Firms Face Tricky Questions on What, When to Disclose
An upbeat news release about the performance in clinical trials of a new drug called Tysabri made it sound like a breakthrough for people coping with multiple sclerosis.
“Tysabri, with its significant effect on slowing the progression of disability, offers new hope for patients with MS,” the release quoted Dr. Burt Adelman, a Biogen Idec executive vice president, as declaring.
That was on Feb. 17. The next day, Biogen notified the Food and Drug Administration that a patient in the clinical trials had fallen sick. Biogen shareholders didn’t learn this news until 10 days later, when Biogen and its marketing partner, Ireland’s Elan Corp., announced that the sick patient had died and Tysabri had been pulled from the market.
Within hours, Biogen shares had plunged 43%. Lawyers launched a flurry of class-action lawsuits. The Securities and Exchange Commission started to ask questions. Biogen had joined a growing group of companies mired in controversy over what management revealed to the public -- and when.
SEC enforcers often think of it as the “reasonable investor” test. “Would a reasonable investor think this is important, knowing what they know already?” said Elizabeth P. Gray, a former assistant director of the Securities and Exchange Commission’s enforcement division.
The test may be tricky. “Science by its nature is complex and uncertain,” said Gray, a lawyer with Foley & Lardner who is also part owner of a Maryland company that develops schizophrenia drugs. “It’s not always obvious for companies to know precisely what should be disclosed.”
Answering the question, however, is increasingly important. In addition to Biogen, Chiron Corp. and Merck & Co. have both suffered stock plunges, class-action lawsuits and regulatory scrutiny in the wake of revelations about their drugs.
“Negative news by a company, particularly on the heels of upbeat statements by company representatives, will require a lot of explaining” in today’s climate, said Jacob S. Frenkel, a former SEC enforcement attorney now with Shulman Rogers. “The idea that a corporate executive did not know will meet great skepticism.”
Biogen spokeswoman Amy Brockelman maintained that the company acted promptly to inform the public and intended to fight the shareholder suits. Senior management didn’t know about the health questions until one day after the Feb. 17 news release and immediately informed the FDA, she said.
At that point, the company needed to evaluate the new information and work with its partner Elan and the FDA before alerting shareholders, she said.
“We acted very swiftly and deliberately to ensure patient safety,” Brockelman said. “That’s actually a very rapid response.”
Biogen shares rose 76 cents Tuesday to $38.35 on Nasdaq. The stock traded at $67.25 on Feb. 25.
Those who enforce disclosure laws focus on the matter of whether an event is “material” -- a concept that may be hard to nail down but is of paramount importance to regulators.
“The threshold is: Would the information change the decision of a reasonable investor to buy or sell the stock?” said Laura A. Berezin, an attorney with Cooley Godward in Palo Alto. “Companies spend a lot of time thinking about that.”
She added: “There’s just no question that the requirements for disclosure have gotten more sophisticated and more demanding -- not just from the SEC but from the investor community.”
Public demands that companies scale back secrecy have escalated since recent corporate scandals, and the SEC has supported more meaningful disclosure for public companies. Yet the pressures may raise particular issues in biotechnology because of the importance of test results and the profound effect that new products may have on the bottom line.
Still, if a company trumpets even modest, initial news, it may establish a public expectation that it will disclose all sorts of developments, good and bad, in the future.
Said Gray: “You don’t want to walk down a road where you only disclose what’s positive. You don’t want to be out there promising the moon.”
The matter of timing -- what did executives know and when did they know it? -- has played a big role in recent cases.
On Oct. 5, when British regulators temporarily shuttered the Liverpool vaccine factory owned by Chiron, slashing the U.S. flu vaccine supply for the current season, shares of the Emeryville, Calif.-based company plunged more than 16%.
Yet just a week earlier, Howard Pien, chief executive of Chiron, testified before Congress that the company expected to supply vaccine for the current season.
A class-action lawsuit by aggrieved investors soon alleged that the Liverpool plant’s history of regulatory problems should have signaled to executives that a serious disruption remained possible. A New York grand jury began looking into the situation. In February, meanwhile, the SEC started a formal investigation.
Although Chiron executives said they had not anticipated the shutdown, the sequence of events placed them on the defensive in the current climate of skepticism.
“In today’s environment, earnest but ignorant public statements no longer fly,” Frenkel said. If bad news seems to abruptly contradict a rosier corporate message, “a CEO will be held accountable,” he said.
The price that companies may pay for upbeat public pronouncements is underlined by what happened with Vioxx, an arthritis drug marketed by Merck. In September, Merck yanked Vioxx from the marketplace after findings that it could raise the risk of heart attacks and strokes.
Shareholder suits have questioned when Merck became aware of the problems and whether the company gave regulators and the public sufficient information. The suits also note that the FDA sent a warning letter to Merck in 1999 calling Merck’s promotional materials “false and misleading,” and also instructed Merck to send a warning letter to doctors in 2002.
The Justice Department and the SEC are investigating Merck’s handling of the matter. Merck last month suggested that it might put Vioxx back on the market.
An SEC spokesman declined to comment on Merck, Chiron or Biogen.
Although regulators often focus on when a company learned of a negative development, disclosure controversies also may center on the message a company gives to the public.
In November 2002, executives at BioCurex Inc. learned that the FDA had classified their cancer detection technology, Histo-RECAF, as “exempt from pre-market notification,” allowing it to be marketed in the United States.
The small British Columbia company went on to tell investors that its product had been “cleared” by the FDA for U.S. sale. But last spring, after a surge in the stock price, the SEC suspended trading on BioCurex for 10 days, complaining about the accuracy of BioCurex’s public statements.
The exempt classification granted BioCurex was a status for medical devices -- and not the same as an FDA approval granted to medications.
“It’s a matter of semantics. I used common language that everybody can understand,” Ricardo Moro, the company’s president and chief executive, said in an interview.
The SEC also began investigating BioCurex, which trades over the counter in the so-called Pink Sheets market. A spokesman for the regulatory agency declined to comment.
“We want to get a resolution to this,” Moro said. “We’re valid as a company. It’s our position that we haven’t done anything wrong.”