading .
80. Laughlin on CNBC Power Lunch . On June 25, 2000, defendant Lai . hlin
appeared on the widely disseminated cable financial news show "Power Lunch," on the C BC
network. When asked by the CNBC interviewer whether Organogenesis had the ability to c :Lain
profitability through sales of the Company's only product Apligraph, defendant LaL, ;hlin
responded, by stating that Organogenesis "can become profitable and will become projl able
with Apligraph alone. The two main drivers of that are diabetic foot ulcer approval ,hich
33
happened last week and getting that standardized Medicare reimbursement, which has beer slo w
going . We're optimistic . . . ." (Emphasis added)
81 . Apligraf Sales 7/00 . On August 2, 2000, Organogenesis issued a release -, hich
purported to announce Apligraf sales for the month of July 2000. According to this release„ sale s
of Apligraf had declined substantially from the prior month, reaching only 912 units in July .
According to defendant Laughlin, however, the decline in sales was the result of the "su inne r
vacation period" and not the result of any production problems within the Company o i any
issues with product quality or product acceptance . Rather, according to defendant Lau .hlin,
slow July 2000 sales were the result of one-time events, that would be resolved as a res .ilt of
Organogenesis receiving approval of Apligraph for foot ulcers and the recent approv .1 by
Medicare for reimbursement, which would allow customers to recover the cost of Apligraf .
82. 2Q :00 Results . On August 14, 2000, Organogenesis issued a release pub91 i she d
on Business Wire which purported to announce financial results for the second quarter .000 .
This quarter defendants stated that the Company was "in the process of transitioning from Being
a research company to becoming an operating company with a strong research base," in adc ition
to stating the following :
For the second quarter of 2000, total revenues were $6 .4 million comparedwith $0.9 million for the same quarter in 1999 . The 2000 revenues include a$5 million milestone payment from Novartis that was received in Marchand earned in June with the approval of Apligraf for diabetic foot ulcers .Total costs and expenses were $8 .5 million during the second quarters ofboth 2000 and 1999 . The 1999 expenses included a non-cash charge of $0 .9million for a technology-related acquisition, while the 2000 expenses showmodest increases across each expense category . Net loss was $2 .0 million($0.06 per share), compared with a net loss of $7 .6 million ($0 .25 per share)for the same quarter in 1999 .
The Company reportedly had $22 .3 million in cash , cash equivalents and investments at Jur ~ :: 30 ,
2000.
34
83 . In addition to reporting the following, the August 14, 2000 release was alsc use d
by defendant Laughlin to condition investors to believe that Organogenesis had achieved c ; :rtain
milestones such that it was foreseeable that the Company could achieve profitability in the iiear-
term. In this regard, defendant Laughlin was quoted in the August 14, 2000 release, as follo, :rs :
When we announced our first quarter results three months ago, we statedour commitment to achieving two important drivers of Apligraf sales : FDAapproval for diabetic foot ulcers and Medicare reimbursement for theproduct's cost. We now have tangible achievements in both areas . Apligrafwas approved for diabetic foot ulcers in June and its marketing waslaunched by Novartis in July. Effective this month, Apligraf qualifies forMedicare reimbursement when used in the hospital outpatient setting, suchas a hospital-affiliated wound care center . There has also been progress ingaining Medicare reimbursement for Apligraf applied in the doctor's office,with additional activities underway. [Emphasis added . ]
84. 2Q :00 From 10 -Q . The same day , August 14, 2000, defendants also filed with
the SEC the Company's financial results for 2Q:00, the period ended June 30, 2000, pursu nt to
Form I0-Q signed by defendants Laughlin and Arcari . The Company's 2Q :00 Form 10-Q
contained the same materially false and misleading financial information as had been previ ;,usly
announced, in addition to reporting, in part, the following :
Basis of Presentatio n
The accompanying unaudited consolidated financial statements ofOrganogenesis Inc . have been prepared in accordance with generallyaccepted accounting principles for interim financial information and withthe instructions to Form 10-Q and Article 10 of Regulation S-X . . . . In theopinion of management, the accompanying consolidated financialstatements include all adjustments , consisting of normal recurringadjustments, necessary for a fair presentation of the financial position,results of operations and changes in cash flows for the periodspresented. . .
COSTS AND EXPENSES
Cost of product sales: Cost of product sales was $1,243,000 and$2,434,000 for the three and six months ended June 30, 2000, compared t o
35
$1,126,000 and $1,730,000 for the same periods in 1999, due to increasedunit sales of Apligraf to Novartis . Cost of product sales includes the directcosts to manufacture and package Apligraf and an allocation of ourproduction related indirect costs . Cost of product sales continues to exceedproduct sales due to the high costs associated with low volume production.We expect production volume to increase and our margins to improve. Weexpect to continue to expand production operations during 2000.[Emphasis added.]
85 . Apligraf Sales 3Q:00 . On October 3, 2000, defendants published a relea . :e on
Business Wire which reported record Apligraf sales for September and 3Q :00 -- with 3Q :00, :3ales
exceeding 3,000 units . According to this release the Company sold 1081 units in 9/00 and, tota l
of 3,232 units during 3Q :00. In addition to reporting the foregoing, this release also q .ioted
defendant Laughlin who stated that," Third quarter Apligraf achievements. . . .lait' th e
foundation for future sales development. " (Emphasis added)
86 . The statements made by defendant Laughlin during the June 25, 2000 C 'JB C
interview and other statements made by defendants and contained in the Company's July 2, 2000
release and 2Q :00 Form 10-Q, reproduced herein supra, were each materially falsf an d
misleading and were know by defendants to be false at that time, or were recklessly disreg irde d
as such for the reasons stated herein in ¶63, supra .
87. 3Q :00 Results. On November 14, 2000, Organogenesis issued a rf leas e
published on Business Wire which purported to announce financial results for the third qi arter
2000. Again, defendants heralded the achievements of Apligraf, reporting that Organoge iesis
was still "in the process of transitioning from being a research Company to becomir l an
operating Company with a strong research base ." This release also stated, in part, the follow :ig :
For the three months ended September 30, 2000, total revenues were $1 .4million compared with $0 .9 million for the same quarter in 1999 . Theincrease was due to increased product sales to related party and others andincreased income from grants and interest . Total costs and expenses were$8 .3 million during the third quarter of 2000 compared with $7 .4 million forthe same quarter in 1999 . The increase was due to increased cost of produc t
36
sales, research and development expenses, interest expense and general andadministrative expenses . Net loss was $6.9 million ($0.20 per share),compared with a net loss of $6.5 million ($0 .21 per share) for the samequarter in 1999 .
In addition to the foregoing, defendant Laughlin was also quoted in this release as conditi inin g
investors to believe the following :
This summer we made important progress in several areas central toApligraf sales development . Apligraf was approved and launched fordiabetic foot ulcers, qualified for Medicare reimbursement when used in thehospital outpatient setting and marketer Novartis expanded the field forceselling the product . We believe the Apligraf sales growth seen in the thirdquarter is the beginning of the effect of these achievements on salesdevelopment . While unit volumes are still small, which adversely affectsour cost of production, the trend is encouraging .
88. 3Q:00 Form 10-Q. The same day, November 14, 2000, defendants also file d
with the SEC pursuant to Form 10-Q the Company's financial results for 3Q :00, the I :!riod
ended September 30, 2000, signed by defendants Laughlin and Arcari . The Company's " ,x :00
Form 10-Q contained the same materially false and misleading financial information a ; had
previously been announced, in addition to reporting, in part, the following :
Basis of Presentation
The accompanying unaudited consolidated financial statements ofOrganogenesis Inc . have been prepared in accordance with generallyaccepted accounting principles for interim financial information and withthe instructions to Form 10-Q and Article 10 of Regulation S-X . . . . In theopinion of management, the accompanying consolidated financialstatements include all adjustments , consisting of normal recurringadjustments, necessary for a fair presentation of the financial position,results of operations and changes in cash flows for the periodspresented. . . .
* * $
COSTS AND EXPENSES
Cost of product sales: Cost of product sales was $1 ,310,000 and$3,744,000 for the three and nine months ended September 30, 2000,
37
compared to $969,000 and $2,699,000 for the same periods in 1999, due toincreased unit sales of Apligraf to Novartis . Cost of product sales includesthe direct costs to manufacture and package Apligraf and an allocation ofour production related indirect costs . Cost of product sales continues toexceed product sales due to the high costs associated with low volumeproduction . We expect production volume to increase and our margins toimprove. [Emphasis added . ]
89. Apligraf Sales 11/00 . Later, on December 4, 2000, Organogenesis annoi pace d
that November sales of Apligraf were 1488 units -- a new record monthly high . In additioi , thi s
release again quoted defendant Laughlin who stated that, "We are clearly beginning ti . see
acceleration in the growth of Apligraf sales . October and November establish a new, h i ;her
sales base on which to build . While it is difficult to predict how the December holidays wil l
impact sales, we expect to begin seeing in the first quarter the impact of the additional sale s
representatives that started this past summer ." (Emphasis added )
90. The statements made by defendants and contained in the Company's Octol' :,~r 3 ,
2000 and November 14, 2000 releases and in the 3Q :00 Form 10-Q, reproduced herein s i ;pra,
were each materially false and misleading and were know by defendants to be false at that :ime,
or were recklessly disregarded as such for the reasons stated herein in ¶63, supra .
91 . 500 ,000 Share Repurchase . On December 6, 2000, defendants issued a rE ease
which announced that the Board of the Company had authorized the repurchase of up to 50, 1,000
shares of Organogenesis common stock -- "at the discretion of management ." Accordi ig to
defendant Laughlin, the decision to purchase the Company's stock was made by the 1 : oard
because, "Our Board is sensitive to shareholder dilution and views current market conditic i, rs as
an opportunity to purchase shares that the Company considers to be undervalued in vii- w of
our prospects ." (Emphasis added) In addition, defendant Laughlin also stated that, "the de( sion
to authorize a stock buyback program demonstrates the confidence our Board has ii . the
38
Company's future ." At the time of this announcement, shares of the Company were trad', ag at
approximately $8 .00 per share .
92. Apligraf Sales January 2001 . On February 5, 2001, Organogenesis anno i i :riced
that Apligraf sales had reached another record in January 2001, with 1771 units sold durin,, . . that
period. In addition, this release again quoted defendant Arcari who stated that, "We are pLased
with the acceleration being seen in Apligraf sales growth."
93. Laughlin on CNBC Power Lunch February 27, 2001. On February 26, . :001 ,
Organogenesis issued a release which announced the broadening of its 1996 marl ,stin g
agreement with Novartis Pharma AG -- an agreement which purportedly gave Organogenes i,L th e
right for three years to sell Novartis up to $20 million in equity . Under the purported terr is o f
this deal, Organogenesis would also get funding from Novartis to upgrade the Compiny' s
manufacturing plants and equipment . The following day, February 27, 2001, defendant Lai ;hlin
appeared on nationally televised cable news show CNBC Power Lunch, during which hr was
interviewed by Bill Griffeth, and stated, the following :
GRIFFETH: What kind of an increase in revenue do you expect from thisexpansion of the deal with Novartis?
LAUGHLIN: Let me just run through the deal . And you are right, it is aturning pointfor us. It is a major improvement in our economic situation .Unfortunately, I can't give you the precise details of the deal but let me -- -
LAUGHLIN: [L]et me tell you the major elements of what it is . We havegranted Novartis the rights to two additional living tissue products, one thatwill be entering clinical trials in the next 30 to 60 days and one that is inresearch . In exchange for that, we will receive a substantial increase in thepercentage of the revenue for our living tissue product, which is actually onthe market today, called Apligraf . We will also receive funding for anumber of different areas which will enable us to expand our business,get into additional markets and drive down our costs . We also received a$20 million stock put . So any time during the next three years we are ableat our discretion and our option to sell Novartis $20 million of shares . Wemay or may not do that, but it is wonderful safety net to have in ourpocket.
39
GRIFFETH: Right. Now, as far as the product agreement goes, though, Iknow you are meeting with Wall Street analysts to talk about this . Are youraising guidance, though, as far as revenue for this year as a result of this?
LAUGHLIN : What we are doing and the thing people have been mostinterested in is giving them guidance on our profitability. What we now feelwith the increased revenue, with the funding support that we will get, weare now targeting to pass through break even and reach profitability inthe second quarter ofnextyear - sorry, the third quarter of next year.
GRIFFETH : Third quarter of next year. OK. And as a result of this, I amcurious, I mean are you finding or at least receiving approval for newapplications for Apligraf? I am wondering why Novartis is doing this now . Iknow I should ask them but maybe you can provide some guidance on that .
LAUGHLIN: I think they are truly convinced that there is majorbusiness here . . . . .Everything is coming together. I think they are saying,yes, this is working . This is going to be a very big business . Let's get into itdeeper. Let's commit to the business .
GRIFFETII: Now and you factor, when you provide this guidance forbreak even , is that a part of that guidance of the anticipated approval ofthose products and when they might be available for market?
LAUGHLIN : As we look into the things that go into our break even weare targeting to reach break even with or without those approvals . Onething that we will hit before break even is we hope to be approved forlaunch into the European market in approximately the second quarter ofnext year. [Emphasis added . ]
At the time of this interview shares of Organogenesis traded at above $12 .00 .
94. The statements made by defendant Laughlin during the February 27, 2001 ( 'IBC
interview and those statements made by defendants and contained in the Company's Febru ry 5 ,
2001 release, reproduced herein supra, were each materially false and misleading and were 1 :.now
by defendants to be false at that time, or were recklessly disregarded as such for the re :i .sons
stated herein in ¶63, supra .
95 . Needham Report. Following defendant Laughlin's well received ('NB C
appearance , analysts at Needham & Co . issued a report on Organogenesis , initiating a "lI UY"
40
rating and a near term price target of $18 per share on Organogenesis stock, and static : :. the
following :
INVESTMENT OPINION
We are initiating coverage of Organogenesis Inc . with a BUY rating and a12-month target price range of $16-$18. Management of skin disordersrequiring tissue replacement represents a major unmet need. A leader in itssegment of the $400B healthcare arena of regenerative medicine, ORG hasdeveloped Apligraf currently approved for two of the most common chronicwounds - venous stasis ulcers and diabetic foot ulcers . . . Apligraf salescontinue to break volume records , assisted by the recent approval fordiabetic foot ulcers as well as expanded coverage by Medicare in August2000 . . . ORG's off-the-balance sheet strength such as the recentlyexpanded relationship with Novartis, the enhanced management teamunder CEO Philip Laughlin (formerly President of Cardiac SurgeryBusiness at Medtronic), and the proven scientific team will help promotethe product portfolio.
A Compelling Valuation. We believe ORG is currently undervaluedcompared to its peers in the regenerative medicine biology space .
Applying two methods of valuation (market capitalization to revenue ratioof l lx as well as PIE ratio of 35x) to our 2004 estimates and discounting
back at 10% annually, we arrive at a 12-month target range of $16-$18.[Emphasis added . ]
96 . Apligraf Sales 2/01 . On March 5, 2001 , Organogenesis announced that sa ;.s of
Apligraf had reached another monthly record, with 1729 units sold in February 2001 In
addition, this release again quoted defendant Arcari who stated that, "Apligraf sales are she wing
sustained growth acceleration . Average daily sales in February surpassed those in Januar! , and
both are ahead of the level seen in our record fourth quarter . We are particularly pleases with
this acceleration, because under the recently amended agreement with Noy ;rrtis,
Organogenesis now receives significantly higher payments for Apligraf." (Emphasis adder )
97. 4Q and FY:00 Results . On March 30, 2001, Organogenesis issued a n leas e
published on Business Wire which purported to announce financial results for the fourth qi arter
and full year 2000, as follows :
41
For the three months ended December 31, 2000, total revenues were $1 .5million compared with $0.9 million for the same quarter in 1999 . . . . Totaloperating costs and expenses were $8.5 million during the fourth quarter of2000 compared with $8.9 million for the same quarter in 1999 . . . . Net losswas $7 .4 million ($0 .21 per share) for the fourth quarter of 2000 comparedwith a net loss of $8 .4 million ($0 .27 per share) for the same quarter in1999 .
For the year ended December 31, 2000, total revenues were $10 .2 millioncompared with $2 .7 million in 1999 . . . . The 2000 full-year revenues include
a $5 million milestone payment from Novartis for our achievement of FDA
approval of Apligraf for diabetic foot ulcers . Full-year revenues also include$1 .1 million in research and development support from Novartis recognized
in 2000 under SAB 101 . Total operating costs and expenses were $31 .6
million in 2000 compared with $30 .6 million in 1999 . . . . Net loss was $22 .3million ($0 .66 per share) in 2000 compared with a net loss of $28 .4 million
($0.93 per share) in 1999. When the one-time cumulative effect charge
against income due to adoption of SAB 101 is included, the 2000 net loss
becomes $28 .6 million ($0 .85 per share) .
In addition to the foregoing, defendant Laughlin also stated that defendants were also keel ng a
tight control over expenses and costs and that Apligraf sales were driving revenues, as follol, -s :
Our increased product revenue in the fourth quarter reflects a significantincrease in our unit sales growth rate, compared to the prior quarter. Ourfirst quarter 2001 financials will show an important increase in revenuedue to a continuation of this higher unit growth rate as well as thesignificantly higher revenue per unit which we now receive from Novartis .We are keeping a tight control on our corporate expenses whileimplementing programs to reduce our manufacturing costs. [Emphasisadded. ]
98. 2000 Form 10-K. The same day, March 30, 2001, Organogenesis also filed with
the SEC its financial results for full year 2000, pursuant to Form 10-K signed by defer. lants
Laughlin, Erani and Arcari, among others . In addition to repeating many of the • ame
misrepresentations made in the Company's release, the 2000 Form 10-K also stated that :
Based upon our current plans, we believe existing working capital atDecember 31, 2000, together with the proceeds of product and otherrevenues in 2001 and proceeds available from exercising a portion or allof a $20, 000,000 equity security put with Novartis, which is at ourdiscretion, will be sufficient to finance operations through at least the firstquarter of 2002 . We expect to raise additional funds in 2001 through equityfinancing . [Emphasis added .]
42
99 . During April 2001, Organogenesis also hosted presentations at additional ai alys t
conferences, including, but not limited to, the Tucker Anthony Sutro Capital Markets .100 1
Health Care Conference, held at the Ritz Carlton in Laguna Niguel, CA, and the Fifth A :inua l
American Stock Exchange Emerging Growth Conference, held at the Grand Hyatt Hotel ir . New
York City. On or about April 17, 2001 analysts at Needham & Co . reiterated their prior "1 UY "
rating and continued to encourage investors to expect a near-term price target of $18 per shay e .
100. The statements made by defendants and contained in the Company's Mar ::h 5,
2001 and March 30, 2001 releases and those statements contained in Organogenesis 2000 ~orm
10-K, reproduced herein supra, were each materially false and misleading and were knc 'v b y
defendants to be false at that time, or were recklessly disregarded as such for the reasons fate d
herein in ¶63, supra .
101 . 1Q:01 Results . On April 27, 2001, defendants announced more purported ;ood
news . That day, the Company published a release, announcing results for first quarter 2001 wit h
product revenues "nearly triple over prior year period ." This release also stated th ; I : the
Company had made another amendment to its marketing agreement with Novartis, -Which
purportedly gave Organogenesis "significantly higher payments" on sales of Apligraf as v .11 as
additional funding support . In addition, this release also stated that :
For the three months ended March 31, 2001, total revenues were $2 .5million compared with $1 .2 million for the same quarter in 2000 . Productsales to related party were $1 .8 million in the first quarter of 2001,compared with $0 .6 million for the same period in 2000, due to increasedsales of Apligraf and the higher payments Organogenesis now receivesfrom Novartis for each unit of Apligraf.
Total operating costs and expenses were $8 .6 million during the first quarterof 2001 compared with $7 .3 million for the same quarter in 2000 . The firstquarter of 2001 cost of product sales increased by $0 .7 million due toincreased sales of Apligraf. During the same period, research anddevelopment costs increased by $0.6 million due to increased clinical,process development and product development expenses. General and
43
administrative expenses decreased slightly . Net loss was $6 .5 million ($0 .19per share) for the first quarter of 2001 compared with a net loss of $6 .4million ($0 .21 per share) for the same quarter in 2000 . When the one-timecumulative effect in change in accounting principle charge due to theadoption of SEC Staff Accounting Bulletin No . 101 - "RevenueRecognition in Financial Statements" is included, the first quarter of 2000net loss becomes $12 .8 million ($0 .41 per share) .
This release also quoted defendant Arcari , as follows:
Our product margin improved significantly over last year . Not only didproduct revenue increase, but per unit costs decreased as a result of processimprovements . We tightly controlled our corporate expenses whileincreasing our investment in process development to further reducemanufacturing costs . Under our amended agreement with Novartis, wereceived nearly $1 .0 million in the first quarter of 2001 for manufacturingfacility improvements . [Emphasis added . ]
102. 1Q :01 Form 10 -Q. The same day, April 27, 2001, defendants also filed wil h the
SEC the Company's financial results for 1Q :01, the period ended March 31, 2000, pursu at to
Form 10-Q signed by defendants Laughlin and Arcari . The Company's I Q :01 Form .0-Q
contained the same materially false and misleading financial information as had been anno i race d
previously, in addition to reporting, in part, the following :
Basis of Presentation
The accompanying unaudited consolidated financial statements ofOrganogenesis Inc . have been prepared in accordance with generallyaccepted accounting principles for interim financial information and withthe instructions to Form 10-Q and Article 10 of Regulation S-X . . . In theopinion of management, the accompanying consolidated financialstatements include all adjustments , consisting of normal recurringadjustments, necessary for a fair presentation of the financial position,results of operations and changes in cash flows for the periodspresented. . . .
Costs and Expenses
Cost of product sales : Cost of product sales increased 50% to $2,196,000 inthe first quarter of fiscal 2001, from $1,467,000 for the comparable quarterlast year, due to increased unit sales of Apligraf to Novartis. Cost of
44
product sales includes the direct costs to manufacture and package Apligraf
and an allocation of our production related indirect costs . Cost of productsales continues to exceed product sales due to the high costs associated with
low volume production . We expect production volume to increase and ourmargins to continue to improve during 2001. [Emphasis added . ]
103. The statements made by defendants and contained in the Company's Apr 1 1. 27 ,
2001 release and in the 1Q :01 Form 10-Q, reproduced herein supra, were each materially fals e
and misleading and were know by defendants to be false at that time, or were reck ! .ssly
disregarded as such for the reasons stated herein in ¶63, supra .
104. 1.9 Million Share Offering . Later the same day, April 27, 2001, Organog( :iesi s
also announced that it had filed a post-effective amendment to its registration statement co) ;:ring
the offering of an additional 1 .9 million shares of common stock . Days later on May 8, .001 ,
Organogenesis published a release on Business Wire which announced that the Compan had
entered into an underwriting agreement with UBS Warburg LLC, as underwriter, providin, that
on any trading day during the next two years, the Company may elect to issue and sell ii .~ the
underwriter a number of shares of common stock that is not less than 5% and not more that 25 %
of the average trading volume of the common stock on the American Stock Exchange fir the
previous five days, up to an aggregate of 1,900,000 shares . 2
105. Following the announcement and repo rt of results for 1 Q : 01, analysts at Nee Iham
& Co. again reiterated a "BUY" rating on shares of Organogenesis and continued to G i [vise
investors to expect a near-term trading price of $18 per share for the Company .
106. Laughlin Quits. On May 16, 2001, the Company issued a release annou , icing
that defendant Laughlin had suddenly resigned from Organogenesis and that Michael Sabol iiski ,
2 The sale price of the shares to the underwriter was to be the volume-weighted average I riceper share at which shares of the common stock traded on the American Stock Exchange durin€„regular trading hours on each purchase date less underwriter's commissions .
45
former Senior Vice President Medical and Regulatory Affairs, would become President, .thief
Executive Officer and a member of the Board of the Company . According to the Coml my's
release, defendant Sabolinski was primarily responsible for the development of Apligra ;' . In
addition, the release also noted that, "this transition occurs at an important tim : for
Organogenesis as the Company focuses on increasing market penetration with Apligra and
leveraging core technologies to commercialize new products ." While no reason was give n for
defendant Laughin's departure, defendant Sabolinski was quoted in this release as thaieking
defendant Laughlin for "all he achieved for Organogenesis ."
107. $13.5 Million Equity Offering . On or about May 17, 2001, defendants gai n
capitalized on the artificial inflation in the price of Organogenesis shares that their fals and
misleading representations had caused, and filed a Prospectus with the SEC in connectior with
the sale of 1 .9 million shares of Organogenesis common stock priced at $7 .75 per share. gross
proceeds from the sales of these shares was estimated, at that time, at over $13.5 nr lion-
According to the Prospectus, this offering was part of the Company's previously file( . 3.0
million share Shelf Registration Statement .
108. Apligraf Sales 5/01 . On June 5, 2001, Organogenesis announced that sa ,-s o f
Apligraf had again reached above 1750 units, for May 2001 . According to defendant Sabol ilski,
who was quoted in the Company's release , as stating that, "The May sales figures :how
sustained support for Apligraf use, and we have accelerated our plans to ramp up prod i i i,ltion
to meet the strong growth forecast for [the] second half of this year." (Emphasis added)
109. While sales for May 2001 were actually less than April sales (1758 units vs . ..813
units), defendants did not revise guidance in any way, and continued to advise analyst and
investors that the Company was still on track to register sequential growth in unit sale an d
46
achieve profitability. As evidence of defendants' further representations, on June 6, .00 1 ,
analysts at Needham & Co . reiterated a "BUY" rating on shares of the Company, and cont ~iue d
to maintain a near-term price target of $18 .00 per share, and stated the slowdown in Apligra was
merely a "Bump in the Road" for Organogenesis .
110. $1.44 Million Private Placement . On June 18, 2001, Organogenesis it wised
another $1 .44 million through the sale of shares of stock through the UBS Warburg underw . iting
previously announced . Pursuant to this agreement , between May 21, 2001 and June 18, 001 ,
defendants caused the Company to sell over 186,000 shares of stock for at least $1 .44 millio L .
111 . Apligraf Sales 7/01. On August 2, 2001, Organogenesis announced that sa i,s of
Apligraf reached another monthly record sales level, of 2015 units sold in July 2001 . This
release also quoted defendant Sabolinski, as stating that , "We are delighted with the gro jii h in
sales seen between June and July. Apligraf unit sales have multiple drivers in place . . . H r are
planning accelerating growth in Apligraf production to meet the increasing deg iaand
anticipated. " (Emphasis added)
112. $10 Million Equity Sale to Novartis . On August 7, 2001, Organogenesis i sue d
a release announcing that it had elected to sell $10 million in equity to Novartis, pursuant I th e
terms of its amended, $20 million stock sales agreement.
113. 2Q:01 Results . On August 13, 2001, defendants published a release on Bu, : i'ness
Wire, which purported to announce financial results for the second quarter 2001, the 1 , .-rio d
ended June 30, 2001, which stated that there was "sustained market demand for Apligraf ar ,i the
Company accelerated its plans to ramp up production to meet the strong sales forecast f ° th e
second half of this year," in addition to stating the following :
Reflecting the growth in product sales and the 2001 amendment tothe agreement with Novartis, for the three months ended June 30, 2001 ,
47
product sales to related party were $1 .7 million in 2001 compared with $0 .7
million for the same period in 2000 . Total operating revenues were $2 .1million in the second quarter of 2001 compared with $1 .3 million for the
same quarter in 2000, excluding a $5 million milestone payment from
Novartis for the approval of Apligraf for diabetic foot ulcers . Total
operating costs and expenses were $ 9 .1 million during the second quarter of2001 compared with $8.0 million for the same quarter in 2000, excluding a
$1 .2 million ($0 .04 per share) one-time severance expense in 2001 for a
former executive officer . Cost of product sales increased by $1 .3 milliondue to increased sales of Apligraf and ramping up production to meet
anticipated increased demand ; research and development as well as general
and administrative costs slightly decreased . Net loss was $8 .6 million($0.25 per share) for the second quarter of 2001 compared with a net loss of$1 .8 million ($0 .05 per share) for the same quarter in 2000 .
* * *
[Defendant] Arcari said, "Our year-to-date revenuefrom product sales isnearly triple that of the same period last year. Our cost of goods per unitcompares favorably with the same period last year, but is up moderatelyfrom the previous quarter due to accelerating our plans to ramp upproduction . To strengthen our cash position, we have exercised our right tosell Novartis $10 million in equity . We retain the right to sell Novartis anadditional $10 million in equity." [Emphasis added.]
114. 2Q :01 Form 10-Q. The following day, August 14, 2001, defendants also filed
with the SEC the Company's financial results for 2Q :01, the period ended June 30, . :001 ,
pursuant to Form 10-Q signed by defendants Sabolinski and Arcari . The Company's ' Q:0 1
Form 10-Q contained the same materially false and misleading financial information a ha d
previously been announced , in addition to repo rt ing , in part, the following :
Basis of Presentatio n
The accompanying unaudited consolidated financial statements ofOrganogenesis Inc . have been prepared in accordance with generallyaccepted accounting principles for interim financial information and withthe instructions to Form 10-Q and Article 10 of Regulation S-X . . . . In theopinion of management, the accompanying consolidated financialstatements include all adjustments , consisting of normal recurringadjustments, necessary for a fair presentation of the financial position,results of operations and changes in cash flows for the periodspresented. . . .
48
COSTS AND EXPENSES
Cost of product sales : Cost of product sales for the quarter ended June 30,2001 increased 82% to $2,837,000, from $1,557,000 for the comparablequarter last year. Cost of product sales for the six-month period ended June30, 2001 increased 66% to 5,033,000, from $3,024,000 for the comparableperiod last year. These increases were due to increased unit sales ofApligraf to Novartis, additional scrap costs and higher allocations ofdepreciation and occupancy costs . Cost of product sales includes the directcosts to manufacture, quality inspect and package Apligraf and an allocationof our production-related indirect costs . Cost of product sales continues toexceed product sales due to the high costs associated with low volumeproduction . We expect production volume to increase and our margins tocontinue to improve during 2001 . We expect that we will have to revisestandard costs and the allocation of costs to product sales in the future aswe continue to modify our manufacturing processes . [Emphasis added . ]
115 . In addition to the foregoing, the 2Q :0I Form 10-Q also reported that the Con : ?any
paid severance to a retiring senior executive, as follows :
Severance Agreement :
In May 2001, we entered into a separation of employment agreement with aformer executive officer, which resulted in the recording of a one-timeseverance expense of $1,233,000 during the quarter ended June 30, 2001 .The separation of employment agreement provides for amounts to be paidover two years and supercedes the previous employment agreement . It hasbeen filed as exhibit 10(ff) to this Form 14Q .
Attached to the 2Q:01 Form 10-Q was a copy of defendant Laughlin ' s May 2001 Seve -ance
Agreement which reported that the vast majority of the Company's $1 .233 million charge s as to
cover the cost of payments made by Organogenesis directly to Laughlin .
116. The statements made by defendants and contained in the Company's 8/2/0! and
8/13/01 releases and those contained in the Company's 2Q :01 Form 10-Q, reproduced l -rei n
supra, were each materially false and misleading and were know by defendants to be false . that
time, or were recklessly disregarded as such for the reasons stated herein in ¶63, supra .
49
117. Needham Report . The materially false and misleading statements issu, .I by
defendants had their intended effect and following the publication of Organogenesis' ' Q :01
results, on August 14, 2001, Needham issued another report on the Company which gain
reiterated a "BUY" rating and issued a near-term price target of $18 per share, and static i :; the
following:
We reiterate our BUY rating and 12-month target range of $16-$18 . Weused two methods to reach this valuation target . In the first instance, weapplied a market capitalization to revenues ratio of 11x for the year 2004 .In the second instance, we applied a 35x multiple to the 2004 estimates . Toboth these calculations, we used a 10% discount per year, given the fact thatApligraf is already on the market thereby less product uncertainty exists .Using these metrics, we arrived at a target price range of $16-18 .
118 . Apligraf Sales August 2001 . On September 2, 2001, Organogenesis iss ied a
report which announced that sales of Apligraf reached another monthly record sales level wit h
2150 units sold in August 2001 . This release also quoted defendant Sabolinski, who states that ,
"We are pleased with the sustained strength in Apligraf sales that has been seen throug ;J the
summer months. We are on track for the third quarter of 2001 to have substantially h ;her
sales than our record second quarter. " (Emphasis added)
119. On September 7, 2001, defendants published a release which purport .1 to
announce that Organogenesis had increased its capacity to manufacture Apligraf. Accord' ugly ,
the Company's release quoted defendant Sabolinski, who stated the following :
"Our Company is now producing Apligraf at a rate of over 40, 000 unitsper year. I am pleased that the manufacturing ramp-up I committed to whenI became CEO in May is on track. We anticipate increasing this productionrate in the near term to meet forecasted demand . The demand has beendriven by an increase in sales and marketing activity, the diabetic foot ulcersupplement approval, and favorable reimbursement policies in the hospitaland physician's office ." [Emphasis added . ]
120. On or about September 21, 2001, Dow Jones news service reported that Ap' :graf
had received Medicare reimbursement in all 50 states .
50
121 . 3 New Products . On September 24, 2001, Organogenesis issued a rf ease
announcing that its experiences selling Apligraf had been so successful, that defendants ` . ould
begin commercializing three additional new proprietary products during 4Q :01 . Accordi i .g to
the release, these products would be marketed directly by Organogenesis using its ow n
marketing personnel and this purportedly would "advance the Company from a rese rrch ,
clinical/regulatory, manufacturing Company to a fully integrated medical pro i'ucts
Company." (Emphasis added) This release also quoted defendant Sabolinski , as follows:
Commercializing our own products, with our own sales and marketingteam, brings Organogenesis to a new stage . We receive the full revenuefrom the products we commercialize ourselves, which will add to ourrevenue stream beginning in October . We look forward to these productscontributing to the overall profitability of the Company . Having our ownsales force also paves the way for Organogenesis commercializingadditional products in the future . [Emphasis added . ]
122. Apligraf Sales 3Q :01. On October 4, 2001 , Organogenesis issued a r+ lease
which purported to announce strong sales of Apligraf during 3Q:01, with 6606 Apligraf units
sold during the quarter . In addition to the foregoing, this release also quoted defe idant
Sabolinski, who stated that, "This has been a very significant quarter for the Com, zany .
Apligraf sales continue to increase and the product is now reimbursed by Medicare in al fift y
states . . . . In addition , we received marketing clearance for the third FortaFlex(TM)-based prc luct ,
FortaGen(TM), and plan to launch four new products in October by an Organop iiesi s
Institutional sales force ." (Emphasis added)
123 . On or about October 9, 2001, Organogenesis presented at the UBS Wr ;-burg
Global Life Sciences Conference in New York City . Later on October 24, 2001, Organog+ iiesis
also presented at the Techvest Emerging Healthcare Forum also in New York City.
124. $20.25 Million Additional Funding . On October 16, 2001, Organog+ aesi s
issued a release which announced that defendants had raised another $20 .25 million from si,veral
51
financing activities, including another $10 million from Novartis and an additional $!0.25
million from two equity placements to institutional investors and/or Company directors . C to of
the placements was made via the sale of the 1 .67 million registered common shares rem ning
under the Company's existing shelf registration, the second placement was for 50 ,876
unregistered shares of common stock and attached warrants . This release also quoted defe i dant
Sabolinski who stated that, "we are pleased to have completed this round of financit :;, an
important step in achieving key corporate milestones including realizing profitability s( Mer .
Furthermore, these proceeds will enable us to accelerate additional key programs for ouji lea d
product, Apligraf, and other notable products in our development pipeline . "
125 . On November 1, 2001, Dow Jones news service reported that defendant had
registered at least 2 .7 million shares of common stock on behalf of certain shareho tiers .
According to this report, of the shares registered 2 .18 million were issuable to Novartis upon
conversion of a $10 million 7% convertible subordinated promissory note that matures 3/' ;)/04 .
In addition, at this time, Organogenesis also registered at least 503,876 shares issued to t ,o o f
the Company's directors and an investor in a private equity transaction on Sept . 5 . Accord iig to
this report, Organogenesis would receive no proceeds from the sale of the shares F' - th e
stockholders .
126. 3Q:01 Results . On November 13, 2001, defendants published a relea ..- on
Business Wire, which purported to announce financial results for the third quarter 200' , th e
period ended September 30, 2001, which stated that :
Organogenesis Inc. today reported its financial results for the third quarter
and nine months ended September 30, 2001 . Product sales to related party
were $2.2 million in the third quarter of 2001, representing a 211% increase
over $0.7 million for the same period in 2000 . This increase reflects the
growth in Apligraf(R) unit sales and the new pricing in the 2001 amended
agreement with Novartis . Total revenues increased 124% to $3 .0 million in
52
the third quarter of 2001 compared with $1 .3 million for the same quarter in2000 . Total operating costs and expenses were $9 .8 million during the thirdquarter of 2001 compared with $7 .7 million for the same quarter in 2000 .Cost of product sales increased by $1 .7 million due to increased sales ofApligraf and costs related to ramping up production to meet anticipatedfuture increased Apligraf demand .
Research and development costs decreased slightly to $4 .1 millioncompared to $4 .4 million in 2000 . Selling, general and administrative costsincreased by $0 .7 million primarily due to selling expenses related topreparations for the commercial launches of the Company'sFortaPerm(TM), FortaGen(TM) and Revitix(TM) products . Net loss was$7.4 million or $0.21 per share for the third quarter of 2001 compared witha net loss of $6 .7 million or $0.19 per share for the same quarter in 2000 .
Again, defendant Sabolinski was quoted in the Company' s release as follows :
Our latest financial results reflect our strategy of implementing programs tosupport the success of Apligraf, while embarking on initiatives that willposition us to capitalize on additional opportunities in the emerging tissueengineering sector.
127. 3Q:01 Form 10-Q. The following day, November 14, 2001, defendants alsc file d
with the SEC the Company's financial results for 3Q :01, the period ended September 30, :000 ,
pursuant to Form 10-Q signed by defendants Sabolinski and Arcari . The Company's 2 :~ :0 1
Form 10-Q contained the same materially false and misleading financial information a ha d
previously been announced, in addition to reporting, in part, the following :
Basis of Presentatio n
The accompanying unaudited consolidated financial statements ofOrganogenesis Inc . have been prepared in accordance with generallyaccepted accounting principles for interim financial information and withthe instructions to Form 10-Q and Article 10 of Regulation S-X . . . In theopinion of management, the accompanying consolidated financialstatements include all adjustments , consisting of normal recurringadjustments, necessary for a fair presentation of the financial position,results of operations and changes in cash flows for the periodspresented. . . .
53
COSTS AND EXPENSES
Cost of product sales : Cost of product sales for the quarter endedSeptember 30, 2001 increased 110% to $3,268,000, from $1,557,000 for thecomparable quarter last year . Cost of product sales for the nine-monthperiod ended September 30, 2001 increased 81% to $8,301,000, from$4,581,000 for the comparable period last year . These increases were dueto increased unit sales of Apligraf to Novartis, higher allocation ofdepreciation and occupancy costs, and increased scrap charges during themonth of September due to the suspension of commercial sales of Apligraffollowing the September 11, 2001 terrorist attack. Cost of product salesincludes the direct costs to manufacture, quality inspect and packageApligraf and an allocation of our production-related indirect costs . Cost ofproduct sales continues to exceed product sales due to the high costsassociated with low volume production . We expect production volume toincrease and our margins to continue to improve during the remainder of2001. We expect that we will have to revise standard costs and theallocation of costs to product sales in the future as we continue to modifyour manufacturing processes . [Emphasis added.]
128. The statements made by defendants and contained in the Company's 9.'.101 ,
9/24/01, 10/16/01, 11/13/01 releases and those statements contained in the Company's _`Q :0 1
Form 10-Q, reproduced herein supra, were each materially false and misleading and were
known by defendants to be false at that time , or were recklessly disregarded as such f ( r the
reasons stated herein in ¶63 supra .
129. Needham Report . On November 16, 2001, with shares of the Compan) now
trading at just above $4 .00 per share, analysts at Needham & Co . were finally forced to ; ijust
downward, their near-term Organogenesis price target to $9 .00-$11 .00 per share from $1 i . . 00 -
$18 .00 per share . At this time, however , Needham analysts did not reduce the "BUY" rati g on
the Company, and also stated that, at current trading levels shares of Organogenesis wer e
"currently undervalued," as follows :
We believe that Organogenesis is currently undervalued, given thatApligraf is the first and only product containing living human cells to proveefficacy and gain FDA PMA marketing approval and now having qualifiednationally for reimbursement under Medicare for outpatient use . ORG'senhanced management team and Novartis agreement is a furtherindicator of ORG's potential . In addition, we believe there will be a
54
number of key events over the next several quarters that will serve tosignificantly increase the visibility of Organogenesis and its products andfurther attract substantial investor interest in the company and its products,such as continued growth in Apligraf sales and postmarketing research aswell as progression of VITRIX clinical trials. [Emphasis added . ]
130 . On January, 4, 2002, only days before the end of the Class Period, defeiidan t
Erani announced his sudden and unexpected departure from Organogenesis . According -i :) the
Company's release, defendant Erani resigned to "pursue personal business interests ."
THE TRUE FINANCIAL AND OPERATIONAL CONDITIONOF ORGANOGENESIS IS BELATED DISCLOSE D
131 . No Money to Fund Operations . On or about January 30, 2002, defendant: filed
with the SEC a report pursuant to Form 8-K, signed by defendant Arcari, which stated f :r the
first time that the Company was running out of money and that it would be forcec int o
insolvency unless it could raise at least $ 15 million in the immediate near term . The Forrr 8- K
stated, in part, the following :
On January 30, 2002, the Registrant filed a Registration Statement on Form
S-3 to register the resale of shares held by certain of its selling securityholders. As a part of that document, the Registrant included an updated set
of risk factors relating to its business . The Registrant intends, by filing suchupdated risk factors with this Current Report on Form 8-K, to provide such
risk factors as part of its documents filed pursuant to the SecuritiesExchange Act of 1934 .
We have incurred significant operating losses in funding the research,development, testing and marketing of our products in every year of ourexistence. We incurred net losses of $14,031,000 for the year endedDecember 31, 1998, $28,350,000 for the year ended December 31, 1999,$28,605,000 for the year ended December 31, 2000 and $22,561,000 for thenine months ended September 30, 2001 . The extent of future losses andthe time required to achieve profitability are highly uncertain, and wemay never achieve a profitable level of operations or, even if we achieveprofitability, we may not be able to sustain it on an ongoing basis .[Emphasis added.]
55
132 . In addition to the foregoing, the January 30, 2002 Form 8-K also revealed th t th e
Company would need to raise additional funds by the end of the first quarter of 2002, bu tha t
Organogenesis may be unable to raise such necessary funds, in which case it would the 1 b e
forced to curtail or discontinue all operations . In this regard, the Form 8-K also stated, jr part ,
the following :
We will need to raise additional funds by the end of the first quarter of2002, but may be unable to raise the funds, in which case we would have tocurtail or discontinue our activities. [Emphasis added.]
We will seek to raise $15 million from the sale of equity securities that havenot been registered under the Securities Act of 1933 ; such securities maynot be sold in the United States absent registration or an exemption fromregistration . Based upon our current forecasts, we believe that proceedsfrom proposed equity financings of approximately $15 million, togetherwith our existing cash, cash equivalents and credit line and product andother revenues, will be sufficient to finance operations through at least thenext twelve months . This projection is based on assumptions regarding ouroperating cash requirements and revenues from sales of Apligraf and otherproducts, any of which could prove to be incorrect . We are currentlyseeking additional funding but our research, development, manufacturingand other activities may require that we raise substantial additional funds .We may not be able to obtain the proposed $15 million in new financing orany additional funding on terms favorable to us or our stockholders, if at all .Equity financings would dilute your ownership in us .
133 . In answer to the question as to why the Company could not access the $10 n. [lion
that defendants had previously reported would be available, the Form 8-K revealed th, is th e
Novartis commitment was subject to certain conditions -- ones the Company had no w iy o f
satisfying -- such that this money was also not available, as follows :
Although we have a contractual put option to sell an additional $10million of our securities to Novartis, we must satisfy a number ofconditions in order to exercise that option . If we do not satisfy theseconditions and Novartis is unwilling to waive any unsatisfied conditions, wewill be unable to sell additional securities to Novartis pursuant to the putoption. In addition, even if we satisfied the conditions, the closing wouldoccur no sooner than 90 days following the day we send the put optionexercise notice . If adequate funds are not available to us when needed, wewill be required to delay, scale back or eliminate our research anddevelopment programs or license to third parties products or technologie s
56
that we would otherwise undertake to develop ourselves and otherwisereduce our level of operations . The failure to have adequate liquidity couldresult in our receiving a "going concern " opinion from our auditors.[Emphasis added . ]
134 . While shares of the Company made virtually no move on the day the Comp ny' s
Form 8-K was filed, in the days immediately before its filing, shares of the Company dry ppe d
precipitously -- falling over 40% due to leakage in the three days prior to its filing with the .'EC.
Prior to this sudden and inexplicable decline, which occurred on volume abnormally aboli ., the
stock's daily average, shares of Organogenesis traded at approximately $3 .70 per shai , on
January 28, 2002 . The day of the Form 8-K was filed, Organogenesis shares traded to $2 .41 :1 per
share , and within days, as investors digested the implications of the Company's SEC -' ling,
shares of Organogenesis fell to as low as $1 .32 on February 7, 2002 -- a decline of almost 95 %
compared to the Class Period high of over $22 .00 per share reached on March 7, 2000 .
135 . Later, on February 25, 2002, Dow Jones news service reported that
Organogenesis had declared that it would engage in a "restructuring" and would lay-off al leas t
16% of its workforce in order to cut overhead by a at least $5 million . Also, according to Do w
Jones, on March 21, 2002, the Company also achieved its goal of raising the $16 rr . [lion
necessary to continue operations, by issuing "convertible preferred shares," convertibl( into
shares of common stock of the Company at a fixed conversion price of $1 .45 per share . The
"vulture capitalists" who arranged for these "toxic convertibles"3 as well as the purchase if an
additional 7 .2 million shares for payments of only $10 million, were identified by the Con jan y
only as "institutional shareholders . "
3 'Toxic," because the greater Organogenesis ' share price declined, the more stock theCompany would have to issue to meet this obligation, the greater shareholder dilution , the low . rthe price of the Stock, the more stock that would be required to be issued to meet this obligatic i. . .
57
136. On April 3, 2002, Organogenesis announced sales of Apligraf for 1 Q :02 whi h, at
7,100 units , was well below forecast sales for 2002 of 40,000 units -- about 30% shy o ~ that
figure. Following the release of 1Q :02 results, on April 11, 2002, defendants hos .,d a
conference call, the transcript of which was subsequently published . During the questio and
answer, call-in section of this call, the following statements were also made :
BRUCE BREWSTER (ph), BREWSTER ASSET MANAGEMENT : Over
the last number of years it seems to be that you have been very successfulfrom a medical point of view . And from the point of view of sales ofApligraf. I don 't think we can say the same thing about the businessresults.
It seems to me that the underlying reason for your lack of success in -from a business point of view, is your original deals with Sandos (ph) andNovartis and the amount of revenue that you get from the sale ofApligraf.
You're entering into - you did adjust that recently . You're entering intonew transactions with other partners . Are these transactions organized insuch a way that you'll have more possibility of overall profitability andtherefore business success ?
RICHARD CARAFF (ph), OPPENHEIMER: Yes, I certainly am pleasedto hear of approval by the 50 states and hope that that word gets out to thedoctors, many of whom at least in our limited experience in Boston are notcompletely aware .
But the other part which is a question, some doctors that I've spoken to arevery happy and satisfied with using Apligraf on complex cases. But theycomplain on less complex cases Apligraf is a rather expensive procedureto use compared to other procedures . Do we have any way of broadeningthe market by means of price? Could you comment upon that please ?
STEVEN BERNITZ : I think the major - if it in looking at the cost of theproduct should be in looking at the pharmo-economics of the productrather than the price of the product.
If you look at the complications associated with diabetic foot ulcers in termsof bone infections and amputations and actually mortality associated withthe complications from these wounds, while I would like to say that wehave done rigorous studies . And to show that I think one that there's anopportunity to do so, and I think that's an important area for bothcompanies going forward.
58
There have been some studies with venous leg ulcers that show thatApligraf can be a very cost effective treatment for those . And actuallygiven that, one would expect that data for diabetic foot ulcers to be morecompelling .
And I think that you also touched on another important point which is theknowledge and confidence in the reimbursement process . Which is that adoctor may have tried the product, a year or so ago and or heard from adoctor that tried the product a year or more ago and had some difficulty . Orhad to go through a rigorous approval process to get it the productreimbursed . [Emphasis added . ]
137. In addition to the foregoing, when asked about the why the Company coup l not
access the second $10 million tranche of the aforementioned Novartis commitment , defer! cants
stated as follows :
JOHN BERGER (ph) : Could you also go over briefly the encumbrances onthe second traunch of capital from - that's available from Novartis? Andwhen that traunch would be available to be utilized since this latestfinancing .
JOHN ARCARI: Well the second put is equal in amount to the first . It's 10million. The time period between exercising a put and receiving money is a
minimum of 90 days. But the thing that really distinguishes the secondput from the first is the hurdles you have to get through on the secondput.
And they're inherently more difficult. There are more hoops to jumpthrough . So it's much more difficult to access that money than was thefirst traunch .
STEVEN BERNITZ : So we look at that as an upside. If it is availablethere's no where in our plans that we are counting on that money . Andwe don't anticipate exercising that put . [Emphasis added . ]
138 . Going Concern Opinion . On April 16, 2002, when the Company filed it: year
end financial statement with the SEC, pursuant to Form 10-K, its outside a Jitor
PricewaterhouseCoopers LLP issued a "going concern " opinion, which stated that the au ,'itors
doubted Organogenesis ' ability to continue as a going concern . Accordir :; to
PricewaterhouseCoopers, "Organogenesis has posted recurring operating losses, as a we :king
capital deficiency and has long-term debt that may become immediately due upon an eve it of
default ." (Emphasis added)
59
139. Following this announcement , shares of Organogenesis fell to as low as $0.6,` per
share on April 16, 2002. In the days that followed, shares of the Company traded even low T, to
as low as $0 .41 per share by May 1, 2002 .
140, Remarkably, in response to this statement by PricewaterhouseCoopers, the gam e
day, April 26, 2002, defendants issued a release on Business Wire which stated that , altfi~ Hugh
Organogenesis had received the aforementioned report, that "we believe that, based of ou r
current forecasts, the Company has sufficient liquidity to finance operations and achieve iH reak
even by year- end 2002." (Emphasis added) This post-Class Period statement was as far Irorn
the truth as defendants' other statements made within the relevant period . Despite this asurd
claim, on August 16, 2002, defendants revealed that the Company would delay filir ;; its
quarterly report for 2Q:02 and that Organogenesis was reviewing a possible material ` :asset
impairment charge." According to a statement made by the Company at this time, "Manag ( anent
is unable to conclude the amount of such impairment or that the financial statements . . are
probably presented on a `going concern ' basis rather than on a `liquidation of assets ' basis ."
141 . Needham Rating Suspended . It was not until July 12, 2002, with shares : f the
Company now trading below $0.20 per share , however , that analysts at Needham & Co. f iially
placed the Company's stock rating "Under Review." With Organogenesis on "life-suI )ort"
Needham analysts reported the following :
* Recent events leavefuture uncertain .
* Disappointing sales figures/ higher than expected burn rate .Organogenesis announced that Apligraf sales decreased approximately7-10% for 2Q02, compared with our estimates for an increase in salesof 25%.
Additionally, the company stated that the burn rate for the quarter was$7.5MM, versus our estimates of $4 .3MM, resulting in $3 .7MM of cash atthe end of 2Q02. Additional cost cutting measures have been initiated tolower the burn rate from $2.5MM/month to $1 .1 MM/month . Using the
60
revised burn rate, Organogenesis will be able to fund operations for 3Q02before seeking additional capital .
* Challenging management strategy. Organogenesis announced that ithas entered into discussions with Novartis Pharma AG to reacquirecommercialization rights to Apligraf. However, in order to completenegotiations, Organogenesis must raise sufficient capital necessary toreacquire [rights to] Apligraf and build the necessary infrastructurenecessary to market and distribute the product.
Additionally, Oganogenesis stated that it would seek a corporate partner forthe marketing of the Fortagen , Fortaperm , and Revitix product lines . Whilethis decision will result in a reduction of costs related to the sales andmarketing infrastructure set up by the company , the partnership will alsoresult decreased revenues, as revenues become royalty based .
* Our conclusions. Despite the efforts of management, Apligraf salescontinue to grow at a slower than anticipated rate . The lower thanexpected sales growth and higher than anticipated burn rate resultsin approximately 3 months of cash ($3.7MM) for on goingoperations, which leaves the company below budgeted forecasts.While major initiatives are being discussed including the reacquiring ofrights to Apligraf and raising of funds for continued operations, webelieve that multiple challenges exist for Organogenesis.
Therefore, given the lack of Apligraf sales growth, the higher than expectedburn rate, the challenging business strategy undertaken by management, andsub-optimal cash position, we are placing our rating under review . We arecurrently evaluating the company's options and will continue to monitorevents going forward . [Emphasis added . ]
142 . Never Achieve Profitability . Huge Layoffs . Halt Apligraf Productioiii . On
August 21, 2002, with Organogenesis shares trading at $0 .09 per share, the Company 's cot . mon
stock was suspendedfrom trading on the American Stock Exchange . On September 13, '002 ,
the Company announced that it had temporarily halted shipments of Apligraf and had furloi ~ lie d
over 110 of its employees, as a result of the Company's "current lack of cash flow ." Defer slants
also blamed the current crisis upon its inability to renegotiate its marketing agreement with
Novartis, which was described as "unsustainable ." On September 13, 2002, defendant: also
revealed that a Chapter 11 bankruptcy filing was a possibility .
61
143 . Product Recalls . In addition to the foregoing, by mid September 002,
production quality at Organogenesis had deteriorated so substantially that an entire bat .4 of
Apligraf had been recalled . Alarmingly, because Apligraf has such a short shelf life, at the tim e
of this "recall," of the 193 affected units at least 72 had already been applied to patients . In total,
this was the fourth time since 1999 that the Company had been forced to recall Apligraf be . aus e
of contamination .
144. Post Class Period Scheme to Leverage Buyout. Having reduced the value i f the
Company's stock to mere pennies per share, and having lost the ability to sell more stock or offe r
debt, or raise money through private or public offerings, defendants next sought to take whr . was
left of Organogenesis for themselves . Thus, on or about September 25, 2002, defendants c used
the Company to file for Chapter 11 protection from creditors in United States Bankruptcy :ourt
in the Eastern District of Massachusetts .
145 . As defendants knew throughout the Class Period, Organogenesis coub no t
produce enough cash flow from operations to support its operations under the terms if its
agreement with Novartis since it was losing money on each sale under the Novartis agree iient .
Thus, on November 20, 2002, immediately after defendants placed the Company into banks n .ptcy
defendants forced Novartis to agree to transfer back to them the worldwide marketin ; , and
distribution rights for Apligraf. Novartis acquiesced to defendants' demand, rather than ris k
losing its entire investment in the Company -- including at least $10 million in unsecurer debt
which Novartis still hoped to collect .
146. The following day, November 21, 2002, the Boston Globe reported that, pus ;.uant
to the terms of the proposed, revised deal between Novartis and defendants :
* The two companies had agreed to work together for another seven months,during which Novartis would continue to market and distribute Apligraf .
62
* When the Company emerges from Chapter 11 bankruptcy protection, marl :,-tingand distribution rights will return to defendants . Two years later, Novar6 willearn royalties on sales of Apligraf, lasting for five years .
* Novartis also agreed to purchase at least 200 units of the product each week fromdefendants .
* Novartis also agreed to loan $3 million to Organogenesis, to be repaid 18 rr . onthsafter the company emerges from bankruptcy .
* Novartis agreed to have a $10 million investment it made in the company las E yeartreated as a general claim , to be repaid with other unsecured credits s ofOrganogenesis .
* The pact also provides hope for dozens of employees who were laid IT inSeptember, when Organogenesis abruptly shut down, with a minimum if 75people anticipated to return to work within several weeks of this announcem+ nt .
Although the precise payment terms were sealed by the Bankruptcy Court, at that time
Organogenesis' vice president and general counsel, Jeffrey L. Dow, stated that, "The pricy s are
considerably more favorable than the $350 a unit we were getting under the old paymen-i :. . It' s
clear we are getting the great bulk of the revenue from Novartis' sales . . . "
147. By June 23, 2003, defendants announced that they had caused the Comp, ry t o
file an Amended Plan of Reorganization with the United States Bankruptcy Court . Accord irg t o
defendants, the Plan incorporated "a funding proposal from a group of unsecured credit irs --
including current and former officers and directors of the Company," and put in moil on a
timeline for emerging from Chapter 11 protection in August 2003 . The Plan also anticip~ i i .ed a
cash distribution of 35% to be made to the holders of allowed general unsecured claims, bi I that
no distribution would be made on shares of the Company's outstanding preferred and cot Amo n
stock, which would be cancelled on the Plan's effective date . Under the Plan, all shares o 'new
63
common stock of the Company, as reorganized, will be distributed to the members of thf pla n
funding group and the holder(s) of the $10 .35 million allowed claim of Novartis .
148. Days later , however, on June 26, 2003, the Boston Globe reported more disti bing
news regarding defendants' continued interference with the bankruptcy proceeding„ an d
documented their continued attempts to place their own interests over and above the intere its o f
the outside shareholders of the Company, as follows :
If all goes as expected at a hearing in US Bankruptcy Court in Boston today,creditors could be solicited next week for their approval of a reorganization planturning ownership of the life sciences company and its sophisticated medicaltechnology to a group led by two cousins who operate chains of clothing storeslike Strawberry and Pay-Half.
Did recently installed chief executive Alan Ades, also a leader of thegroup in line to buy the company, impede other potential bidders, a tactic that
could have protected his own financial interests? Did the previous CEO,seemingly ousted last fall, try to use his own inside connections seeking
proprietary information for a bid with private investors that could have put himback in charge?
Ades, his cousin Albert Erani, and a small group of others that includes theirrelatives would end up with the company at a seemingly modest price , thoughtheir total cost is hard to calculate . . . .
Steven Bernitz, the company's chief executive at the time of the bankruptcy filing,quit as he was about to be fired in October and Ades took charge, according to thecompany. A short time later, the company tracked cellphone calls betweenBernitz and another executive still employed at Organogenesis, Jeffrey Dow, andfired him. Company lawyers questioned whether confidential information wasbeing leaked .
Soon, it became clear Bernitz was formally advising a private equity firm circlingto make a bid on company assets . His lawyer claimed the company washarassing Bernitz because Ades "wants to end up with the company. "
64
"He has been very successful at chilling the sale," the lawyer, Stephen Gordon,said in a transcript of a bankruptcy court hearing. [Emphasis added . ]
149. Despite defendants actions, on August 14, 2003, Judge William Hillman it U .S .
Bankruptcy Court for the Eastern District of Massachusetts in Boston cleared the way f r the
defendants to emerge from bankruptcy with the Company under their full dominance and ci ntrol
by or about August 26 . The insider group led by interim CEO Alan Ades and his partnf and
cousin Albert Erani will buy a $10 .5 million unsecured claim in the form of a bond he d by
pharmaceutical giant Novartis . Ades, who co-founded A&E Stores with Erani, will t! .! the
interim CEO, president and chairman of the new company . Novartis agreed to convert t ie $3
million in debtor-in-possession financing it provided into a $3 million exit loan . Accord, ig to
John Hutchins, Boston counsel for Novartis at Kirkpatrick & Lockhart LLP, who was quo : i-,d at
this time, the final terms of this bankruptcy restructuring actually amounted to a "level-aged
acquisition" by the insider group because they have bought up the $10 .5 million No artis
unsecured claim and are investing additional funding .
150. Thus, in less than one year, not only were defendants successful in thw rting
other interested bidders and in facilitating defendants Erani and Ades and their family men hers'
gaining total control over the Company, but within that time defendants were also able to . :ause
Organogenesis to emerge from bankruptcy having completed its restructuring plan . As a ,-sult
of this restructuring, new shares were issued to defendant Erani and Ades and their f .mily
members -- the new owners of the Company -- and the shareholders who purchased ~i id/or
otherwise acquired shares of the Company during the Class Period received NOTHING foi their
Organogenesis shares!
65
151 . The market for Organogenesis securities was open, well-developed and eff i -.ient
at all relevant times . As a result of these materially false and misleading statements and failures
to disclose, Organogenesis common stock traded at artificially inflated prices during the :.lass
Period. Plaintiff and other members of the Class purchased or otherwise acquired Organogr :nesis
securities relying upon the integrity of the market price of Organogenesis securities and n arket
information relating to Organogenesis, and have been damaged thereby .
152. During the Class Period, defendants materially misled the investing p .i .blic ,
thereby inflating the price of Organogenesis common stock by publicly issuing falsc and
misleading statements and omitting to disclose material facts necessary to make defend ants'
statements, as set forth herein, not false and misleading. Said statements and omissions were
materially false and misleading in that they failed to disclose material adverse informatio and
misrepresented the truth about the Company , its business and operations , as alleged herein .
153 . At all relevant times, the material misrepresentations and omissions particul, rized
in this Complaint directly or proximately caused or were a substantial contributing cause c f the
damages sustained by plaintiff and other members of the Class . As described herein, durit the
Class Period, defendants made or caused to be made a series of materially false or misle ding
statements about Organogenesis' business, prospects and operations . These m, serial
misstatements and omissions had the cause and effect of creating in the market an unrealist i,ally
positive assessment of Organogenesis and its business, prospects and operations, thus causii th e
Company 's securities to be overvalued and artificially inflated at all relevant times . Defenc ants '
materially false and misleading statements during the Class Period resulted in plaintiff and, othe r
members of the Class purchasing the Company' s securities at artificially inflated prices, thus
causing the damages complained of herein .
66
ADDITIONAL SCIENTER ALLEGATION S
154. As alleged herein, defendants acted with scienter in that each defendant kne , , that
the public documents and statements issued or disseminated in the name of the Company wer e
materially false and misleading ; knew that such statements or documents would be issL ::d or
disseminated to the investing public ; and knowingly and substantially participated or acqui . -sced
in the issuance or dissemination of such statements or documents as primary violations I the
federal securities laws . As set forth elsewhere herein in detail, defendants, by virtue of their
receipt of information reflecting the true facts regarding Organogenesis, their control ewer,
and/or receipt and/or modification of Organogenesis' allegedly materially misle: ding
misstatements and/or their associations with the Company which made them pri,l ,y to
confidential proprietary information concerning Organogenesis, participated in the frauc silent
scheme alleged herein .
155. In addition, throughout the Class Period, while in possession of material ad Ters e
non-public information, defendants caused the Company to issue and/or register for the & le of
millions of shares of Company stock . Defendants were motivated to materially misrepres i :at to
the SEC and investors the true financial condition of the Company in order to raise over 458.1
million in total proceeds from the sales of Organogenesis securities through public stock
offerings, private equity offerings and other debt and/or equity sales, which defendants fail .A to
utilize in avoiding Organogenesis' bankruptcy . Moreover, further evidence of defenc mts'
motivation to engage in the illegal scheme described herein, on or about April 21, :1000
defendant Stein was motivated to, and did register the authorized sale over $6 .9 million c, r his
privately held Organogenesis stock -- approximately half of the Company shares he persc sally
owned and controlled. Company insiders, including defendants Herbert Stein and Mi :hael
Sabolinski, took advantage of the artificially inflated prices of the Company's securities d .iring
67
the Class Period by selling their shares of the securities ("Selling Shareholders") and re : :.ping
millions of dollars in proceeds therefrom. These insider sales are set forth below :
NO. OF PRICE TOTALDATE OF SHARES PER VALUE OF
INSIDER SALE SOLD SHARE SALEMichael L. Sabolinski 6/20/2000 12,208 .00 $3 .02 $36,877 .9'!Michael L. Sabolinski 6/20/2000 12,208 .00 $10.39 $126,841 .1 :Herbert Stein 4/21/2000 732,423 .00 $9.44 $6,912,242.1 (Anton E. Schrafl 7/20/2001 36,623 .00 $2.97 $108,755 .6 (Nancy L . Parenteu 5/14/2001 31,334 .00 $3 .53 $110,696.7(Nancy L . Parenteu 5/11/2001 3,666 .00 $3 .43 $12,575 .8".Nancy L . Parenteu 5/10/2001 15,000 .00 $8 .18 $122,640.0 (Nancy L . Parenteu 5/9/2001 5,000 .00 $8 .56 $42,813 .0 (Nancy L . Parenteu 5/7/2001 10,000 .00 $9.00 $90,000.0 (Nancy L . Parenteu 5/7/2001 5,000 .00 $8 .97 $44,850.0(
TOTAL 863,462.00 $7,608,292.4:
156. The sales of millions of shares of Company stock during the Class Period, '~ -hic h
sales were designed and/or permitted by the Individual Defendants as well as numerous :)the r
high-level senior executives of Organogenesis further evidences defendants' motive to perp . orate
the fraudulent scheme detailed herein . In addition, defendants also caused the Compa ~ :.y to
engage in the sale of tens of millions of dollars in other sales of Organogenesis secs : ities
pursuant to stock offerings, private equity offerings and other debt and/or equity sales durit ; the
Class Period, including the following :
NO. OF PRICE TOTALDATE OF SHARES PER VALUE OF
TRANSACTION SALE SOLD SHARE SALE$9 .4M Equity Sale 2/24/2000 688,000 $9,400,000 .K$1 .4M Equity Sale 2/25/2000 100,000 $1,400,000 .0C1$5 .27M Equity Sale 3/09/2000 300,000 $5,270,000 .0($19M Share Offering 4/27/2001 1,900,000 $7 .75 $13,500,000.OCi$1 .44M PrivatePlacement 6/18/2001 186,000 $1,440,000.00$1 OM Equity Sale toNovartis 8/07/2001 $10,000,000.00
68
$20.25M additionalFunding 10/16/2001 2,173,876 $20,250,000.0 1~
TOTAL $ 61,260,0011 1
TOTAL ALL DEBT AND EQUITY SALES BY DEFENDANTS AND INSIDERtiDURING THE CLASS PERIOD = $68,868,29 2
Applicability Of Presumption Of Reliance :Fraud-On-The-Market Doctrine
157. At all relevant times , the market for Organogenesis's securities was an efi cient
market for the following reasons, among others :
(a) Organogenesis stock met the requirements for listing, and was liste .l and
actively traded on the American Stock Exchange, a highly efficient and automated market ;
(b) As a regulated issuer, Organogenesis filed periodic public reports wi .h the
SEC and the American Stock Exchange ;
(c) Organogenesis regularly communicated with public investor, via
established market communication mechanisms, including through regular disseminatic s of
press releases on the national circuits of major newswire services and through other vide-
ranging public disclosures, such as communications with the financial press and other s'~ nilar
reporting services ; and
(d) Organogenesis was followed by several securities analysts employe-d by
major brokerage firm(s) who wrote reports which were distributed to the sales force and o . rtain
customers of their respective brokerage firm(s) . Each of these reports was publicly availab] . , and
entered the public marketplace .
158. As a result of the foregoing, the market for Organogenesis securities pro i Lptl y
digested current information regarding Organogenesis from all publicly available source ; and
69
reflected such information in Organogenesis stock price . Under these circumstancE :, all
purchasers of Organogenesis securities during the Class Period suffered similar injury through
their purchase of Organogenesis securities at artificially inflated prices and a presumpfon of
reliance applies .
NO SAFE HARBOR
159. The statutory safe harbor provided for forward-looking statements under c , x rtai n
circumstances does not apply to any of the allegedly false statements pleaded in this com7 ..aint.
Many of the specific statements pleaded herein were not identified as "forward-lc,Iing
statements" when made . To the extent there were any forward-looking statements, there wr - ire no
meaningful cautionary statements identifying important factors that could cause actual resu .Its to
differ materially from those in the purportedly forward-looking statements . Alternatively, io the
extent that the statutory safe harbor does apply to any forward-looking statements pl aded
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 knew that the part iular
forward-looking statement was false, and/or the forward-looking statement was authc ~rized
and/or approved by an executive officer of Organogenesis who knew that those statements were
false when made .
FIRST CLAIM
Violation Of Section 10(b) OfThe Exchange Act And Rule 10b-5
Promulgated Thereunder Against All Defendant s
160. Plaintiff repeats and realleges each and every allegation contained above as i f
fully set forth herein .
70
161 . During the Class Period, defendants carried out a plan, scheme and cou se o f
conduct which was intended to and, throughout the Class Period, did : (i) deceive the inv .!sting
public, including plaintiff and other Class members, as alleged herein ; (ii) enable the Indi- idual
Defendants and other Organogenesis insiders to sell more than $7 .6 million of the Coml :m y's
and/or their personally-held Organogenesis common stock to the unsuspecting public ; an .I (iii)
cause plaintiff and other members of the Class to purchase Organogenesis securiti . .rs at
artificially inflated prices . In furtherance of this unlawful scheme, plan and course of coii~duct,
defendants, jointly and individually (and each of them,) took the actions set forth herein .
162. Defendants (a) employed devices, schemes, and artifices to defraud ; (b) nade
untrue statements of material fact and/or omitted to state material facts necessary to mall :,- the
statements not misleading ; and (c) engaged in acts, practices, and a course of business 1 hich
operated as a fraud and deceit upon the purchasers of the Company's securities in an eff irt to
maintain artificially high market prices for Organogenesis securities in violation of Section 10(b)
of the Exchange Act and Rule 1Ob-5 . All defendants are sued either as primary participa its in
the wrongful and illegal conduct charged herein or as controlling persons as alleged below .
163. Defendants, individually and in concert, directly and indirectly, by the use, r ear s
or instrumentalities of interstate commerce and/or of the mails, engaged and participates in a
continuous course of conduct to conceal adverse material information about the bus ;less,
operations and future prospects of Organogenesis as specified herein .
164. These defendants employed devices, schemes and artifices to defraud, wh It i n
possession of material adverse non-public information and engaged in acts, practices, , .iid a
course of conduct as alleged herein in an effort to assure investors of Organogenesis' value . and
performance and continued substantial growth, which included the making of, oii th e
71
participation in the making of, untrue statements of material facts and omitting to state m~ Lerial
facts necessary in order to make the statements made about Organogenesis and its btu iness
operations and future prospects in the light of the circumstances under which they were made,
not misleading, as set forth more particularly herein, and engaged in transactions, practices and a
course of business which operated as a fraud and deceit upon the purchasers of Organogi . :nesis
securities during the Class Period .
165 . Each of the Individual Defendants' primary liability, and controlling 1 . ;arson
liability, arises from the following facts : (i) the Individual Defendants were high-level exec . .tives
and/or directors at the Company during the Class Period and members of the Coml :m y's
management team or had control thereof; (ii) each of these defendants, by virtue c I' his
responsibilities and activities as a senior officer and/or director of the Company was privy t, , and
participated in the creation, development and reporting of the Company's internal budgets, lans,
projections and/or reports ; (iii) each of these defendants enjoyed significant personal contai, 1. and
familiarity with the other defendants and was advised of and had access to other members 1 f the
Company's management team, internal reports and other data and information abot : the
Company's finances, operations, and sales at all relevant times ; and (iv) each of these defers cants
was aware of the Company's dissemination of information to the investing public whict they
knew or recklessly disregarded was materially false and misleading .
166. The defendants had actual knowledge of the misrepresentations and omissic is o f
material facts set forth herein, or acted with reckless disregard for the truth in that they fai . , .d to
ascertain and to disclose such facts . Such defendants' material misrepresentations aE :.d/or
omissions were done knowingly or recklessly and for the purpose and effect of cone, Ling
Organogenesis' operating condition and future business prospects from the investing public . and
72
supporting the artificially inflated price of its securities . As demonstrated by defen .lants'
overstatements and misstatements of the Company's business, operations and ea :icings
throughout the Class Period, defendants, if they did not have actual knowledge c I' the
misrepresentations and omissions alleged, were reckless in failing to obtain such knowlec ;e by
deliberately refraining from taking those steps necessary to discover whether those state iients
were false or misleading.
167. As a result of the dissemination of the materially false and misleading inforn atio n
and failure to disclose material facts, as set forth above, the market price of Organogi .nesis
securities was artificially inflated during the Class Period . In ignorance of the fact that market
prices of Organogenesis' publicly-traded securities were artificially inflated, and relying directly
or indirectly on the false and misleading statements made by defendants, or upon the integli ty of
the market in which the securities trade, and/or on the absence of material adverse inforn i atio n
that was known to or recklessly disregarded by defendants but not disclosed in public states cents
by defendants during the Class Period, plaintiff and the other members of the Class ac( aired
Organogenesis securities during the Class Period at artificially high prices and were dar aged
thereby .
168. At the time of said misrepresentations and omissions, plaintiff and other mere- .hers
of the Class were ignorant of their falsity, and believed them to be true . Had plaintiff ar a the
other members of the Class and the marketplace known the truth regarding the problem . that
Organogenesis was experiencing, which were not disclosed by defendants, plaintiff and ether
members of the Class would not have purchased or otherwise acquired their Organoge iesis
securities, or, if they had acquired such securities during the Class Period, they would not leave
done so at the artificially inflated prices which they paid .
73
169, By virtue of the foregoing, defendants have violated Section 10(b) ck ;.' the
Exchange Act, and Rule I Ob-5 promulgated thereunder .
170 . As a direct and proximate result of defendants' wrongful conduct, plainti I- and
the other members of the Class suffered damages in connection with their respective pure iases
and sales of the Company's securities during the Class Period .
SECOND CLAIM
Violation Of Section 20(a) OfThe Exchange Act Against Individual Defendant s
171 . Plaintiff repeats and realleges each and every allegation contained above as if
fully set forth herein .
172. The Individual Defendants acted as controlling persons of Organogenesis ,,,ithi n
the meaning of Section 20(a) of the Exchange Act as alleged herein . By virtue of their high Level
positions, and their ownership and contractual rights, participation in and/or awareness f the
Company's operations and/or intimate knowledge of the false financial statements filed t t the
Company with the SEC and disseminated to the investing public, the Individual Defendanil had
the power to influence and control and did influence and control, directly or indirectl ; ., the
decision-making of the Company, including the content and dissemination of the vw rious
statements which plaintiff contends are false and misleading. The Individual Defendants were
provided with or had unlimited access to copies of the Company's reports, press releases, I iblic
filings and other statements alleged by plaintiff to be misleading prior to and/or shortly after
these statements were issued and had the ability to prevent the issuance of the statemei l :s or
cause the statements to be corrected .
173 . In particular, each of these defendants had direct and supervisory involvemt it in
the day-to-day operations of the Company and, therefore, is presumed to have had the pov „r t o
74
control or influence the particular transactions giving rise to the securities violations as a Leged
herein, and exercised the same .
174. As set forth above, Organogenesis and the Individual Defendants each vi .ilated
Section 10 (b) and Rule I Ob-5 by their acts and omissions as alleged in this Complaint . By ~,irtue
of their positions as controlling persons , the Individual Defendants are liable pursuant to S i . ction
20(a) of the Exchange Act. As a direct and proximate result of defendants ' wrongful coy .duct,
plaintiff and other members of the Class suffered damages in connection with their purcha es of
the Company ' s securities during the Class Period .
WHEREFORE , plaintiff prays for relief and judgment, as follows :
A . Determining that this action is a proper class action , designating pl~H :intiff
as Lead Plaintiff and certifying plaintiff as a class representative under Rule 23 of the Fderal
Rules of Civil Procedure and plaintiff's counsel as Lead Counsel ;
B. Awarding compensatory damages in favor of plaintiff and the other , ;;lass
members against all defendants, jointly and severally, for all damages sustained as a res It o f
defendants' wrongdoing, in an amount to be proven at trial, including interest thereon ;
C . Awarding plaintiff and the Class their reasonable costs and exp,,nse s
incurred in this action, including counsel fees and expert fees ;
D. Awarding extraordinary, equitable and/or injunctive relief as perrnitt . d by
law, equity and the federal statutory provisions sued hereunder, pursuant to Rules 64 and 6' an d
any appropriate state law remedies to assure that the Class has an effective remedy ; and
E. Such other and further relief as the Court may deem just and proper.
75
JURY TRIAL DEMANDE D
Plaintiff hereby demands a trial by jury .
Dated : January _, 2004 MOULTON & GANS, P.C.
By :Nancy Free ans, BBO #1 45433 Broad Stre , Suite 1100Boston, MA 02109-4216Telephone: (617) 369-7979Facsimile : (617) 369-798 0
MILBERG WEISS BERSHADHYNES & LERACH LLP
Steven G. SchulmanAndrei V. RadoSharon M. LeeOne Pennsylvania Plaza - 49th FloorNew York, NY 1011 9(212) 594-530 0
SCOTT + SCOTT LLCDavid R. ScottMichael A. SwickP.O. Box 192108 Norwich AvenueColchester, CT 06415(860) 537-553 7
Attorneys for Plaintiff
(01UX4)
76
CERTIFICATION OF BRUNO L1OVMANN IN SUPPORT OFORGANOGEN)SIS CLASS ACTION COMEPLAXINT
Bruno Hofmann ("Plaintiff ') declares, as to the claims asserted under federal securi ~ :ies
laws, that :
1 . Plaintiff has reviewed the complaint prepared by counsel in the above
captioned case, and authorizes its filing.
2. Plaintiff did not purchase the securities that are the subject of the complai ii .t at
the direction of plaintiff's counsel or in order to participate in any private action arising and : r the
federal securities laws .
3. Plaintiff is willing to serve as a representative party on behalf of a class ,
including providing testimony at deposition and trial , if necessary-
4- During the proposed class period, plaintiff made the following transaction ; inra
Organogenesis securities : See attached Schedule A
S. in the past three years, plaintiff has not sought to serve as a representative
party on behalf of a class action filed under federal securities law except : none
6_ Plaintiff wi ll not accept payment for serving as a representa tive party on be,Wf
of the class beyond plaintiff's pro rata share of any recovery, except such reasonable costs anc',
expenses (including lost wages) directly relating to representation of the class as ordered or
approved by the court .
I declare under penalty on perjury that the foregoing is true and correct .
xecated this day ofJ~~~ , 200
Br =o Hoiinaw
5rb
C /Z 301da 000 ' 01 000 : WOdd BOLT DO -9O -Nb'L
Schedule ABruno Hofmann Transactions in
Organogenesis CP
C /E 3 wd
Purchases:
Sales,
Date Number of Shares Price Per Share
01/14/00 300 9.500001/18100 1 .500 9.500001/25/00 700 9.500001/28/00 2,500 9250001/31/00 5.000 8.875002/18/00 5,000 14.375002(18/00 5.000 14.750002/18/00 5.000 15.500003/03/00 5,000 13.562503/16/00 5,000 15.500004/18/00 5.000 10 .7500
Date Number of Shares Price Per Share
11/16/00 9.000 10.000011/16/00 1 .000 10.0300
m00 :01 ooo 'wobd em'LI bm-90-Nvr