Video: Life Sciences Quarterly (Q3 2019): SEC Enforcement and Class Actions Regarding FDA Communications

October 2, 2019
52 minutes


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 evidencekind 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.

So for those of you that are working with brand lawyers, commercial counsel, or other business and marketing folks, that's one reason to be very careful with your promotional practices because even though an untitled letter in and of itself is not necessarily going to cause you a lot of problems, it can really kind of have a snowball effect.

Dan Ward: The last disclosure topic to touch on, some of the cases have dealt with serious adverse events particularly when those come up in clinical trials and should the company be disclosing when it knows about SAEs? So far the courts have mostly held that no. There is high standard for showing both that the SAE is serious and that it's actually caused by the drug in the trial.

Again in the Seres case, the plaintiffs tried to show that, well, you must have known that the clinical trial wasn't going as well as you thought it was going to go based on the number of SAEs that were ultimately disclosed. But, they were able to show that it was a double blind trial. They had a data monitoring committee and they weren't getting the results, even the SAEs, unless they rose to that very high level of being able to show that they had been caused by the drug which they weren't in that case. That's another theory that plaintiffs have been pursuing. I'm going to flip it to you guys to talk about some of the key lessons here.

Audience Question: Just quickly on that last point. So if there’s an SAE with a causal relationship in early trials and you’ve said nothing before about outcomes does that trigger disclosure or only if you've made disclosures before that suggest something more positive?

Pat O'Brien: I'll take a shot at that and then the real lawyers can weigh in. As Dan O'Connor said in the beginning, you don't have an obligation to disclose all material information all the time except when you do which is if you're filing your 34 Act reports and it's required disclosure or you're selling in securities in which case all material information needs to be disclosed.

So I would think in that circumstance if you have an SAE which is drug related and you might not have an obligation to disclose it the minute you find out. But if, and I'm sort of continuing your hypothetical that you otherwise haven't commented on it, which therefore you might not have an obligation to update in your next 10Q or something. I think if you were going to sell securities and that was material to an investor's understanding of the likelihood of success of this drug, I think you would have an obligation.

Audience Question: I agree with that. That is exactly what I wanted to hear.

Dan Ward: I agree.

Dan O'Connor: I mean, and I would add in addition to the selling securities piece, right, because that's where the class actions going to come and rise and fall.

Audience Question: Because you’re saying that that’s material information?

Dan O'Connor: It probably is. Then you have to put it in the real world context of how the SEC will look at it. If that's your only drug and that's your principle active trial, you're phase three and that's where you're moving, it's hard to imagine that you can have investor communications and not talk about the trial and not talk about where the trial is headed and not talk about where things are going.

So what you unfortunately have to ask yourself is if I'm putting my CMO out there or my CEO out there and she is talking about these events and we're not mentioning this other issue, how will the SEC come back and look at those interactions as well?

If you clean it up fairly soon and put it in a securities filing, you're in good shape. But, that's what investors are going to want to know about it. That's what investors are going to talk about -- how's your enrollment? I mean, they always want to know that. That's the principle form of questions. You really have to evaluate, I think very hard, how those interactions with investors are going to be looked at with hindsight when that comes out. And against the backdrop of, and we've said it before, it would be confusing to investors to give them that SAE information because really we think now -- most of the time you have the SAE and you can explain to yourself why you don't think it's going to end the world. Right? So that's the backdrop and that's the really hard thing.

Audience Question: I agree with that completely. And I think for most of us in the room it's a non-issue. But if you're in a company where you instead have ten product candidates and some of them are in phase 3 and you’re hardly ever talking about this one phase 1 program. Then you throw that in your prospectus I think it could be confusing and not necessarily material to the company and so I think you really do have to be able to defend that it’s not material.

Dan O'Connor: I absolutely agree with that. There's no question about it. I think it's just a very different context.

Pat O'Brien: But, don't talk about how great the efficacy is on that product either.

Audience Question: Exactly

Dan O’Connor: Yeah. You're in a very different world if you have that very deep product line.

Pat O'Brien: Pfizer isn't talking about the SAE in their phase one trial. Right?

Audience Question: Yeah. And I think it's important that our clients understand this norm because explaining, yes, we have an obligation to disclose. And then you hear, well nobody else is. These other companies don't disclose and they have a similar product. Well, yeah, they do. But maybe they also have 20 others. So those are the nuances.

Pat O'Brien: Why don't we get into some other real-world examples?

Audience Question: So can I just follow up on that? Are you thinking that distinction based on that product pipeline because of how many products you have in the pipeline or because the results are so “early.”

Audience Response: No. The first because unless you are not guessing based on this phase of the trial. It's not material to their decision. But they're not doing that. They're not putting it out there as--

Dan O'Connor: Well, but it would depend though. Right? I mean, I don't know if there's many public companies with just one drug that are in the phase one trial stage. I mean, so that might not be the most realistic--

Audience Question: More than you think.

Dan O'Connor: Well, okay.

Pat O'Brien: Life's been-- it's been busy.

Dan O'Connor: So in that circumstance, I'm not sure I would agree. And maybe we're not disagreeing. But if you have one drug and this is the thing that's going to bring it home, it really does. I mean, you have to do this. Everybody hates the facts and circumstances.

Audience Question: But the phrase three products that you have a very hard time arguing that Pfizer's investors aren't paying attention because they do have twenty products.

Pat O'Brien: Yeah. That's right.

Dan O'Connor: Yes. Yeah. Yeah. That makes sense.

Pat O'Brien: So a couple things, so some of these we've talked about. The open label trial example which we talked about a little earlier, I think we often times hear from our business clients, "Well, you know, it's not good clinical practice to be disclosing clinical trial data on an ongoing sort of narrative basis.” Or, “Well, we only disclose clinical trial results at scientific conferences because that's what real scientists do." And that's all fine, but that doesn't change the securities law disclosure obligations. So if you're selling securities, we need to be thinking about what you know as a result of these open label trials even more so if you've already given some earlier interim results and then the later stage of the same trial starts going not so well. That would be an area where you'd probably be obligated to update. But again, even if you hadn't given any information yet and you had some knowledge of how the trial was going and it wasn't positive, arguably even if it is positive, but particularly if it's not positive you're going to want to think hard about that.

We didn't really prep for this question so apologies to my fellow panel members. One of the things we sometimes hear from people is, "Oh, well, the C suite doesn't know about it, the CFO. But, the clinical ops people, the clinical operations people, they get the data. But we don't." Can senior management and “the company” credibly take the position that they didn't know and therefore didn't disclose it? Obviously hypothetical.

Dan O'Connor: Well, no. If you think about it from an SEC enforcement point of view, you have very clear information within an aspect of the company that hasn't made it to the C suite. Every fiber of the investigation is going to be tell me about the last time you had lunch or walked by them in the hallway? I mean, do you really not know? So that's what the nature of that interaction's going to be. And if you really did, if you set up a really nice firewall, you kept things walled off in that regard, what that's going to do is protect the C suite from potentially being individually named. It won't protect the company. It really won't. The company is the one that makes the disclosure regardless of where that information is. That's why we have the SARBOX process, why we do the questionnaires that come out.

It would be a very challenging argument to the SEC to keep your information within a division of the company in the sense of financial reporting obligations. I'm not saying it would be a complete loser. There might be some argument. You definitely maybe could get them to exercise some discretion. Maybe you'd end up with an internal controls case as opposed to a fraud case from the SEC or a negligence 17(a) (2) or (3) case. I think that gets a little bit harder maybe, Pat, if it's outside the company. If you have a contract organization that's over here doing this and doing that work, that's I imagine one of the benefits in some respects of that. But then you're still going to get into what was the nature of their work? How separate are they? What are the means of communication? If you had been having weekly updates and all of a sudden those stop. But you're going to start to really wonder. But I think those are where some of the lines are.

Dan Ward: And it is a little different in the class action space that actually has been a defense. And the reason being for 10b-5 class actions, again the plaintiffs have to prove scienter, that they acted intentionally fraudulently, where the SEC can bring a case without scienter.

So the courts have looked at that in terms of who the speaker is. And, again, it's contextual. So to the Pfizer example, it may be plausible that the CEO or the CFO doesn't know the details of every clinical trial or product pipeline in a big company. But they look at the size of the company and they look at the importance of the product to the company. So if it's your one key pipeline drug, is it plausible for the CEO to say, "I didn't really know what was going on with that drug"? I think the courts have said no. So it's contextual. But they can be a defense in civil actions.

Pat O'Brien: One of the other areas we often get into that creates some sort of sticky disclosure issues is around top-line results. I think people do that routinely. And I think it's perfectly fine to be disclosing that is material and saving the other stuff and the deeper dive for the scientific journal or the presentation at the conference. But, we need to interrogate that a little bit and understand is there any data in the secondary endpoints, in the biomarker, whatever it is, that suggests anything inconsistent with what the top-line results that we're disclosing are.

Again it's just this same theme of, if you start to disclose and, typically if it's an important trial you're going to be disclosing at the very least top-line results, we need to think through whether there's any other data that the company has which is at all inconsistent with the top-line results that you're disclosing.

And often times, you flip over the proverbial card and you disclose the blinded results and you really haven't done the analysis for all of the secondary and tertiary endpoints. So I think that's the sort of easy case. But when you do have the full data set or almost the full data set in front of you, I think you need to think about that.

Kellie Combs: And it's important, too, to consider what the other endpoints in the study are. So, if you haven't looked at secondary endpoint data yet, but the drug is intended to treat a chronic condition and the secondary endpoint goes out to 52 weeks and the primary goes out to only 28 weeks, you might want to disclose the fact that the secondary endpoint data, which is ultimately going to impact how patients do over a longer course of time, has not yet been evaluated.

Pat O'Brien: We talked about adverse events a little bit. I think the only point to be made here-- and I think the case law and just sort of common sense suggests that, if the adverse events are not drug related, if somebody is injured in a car accident, it could be a serious adverse event for clinical trial reporting purposes. But everyone would probably agree that's not drug related. But, there are situations where whether something is drug related is in the eye of the beholder. I think it's helpful from a scienter standpoint that principle investigators are in the first instance making that call. But, the FDA can take a different view of those and whether the drug relatedness of a particular issue and may want the company to gather additional information to confirm that that event is not drug related.

So I don't think we should think about it as a bright line test. If it's not drug related, we don't have to disclose it. If it is drug related, we do. I think to the extent we think there's a possibility that it might be drug related we need to think about disclosure on that.

Dan O'Connor: I think against that backdrop in the SEC context, you really have to think about what have been the communications. Pat talked about the principle investigator, often times not someone within the company, but the SEC will go to that investigator. They have no reason not to. And we've seen that. So you have to think about where your squeaky wheel is. What are the contrary opinions going to be around the nature of the event and how are those being discussed contemporaneously? That's where they're going to look. If you have someone that you've hired to run your clinical trial and he or she has a very different point of view than your chief medical officer, you have to take into account how that's going to be looked at in hindsight.

You have two people that think X and one that thinks X prime, you really have to make sure that you're not just hearing what you want to hear. Or your CMOs not being told what he or she wants to hear. And how are those differing opinions internally or with the folks that you've trusted otherwise going to be viewed in that hindsight situation?

Pat O'Brien: I think we've talked about sort of no duty to disclose ordinary course FDA interactions or sort of interim back and forth. Exactly where you draw that line can be a little tricky. But we've covered that. Sort of how much information do you need about clinical trial design?

Clearly you don't need to disclose every detail of your protocol. On the other hand, as an example, if you reported positive phase two data and now you're doing the confirmatory phase three but your patient inclusion criteria is different so that you're going to be including a broader range of subjects, maybe sicker subjects or something like that. Or you, often times change your endpoint. I think you really need to focus on that.

We had a company quite a while ago that had negotiated what they thought was a very favorably endpoint in a pivotal trial for a phase three. And they said, "Oh, well, this is competitively sensitive information. We can't possibly disclose this." And I foolishly went along with that. That was a bad decision.

I think you need to be thinking about what are investors investing in? And if what they're investing in is sort of these positive phase-two results and the likelihood that those are going to be replicated in the pivotal trial you can be sure that to the extent that pivotal trial isn't as confirmatory as we all hoped that people will very much be burrowing in on what's different from the phase three from the phase two. And if I'd have known that that the bar was higher, I would've thought differently about the investment. The other thing that the FDA often does and you've probably all seen this or many of you, is the FDA will say, "Well, it's a review issue," to Dan's point, "Or we'll be willing to go along with this endpoint if the results are particularly statistically significant. Mere statistical significance won't be sufficient.” I think that has to be disclosed that it's not .05 that's going to get you across the finish line with the FDA. And if you come in at mere statistical significance and the correspondence has said, "You're going to have to exceed that in order for us to go along with this endpoint," I think that's the kind of stuff you have to disclose.

Kellie Combs: I'm personally seeing more of that type of uncertainty in my regulatory practice. As companies are starting to develop products for these rare or ultra-rare diseases, in many cases there's not yet a validated endpoint. And so the company is working with KOLs in kind of reviewing the scientific literature to come up with an endpoint that may be clinically meaningful. And a lot of times we see in the FDA minutes it's not framed by the FDA as an issue of disagreement. It's as Pat said, let's see how the trial pans out. We need to evaluate the results to determine whether the endpoint is one that we'd be willing to accept.

Additionally aside from the clinical study design, it's important to consider product formulation or other issues that may impact how the product changes from phase two to phase three. Often times, we see phase two being relatively small studies. But when you get to phase three, you are changing suppliers or changing product formulation in a way because you ultimately need to scale up for commercial use. Those sorts of changes, it's important to think through whether they need to be disclosed because they might impact the phase three study results.

Pat O'Brien: The final one sort of speaks for itself. I mean, we're all under a lot of pressure to sort of spin the complete response letter in a relatively positive way because it's by definition not very positive.

You see in almost all headlines -- complete response letter but no new clinical data required. I would just caution again being very careful about that and making sure before you make disclosure like that either you've had some follow-up discussions with the FDA about understanding exactly what they're looking for and sort of otherwise not minimizing what the complete response letter provides and how long it's going to take the company to get there, whether it's a manufacturing issue or a safety database issue or whatever you have. That sort of speaks for itself, but that's an area where people have gotten themselves in trouble.

Dan O'Connor: Now we're going to talk about where the SEC is going because, look, I think that's where the SEC was. I mentioned to you when I was at the SEC we did this case against Biopure that related to how the company described the complete response letter.

In many respects, it was a fairly simple situation. Here's the complete response letter. Here's what you said. Boy, those really seem very different. You know, “thank you to the FDA for helping us with a path forward. We're looking forward to working together with them.” And it's like a 40-page awful, I'm not a scientist or a doctor, but even I know right from the simple truth of it, it is really not good. And it's being spun in a positive way. That ended up being a unique situation where the chief medical officer was I think in part lying to his executives about his interactions with the FDA, which certainly complicated some of those interactions.

He subsequently went to jail because he lied to the court in the course of getting ready for trial and told them that he had colon cancer when he did not. And then he went to jail. But he helped take down a lot of unfortunate other circumstances. But he helped bolster some internal positive-ness after complete response letter.

Audience Question: Can you please talk to the jail part because I didn't think the SEC could actually do that?

Dan O'Connor: Well, no. It wasn't the SEC. That was the helpful friends at the DOJ. But this is the place where we've also started to see some overlap. We talk about the SEC. And the SEC, if you're a public company or a private company or an individual, is awful because it costs a lot for an SEC investigation. You have the potential for fines and penalties and being barred as an officer and a director. But, the DOJ really sucks because you go to jail. And we don't always talk about this, but the SEC and the DOJ have concurrent jurisdiction to investigate these securities laws and evaluate whether they should bring cases.

There's an interesting development in that space. The most common overlap in the enforcement of the securities laws in insider trading. So the SEC and the DOJ bring insider trading cases in parallel a lot. We have seen that the DOJ is getting a little bit more interested in some of these disclosure cases. We've had a number of matters that we've been involved in where the DOJ spends a lot of time evaluating those.

It's particularly true here unfortunately. The head of the SEC office in Boston is a guy named Paul Levinson, was the head of the white collar crime unit in the DOJ. And they've brought over a number of prosecutors into the SEC. The pay's a little bit better at the SEC and I think the hours sometimes can be a little bit better. So those folks are coming over. But that has given them a lot of ability to work together. You have, to the extent you've been otherwise been dealing with off-label and things like that, a really sophisticated prosecutorial base here in this office that feel like they know how biotech companies operate.

What we've seen is that as the healthcare fraud unit within the DOJ has gotten reshuffled, some of those folks have moved over into the white collar unit. And so they're very willing to jump in with the SEC on some of these investigations.

And what we've seen here in the SEC is I think very, I would imagine, scary because what the SEC is doing is moving from those situations like we did with Biopure where you have a communication and then you lie about it potentially or you're negligent about how you'd describe it I guess because that's a big difference.

They're really starting to look at, what did the FDA say to you before about what might happen? Has that come true? And should you have said more about what they were predicting in the past? The SEC has a much, in some respects, easier approach than the class action plaintiffs do. Dan mentioned this earlier, the SEC can bring negligence cases. They don't need to rely just on scienter. A should have disclosed scenario is alive for them. They are doing multi-year investigations before they actually bring a charge.

The difficulty with dealing with the SEC, it's an unfortunate reality that I saw when I was there and that I see now time and time again, is that once they've spent some substantial time on a matter and where that is depends on the people, but a year to 18 months, it is very hard to get a complete walk away from the SEC.

It is very hard for them to get a walk away. They don't have to prove loss causation. And they're not as impressed as they were in the past by the fact that Dan and my other partners have won on the motion to dismiss because they're like, oh, fine. That's great. The plaintiffs didn't know what we now know.

They're very focused on pursuing individuals. They really have a mantra there of looking at, who knew what when and what was disclosed.

The Aveo case I think is maybe the tip of the iceberg for them, the start of track, whatever you want to call it. That's a situation where after the company was successful in district court on a motion to dismiss, the SEC started its investigation and started focusing in on the issues.

They sued a slew of people at Aveo. Their CFO went to trial and lost unfortunately, and lost on a fraud charge. It's a difficult set of circumstances. That case involved the survivability of patients in the control arm versus the drug arm. The control arm had a lower overall survivability than the control arm. The FDA going into the pre-NDA, told them, "We recommend that you do another trial. We recommend that you do another trial because of that data." The company disclosed that the FDA had a concern about that specific issue.

The company disclosed that it was a risk that if their NDA isn't accepted that they would have to do a second trial. The company never disclosed that the FDA had recommended that they do a second trial. And that's the principle omission that the SEC cited.

What the company argued is -- we disclosed the statistics and everybody knew it.

We represented a securities analyst. We had a bunch of different ways in on this case. I represented an individual who was a healthcare focused securities analyst.

He went in to talk to the SEC. They called up and said, "Okay. We want to come in and see him for three hours." Let's set that aside. I got the guy prepped. We went in. And within the first 30 minutes, he said, "Well, look, I saw the survivability data and I knew they were never going to get approved. Everybody knows that. Everybody knows."

Pat O'Brien: Without running another trial.

Dan O'Connor: “Without running another trial. Everybody knows that.” And the SEC said, "Oh, okay. Let's take a quick break," and walked out of the room. They came back in and said, "Okay. We're done. We don't need to talk to you anymore." That was after they had filed the case. And that guy didn't show up on the witness list I'll tell you right now. But that's what the company was relying upon. The company was relying upon that sophisticated investors are going to know what this data means. And we've told people that it's a concern of the FDA. And we've told people there's a risk that we might have to do another trial. And the SEC said that was not enough. That was not enough.

They went after the CFO, right, not somebody necessarily you think is at the center of the disclosure regime with respect to the trial results. And they brought that case against the CFO. The money was not that big here, but this was a three-year ordeal.

Audience Question: Why do you think they went after the CFO? Was it just a message case?

Dan O'Connor: Everybody else settled. So they went after the CEO, they went after the CMO, and at least one other person as well. I think there were four others that they went after. And what the CFO said is, "This is ridiculous to me. I didn't make a disclosure that didn't get reviewed by inside counsel. And most of them were also reviewed by outside counsel. There's a securities that happened in here. The underwriters knew what the FDA had said, had seen the minutes. They were okay with the disclosure we made and the securities offering." In the end what the SEC focused on was not the registration statement because I think they recognized they might have some problems there. They focused on one or two statements that the CFO made, I can't remember if it was at an investor day or the J.P. Morgan conference.

That's what they focused on. And it was a failure to mention that one FDA recommendation when otherwise talking about the progress on the NDA. They didn't talk about that. And that's where they focused. And he was a speaker. And that's why they focused on him.

Audience Question: He was a speaker.

Dan O'Connor: He was a speaker. And so it was not a collective thought thing. It was he made a statement and had talked about the trial and the NDA. And it didn't talk about that one critical fact.

Audience Question: Do we know the differential in the outcomes were for the executives who settled versus the CFO?

Dan O'Connor: Yeah. Some of the people settled for negligence charges, which doesn't carry a D&O bar. Now the reality of the situation is, he went to trial. He lost. He has a finding of liability. And he has a D&O bar. What I've taken to telling the SEC, as a practical matter, if you settle a case even on a negligence basis, almost every public company you're going to be associated with is going to have to make disclosure on that point. And so unless you are, the smartest person alive or you found your own company, you might find it very challenging to find an officer job at another public company even though you don't have a technical officer bar, D&O bar.

His remedies on the money are better than what the other people got. I think that's very cold comfort. I think he can tell his story in a way. He had moved on. He was at another company at the point and had to move on from that job. He was the CFO of another company by the time that this trial went through.

Audience Question: Public company?

Dan O'Connor: Another public company. That's right. They had made disclosure about the case. But that's the unique circumstance. And so what's happened here is that the SEC has kind of formed a unit. I mean, it's a very loose affiliation of three or four folks, investigators, trial attorneys within the Boston office who see this as a rich environment of folks who make disclosures about their FDA interactions all the time.

We're seeing this being very active. Like I said, we're aware of four ongoing investigations that are looking at disclosures with hindsight. You've got a CRL. You had a clinical hold. You got a major 483. And you disclose that. And your stock dumps.

Or, like I said, there's a couple of private companies that are being investigated as well. What did you know going into that? It's almost like how easy would it have been to predict that? And they are second-guessing the disclosure decisions that were made almost always with the involvement of counsel and looking at the minutes from the FDA meetings and looking at the interactions internally about those FDA meetings. People knew this was going to be a problem.

People could predict this was going to be a real issue. Even though you thought you had the smartest consultants in the world and they were going to get it through, the FDA was telling you, was signaling you this was going to be an issue. How well did you communicate that? And we've seen those interactions. Kellie, do you want to talk about the FDA and the SEC overlaps?

Kellie Combs: Sure. So back in 2004, SEC and FDA actually came out publicly and announced a bunch of initiatives about interagency cooperation. So among other things, SEC and FDA staff at certain levels are cross-trained to spot issues and are instructed to notify each other.

So if for example, someone in an FDA review division notices what looks to be a misstatement in a filing document, that person is supposed to notify the key point of contact at the FDA. Now many of these initiatives are internal only. There's hardly anything in the public domain about kind of the impact or the end results of some of these initiatives. But we do know that they cooperate and that they're working together and that, in particular, the folks at FDA are educated at the highest levels on how to spot these sorts of problems.

Dan O'Connor: And the folks that we're dealing with at the SEC know these issues too. I mean, you sit down with them in an interview and they're not fumbling around. I mean, they know how these things unfold. I actually have gotten to know some of the reviewers. They know some of the means of communications. The level of sophistication from the questions have been on an uptick in a very serious way and it's not showing any signs of slowing down. I'm aware of one situation where a company had a CRL, had a 10b suit. Some group of the SEC picked up the phone and said, "Hey, tell us what's going on here." The company went and made a presentation, explained to them there shouldn't be a problem. The SEC said, "we hear you. That seems reasonable to us." And they shut down the investigation. They issued a closure letter. Another issue arose that brought that company's disclosures back to the attention of the SEC including some people that were in this little unit and they reopened the investigation on the disclosures. I've been doing this for 20 some odd years. I've never seen an SEC case --they always say you can -- I've never seen an SEC case be reopened after a closure letter has been issued. These folks feel like they know the FDA regime. They know how these cases should look. And they convinced their colleagues, which is not a small feat, to reopen the investigation. It just shows you the strength by which they're kind of pursuing these cases.

Pat O'Brien: I want to make one point. You may have seen last week or the week before the reg FD case that the SEC settled against Therapeutics MD. They don't bring a lot of reg FD cases. I think for the most part people are pretty well versed on that. But the facts of that case were that the company had informed the market, with respect to a CRO that they had, that they were going to have a meeting with the FDA on a particular date.

So naturally analysts started calling the executives that day. Like, "How'd it go? What did you learn?" And the executives, having some general understanding of FDA, although later showed they didn't have a lot of policies and training, made some comments at least I think sound sort of innocuous. And they say, "Well, it was positive and productive," nothing specific, just positive and productive. On that news the stock jumps.

So in hindsight what I suspect the executives thought was not really telling the analysts anything by the stock jumping shortly after that or the day after that they disclosed that to the analysts, you no longer have the ability to really argue that that information wasn't material because it moved the market.

So in my mind, this case shows two things. One, make sure your executives are trained on reg FD. Two, I'm not sure how actionable this is, things which you think are innocuous, are going to be judged in hindsight which has been a theme throughout our comments today.

So any analyst-only communications you have to think very hard about. And I think the real issue or the real takeaway from this case is not to create expectations giving information as specific as here's the day we're meeting with the FDA because you can be sure that analysts and the market generally are going to be all over you. So anyway, this case is just a reminder to sort of reopen our reg FD and maybe do another round of training and think about it with your business folks.

Dan O'Connor: And I think the other big thing there too, if you do make those disclosures, that we're going to have this meeting, this event's going to occur, think the next step and make sure that your executives that are picking up the phone have an actual script and aren't working off the cuff because it's much harder to tell your executives, "Well, no. You probably went too far. We got to make a disclosure. We got to get out an 8K on that." It can be a very hard conversation to have. We've all had to have those or get close to those. And the way you can avoid that is trying to think about that next thing.

And we've announced that this is the day. How likely is it that that analyst is going to call? That guy calls all the time. She always wanting to know what happened. So let's anticipate it. Let's have the communications plan. Let's have the talking points. It's much harder for the SEC to second-guess the thought out reviewed by counsel talking points than it is the off-the-cuff guy where you got the email. Did he really say that? That comes afterwards. I'm not saying that happened here exactly. But you have to be thinking about that.

Dan Ward: Want to wrap it up?

Pat O'Brien: Yeah. So think these are just sort of some takeaways to think about and just summarize what we've been talking about today. Thanks for coming. Any questions before we break? Thanks a lot. Thanks for coming.