Critics worry Stewart trial won't bring major change

Will the Martha Stewart case lead to major changes in the way biotechnology companies are regulated?

Some congressional critics are starting to worry it won't.

Stewart's trial, set to begin later this month, stems from the media executive's handling of stock she owned in ImClone Systems Inc. prior to the disclosure of bad news about the cancer-drug developer's dealings with the Food and Drug Administration.

Some congressmen charged that ImClone had too much leeway to hide the news in the first place.

During and after hearings in 2002, the lawmakers pressed the FDA to work with the Securities and Exchange Commission to ensure that biotechnology companies don't mislead investors about their progress in getting drugs through the FDA's long approval process.

Dealings between the two agencies remain a hot topic in the world of biotechnology. Since the ImClone case several other companies have disclosed investigations by the SEC into whether they said enough about their discussions with the FDA. The two agencies are in talks to develop new guidelines on cooperation, and spokespeople say SEC chairman William H. Donaldson and FDA Commissioner Mark B. McClellan spoke by phone Dec. 19.

But neither agency will talk about what specific changes might be in store, and some outsiders worry that means little is coming of the effort.

"Our investigation of ImClone prompted an important dialogue between the agencies. But clearly, it appears they are still struggling on how to implement certain procedures and safeguards," said Ken Johnson, a spokesman for the House Energy and Commerce Committee chaired by Billy Tauzin, a Louisiana Republican.

Johnson added that the two agencies may have made some progress, but FDA officials were more willing to say what the agency won't do. For instance, one type of document at the center of the ImClone storm still probably won't be passed along to the SEC in the future: the "refuse-to-file" notices similar to the one ImClone got from the FDA in late 2001.

That action marked a setback to ImClone's research efforts and preceded Stewart's trades. The company's chief executive, Samuel Waksal, was sentenced to seven years in prison last year after admitting he tried to sell shares ahead of the news.

Refuse-to-file letters are considered part of the new drug applications that companies make to the FDA, and are considered confidential company information under the agency's rules. Making them available to the SEC would require changes to these statutes, said Peter Pitts, the FDA's associate commissioner for external relations. He indicated the agencies don't envision sweeping changes.

"This isn't about changing the rules, this is about clarifying the rules," he said. John Heine, a spokesman for the SEC, wouldn't discuss the talks.

Just how the FDA and SEC should interact is among the most sensitive issues for biotechnology companies. Their fortunes depend largely on showing investors they are making progress getting approvals for drugs that can cost hundreds of millions of dollars to research.

Yet many executives believe that the two agencies work at cross-purposes. While securities rules require wide disclosure, repeating all of the technical detail the FDA conveys about an experimental drug can make a stock extremely volatile, said Carl B. Feldbaum, president of the Biotechnology Industry Organization, a trade group in Washington.

"I think we need to come up with a coherent system where biotech CEOs aren't cross-cut, like logs, between the FDA and the SEC," Feldbaum said.

Others worry that biotechnology companies will become the target of too many shareholder class-action lawsuits like the ones technology companies faced in the 1990s, before reforms.

In a speech last summer the FDA's McClellan said his agency had begun "making referrals to the SEC when we see companies misrepresenting our discussions with them to the public markets." Pitts and others wouldn't say how many referrals have been made or whether new openness by the FDA was at the heart of several recent steps the SEC has taken against biotechnology companies who may not have disclosed enough. Whatever the cause, the SEC has stepped up its enforcement actions in the area. For instance, Biopure Corp., a Cambridge developer of artificial blood, disclosed on Christmas Eve that the FDA had put it on notice it might bring legal action against the company, its chief executive, Thomas A. Moore, and a former executive.

The company believes the SEC is focused on whether it disclosed enough about its interactions with the FDA. Among other things, the FDA told the company that it couldn't begin a trauma trial of its Hemopure product because of safety concerns. The company said it didn't disclose this previously because it felt the matter wasn't "material" under securities rules until the trial began.

Another local case involves Transkaryotic Therapies Inc. The company said last May it faces an SEC investigation related to its disclosures and public filings regarding its work to gain approvals for Replagel, meant to treat the rare genetic disorder Fabry disease. The company says it is cooperating with the investigation, but that no charges have been filed to date. And on Dec. 19, Amylin Pharmaceuticals Inc. of San Diego said it faces an informal inquiry from the SEC related to its communications about Symlin, a diabetes treatment.

Jeffrey B. Rudman, a Hale and Dorr LLP attorney representing biotechnology companies including Transkaryotic, said he couldn't talk about its case.

But he added that the task that companies face in balancing the tensions between the two agencies represents "the most difficult tightrope in contemporary disclosure issues of which I'm aware."

Ross Kerber can be reached at kerber@globe.com.