Medical Device Link.

Originally Published MX September/October 2003

Governmental & Legal Affairs

Promising clinical trial developments may seem cause for crowing, but FDA and SEC could think otherwise.

Darren W. Alch and Deidre L. Shearer

Few would argue with the proposition that the value of a pharmaceutical or medical device company lies largely in the strength of its product line. And just as important as the products already on the market is the product pipeline—those drugs or devices in development that FDA has not yet approved for marketing. In many instances, the value of a publicly owned medical technology company’s stock—as well as the availability of investment capital—depends on how the firm communicates the potential value and research progress of its pipeline products to those with an interest.

All forms of such communication, when initiated by either the medtech company or one of its agents such as an advertising or public relations firm, are regulated by FDA. Recently, however, the agency has also been paying much more attention to the disclosure of clinical trial results by publicly traded companies. FDA has joined the Securities and Exchange Commission (SEC) in significantly stepping up its monitoring of clinical studies publicity in the wake of the ImClone debacle. Medical technology executives need to be aware of heightened FDA scrutiny of clinical trials and the premature public disclosure of results.

Being aware is not the same thing as knowing what to do, however, as this article endeavors to show.

FDA Premarket Regulation

To keep their product pipelines robust, medical device manufacturers must constantly develop new products and upgrade products already approved for marketing. Generally speaking, before a new medical device may be marketed, it must be approved by FDA. Not all new-device marketing applications require supporting clinical research data. Many 510(k) submissions are not supported by human clinical research, nor do all premarket approval applications call for clinical data. Nevertheless, most new medical devices do need to be backed by clinical data to qualify for market approval.

During the FDA approval phase of product development, medtech companies may be tempted to discuss favorable clinical research results with interested potential customers, investors, or the media. Such dissemination of information or promotion of a product before approval is, however, of particular concern to FDA. FDA regulations prohibit promoting an investigational new drug as safe and effective.¹ (The FDA Center for Devices and Radiological Health takes a similar position with respect to devices.) 

The agency’s argument: “Prior to approval [a] sponsor’s assessment of the product may be overly optimistic, exaggerating efficacy while minimizing risk. Thus, the sponsor’s biases may be incorporated into the promotional materials it provides prior to . . . approval.”²

FDA-related statutes and rules focus on regulation of advertising directed at physicians, but over the years the agency has expanded its jurisdiction to encompass all communicated product information. This includes direct-to-consumer advertising, Internet Web sites, press releases and other public relations materials, information provided to the investment community, and even oral statements made by company employees or representatives. All materials and statements must meet FDA requirements for truthfulness, fair balance, and full disclosure.

A few basic principles underlie all FDA regulation of product-specific information that is issued or caused to be issued by a company, either directly or through any agent:

• All product-specific materials are considered marketing.
• Truthfulness means the whole truth.
• Product benefits must be balanced with risks.
• Claims must be adequately supported.
• Material facts must be disclosed.

It’s All Marketing. FDA generally regards promotional materials issued by a company as falling into the category of advertising or that of labeling. Advertising means traditional paid advertising. Labeling encompasses everything else—for example, Web sites, booklets, direct mail pieces, press releases, letters to formulary committees, slide kits, audiovisual materials, and so on.
Truth Alone Is Not Enough. To be sure, all communications should contain information that is truthful and not misleading. Being accurate and truthful is not sufficient to satisfy FDA, however, for the agency imposes requirements beyond mere accuracy and truthfulness. A press release that accurately and truthfully describes new research on an unapproved medical device but does not also mention risk factors or fully disclose risk information, for example, would be regarded by FDA as problematic.

The Bad Must Go Hand in Hand with the Good. All discussion of product benefits must be fairly balanced with risk information. The concept of fair balance is hard to define precisely because it varies from product to product. FDA calls it a balanced presentation of benefits and risks. This means that in a press release, for example, when benefits are described, major adverse experiences and side effects usually must also be described. Fair balance also involves delineation of a product’s limitations, especially important when discussion of preapproval clinical trial results can affect investment decisions.

Proof Is Necessary. Any claims for a medical product must be supported by scientific studies that have been reviewed by FDA or that are subject to agency review. One of the ImClone issues was FDA’s concern about the size and design of the Erbitux drug study. FDA expects claims to be substantiated by well-controlled studies—at least two, usually.

Facts Are Facts. Material facts about a product must be disclosed. If a press release or other company statement fails to mention some material fact essential to a full understanding of the product, the communication is improper.

Press releases should be handled just like other product-specific communications. To please FDA, press releases issued before product approval must avoid stating that the product has been shown to be safe and effective and should avoid any statements that might be construed as promotional. Words such as promising and breakthrough should not appear. Preapproval press releases should not contain claims regarding the likelihood of FDA approval or anticipated FDA approval dates.

Context is also important. While investor-directed communications and such other materials as annual reports are technically subject to the same regulatory requirements as advertising and labeling materials, FDA seems to acknowledge that these materials are not intended for product promotion. It has geared its enforcement policies accordingly. For example, FDA could regard an annual report handed out to physicians at a medical meeting as promotional. The agency has never, however, considered annual reports issued to investors, and that may cursorily mention ongoing research or newly approved products, to be labeling.

Regulation by SEC and the Stock Exchanges

Companies listed for trading on national stock exchanges have an obligation to disclose to the public any material information that could reasonably be expected to affect significantly the value of their securities or to influence investors’ decisions.^3,4 The determination of whether a development is material is left to the judgment of company executives.

To Disclose or Not to Disclose. Both the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD) specifically state that progress in new product development and significant advances in clinical trials are among the kinds of developments that may be material to the investing public and, if so, should be disclosed to ensure an efficient market in the securities of the company.5,6 It is equally clear, however, that listed companies are expected to avoid promotional disclosure, that is, disclosure of product development news exceeding that necessary to enable the public to make informed investment decisions.7 Both NYSE and the American Stock Exchange (Amex) state explicitly that products in the development stage whose commercial prospects cannot yet be reasonably evaluated should not be announced prematurely.^5,8

Such disclosure could mislead investors and cause unwarranted activity and price movements in the company’s securities.
The exchanges recognize that a company may legitimately withhold material information in certain circumstances, provided that complete confidentiality is maintained. Although the presumption should always be in favor of disclosure, exceptions to it have developed in the interest of striking a balance between the free flow of information and the stability of the markets. Generally, disclosure is only delayed until a more appropriate time.

One such situation arises when immediate disclosure would prejudice the ability of the company to achieve a valid corporate objective. For example, it might interfere with the company’s plans to acquire a competitor, by driving up the price of the acquisition or preventing it from being carried out at all.

Or perhaps the facts of the situation are in a state of flux. In this circumstance, premature disclosure could result in a need to correct the public information when the facts change.⁹ Successive, fluctuating public statements concerning the same subject may be more confusing to the investing public than withholding disclosure until the situation stabilizes, and could result in more stock price volatility. Having a product going through the FDA approval process likely puts a medtech company in this category.

Deciding Not to Disclose. If company leaders determine that disclosure of a potentially material corporate development is not required, they must take extraordinary steps to ensure that the information does not leak to any investors and that insiders do not use their knowledge of it to trade in the stock themselves. All national stock exchanges require companies to immediately disclose publicly any sequestered facts that appear to have leaked out and to have had an effect on the market in the securities. Similarly, when executives become aware of rumors being circulated about their company or notice unusual activity in its stock, either of which may indicate that material corporate information has leaked, they should consider immediately disclosing such information to the public.

Procedures for Disclosure. When the management of a listed company determines that it must disclose material information to the public, the normal means of publication is a press release furnished to the national wire services and designated as being for immediate release. This method is endorsed by all national exchanges.

The exchange on which the company’s securities are listed should always be given prior notice of such press material, especially if it is provided for release during trading hours. With input from the company, the exchange will then decide whether the news warrants a temporary trading halt to give the market an opportunity to absorb and evaluate the information.
In any event, whatever news is material must be disclosed, whether it is positive or negative in nature.

The national press release is clearly an effective means for disseminating material information to the investing public. However, such information often is furnished in a less public way, such as in a meeting with analysts or key investors or through a Web site to which access is limited.

Disclosure by methods such as those could result in a problem if executives are not careful. Some investors might get a jump on the market for the stock in violation of the SEC fair disclosure regulation (Regulation FD), which became effective in October 2000.¹⁰ 

Regulation FD says that if any nonpublic material information is disclosed by a company to any investors in particular, it must be disclosed simultaneously to the investing public in general. Several prescribed means are available for doing this: issuing a widely disseminated press release, including the information on a Form 8-K filed with SEC, and holding a conference call or Webcast about which the public is notified in advance and to which anyone is allowed to listen or attend.

Disclosure within the Rules

The clinical trial phase in the development of products seeking FDA approval presents medtech companies with a distinct challenge in deciding what and when to disclose.

On the one hand, companies are naturally eager to discuss favorable trial results and, generally speaking, are encouraged to do so publicly by stock exchange and SEC regulations, to the extent such results are material to investors. But on the other hand, FDA generally prohibits premarket disclosures. And besides, FDA, SEC, and the stock exchanges require that any allowable disclosures be complete, accurate, and not misleading to the investing public—a difficult order given the fluid nature of clinical trials and the lack of predictability inherent in the FDA approval process.

Similarly, a failure to disclose material results could result in sagging stock prices and the loss of competitive advantage in the quest for investors’ dollars. Yet disclosing results too soon could cause an artificial inflation in the stock prices. Shareholder derivative suits and SEC enforcement action could follow if clinical study results turn out to be less favorable than the sponsoring company had expected and had led others to expect.

If the ImClone saga is any indication, the agencies themselves are struggling with oversight of this dilemma. Attempting to define regulatory enforcement boundaries in testimony to Congress, FDA Deputy Commissioner Lester Crawford recently said, “While FDA has authority to correct false and misleading sponsor statements in appropriate circumstances, primary responsibility for assuring the truthfulness of company statements aimed at investors resides not with FDA, but with the Securities and Exchange Commission. The SEC has broad authority . . . to take action against . . . false or misleading statements in connection with a securities transaction.”¹¹ FDA and SEC are engaged now in preparing a guidance document on the issue, whose final form is uncertain. It is to be hoped that it will clarify the rules of engagement for medtech executives currently making decisions within an environment of competing rules and diverse corporate objectives.

Medtech company executives thus find themselves tugged in opposite directions by these contradictory forces. To follow the proper course under these circumstances calls for strict adherence to some basic practical guidelines.

Protect Sensitive Clinical Information. Within the company, FDA status should be handled on a need-to-know basis. The company should be organized such that access to preapproval clinical research information is limited to personnel directly involved in the process—for example, R&D, legal, and regulatory staff, and key executives.

The physical layout of departments and processes of corporate internal communication should be designed to prevent unintentional dissemination of sensitive, volatile material information. Sales and marketing staff should not share space with R&D.

Be Conservative. Only information regarding products that are in Phase III clinical trials or beyond should be disclosed. Products at earlier stages of development are generally years away from approval; the risk of disclosing information about them that is inaccurate or misleading is much higher. Premature disclosure could result in liability to the company. Other possible bad outcomes are stock price volatility and a weakening of investor confidence.

FDA filing dates and projected approval dates should never be disclosed. Appropriate content for any disclosure statement includes the generic name of the product, its brand name, indications for use, and any patent issues.

Follow a Written Policy. Every medtech company should develop and observe a corporate disclosure policy that specifically addresses matters pertaining to communication of information about products, especially those not yet approved by FDA. The policy should list individuals authorized to make disclosures on behalf of the company regarding pipeline products. It should also include guidelines for the content, timing, and mechanics of such disclosures. In addition, every disclosure issued in some written form should be reviewed by all corporate employees bearing responsibility for legal or regulatory compliance.

It is important that all employees be trained in the policy and that procedures for ensuring compliance be implemented. Managers should encourage employees to report any suspected policy violations and should investigate all such reports. They should unfailingly act to stop information leaks and to correct market rumors.

Ask FDA. Finally, any executive in doubt about the appropriateness of a disclosure with respect to FDA regulations should telephone the agency. FDA is willing to offer guidance and suggestions in this area.

Conclusion

The emergence of apparently favorable clinical research results can be good news for the medtech company but may not properly be news for the general public at all. In circumstances like these, cautious, astute executives will know when it’s time to blow the company’s horn and when it’s quiet time.

References

1. Code of Federal Regulations, 21 CFR 312.7(a).
2. Pre-Approval Promotion Guidance (Rockville, MD: FDA, Center for Drug Evaluation and Research, Div. of Drug Marketing, Advertising, and Communications, 1994).
3. New York Stock Exchange Listed Company Manual (New York: NYSE, 2003), Rule 202.05; available from Internet: http://www. nyse.com/press/1020656068711.html.
4. NASD Marketplace Rules, Rule IM-4120-1, in NASD Manual (Chicago: CCH, 2003); available from Internet: http://www. cchwallstreet. com/NASD.
5. New York Stock Exchange Listed Company Manual (New York: NYSE, 2003), Rule 202.06(A); available from Internet: http://www.nyse.com/press/1020656068711.html.
6. NASD Marketplace Rules, Rule IM-4120, in NASD Manual (Chicago: CCH, 2003); available from Internet: http://www. cchwallstreet.com/NASD.
7. Amex Company Guide, Sec. 401(e), in American Stock Exchange Guide (Chicago: CCH, 2003); available from Internet: http://www. amex.com/atamex/constitutionRules/ companyguide.html.
8. Amex Company Guide, Sec. 402(a), in American Stock Exchange Guide (Chicago: CCH, 2003); available from Internet: http://www. amex.com/atamex/constitutionRules/ companyguide.html.
9. Amex Company Guide, Sec. 402(e), in American Stock Exchange Guide (Chicago: CCH, 2003); available from Internet: http://www. amex.com/atamex/constitutionRules/ companyguide.html.
10. Code of Federal Regulations, 17 CFR 240.100–103.
11. U.S. House Committee on Energy and Commerce Subcommittee on Oversight and Investigations, An Inquiry into the ImClone Cancer-Drug Story, 107th Cong., 2nd sess. (10 October 2002): 228–229; available from Internet: http://energycommerce.house.gov/ 107/action/107-142.pdf.

Darren W. Alch and Deidre L. Shearer are attorneys in the Houston office of the national law firm Jenkens & Gilchrist PC. 

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