One of the fastest ways to garner unwanted attention as a publicly-traded life sciences company is to be accused by either a regulator or stockholder that the company disclosed materially misleading information about the results of a clinical trial. Publicly-traded life sciences companies are constantly evaluating how to communicate with investors about key developments in clinical trials or provide updates regarding the regulatory review process with the U.S. Food and Drug Administration (“FDA”). The FDA regulatory process and the disclosure requirements imposed by U.S. federal securities laws often do not fully align. Disclosure from federal securities law perspective may be required even in certain circumstances where a company has incomplete information – a less than ideal predicament for any management team. For example, a life sciences company may have topline data for a pivotal clinical trial with mixed efficacy signals, but will not be able to do a deep dive into the underlying data for weeks or months. Situations of this nature, which are normal course events for companies developing novel therapies for human treatment, require companies to make difficult decisions, often with incomplete information and with the potential that investors will not understand the nuance of the clinical trial end points or other metrics that, from a clinical trial perspective are not fatal, but may be viewed so by investors without a strong scientific background. Management teams must be thoughtful in balancing the investor perception and fully complying with applicable securities laws in order to avoid stockholder litigation and/or investigations by the Securities and Exchange Commission (the “SEC”) and/or Department of Justice (“DOJ”) (or to have a fully supportable defense).
Life sciences investors often base investment decisions on disclosures relating to clinical trials and the status of the regulatory review process, which is especially true for development stage companies without revenue from product sales (or potentially even licensing activities) – which in turn draws SEC and DOJ scrutiny to these disclosures. While securities and commercial litigation can be costly and time consuming, SEC and DOJ investigations often pose a greater threat due to their far-reaching and time-consuming nature. The SEC and DOJ have broad subpoena power to gather documents and question witnesses, and do so on their own time and with their expansive resources. Further, the consequences of enforcement may be severe due to the large fines for the company and its executives, bars on service as a director or officer at a publicly traded company for a period of time and, in extreme cases, criminal prosecution including potential jail time.
The following discussion is intended to help guide companies in making clinical trial-related disclosures. Some key takeaways:
While this may seem obvious, clinical trial data should be disclosed accurately and in concise statements reviewed with legal counsel (both SEC and FDA counsel should be consulted) and all interested internal teams. A company should not make statements about clinical trial data that are contradicted by the underlying data. Care should also be taken to ensure that disclosures are consistent with information provided to the company’s board of directors and, more importantly, directors should ensure that the company’s disclosures are consistent with both the clinical trial data and what is disclosed to the board of directors. In October 2019 in In re Clovis Oncology, Inc. Derivative Litigation (2019 WL 4850188 (Del. Ch. Oct. 1, 2019)), the Delaware Court of Chancery denied a motion to dismiss a stockholder derivative suit, applying the “duty to monitor” doctrine expanded early in 2019 by the Delaware Supreme Court. Clovis stockholders brought a Caremark (In re Caremark Int’l Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996)) claim alleging that the board ignored red flags in the testing of the company’s sole product in development. The clinical trials for the sole product failed to follow standard protocol, which would prevent the drug from gaining FDA approval. Clovis allegedly made public statements about the success of trials that were inconsistent with the information the board received (and information management would have had access to as part of the clinical trial). When Clovis withdrew the drug from FDA consideration in 2016, the stock price plummeted. The Delaware Court of Chancery interpreted precedent as requiring a higher level of board oversight in industries where “externally imposed regulations govern its ‘mission critical operations’” (which would be the case for all life sciences companies engaged with the FDA).
Further, companies should be wary of getting ahead of the FDA, especially if a meeting with the FDA regarding data resulted in feedback that was not clear or left the door open for the FDA to make a decision. If the FDA has a different interpretation of the data, the FDA’s differing interpretation under many circumstances should be disclosed to investors upfront. Otherwise, disclosure would be required in almost any circumstance to update prior disclosure that would otherwise be materially misleading to an investor. Additionally, it should be noted that companies often obtain negative information from the FDA during the course of drug or device development. This information is not necessarily an indication of approval delay or clinical trial failure, but such information may, under certain circumstances, be material and require disclosure (sometimes very quickly). For instance, companies that become aware of an approval delay or that a product is not likely to be approved by the FDA, must be cautious about disclosing inaccurate or incomplete information (which can sometime force off-cycle disclosure if material enough to the company’s business or prospects.
Clinical trials are inherently uncertain as they are testing a scientific hypothesis, meaning all statements relating to clinical trials must have appropriate caveats. Statements about clinical trial data should include proper qualifications so that investors can make their own informed investment decision about the significance (or lack thereof) of the applicable data. Particular attention should be paid to disclosure around a product’s safety or efficacy as these disclosures draw particular attention from SEC and DOJ, and can potentially draw ire from the FDA if they inaccurately reflect the scientific data.
Disclosures relating to interim results pose particular difficulties for life sciences companies. Companies making interim disclosures may be liable for failing to sufficiently caution investors that interim results may not be reliable, especially when topline results are disclosed and a full analysis of downstream data is not completed or only reviewed for major potential issues. Additionally, companies may assume a duty to report future interim negative results and may face liability when they fail to do so. On the flip side, companies that do not comment on interim results, or that adopt a plan of periodic rather than current reporting of such information, are less likely to face liability for omitting negative interim results. More generally, companies may in many cases avoid liability for omitting adverse interim results simply by remaining silent on all interim results. At least one court (see Gregory v. ProNAi Therapeutics, Inc., Fed. Appx., 2018 WL 6288008 (2d Cir. Dec. 3, 2018)) has observed that in the absence of any affirmative statements about developments in those trials, the company had no duty to release unfavorable interim results.
Similarly, another challenging issue is how to deal with open-label trials, which are often done in rare or orphan diseases where there is an inherently limited patient population, or where there are ethical limitations around a control group (e.g., sham surgery). In these types of trials, the company will receive real-time reporting of results and will therefore know how the trial is progressing on an on-going basis. A key question is how much data is enough to disclose, balanced with continued FDA interactions and potential trial modifications with FDA support given the devastating and rare nature of such diseases. These situations require continuous dialogue among management, SEC and FDA counsel in order to assess and evaluate disclosure obligations and best practices throughout the trial (and can have implications for insider trading and other disclosure matters).
Topline results pose their own set of disclosure risks and should be accurate and muted where necessary to ward off assertions that significant details were omitted or, even worse, that later analysis of results yielded results inconsistent with original disclosure. A company faces a particular challenge in a situation where it has topline results from a clinical trial but the company has not yet digested the full data set and therefore cannot yet disclose the underlying data without undue risk. A company must carefully consider whether it has conducted sufficient analyses of the applicable data set to reach a topline determination that will not be subject to later re-interpretation. If the company determines that disclosure is required, it should include appropriate caveats regarding the company’s stage of analysis, including whether only topline data was reviewed and what additional data is expected to be reviewed and, if applicable, will be disclosed. Great care should always be taken to not overstate the effectiveness of the company’s product.
We would be remiss not discuss clinical trial disclosures in light of the coronavirus epidemic. Many life sciences issuers updated risk factor and business disclosures in March 2020 (off the periodic filing cycle for many issuers) relating to clinical trial timing both from an enrollment perspective and a supply chain disruption perspective because such disclosure was either (i) required due to the material effect on their business or (ii) market conditions were such that disclosure was otherwise prudent to ward off potential litigation risk following a decline in stock price. The disclosures resulting from the coronavirus outbreak highlight the need for proper protocols and processes to identify and quickly react when disclosure becomes stale due to market or external conditions that may not be in the hands of the company itself.
While not within the scope of this article, life sciences companies should also continue to carefully monitor and review statements regarding post-approval developments, including that all statements about a product are accurate following regulatory approval, issues related to FDA inspection of facilities to the extent they deviate from normal course inspections and the disclosure of material adverse events resulting from products in the market or in further clinical testing, especially if unexpected and serious.
Life sciences companies must ensure they have proper protocols and processes in place to ensure that all statements relating to its clinical trials are accurate. Disclosure committees or other appropriate management team members should ensure that these protocols and processes are adhered to and updated on a periodic basis (but no less frequently than annually). Each periodic filing on Form 10-Q and Form 10-K should be scrubbed and revised for consistency and accuracy, including carefully reviewing prior periodic filings, current filings on Form 8-K since the most recent periodic filing, website, social media and investor presentation materials. Consistency and accuracy between business and risk factor disclosure is paramount to reducing enforcement and litigation risk (and will also ensure that there has not been selective disclosure in violation of Regulation FD). Review of applicable “safe harbor” language for each filing, press release or other public statement should include ensuring that such language is detailed enough to fall under intended provisions of the Private Securities Litigation Reform Act of 1995 (safe harbor language may require specific and comprehensive information about particular events and related risks that may affect whether a forward-looking statement may or may not occur as anticipated).
In conclusion, the most effective ways to minimize enforcement and litigation risk are ensuring that the company carefully and thoughtfully considers its clinical trial disclosures. Companies can avoid stressful situations by implementing protocols and processes that ensure all necessary parties have adequate time to review disclosures and understand the underlying clinical trial results. At a minimum, life sciences companies should engage with their SEC and FDA counsel well in advance of any interim or full results readouts to plan for disclosure in the event the results are good, bad or ugly.