New plan to keep biotech firms from talking out of school: FDA will watch what companies say during pre-market review process

San Diego Business Journal, Feb 16, 2004 by Marion Webb

The Food and Drug Administration and the Securities and Exchange Commission have adopted a new plan to ensure public biotechnology companies tell their investors the truth about their dealings with the FDA.

The initiative, first unveiled Feb. 5, calls for FDA employees to report companies that spread false and misleading statements about a product still being reviewed to a designated individual within the agency.

The chief counsel's office will then decide whether to report the instance to the SEC.

A local attorney said the changing interaction between the FDA and SEC creates an extra layer of bureaucracy for biotechnology firms.

"The problem that biotechs will have is that it creates an additional distraction, if they constantly have to justify to the SEC what they "say to the public about their FDA activities," said Laurie Axford, a partner with the law offices of Burns Doane Swecker & Mathis LLP in downtown San Diego.

FDA reviews are critical for biotech firms that want to show investors their product is making progress with the agency.

Bad news from the agency tends to have a negative impact on the company's stock price.

It can also shake investors' confidence in the product, which requires more than a decade and hundreds of millions of dollars to develop.

So far, the FDA has left it largely up to the firms to decide how much information they should make public. This has led to problems.

Foremost in people's mind is the ImClone (Systems Inc.) scandal, which landed former chief executive Samuel D. Waksal in jail after being convicted of securities fraud.

His friend Martha Stewart is now on trial about selling ImClone's stock before it was made public that the FDA found problems with the firm's cancer drug Erbitux.

Since Congress held hearings two years ago on the ImClone matter, the SEC reportedly began to speed up its enforcement actions.

Feeling The Effects

Several firms have felt the effects, including San Diego-based Amylin Pharmaceuticals Inc., which announced in December that the SEC has launched an informal inquiry related to communication about its experimental diabetes drug Symlin.

Another case involves Cambridge, Mass.-based Biopure Corp., which developed a blood substitute. Biopure said in December it is being investigated by the SEC on whether it disclosed enough information to investors about its interactions with the FDA.

Joseph Panetta, the president and chief executive for Biocom, the San Diego-based life sciences industry association, believes biotech executives face a tough balancing act.

"There is a responsibility on the part of the FDA to more clearly communicate with companies when products are in pre-market review," Panetta said. And he added, "It's not always clear to determine what is and what isn't being said (by the FDA) and what they (companies) can and can not say."

Axford and Panetta both feel the new plan shifts FDA employees' responsibility into a watchdog role for the SEC.

FDA Commissioner Dr. Mark McClellan said during a conference call that FDA employees will not go out of their way to monitor companies for statements that might affect the securities market.

At the same time, he said, "We want to have a mechanism in place for when we notice things, to refer those on efficiently and help the SEC with its very important job."

McClellan also said during the Feb. 5 call with members of the media that FDA rules still require the agency to keep much of the company information private.

Change In Rules

The new rules authorize certain FDA employees to share private information, including "misstatements about scientific research" with the SEC, rather than on a case-by-case basis, he said.

To ease the matter, FDA staff who interact with the SEC will be trained in securities law, but Axford said there is still the possibility that confidential information will be "leaked" to the SEC.

And securities rules require wide disclosure.

Axford said she's curious to see how the new rules will play out.

She finds that the additional scrutiny by regulators is likely to burden law-abiding companies by having to spend time and money on double-checking the wording in press releases and training people.

Her advice to biotech execs: "Be extra careful and leave nothing open to interpretation--Just the facts."

Asked whether she thinks that the new rules will help protect shareholders from another ImClone debacle, Axford said, "it's too soon to tell."

As for ImClone's drug Erbitux, the cancer drug has been approved in Switzerland and analysts expected its FDA approval as well.