SEC focusing on drug makers

The Securities and Exchange Commission is scrutinizing biotechnology companies as part of a wider effort to ensure that companies don't mislead investors by covering up negative results of clinical trials.

The SEC's Boston office has made the biotech industry a new focus because of the concentration of companies in the area and the possibility that selective disclosure could seriously harm investors, say lawyers and company officials.

"We won't comment on any particular matter," said Walter Ricciardi, district administrator of the SEC in Boston, "but speaking generally, we'd note that when companies speak, they must do so truthfully and accurately. Misrepresentations about the status of a product in development can be very damaging to investors."

The heightened interest comes amid a flurry of Boston-area cases involving disclosure of clinical trial information.

In December, the SEC sent so-called Wells notices to Biopure Corp., its chief executive, and a former official, indicating they were likely to be sued. Four other Biopure officials received such notices in the spring. The Cambridge company said the SEC is looking at whether it misled investors when it failed to tell them the Food and Drug Administration had blocked clinical trials because of safety concerns.

In July, Transkaryotic Therapies Inc. said the SEC had recommended seeking penalties against the Cambridge company and its former chief executive. The commission is investigating company disclosures surrounding its drug Replagal for Fabry disease.

And in August, Cubist Pharmaceuticals Inc. said it is under investigation by the SEC, which is looking at whether the Lexington firm disclosed the results of a clinical trial with a drug candidate in a timely fashion in January.

Drug companies' prospects are determined in large part by their success in winning FDA approval for new treatments. For most investors, the way to track drugs in the pipeline is to follow the human clinical trials, which take place over years.

But there are no hard-and-fast rules as to how and when companies must disclose such trial results. Some are published in medical journals or presented at medical conventions. Others are publicized in news releases. Sometimes, companies extract and disseminate specific information from a larger trial, such as disclosing results from a single location.

Regulators have become increasingly concerned that drug companies may be highlighting successful trials while burying the results of failed trials.

In June, New York Attorney General Eliot Spitzer sued GlaxoSmithKline, alleging the drug giant had engaged in "repeated and persistent fraud" by failing to disclose clinical trial information about its antidepressant Paxil. In particular, Spitzer alleged, Glaxo had suppressed trials showing that Paxil was not effective in treating depression in children and adolescents.

"The attorney general's office has an ongoing interest and concern with respect to the pharmaceutical industry," said Marc Violette, a spokesman for Spitzer. "I cannot comment on biotech."

Violette said that, to the best of his knowledge, "this office is not involved in a review of the biotech industry."

Spitzer's action has already sparked a small revolution in the medical publishing world. A group of editors of prestigious medical journals, including the New England Journal of Medicine, said this month that they would publish results only from trials that are registered in a central database. The move is intended to prevent the journals from unknowingly highlighting only positive results.

"The drug companies want to tell you the good news, but they want to bury the bad news," said Dr. Jeffrey M. Drazen, in a recent interview with the Globe.

The disclosure of trial information is particularly important to biotech companies, which tend to be younger and smaller than pharmaceutical firms. Biotech firms often depend on a single promising drug candidate. Share prices often plunge when a biotech firm discloses a clinical setback for that one product.

Because biotechnology firms have fewer products, the threshold for materiality -- whether information has enough impact on a firm's results to require disclosure to investors -- is lower for their clinical trial results.

"The larger the company and the more drugs in the pipeline, the less likely the information is going to be considered material," said Derek M. Meisner, an attorney with Kirkpatrick & Lockhart LLP in Boston and a former SEC enforcement attorney. "If the drug's success is crucial to the company's bottom line or scientific credibility, then disclosure may be warranted."

Meisner said he is advising biotech firms to develop explicit policies to notify their lawyers when trial results are imminent. Company lawyers need to be able to "react to prevent innocent but embarrassing and perhaps even legally actionable" statements by the company, he said.

The new focus on clinical trials began in February, when SEC enforcement director Stephen M. Cutler said the commission would be working more closely with the FDA. One step: The FDA, which has tremendous reservoirs of clinical trial data, will take steps to share "nonpublic information" more quickly with the SEC.

Jeffrey Krasner can be reached at krasner@globe.com.