During the last several years, the Securities and Exchange Commission has been taking a closer look at filings and investor communications by public companies regulated by the FDA, particularly in relation to clinical trials.
Largely in response to the Martha Stewart insider-trading debacle, which involved the biotechnology stock ImClone Systems Inc., the FDA and SEC initiated new policies to make it easier for the two agencies to cooperate on biotechnology cases.
The sharing of materials between the two regulatory agencies has given rise to a more careful approach by life sciences companies preparing prospectuses, news releases, annual conference communications and other documents.
“In recent years, in particular in recent IPOs, the FDA and SEC have undertaken a tag-team approach,” said Cheston Larson, a partner in the San Diego office of Latham & Watkins LLP. “That’s not been the historical approval. Government agencies have sort of worked independently of one another.”
Publicly traded life sciences companies have been held to a higher degree of accountability for the materials they present and the news they report. Part of their newfound responsibility stems from the Sarbanes-Oxley Act of 2002, which put in place a series of measures public companies would have to comply with, and required the SEC to implement rulings on requirements to comply with the law.
Personal Liability
“Sarbanes-Oxley put personal liability on the line,” said Bradley Peck, a partner in the San Diego office of Cooley Godward Kronish LLP. “A lot of thought went into the procedures you wanted to have in place before signing those individual certifications.”
In the world of life sciences, companies often grapple with the task of attracting investor interest while also highlighting the potential risks involved in their product development cycle.
As an example, most IPOs involve filing a registration statement with the SEC. A prospectus, or a document that markets securities to potential investors, generally accompanies the registration statement.
During the preparation of these documents, Larson said companies should be cognizant in describing both their products and the risks associated with those products.
Unmentioned risks could also lead to trouble for the company, Larson said, because investors consider that information vitally important to whether they choose to put their money into the company’s stock.
Larson, who will speak on the topic at a private Biocom seminar Sept. 27, said it’s important that life sciences companies understand the potential liabilities involved in keeping their communications consistent.
A lack of uniformity between company communications and filings with the SEC could lead to litigation involving “material misstatements” or “material omissions,” Larson said.
A biotechnology company looking to tout the results of its latest clinical trial should take care to disclose both its positive results and any side effects associated with the drug, he said. It should also address those risks appropriately in its filings with the SEC.
Investors could sue the company for material omission if significant data were left out of company filings with the SEC, Larson said.
“With the FDA and SEC announcing a desire to collaborate and improve interagency communications, our companies in town need to do the same,” Larson said.
Case in point: GPC Biotech AG stands to face a class action lawsuit in the United States over its alleged failure to disclose adverse effects of its experimental cancer drug satraplatin.
Lawsuit Alleges
The suit alleged the firm failed to disclose and misrepresented information regarding the FDA’s early disapproval regarding GPC’s choice of methodology and primary endpoint in clinical studies.
The FDA questioned the methods of the German biotechnology company in regard to measurements in a study to determine the drug’s effectiveness, including the main goal the company defined as a “composite endpoint.”
An investigative committee said the FDA had no prior experience with that kind of endpoint, an issue it said it had addressed in previous documents to the biotechnology company.
Two independent reviewers also disagreed on the progress made by 39 percent of patients in the study, raising the question whether the study’s main goal could be reliably assessed.
GPC allegedly disregarded FDA concerns and misled investors into thinking the company had gained early approvals.
“For a biotech company working in that area, the drug development and the progress you make in clinical trials is full of opportunity for disappointments, for failures that can lead to stock drops and lawsuits,” Peck said. “It’s important in all your disclosures you address products under development and provide enough disclosure for someone to make a reasonable investment.”
When a lead product fails, it’s not unusual for investors to go looking into previous disclosures, he said.
“Obviously, as a business, if your product fails in approval points your whole reason for being is threatened,” Peck said.
“It’s important in all your disclosures that you address not just the pros, but annual reports, press releases and investor conferences to discuss products under development and provide enough disclosure for someone to make a reasonable investment.”
