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In this recap of our September presentation, which includes video and an accompanying transcript, panelists – life sciences regulatory & compliance partner Kellie Combs, strategic transactions partner Patrick O’Brien, and litigation & enforcement partners Dan O’Connor and Dan Ward – discuss a trend they are seeing in U.S. Securities and Exchange Commission enforcement and class-action securities fraud matters related to life sciences companies’ communications with the U.S. Food and Drug Administration.

Topics addressed include:

  • How should companies assess materiality and frame disclosures related to FDA communications about product development or approval?
  • What is the risk that an SEC investigation will negatively impact parallel civil litigation?
  • What practical advice should life sciences companies and their executives follow to avoid issues that have arisen in recent cases brought by the SEC?

This presentation is part of Life Sciences Quarterly, a quarterly seminar series that delivers insights from Ropes & Gray attorneys, speakers from government and industry and other professionals as they examine key developments, issues and trends affecting the life sciences sector.


Chris Comeau: Thank you for coming. For those of you who I've not met, I'm Chris Comeau. I'm a partner in our M&A and securities group at Ropes and Gray and welcome to this morning's breakfast. We've got a really good topic today. The decisions by the FDA are critically important to the companies in our industry. Communications with the FDA leading up to those decisions can be tricky to read and figure out and consider how you're going to communicate to investors. And, unfortunately, when the FDA delivers bad news, it's not only bad news for the company and the patients that they're trying to treat but also for the investors, and then the stock drops, and then the securities lawsuits come. And now, much like Prince Humperdinck from Florin, the SEC is proving that it is not to be trifled with and is piling on by pursuing some enforcement actions against executives of companies where some might say they've made judgment disclosures decisions that just turned out to be wrong, turning out some really unfortunate results. We've got a good group here to talk about it. We've got two people from the initial disclosure side of the show, Pat O'Brien and Kellie Combs, who work with issuers on financial disclosure matters. And then we've got the two Dans, Dan Ward and Dan O'Connor who work with the SEC to try to convince them that we got it right. So I'll let these guys introduce themselves further and kick it off.

Dan O'Connor: All right, I'll start. So I'm Dan O'Connor. I'm a partner in Boston. I'm co-head of our securities enforcement group. As Chris said, we often times are involved with helping to guide the SEC hopefully to the right place if the disclosures were reasoned, well thought out, and accurate at all times. I was at the SEC for about four years as a trial attorney, had an FDA disclosure case when I was there involving a company called Biopure which was at the time or maybe shortly later was a Ropes & Gray client. I got to know a lot about the FDA work and how the SEC looks at these cases and I have been involved in a number since.

In addition to trying to convince the SEC to go away, we also work with Pat and Kellie and others up front too when you get into tricky disclosure decisions. We bring the perspective of how disclosure decisions might look in hindsight because, at the end of the day, that is what all of this is about.

Kellie Combs: I'm Kellie Combs. I'm a partner in the life sciences regulatory and compliance practice and based in Washington D.C. I advise pharma, biotech, medical device companies on a broad range of FDA regulatory issues that span the product life cycle. I work extensively with companies on the counseling side through the product approval process, FDA labeling negotiations, administrative disputes over things like clinical trial design and product approval.

I also do a lot of post-market work on safety and risk management, recalls, advertising and promotion and so on. I've worked extensively with Pat and others on his team advising companies on how to disclose material issues that pop up in FDA interactions and work on the back end as well on enforcement matters and investigations.

Dan Ward: I'm Dan Ward. I'm a partner in the Boston office in the litigation group. I do a mix of civil litigation including securities class actions involving biotech companies and also on the SEC enforcement side working with Dan when the SEC comes knocking.

Pat O'Brien: I'm Pat O'Brien in the capital markets group. I work almost exclusively in the life science space working for both issuers and underwriters and have worked with a number of you in the room. To some of you, what we talk about today will sound familiar from me being a burr in your saddle along the way.

Hopefully it'll be helpful. I would encourage people to ask questions as we go along because you guys are on the front lines on all of this. There's a lot of nuance in disclosing both the FDA interactions and clinical trial results. We certainly don't have all the answers, but as one of the Dans said, it all gets evaluated in hindsight which suggests an additional level of caution.

Dan O'Connor: We're going to use some case studies today. We're going go through first a number of recent class action cases and talk a little bit about the class action environment and then we're going to talk about what's been going on at the SEC. And that's based upon what we've seen since the Aveo case. I'm sure a number of you are aware of it and what happened there. What we're going to talk about is what we've seen is a real focus and concentration by the Boston office of the SEC and a small group within that office that have become very comfortable with the timelines, the typical interactions, and working with their counterparts at the FDA putting together cases. We note here that we're aware of and involved in a number of cases involving public companies, but I'd also note that there are private companies that are getting looked at as well, which are pure fraud cases. They're often times close to final rounds ahead of their complete response letters or other principle interactions. The SEC's looking at both. It is it's a real concentrated group of folks.

We'll talk a little bit about that and what we're seeing coming out of those investigations. These investigations almost always go hand in hand with class actions. There's a lot of overlap between the concepts there. We're going to talk about that as well.

Dan Ward: I'm going to run through some updates, some of the recent trends in civil securities fraud class actions particularly locally here. This is a little bit of a bad news, good news story. The bad news is that there are still a lot of securities class actions being filed. There’s actually been a pretty significant uptick in the last couple of years after the number went down a bit during the recession, and that's despite they're being fewer public listings. The even worse news for this group is that not only are the civil class actions jumping, but 30% of all securities litigation cases in the last couple of years have involved the life science sector.

It's a hot area for plaintiffs and plaintiffs' lawyers. It's the highest concentration of filings in any single sector since we had the financial crisis I think there are a couple reasons for it. One, obviously, there are a lot of companies active in this space with IPOs. But also especially for smaller, early-stage companies, it's an easy target for plaintiff's lawyers. You have a lead drug candidate in your pipeline and the price of the stock is dependent upon the success of that drug. Then there's some kind of regulatory stumble or clinical trial stumble. The results are announced. The stock immediately drops. It's very easy for the plaintiffs to prove causation. It was maybe one or two single drug candidates in the pipeline.

So there's no question about what caused the stock drop. Those kinds of situations immediately draw a lawsuit. We've been involved in a lot of them. We're going to survey here some of the cases in this field over the last four or five years. The good news is that, particularly here in district of Massachusetts in the First Circuit, the results have been pretty good for defendants overall. The courts here, the judges in D Mass, and at the First Circuit have gotten familiar with these kinds of cases and have taken a fairly defendant-friendly view, as they should. The pleading standard to plead securities fraud is very high -- you have to prove not only material misrepresentation but that the company acted with scienter meaning intent to defraud. There's a very high standard for what it means to prove intent to defraud.

In terms of some of the cases on today's topic - FDA correspondence or disclosures, there were a pair of cases involving Sarepta both which went to the First Circuit and were resolved favorably for Sarepta. The First Circuit basically held you don't have to disclose your interim back and forth with the FDA over things like clinical trial design. There are all kinds of interim communications that companies have with the FDA and all of those are not subject to disclosure. So that's a key principle that has been established by the First Circuit.

Clinical trials and disclosures about clinical trials and what's known during the course of a clinical trial also frequently draw lawsuits. There have been a couple of recent cases. We were involved in both of these. Genocea and Seres Therapeutics both involved phase-two trials that did not meet their end points. In both cases the plaintiffs alleged that the company must have known that the clinical trials were not going as well as they had hoped. And the company had made some statements saying that they thought that the results were going to be favorable and the results weren't as favorable as you would've hoped. Both those cases were dismissed. The court found that it was speculative whether the plaintiffs can show that the companies actually knew that there were problems with the clinical trials as they were going on. These were double blind placebo controlled trials. The courts recognize what that means and that companies don't get information about the results of the clinical trials as they happen. Interestingly, Seres involved an open label extension so the theory of the case was, well, you knew how many people were getting the second dose of the drug in the open label extension. And you also knew that the size of the group of people getting the drug was twice the size of the placebo group. So you could have inferred from that that you weren't going meet your clinical endpoint. The court rejected that as too speculative.

Dan O'Connor: Not to jump ahead on this but, this is a place where there's a big distinction obviously what happens in the class action where you have the plaintiffs are making allegations based on what they can perceive from the public domain or from the three or four disgruntled employees that they gather information from and what the SEC does.

One of the places in our interactions with the SEC in recent times is that the SEC seems very willing to jump in on what did you actually know about the trial. I recall a recent interaction with one of the lead SEC investigators here where she said, "Listen one of the things that's been very interesting to us is that the concept of the double blind trial is pretty well known, but there is a lot of information that flows." The SEC is very willing to dig in on that information and take a look at it and see what those inferences are and what people could have known.

Obviously the SEC is not going to be bringing their complaints in the blind. They're going to have the internal communications with folks evaluating how this data is coming out. They're very skeptical about whether people really do know how things might break. In the past, this concept has had a lot of appeal and has helped kind of cut things off. This is a place again where the SEC is showing that they're willing to dig in and to spend some more time. That leads to counseling about how you're evaluating that data and what you're doing with that data and how much of a firewall you really have there in thinking about your own disclosure.

Audience Question: In either of those cases, did they have an interim analysis and did they disclose the interim analysis?

Dan Ward: No. I don't think they did. That was one of the key things. Some of the other cases have come out differently where interim analyses are disclosed or partially disclosed and then follow-up results are not disclosed. So it is important to keep that in mind. Once you start down the path of disclosing interim results then you take on the obligation of updating that.

Kellie Combs: Further to that point, we're starting to see on the clinical research side and FDA submission, that the agency is being much more flexible with the types of clinical studies that it will accept either to get initial approval for a product or an expanded label.

And so as we're moving toward more adaptive clinical study designs, enhanced use of real-world evidence‒kind of a little further away from the double-blinded, randomized, controlled trial. I think these disclosure issues about what you knew and when you knew it will become even more important.

Pat O'Brien: I'm not sure I'd take too much comfort from some of the cases Dan Ward just described. Whether or not you have an interim analysis, the test is going to be what you knew and if it's an open label study and you're getting data on a semi regular or periodic basis what you know at that point in time is going to be what you're measured against. You can still have a discussion about whether what you know is material or whether what you know is consistent or consistent with what's already been disclosed.

In another situation we had a number of years ago for a company that doesn't exist anymore, the company was preparing for their IPO as an oncology company and the trial was blinded. But, it was one of these events-based endpoints and the data was so bad that even though it was blinded you knew mathematically based on the number of events left to occur that it couldn't be positive. We shelved that IPO for a little while, it ended up going out and turned out that it work again.

Audience Question: Is the SEC's view that information is good in the sense that if you're just getting bits and pieces of information, sure you can disclose X. But if people can't really understand X without knowing A, B, C and D, it's hard to disclose that.

Dan O'Connor: No. Look, it's a difficult situation. We've all given advice to our clients that you have no affirmative obligation to disclose material information, unless you do. Right?

So if you're in a securities offering, obviously you're in a very different situation. But if you start to talk about something, you have to be complete. You see this in a lot of different frameworks -- where the SEC understands the conceptual boundaries of the law -- that you don't have an obligation to disclose all material information -- but they very much investigate why didn't you disclose those things. What that mentality does is force the SEC to look really hard at what you did disclose.

And that's where the trick comes because if you're talking about X -- you're talking about the trial design, or you're talking about where the next trial's going to go, whatever it may be -- they really look at -- because 95% of these cases are omissions -- so it really is about what else you should have said alongside those other things. The SEC starts with the framework of you should have disclosed everything because they have some Pollyannaish idea about that which is misplaced, just wildly misplaced.

But then when they actually bring the cases, they tuck things into omissions. Well, you talked about X. You talked about the FDA had a concern about this, but you didn't mention what else they said and because you didn't say what else they said, it really ended up being fairly incomplete.

The challenge that we all face is that concept -- if we put this out there it's going to confuse investors and the stock price is going to go down, but when they get complete information the stock price will come up and that's not going to help anybody. It's a very difficult line to figure out where you fit. It forces a lot of people to try to say nothing if they can which, especially when you're a small company and you're trying to raise capital, is next to impossible. So being thoughtful about everything and making sure everybody has all the right information when they're giving advice is going to be key.

Dan Ward: So as not to paint too rosy a picture of the securities class action landscape, the next couple cases illustrate that not all the cases result favorably for the defendants. There was a case last year out in the Ninth Circuit, Orexigen, where the company did comment on interim results of a clinical trial and said that they were more favorable than expected. Then when they get more interim results that were less favorable than expected, they didn't disclose that. They lost on a motion to dismiss. The court said that once you've spoken about the interim results, you have an obligation to update the market on the next set of interim results.

Dan O'Connor: The duty to update is very challenging because when have you crossed over the line that now you have really new information that makes what you said before problematic? But the fact that they didn't get through the motion to dismiss, is the way we figure out these lines in that regard.

Dan Ward: Right. And to your point about doing an offering and having the additional burden in connection with an offering, Chiasma was a case here in D Mass where the company was doing an offering and had received a CRL from the FDA and then had some further discussions with the FDA where they were expressing concerns about their clinical trial going forward. They had a risk disclosure in their offering documents saying that there's a risk that the FDA will not agree or will require more data.

The plaintiffs allege that the company actually had those discussions with the FDA at that point and knew the FDA had concerns. It wasn't just a risk that they might. That's something we hear a lot when dealing with regulators -- the difference between this may happen versus well you know that's already happening. So that was one of the key issues in Chiasma where they had had those discussions with the FDA and so the court held that the risk disclosure was insufficient.

Dan O'Connor: I mean, and the Chiasma case really points out where those challenges lie and where the lines can be. If you go back and you look at their disclosure the issue there was they had an open trial. It's a new variation on an existing drug, one that had been delivered by injection shifting over to one that's delivered orally with a lot less pain, some benefit, but essentially it's the exact same drug. And it had to do with trial design. And if you look at their disclosures, this one is a harder decision for me to understand because their disclosures talked about the fact that in their pre-NDA meetings the SEC said it would be a review issue. So it's a pretty direct disclosure of the nature of the communications with the FDA. Some of these are closer and harder to see as you go through it.

Pat O'Brien: Saying something might happen isn't protective when it has happened. From a disclosure standpoint, if we're talking to the business folks a lot of times they ask -- why do we need to revise our risk factor? We said this might happen and it happened.

Well, yeah. But we said it might happen and it has happened. One of the things the Chiasma case makes clear is that what we've been saying as disclosure council for years is that it's not good enough to say it might happen if it has happened. So then you can use, well, for example, the FDA said this or that. I would just caution on that because saying something might happen really isn't good enough if it has happened.

Dan Ward: We've been talking mostly sort of about discussions with the FDA and the clinical trial phase, but what about other kinds of regulatory communications? There have been cases that dealt with other context well. Abiomed a couple years ago involved an investigation the FDA was doing into off-label marketing at Abiomed. The FDA had been asking a lot of questions about their marketing practices that were not disclosed and then the company received a subpoena from the U.S. Attorney's Office which was disclosed. The plaintiffs seized on that to say that you haven't been telling us for the last however long that you were also undergoing this FDA investigation to off-label marketing. The court there found that they did not need to disclose all of the communications with the FDA back and forth on the off-labeling marketing inquiry, that an inquiry is only an inquiry. Even the receipt of a subpoena doesn't mean that the company has committed any wrongdoing. And they didn't have to disclose all of the prior regulatory back and forth. Interestingly, even on that, the court found it was really close as to whether the company's statements could have been deemed misrepresentations. But they ultimately ruled that there was no scienter. And a lot of these cases turn on scienter which is -- can you prove that the company or the speakers actually not only knew the facts, knew that they were wrong at the time, but intended to somehow defraud the market when they made them.

Genzyme was another case from years ago that many people probably know about which involved the FDA inspecting some of Genzyme's facilities and issuing Form 483 regarding deficiencies at their facilities which weren't disclosed initially. The court held that that was, again, regulatory back and forth that wasn't necessarily something that was material for the company to disclose.

Kellie Combs: Just to jump in for a second on that Abiomed case, I think one interesting thing about that matter is there had been an FDA untitled letter and then an FDA warning letter specifically related to the company's promotional practices. I find very frequently in my practice that those sorts of untitled or warning letters can ultimately tip off a DOJ investigation that then obviously can cause a lot of problems for the company.