The New SEC-FDA Alliance

When prosecuting a company for securities fraud, the government has historically focused on the company's dissemination of false financial information, information that is objective and easily quantifiable. In the last few months, the SEC has signaled, at least with respect to the pharmaceutical industry, that it may widen its enforcement net to a significantly grayer area, the dissemination of information regarding the status of drugs for which the company is seeking FDA approval.

The New Alliance

On Feb. 5, 2004, the FDA and the SEC announced a new alliance between the two agencies. In a press release describing the changes, the FDA explained that “[u]nder the new referral procedure, any FDA employee who believes a publicly held, FDA-regulated firm has made a false or misleading statement to the investment public concerning a matter within the FDA's authority can initiate a process for referring the matter to the SEC Division of Enforcement.” http://www.fda. gov//bbs/topics/NEWS/2004/NEW01019.html.   According to letters exchanged between the two agencies, the Deputy Director of the SEC Division of Enforcement is responsible for receiving the referrals. The alliance also creates a designated contact person in each of the FDA's main organizational components from whom the SEC can request information. Most importantly, the information that can be exchanged includes what in the past was deemed “confidential information.” Under the alliance, the designated points of contact at the FDA have blanket authority to share such confidential information with the SEC.

Why the Alliance?

According to Jeffrey Reidler, the assistant director of the SEC's Corporation Division, the SEC's increased interest in statements made by pharmaceutical companies is attributable to the increase in the number of pharmaceutical companies that are publicly discussing their products' progress through the drug development process. The new program may also be fallout from the Sam Waksal insider-trading case, which spawned a congressional investigation into, among other things, what the FDA could or should have done about certain “overly optimistic” public statements made by Dr. Waksal, the then-President and CEO of ImClone Systems, during the time that its drug Erbitux was under the agency's review.

For example, on Sept. 19, 2001, Dr. Waksal announced to the public: “We do not have any worries about the FDA. We work very closely with the FDA and we feel very comfortable that the package that we're submitting to the FDA will be able to get us to approval for refractory colorectal cancer … at the beginning of next year.” Anand and Adams, ImClone Incident Spurs Demand for Greater Disclosure from FDA, The Wall Street Journal, Jan. 25, 2002. In December 2001, the FDA rejected ImClone's application for Erbitux.

In reviewing the statements made by Dr. Waksal, members of Congress queried the FDA as to why it did not take any action if it knew the statements were untrue. Richard Pazdur, the director of the FDA's Division of Oncology Drug Products, testified that it was not uncommon, in the wake of a very contentious meeting with a company, for the FDA to read in the press that “the meeting with the FDA was a very fruitful and productive meeting, which is exactly the opposite of what it was. And we have no way to basically counteract that in essence.”

To date, pharmaceutical companies that have made overly optimistic public statements about the status of their dealings with the FDA have been the subject of class action lawsuits. See, e.g., Greater Pa. Carpenters Pension Fund v. Adolor Corp., No. 04-1728 (E.D.P.A. filed Apr. 21, 2004). In only a small number of cases have companies been exposed to SEC enforcement action. See, e.g., SEC v. Global Telecom Servs. L.L.C. d/b/a Med. Disposal Devices, No. 03-418 (D.Conn. filed Mar. 11, 2003) (SEC alleges that company claimed that device was approved by the FDA when it was not); SEC v. Maxxon, Inc., No. 02-975 (N.D.Okla. filed Dec. 30, 2002) (SEC alleges, among other things, that company publicly stated that it recently applied for approval of its device with the FDA without disclosing that the FDA had already responded negatively to its application).

Given the complexities of the drug approval process, it makes sense that the SEC's forays into this arena have been limited. When seeking approval for a new drug, pharmaceutical companies spend years dealing with the FDA; there are numerous communications, some more positive than others. FDA's rejection of a pending application “as is” and request for an additional trial or additional data does not translate into a complete rejection of the drug. Indeed, ImClone was ultimately granted FDA approval for Erbitux. Furthermore, for the FDA to review a drug for approval intelligently, truthful exchanges of scientific information — good and bad — are important and encouraged by the confidentiality afforded the company's submissions. If a clinical trial supporting a new drug has one small piece of data that is possibly unfavorable, the company must feel comfortable discussing this with the FDA so that future patients can benefit from the information. The new program, in eliminating any confidentiality protections, does not appear to take into account the value to the public of disclosures to the FDA that may be more candid because they are confidential.

What About SOX?

In reviewing press releases and financial statements, company counsel have generally relied on the representations of management with regard to a drug's performance in clinical trials or the status of FDA review of a new drug. In light of the new program, is this enough? Does ' 307 of Sarbanes-Oxley (SOX), which requires lawyers to report up-the-ladder evidence of material violations of securities law, require counsel to delve deeper? Jeffrey Reidler has suggested that more vigilance may be necessary. At the Food and Drug Law Institute's annual conference last April, Reidler advised pharmaceutical companies, when they make any public statement about a clinical trial supporting an application for a new drug, to specify what the trial was designed to show along with other details to put the news in context. For counsel to review such statements would require significantly greater familiarity with detailed clinical trial materials than they would ordinarily have.

Avoid Getting Ensnared

What can an attorney do to help his or her pharmaceutical client avoid getting ensnared in the SEC's new enforcement net? During the approval process, the FDA routinely provides written FDA “minutes” memorializing meetings and conference calls with the applicant company. Attorneys should consider periodically reviewing those minutes along with the client's internal memos of the same meetings and calls. The information can then be compared with statements proposed for press releases, SEC filings and other public statements.

Also, legal and regulatory review of promotional materials is an accepted and oftentimes required practice in the pharmaceutical industry. A company may wish to consider expanding the jurisdiction of review committees to cover sections of financial filings, press releases, analysts' calls and all public statements relating to any matter within the FDA's jurisdiction. Indeed, the SEC has suggested as much. In a Nov. 25, 2002 cease-and-desist order against the General Counsel of ICN Pharmaceuticals, the SEC found that he should have consulted with regulatory counsel before issuing a press release addressing the status of ICN's new drug application.

Recently, certain members of Congress have been considering the American Medical Association's proposal to require pharmaceutical companies to include the results of all their clinical trials in a national registry. Should such a registry be instituted, counsel should not only review submissions to the registry but should review those submissions against draft financial statements and press releases.

After Enron and the accounting scandals, the SEC pledged to take a stronger stand to protect the public from securities fraud. The new program with the FDA appears to be in furtherance of this pledge. In protecting the public from potential securities fraud, the SEC may, however, be hurting the public in freezing the flow of useful information regarding a company's drug approval process. Only time will tell whether the new program with the FDA will do more good than harm.

When prosecuting a company for securities fraud, the government has historically focused on the company's dissemination of false financial information, information that is objective and easily quantifiable. In the last few months, the SEC has signaled, at least with respect to the pharmaceutical industry, that it may widen its enforcement net to a significantly grayer area, the dissemination of information regarding the status of drugs for which the company is seeking FDA approval.

The New Alliance

On Feb. 5, 2004, the FDA and the SEC announced a new alliance between the two agencies. In a press release describing the changes, the FDA explained that “[u]nder the new referral procedure, any FDA employee who believes a publicly held, FDA-regulated firm has made a false or misleading statement to the investment public concerning a matter within the FDA's authority can initiate a process for referring the matter to the SEC Division of Enforcement.” http://www.fda. gov//bbs/topics/NEWS/2004/NEW01019.html.   According to letters exchanged between the two agencies, the Deputy Director of the SEC Division of Enforcement is responsible for receiving the referrals. The alliance also creates a designated contact person in each of the FDA's main organizational components from whom the SEC can request information. Most importantly, the information that can be exchanged includes what in the past was deemed “confidential information.” Under the alliance, the designated points of contact at the FDA have blanket authority to share such confidential information with the SEC.

Why the Alliance?

According to Jeffrey Reidler, the assistant director of the SEC's Corporation Division, the SEC's increased interest in statements made by pharmaceutical companies is attributable to the increase in the number of pharmaceutical companies that are publicly discussing their products' progress through the drug development process. The new program may also be fallout from the Sam Waksal insider-trading case, which spawned a congressional investigation into, among other things, what the FDA could or should have done about certain “overly optimistic” public statements made by Dr. Waksal, the then-President and CEO of ImClone Systems, during the time that its drug Erbitux was under the agency's review.

For example, on Sept. 19, 2001, Dr. Waksal announced to the public: “We do not have any worries about the FDA. We work very closely with the FDA and we feel very comfortable that the package that we're submitting to the FDA will be able to get us to approval for refractory colorectal cancer … at the beginning of next year.” Anand and Adams, ImClone Incident Spurs Demand for Greater Disclosure from FDA, The Wall Street Journal, Jan. 25, 2002. In December 2001, the FDA rejected ImClone's application for Erbitux.

In reviewing the statements made by Dr. Waksal, members of Congress queried the FDA as to why it did not take any action if it knew the statements were untrue. Richard Pazdur, the director of the FDA's Division of Oncology Drug Products, testified that it was not uncommon, in the wake of a very contentious meeting with a company, for the FDA to read in the press that “the meeting with the FDA was a very fruitful and productive meeting, which is exactly the opposite of what it was. And we have no way to basically counteract that in essence.”

To date, pharmaceutical companies that have made overly optimistic public statements about the status of their dealings with the FDA have been the subject of class action lawsuits. See, e.g., Greater Pa. Carpenters Pension Fund v. Adolor Corp., No. 04-1728 (E.D.P.A. filed Apr. 21, 2004). In only a small number of cases have companies been exposed to SEC enforcement action. See, e.g., SEC v. Global Telecom Servs. L.L.C. d/b/a Med. Disposal Devices, No. 03-418 (D.Conn. filed Mar. 11, 2003) (SEC alleges that company claimed that device was approved by the FDA when it was not); SEC v. Maxxon, Inc., No. 02-975 (N.D.Okla. filed Dec. 30, 2002) (SEC alleges, among other things, that company publicly stated that it recently applied for approval of its device with the FDA without disclosing that the FDA had already responded negatively to its application).

Given the complexities of the drug approval process, it makes sense that the SEC's forays into this arena have been limited. When seeking approval for a new drug, pharmaceutical companies spend years dealing with the FDA; there are numerous communications, some more positive than others. FDA's rejection of a pending application “as is” and request for an additional trial or additional data does not translate into a complete rejection of the drug. Indeed, ImClone was ultimately granted FDA approval for Erbitux. Furthermore, for the FDA to review a drug for approval intelligently, truthful exchanges of scientific information — good and bad — are important and encouraged by the confidentiality afforded the company's submissions. If a clinical trial supporting a new drug has one small piece of data that is possibly unfavorable, the company must feel comfortable discussing this with the FDA so that future patients can benefit from the information. The new program, in eliminating any confidentiality protections, does not appear to take into account the value to the public of disclosures to the FDA that may be more candid because they are confidential.

What About SOX?

In reviewing press releases and financial statements, company counsel have generally relied on the representations of management with regard to a drug's performance in clinical trials or the status of FDA review of a new drug. In light of the new program, is this enough? Does ' 307 of Sarbanes-Oxley (SOX), which requires lawyers to report up-the-ladder evidence of material violations of securities law, require counsel to delve deeper? Jeffrey Reidler has suggested that more vigilance may be necessary. At the Food and Drug Law Institute's annual conference last April, Reidler advised pharmaceutical companies, when they make any public statement about a clinical trial supporting an application for a new drug, to specify what the trial was designed to show along with other details to put the news in context. For counsel to review such statements would require significantly greater familiarity with detailed clinical trial materials than they would ordinarily have.

Avoid Getting Ensnared

What can an attorney do to help his or her pharmaceutical client avoid getting ensnared in the SEC's new enforcement net? During the approval process, the FDA routinely provides written FDA “minutes” memorializing meetings and conference calls with the applicant company. Attorneys should consider periodically reviewing those minutes along with the client's internal memos of the same meetings and calls. The information can then be compared with statements proposed for press releases, SEC filings and other public statements.

Also, legal and regulatory review of promotional materials is an accepted and oftentimes required practice in the pharmaceutical industry. A company may wish to consider expanding the jurisdiction of review committees to cover sections of financial filings, press releases, analysts' calls and all public statements relating to any matter within the FDA's jurisdiction. Indeed, the SEC has suggested as much. In a Nov. 25, 2002 cease-and-desist order against the General Counsel of ICN Pharmaceuticals, the SEC found that he should have consulted with regulatory counsel before issuing a press release addressing the status of ICN's new drug application.

Recently, certain members of Congress have been considering the American Medical Association's proposal to require pharmaceutical companies to include the results of all their clinical trials in a national registry. Should such a registry be instituted, counsel should not only review submissions to the registry but should review those submissions against draft financial statements and press releases.

After Enron and the accounting scandals, the SEC pledged to take a stronger stand to protect the public from securities fraud. The new program with the FDA appears to be in furtherance of this pledge. In protecting the public from potential securities fraud, the SEC may, however, be hurting the public in freezing the flow of useful information regarding a company's drug approval process. Only time will tell whether the new program with the FDA will do more good than harm.