Pharmaceutical companies and medical device companies frequently must determine what (if anything) to communicate to investors about key developments in clinical trials or the Food and Drug Administration’s (“FDA’s”) regulatory review process. This decision is often complicated because a disclosure may be required even in instances where a company has incomplete information. A life sciences company may, for example, be uncertain about the status of the FDA’s regulatory review, have partial results from a pivotal clinical trial, or have reports of serious adverse events in the absence of confirmatory evidence. In these situations, a company may conclude it has to say something to investors. Determining what to say, however, requires great nuance to ensure that meaningful information is relayed while clearly describing the limits of the company’s knowledge.
Statements made by life sciences companies are closely scrutinized by the Securities and Exchange Commission (“SEC”) and Department of Justice (“DOJ”). These agencies recognize that investors often base their investment decisions on disclosures relating to clinical trials and the status of the regulatory review process. That is particularly true when a company’s financial well-being is dependent on one developmental product, in which case even relatively routine regulatory developments may be deemed “material” and require disclosure.
The SEC and/or DOJ will open investigations if they believe life science companies may have intentionally deceived investors. These inquiries are often aided by a key inside source: the FDA. The FDA will know exactly what it communicated to the company about its regulatory review. Since 2004, in fact, the FDA and SEC have had a coordination mechanism that enables the FDA to make referrals to the SEC if, “in the normal course of their activities, they come to believe that a company may have made a false or misleading statement to the investing public.”
SEC and DOJ investigations present far greater risk than ordinary commercial litigation. These entities have broad (although not unlimited) subpoena power to gather documents and question witnesses. And the consequences of enforcement may be severe: large fines for the company and its executives, bars on service as a director or officer at a publicly traded company for a period of time and, in extreme cases, criminal prosecution including potential jail time.
Examples of SEC and DOJ Enforcement Actions that Illustrate Challenges Faced by Life Sciences Companies in Making Disclosure Decisions
The SEC’s investigation of Clovis Oncology, Inc. (“Clovis”) highlights the challenges that a company faces when making disclosures about ongoing clinical trials. The following factual summary reflects the SEC’s allegations, which Clovis has neither admitted nor denied. In 2015, Clovis was in a race with a competitor to receive approval from the FDA for a drug designed to treat a particular type of lung cancer. The competitor had already disclosed that its drug had a confirmed 63% efficacy rate. In May 2015, Clovis told investors that its drug had an efficacy rate of 60% – but Clovis did not disclose the data were unconfirmed. Investors believed that Clovis’ disclosure was good news because it appeared to show that the efficacy rate of Clovis’ drug matched that of its competitor. In July 2015, Clovis’ executives were told that the unconfirmed efficacy rate was 42% and the confirmed efficacy rate was 31%. Based on prior experience, these executives hoped that the efficacy rate would increase with the passage of time. Clovis nonetheless again referenced the 60% efficacy rate in solicitation materials for a $298 million stock offering. In November, 2015, the FDA informed Clovis that it believed the efficacy rate was in the 20% range. Clovis nevertheless used the 60% efficacy figure at an investor conference and did not tell investors that the FDA believed the efficacy rate was significantly lower.
Clovis ultimately disclosed that the drug’s efficacy was 28%. Clovis’ stock fell 70% on this news, and the SEC opened an investigation. Under the terms of a settlement with the SEC, Clovis agreed to a $20 million penalty and two executives agreed to significant monetary penalties.
In another recent case, the DOJ’s criminal prosecution of InterMune and its CEO highlight that a company must consider not only what clinical trial data it discloses but how it characterizes that data. As addressed below, the DOJ’s prosecution was based on a disclosure that was literally true but allegedly omitted key information about how the company reached its results. Specifically, InterMune sought FDA approval to use Actimmune to treat idiopathic pulmonary fibrosis. The clinical trial, however, failed to achieve the desired endpoint because there was no statistically significant difference between patients who took the drug and a placebo. The company issued a press release touting that the drug reduced mortality by 70% for a specific subset of patients, those with “mild to moderate disease”; the press release also acknowledged that the clinical trials had failed to meet the primary endpoints. The DOJ took the position that the press release was fraudulent – notwithstanding that it was technically accurate – because the press release did not explain that the subgroup of patients was not identified until after the trial. The DOJ argued that once a clinical trial failed to meet primary endpoints, the company should not have made claims about efficacy in patient subgroups that were identified post-trial. On the basis of this press release, the DOJ brought fraud charges against InterMune and its CEO, W. Scott Harkonen. InterMune agreed to a $37 million fine and entered into a deferred prosecution agreement. Dr. Harkonen was convicted of wire fraud and was sentenced to six months of home confinement.
Best Practices for Life Sciences Companies to Reduce SEC and DOJ Enforcement Risk
Life sciences companies should have protocols in place to ensure that all statements about significant developments in clinical trials and the regulatory approval process are carefully reviewed for accuracy. It may be prudent for such statements to be reviewed by an interdisciplinary team that includes members of the company’s senior executive leadership, investor relations, scientific experts, regulatory experts, in-house counsel and, where appropriate outside counsel with expertise in both securities and FDA law.
A. Statements About Clinical Trials
- Make accurate statements about clinical trial data. A company should not make statements about clinical trial data that are contradicted by the underlying data. If the FDA has a different interpretation of the data, the FDA’s differing interpretation under many circumstances should be disclosed to investors.
- Provide appropriate caveats regarding clinical results. Statements about clinical trial data should include proper qualifications so that investors can make their own informed judgment about the significance (or lack thereof) of the applicable data. This issue is of particular concern to government enforcers, as evidenced by the SEC’s allegation that Clovis acted improperly by not disclosing that the efficacy rate was unverified and DOJ’s allegation that InterMune and its CEO committed fraud by not disclosing that the patient subgroup highlighted in the press release was not identified until after the clinical trial. Similarly, a company may risk an enforcement action if it touts a product’s safety or efficacy without disclosing negative test results.
- “Top line” results should not overstate the outcome of a clinical trial. A company faces a particular challenge in a situation where it has “top line” results from a clinical trial but the company cannot yet disclose the underlying data. A company risks the allegation that a “top line” summary omitted significant details, e.g., that notwithstanding that the primary endpoint was met, the drug or device provides only modest benefits. A company should consider: (i) whether it has conducted sufficient analyses to reach a “top line” determination; (ii) whether the company is required to disclose those “top line” results to investors; and (iii) what the company should say about them. If the company determines that disclosure is required, it should include appropriate caveats regarding the company’s state of knowledge. Further, to the extent possible, a company should avoid putting itself in a situation where it may be alleged to have overstated a product’s benefits.
- Ensure that clinical trial data is accurate and reliable. A company risks fraud allegations if it discloses a favorable clinical trial outcome but knows (or should have known) that the underlying data may be unreliable. Ensuring data accuracy and integrity is a complex task and a full discussion is beyond the scope of this article. A company should generally ensure that clinical trials are conducted by independent researchers who do not profit if a trial is successful. Nevertheless, a company is ultimately responsible for all aspects of a study and therefore should consider establishing mechanisms such as review committees, periodic audits or independent reviews designed to identify potential errors or actual misconduct. Additionally, all adverse events should be properly reported to the FDA.
B. Statements About the Regulatory Review Process
- Evaluate the need to disclose negative information obtained from the FDA about a pending application. Companies often obtain negative information from the FDA – particularly with regard to drug or device development. Such information may, under some circumstances, be material and may need to be disclosed immediately. When a company becomes aware, for example, that approval may be delayed, that a product is not likely to be approved by the FDA or that the approval status has otherwise changed, it must be cautious about disclosing inaccurate or incomplete information.
While there is no requirement to disclose exact copies of communications from the FDA, companies should assume that the SEC or DOJ will carefully compare what a company has been told by the FDA with what the company has told investors. Any material discrepancies could form the basis of an allegation that the company has intentionally defrauded investors. Andrew Ceresney, the former SEC Enforcement Director, emphasized the importance of accuracy regarding communications with the FDA: “Accuracy of reporting in your dealings with the FDA is critical to getting investors the information they need. FDA dealings and approvals are the lifeblood of your business and are so important to investment decisions.”
- Analyze public statements that are predicated on assumptions about the outcome of the FDA’s regulatory review process. A company should carefully analyze statements about the company’s business initiatives that are based on unspoken assumptions about the status of regulatory review. For example, a company should not provide unqualified projections of a product’s sales starting in one year if communications from the FDA suggest that it will take at least 18 months for the product to be approved.
C. Statements About Post-Approval Developments
- Ensure that statements about a product are accurate even after FDA approval has been obtained. The FDA may inform manufacturers that it has concerns about products that are already on the market. To the extent such concerns raise a potential material risk that the FDA may expect a company to conduct a recall or cease marketing the product entirely, such communication should be taken into account as appropriate when the company is making public communications about the product. Additionally, a company should implement appropriate safeguards to ensure that its products are not being marketed off label. Not only is off-label marketing potentially illegal in its own right, but a company risks the allegation that it improperly led investors to believe that product sales were legitimate and likely to continue, when in fact a significant portion of sales were the result of unlawful promotional activities.
- Evaluate the need to disclose FDA inspection results. The mere fact that a company has been inspected by the FDA is routine and generally is not material. If, however, the FDA informs a company of serious manufacturing or regulatory problems, a company must evaluate whether a disclosure is required. A materiality determination typically will depend on varied factors such as the size of the company, the number of inspections conducted relative to the number of deficiencies found, the facts known to the company, the company’s history with FDA, the agency’s language in notifying the company of the problem and the likelihood and severity of sanctions. Thus, if a company believes that there is a high probability that the inspection will result in sanctions and that the sanctions would have a significant impact on the company, then the inspection results may be material. By contrast, the results may be immaterial if the company reasonably determines that any deficiencies identified are currently being – or already have been – remedied, the cost of remediation is not significant, and the company is unlikely to face costly sanctions.
- Evaluate the need to disclose adverse events. There is no obligation to disclose every adverse event report because it is well recognized that the existence of an adverse event does not necessarily mean that the product caused the event in question. However, adverse events could become material if they are serious and unexpected, there is statistically significant data showing that the product causes the reported event, or even if there is data that shows a plausible causal link between the product and the event. Even if a company determines that adverse events are immaterial, it should consider whether any affirmative statements made by the company are questionable in light of information available to the company at the time statements were made. If adverse events ultimately trigger a public relations crisis, the SEC and DOJ may analyze whether a company’s statements about a product’s safety or efficacy were consistent with its knowledge about adverse events at the time that the statements were made. If there is a significant discrepancy between what a company said and what the company knew, it may be subject to enforcement actions for misleading investors. Additionally, the DOJ may allege the company committed mail or wire fraud by misleading consumers.
D. Additional Practical Pointers for FDA-Regulated Companies
- Avoid selective disclosure. Regulation FD requires domestic public companies, and persons acting on their behalf, to make simultaneous public disclosure when discussing material nonpublic information with certain market participants. For example, in 2003, Schering-Plough and its CEO settled charges brought by the SEC alleging violations of Regulation FD based on disclosure by the CEO of material nonpublic information about the company’s earnings prospects to institutional investors. Most public companies either have a stand-alone Regulation FD policy or incorporate the substance in another policy addressing corporate communications. Publicly traded FDA-regulated companies should review compliance with Regulation FD and their own communications policies with respect to material nonpublic information about clinical trials, the regulatory review process and post-approval developments.
- Consider whether to update existing disclosures. The full slate of corporate disclosures – from existing risk factor disclosures in annual reports on Form 10-K and quarterly reports on Form 10-Q, to company website disclosures and investor presentations – should be reviewed against new material nonpublic information to assess whether the company has a duty to update. This duty can be triggered by, for example, an upcoming periodic SEC report or a securities offering.
- Confirm compliance with applicable corporate governance policies and procedures. A variety of existing company policies (e.g., insider trading policy, disclosure policy, corporate governance policy, code of business ethics) are often implicated by new material nonpublic information. For example, the general counsel may be required to close the window for trading in the company’s securities. A key question posed in any SEC enforcement action is whether the company’s governance policies and procedures were adequate and whether the company acted in compliance.
- Always use precise language to the extent possible. Press releases and other public statements should be carefully scrutinized to reduce or eliminate ambiguity. If a press release can create confusion or be misinterpreted, the likelihood of an SEC or DOJ enforcement action will be increased.
- Consider whether “safe harbor” language is sufficiently detailed. A company may choose to make forward-looking statements, which are protected under the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995 – provided that such a statement is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in forward-looking statements. In many cases, safe harbor language may require specific and substantive information about particular events, including specific risks that may affect whether predictions materialize as anticipated. By contrast, boilerplate warnings that are true of every drug or device, e.g., that FDA may not approve a drug, may be insufficient.
- Ensure that short- and long-term predictions are reasonable. SEC and DOJ generally understand that the FDA approval process is subject to inherent uncertainties, and accordingly a prediction about FDA approval or clinical trial results is not considered to be false merely because the prediction does not come to fruition. Instead, enforcers will generally analyze a prediction by considering whether a company had a reasonable basis for making the prediction at the time the prediction was made.
- Ensure that public statements are reviewed by both FDA and SEC counsel. The interplay between FDA and SEC legal and regulatory requirements makes a multidisciplinary review essential to ensure compliance with both agencies’ legal standards. Ideally, FDA and SEC counsel should work in tandem to ensure that there is a seamless review of applicable legal issues.
For a life sciences company, there is no time like the present to evaluate whether it has processes in place to ensure that statements regarding clinical trials and regulatory review are carefully analyzed for accuracy. These processes should be periodically updated to include precautions against pitfalls that may have been experienced by the company or other life sciences companies that were the subject of enforcement actions. Further, when reviewing public statements about these issues, the best advice is to err on the side of caution when there is meaningful uncertainty regarding the outcome of a clinical trial or the regulatory review process. Taking these steps can go a long way towards minimizing the risk of enforcement.
Andrew J. Ceresney, Maura K. Monaghan, Paul M. Rodel, and Paul D. Rubin are partners and Jacob W. Stahl is counsel with Debevoise & Plimpton LLP. The authors gratefully acknowledge the contributions of associate Kate Walsh.
Andrew J. Ceresney is a partner and Co-Chair of the firm’s Litigation Department. He has many years of experience prosecuting and defending a wide range of white collar criminal and civil cases, having served in senior law enforcement roles at both the United States Securities and Exchange Commission and the U.S. Attorney’s Office for the Southern District of New York. Mr. Ceresney represents public companies, financial institutions, asset management firms, accounting firms, boards of directors, and individuals in federal and state government investigations and contested litigation in federal and state courts.
Maura Kathleen Monaghan is Co-Chair of the firm’s Commercial Litigation Group whose practice focuses on a wide range of complex commercial litigation including products liability and mass tort litigation, environmental, healthcare, regulatory and criminal investigations and arbitration.
Paul M. Rodel is a corporate partner and a member of Debevoise’s Capital Markets, Banking, Private Equity and Latin America Groups. He represents U.S., Latin American and European companies in the financial services, energy, banking and media industries in registered, private and offshore capital markets transactions.
Paul D. Rubin is a partner and a member of the firm’s Healthcare Group. His practice focuses on FDA/FTC regulatory matters. Mr. Rubin represents FDA-regulated drug, device and consumer product companies on a wide range of issues, ranging from strategic regulatory counseling to complex compliance and enforcement matters. He also routinely conducts regulatory due diligence for private equity funds and strategic acquirers in corporate transactions.
Jacob W. Stahl is counsel and a member of the firm’s Litigation Department. His practice focuses on representing clients on healthcare-related issues, including commercial litigation, administrative disputes and compliance and regulatory advice. He also represents clients in the areas of mass tort, products liability, general commercial litigation and white collar criminal defense.
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