Some light reading, from the XOMA thread, posted by Tharos:
From: Tharos Monday, Jul 6 1998 8:38AM ET
Reply # of 6628
genre.com
Industry Focus: Biotechnology
Biotechnology companies have certain characteristics that make them more susceptible to securities fraud lawsuits. For example, the value of a development stage biotech company, as most are, is based on anticipation of future rewards, not historical performance. Because a biotech company's value is largely based on the future, biotech companies must be exceedingly careful in their public communications with regard to future events.
Perhaps the trickiest issue for a biotech company to deal with in discussing future events with investors and the public is the issue of commenting on the conduct of an entity over whom the company has no control -- the FDA. Even seemingly innocuous statements that attempt to predict the FDA's actions could form the basis for a securities fraud lawsuit if the FDA fails to act accordingly.
Take the case of U.S. Biosciences and the events surrounding the clearance process for its drug, Ethyol. While the FDA was reviewing the company's Ethyol submission, company management made the following statements: (1) "Ethyol may be marketed during the latter part of 1992, pending FDA approval;" and (2) "We're quite anxious to see the new system [at FDA] speed up the approval process for this drug."
After it was announced that the FDA had determined that the clinical trials of Ethyol failed to produce statistically significant results, U.S. Bioscience was sued. The Court held that the statement set forth above, along with others, could form the basis for a securities claim. See In re U.S. Bioscience Securities Litigation, 806 F. Supp. 1197, 1201 (E.D. Pa. 1992). The defendants subsequently settled the case for over $15 million.
We do not believe that a biotech company is required to make a public disclosure after every conversation with FDA staffers. At least one court has noted that a biotech company is not required to disclose every conversation that forms a part of the continuous dialogue between the FDA and a biotech company. In re MedImmune, Inc. Securities Litigation, 873 F. Supp. 953, 966 (D. Md. 1995). Rather, the lesson to be learned from U.S. Biosciences and other cases is that a company, when commenting publicly on the FDA's likely conduct, must emphasize the uncertainty of the FDA clearance process. A boilerplate disclaimer that marketing of a drug or device is subject to government regulation and/or FDA clearance may not be sufficient to apprise investors of the uncertainty of the process. Indeed, a number of courts have noted that general disclaimers in SEC filings may provide no protection if the company's other public statements give the impression that FDA clearance will be forthcoming. See, e.g., Warshaw v. Xoma Corp., 74 F.3d 955, 958 (9th Cir. 1996).
For this reason, whenever a biotech company makes any comment about the results of clinical trials, anticipated submission of data to the FDA, or the FDA clearance process, the company's statements should be accompanied by meaningful cautionary language that informs the public that (1) the FDA will independently review the data submitted; and (2) the FDA review process is an uncertain one whose outcome cannot be guaranteed. Biotech companies that sufficiently warn investors and the public of the possibility of an adverse ruling by the FDA will be much better protected from a securities litigation perspective if an adverse ruling does issue from FDA.
Updates to the Guide
A. Defensive Disclosure
The decision in In re OPTi, Inc., Securities Litigation, Civil Action No. C 95-3434 SBA (N.D. Cal., March 31, 1997), reinforces the principle long advocated by Genesis that defensive disclosure can protect a public company that is forced to defend itself in a securities fraud case. OPTi was sued after the company announced weak third quarter results. Plaintiffs alleged that, when the company announced first quarter results some six months prior, the defendants made a number of misrepresentations, including misrepresenting the level of demand for its older products and the transition to production of a new generation of products.
The Court dismissed plaintiffs' case on a motion to dismiss. In so doing, the Court carefully reviewed, not just the statements that plaintiffs alleged to be misleading, but other statements made by the company prior to and during the Class Period. In particular, the Court reviewed the company's Form 10-K, which had been filed just prior to the Class Period. The Court concluded that, when viewed together, the defendants' disclosures -- the 10-K, press releases and end-of-quarter conference calls -- "bespoke caution." Indeed, the Court stated that defendants' "risk disclosures relate directly to defendants' alleged omissions and are inextricably intertwined with the statements which plaintiffs allege give rise to the false illusion of continued profitability." Opinion, at 12-13.
The opinion in OPTi demonstrates the prudence of defensive disclosure. Of particular note was the Court's careful review of the 10-K and the entire transcript of the end-of-quarter conference call. OPTi thus reinforces the principle that the use of defensive disclosure in all aspects of public communications, written and oral, will give a company powerful weapons to defend itself if the company is sued. We also believe that good defensive disclosure may prevent the filing of a lawsuit in the first plac
|
