Boston Globe Examines SEC’s Increased Scrutiny of Biotech Firms’ Disclosure Policies

The Boston Globe on Sunday examined how the Securities and Exchange Commission since February has begun "scrutinizing biotechnology companies as part of a wider effort to ensure that companies don't mislead investors by covering up negative results of clinical trials." According to the Globe, regulators are increasingly concerned that some drug manufacturers disclose only positive clinical trial results and minimize negative results. The disclosure of trial information is "particularly important to biotech companies -- which tend to be younger and smaller than pharmaceutical firms" -- because many biotech firms depend on a single drug for financial success, the Globe reports. Stocks prices often decline rapidly when a biotech firm discloses a clinical setback for its one promising product. Because the firms have fewer products, the threshold for materiality -- the measure of whether information has sufficient impact on a firm's financial results to require disclosure to investors -- is lower for their clinical trial results.

Investigations
SEC began investigating whether Massachusetts-based Biopure misled investors when it did not disclose that FDA had blocked clinical trials because of safety concerns. SEC in December sent notices to the company CEO and a former company official indicating that the company was likely to be sued, and four other Biopure officials received such notices in the spring. In July, Transkaryotic Therapies said that SEC officials -- after an investigation into disclosures surrounding Replagal, the company's drug for Fabry disease -- recommended seeking penalties against the company and its former CEO. In August, Cubist Pharmaceuticals officials said that the company is under SEC investigation to determine whether the firm in January disclosed the results of a clinical trial with one drug candidate "in a timely fashion," the Globe reports. Derek Meisner, a Boston attorney and a former SEC enforcement attorney, said, "The larger the company and the more drugs in the pipeline, the less likely the information is going to be considered material," adding, "If the drug's success is crucial to the company's bottom line or scientific credibility, then disclosure may be warranted." Walter Ricciardi, district administrator of the SEC in Boston, said that he could not comment on a particular investigation but said, "[W]hen companies speak, they must do so truthfully and accurately. Misrepresentations about the status of a product in development can be very damaging to investors."

Clinical Trial Questions
The SEC focus on clinical trials began in February when the commission's Enforcement Director Stephen Cutler announced that SEC would work more closely with FDA (Krasner, Boston Globe, 9/27). FDA recently received several complaints that drug companies have sought to suppress negative trial data concerning the use of antidepressants in children. GlaxoSmithKline last month agreed to settle a lawsuit filed by New York Attorney General Eliot Spitzer (D) that will require the company to post all of its clinical trial results online by the end of 2005. Merck and Eli Lilly have also recently announced plans to register their clinical trials on their own Web sites. NIH earlier this month announced that the agency planned to make available at no cost to the public the results of all NIH-funded research six months after the work is published in a scientific journal. The proposal, which NIH has been considering for more than a year, would require federally funded researchers to submit their papers to the agency after they have been accepted for publication and edited by a journal. Meanwhile, the Pharmaceutical Research and Manufacturers of America has presented plans to launch on Oct. 1 a database that would publish clinical trial results within a year of their conclusion; feature only summaries of unpublished studies; exclude some data, such as early-stage studies and unfinished trials; include trials not published in medical journals; and contain only trials completed after Oct. 1, 2002 (Kaiser Daily Health Policy Report, 9/9).