Feds to Biotech: No More Fibbing!


By Amy Tsao Amid all the hubbub over the Martha Stewart trial, which centers on the alleged improper trading of ImClone (IMCL) stock, Wall Street has largely ignored what may be a significant announcement by the Food & Drug Administration and the Securities & Exchange Commission. On Feb. 5, regulators said they were improving their procedures for policing biotech and drug companies' disclosure of information.

Many Wall Street analysts brushed off the news as a relatively minor change in bureaucratic procedure. But in fact the changes could make companies far more cautious. The Feds are hoping to identify biotech and drug companies that aren't being straight with investors and crack down on them much earlier in the regulatory process than in the past.

"We will protect the confidential information you give us, but that doesn't mean you can feel free to mislead the investment community," warned FDA Commissioner Mark McClellan in a conference call about the measures on the day they were released. He added: "The law will catch up with [companies]" that misrepresent their confidential communications with the FDA.

SPIN CONTROL. The "substantial number" of ImClone-style stock blowups as a result of late-breaking news has captured regulators' attention, says Dr. Greg Glover, partner in the life-sciences practice group of Boston-based Ropes & Gray LLP. The FDA and SEC were already working together, but they've set up new processes - designated contacts at each agency to swap information and training on what the agencies should be watching for - to make it easier to identify false and misleading statements.

"This is a big deal," says Geoff Porges, an analyst at Bernstein Research and one of the few on Wall Street who has recognized the importance of the changes. "Companies will have to be even more vigilant about equal and broad disclosure."

Greater attention to how and what companies are saying in their myriad press releases should be a positive development for investors. Biotech companies, typically small and dependent on a single experimental product, are often quick to issue updates on every single turn of events. The FDA doesn't comment on how a drug is faring in the review process, but companies do.

And usually, they'll cast the situation in the most positive light possible. Companies have long "played with their stock price by the way they spun updates on their regulatory processes," says Porges. "We're still seeing companies spinning results of trials or even discussions with the FDA," he says.

TRADING BLACKOUTS. Greater cooperation between the agencies could make such fiddling a lot harder. The SEC is in charge of stamping out securities fraud, but the FDA can -- and, many argue, should -- play a bigger role in raising flags at publicly traded companies in the business of drug development.

In the case of ImClone, some have questioned whether the FDA could've contacted the SEC about the company's misleading statements earlier on. While it's not under the agency's purview, "we don't want to see securities fraud occur," says David Elder, director of enforcement at the FDA.

Public-relations advisers to the industry like what the regulators are saying. However, Julie Huang, senior vice-president at New York-based Financial Dynamics, a communications company with clients in the biotech industry, wants to see the FDA and SEC "broaden their discussion." Regulators could institute blackout periods, in which insiders and other individuals involved in product's regulatory process are blocked from trading. "I look forward to knowing how they'll manage that," she says.

TOO SMALL A SOLUTION? Indeed, a fair number of industry watchers think the agencies need to do more. "This isn't going to make a difference," says Matt Kaplan, analyst at investment bank Punk, Ziegel & Co. Kaplan contends that companies that have been misleading investors will continue to do so. Others are skeptical that enforcement will be sufficiently widespread to be effective. Tad Bromley, partner in the Princeton office of law firm Reed Smith, wonders if the FDA will have "a bunch of people looking at every press release." With hundreds of publicly traded biotech firms, that would be an overwhelming task.

Another skeptic is Henry Blair, chief executive of Dyax (DYAX) and co-founder of biotech bellwether Genzyme (GENZ). When there's material information to report, he says Dyax clears the press release with its own legal department, then through outside attorneys before releasing anything. "Every press release is reviewed that way," says Blair. He adds that the measures still do little for the bigger problem that average individual investors face - the ability to judge the meaning and significance of information wisely.

At the very least, though, the industry could get a better sense of what the regulators deem to be material transgressions. And more eyes and ears paying attention to disclosure will mean that more miscreants will be flagged early on. The bottom line is that ImClone-style scandals will be a little less likely in the future. Tsao covers biotechnology issues for BusinessWeek Online. Follow her Biotech Beat column only on BusinessWeek Online


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