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The eighth installment of Ropes & Gray’s podcast series Non-binding Guidance looks at SEC disclosure issues for life sciences companies. In this episode, Ropes & Gray partners Kellie Combs and Emily Oldshue discuss when to disclose, how to frame the disclosure, and how the responses to both of these questions are informed by SEC enforcement actions and securities litigation, as well as their experience working with life sciences companies in various stages of development. Emily and Kellie will dive into how to craft SEC disclosures involving a variety of FDA regulatory issues, such as clinical trial results, adverse findings from regulatory audits and inspections, and FDA interactions that occur during review of a pending application or post-market.

Kellie Combs: Hi, I'm Kellie Combs, a partner in the life sciences regulatory and compliance practice group at Ropes & Gray, based in our Washington, D.C. office. Welcome to Non-binding Guidance, a podcast series from Ropes & Gray focused on current trends in FDA regulatory law, as well as other important developments affecting the life sciences industry. We have a special guest on our podcast today: my colleague Emily Oldshue, a partner in our strategic transactions group, who works in our Boston office. Much of Emily's practice is concentrated in the life sciences space, representing issuers and underwriters in capital markets transactions, and advising pharmaceutical and med device companies in M&A and ongoing corporate governance and public company reporting matters. Emily and I frequently work together to advise pharma and biotech companies, as well as underwriters, on how to craft SEC disclosures involving a variety of FDA regulatory issues, including clinical trial results, adverse findings from regulatory audits and inspections, and FDA interactions that occurred during review of a pending application or after a product is on the market. On today's episode, we'll be talking about SEC disclosure issues for life sciences companies, and in particular, how we think about when to disclose and how to frame the disclosure. Responses to these questions are informed by SEC enforcement actions and securities litigation, as well as some practical experience that we've both gained on the job. I'll turn first to Emily to give us some background and set the stage for the discussion.

Emily Oldshue: Thanks, Kellie. As you mentioned, this general topic comes up in a variety of contexts for our clients. Whether you're a pre-revenue, early-stage biotech looking to go public, or a large cap pharma company with $50 billion in revenue, figuring out what clinical updates and other business information would be material to an investor is a multi-faceted and fact-intensive analysis involving various internal company functions: legal, finance, R&D, clinical, regulatory, etc. The general standard for what needs to be disclosed sounds simple enough – companies are under no obligation to disclose information, unless failing to disclose the information renders other company disclosures misleading or there is an affirmative duty to disclose the information under securities laws or exchange listing rules (e.g., in connection with an offering or when filing a periodic report). But as soon as you pause on the standard, the questions start:

What information is material to investors, and therefore subject to disclosure when an affirmative obligation to disclose exists? This would have been material last year, but what about now, given that we have since gotten approval for another product? The FDA letter we just received indicates that they may require another trial, but we feel good about talking them out of it. Do we need to disclose the FDA's view? We said previously that this was our lead candidate, but now that we have these results, we expect to redirect most of our R&D budget to another pipeline candidate. We are as bullish on that candidate as we were on this one before, so is there a duty to update? A trial subject experienced a serious adverse event, but we are discontinuing that trial. We are using a related compound in a different trial, though – do we still need to disclose the SAE? Would leaving this out make other information we have already disclosed misleading?

Kellie Combs: Thanks, Emily. Those are really important questions – definitely ones that you and I think through together all the time. And look, I know the answer is always going to depend on the specific facts of the situation, but, just in general, how might considerations vary by company size or the stage of a product?

Emily Oldshue: That's right, Kellie. When you and I advise early-stage biotechs, particularly in the rare disease space, or for example, in immuno-oncology or other areas where companies are increasingly going public while their lead candidates are still in the earlier stages of development, we have in mind a scenario in which the development doesn't go as well as everyone hopes it will, and investors circle back to the IPO prospectus and the disclosure about the product candidates and trials, all with the benefit of hindsight. That early in a company's lifecycle, particularly in these spaces, there's a lot that is potentially material. So we generally press for companies to include lots of disclosure about their early results, early communications with regulators and all of the ways in which things could go wrong. In some ways, though, this is the easier analysis. Just about everything in the way of projected milestones, regulatory interactions and clinical updates is arguably material to those folks. For large companies, on the other hand, the materiality analysis shifts, as updates are measured against the business as a whole, and there is more room to argue something isn't material to an investment decision.

To give an example, if we're thinking in particular about FDA interactions for an early stage company, like meetings or correspondence between the agency and a company, Kellie, I'll put to you the question of your framework for evaluating what feels like a fairly typical dynamic when we work on things together. The early-stage company has served up disclosure that describes their trial results fairly well, but skips over FDA feedback that their trial design may not support approval. How do you think about that one? Is there an obligation to disclose uncertain FDA feedback? What about negative feedback that the company thinks it can overcome?

Kellie Combs: Thanks, Emily. I think there are a few different things at play here. If the company itself truly doesn't understand FDA's perspective or concern, in other words, if there is just a lack of clarity in the agency's feedback, it's important that the company seek an opportunity to clarify with FDA (for example, through a follow-up teleconference or a request for clarification upon seeing the FDA's version of the meeting minutes). This is important, of course, with respect to investor communications and SEC disclosure, but it's also critical when it comes just to regulatory strategy in the clinical development program on the whole. If the feedback, though, is uncertain or negative, like if FDA stated at the end of a Phase 2 Meeting that the primary end point of the company's pivotal study may not be clinically meaningful, or if the agency actually suggests use of another end point, it would be prudent there to disclose that the FDA's expressed those concerns, and the company can then give the rationale as to why it believes that proceeding in a certain way makes sense and is likely to lead to success. What's most important here, though, is not to spin the feedback. So it's important to be objective, to describe the risk with some specificity, and then say how the company is managing that risk. An interesting example to note here is the AVEO case. There, the company met with FDA to discuss clinical study results prior to filing their NDA. At the meeting, FDA expressed significant concerns about the results of the study, and in fact recommended the company conduct another clinical study. In the press release and the 10-Q, the company acknowledged that FDA had concerns about the data, but didn't go so far as to actually disclose that the agency had recommended another trial. The company ultimately settled with SEC for $4 million for misleading investors. The CEO and the CMO settled with SEC also, and the CFO was actually found guilty in a jury trial.

Emily Oldshue: Yes, those are some good ones. And, Kellie, the examples we've been discussing so far arise in the context of key meetings or decision points in the drug approval process. We often have companies tell us that the correspondence with the FDA is ordinary course. How do you think about those FDA interactions, such as the back and forth that occurs during FDA review of a pending new drug application, or inquiries or inspections that occur post-market?

Kellie Combs: Great question. There's no duty to disclose ordinary course interactions or the interim back and forth. The problem is it can be tricky to know where to draw the line, and so you always have to consider the specific facts in each case. In general, though, situations where the agency is probing, for example, about adverse events observed post-market or about how a company is marketing its products, oftentimes those are just questions – not conclusions, not significant risks that would have to be disclosed. Similarly, 483s from an inspection may also constitute the sort of ordinary back and forth that would not have to be disclosed, particularly if the violations are technical and are unlikely to have a broader impact on company operations, product quality, and so on.

Emily Oldshue: Got it. That makes sense. And staying with the FDA for another minute, Kellie, I'm curious about recent trends in the FDA regulatory space. Are there certain developments or trend lines that you think of as particularly important to consider when it comes to securities disclosures?

Kellie Combs: Absolutely. You know, for one thing, I think we're seeing increasing flexibility from FDA on the types of studies it will accept, either for initial approval of a product or for label expansion. A randomized double-blinded trial where you don't have any results until the study concludes is not necessarily the norm anymore. Use of real world evidence or open-label studies or other observational data, for example, may mean that you have a much clearer sense of whether your product is working, and whether there are any serious safety issues, much earlier on in the process. So then it becomes a question of disclosure. And keep in mind that if you do disclose some positive results early on, such as results from an interim analysis, you may now be on the hook to update investors if the data don't turn out as well as expected. As companies are starting to develop products for rare diseases or ultra diseases, also, in many cases, as we were discussing before, there might just be some uncertainty about the clinical study design, because in many cases, there's not yet a validated end point – the company might be working with KOLs and reviewing the scientific literature, or working with patients to come up with an endpoint that's clinically meaningful. And a lot of times we see in the meeting minutes that it's not framed by FDA as an issue of disagreement – it's exactly along the lines that we were discussing earlier. It's that we have to wait and see how the trial pans out and what the data look like before FDA can really predict whether a trial will be sufficient to support approval. Additionally, aside from the clinical study design issues, there are other important issues that arise, especially in the rare disease context – so manufacturing, product formulation, or other issues that may impact how the product changes from Phase 2 to Phase 3. Oftentimes we see Phase 2 being relatively small studies, of course. When you get to Phase 3, you might be changing suppliers, you might be changing the manufacturing process or changing the product formulation in a way, because you ultimately need to scale up for commercial use. All those sorts of changes are really important to evaluate and it's important to think through whether they need to be disclosed, because they might ultimately impact the Phase 3 study results. Stepping back for a minute, Emily, I'm curious about your perspective with respect to clinical data disclosure and regulatory interactions in the context of the broader disclosure package. So what are your key considerations when helping companies craft what they say about their trials or recent developments in the business?

Emily Oldshue: We have a few key areas of focus, whether we're helping a company prepare its IPO prospectus or advising a client on whether or not they need to provide a particular clinical update in an upcoming periodic report. To give a few examples of things we think about, clinical data from all material programs needs to be accurate and complete, and it needs to track other public disclosure of clinical results. For example, if the company has put out a scientific poster or paper, or, similarly, if it's issued a press release, we are always focused on understanding if things that are said in those papers or in that press release are different from or inconsistent with what the company is proposing to disclose in its SEC filings. Likewise, we discussed this earlier, but any FDA or other regulatory feedback that is inconsistent with the company's hopes or worldview should be disclosed, and company statements that conflict with this feedback should be appropriately cushioned. Even post-approval, certain updates need to be disclosed. For example, if there are adverse events post-approval, a company could find itself in a situation in which its existing disclosure, that a drug is safe and effective, now could be read to omit material information and be misleading as a result. Similarly, describing the FDA's approval of a product and omitting discussion of a key ex-U.S. regulator's contrary view could be misleading. Even where there is no affirmative duty to disclose, companies need to be mindful of the implications of omissions. For example, in press releases disclosing recent clinical updates, companies need to bear in mind that existing disclosure regarding safety and effectiveness may be rendered misleading if there have been adverse events or other news that isn't included in that press release, or has not otherwise been disclosed.

Kellie Combs: And so, Emily, we hear all the time that companies want to mitigate risk by saying that, "We believe a certain outcome will occur." Does that actually work? What about that sort of caveat or others?

Emily Oldshue: Yes, Kellie, absolutely right. This is one of our favorites, right? And it would be so much easier if that indeed did do the trick. However, companies should be careful on this one, and need to avoid thinking that "we believe" is some sort of panacea. The catch is that there must be a reasonable basis for the belief. So if the FDA has said, for example, that a current trial design would not support approval, saying the company believes the applicable trial is pivotal or registrational probably is not based on a reasonable belief. If you need the FDA to approve your product based on your trial, and they're saying the trial design is deficient and won’t support approval, you can't believe your way into the trial being pivotal or registrational when the FDA disagrees. Similarly, companies should be transparent about any places where the FDA or other regulators interpret data differently. Companies should appropriately caveat top-line or other preliminary clinical data. For example, is the data yet to be verified? Manufacturing issues and FDA inspections may very well be material as well, and companies should consider whether disclosure is appropriate. Cautionary forward-looking statement disclaimers should be detailed and specific to gain the protection of the safe harbor.

Kellie Combs: Thanks so much, Emily, for providing your perspective. We really appreciate you joining the podcast today. And thanks, as always, to our audience. That's all the time we have – we appreciate you turning in to our podcast Non-binding Guidance. For more information about our practice or other topics of interests to life sciences companies, please visit our FDA regulatory and life sciences practice pages at www.ropesgray.com. You can also listen to Non-binding Guidance and other RopesTalk podcasts in Ropes & Gray's podcast newsroom on our website or subscribe to this series wherever you listen to podcasts, including on Apple, Google and Spotify. Thanks again for listening