IN THE UNITED STATES DISTRICT COURT DOCKETEDFOR THE NORTHERN DISTRICT OF ILLINOIS APR 2

6EASTERN DIVISION 2002

MARILYN CARSON, individually and on behalfof all others similarly situated, )

}02C J

y q)Plaintiff, .

JUDGE JOAN H. LEFKOWv. ) No.

MAGIST~ATE JUDGE CNEOPHARM, INC., JOHN N. KAPOO& iALD1 SORTBROWNJAMES M. HUSSEY and AQUILUR RAHMAN, ) c7 ' .

) JURY TRIAL DEMANDEDDefendants .

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CLASS ACTION COMPLAINT FOR c :VIOLATION OF THE SECURITIES EXCHANGE ACT OF 1934 ="k

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Plaintiff alleges the following based upon the investigation of plaintiff's counsel, whic h

included a review of United States Securities and Exchange Commission ("SEC") filings by

NeoPharm Corporation ("NeoPharm" or the "Company"), as well as regulatory filings and reports ,

securities analysts' reports and advisories about the Company, press releases and other publi c

statements issued by the Company, and media reports about the Company, and plaintiff believes tha t

substantial additional evidentiary support will exist for the allegations set forth herein after a

reasonable opportunity for discovery .

NATURE OF THE ACTION

1 . This is a class action on behalf of purchasers of the common stock of NeoPhar m

between September 25 , 2000 and April 19, 2002 inclusive (the "Class Period"), seeking to pursu e

remedies under the Securities Exchange Act of 1934 (the "Exchange Act") .

2. During the Class Period, the defendants made materially false and misleadin g

statements concerning its Liposome Encapsulated Praclitaxel ("LEP") product .

3 . Defendants' made materially false positive statements to Pharmacia in order to induc e

their participation in clinical trials of LEP; failed to disclose that Pharmacia was studying a different

formulation of LEP that would not necessarily support the approval of NeoPharm's LEP product ;

and failed to disclose that all of Pharmacia's clinical trials failed to produce any positive benefits t o

patients .

4 . Indeed, the Company utilized these materially false and misleading statement s

concerning LEP in order to raise over $100 million in a secondary offering of 3 .2 million shares at

$35 .50 per share on or about September 25, 2000 (the "Offering") . Without the purported succes s

of LEP, a "new" process for delivery of a popular cancer drug, the Offering would have bee n

impossible .

5 . Of the 3.2 million shares offered, NeoPharm offered 3 million shares, and defendan t

Aquilur Rahman, NeoPharm's Chief Science Officer, offered 200,000 shares, reaping over $6 . 6

million in the Offering.

6. In fact, however, as disclosed by Pharamcia Corp . on or about April 22, 2002, wit h

whom NeoPharm partnered in the development and commercialization ofLEP, NeoPharm failed t o

disclose the truth about LEP to Pharmacia,and that "LEP failed to show a benefit in studies

Pharmacia conducted ."

7 . In addition, defendant James M . Hussey, NeoPharm's President and Chief Executive

Officer ("CEO"), used his insider knowledge improperly to exercise options at $4 .75 per share, and

sold 71,000 shares at prices between $14 .25 and $14.84 per share, for proceeds of approximately

$1,033,000 .

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8 . During the Class Period, NeoPharm's stock traded as high as $41 .0625 per share. At

the end of the Class Period , it closed at $15 .43 per share .

JURISDICTION AND VENUE

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

Exchange Act [15 U. S.C. §§ 78j (b) and 78t(a)] and Rule 10b -5 promulgated thereunder by the

Securities and Exchange Commission ("SEC") [17 C .F .R. § 240 .1Ob-5] .

10. This Court has jurisdiction over the subject matter ofthis action pursuant to 28 U . S . C .

§§ 1331 and 1337 and Section 27 of the Exchange Act [15 U .S .C . § 78aa] .

11 . Venue is proper in this District pursuant to Section 27 of the Exchange Act and 2 8

U.S .C. § 1391(b). NeoPharm maintains its principal place of business in this District at 100

Corporate North, Suite 215, Bannockburn, Illinois 60015, and many of the acts and practice s

complained of herein occurred in substantial part in this District .

12. In connection with the acts alleged in this complaint, defendants, directly or indirectly ,

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

interstate telephone communications and the facilities of the national securities markets .

PARTIES

Plaintiff

13 . Marilyn Carson, as set forth in the accompanying certification, incorporated b y

reference herein, purchased the common stock of NeoPharm at an artificially inflated price during th e

Class Period and has been damaged thereby .

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Defendants

rN,

14. NeoPharm is a Delaware corporation with its principal place of business at 10 0

Corporate North, Suite 215, Bannockburn, Illinois 60015 . NeoPharm is a biopharmaceutica l

company engaged in the research, development and commercialization of drugs for the treatment o f

various forms of cancer . NeoPharm is developing a portfolio of seven anti-cancer drugs, three of

which have advanced to clinical trials . NeoPharm built its drug portfolio based on two technolog y

platforms : an electrostatic liposome drug delivery platform and a tumor-targeting fusion protein

platform. The liposome drug delivery platform involves encapsulating drugs in liposomes, which ar e

microscopic spheres composed of lipid (or fat) membranes . Liposomes are particularly suitable fo r

the delivery of toxic drugs , such as cancer drugs, because they are not as readily absorbed by th e

nervous system or key organs, like the heart, thus helping to reduce toxicity .

15 . John N. Kapoor ("Kapoor") at all relevant times served as the Chairman o f

NeoPharm's Board ofDirectors (the "Board") .

16. James M. Hussey ("Hussey") at all relevant times served as the Company's Presiden t

and CEO and a Director .

17. Aquilur Rahman ("Rahman"), at all relevant times served as the Company 's Chief

Science Officer. Rahman offered 200,000 shares to the investing public in the Offering, reapin g

proceeds of over $6 .6 million .

18 . Kappor, Hussey and Rahman are referred to herein as the "Individual Defendants . "

19. Because of the Individual Defendants' positions with the Company, they had acces s

to the adverse undisclosed information about its business, operations, products, operational trends ,

financial statements, markets and present and future business prospects via access to interna l

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corporate documents (including the Company's operating plans, budgets and forecasts and report s

of actual operations compared thereto), conversations and connections with other corporate officer s

and employees, attendance at management and Board of Directors meetings and committees thereo f

and via reports and other information provided to them in connection therewith .

20. It is appropriate to treat the Individual Defendants as a group for pleading purpose s

and to presume that the false, misleading and incomplete information conveyed in the Company' s

public filings, press releases and other publications as alleged herein are the collective actions of the

narrowly defined group of defendants identified above . Each of the above officers of NeoPharm, by

virtue of their high-level positions with the Company, directly participated in the management of th e

Company, was directly involved in the day-to-day operations of the Company at the highest level s

and was privy to confidential proprietary information concerning the Company and its business ,

operations, products, growth, financial statements, and financial condition, as alleged herein. Said

defendants were involved in drafting, producing, reviewing and/or disseminating the false an d

misleading statements and information alleged herein, were aware, or recklessly disregarded, that the

false and misleading statements were being issued regarding the Company, and approved or ratifie d

these statements, in violation of the federal securities laws .

21 . As officers and controlling persons of a publicly-held company whose common stoc k

was, and is, registered with the SEC pursuant to the Exchange Act, and was traded on the NASDAQ

National Market (the "NASDAQ"), and governed by the provisions ofthe federal securities laws, th e

Individual Defendants each had a duty to disseminate promptly, accurate and truthful information

with respect to the Company's financial condition and performance, growth, operations, financia l

statements, business, products, markets, management, earnings and present and future business

prospects, and to correct any previously issued statements that had become materially misleading or

untrue, so that the market price of the Company's publicly-traded securities would be based upon

truthful and accurate information . The Individual Defendants' misrepresentations and omissions

during the Class Period violated these specific requirements and obligations .

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

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

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

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

Board membership and/or executive and managerial positions with NeoPharm, each of the Individual

Defendants had access to the adverse undisclosed information about NeoPharm's business prospects

and financial condition and performance as particularized herein and knew (or recklessly disregarded)

that these adverse facts rendered the positive representations made by or about NeoPharm and its

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

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

officers and/or directors ofthe Company, were able to and did control the content of the various SE C

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

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

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

issuance or cause them to be corrected. Accordingly, each of the Individual Defendants is responsible

for the accuracy of the public reports and releases detailed herein and is therefore primarily liable for

the representations contained therein .

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24. Each of the defendants is liable as a participant in a fraudulent scheme and course of

business that operated as a fraud or deceit on purchasers of NeoPharm common stock by

disseminating materially false and misleading statements and/or concealing material adverse facts .

The scheme: (i) deceived the investing public regarding NeoPharm's business, operations ,

management and the intrinsic value of NeoPharm common stock ; (ii) deceived the investing publi c

in connection with the benefits related to LEP ; and (iii) caused plaintiff and other members of th e

Class to purchase NeoPharm securities at artificially inflated prices .

PLAINTIFF'S CLASS ACTION ALLEGATION S

25 . Plaintiff brings this action as a class action pursuant to Federal Rule of Civil Procedur e

23(a) and (b)(3) on behalf of a Class, consisting of all those who purchased or otherwise acquired the

common stock of NeoPharm between September 25, 2000 and April 19, 2002 inclusive (the "Clas s

Period") and who were damaged thereby . Excluded from the Class are defendants, the officers an d

directors of the Company, at all relevant times, members of their immediate families and their legal

representatives, heirs, successors or assigns and any entity in which defendants have or had a

controlling interest .

26 . The members of the Class are so numerous that joinder of all members i s

impracticable . Throughout the Class Period, NeoPharm common shares were actively traded on th e

NASDAQ . While the exact number of Class members is unknown to plaintiff at this time and ca n

only be ascertained through appropriate discovery, plaintiff believes that there are hundreds o r

thousands of members in the proposed Class . Record owners and other members of the Class may

be identified from records maintained by NeoPharm or its transfer agent and may be notified of th e

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pendency of this action by mail, using the form of notice similar to that customarily used in securitie s

class actions . As of November 13, 2002, the Company had 14, 661,838 hares outstanding .

27. Plaintiffs claims are typical of the claims of the members of the Class as all member s

of the Class are similarly affected by defendants' wrongful conduct in violation of federal law that i s

complained of herein .

28 . Plaintiffwill fairly and adequately protect the interests ofthe members of the Class an d

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

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

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

questions of law and fact common to the Class are :

(a) Whether the federal securities laws were violated by Defendants' acts as allege d

herein ;

(b) Whether Defendants participated in and pursued the common course o f

conduct complained of herein ;

(c) Whether documents filed with the SEC and other documents, press release s

and statements disseminated to the investing public and NeoPharm's shareholders during the Clas s

Period misrepresented material facts about the benefits of LEP ;

(d) Whether the market price of NeoPharm's common stock during the Clas s

Period was artificially inflated due to the material misrepresentations and failure to correct th e

material misrepresentations complained of herein; and

(e) To what extent the members of the Class have sustained damages and th e

proper measure of damages .

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

adjudication of this controversy since joinder of all members is impracticable . Furthermore, as the

damages suffered by individual Class members may be relatively small, the expense and burden o f

individual litigation make it impossible for members of the Class to individually redress the wrong s

done to them. There will be no difficulty in the management of this action as a class action .

SUBSTANTIVE ALLEGATIONS

LEP and the NeoPharm-Pharmacia Agreement

31 . LEP, developed and patented by NeoPharm , is a liposome encapsulated formulation

of the widely used cancer drug, paclitaxel . Paclitaxel is marketed by Bristol-Myers Squibb Compan y

under the trade name "Taxol-Registered Trademark-" and is used in the treatment of a number o f

cancers, including breast, ovarian and lung. Taxol is the largest selling anti-cancer drug in the world ,

with 1999 sales of $1 .5 billion, Despite paclitaxel's wide use and its anti-tumor characteristics, its

effectiveness has been limited both by side effects , such as nausea, vomiting , hair loss and nerve and

muscle pain, and by a long infusion time . Because of the chemical characteristics of paclitaxel, i t

cannot be introduced into the body unless it is first formulated in a toxic mixture of castor oil and

ethanol, which requires premedication of the patient .

32 . LEP does not require administration with castor oil and ethanol, thus reducing th e

need for premedication . Because LEP is stable, it is easier to store, prepare and administer . Another

potential advantage of LEP is its ability to reduce multi-drug resistance , i . e ., the resistance to cancer

drugs developed by cells that have been exposed to several rounds of chemotherapy .

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33 . On or about February 19, 1999, NeoPharm and Pharmacia entered into a worldwid e

collaborative relationship with Pharmacia to develop and commercialize two products, one of whic h

was LEP (the "Pharmacia Agreement" )

34. Under the Pharmacia Agreement, Pharmacia obtained exclusive rights to develop an d

market LEP throughout the world, and assumed responsibility for, and the costs associated with, th e

clinical development and regulatory filings for LED . The license agreement provides for up to $69

million in payments to NeoPharm from . Pharmacia. Through August 25, 2002, Pharmacia paid t o

NeoPharm $22 million, including the purchase of $S million ofNeoPharm common stock . NeoPharm

is to receive royalties on any foreign sales, and in the United States NeoPharm has the right t o

purchase co- promotion rights from Pharmacia instead of receiving royalties .

NeoPharnn's False And Misleading Statements

35 . On or about September 25, 2000, NeoPharm offered to the investing public 3 .2 million

shares of stock at $3 5 .50 per share pursuant to a registration statement dated August 24, 2002 (th e

"Registration Statement") and prospectus dated September 25, 2002 (the "Prospectus") . Of the 3 . 2

million shares, 200,000 were offered by defendant Rahman . The Registration Statement was signed

by defendants Kapoor and Hussey.

36 . In connection with LEP, the Prospectus stated as follows :

We believe LEP is the first and only liposomal form of paclitaxel toenter clinical trials . Our Phase I/II clinical trials provided evidence ofLEP's ability to reduce the incidence and severity of certain of the sideeffects associated with paclitaxel, allowing higher dosage levels andincreasing the number of treatment cycles that could be given .Although our Phase 1111 trial was not designed to determine efficacy,six of the 31 lung cancer patients enrolled through April 2000 whowere unresponsive to other treatments experienced tumor reductiongreater than 35%. The tumors in 12 other patients did not increase in

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size after 12 weeks, and in four of these 12 patients, the tumors hadnot increased in size after one year .

37 . The Prospectus further stressed the impo rtance of LEP to the Company through th e

payments it received and could receive in the future from the Pharmacia Agreement :

For the six-month period ended June 30, 2000, we recorded$3,000,000 in milestone payments from Pharmacia for the completionof Phase I clinical trials and commencement of Phase II/III clinicaltrials for LEP . We recorded a nonrefundable license fee of $9, 000, 000for the same period in 1999 for entering into the licensing agreementwith Pharmacia for the development and commercialization of LEPand LED .

The Company shall receive milestone payments upon the completionof each phase of clinical development and upon regulatory approvalfor both LED and LEP . If all milestone goals set forth in theagreement are met, the Company would be eligible to receive$52,000,000 in milestone payments . During 1999, the Companyreceived a $2,000,000 milestone payment in addition to the$9,000,000 license fee . In March, 2000 the Company received a$3,000,000 milestone payment for the completion of PhaseIlbeginning of Phase II clinical studies for LEP .

38. Moreover, the Prospectus stated that the Company's research and development cost s

declined by $330,000 as a result of the Pharmacia Agreement .

39 . The statements referenced above in 13 5-3 7 were materially false and misleading when

made as they misrepresented and/or omitted the following adverse facts which then existed an d

disclosure of which was necessary to make the statements made not false and/or misleading, including

that .

(a) NeoPharm had misrepresented the positive benefits of LEP in order to induce

Pharmacia to invest in clinical trials ; and

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(b) Pharmacia was not studying the same formulation of LEP, so that its stud y

results would not be applicable to NeoPharm's LEP approval .

40, Moreover, the Offering would not have been possible but for the touted success of

LEP .

41 . On or about November 14, 2000, as reported in the Business Wire, NeoPharm

announced its financial results for the quarter ended September 30, 2000 .

42 . In the same press release, defendant Hussey touted the successful secondary offerin g

and further development of the electrostatic liposomal platform used by LEP :

"We had a very successful third quarter raising over $100 million viaa secondary offering," said James M. Hussey, President and ChiefExecutive Officer of NeoPharm. "We also made significant progressin both our pre-clinical and clinical programs and have begun toexpand our infrastructure to support our electrostatic liposomalplatform development . We plan on placing a number of compoundsin our liposomal system in the coming months . "

43 . On or about November 14, 2000, NeoPharm filed its form l OQ for the quarter ende d

September 30, 2000, In it, the Company repeated the claims concerning LEP that were set forth i n

the Prospectus :

Liposomal Encapsulated Paclitaxe l

Product Description. LEP is aliposomal encapsulated formulation of the widely-used cancerdrug, paclitaxel . Paclitaxel is marketed by Bristol-Myers Squibb Company under the tradename "Taxol®" and is used in the treatment of a number of tumors, including breast, ovarianand lung cancer. Despite paclitaxel's wide use and its anti-tumor characteristics, itseffectiveness is limited by its side effects, which can include nausea, vomiting, hair loss andnerve and muscle pain. Because of the chemical characteristics of paclitaxel, it cannot beintroduced into the body unless it is first formulated in a toxic mixture of castor oil andethanol which requires premedication of the patient . In addition, paclitaxel must be infused

over a period of at least three hours .

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We believe our technology may overcome many of the current limitations of paclitaxel byutilizing cardiolipin, a naturally occurring negatively charged lipid found in cardiac tissue, toincrease the solubility of paclitaxel . We have been able to standardize the preparation ofcardiolipin through the development of a proprietary form of synthetic cardiolipin . Usingcardiolipin eliminates the need for administration of castor oil and ethanol and reduces theneed for the accompanying premedication . Since paclitaxel has a positive charge andcardiolipin has a negative charge, cardiolipin electrostatically combines with the paclitaxel toform a stable product that can be freeze dried and easily reconstituted . Based on preclinicalstudies, we believe another potential advantage of LEP may be the ability of cardiolipin toovercome multi-drug resistance, which is the resistance to cancer drugs developed by cellswhich have been exposed to several rounds of chemotherapy . As a result, we may be able tosignificantly increase the effectiveness of LEP against tumors, thereby maximizing the killingof otherwise resistant cells .

Development Status. LEP is being developed for various solid tumors . We believe LEP is thefirst, and only, liposomal form of paclitaxel to enter clinical trials . Enrollment of patients inour Phase I/II clinical trials for LEP was completed in April 2000 . These Phase IIII trialsinvolved the treatment of 31 cancer patients, none of whom were then responding to otherforms of treatment . Our Phase IIII trials have provided evidence that LEP may be able to beadministered at higher levels than paclitaxel is currently administered, with fewer side effects .Although not designed to measure efficacy, six patients in the Phase 1/11 trial experiencedtumor reductions greater than 35%. The tumors in twelve other patients did not increase insize after 12 weeks, and in four of these twelve patients, the tumors were still stable in sizeone year later . Some patients received significantly more cycles ofLEP than can be given withunencapsulated paclitaxel, including two patients who received greater than 30 cycles of LEP .None of the patients showed signs of the nerve and muscle pain commonly associated withpaclitaxel, and most patients did not experience the hair loss or nausea often associated withpaclitaxel treatment.

Currently, our collaboration partner, Pharmacia, is initiating large scale multi-center,multinational Phase II/111 clinical trials . These Phase I11111 trials will assess LEP as both asingle and combination therapy for a variety of solid tumors to determine its safety andefficacy .

44. The statements referenced above in ¶43 were materially false and misleading whe n

made as they misrepresented and/or omitted the following adverse facts which then existed an d

disclosure of which was necessary to make the statements made not false and/or misleading, includin g

that .,

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(a) NeoPharm had misrepresented the positive benefits of LEP in order to induc e

Pharmacia to invest in clinical trials; and

(b) Pharmacia was not studying the same formulation of LEP, so that its stud y

results would not be applicable to NeoPharm's LEP approval .

45 . On or about November 27, 2000, as reported in the Business Wire, NeoPharm

announced that it had received a new patent covering claims for use of LEP . In this press release ,

the Company touted the "novel administration" of LEP and its "more desirable side effect profile" :

This new patent covers the novel administration of LEP and a moredesirable side effect profile as observed in clinical trials conductedthus far .

46. The statements referenced above in ¶45 were materially false and misleading whe n

made as they misrepresented and/or omitted the following adverse facts which then existed an d

disclosure of which was necessary to make the statements made not false and/or misleading, includin g

that :

(a) LEP was not efficacious in reducing the size oftumors or halting their growth .

47 . On or about March 29, 2001, as reported in the Business Wire, NeoPharm announced

its results for the fourth quarter and year ended December 31, 2000 . Defendant Hussey touted LEP' s

progress and its financial benefit to the Company :

The year 2000 was a breakthrough year for NeoPharm . . . . ourpartner, Pharmacia (NYSE : PHA), initiated Phase II/III clinical trialsfor Liposome Encapsulated Paclitexel ("LEP"), for which we receiveda $3 million milestone payment . We also raised approximately $116million in cash through the sale of common stock in a follow-onoffering in September[ .]

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48 . The statements referenced above in ¶ 47 were each materially false and misleading

when made as they misrepresented and/or omitted the following adverse facts which then existed an d

disclosure ofwhich was necessary to make the statements made not false and/or misleading , including

that in all of Pharmacia 's clinical trials LEP provided no benefit to patients as follows :

(a) that there was no evidence ofLEP's ability to reduce the incidence and severit y

of certain side affects associated with paclitextl ; and

(b) LEP was not efficacious in reducing the size oftumors or halting their growth .

49 . In response to investor inquiries and a drop in the Company's stock price from $25 .70

to $22.26 per share on volume of over 830,000 shares -- over 14 times the prior day's volume -- o n

or about May 9, 200 1, as reported in the Business Wire, NeoPharm "confirmed . . . that the clinica l

development program for LEP . . is continuing in key onncology indications .

50. The statement referenced above in 149 was materially false and misleading when mad e

as it misrepresented and/or omitted the following adverse facts which then existed and disclosure o f

which was necessary to make the statements made not false and/or misleading, including that LE P

provided no benefit to patients as follows :

(a) that there was no evidence ofLEP's ability to reduce the incidence and severit y

of certain side affects associated with paclitextl ; and

(b) LEP was not efficacious in reducing the size of tumors or halting their growth .

51 . On or about November 14, 2001, ThinkEquity Partners initiated coverage o f

NeoPharm, rating it a "Buy" in part due to LEP:

NeoPharm's pipeline led by LEP . . . We anticipate that . . . LEP willsecure a significant portion of the sizable Taxol market, with peakworldwide sales reaching $500 million. LEP should begin phase II/11 1

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testing shortly in breast and lung cancer ; we anticipate the launch ofLEP in the first half of 2005 .

52. In response to investor inquiries concerning LEP, NeoPharm on January 15, 2002, met

with "senior officials" of Pharmacia, who expressed the following points to NeoPharm official s

concerning the Pharmacia Agreement: (1) Pharmacia remains fully committed to the development o f

LEP and (2) Pharmacia is interested in exploring the possibility of licensing other products in th e

NeoPharm portfolio .

53 . However, this press release was materially false and misleading because it failed t o

disclose that in all of Pharmacia's testing, LEP had demonstrated benefit to patients .

54. On or about March 18, 2002, NeoPharm held a conference call to discuss its fourth

quarter 2001 results . In the conference defendant Hussey further touted the extension of th e

Pharmacia Agreement :

The position for both us and Pharmacia is the desire to expand thatagreement, but we aren't in a position yet to really know exactly whatstructure that will look like.

55 . This statement was materially false and misleading because it failed to disclose tha t

in all of Pharmacia's testing, LEP had demonstrated benefit to patients .

The Truth Is Reveale d

56 . On or about April 19, 2002, as reported in the Dow Jones News Service, NeoPharm

announced that it filed for arbitration to resolve a dispute with Pharmacia .

57. The Company contended that Pharmacia failed in its duty to use "reasobale effo rts"

to develop the drugs covered by the Pharmacia Agreement, including LEP .

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58, In response, Pharmacia presented a counter-claim for breach of the Pharmaci a

Agreement concerning the nature of NeoPharm 's initial disclosures .

59 . Indeed, Paul Fizhenry, a spokesman for Pharmacia, stated in a Bloomberg . com articl e

that "to date the formulation [ofLEP] has not demonstrated any clinical bene fits in studies conducted

by Pharmacia ."

60 . The market response to this announcement was harsh . NeoPharm's stock price

dropped from $20.41 per share on April 19, 2002 to $ 15 .43 on April 22, 2002 on volume of

2,863,000 -- over seventeen times the prior day's volume .

61 . As alleged herein, defendants acted with scienter in that defendants knew that th e

public documents and statements issued or disseminated in the name of the Company were materiall y

false and misleading ; knew that such statements or documents would be issued or disseminated to the

investing public ; and knowingly and substantially participated or acquiesced in the issuance o r

dissemination of such statements or documents as primary violations of the federal securities laws .

As set forth elsewhere herein in detail, defendants, by virtue of their receipt of information reflectin g

the true facts regarding NeoPharm, their control over, and/or receipt and/or modification o f

NeoPharm's allegedly materially misleading misstatements and/or their associations with th e

Company which made them privy to confidential proprietary information concerning NeoPharm ,

participated in the fraudulent scheme alleged herein .

62. The market for NeoPharm's securities was open, well-developed and efficient at al l

relevant times . As a result of these materially false and misleading statements and failures to disclose,

NeoPharm's common stock traded at artificially inflated prices during the Class Period . Plaintiff an d

other members of the Class purchased or otherwise acquired NeoPharm securities relying upon th e

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integrity of the market price ofNeoPharm's securities and market information relating to NeoPharm,

and have been damaged thereby .

63 . During the Class Period, defendants materially misled the investing public, thereby

inflating the price of NeoPharm's common stock, by publicly issuing false and misleading statements

and omitting to disclose material facts necessary to make defendants' 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 information and misrepresented the truth about the Company,

its business and operations, as alleged herein .

64. At all relevant times, the material misrepresentations and omissions particularized in

this Complaint directly or proximately caused or were a substantial contributing cause of the damages

sustained by plaintiff and other members of the Class. As described herein, during the Class Period,

defendants made or caused to be made a series of materially false or misleading statements about

NeoPharm's business, prospects and operations . These material misstatements and omissions had the

cause and effect of creating in the market an unrealistically positive assessment of NeoPharm and it s

business, prospects and operations, thus causing the Company's securities to be overvalued and

artificially inflated at all relevant times . Defendants' materially false and misleading statements during

the Class Period resulted in plaintiff and other members of the Class purchasing the Company's

securities at artificially inflated prices, thus causing the damages complained of herein .

Insider Trading

65. Defendants Rahman and Hussey took advantage of their insider positions and

knowledge of non-public information in order to sellshares of NeoPharm at artificially inflated prices .

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66. Defendant Rahman, NeoPharm's Chief Science Officer, offered 200,000 shares in the

Offering at $35 .50 per share, reaping proceeds of over $6 .6 million .

67. Defendant Hussey, NeoPharm's President and Chief CEO, improperly exercise d

options at $4 .75 per share on November 13, 2001 , and sold 71,000 shares at prices between $14 .25

and $14 .84 per share on November 13 and 14, 2001, for proceeds of approximately $1,033,000 .

Applicability Of Presumption Of Reliance :Fraud-On-The-Market Doctrin e

68 . At all relevant times, the market for NeoPharm ' s securities was an efficient market for

the following reasons, among others :

(a) NeoPharm's stock met the requirements for listing, and was listed and actively

traded on the NASDAQ, a highly efficient and automated market ;

(b) As a regulated issuer, NeoPharm filed periodic public reports with the SEC

and the NASD ;

(c) NeoPharm regularly communicated with public investors via establishe d

market communication mechanisms, including through regular disseminations ofpress releases on th e

national circuits of major newswire services and through other wide-ranging public disclosures, suc h

as communications with the financial press and other similar reporting services ; and

(d) NeoPharm was followed by several securities analysts employed by major

brokerage firms who wrote reports which were distributed to the sales force and certain customer s

oftheir respective brokerage firms . Each ofthese reports was publicly available and entered the publi c

marketplace .

19

69. As a result of the foregoing, the market for NeoPharm's securities promptly digested

current information regarding NeoPharm from all publicly available sources and reflected suc h

information in NeoPharm's stock price . Under these circumstances, all purchasers of NeoPharm' s

securities during the Class Period suffered similar injury through their purchase of NeoPharm' s

securities at artificially inflated prices and a presumption of reliance applies .

No Safe Harbor

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

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

of the specific statements pleaded herein were not identified as "forward-looking statements" whe n

made. To the extent there were any forward-looking statements, there were no meaningful cautionar y

statements identifying important factors that could cause actual results to differ materially from thos e

in the purportedly forward-looking statements. Alternatively, to the extent that the statutory safe

harbor does apply to any forward-looking statements pleaded herein, defendants are liable for thos e

false forward- looking statements because at the time each of those forward-looking statements was

made, the particular speaker knew that the particular forward-looking statement was false, and/or the

forward-looking statement was authorized and/or approved by an executive officer ofNeoPharm wh o

knew that those statements were false when made .

20

COUNT I

(Against All Defendants Fo rViolation of Section 10(b) of the Exchange Act and

Rule lOb-5 of the Securities and Exchange Commission

71 . Plaintiff repeats and realleges each and every allegation contained in the foregoing

paragraphs as if fully set forth herein .

72 . This Count is asserted against all defendants and is based upon Section 10 (b) of the

Exchange Act, 15 U . S .C. § 78j (b), and Rule lOb-5 promulgated thereunder .

73 . During the Class Period, defendants, singularly and in concert, directly engaged in a

common plan, scheme, and unlawful course of conduct, pursuant to which they knowingly o r

recklessly engaged in acts, transactions, practices, and courses of business which operated as a frau d

and deceit upon plaintiff and the other members of the Class, and made various deceptive and untru e

statements of material facts and omitted to state material in order to make the statements made, i n

light of the circumstances under which they were made, not misleading to plaintiff and the othe r

members of the Class . The purpose and effect of said scheme, plan, and unlawful course of conduct

was, among other things, to induce plaintiff and the other members of the Class to purchas e

NeoPharm common stock during the Class Period at artificially inflated prices .

74. During the Class Period, defendants, pursuant to said scheme, plan, and unlawfu l

course of conduct, knowingly and recklessly issued , caused to be issued, participated in the issuanc e

of, the preparation and issuance of deceptive and materially false and misleading statements to th e

investing public as particularized above .

75 . Throughout the Class Period, NeoPharm acted through the Individual Defendants ,

whom it portrayed and represented to the financial press and public as its valid representative. The

21

willfulness, motive, knowledge, and recklessness of the Individual Defendants are therefore impute d

to NeoPharm, which is primarily liable for the securities law violations while acting in their official

capacities as Company representatives, or, in the alternative, which is liable for the acts of th e

Individual Defendants under the doctrine of respondent superior .

76. As a result of the dissemination of the false and misleading statements set forth above ,

the market price of NeoPharm common stock was artificially inflated during the Class Period . In

ignorance of the false and misleading nature of the statements described above and the deceptive and

manipulative devices and contrivances employed by said defendants, plaintiff and the other member s

of the Class relied, to their detriment, on the integrity of the market price of the stock in purchasing

NeoPharm common stock. Had plaintiff and the other members of the Class known the truth, the y

would not have purchased said shares or would not have purchased them at the inflated prices that

were paid .

77 . Plaintiff and the other members of the Class have suffered substantial damages as a

result of the wrongs herein alleged in an amount to be proved at trial .

78 . By reason ofthe foregoing, defendants directly violated Section 10(b) ofthe Exchang e

Act and Rule 1 Ob-5 promulgated thereunder in that they: (a) employed devices, schemes, and

artifices to defraud; (b) made untrue statements of material facts or omitted to state material facts in

order to make the statements made, in light of the circumstances under which they were made, not

misleading; or (c) engaged in acts, practices, and a course of business which operated as a fraud an d

deceit upon plaintiff and the other members of the Class in connection with his purchases o f

NeoPharm common stock during the Class Period .

22

COUNT II

(Against The Individual Defendants ForViolation of Section 20(a) of the Exchange Act)

79, Plaintiff repeats and realleges each and every allegation contained in each of th e

foregoing paragraphs as if set forth fully herein .

80. The Individual Defendants, by virtue of their positions, stock ownership and/o r

specific acts described above, were, at the time of the wrongs alleged herein, controlling person s

within the meaning of Section 20(a) of the 1934 Act .

81 . The Individual Defendants had the power and influence and exercised the same t o

cause NeoPharm to engage in the illegal conduct and practices complained of herein .

82. By reason of the conduct alleged in Count I of the Complaint, the Individual

Defendants are liable for the aforesaid wrongful conduct, and are liable to plaintiff and to the othe r

members of the Class for the substantial damages which they suffered in connection with hi s

purchases of NeoPharm common stock during the Class Period .

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

(a) Determining that this action is a proper class action, designating plaintiff a s

Lead Plaintiff and certifying plaintiff as a class representative under Rule 23 of the Federal Rules o f

Civil Procedure and plaintiffs counsel as Lead Counsel ;

(b) Awarding compensatory damages in favor of plaintiff and the other Class

members against all defendants, jointly and severally, for all damages sustained as a result o f

defendants' wrongdoing, in an amount to be proven at trial, including interest thereon ;

23

(c) Awarding plaintiff and the Class their reasonable costs and expenses incurred

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

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

JURY TRIAL DEMANDED

Plaintiff hereby demands a trial by jury .

Dated: April 25, 2002 Marilyn Carson, individually and on behalf ofall others similarly situated, Plaintiff

By :M in A. MillerJennifer Winter SprengelChristopher B . SanchezMiller Faucher and Cafferty LLP30 North LaSalle StreetSuite 3200Chicago, Illinois 60602(312) 782-4880

Joel P. LaitmanJay P. SaltzmanSchoengold & Sporn, P .C .19 Fulton Stree tSuite 406New York, New York 10038(212) 964-0046

Attorneys for Plaintiff

24

CER' ICATIoN OFQ =7r .,g rrA etc CO

1 ; + azit3m C a , h e y eet# tt following is ttue and correct t # of my .iczuaw led9 ,

it rmatiass, and belief.

I have review4d-the cornplW} ': Mad h r n (tiee'Comp# t"), and ava *udrorized the fling of a

bxmiiar comp faint of a ion plat mot~ft at my b~h&

2. I sm wilU iig to serve as a rspr eAftdva party o boh&ofthe etas (the "Cl ") as deztod in the

complaint, itmlu4ing providing s moray st de sitic .aisd trial, If -aw ay.

I did not phase or seII sus ofNeaPha n = Its. t the dir*Won oft y 4tmel or in order to

par tiespa in any pzivate action arising cedar Ito Securities Act of 1933 (the 4 40uem Ace ) or t

he Securitie s

Exehunge Ad of 1934 (fie " cbige AC") .

4. Dwin the three your pei' d pre dlu the cue of Csr+ "r t iat I have vot set t to s rve nor

have I s ed. a a r Ares #va parry an b"f of Odra in arty private a .dosx using under the SeMWei Art or

the BAChan'ss Act .

S. I will not =opt gay payr4ett for leaving 3s & rspres va pa Ey on bhp' of The Class beyond

my pr9 rate sham of aty pe eit 1e ruavery, except IDr an zwur4 a arderad by the W=t ft r nab1e Scots n d

UPMSes (mc1U4iug lost wI.ge5) directly relztin4 to MY p rese tATkZ of the C1&ss.

6. I ucuecstand'E ea s=tirig this C:erts tiara is slat 3 prey isiw to pa1cip.tion in this Cl

Aatsa as a member afthe Claw .

7. nu~ng the Clap ?$riod (as de wd to the Campla{rat), I pmthumd the security Is the SdJed

Of tho Ceniplai= as cet fort in the Atta.cbment A hereto ,

Signed under the periaities of perjury, this 23rd day of April, 2002 .

Civil Cover Sheet Page 1 of2

UNITED STATES DISTRICT COURT

DOCKETED NORTHERN DISTRICT OF ILLINOIS

APR 2 6 2002 C ,Civil Cover ShJUDGE JOAN H . LEFKOW

This automated JS-44 conforms generally to the manual JS-44 approved by the Judicial Conference of the United Statesin September 1974 . The data is required for the use of the Clerk of Cou rt for the purpose of initiating the civil docketsheet. The information contained herein neither replaces nor supplements the filing and se rvice of pleadings or otherpapers as required by law . This form is authorized for use only in the Northern District of Illinois .

Plaintiff(s) : Marilyn Carson , individually ; 1f l ~ -and on behalf of all others similarly situated Defendant

{s) :Neopharm , Inc .$4 41\1E SOAT [ RO`dV~

III . Citizenship of Principal

Parties (D iversity Cases Only)

Plaintiff:- N/A

Defendant :-N/A

3200Chicago, Illinois 60602(312) 782-488 0

II. Basis of Jurisdiction : 3. Federal Question (U.S. not a party)

County of Residence : Nassua County of Residence :

Plaintiffs Atty: Marvin'A . Miller - Miller Defendant 's Atty: _)Faucher and Cafferty LLP30 North LaSalle Street , Suite

IV. Origin: 1. Original Proceeding

V . Nature of Suit : 850 Securities / Commodities / Exchange

VI.Cause of Action : Sections 10(b) and 20 (a) of the Exchange Act [15 U.S.C. §§ 78j(b)and 78t (a)] and Rule 10b-5 promulgated thereunder by theSecurities and Exchange Commission ("SEC") [17 C.F.R. §240.10b-5]

VII. Requested in Complaint

Class Action :Dollar Demand :

Jury Demand: Yes

VIII . This case IS NOT a refiling of a previously dismissed case .

Signature ,

Date :

http://www.ilnd.uscourts.gov/PLTBLIC/Forms/autois44 .cfm 45/02

LA 1TED STATES DISTRICT COURTNORTHERN DISTRICT OF ILLINOIS

In the Matter of Eastern Division

02u"Case Number:

02JUO^T JOAN H. LEFKOW

APPEARANCES ARE HEREBY FILED BY THE UNDERSIGNED AS ATTORNEY(S) FOR :

Mari) . Carson . indi d za l aid on al I all tit s s z~ a €a , Pla t rf

(A) (B)

SIGMA E SIGNATUR tti ~

zaLn

oel P LaitmanNAME

Marvin A Miller. .FIRM Fes,{

Schoengold & Sporn P C Miller Faucher and Caffert LLP., . y ~•,; ,STREET ADDRESS

19 Fulton Street, Suite 406STREET ADDRESS -ti

30 North LaSalle Street, Suite 320 LCITY/STATE/ZI P

New York , New York 10038CITY/STATE/ZIP

Chicago Illinois 60602C~

Y?, ,*P NFiFt

O~46

1 yTELEPHONE NUMBER

(312) 782-488 0IDENTIFICATION NUMBER ( SEE ITEM 4 ON REVERSE ) IDENTIFICATION NUMBER ( SEE ITEM 4 ON REVERSE )

01916769MEMBER OF TRIAL BAR? YES F E NO = MEMBER OF TRIAL BAR? YES NO ------- :

TRIAL ATTORNEY? YES NO TRIAL ATTORNEY? YES NO

DESIGNATED AS LOCAL COUNSEL? YES NO

(C) (D)SIGN URE SIGMA E

WAME

a P. Saltzman ennifer inter SprengelFIRM

Same as (A)FIRM

Same as BSTREET ADDRESS STREET ADDRESS

CITY/STATE/ZIP CITY/STATE/ZIP

TELEPHONE NUMBER TELEPHONE NUMBER

IDENTIFICATION NUMBER (SEE ITEM 4 ON REVERSE ) IDENTIFICATION NUMBER (SEE ITEM 4 ON REVERSE)

06204446MEMBER OF TRIAL EAR? YES NO MEMBER OF TRIAL BAR? YES NO

TRIAL ATTORNEY? YES i NO TRIAL ATTORNEY? YES N O

DESIGNATED AS LOCAL COUNSEL? YESE.

DESIGNATED AS LOCAL COUNSEL? YES NO

W

JUDGE JOAN H . L FKOW

IC SIGNATURE . .. „ .

NAM E

Christopher B. S anchezNAME

7 =` [FIRM

Same as BF IRM C,

STREET ADDRESS STREET ADDRESS - ~ •

CITY/STATElZIP CITY/STATE/ZIP

TELEPHONE NUMBER TELEPHONE NUMBER

IDENTIFICATION NUMI)ER { SEE ITEM 4 ON REVERSE )

06272989IDENTIFICATION NUMBER ( SEE ITEM 4 ON REVERSE )

MEMBER OF TRIAL BAR? YES NO MEMBER OF TRIAL BAR? YES NO

M1TRIAL ATTORNEY? YES NO TRIAL ATTORNEY? YES NO

DESIGNATED AS LOCAL COUNSEL? YES < NO

() ( )SIGNATURE SIGNATURE

NAME NAME

FIRM FIRM

STREET ADDRESS STREET ADDRESS

CITYISTATE /Z IP C[TYISTATEIZIP

TELEPHONE NUMBER TELEPHONE NUMBER

IDENTIFICATION NUMBER (SEE ITEM 4 ON REVERSE) IDENTIFICATION NUMBER ( SEE ITEM 4 ON REVERSE)

MEMBER OF TRIAL BAR? YES NO MEMBER OF TRIAL BAR? YES } N O

TRIAL ATTORNEY? YES NO TRIAL ATTORNEY? YES N O

DESIGNATED AS LOCAL COUNSEL? YES NO DES I GNATED AS LOCAL COUNSEL? YES N O

APPEARANCES ARE HEREBY FILED BY THE UNDERSIGNED AS ATTORNEY(S) FOR :