Halting the Hype

Unfortunately, companies sometimes violate the public trust by issuing false or misleading statements about FDA-related issues, such as the progress of FDA's pre-market review. When we identify suspected misstatements, we have a new process to bring them to the attention of the SEC staff as quickly and efficiently as possible." Then FDA Commissioner Mark McClellan issued that statement in a February press release.

The new collaboration between FDA and the Securities and Exchange Commission signals a firm commitment by both agencies to increase their protection of investors against false and misleading statements about FDA-related issues, in particular the status of the FDA's review of new drugs. It also sends a strong message to the industry that the rules of the game have changed and that pre-approval promotional statements will be subject to heightened scrutiny from here on.

This article discusses how the ImClone/Martha Stewart scandal paved the way for the new FDA-SEC initiative and provides an overview of the new intra-agency collaboration and its centralized procedures. It also highlights the potential effect on companies' pre-approval promotional statements and explains how they can minimize the risk of exposure from such statements.

Ups + Downs

BACK IN 2001, IMCLONE WAS A WALL STREET

darling, rising from $38 a share in 2000 to more than $75 a share in early December 2001. ImClone's business was founded on a single compound—a highly publicized, experimental drug, Erbitux (cetuximab), which was designed to be used in colon cancer patients with irinotecan, a marketed chemotherapy drug. ImClone and Erbitux were hot, making the cover of

Business Week

and grabbing headlines with a feature story on CBS's

60 Minutes

.

ImClone's founder and CEO, Samuel Waksal, predicted publicly many times that Erbitux would be "one of the biggest drugs in the history of oncology," a multibillion-dollar blockbuster. Waksal repeatedly boasted about how quickly FDA was expected to approve the drug and how an expedited approval would catapult revenues. ImClone's future looked promising. But in December 2001, black clouds moved in over the Wall Street favorite.

ImClone's fast-track application. Six months earlier (June 2001), ImClone had submitted to FDA a "rolling" biologics licensing application (BLA), meaning that it would submit its application in piecemeal fashion as each section was completed. ImClone explained to investors that this approach would allow ImClone to get continuous feedback from the agency, thereby minimizing potential problems.

It took ImClone five months to complete its BLA. During that time, the company issued multiple press releases highlighting the successful progress of its fast-track application and the positive effect FDA approval would have on the company's revenues.

In September 2001, ImClone entered into a lucrative commercialization agreement with Bristol-Myers Squibb to co-develop and co-promote Erbitux in the United States, Canada, and Japan. Under the terms of the agreement, BMS agreed to pay ImClone $1 billion in three cash payments upon achieving certain milestones, starting with $200 million for executing the agreement and ending with $300 million after FDA accepted the Erbitux application.

BMS also acquired about 14.4 million shares of ImClone's common stock through a tender offer at a price of $70 per share. In the end, BMS took a 20 percent stake in the company and secured up to 40 percent of Erbitux's future profits.

FDA regulations required the agency to decide within 60 days whether the application was administratively and scientifically complete and could be accepted for review. Only if a BLA is accepted for filing does the FDA review the application to determine whether the drug will be approved for marketing. The 60-day deadline on ImClone's application came and went, with no word from the agency. FDA exercised its right to extend its review period by an additional 30 days.

A bombshell drops. On Friday, December 28, 2001, after the market closed, ImClone issued a shocking press release, announcing that FDA had issued a "refuse to file" or RTF letter rejecting the Erbitux application. The press release stated:

• FDA would not accept the filing in its current form.

• The company would meet with the agency as soon as pos- sible to discuss the requests for additional information.

• ImClone would work closely with FDA toward the goal of an expeditious acceptance of the BLA.

On December 31, ImClone held a conference call for analysts and investors, during which it painted a somewhat optimistic picture of the reasons for FDA's refusal to file and the prospects for moving forward. Waksal told investors that the agency had denied the application because ImClone had not provided enough data about the cancer patients participating in the trial. He projected that ImClone would be able to answer the questions by the end of the first quarter of 2002 and said he expected FDA to approve Erbitux for marketing by the fall of 2002.

The plot thickens. Unbeknownst to ImClone, FDA's RTF letter, which is a non-public document, had been leaked to the Cancer Letter, a Washington, DC-based newsletter. On Jan-uary 4, 2002, the Cancer Letter disclosed the contents of the letter and revealed for the first time that the agency had repeatedly informed ImClone about problems with the structure of its Erbitux trials and had warned it about violations of protocol.

The agency letter stated: "In order for your applicationto be considered, you were informed during the meeting of August 11, 2000, in our letter of January 19, 2001, and during the telephone conference call of January 26, 2001, that the application must provide evidence that the addition of a toxic agent (irinotecan) is necessary to achieve the clinical effect."

Failure to Disclose

FDA'S LETTER INDICATED THAT THE AGENCY

had talked to ImClone about ways to rectify the problems to ensure the application and clinical trials were complete. FDA also told ImClone that trial patients had to have failed previous chemotherapy treatments. Despite this, ImClone failed to submit such refractory evidence.

According to the Cancer Letter, the defects in ImClone's clinical trials were so serious that the company would not likely be able to refile its Erbitux application in the first half of 2002 and would likely be delayed until late in 2002 because FDA was requiring additional studies.

Faced with that exposure, on January 9, 2002, Waksal finally admitted, "We put together a faulty package. We screwed up." The CEO also admitted that ImClone would need to conduct new clinical trials to prove Erbitux's efficacy. On January 10, 2002, the New York Times reported that Waksal had admitted at the 20th Annual J.P. Morgan H&Q Healthcare Conference that FDA's rejection was "not an insignificant problem; the data does not exist." Between December 28, 2001 and January 9, 2002, ImClone's stock lost more than 42 percent of its value.

More Trouble

IN JANUARY 2002, THE HOUSE ENERGY AND

Commerce Committee, which at the time was investigating the Enron scandal, initiated an inquiry into ImClone's clinical trials and its pre-approval promotional statements about Erbitux.

The thrust of the congressional inquiry, led by Republicans Billy Tauzin and James Greenwood, was whether ImClone had misled public investors into believing that its FDA application was on track when it was not. The committee delved into issues of timing, specifically when ImClone's officers first learned about FDA's concerns about clinical trial structure, and whether the agency had talked with SEC about any pre-approval promotional statements that ImClone had made to investors.

The committee served formal letters of inquiry on ImClone, BMS, and FDA. Its letter to FDA underscored the gravity of the situation: "We have several serious concerns. Available information seems to conflict with ImClone's description of the contents of the agency's RTF letter and its clinical research. Without the Cancer Letter article, investors would have had to rely on ImClone's questionable descriptions of the RTF letter."

The congressional inquiry letter also stated: "The FDA's statute and regulations appear to inhibit the agency on its own from disclosing some, if not all, of the RTF letter or other similar, relevant information to the Securities and Exchange Commission when there are concerns about the accuracy and completeness of company's descriptions of FDA actions."

The committee demanded that FDA produce all records relating to its rejection of Erbitux's BLA, as well as records of all meetings it had had with ImClone officials. The committee specifically wanted to know: "whether the FDA has had contact with the SEC on the ImClone/Erbitux matter, and, if there was contact, appropriate details about the nature of the contact." The committee asked hard questions about whether FDA should have had any contact with SEC about the ImClone/Erbitux matter before January 2002. It debated the prudence of sharing non-public information between the agencies in the event that FDA believed a company was not being truthful with the public.

The congressional committee subsequently expanded its probe to include whether the price of ImClone's shares had been artificially inflated and propped up as certain Waksal family members sold their shares in advance of FDA's bad news.

Insider Trading

ON THE HEELS OF THE CONGRESSIONAL INVESTIGATION

, SEC and the Department of Justice (DOJ) launched their own investigations into ImClone and Waksal. They discovered that Waksal and his family had attempted to sell shares of ImClone stock, then worth over $7.3 million, just before the company announced FDA's bad news.

Over time, it was discovered that Waksal's stockbroker Peter Bacanovic (who had refused to sell Waksal's shares) had told his assistant, Douglas Faneuil, about Waksal's attempted sale and instructed him to immediately tell Waksal's close friend and fellow ImClone stockholder Martha Stewart about it. Upon hearing the news, Stewart directed Faneuil to sell all 3,928 shares of her ImClone stock. Her stock was sold just ahead of the FDA announcement at a price of $58.43 per share, for a profit of $228,000.

According to the indictments against Stewart, Bacanovic, and Faneuil that soon followed, after learning of the SEC and DOJ investigations, Bacanovic and Stewart allegedly entered into a conspiracy to obstruct the investigation and then committed perjury to conceal and cover up Stewart's insider trading. According to the indictments, they allegedly fabricated an explanation for Stewart's sale of her stock—that she had a pre-existing agreement to sell the stock if the price ever dropped below $60 per share.

In the wake of investigations by Congress, SEC, and DOJ, class action securities lawsuits began to crop up around the country. The suits alleged that Waksal and other company officials had made many false and misleading statements to investors about the status of FDA's review of Erbitux. The lawsuits alleged that the statements were misleading because ImClone knew that its application did not comply with the stated requirements of FDA and it had not, in fact, been working "diligently" with the agency in preparing the Erbitux application as it had claimed.

SEC + FDA Collaborate

THESE DEVELOPMENTS LED TO THE FEBRUARY 2004

announcement that SEC and FDA would enhance their collaboration in targeting pharma companies' pre-approval promotional statements. But FDA assistance to SEC is not an entirely new concept. For the past few years, FDA has been assessing the accuracy of statements in SEC filings related to FDA issues and providing technical support when SEC investigated potential securities laws violations by FDA-regulated companies.

New referral process. The initiative seeks to improve the level of support that FDA provides to SEC and enhance information coordination between the two agencies. It establishes a new centralized procedure for referring to SEC possible instances of securities laws violation by public companies regulated by FDA. Under new procedures, whenever an FDA employee believes that a publicly held, FDA-regulated company has made a false or misleading statement to the public concerning a matter within the agency's authority, the FDA employee can initiate a process through the Office of General Counsel for referring the matter to SEC's Division of Enforcement. The deputy director of the Division of Enforcement has been designated as the person responsible for receiving such referrals.

New administrative measures. FDA has also implemented four new administrative measures to improve the level of technical and scientific assistance it provides to SEC:

1. FDA contacts: The agency has identified a liaison officer and specific contacts within each of its principal operation components for SEC to use in requesting information. These contacts are responsible for assuring that SEC's requests are handled promptly and thoroughly. FDA designated its associate commissioner of regulator affairs as the liaison officer to work with SEC in general areas of mutual interest.

2. Training: FDA and SEC are working together to identify opportunities for the two agencies to engage in simultaneous training. FDA suggested that one such area could be responding to requests for non-public information or testimony.

3. Electronic communication: FDA will use electronic communications—e-mail and file sharing—with SEC whenever possible, to provide technical or scientific support, to respond to requests from SEC for non-public information, and to review statements by FDA-regulated companies in public SEC filings, such as annual reports.

4. Non-public records/information: FDA will provide certain employees with "blanket" authorization to share non-public information with SEC. In the past, authorization was only granted on a case-by-case basis. The agencies also agreed to consider additional ways to improve their collaborative process.

No proactive policing. The new initiative has led some to question whether FDA staff will now be proactively policing all statements by all public companies. The agency addressed this issue head on in a press release, in which it said, "FDA employees will not be expected routinely to police statements by publicly held, FDA-regulated companies. However, FDA can be in a position to identify statements that may be of interest to the SEC and its staff, and FDA employees will now have a centralized procedure to make SEC referrals 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."

Impact on Industry

IT IS STILL TOO EARLY TO DETERMINE THE

extent to which the new FDA-SEC collaboration will affect drug companies' pre-approval promotional statements. But it is clear that there are several practical steps companies can take to avoid costly mistakes and minimize the risk of government investigations and private-party litigation.

Assessment. First, assess all the manners and venues in which companies make promotional statements about ongoing clinical trials. Prepare an inventory of your company's activities involving pre-marketing promotional statements, such as SEC filings, periodic press releases, and company newsletters. Determine when and how such promotional statements are made and who verifies the accuracy of the statements.

Policy. Re-evaluate your company's policy on the use of pre-approval promotional statements. If your company does not have such a policy, consider creating one. The parameters can help the company properly evaluate pre-approval statements when they are proposed. It can also address the different ways in which such promotional statements may permissibly be used in public filings, as well as in marketing initiatives and press releases. To minimize risk of liability, a company should have such statements reviewed by legal counsel.

Communication. It's important to communicate your company's policy within, and when appropriate, outside the company. Some firms have opted to use this as a public relations opportunity.

Training. The appropriate executives and business unit leaders must be trained to understand the impact of the new rules as well as on the company's own policy. No matter how good a company's policies and procedures are, if its executives do not follow them, the company could face legal risk. A well-known corporate compliance survey, conducted by Corporate Legal Times and PricewaterhouseCoopers, found that despite having written policies and procedures on various compliance matters, 60 percent of the corporations interviewed had been faced with litigation, claims, and government investigations on the very same policies and procedures covered by their written compliance programs. This suggests that training and periodic assessments to identify risks and vulnerabilities should be key components of any compliance program.

Monitor implementation. Monitoring and corrective action are part of any effective compliance effort. It may make sense to regard pre-approval promotional-statement compliance as part of a larger program of corporate integrity and legal compliance.

The fallout from the ImClone scandal has permanently affected the industry. Consequently, pharma and biotech companies need to increase their scrutiny of pre-approval promotional statements in public filings and press releases to ensure they do not run afoul of the new rules.