LEDA at Harvard Law
Disclosure of the Dealings Between Drug Developing Companies and the FDA Under the Federal Securities Laws
Food and Drug Law, 37300-21
Harvard Law School
LL.M. Candidate ‘02
26 April 2002
Disclosure of corporate information is deemed to be the key to efficient and well-functioning securities markets  . Corporate press releases, publicly available documents and other disclosures enable investors simultaneously to get information relevant to the valuation of the traded securities. When the use of non-disclosed material information is forbidden, the trading price of any given stock should at any time be based on public and efficiently allocated information. This information will be influenced by subjective assessments and instances of irrational behavior by the market makers, irrespective of the timing of the disclosure  .
A truly efficient market is, of course, the optimal yet Utopian state of affairs in securities trading. Disturbances and inefficiencies in the distribution of market information and, also, the unequal ability of different players to analyze and react on the information affecting the market of a particular security makes it impossible for the market to mirror the absolute value of a security. Despite all participants to the market having the same information, this does not mean that “all market participants have the same opinion as to the security’s price; rather, an efficient market is the result of their collective investment decisions, even if participating investors hold varying beliefs as to the information’s impact”  . Setting aside the personal and organizational factors – the ability to analyze the market information -- the inefficiencies of the market mainly result from an ill-functioning system. In turn this system results from ambiguous or insufficient regulation of the financial markets, and/or non-compliance with vague disclosure regulations and insider trading prohibitions.
The federal securities laws sometimes impose very general guidelines for disclosure (for example the rules concerning the assessment of the materiality of the information) and sometimes somewhat detailed and technical sets of rules (for example, the regulation of periodic disclosures) relating to information to be released by public companies. The general rules have additionally been defined by extensive case law making them, to some extent, even more ambiguous  . The combination of these disclosure rules with the strict regime governing the activities of drug developing companies  added to the huge effect announcements made by such drug companies have on the value of security issued by them, on explains why there have been, and will be, so many disputes relating to disclosures made by the drug developing and manufacturing companies  . It is worthwhile mentioning that there are no specific rules or regulations applicable to or relating to, the disclosures to be made by a biotech or a drug developing company.
The purpose of this article is to highlight the main issues raised by the Food and Drug Administration’s (“FDA”) approval process relating to new drugs and the treatment of this process receives in the context of the Federal Securities Laws  . The partial inspiration for this article has been the recent highly publicized case concerning ImClone Systems Incorporated – a case, which well exemplifies both the connection between the valuation of a biotech/medical company and the FDA’s approval process for new drugs, and also the huge effect of the approval process to the market’s valuation of the stock price.
ImClone conducted clinical trials with “Erbitux”, a promising cancer drug. The FDA sent a letter to ImClone stating that, despite long pre-clinical and clinical studies, it would not even consider the company’s application for approval to market Erbitux. Before the leak of the contents of the FDA’s letter to the public, ImClone’s stock had been trading above $70 but fell as low as $21.15 after the letter was publicized in January 2002.  In connection with ImClone’s problems with the FDA Dr. Eric Ende, Managing Director of Bank of America Securities concluded that ImClone’s case “...does wake people up to the fact that drug development is risky, and FDA is a black box” – a statement which also well describes the special problems relating to disclosure issues young biotech companies are particularly facing  . The Wall Street Journal has published ImClone related stories with enthusiasm and a good example of this is the recent editorial on 27 February 2002 headlined “The Real ImClone Scandal”  . This editorial described the case as follows: “The headlines about troubled ImClone have been all about its stock price and whether management sold stock based on insider information. But the real news took place yesterday, when the Food and Drug Administration finally met with ImClone to discuss the approval of its promising cancer drug Erbitux.... Instead of fuming at ImClone exes and Sam and Harlan Waksal [the CEO and CFO of ImClone], angry shareholders might better aim their anger at the FDA.... [O]n December 28 the FDA declined even to review ImClone’s application, leading to allegations ImClone executives had misled investors about the status of the drug. Well, we’ve had a good look at the leaked letter detailing the FDA’s reasons for rejecting ImClone’s study, and we’d say it says more damning things about the agency than it does about ImClone...The solution isn’t to punish ImClone but for the FDA do disclose more about its drug reviews, as guidance to both investors and patients....[T]he problem isn’t stock speculation but helping the desperately ill.”
After ImClone’s meeting with the FDA referred to above, and the press release following the meeting, ImClone’s shares climbed 32% to $20.52 on February 27, 2002  .
This paper deals with private securities law actions, but it should be noted, that the Securities and Exchange Commission (“SEC”) often has an independent right of action if a violation of securities laws is suspected  . Before analyzing the case law relating to the topic, the general frameworks of disclosure obligations under the federal securities laws and the FDA approval process need to be spelled out.
The disclosure rules apply to companies with securities listed in national securities exchanges, but also, according to Section 12(g) of Securities Exchange Act of 1934, to companies, with $ 10 million and more assets and whose securities have more than 500 holders  .
There are basically two different sets of rules relating to the disclosure of information by a public company  . Firstly, public companies have to release certain information periodically irrespective of whether any material events or developments have taken place. The information is to be released annually in connection with the publishing of the annual report (in Form 10-K – format) and quarterly, when announcing the results from the previous quarter ended (in Form 10-Q – format). Secondly, certain material events or developments need to be published at the time they occur or immediately thereafter or, alternatively, the company and its insiders must abstain from dealing with the securities issued by the company. This “disclose or abstain” rule thus enables the companies to withhold material information from markets for significant periods of time (even months) subject to the prohibition on the company and its officers trading with the securities in question.
There is some uncertainty as to what information is considered significant enough to fulfill the materiality threshold i.e. which information should be disclosed in connection with the periodic reporting and which information gives rise to a duty to abstain from trading if that information is not disclosed. The investor’s investment decisions should be based on accurate and timely distributed information, but not all information relating to the corporation is deemed important enough to affect the valuation of the securities of a company. There must, therefore, be some kind of materiality threshold, and a frequent problem and topic of litigation has been, and will be in the future, the assessment of the information’s materiality. The assessment clearly has two sides: if just all information, irrespective of its materiality, were disclosed to the market, there would be such an overflow of information that nobody would be able to evaluate the effects of the information on the value of the securities. At the same time, the markets should have all important and useful information relating to the issuer of securities in order for them to accurately reflect the actual condition of the company.
It is also considered important that there should be some uniformity as to what information is generally considered material. The materiality thresholds should be more or less constant for all companies in any given branch. An example of the misleading nature of too easily given press releases may be found in the case In re Ribozyme Pharmaceuticals, Inc. Securities Litigation  . The vice president of corporate communications at Chiron Corporation (the development partner of the defendant Ribozyme Pharmaceuticals, Inc.) stated that the Press Release was “very over stated” and that, “[t]here is always pressure [on small biotechnology companies] when anything good happens, no matter how small, to make it into big news”  . The companies, especially in the biotech sector, tend to have a quite liberal disclosure policy – since the development of a drug takes years and announcements are otherwise infrequent (there just isn’t so much to announce in the middle of a long lasting R&D program), the companies want to have as much good press as possible to keep the trading volatile and the value of the securities increasing.
As a general rule, all such information that is deemed to affect the price of the shares should, at some point, be released to the markets. On the other hand, “a corporation is not required to disclose a fact merely because a reasonable investor would very much like to know that fact. Rather, an omission is actionable under the securities laws only when the corporation is subject to a duty to disclose the omitted fact”  . At least four different kind of scenarios, where the company (issuer of the securities) must disclose all material information, may be identified: i) when the company or the insiders are selling the securities of the company (offering), ii) when the company is making periodic filings (quarterly, yearly), iii) when proxy statements are disclosed  and iv) when a previously announced information must be corrected (or updated)  . What, then, is the information material enough to affect the valuation and therefore putting the company under the obligation to disclose? When is the information deemed to have reached a level of certainty (for example relating to drug development process) making it ripe enough to be released? These are some of the issues this paper covers after the general securities law stipulations relating to disclosure, and new drug approval framework, have been discussed. 
Sections 13 and 15(d) of the Securities Exchange Act of 1934 set the requirements for the issuers of securities to give certain periodic disclosures. Pursuant to the said sections the SEC has drafted forms 10-K and 10-Q as well as Regulation S-K (applicable to filings both under the Securities Act of 1933 and the Securities Exchange Act of 1934) giving detailed instructions for making the filings. It may be noted, that despite the specific nature and special interpretative problems relating to disclosures to be made by the biotech and drug industries, the SEC has not, however, according to Item 801 of the Regulation S-K, made any specific industry guides relating to these industries, unlike inter alia for oil and gas, banking and real estate businesses.
One of the most controversial and at the same time most difficult provisions to interpret is the Management Discussion and Analysis (“MD&A”) – section, Item 302, of the Regulation S-K. According to the MD&A section the companies shall submit discussions of certain financial and operative issues of the company. As discussions are less exact than plain figures or data, such disclosures, are subject to interpretation and there is always some potential ambiguity relating to the narrative sections which may, due to their subjective nature, cause misunderstandings and confusion. According to the instructions to Paragraph 303(a) (to the MD&A – item of the Regulation S-K), those registering securities are encouraged (but not required) also to supply forward-looking information.
Relating to small biotech and other drug development companies, the requirement to provide information on “any known trends or uncertainties” relating to liquidity, capital resources and results of operations, are likely to be interpreted as forward-looking although the direct purpose of the information provided under the section is not to make forward-looking disclosures. An example of this is the claim made by the plaintiffs in the case concerning Wyeth-corporation (formerly American Home Products) discussed in Section 6.2 below  .
As mentioned above, public companies have basically four different occasions when disclosures of material operational issues must be made. When a material event takes place between, for example, the quarterly (10-Q) filings or other periodic announcements, there is no duty for the issuer of securities to make the disclosure of even very material events in the operational environment, if the issuer is not engaged in trading with its own shares. Usually it is, however, beneficial for the issuers to make the announcements promptly after the occurrence of a material event that needs to be disclosed sooner or later anyway, since this prevent leaks and insider trading problems. The assessment of materiality criteria is perhaps most crucial in connection with the duty to correct or update previously announced information. In such cases, the company has the duty to make the disclosure without delay and may therefore not wait until, for example, the publishing of the next quarterly report. In such circumstances, the evaluation of the materiality is imminent. 
As mentioned, there are no statutory standards applied to the interpretation of the materiality criterion. What is considered material enough to be disclosed either with a separate press release (or, if not disclosed, when the insiders or the issuer must abstain from trading) or in connection with another filing (10-K, 10-Q, Proxy statement etc) is assessed separately on a case-by-case basis. The facts, which are assessed for significance, are for example, the effect the event has on the assets or revenues of the company  , the likelihood of an event really occurring and the anticipated market reaction after the announcement. The issues relating to materiality assessment are affected therefore by the relative size of the issue to the company – for a large corporation an issue may be considered as minor and thus immaterial, whereas the same issue may for a smaller corporation be clearly material  . Materiality is often dependent on a subjective assessment and the financial experts used by the plaintiffs and defendants often have different learned opinions about whether or not some event should be considered material  .
The Supreme Court has expressed a frequently repeated standard of materiality concerning the above mentioned anticipated market reaction of the non-disclosure: “An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote....It does not require proof of a substantial likelihood that disclosure of the omitted fact would have caused the reasonable investor to change his vote. What the standard does contemplate is a showing of a substantial likelihood that, under all the circumstances, the omitted fact would have assumed actual significance in the deliberations of the reasonable shareholder. Put another way, there must be a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the ‘total mix’ of information made available”  . The case referred to concerned issues to be disclosed in a proxy statement, but the standard is applicable to other disclosures (issues concerning liability under 10b-5) as well, as both the proxy rules and 10b-5 have identical wording describing the materiality  .
In Oran v. Stafford  , concerning the drug manufacturer Wyeth (formerly American Home Products Corporation), the court also adopted a practical analysis about what information should be considered material by quoting the decision of an earlier case (In re Burlington Coat Factory Securities Litigation  ) as follows: “Because in an efficient market ‘the concept of materiality translates into information that alters the price of the firm’s stock’, if a company’s disclosure of information has no effect on stock prices, ‘it follows that the information disclosed ... was immaterial as a mater of law  .’” This test is, of course, of help only retroactively and could be used in litigation as a tool to defend the company or, alternatively, motivate the plaintiff’s claim. In order it to be used as a tool when assessing the disclosure requirements in any given case, one should be able to predict what information affects the markets view of the value of the company. However, it would perhaps be naïve to think that the managers and/or officers of the company (or their aids) evaluating whether or not the information should be disclosed would not have at least some kind of picture of the markets’ reactions to the information under assessment  .
The issue of materiality has often arisen in connection with drug developing companies in relation to the statements made about FDA’s approval process. Plaintiffs have in several cases claimed that the Company or its officers painted too positive a picture of the likelihood of FDA approval and that such misstatements or omissions of information have been material to the investment decisions  . The questions have, however, more to do with whether or not there is a misstatement since if such is found, the materiality threshold is usually easily exceed because of the importance of the FDA process to the issuers which are drug developing companies. This issue will be further enlarged upon below in connection with the assessment of the biotech and drug company related securities law litigation.
A special concern of the Securities and Exchange Commission (“SEC”) has been the disclosure and reporting of “soft information”, which has to do with the future prospects of the company and views of the management  . This soft, or forward-looking, information could be very valuable for investors, but it could also turn out to be wrong. Forward-looking information consists basically of future projections, subjective assessments, and insights from the management as to the business and to the state of the company. Such discussions go beyond statistics and “hard” (more objective) data. Forward-looking information is sometimes very valuable as the historical data is not always a good projection of the future and because shares are valued based on assessment of the future success of the company rather than its history.
As described above, issuers are now encouraged to supply investors with forward-looking information in connection with the periodic disclosures  . This information is often very much appreciated by the investors but also risky for the issuers as future projections may be difficult to make (they are by nature subjective) and corporate development does not always go as anticipated  . Forward-looking information is especially problematic in light of the duty to correct and update previously announced issues which turn out to be false or misleading. Correcting or updating previously announced forward-looking information is especially painful, for three reasons: firstly, the duty to announce something exists only because a (often voluntarily made) forward-looking statement that has been made previously. Secondly, since the duty to correct exists immediately upon the occurrence of an event which reveals the prior statement false, the timing of the release becomes an issue (i.e. when is the information material, ripe and certain enough to be published)  and, thirdly, as only material issues need to be announced, an explicit stand as to the materiality must be taken  .
Many bioteches or other small drug developing companies do not have much else to report (the accounting figures do not reveal much especially because the value of the biotech company is usually not based on its current economic standing, but on the development and market potential of the drugs being developed). Therefore drug developing companies tend to keep up the hopes of investors by giving predictions of the future.
Due to the value of the forward-looking information to investors and the difficulty in making projections on the future, the forward-looking (or soft) information enjoys special protection against shareholder suits. There are two sets of such protective rules, which may be used for the defense of the issuer of the securities and the person(s) acting on behalf of the issuer.
The statutory safe harbor (Section 21E of the Securities Exchange Act of 1934) for forward-looking statements was added to the statute in 1995 in connection with the Private Securities Litigation Reform Act. The safe harbor provides that the issuer or a person acting on behalf of the issuer shall not be liable for an untrue statement or omission of a material fact in connection with forward-looking statements if: i) the statement was identified as forward-looking and it was accompanied by meaningful cautionary statements, ii) the statement was immaterial or iii) the person or entity disclosing the forward-looking information did not have actual knowledge of the right state of affairs. Any one of the criteria i) through iii) is alone enough to preclude the liability. It is worth noticing, that the safe harbor (subsections i and ii) permits therefore even knowingly false statements by the issuers or their representatives if such statements are immaterial or accompanied by meaningful cautionary language  . Since the statements protected must, however, be forward-looking, the false statements may not concern historical or current facts, but projections of the future  .
The more traditional doctrine developed in the case law protecting the forward-looking statements is the Bespeaks Caution Doctrine. The common law doctrine applies also to non-public companies, but it is more ambiguous than the statutory safe harbor as the doctrine is developed by case law. An analysis of the statutory safe harbor, the different circuits’ views on the Bespeaks Caution Doctrine, or the differences between the protections created by the different standards are beyond the scope of this paper. It is, however, important to realize that even if the company is not qualified to enjoy the protection created by the statutory safe harbor, its forward-looking statements, even if they turn out to be false, may still effectively be protected against shareholder suits. 
According to Instructions to Paragraph 303(a) (the MD&A – item of the Regulation S-K), the forward-looking statements made in connection with the MD&A statements are expressly covered by Rule 175 of the Securities Act of 1933 and by Rule 3b-6 of the Securities Exchange Act of 1934, both of which provide safe harbors for future projections. As the term “forward-looking” is not defined in the law, the question arises, what kind of information qualifies for the protection? This issue has been at the fore in the case law, and the below case is an example of how the issue may arise in connection with a drug developing company:
In re Ribozyme Pharmaceuticals, Inc. Securities Litigation  , the issue facing the district court of Colorado was whether the statement by Ribozyme Pharmaceuticals (“Ribozyme”) should be held as forward-looking and thus protected or not. Ribozyme issued on November 15, 1999 a “Media Advisory”  entitled “Colorado Pharmaceutical Co. Makes Cancer Drug History” and it announced simultaneously a press conference to be held two days after the publishing of the “Media Advisory”. In connection with the invitation to the press conference, Ribozyme stated that Ribozyme “...presently has several drug compounds in development, of these Angiozyme – its cancer drug – has made significant progress. Angiozyme is now in human clinical trials at the Cleveland Clinic Foundation and has taken an important step forward ... making both clinical history and industry news . [At the November 17, 1999 press conference] Christofersen, Ph.D., and other senior RPI staff, will explain Angiozyme and its recent history-making leap, an achievement which may be of great significance to cancer patients everywhere”  . Due to the announcement, the price of stock of Ribozyme in NASDAQ more than doubled from the previous day’s closing price of $10.06 to $22. Plaintiffs’ alleged that the Media Advisory “failed to state how far the FDA approval process Angiozyme has progressed”, and that it “failed to specify that the information contained therein was all that would be discussed at the scheduled...press conference” and markets thus interpreted that the press conference to be held would contain information “something other than, and perhaps beyond, the previously disclosed commencement of Phase II trials”  . The defendants’ motion to dismiss was denied and the court held that statements such as “history making leap” refer rather to something already achieved and they will not qualify as forward-looking by nature. The district court further stated that cautionary statements elsewhere in the press release would not render all statements or the whole press release forward-looking  .
The issue of forward-looking statements by biotech companies has arisen several times in the securities litigation  . Some of these cases will be discussed in some detail later in this paper.
Another unclear issue requiring a case-by-case assessment in connection with the potential obligation to disclose corporate information is the duty to correct false information, and the even more ambiguous question of updating previously released information. A duty to correct refers to a situation where information, when published, was believed to be correct, but it is later realized that it was false or misleading at the time of the disclosure. If such information is material, the issuer has an affirmative duty to correct the information. Duty to update relates to the slightly different situation where information, when published was correct, but subsequent events have changed it so that the information published earlier no longer reflects the current state of affairs.
The boundary between the two scenarios – duty to update and duty to correct – is unclear and, it seems that the SEC has described the duty to correct in terms which also appear to cover the duty to update: “...the Commission believes that, depending on the circumstances, there is a duty to correct statements made in any filing, whether or not the filing is related to a specified transaction or event, if the statements either have become inaccurate by virtue of subsequent events, or are later discovered to have been false and misleading from the outset , and the issuer knows or should know that persons are continuing to rely on all or any material portion of the statements”  . This statement seems to place the burden to update on the issuer. It is, however established by most circuits that there is no general duty to update although the line between correcting and updating seems to be quite unclear. 
The broad definition of the duty to correct as stated by the SEC becomes problematic especially in the light of forward-looking statements. The SEC has, however in this context limited the duty to correct forward-looking statements as follows: “With respect to forward-looking statements of material facts made in relation to specific transactions or events ... there is an obligation to correct such statements prior to consummation of the transaction where they become false or misleading by reason of subsequent events which render material assumptions underlying such statements invalid. Similarly, there is a duty to correct where it is discovered prior to consummation of a transaction that the underlying assumptions were false or misleading from the outset”  .
From the above it is safe to assume that the duty to update necessarily exists at least before the issuer consummates a transaction or engages in a material event (proxy solicitations, exchange offers, purchases of securities etc.). The general principle “disclose or abstain” thus applies also in relation to forward-looking statements. The courts have, however accepted the duty to update “whenever secret information renders prior public statements materially misleading, not merely when that information completely negates the public statements”  . Courts have concluded further that, “firms need not disclose tentative internal estimates, even though they conflict with published estimates, unless the internal estimates are so certain that they reveal the published figures as materially misleading”  . A different view was taken in another seventh circuit decision Gallagher v. Abbott Laboratories, where the court said “...if the 10-K report had projected a net income of $125 million for the first quarter of 1999, and accountants determined in May that the actual profit was only $100 million, there would have been nothing to correct; a projection is not rendered false when the world turns out otherwise”  .
The duty to update may in any case be seen as an exception to the rule that the companies are not under a general duty to publish developments or even material events unless there is a certain circumstance (issuance of shares, annual or quarterly report, proxy solicitation etc.) which requires a statement giving an accurate picture of the current state of the company  . The duty to update, where such duty is deemed to exist, should be considered as an exception from the general rule and should, therefore, be interpreted narrowly. For example, there should no general duty to update financial figures although the figures announced today may not be accurate tomorrow. Statements, when made, describe (or estimate) the situation as of the time of the statement  . The District Court of the Southern District of California concluded that the duty to update in a case concerning Alliance Pharmaceutical Corp. was as follows: “A duty to update under Rule 10b-5 could only give rise to liability where the failure to update was committed with scienter, that is, where the issuer knew that investors would be materially misled if the new information was not announced, or it was obvious that they would be misled”  . Based on that statement the court noted, that there was no requirement to update the previous announcements when the clinical trials were suspended  .
The plaintiff must, in order to successfully litigate a securities fraud case under the Rule 10b-5 (which is the most common section in the law used for securities fraud litigation) against an issuer or a person acting on behalf of an issuer, establish the existence of five conditions. These conditions are 1) a misstatement or omission 2) relating to a material fact, which is 3) made in scienter 4) on which the plaintiff relied and that 5) proximately caused the plaintiff’s injury  .
Of these, the defendants usually try to claim that there were no material facts, which were misstated or omitted (condition 2 above) or that there was no scienter on behalf of the plaintiffs (condition 3 above)  .
Due to the fact that most cases relating to biotech companies are concerned with claims of misleading or non-disclosures of facts rather than insider trading issues, the scienter criterion is harder to show since there is usually no direct interest on behalf of the defendant directors or the company to make misstatements or omit facts  . The preconditions of securities claims are studied in more detail below but only to the extent that the criteria is interpreted differently compared to cases concerning more traditional businesses, or cases where the nature of the drug development industry gives a special emphasis to the issues  .
The FDA’s approval process for new drugs is set forth in Section 505 of the Food, Drug and Cosmetics Act (the “FDC Act”). The process of approving new drugs to be sold in the U.S. markets contains basically four different stages or phases, which may overlap. These stages are summarized as follows. 
Before testing the drug candidate on any (healthy or ill) humans or before conducting tests proving the possible therapeutic value of the drug substance, extensive pre-clinical studies must be conducted. The pre-clinical studies are conducted by using animal tests and the purpose of these studies is to define the chemistry, toxicology and pharmacology of the substance so that the safety of the clinical studies to the humans may be guaranteed. The results of the pre-clinical studies must justify the commencement of the clinical studies with humans and, if the pre-clinical trials are done with satisfaction of the FDA, it may grant an exemption from the general prohibition on introducing new drugs to sell by allowing clinical studies to be conducted with the substance in question. The results of these pre-clinical studies are to be submitted to the FDA in the form of IND – application for Investigational New Drug. The FDA has the right to reject the application.
If the FDA approves the IND application, the company may start the Phase I clinical studies in a form presented to the FDA The purpose of Phase I studies is to observe how the human body reacts to the substance and investigate, the proper dosages and the effects of different dosages. During these studies, the substance is administered to healthy humans by using first very small dosages and gradually increasing the dose. The substance is not directly tested for the claimed use (i.e. its effectiveness) but rather to prove the safety of the substance and dose.
The purpose of Phase II studies is to collect data on the effectiveness of the substance (potential drug) and it is thus tested on patients. During this phase, issues relating to inter alia the anticipated effect, optimal dose and side effects are studied.
If Phase II studies show that the substance may be used to cure the illnesses anticipated and it is shown to be safe, further clinical studies are conducted. This time the tests are conducted with larger patient population in many locations and in such a way that the patients do not know whether they are being administered the IND substance or a placebo. The climax of the new drug application is when a Phase III study has been successfully completed and a New Drug Application (NDA) submitted to the FDA. The NDA is an extensive filing and it combines the results of pre-clinical and clinical studies. Only about one of ten IND applications pass all the phases of the clinical studies and the whole development process takes years. 
If the FDA approves the NDA the drug may be put into the U.S. markets subject to FDA approval about the labeling and directions of the drug to be distributed. From the securities laws point of view, it is important to understand, that the drug companies may not put open ended or unsubstantiated warnings on the package insert or in other information distributed in connection with the distribution or marketing of drug  . The FDA has motivated this by stating: “including theoretical hazards as contraindications in drug labeling would cause that very important section of the labeling to lose its significance”  . It is also stated in the legal literature, that “[b]ecause the FDA should have the primary responsibility for determining appropriate labeling, there can be little utility in permitting a tort system to impose liability on a company for complying with that judgment”  . From this point of view a securities fraud claim based on false labeling would be an anomaly since the securities claim should be derived from the tort liability  .
The evolution of a new drug developing company is very different from that of more conventional industries. A new biotech company is often founded after an invention has been successfully patented. The patent is however, only a minor, but necessary, part of the success of a drug developing company. The pre-clinical and clinical testing of the biotech invention takes many years and costs millions of dollars. After years of development it is still uncertain whether or not the invention will actually make its way on to the market as the safety and efficiency of all new drugs needs to be tested and documented by the company as well as approved by the FDA.
The valuation of a biotech company has much to do with the success of the development process and therefore press releases, and statements having to do with the studies made with the drug candidates, are followed very closely. Unlike in other industries the demand for the products, drugs, can also be calculated before the drug in question is even on the market. This is due to the fact that the number of people suffering from a certain disease will be known, and depending on the severity of the disease and the price of the drug, it can be predicted whether patients are likely to use a new effective treatment if such becomes available. Therefore, the major uncertainty and cause of change in the valuation of biotechnology stocks is base on success in the drug development process.
The valuation of a stock of a biotech company may be described by a simplified mathematical equation, which has a few key factors characteristic to the industry  . Firstly and as stated above, the potential revenues of a biotech company may be calculated with some certainty as the market is basically pre-existing and as the company usually enjoys the exclusive right, protected by patents, to manufacture and market the drug  . The multiplier, which is a figure less than one (1) is the likelihood of the company achieving the FDA approval (the New Drug Approval – NDA). The multiplier increases as the development process advances and as the probability of the company achieving the NDA increases so that, for example, in the process of moving from Phase II to Phase III the multiplier may take a leap from 0.5 to 0.7  . To find out the value of the multiplier the analysts must pay very close attention to announcements made by the companies and based on those, try to assess what is the likelihood of the company being able to move from Phase II to Phase III. The potential revenues may be calculated because of the period of exclusivity and as in the U.S. markets, unlike in various other jurisdictions, the company is free to set the price of the drug (resulting likely in monopoly pricing and profit maximization).
As stated above, materially misleading statements or omissions need to be made in connection with the purchase or sale of securities in order to be actionable under rule 10b-5  . If a fact is misstated by a non-affiliated third party the issuer is generally not liable for such false statements. Sometimes, however, it is in the interest and even a duty of the issuer to correct statements made by third parties in order to prevent rumors and harmful or false information in the market. In order for the misstatement or omission to actionable there thus needs to be some kind of link between the false or omitted statement and the purchase or sale transaction.
The simplest form of the “connection with” requirement may occur in the case of face-to-face transactions when the seller gives information directly to the purchaser. If such information turns out to be false or misleading, the “in connection with”- requirement may be easily shown (especially if representations by the seller are documented). The most famous case having to do with the “in connection with” requirement is probably the SEC v. Texas Gulf Sulphur Co.  where the court said as follows:
“...[I]t seems clear from...the legislative history of Section 10(b) that Congress when it used the phrase ‘in connection with the purchase or sale of any security’ intended only that the evidence employed, whatever it might be, be of a sort that would cause reasonable investors to rely thereon, and, in connection therewith, so relying, cause them to purchase or sell a corporation’s securities. There is no indication that Congress intended that the corporations or persons responsible for the issuance of a misleading statement would not violate the section unless they engaged in related securities transactions or otherwise acted with wrongful motives...Accordingly, we hold that Rule 10b-5 is violated whenever assertions are made, as in here, in a manner reasonably calculated to influence the investing public, e.g. by means of the financial media, if such assertions are false or misleading or are so incomplete as to mislead...”
Another question related to the issue of “in connection with” is that of reliance. In order for the securities claim to be actionable under Rule 10b-5 the plaintiffs must show that they relied on the false or misleading information or the non-existence of omitted information as well as showing that the misinformation took place in connection with the securities transaction  . In the effective markets  -- where all relevant information is incorporated into the price of the stock -- the causality requirement is deemed to have been fulfilled even in cases where the purchaser or seller has not even been aware of the misstatements or omissions. In such cases the damage is done due to the markets reflecting the “right” price of the security based on all information. This theory, now adopted by at least most circuits, is called the “fraud on the market” – doctrine. A landmark case combining both the “in connection with” and “fraud on the market” – doctrines is the case below concerning the drug company Charter-Wallace  :
In short, the interesting issue in the Charter-Wallace case was whether misleading advertisements in scientific medical journals should be considered to fulfill the “in connection with” –requirement of the Rule 10b-5 and would thus “have impact on the market price of Charter-Wallace”  .
To promote Felbatol, Charter-Wallace ran a sixteen – page advertisement in the January 1994 issue of Neurology. The advertisement recited Felbatol’s safety record and stated that ‘no life-threatening liver toxicities or blood dyscrasias have been attributed to Felbatol monotherapy.’ ...in June Charter-Wallace filed with the Securities and Exchange Commission a Form 10-K in which it stated, pursuant to Section 13(a) of the Securities Exchange Act of 1934 ... that it’s sales were higher as a result of ‘greater than planned introductory sales of Felbatol.’ In its annual report to Shareholders ... Charter-Wallace also represented that ‘Felbatol sales have exceeded expectations’ that ‘this rate of growth is expected to continue’ and that the company expected ‘to receive royalties, which could be significant’ from licensing Felbatol  .
The issue at fore was that the advertisements published in medical journals claimed that the drugs did not have life-threatening side effects. However, Charter-Wallace received first the report of Felbatol-related death in January 1994, another report on March 1994, two deaths were reported in April and May and four deaths in July 1994. Charter-Wallace kept advertising Felbatol with statement “no life threatening liver toxicities or blood dyscrasias have been attributed to Felbatol monotherapy” in January, February, March, April, May, June and July 1994 issues of “Neurology” and “Archives of Neurology” – magazines. The investors, who purchased Charter-Wallace stock in June and July 1994 alleged that the advertisements were false and misleading in the absence of disclosure of the reports of Felbatol-related deaths.
The appellate court held, reversing district court’s decision, that the advertisements in medical journals fulfill the “in connection with” - requirement if it can be shown that the advertisements were used by the market professionals when analyzing the value of the company’s shares. The court concluded that “[t]echnical advertisements in sophisticated medical journals detailing the attributes of a new drug could be highly relevant to analysis evaluating the stock of the company marketing the drug”  . The court went on by saying that:
Technical information about the medical efficacy of new drugs, whether found in advertisements or elsewhere has an obvious bearing on the financial future of a drug company. In an economy that produces highly sophisticated products, technical information is of enormous importance to financial analysts, whether such companies are producing drugs, as here, or nuclear power plants, as in Weiglos  . The fact that such information is found in a specialized medical journal, as here, rather than in a statement addressed to participants in financial markets, as in TGS, seems to us irrelevant, so long as the journals are used by analysts studying the prospects of drug companies. In fact, an analyst might consider such an advertisement more informative than a non-technical but corresponding statement to financial market professionals. 
The above statement “in advertisements or elsewhere” indicates, that also other kind of technical (non economic) data, perhaps even scientific articles (not advertisements as in Charter-Wallace’s case), which were not purported to be distributed to the market makers in the first place, would be considered as potential mediums satisfying the “in connection with” standard  . To this end, the case In re Biogen Securities Litigation  dealt with allegedly false information distributed at a medical conference. The district court held in that case that statements, such as “we believe that given positive clinical results we have a very large potential market for the drug” and “what we’ve seen to date looks good” made in Hambrech & Quist’s annual Life Sciences Conference had entered into the securities market. With these cases in mind, questions arise also whether package inserts or other detailed technical information about the drug would also be considered to be “in connection with”. As, however, the package inserts or instructions are purportedly to help the patient and her physician, such prints or instructions could in my opinion not be considered as satisfying the “in connection with” standard. Since, however, also advertisements in scientific journals are targeted at doctors and other specialists and only indirectly (if at all) at investors, and still they were considered “in connection with”, the arguments to broaden the “in connection with” interpretation even further exist. Indeed, following the reasoning presented in the legal literature, the texts in the package inserts and other statements concerning certain drugs could be compared for securities law purposes  .
The Charter-Wallace decision requires drug manufacturers to consider securities liability in situations in which the sole consideration should be the ultimate consequence of disclosure or nondisclosure to patients. While the FDA does not prohibit premature disclosure, the court concluded that the effects of premature disclosure warrant delayed disclosure in certain circumstances. Particularly when a corporation’s decisions can have life-affecting consequences, drug manufacturers should focus on FDA guidelines regarding the appropriateness of disclosure, not on potential securities litigation. 
In any case it is at least now confirmed by the second circuit that material in scientific publications could fulfill the “in connection with” prerequisite. From a securities laws point of view, in order to be on the safe side, perhaps all documents and information, including package inserts and advertisements, distributed by a drug company should contain information which is as complete and accurate as possible and be worded with additional phrases so as to qualify either under the statutory safe harbor concerning forward-looking statements or the Bespeaks caution – doctrine. In the Charter-Wallace context this would have meant that all possible side effects, even those about which there are no accurate scientific proof, should have been mentioned and, in addition, a tailor-made cautionary statement should have been included. Another “catch all” approach has been taken by Tonya Smits Rodriguez, proposing that advertisements (and other information) issued by drug companies should (after identifying which statements should be covered by the protections on forward-looking statements and in addition to the tailored warning) mention factors “which might cause the information in the advertisement to change”  . She lists the following five as examples of such factors: “(1) an imperfect FDA testing process that might allow some risks to go undetected, (2) the possibility that a side effect is so rare it was not detected in any testing group, (3) the fact that testing groups are not always representative of ‘population that ultimately uses the drug’ (4) the possibility that the symptoms take more time to develop than the testing period allowed or that the drug was used differently in IND testing and (5) the possibility of adverse interactions with other drugs”  .
In order for advertisements or other kinds of information not meant for the market-makers, to be a sufficient basis for a securities class action, the fraud on the market-theory must likewise be applicable. As in the Charter-Wallace case, the combination of both the “in connection with” and “fraud on the markets” tests being found in the case, enabled the investors who had not even seen the advertisements to be part of the claim and form a plaintiff-class. 
An interesting yet unexplored issue relating to drug developing companies and to the “in connection with” – requirement is the role of scientific advisory boards and other scientific experts used by the companies. Almost every drug developing company has a “semi independent” body of prominent scientists in the field in which the company is developing drugs. The members of the scientific advisory boards are encouraged by the company to write scientific articles about the science behind the drug or invention the company is developing. In light of the case In re Charter-Wallace, Inc. Securities Litigation  , discussed in detail above, the issue arises whether such articles could influence the securities markets and whether the articles would be considered as statements made by the company. In light of the Charter-Wallace-case, articles could be deemed to reach the securities markets, and therefore the only issue remaining is whether the issuer of the securities may be held liable under 10b-5 fore misstatements made by such third parties. Some district courts have, to my understanding, in principle accepted such a possibility in connection with other kinds of fact patterns. For example in DeMarco v. DepoTech Corp. the District Court of Southern District of California spelled out three criteria which must be satisfied in order for the plaintiff to show that third party statements may be used to sue the issuer  . Modified to scientific experts, the three part test could be as follows: a) showing that the corporate insider provided misleading information to a third party (for example CEO providing false scientific data to a scientist or advisory board) b) the scientist prepares a statement – for example an article or a report based on this false data and c) the corporate insider endorsed or approved the statement by the third party (scientist)  . This issue has been further discussed in detail in the famous case of In re Time Warner Inc. Securities Litigation  . Also, the use of third parties has been at the fore in the case of Warshaw v. Xoma Corporation  , where it was asserted that “Xoma intentionally used ... third parties to disseminate false information [misleading, optimistic public statements that the FDA-process was progressing positively] to the investing public”  .
Companies may often escape taking an explicit stand as to what information is material since it is customary for the companies to publish information in connection with the periodic disclosures (such as annual and quarterly filings), even if the materiality is questionable. Such disclosures are made both in the interest of informing the public but also for the issuers to be on the safe side (“just in case”).
The issue of materiality is the standard under dispute when assessing the duty to disclose. The materiality issue has explicitly arisen a few times in securities litigation concerning drug developing and manufacturing companies. In the case Acito v. IMCERA Group  , the plaintiffs contended that the results of the inspections made by FDA in some of IMCERA’s premises constituted material information and should have been disclosed to the investing public. The court disagreed by using the TSC Industries, Inc. v. Nortway, Inc – decision as a yardstick  . In IMCERA’s case, the inspected “Kansas City plant was one of over thirty IMCERA business locations and produced only ten of the 1000 products manufactured by IMCERA”  . The court went on justifying its decision rejecting the plaintiffs’ view by stating: “...no materially adverse action was taken by the FDA as a result of the first two inspections, and the company made commitments to the FDA to correct the plant deficiencies.... These reports therefore were not material to the average investor. Moreover, IMCERA is a worldwide company engaged in heavily regulated businesses that produce over a thousand products in over thirty countries. It would be unduly burdensome and impractical to publicly disseminate the results of every inspection of every plant”  .
The courts are usually very reluctant to grant a summary judgment to dismiss the case just on the grounds of lack of materiality but the courts tend to leave the assessment of materiality to juries. The IMCERA case is in that respect somewhat exceptional  . A more “mainstream” explanation was given by the district court of Western Pennsylvania, stating In the case Walsingham v. Biocontrol Technology, Inc., (where the product under scrutiny was the only product of the defendant Biocontrol Technology) as follows: “Omissions of the product’s allegedly poor test results would likely be viewed by a reasonable investor as significantly altering the total mix of available information, as positive test results were necessary to secure FDA approval”  . This is also a good example of the fact that defense against security law fraud becomes more difficult the smaller the company accused of securities fraud is. If the drug developer has several products and development projects it is always less likely that misstatements or omissions relating to one product or development project would be considered as material  .
As stated above, the lack of scienter is often the most effective defense for the drug developing companies against security lawsuits brought by shareholders. In a fact pattern where the lack of efficiency or problems in safety of the drug candidate have been disclosed to FDA and yet the FDA does not require any action from the drug developer, it may be used as a evidence showing the lack of scienter by the company and its managers and directors  .
Salpeter and Hutchins also remind us, that “...some courts allow corporate organizations to assert an absence of collective scienter as defense. This defense frequently will be available to all but smallest drug companies. Most information about a drug product is generated, and most dealings with the FDA occur, among lower level personnel in a drug company’s medical or regulatory departments. Such information, particularly in larger drug companies, is not necessarily known to the senior company officers that write the shareholder reports, make the SEC filings, and control press releases to the investment community”  . This, indeed, may save the management against security law liability but open the door for corporate law claims: the lack of duty of care would probably be relatively easy to argue after no-knowledge securities law defense  .
The successful life cycle of an invention to a drug is more or less the same irrespective of the size of the company developing the drug. Resources, experience and know-how of the entities may vary but still all development projects need to go through the same steps and phases before the efforts result in a marketable drug  .
The disclosure requirements of the drug developing companies vary depending on the relative size and importance of the development project to the company. If the issue has to do with an uncertain event such, as drug development (a medical invention becoming a product), the likelihood of the material outcome becoming reality affects the importance of the issue to the company. As a rule of thumb, information for which there is an obligation to disclose needs to be material, and the probability affects the materiality  . For example, if the drug developing company has revenues of $500 million and the potential value of a biotech patent is $100 million if it results in a product, but the likelihood of the patent to make it all the way to the NDA stage and to the markets is only 10%, the current value of the patent could be deemed to be $10 million (i.e. $ 100 million x 10%) and thus less than the 5%-of-the-revenues or assets threshold adopted by the SEC. The test gives, however, only guide as to relative materiality and it is not necessarily very helpful as neither the probability nor the potential value can be measured very accurately especially during the early stages of the product development cycle  . Furthermore, although the “mathematically” measured materiality would under the guidelines not require the disclosure, it may still be considered by an average investor to be material enough to affect the “total mix of information” available from the company and thus the price of the stock.
As regards the obligation to disclose events and issues, one must separate the issues which may be useful to stock analysts or investors. It is usually in the interest of the company to be as transparent, honest and accurate in its press releases and periodic disclosures as uncertainty and suspicions are likely to decrease the value of the share. Pleasing the analysts with accurate disclosures is usually a good policy  .
What information shall be disclosed and in what form depends on the company. Private companies do not need to disclose anything about the drug development or approval process and the disclosures of a public company depend on the above relative materiality criteria and the policy of the company. The level of information to be distributed into the markets should be consistent so that same materiality threshold is applied regularly. The companies need to disclose in their periodic statements the current status of the development programs in a consistent manner. If separate press releases are being made when good results are achieved, separate releases regarding negative results of same relative importance should, for the sake of consistency, be made as well  .
As discussed above, companies do not have a general duty to inform the investors or the public of events taking place between periodic disclosures. It is, however, usually wise to make separate press releases when some material event takes place since the information may spread and cause insider trading problems. Therefore the “leaps” made in the drug development process are usually reported immediately so that if, for example, the development changes from Phase II to Phase III, a separate press release will usually be made. Likewise, it would be good practice to publish the negative news without delay as experience has shown, that such news tends to leak to the markets sooner or later anyway and may in the absence of disclosure by the company, cause undue restlessness in the securities market and allegations of the use of insider information.
Even though there is no general obligation to disclose material events or issues apart from occasions when complete disclosure of the state of the company needs to be made anyway (annual and quarterly reports, proxy statements, registration statements etc.) the issue of disclosure has arisen in litigation numerous times. The issue often arises due to the fact that the company has announced (by forward-looking statements or otherwise) how the drug development is advancing and what is the probability and timing of passing FDA’s approval process. When everything does not go as planned and announced, the company faces difficult issues as to whether or not to correct or update information disclosed previously. Central cases where the issue has been the violation of disclosure requirements are summarized and discussed below.
The following recent case, does not directly deal with drug development although it concerns a company under an obligation to follow FDA regulations and deals with the disclosure of the correspondence between the FDA and the issuer, Abbott Laboratories  . This case raises the securities laws issues in a setting, which often arises in drug development context.
Year after year the Food and Drug Administration inspected the Diagnostic Division of Abbott Laboratories, found deficiencies in manufacturing quality control, and issued warnings. The Division made efforts to do better, never to the FDA’s satisfaction, but until 1999 the FDA was willing to accept Abbot’s promises and remedial steps. On March 17, 1999 the FDA sent Abbott another letter demanding compliance with all regulatory requirements and threatening severe consequences....Bloomberg News revealed the letter to the financial world in June, and Abbott’s stock price did not eve quiver... By September 1999 the FDA was insisting on substantial penalties plus changes in Abbot’s methods in doing business. On September 29, 1999, after the markets had closed, Abbott issued a press release describing the FDA’s position, asserting that Abbott was in “substantial” compliance with federal regulations, and revealing that the parties were engaged in settlement talks. Abbott’s stock fell more than 6% ... the next business day. Abbott and the FDA resolved their differences, and entered a consent decree requiring Abbott to remove 125 diagnostic products from the market until it had improved its quality control and to pay a $100 million civil fine.... The next business day Abbott’s stock slumped $3.50, which together with the earlier drop implied that shareholders saw the episode as costing Abbott more than $5 billion.... Plaintiffs...contend that Abbott committed fraud by deferring public revelation.
(...)[I]t is not necessary to decide whether the news was “material” before the FDA’s negotiating position stiffened, to decide whether Abbot acted with the state of mind necessary to support liability under Rule 10b-5, or to address other potential stumbling blocks. What sinks plaintiff’s position is their inability to identify any false statement – or for that matter any truthful statement made misleading by the omission of news about the FDA’s demands.
Much of the plaintiff’s argument reads as if firms have an absolute duty to disclose all information material to stock prices as soon as news comes into their possession. Yet that is not the way the securities laws work. We do not have a system of continuous disclosure. Instead firms are entitled to keep silent (about good news as well as bad news) unless positive law creates a duty to disclose.... The [Securities Act of] 1933 requires firms to reveal information only when they issue securities, and the duty is owed only to persons who buy from their issuer or an underwriter distributing on its behalf; every other transaction is exempt...Section 13 of the Securities Exchange Act of 1934...adds that the SEC may require issuers to file annual and other periodic reports – with the emphasis on periodic rather than continuous. Section 13 and the implementing regulations contemplate that these reports will be snapshots of the corporation’s status on or near the filing date, with updates due not when something “material” happens, but on the next prescribed filing date....
Plaintiffs rely principally on Item 303(a)(3)(ii) of Regulation S-K, which provides that registration statements and annual 10-K reports must reveal
Any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.
The FDA’s letter, and its negotiating demands, are within this description, according to plaintiff classes. We shall assume this is so. The 10-K report did state that Abbott is “subject to comprehensive government regulation” and that “[g]overnment regulatory actions can result in ... sanctions”. Plaintiffs say that this too general in light to the FDA’s letter and Abbott’s continuing inability to satisfy the FDA’s demands. Again we shall assume that plaintiffs are right. But there is a fundamental problem: The 10-K report was filed on March 9, 1999, and the FDA’s letter is dated March 17, eight days later. Unless Abbott had a time machine, it could not have described on March 9 a letter that had yet to be written.
Attempting to surmount this temporal problem, plaintiffs insist that Abbott had a “duty to correct” the 10-K report. Yet a statement may be “corrected” only if it was in correct when made, and nothing said as of March 9 was incorrect. In order to maintain the difference between periodic-disclosure and continuous-disclosure systems, it is essential to draw a sharp line between duties to correct and duties to update....Amending the 10-K report to show the results for 1999 as they came in – or to supply a running narrative of the dispute between Abbott and the FDA – would update the report, not correct it to show Abbott’s actual condition as of March 9.
The above quote from the case Gallagher v. Abbott Laboratories is a textbook explanation of the disclosure duties raised under the set of facts at issue.
The issue of corporate mismanagement or the incompetence of the management has very seldom been the actual issue litigated in connection with securities litigation concerning drug developing companies. In fact, the only case, where the plaintiffs have expressly tried to argue securities fraud by claiming that the management has failed to disclose information to the FDA, seems to be the district court for the Southern District of California In re Alliance Pharmaceutical Securities Litigation  . In this case the district court concluded,
Plaintiffs present thousands of pages of evidence going to the question of whether Alliance [Pharmaceuticals, Inc.] violated FDA regulations by failing to disclose certain information to the FDA. However, they do not overtly argue that the securities laws provide a private right of action for violation of FDA regulations, nor do they present any cases so holding. As far as the Court is aware, there is no authority for the view that a violation of FDA regulations constitutes a violation of the securities laws. That view is analogous to the now-discredited opinion that corporate mismanagement can be a securities law violation. 
A violation of the FDA’s regulations or unwise decisions relating to drug development program is thus generally not per se actionable under securities laws. A successful 10b-5 case requires the showing of the five criteria referred to in section 2.5 above  .
The unpleasant, yet common situation where the drug development process has not advanced in accordance with the plans disclosed earlier has frequently generated securities litigation. The cases usually involve the assessment of the “Bespeaks caution” –doctrine and/or the statutory safe harbor for forward-looking statements. When the protection provided by the forward-looking statements is not available, the defendants try to defend the non-disclosure or accused misleading or false disclosures by contending lack of materiality (that there was no duty to disclose in the first place), the lack of scienter or that there was no reliance on behalf of the defendants. As stated above, the lack of scienter seems to be the most successful defense  .
The cases concerning overly optimistic statements by the drug developers may be divided into three different categories: the first category being cases where the FDA has expressly disapproved of the filing or application made, the second is where the companies have themselves concluded that the development project should be terminated due to insufficient test results and the third comprise a few (securities law) cases where the issues raised concerns compliance with the FDA rules and regulations in general – not any given development project as such. The division into three categories is rather academic in the sense that the securities law issues in all cases are identical, though the fact patterns may be categorized into three and may thus vary a great deal.
There are a few securities law cases where the FDA has expressly decided not to approve the NDA or other filings made concerning the INDs under research and development. In the case Demarco v. Depotech Corporation  some of Depotec Corporation’s shareholders brought a suit after FDA had made a decision not to approve the drug for its anticipated field of use. The plaintiffs claimed, that the company’s and its officers’ statements about the efficiency of the drug and the likelihood of FDA approval were false and misleading. The court, however ruled that, “Plaintiffs have failed to show that Defendant Erickson’s opinion that DepoCyt had ‘extremely promising’ prospects for FDA approval was false or misleading when made. ... Defendants had a reasonable basis for believing that DepoCyt had advantages ... including increased response rates, greater survival and quality life benefits. The FDA’s subsequent rejection of DepoCyt’s application does not render Erickson’s earlier statement of optimism false or misleading”  .
Another recent case concerning FDA’s disapproval is the In re Medimmune, Inc. Securities Litigation  , where the litigation was motivated by the vote of the FDA’s Blood Products Advisory Committee 11 to 0 against recommending approval of the drug to the FDA. Medimmune, Inc. had previously made statements where it hoped and expected FDA’s approval, but the court stated that “mere hope or expectation regarding future approval, not worded as guarantees, are not actionable. Especially is that so where, as here, virtually every reference made by any Defendant to FDA approval was hedged by variations of the proviso ‘if and when approved by FDA’”  . However, the court found that the stronger claims made by the company were actionable under 10b-5 and in this regard it stated the following:
...[I]t is one thing to declare enthusiasm “about the results form this study and the implications for preventing this serious illness” ... or to say, as the company did in its ...press release, that a high dose of Respivir “significantly reduced the severity of RSV and significantly reduced the frequency of RSV related hospitalizations.” It is quite another thing to make a statement that falls into ... category of arguably false or misleading statements, i.e. that Respiriv was unquestionably efficacious. Thus [the defendant] allegedly stated ..., that “the results of treatment with Respivir were highly statistically significant along all of the efficacy parameters built into the Phase III study. There’s absolutely no question about efficacy . ... The data are overwhelmingly good... We’ve exceeded the rule of thumb standards” (emphasis added).
That statement arguably goes beyond a bona fide claim that the test data are “valid” or the drug “efficacious.” Given that the FDA review was well under way, the statement might well contain in its sweep a representation that the FDA had raised no question about the efficacy of the drug when in fact quite possibly it had. 
In the same case, the question of the timing of the release of information arose as well. The court rightfully took the stand that when public announcements are made, they need to be accurate and not misleading. The company may choose not to comment (in the absence of affirmative duty to disclose) or, if it decides to speak, announce the facts truthfully. In the Medimmune case, the court commented the company’s two statements about the delay of FDA’s review as follows:
Arguably both of these statements were attempts to reassure the public that FDA’s postponement of the drug review was not a cause for concern and simply a matter of routine. But the comments of ... staff fellow at FDA’s Office of Blood Research and Review, reported in Biocentury the day after the Advisory Committee vote, suggest that, by the time of the statements, FDA may have taken a harder line and MedImmune may in fact have been aware of considerably more serious reasons for the postponement... If FDA had indeed communicated such concern to MedImmune and did so in such a way as to indicate that ultimate approval of Respivir looked problematic, then ... statements could possibly have misled an investor into thinking that the review process remained totally problem-free. 
The drug development process is almost like any other R&D process – when commencing the research there is only a hypothesis of the end result. The process from patent to marketable drug, even if successful, takes years and the road is full of uncertainty. In this environment, the public companies developing drugs must, however, state to the investing public the likely outcome, timing and preliminary results of the research and development process. The projections are likely to change as in any project lasting for years, but in drug development the likelihood of getting a marketable product from a patent is perhaps even more uncertain. The statements made by drug developing companies have often been subject to securities litigation after the projections have not materialized as planned and disclosed to the public. A typical fact pattern may be described as follows:
[T]he drug company previously made positive announcements about its development or introduction of a new drug. As negative reports are received by the drug company, and reported by the drug company to the FDA, evidence of problems with the product is created. Typically, that information is not publicly disclosed to shareholders because the drug company regards these reports as routine and part of the FDA regulatory process. If the development of the drug later is delayed or stopped, or a drug is pulled from the marketplace, and the price of the company stock falls as a result, plaintiffs may argue that the drug company should have disclosed the problem sooner. Plaintiffs also may claim that earlier, positive statements about the drug were false and misleading  .
Several cases follow the above “normal” fact pattern where the expectations (according to the plaintiffs: overly optimistic statements) of the likelihood of getting FDA approval to the drug turns sour. The cases are usually all about the assessment of materiality, scienter and the duty to disclose information deviating from previously published forward-looking statements  .
In the case Walsingham v. Biocontrol Technology, Inc.  the plaintiffs argued, that the company’s statements were not overly optimistic but materially misleading or even outright false. The court concluded, that “...the defendants failure to disclose the [negative] test results occurred during a time when they were issuing what can only be described as very positive press releases, one of which was in response to public criticism of the Diasensor 1000’s effectiveness”  . This captures well the principle that it is in the company’s discretion whether or not publish information when it is not under an affirmative duty to do so (as in connection with periodic filings etc.), but when it does decide to speak, it must speak the truth  .
A case that describes well the complexity of the facts and the sensitivity of statements to be made by the drug developing companies is the district court case In re Biogen Securities Litigation  , which is summarized below in greater detail.
In May 1992, Biogen began TIMI-7  , a Phase II clinical trial comparing four doses of Hirulog in patients with unstable angina.... The purpose of TIMI-7 was to identify an efficacious dose of Hirulog in the management of unstable angina, which could then be used in at least one larger Phase III trial (to be called “TIMI-8”) comparing Hirulog against Heparin in the treatment of unstable angina. ... By early September, 1993, Biogen officials learned that the TIMI-7 trial had failed to show efficacy at its primary and secondary endpoints. ... On December 23, 1993, Biogen reported the results of TIMI-7 to Dr. Stephen Fredd, Director of the FDA’s Gastrointestinal & Coagulation Drugs Division, in a confidential letter explaining that TIMI-7 had failed to show statistically significant evidence that increased doses of Hirulog achieved improved results over Heparin as measured by the primary endpoint of the study. Biogen also submitted to the FDA a protocol for TIMI-8, a proposed Phase III to compare the efficacy of Hirulog to Heparin “by the occurrence of death or non-fatal MI from randomization to hospital discharge.” By December 1993, Biogen was considering not proceeding with TIMI-8 if the FDA did not agree at a meeting to occur in February that TIMI-8 could be used as the basis for registration for a NDA without a second Phase III trial.
On February 4, 1994, Biogen representatives met with Dr. Fredd, of the FDA, to discuss the results of TIMI-7 and the proposed TIMI-8 protocol. Dr. Fredd warned that the lack of a statistical difference between the various dose groups with respect to the primary endpoint of the TIMI-7 study “raises concern regarding the efficacy of [Hirulog].” Nonetheless, the FDA encouraged Biogen to embark on TIMI-8, a larger, $25 million Phase III follow-up clinical trial, designed to compare Hirulog against Heparin in the treatment of unstable angina. The FDA never actually promised that TIMI-8 would suffice for an NDA application.
On January 11, 1994, defendant Vincent, who then knew about the TIMI-7 primary endpoint failure and the concerns about an unfavorable decision by the FDA, gave a presentation at the Hambrech & Quist’s (“H&Q”) annual Life Sciences Conference in San Francisco. He stated: “Clinical trial results to date encourage us to believe that Hirulog can do much better” than Heparin. He added: “Throughout all our Phase II and Phase III studies, Hirulog continues to show an impeccable safety profile.... What we’ve seen today looks very good ... Biogen is moving full speed ahead on Hirulog. We have manufacturing under control and a marketing strategy in place. We believe that given positive clinical results we have a very large potential market for the drug”.
Sometime [after January 11]..., but before the March 14, 1994 press release discussed below some stock analysts learned from other sources of the failure of TIMI-7 with respect to its primary endpoints.
Between September 1993, when Biogen officials first obtained the results of TIMI-7, and February, 1994, no information was released to the public regarding TIMI-7 results. ... At the March 14, 1994 ACC  Conference, Dr. Joanna Fuchs of the TIMI Study Office presented the results of TIMI-7 clinical trials, including both the primary endpoint failure and the reduction in the incidence of death and non-fatal heart attacks. That same day, Biogen also issued a press release stating that Hirulog reduced death and nonfatal heart attacks in patients participating in the TIMI-7 trial. ... On October 7, 1994 Biogen had preliminary analyses of the data from the Phase III angioplasty trial which showed that the trial failed at its primary endpoint. Earlier that morning, before he had the bad news, Biogen’s president, James Tobin, had spoken with a Reuters reporter about Biogen’s plans to file for FDA approval for Hirulog in 1995. The article appeared on October 11, 1994. On October 14, 1994, Biogen had definitive results, and on October 23, 1994, senior Biogen officials decided to discontinue the Hirulog development program. The disappointing test results from the angioplasty trials were released on October 31, 1994, when Biogen announced that, as a result of its analysis of the angioplasty trials, it was abandoning its efforts to develop Hirulog as a proprietary drug. The stock price of Biogen dropped almost 20 per cent in one day, principally as a result of Biogen discontinuing the Hirulog development program for unstable angina. 
Plaintiffs allege that Defendant’s January 11, 1994 and March 14, 1994 statements misrepresented the prospects for Hirulog and constituted securities fraud under Section 10(b) and Rule 10(b)-5.
The district court stated relating to the statement of January 11, 1994 that “a reasonable jury could find evidence of scienter, at least sufficient to surmount the recklessness threshold, in light of Vincent’s actual knowledge that TIMI-7 had not reached its primary endpoint and Biogen’s concerns about the FDA’s response to the shortcomings of TIMI-7. At minimum, Vincent was fully aware of undisclosed facts tending to seriously undermine the optimism of his statement on January 11, 1994”  . Regarding the March 14, 1994 press release the court refers to the Medimmune case  (described in Section 6.3. below) and concluded, that the company did not have a duty to disclose ongoing discussions with the FDA and that “absent a misleading prior disclosure, there is no duty to disclose internal business strategy”  .
Strict FDA regulations govern almost all operational activities by the drug manufacturing and developing companies. The FDA inspectors make regular site visits to the drug companies’ facilities in order to check compliance with the regulations regarding, inter alia, good manufacturing practice, documentation and quality control. As the success of a drug developing and manufacturing company is very much related to its good reputation for quality and strict compliance with the regulations, the investors are interested in the company’s capability of complying with the high standards  . The companies must usually state something relating to their overall compliance with the regulations in connection with their periodic reporting. There are a few published cases where the question has explicitly been that of the accuracy of the general statements of compliance with the relevant FDA regulations.
Copley Pharmaceutical, Inc. stated in its Form 10-K for the fiscal year ending January 31, 1994 that “[t]he Company believes it is in material compliance with cGMP  standards”  . The plaintiffs claimed, however, that the defendants (the company and some of its officers and directors) knew at the time of the statements, that the company was not in material compliance with the appropriate regulations. Of 29 statements by the company investigated at trial only one survived the defendants’ motion to dismiss, when it was “reasonably inferred” that two of the defendants had actual knowledge that the company was not in compliance with the FDA regulations  .
The same kind of issue was at the fore in the case of In re Par Pharmaceutical, Inc. Securities Litigation – in that case, the plaintiffs alleged that the company failed to disclose in its filings that Par Pharmaceutical, Inc. and its subsidiary had made illegal payments to government officials to expedite approval of the companies applications for permission to manufacture certain drugs  . After the information concerning the wrongdoings become public, the price of the company’s security plummeted. The defendants tried to argue, that the company was under no duty to announce publicly that it or its officers were guilty of uncharged criminal behavior, or to accuse itself of antisocial or illegal policies  . The court rightly stated, “illegality of corporate behavior is not a justification for withholding information that the corporation is otherwise obligated to disclose”  . The court based its decision also on the “ever-present duty not to mislead” – which applies irrespective of whether or not the duty to disclose exists  . Thus, if Par Pharmaceuticals, Inc. had not made statements such as “...the company’s ability to secure speedy FDA approval for its products was because of Par’s ‘legitimate business acumen and ingenuity’” and “we are not aware of any instances of the favoritism that has been alleged in the [congressional] investigation”,  it might have been able to effectively defend itself against securities fraud claims in spite of the alleged bribery.
Another special case concerning drug manufacturing companies arises, when a drug or other product approved by the FDA turn out to have severe side effects (the drug turns out to be unsafe) or the drug already marketed does not after all have the effect anticipated. These issues have arisen a few times and the biggest securities law-related problem has to do with the timing of the disclosure of the negative data.
In Oran v. Stafford  (a case concerning Wyeth, formerly American Home Products Corporation (“AHP”)) certain AHP’s stockholders brought a suit against AHP and certain of its officers and directors after AHP “in response to reports of serious medical side effects, withdrew its prescription weight-loss drugs from the market”  . The plaintiffs claimed that AHP failed to disclose data about the weight-loss drugs and its links with heart-valve disorders when the drug was first entered into the markets and was being marketed to consumers and physicians. The facts of the case may be summarized as follows:
...AHP marketed the weight-loss drugs Pondimin (fenfluramine) and Redux (dexfenluramine). Pondimin was marketed together with another drug, phentermine, in a combination popularly known as “fen-phen.” Pondimin was approved by the [FDA] in 1973. Redux was recommended for approval by an FDA Advisory Committee in November 1995 and approved by the FDA in 1996.
In February 1994, AHP learned, however, that a Belgian cardiologist had documented leaky heart valves in seven patients who had been taking diet pills containing Pondimin and Redux. By the time FDA Advisory Committee voted to approve Redux in November 1995, AHP knew of at least 31 cases of heart valve abnormalities in European diet-pill users, but had informed FDA of only eight of those cases. During the same time period, AHP also received hundreds of adverse reaction reports of patients displaying symptoms often associated with heart and lung problems. (...) In March 1997, AHP representatives met separately with cardiologists from the Mayo Clinic and MeritCare Health Systems, who informed AHP that they had documented heart-valve abnormalities in a total of 17 fen-phen users. ... Although AHP continued to investigate this data throughout 1997, it did not immediately release the reports to the public. The Mayo data, which by that time included 24 cases of heart-valve abnormalities in fen-phen users, was finally disclosed to the public on July 8, 1997 ... [when] AHP, Mayo, MeritCare and the FDA each made public announcement concerning the reports. ... The Mayo, FDA and AHP announcements, however, emphasized that there was no conclusive evidence establishing a causal relationship between fen-phen and heart valve disorders and that further study was needed before such a link could be confirmed. Following these announcements, there was no decline in the New York Stock Exchange price of AHP common stock.
On September 12, 1997 the FDA informed AHP of a survey showing that 92 of 291 fen-phen users had developed heart-valve abnormalities. The next business day, ... AHP announced that it was withdrawing Pondimin and Redux from the markets. The same day, AHP issued a press release estimating total lost of profits of 14 cents per share for 1997 and 1998 as a result of the lost sales of the two drugs, as well as one- time product withdrawal loss of $ 200 million to $ 300 million. On ... the day of the withdrawal announcement, the closing price of AHP common stock fell 3 11/16 points to 73 ¼.
... On September 17, 1997, articles in the Wall Street Journal and the New York Times reported that AHP had known about the possible heart-valve abnormalities since at least March 1997, and that the company faced substantial personal injury liability exposure. That day, AHP stock suffered another 4 ¼ point decline.
[During the time AHP had known for sure about the side effects of Redux, AHP made several statements about Redux but never disclosing the side effects or investigation of heart-valve abnormalities]. For example, on March 27, 1997, AHP issued its Annual Report, which contained a statement that “Redux, the first prescription weight-loss drug to be cleared by the FDA in more than 20 years, was one of the most successful drug launches ever.” The report contained no reference to either the European or the Mayo data. On April 21, 1997, AHP issued a press release addressing newspaper reports of a death that had been mistakenly attributed to Redux by an FDA official. The press release noted that “scientific evidence has shown Redux to be safe and effective when used as indicated.” In addition, in various releases listing Redux and Pondimin’s side effects, AHP omitted any mention of heart-valve damage.
The court of appeals affirmed the district court’s decision granting summary judgment for the defendants on the grounds that “the medical data disclosed by AHP on July 8, 1997 was immaterial as a matter of law”  . The plaintiffs’ appeal to the Court of Appeals was based on the following four grounds: firstly, the plaintiffs claimed that AHP’s misstatements and omissions fulfilled the materiality threshold. Secondly, the plaintiffs argued that AHP violated SEC Regulation S-K, Item 303(a), requiring the disclosure of “known trends and uncertainties” and that such an omission supported a claimed under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Thirdly, the plaintiffs claim that the threshold set by Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 78u-4 et seq had been satisfied. Fourthly, the plaintiffs appealed on the grounds that they should have been given the opportunity to amend their claims before their case was dismissed.  The first and second claims are discussed in more detail below.
As noted above in section 2, there are uncertainties relating to what should be considered material information and would thus oblige the company to disclose it under the securities laws. As discussed, the same information may be deemed material for a smaller company whereas for a large, multinational corporation with several products in its production and R&D pipeline, the threshold would not be deemed to have been reached. It is very likely that for a company to with only Redux and Pondimin as its products the omission of the harmful side effects could have been considered to be material. However, since case in fact concerned AHP, one of the largest drug manufacturers in the world, the threshold was certainly higher. Even though the case involved large manufacturer instead of a small drug developing company, it is worthwhile analyzing the case in more detail, because the issues raised apply generally to drug developing companies.
Here AHP could effectively use in its defense the fact that the price of its common stock was not affected post hoc by the announcement of the side effects on July 8, 1997 and thus claim that markets did not think the issue was of importance.
The appellate court adopted quite a high standard as to the scientific evaluation of the causal link between the adverse effects and the use of the two drugs in question. The court even concluded that even the disclosure of the European data in connection with the data provided by Mayo would not have significantly changed the reasonable investor’s total mix of information relating to AHP  . The court continued by citing the Charter-Wallace decision as follows: “AHP characterized the Mayo data as inconclusive. Had it simultaneously disclosed the European data and the adverse reaction reports, the aggregate of available information would nevertheless have led a reasonable investor to the same conclusion – that the relationship between the two drugs and heart valve disorders was still inconclusive. As the second circuit has noted ‘drug companies need not disclose isolated reports of illnesses suffered by users of their drugs until those reports provide statistically significant evidence that the ill effects may be caused by – rather than randomly associated with – use of the drugs and sufficiently serious and frequent to affect future earnings”  . After this statement, at least two circuits have now concluded that isolated reports of previously undisclosed side effects should not be considered as material. Although both of the cases have to do with major drug companies (Carter-Wallace, Inc. and AHP) this conclusion should be applicable to smaller drug developing companies as well since the issue has to do with scientific causal connection – an issue, which has per se nothing to do with the size of the company.
The plaintiffs presented additional two arguments as to why the omission in disclosing data by AHP should be viewed as material. Firstly the plaintiffs argued, that they were materially misled about the FDA approval process for Redux as AHP did not disclose to FDA all of the 31 cases of heart valve abnormalities in European diet-pill users. In this respect the court said that it “...do[es] not believe that AHP’s statements regarding the FDA approval process were materially misleading...”  . The court applied the standard it had previously created in a case Shapiro v. UJB Financial Corporation  -- a involving the assessment of affirmative characterization to the authorities by a financial institution that its loan loss reserves were “adequate”. The court reasoned that unlike in the Shapiro-case, here “AHP did not make any ‘affirmative characterization’ that the FDA’s approval was based on a complete review of every piece of relevant medical information”  . The court further stated that “AHP made a simple (and accurate) factual assertion that the FDA had found that Redux had an ‘acceptable safety profile’ following a “thorough review of more than 17 clinical trials.”  It is difficult to understand the court’s reasoning on this – as the FDA makes its evaluation based on the pre-clinical and clinical studies conducted by the drug developing company, it should be essential that the FDA would be able to consider its position to the NDA (or IND) in light of all information available to the NDA applicant. One reading of the third circuit’s view is that it is acceptable, from the securities laws standpoint, to submit half-truths to the authorities as long as the company does not make “affirmative characterizations” to the FDA or to the public that the FDA’s approval is based on “complete review of every piece of relevant medical information”. The information to be submitted to the FDA and the statements to be made in connection with the process of FDA assessing the NDA is not a topic covered by this paper but it would however, be interesting to hear the FDA’s views on the court’s “affirmative characterization” doctrine especially in light of the fact that FDA should ultimately control the presentation and content of risk information  .
The final issue raised by the plaintiffs relating to the materiality of the information was the charge that AHP failed to disclose the dates when it first learned about the side effects from the European data. This contention involves with the evaluation of the possibility of product liability claims against AHP. As the share price of AHP decreased after the release of this information, the court concluded that this could be held as material information. According to the court, the materiality of information itself was however not enough if there was no duty to disclose such information. The basic premise of the securities laws is that one cannot use insider information (material information affecting the share price) when trading in the securities markets. As stated above, the holder of insider information has basically two choices – either to disclose the information before buying or selling securities or to abstain from trading (except for when there is prior misleading information in the markets). As AHP (or its officers or directors) did not trade, there were no securities laws violations since there was no duty to disclose. 
The second line of argument used by the plaintiffs was that AHP failed to fulfill its duties under SEC Regulation S-K, Item 303(a) under which the company shall provide a Management Discussion and Analysis section when filing the annual reports. According to the plaintiffs, AHP should have made disclosure of the negative reports under the part of the MD&A which discusses “any known trends or uncertainties that have had or that the registrant reasonably expects will have a material favorable or unfavorable impact on net sales or revenues or income from the continuing operations”  . In short, the court concluded that breaches under the Regulation S-K did not create a private right of action and, secondly, that violations of Regulation S-K did not constitute a material omission under Rule 10b-5 of the Securities Exchange Act of 1934.  The issue of possible violation of Regulation S-K in connection with AHP’s omission of the side effects was thus not decided and this leaves the door open for liability if the SEC were to try such a case in the future.
In the case Demarco v. Depotech Corporation  , the court took a stand as to the availability of the NDA application in the securities litigation as follows:
Defendants’ Exhibit R and R-1 through R-6 contain portions of the DepoCyt New Drug Application (NDA) filed with the FDA on April 28, 1997, correspondence between the DepoTech and FD, and sections of the protocol for DepoCyt’s clinical trials. Plaintiffs contend the Court should not consider these documents.
These documents do not fall within any of the categories of documents district courts can generally consider on a motion to dismiss. Although the NDA and protocol study were submitted to the FDA, they are not available to the public and not suitable for judicial notice....Plaintiffs do not have possession of the complete DepoCyt NDA or protocol study, and thus could not have relied on those documents in forming the allegations in the Second Amended Complaint. Therefore the Court grants Plaintiffs’ motion to strike as to Exhibits R and R-1 through R-6  .
The case In re Medimmune Securities Litigation  discussed explicitly the issue of availability of the correspondence between the FDA and the company developing drug. The District Court ruled that the correspondence is not something that lies under the duty to be disclosed by reasoning as follows:
Continuous dialogue between the FDA and the proponent of a new drug is the essence of the product license application process. Questions may emanate from one or more staffers in random or sporadic fashion. Many, if not all, questions presumably get answered in the process. Requiring ongoing disclosure of FDA’s questions would not only be disruptive to the review process; it could easily result in misleading the public more than not reporting the questions. Where mere disclosure of a question might cause the company’s stock to decline in value, the eventual answer to the question might cause it to rise once again. Investors who sold that stock when the FDA’s question was asked but before the company’s answer was given might have legitimate cause for concern when a satisfactory answer came forth and the stock’s price began to climb again...The Court finds Defendants, as a general proposition, had no duty to report its ongoing discussions with FDA during the review process  .
The above extract may be helpful when assessing the duty to disclose correspondence with authorities in general, but at the same time, it must be noted, that not all kind of correspondence with the authorities in all circumstances may be deemed to enjoy the right created by the judgment. For example, the company may not escape the liability to disclose the opinions and decisions of the authority just by initiating correspondence and challenging the views of the authority by quasi-grounds. In such a case the obligation to disclose information arises when the company is liable to make a disclosure any way (for example in connection with a proxy statement or offering). The courts have sometimes even expressly stated, that the drug developing company is under an obligation to disclose the correspondence with the FDA. For example, in case Walsingham v. Biocontrol Technology, Inc., the district court ruled, that the defendant, Biocontrol, Inc., was under an obligation to disclose the contents of the correspondence with the FDA  . The decision was, however, heavily motivated by the fact that the company had only one product in its development pipeline and thus, any news relating to the product was considered (extremely) material for the assessment of the price of the security.
Combining two complex and ambiguous frameworks – the one dealing with the FDA’s approval process and the other regulating announcements made by public companies – can lead to complex practical problems. Some of the problems concern the somewhat mysterious manner in which the FDA handles drug development processes. In particular, companies dealing with issues relating to the approval process for the very first time, may have difficulty in interpreting the FDA’s aims. The FDA and drug development process is also heightened institutions involving small companies due to the fact that almost all news relating to the drug development process or correspondence with the FDA is likely to be held material by investors. In order to improve the situation, the most crucial step would probably be to improve the FDA process in a way, which would improve the predictability of the outcome of the approval process. Some clarification is also needed regarding the rules relating to disclosures of information. A system lacking bright line rules regarding the duty to inform is highly inefficient because it creates litigation that could be avoided by imposing more industry specific standards and simplifying guidelines issued by the SEC. Meanwhile, the securities law cases dealing with drug developing companies cover almost all possible aspects and give, to the extent that they do not contradict one another, some guidelines which help when assessing the duty to inform the markets.
 Cox, Hillman & Langevoort: Securities Regulation, Cases and Materials, Aspen Law & Business, Third Edition p. 29 and Donald C. Langevoort “Theories, Assumptions and Securities Regulation: Market Efficiency Revisited”, 140 V. Pa. L. Rev. 851.
 This irrational behavior has been described as “noise” – pricing influences not associated with rational expectations about asset values. Cox, Hillman & Langevoort supra note 1 at 35 and Langevoort supra note 1 at 866.
 Cox, Hillman & Langevoort supra note 1 at 29.
 The extensive case law becomes more problematic when the different federal circuits decide the same kind of cases differently. This text does not purport to be an overview of general securities regulation but will concentrate on cases which involve drug developing companies. However, some references will be made to landmark cases from other fields of business, in order to set out the prevailing legal framework governing public companies developing drugs too.
 For example good laboratory and manufacturing practices, tightly defined research programs etc.
 To my knowledge there are no statistics as to the number of biotech-related securities law cases but it has been estimated, that at any one time there are between 500 to 700 class action securities fraud suits pending against corporations. Jonathan L. Booze: Comparative Analysis of the Application of the Bespeaks Caution Doctrine to Forward-looking Statements, 47 Kan.L. Rev. 495, January 1999.
 It should be remembered, that states have regulated securities law as well. The state rules, so called “blue sky laws” are not discussed in this paper.
 The New York Times on Saturday January 19, 2002 on page B15 (“House Panel To Investigate A Cancer Drug And Its Maker”).
 The New York Times on Sunday February 17, 2002 on section 3 page 8. (“Market Insight: The Future Beckons To Biotech’s Faithful” by Kenneth N. Gilpin.)
 The Wall Street Journal, 27 February 2002 at A20.
 Business Week: “Second Chance” at March 11, 2002 on page 40.
 For recent SEC Enforcement Actions against pharmaceutical companies, see for example William R. Baker, III, Thomas C. Newkirk & Steven A. Yadegari: Recent Significant Enforcement Actions, PLI September-December 2001 and pending cases SEC v. ICN Pharmaceuticals, Inc. (www.sec.gov/enforce/litigrel/lr16249.htm ) and the case concerning British Biotech PLC (www.sec.gov/litigation/admin/24-41505.htm ) referred to in the said document (net sources available at least on 10 March, 2002).
 In this paper, the companies under the disclosure obligation will be referred to as “public companies”, as customary. The term “issuer” will be used to denote both the term company, and public company under the obligation to make disclosures of information under securities laws.
 Yet another set of rules and regulations relates to the security offerings (initial or secondary) by the issuers to the public.
 In re Ribozyme Pharmaceuticals, Inc. Securities Litigation, 119 F.Supp. 2d 1156, 1160 (D.Colorado, 2000).
 In re Time Warner Securities Litigation, 9 F.3d 259, 266-267 (2d Cir., 1993).
 When the proxy statement has been disclosed but the meeting of the shareholders has not yet been held, the company has a duty to update the statement so that it gives accurate picture of the company at the time of the meeting and thus elaborate on even events which have taken place subsequent to the first release of the proxy statement. The same applies to the registration statements relating to new issues of securities (item i in the list above).
 In addition to the four mentioned, an acquirer of 5 % or more of the stock of a listed company has, according to the Williams Act, to disclose their ownership and future intentions relating to the stock. It should be also remembered, that such holder of insider information who has fiduciary duties towards the issuer, is also under the “duty to disclose or abstain” - rule.
 Recently, and very much due to the ongoing investigation concerning Enron Corp., there have been discussions and proposals that the federal rules concerning disclosures made by public companies should be made stricter and less ambiguous.
 Oran v. Stafford, 226 F.3d 275, (3rd Cir., 2000).
 For discussion of the duty to correct and update, please see section 2.4. below.
 SEC’s Staff Accounting Bulleting No. 99 (1999) mentions that misstatement regarding financial statement item of five (5) percent or less is not material. See James Cox, Robert Hilman and Donald Langevoot: Securities Regulation, supra note 1 at 41-42 for discussion of this rule.
 James Cox, Robert Hillman & Donald Langevoot: Securities Regulation, supra note 1 at 40: “Because the materiality concept is such a workhorse in securities regulation, learning to apply it is probably the most valuable skill a securities lawyer can acquire.” Such a statement describes well both the importance and the difficulty of the materiality criterion.
 An example of this may be found in case In re Alliance Pharmaceutical Securities Litigation, 1995 U.S. Dist. LEXIS 11351 at *33, where the court states: “Defendants offer their financial expert’s contention that the endotoxin problem was not even material because it had such a small effect on the stock price when it was eventually announced. Plaintiffs dispute this with a declaration from their own financial expert, arguing that the small stock price movement was due to good news released concurrently with the bad news.”
 TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438 (1976), revg. 512 F.2d 324 (1975) at 449 emphases added.
 Section 14(e) of the Securities Exchange Act of 1934 relating to proxies: “...to make any untrue statement of a material fact or omit to state any material fact necessary...” and the Rule 10b-5 “...to make any untrue statement of a material fact or to omit to state a material fact necessary...”. Rule 12b-20 (of the Securities Exchange Act of 1934) and Rule 408 (of Securities Exchange Act of 1933) describe the materiality identically as follows: “...there shall be added such further material information, if any, as may be necessary to make the required statements, in the light of the circumstances under which they are made, not misleading”. Rule 408 relates to additional information to be provided in a registration statement and Rule 12b-20 relates to additional information to be disclosed in connection with statement or report.
 Supra note 21.
 In re Burlington Coat Factory Securities Litigation, 114 F. 3d 1410, 1425 (3rd Cir., 1997).
 Oran v. Stafford, supra note 21 at 13.
 One yardstick would perhaps be that the “substantial likelihood” standard should be used here ex analogy so that when assessing the possible movements of the share price beforehand, it would be enough if the officers or directors believed that there is substantial likelihood that the share price would react to the information. The substantial likelihood test was adopted by the Supreme Court in case TSC Industries, Inc. v. Northway, Inc., supra note 26, when assessing the materiality of the information.
 See for example: Warshaw v. Xoma Corporation, 74 F.3d 955 (9th Cir., 1996), Demarco v. Depotech Corporation, 149 F.Supp. 2d 1212 (S.D. California, 2001), In re Medimmunce, Inc. Securities Litigation, 873 F.Supp. 953 (D. Maryland, 1995).
 Prior to 1973 the SEC did not allow the companies to make soft information announcements, as the SEC believed the information was too subjective and unreliable. The SEC adopted the current position regarding projections in 1978 (Cox, Hillman, Langevoort, Securities Regulation, supra note 1, at 63).
 If the company decides to make a voluntary disclosure, the disclosure must be accurate and complete but “whenever a corporation speaks, it must [not] disclose every piece information in its possession that could affect the price of its stock” In re Time-Warner Securities Litigation, supra note 17 at 268.
 “Predictions of future performance are inevitably inaccurate because things almost never go exactly as planned” Wieglos v. Commonwealth Edison Co., 892 F.2d 509 (7th Cir. 1989)).
 For investors the issue of unexpected disclosure (i.e. other than periodic disclosure) may be of great significance. By way of example, let us assume a somewhat usual sequence of events where a biotech company X has received negative news from FDA relating to the approval of the drug at noon on Tuesday. An investor buys the stock of the company X late Tuesday afternoon assuming that the drug development process is advancing as described in the MD&A section of the previous 10-Q issued by the company. The company X discloses the opinion of the FDA only on Wednesday morning when the price of the common stock of the Company X falls 30 percent in NASDAQ. The investor could claim, that should the company have published FDA’s standpoint promptly, it would not have purchased the shares at all and it has thus suffered a loss of 30 percent.
 The issuers may escape taking express stand as to the materiality when disclosing information in connection with the quarterly filings. In such filings the companies may disclose information, which is not necessarily material in order to play it safe.
 About pleading standards under the Private Securities Litigation Reform Act of 1955 see for example, In re Dura Pharmaceuticals, Inc. Securities Litigation, 200 WL 33176043 (S.D.Cal., 2000) at *5.
 The courts have in few occasions stated that the safe harbor or the bespeaks caution doctrine is not available as the statements considered more facts than projections. See for example Walsingham v. Biocontrol Technology, Inc. 66 F.Supp.2d 699, 678 (W.D. Pennsylvania, 1998).
 For more detailed information about the Bespeaks Caution-doctrine, please see for example: “’Bespeaks Caution’ Doctrine Under Federal Securities Laws”, 130 A.L.R. Fed. 119 (1996), or Jonathan L. Booze: “A Comparative Analysis of the Application of the Bespeaks Caution Doctrine to Forward-Looking Statements”,supra note 6.
 Supra note 15.
 The court held that since the defendant could not argue that the “Media Advisory” was in any way different from regular “Press Statements” they are treated similarly for securities laws purposes. Id at 1165.
 Id. at 1160, emphasis added.
 Id. at 1163.
 For example cases: Warshaw v. Xoma Corporation, 74 F.3d 955 (9th Cir.), In re Columbia Laboratories, Inc. Securities Litigation, 144 F.Supp. 2d 1362 (S.D. Florida, 2001), In re Ribozyme Pharmaceuticals, Inc. Securities Litigation, 119 F.Supp.2d 1156 (D.Colorado, 2000).
 Sec. Act Rel. 6084, 17 SEC Dock. 1048, 1054 (1979), emphasis added.
 Courts, too, have often been somewhat confused about the distinction between the duty to correct and duty to update. Furthermore, the law in different circuits vary and the final word on this topic is yet to be said. For example the district court for the Southern District of California admitted this situation in case In re Alliance Pharmaceutical Securities Litigation, supra note 25 at 133 233 333 533 633 733 by saying “...even assuming that the law of the Ninth Circuit recognizes some sort of duty to update...the Court finds that [the defendant] had no duty to update its prior disclosures by announcing the endotoxin problem sooner than it did”.
 Supra note 47.
 In re Time-Warner, Inc. Securities Litigation, supra note 17 at 268.
 Wieglos v. Commonwealth Edison Co., supra note 35 at 516.
 Gallagher v. Abbott Laboratories, 269 F.3d 806, 810 (7th Cir, 2001). This case is discussed in detail in section 6 below.
 European securities regulation has adopted a different approach. The companies bound by the disclosure regime applicable in the European Union have a continuous disclosure obligation and are therefore liable to announce without delay all matters which may affect the price of the security.
 In other words: “Section 13 [of Securities Exchange Act of 1934 Act] and the implementing regulations contemplate that these reports will be snapshots of the corporation’s status on or near the filing date, with updates due not when something “material” happens, but on the next prescribed filing date” (Gallagher v. Abbott Laboratories, supra note 52 at 809).
 In re Alliance Pharmaceutical Securities Litigation, supra note 25 at 32 cited in Alan N. Salpeter & Harley Hutchins, infra note 94. The court cited 2nd Circuit’s decision in Acito v. IMCERA Group Inc., 47 F.3d 47, 53 (2d Cir. 1995).
 In re Alliance, Id at 25.
 For example in Nathenson v. Zonagen, Inc. (267 F.3d 400 (5th Cir)), In re Healthcare Compare Corp. Securities Litigation (75 F.3d 276 (7th Cir)), Oran v. Stafford, supra note 21.
 Scienter is defined by the Supreme Court as “a mental state embracing intent to deceive, manipulate, or defraud” Hochfelder, 425 U.S. at n.12 cited in Tonya Smits Rodriguez, infra note 63. Also, the district court for the Southern District of California concluded in case In re Alliance Pharmaceutical Securities Litigation supra note 25 at *11, that “Scienter may be...proved in two somewhat distinct ways: (a) by evidence that the defendant actually knew that the statements at issue were materially misleading, or (b) by evidence that the statements at issue were so obviously materially misleading that ‘any reasonable man would be legally bound as knowing’”.
 The plaintiffs have tried to show the scienter by claiming that the defendant directors had a personal interest in omitting facts or making misstatements. For example, in case In re Healthcare Compare Corp. (75 F.3d 276 (7th Cir., 1996)) the plaintiffs alleged, that the directors/officers made fraudulent statements “to (a) perpetuate the appearance of [the company]...growth, (b) to allow [the directors]...to retain their positions, compensation and other substantial perquisites of executive employment (c) inflate analysts’ projected estimates of [the company’s]...revenues and earnings per share and (d) perpetuate the inflated value of the defendants’ substantial personal holdings in company securities.” Such claims have generally not been successful.
 A general description of the general issues relating to securities claims (“five fingers of fraud”) please see for example: Alan R. Palmiter: Securities Regulation, Aspen Law & Business, 1998 pp.257-287, or Cox, Hillman and Langevoort: Securities Regulation, supra note 1, at 701-797.
 For a more detailed description of the process, please see for example: James T. O’Reilly: Food and Drug Administration, 2nd ed. (loose-leaf) chapter 13-11 or Peter Barton Hutt & Richard R. Merrill, Food and Drug Law Cases and Materials, 513-551 (1991). A condensed description of the approval process may be found for example in case In re Ribozyme Pharmaceuticals, Inc. Securities Litigation, supra note 15 at 1159-1160.
 Peter Barton Hutt & Richard R. Merrill, Food and Drug Law Cases and Materials, supra note 61 at 516.
 Lars Noah, The Imperative to Warn: Disentangling the “Right to Know” for the “Need to Know” About Consumer Product Hazards, 11 Yale J. on Reg. 293, 329 (1994) cited in Tonya Smits Rodriquez, “Comment: Extending the Fraud on the Market Theory: Second Circuit’s Connection Test for SEC Rule 10b-5” 25 Iowa J. Corp.L. 423, 437-8 (2000).
 44 Fed. Reg. 37, 434, 37, 447 (1979) cited in Noah, supra note 63, at 329. Generally of overwarnings, see Noah, supra note 53, at 381-391.
 W. Kip Viscusi et al., Determining Inefficient Pharmaceutical Litigation: An Economic Rationale for the FDA Regulatory Compliance Defense, 24 Seton Hall L. Rev. 1437, 1469 (1994) cited also in Tonya Smits Rodriquez, supra note 63.
 See section 6.2 below and especially the discussion relating to cases In re Charter-Wallace, Inc. Securities Litigation 150 F.3d 153 (2nd Cir. 1998) and Oran v. Safford, supra note 21.
 This is not an exact or a scientific model of the calculation of the value of a biotech company but rather a very simplified layman’s view on the issues specific to the biotech industry and their effects to the valuation. For more complete analysis of the valuation issues, please see for example: Olli Arojärvi, “How to Value Biotechnology Firms: A Study of Current Approaches and Key Value Drivers, Masters Thesis in Finance Theory, Helsinki School of Economics and Business Administration, 2001.
 The revenues depend of course on also the strategy adopted by the company – if the company decides to stay “virtual” and outlicense some of the development and/or manufacturing and/or marketing process, the revenues may be greatly affected. On the other hand, if the company decides to take care of the whole manufacturing, R&D and distribution process itself, it may affect the size of the markets and probability of succeeding in getting the product timely into the markets but the company would be less likely to be splitting profits with collaborators.
 See also in Section 5 where a practical example of the probability and likely effect is given.
 Relating to other securities law provisions (such as Section 11 of the Securities Act of 1933 and Section 18(a) of the Securities Exchange Act of 1934) the false or misleading statement or omission need to be made in the filing (proxy statement, registration statement etc.) in question.
 401 F.2d 833 (2d Cir. 1968) (en blanc), cert. denied, 394 U.S. 976 (1969).
 Reliance is not, however, required under Section 11 of the Securities Act of 1933 concerning offerings by the issuers. Under that section all misstatements or omissions are thus actionable.
 Courts have assessed the following issues when determining whether or not the markets shall be considered effective: the volume of the trade of the stock in question, whether securities analysts follow the reports on the stock, whether the stock has market makers and arbitrageurs, whether the company is eligible to file SEC Form S-3 available only to more seasoned companies and whether there are empirical evidence showing a cause and effect relationship between unexpected corporate events or financial releases and immediate response in the stock price. See for example the following cases concerning drug developing companies discussing the fraud on the market theory: In Re Ribozyme Pharmaceuticals, Inc. Securities Litigation, supra note 15 and Nathenson v. Zonagen, 267 F.3d 400, 413-415 (5th Cir., 2001).
 In re Charter-Wallace, Inc. Securities Litigation, 150 F.3d 153; U.S. App. LEXIS 15983 (2nd Cir., 1998).
 Id. at 7.
 Id. at 3-4.
 Id at 9. Here the court also referred to the In re Time Warner, supra note 17 at 265.
 The reference to Weiglos relate to the court’s previous discussion about the case Weiglos v. Commonwealth Edision Co., supra note 35.
 Id. at 9-10. Footnote added.
 See also Ross v. A. H. Robins Co., Inc, 77 Civ. 1409, 1978 WL 1078 (S.D.N.Y. Apr. 6, 1978) in which the district court rejected the claim that advertisement in a technical medical journal could be “in connection with”. The said case was, however, decided before the Basic, Inc. v. Levinson which introduced the “fraud on the market” claim. See discussion about this in Tonya Smits Rodriguez, supra note 63 at 433-434.
 In re Biogen Securities Litigation 179 F.R.D. 25 (D.Mass, 1997).
 Tonya Smits Rodriguez, supra note 63 at 437.
 Id. at 438.
 Id. at 441.
 After having found that the “in connection with” requirement is fulfilled, the Appellate court remanded the case to the district court. The substantive issue was decided by the district court and appealed further back to the court of appeals for the second circuit. Both the district court and the court of appeals decided that the defendants lacked scienter and the case was then ultimately dismissed. See In re Carter-Wallace, Inc. Securities Litigation 220 F.3d 36 (2nd Cir).
 Supra note 66.
 DeMarco v. DepoTech Corp., 149 F.Supp.2d 1212 (S.D. California, 2001).
 Modified by using the test applied in the DeMarco v. DepoTech Corp. – case, id. The same test is described in the case In re Medimmune, Inc. Securities Litigation, supra note 22, concerning the liability based on statements made by market analysts as follows: “...statements of independent market analysts are not actionable unless Plaintiffs can plead with particularity who among Defendants supplied the information, how it was supplied, and how Defendants could have controlled the content of the statement.” at 965. Both courts refer to the Raab v. General Physics Corp., 4 F.3d 286 (4th Cir., 1993) – case.
 9 F.3d 259, 265 (2nd Cir., 1996).
 74 F.3d 955, 956 and 959 (9th Cir., 1996).
 Acito v. IMCERA Group, 47 F.3d 47 (2nd Cir. 1995).
 TSC Industries, Inc. v. Northway, Inc., supra note 26 at 449. In the said case, the Supreme Court introduced the “substantial likelihood”, “reasonable investor” and “total mix of information” – standards. See also supra note 24 and the discussion in that connection and Alan N. Salpeter & Harly Hutchins: Recent Developments Help the Defense of Drug Companies in 10b-5 Cases, Food and Drug Law Journal, vol 51 345 at 347.
 Acito v. IMCERA, supra note 93 at 52.
 Acito v. IMCERA, supra note 93 at 52-53.
 Alan N. Salpeter & Harly Hutchins, supra note 94 at 348, who quote the U.S. Supreme Court decision in case Basic, Inc. v. Levinson (485 U.S. 224, 232: “it is [often] difficult to ascertain whether the ‘reasonable investor’ would have considered the omitted information significant at the time”.
 Walsingham v. Biocontrol Technology, Inc., supra note 39 at 677.
 See also Tonya Smits Rodriguez, supra note 63 at 439 stating inter alia that “Smaller companies might be able to use the materiality defense, but the issue will likely go to a jury”.
 See also Salpeter & Hutchins supra note 94 at 350.
 Id. at 351 referring also to the case In re Copley Pharmaceutical, Inc. Securities Litigation, 1995 WL 169215 (D.Mass., 1995).
 The outcomes of securities and corporate (derivative) suits differ, however: the potential remedy from any wrongdoings go in case of corporate law suit to the company and in case of securities law case the benefactor and plaintiff is the shareholder(s).
 For some IND, however, the fast track procedure may be available and getting the “fast track” status may be easier for a more experienced organization than for a biotech startup company doing everything the first time.
 This probability times magnitude test was applied by the Supreme Court in a merger stetting. Basic, Inc. v. Levinson 485 U.S. 224.
 A court’s discussion about this probability – magnitude relationship, see In re Alliance Pharmaceuticals Securities Litigation, supra note 25 at 110 210 310 410 510 610 710 where the court concludes inter alia that “...the materiality of the disclosure is a function of the probability of the contingent event taking place and the magnitude of its effect on issuer. Thus, for example, if merger talks are at preliminary stage, the probability of the takeover happening is low. However, its effect on the stock price is likely to be high, so materiality is difficult to decide”. The court continues later in the decision concerning drug developing companies that “...the possibility of FDA rejection has the same kind of low probability/high magnitude profile as preliminary merger negotiations, and it is recognized that deciding the materiality of those negotiations is difficult...” At *20.
 The flip side of the accurate and detailed disclosures relating to drug developing companies is of course that the proprietary scientific information becomes available in the public domain. For this reason, it is beneficial for some drug manufacturing companies to stay private as long as possible.
 Another example of the importance of the consistency of the announcements: stock analysts tend to inquire from the companies every now and then how the drug development is going and whether any good results have been obtained. The company may usually refer to their “no-comment policy” but still imply that everything is going according to plans and in accordance with the timetable published previously. If problems arise in the development project the company could not even implicitly say that everything is going as planned and that there are no problems in the project as, misleading or false statements, are even absent to duty to disclose, impermissible. As the company is not able to say other than “we have this no-comment policy and are thus not commenting on anything” the analysts who previously have obtained at least an indication how the company is advancing with its research and development programs in addition to the “no-comment”- comment may realize that something is not going as planned. Therefore companies should stick strictly with their “no-comment” policy, authorized by the Basic v. Levinson –case (supra note 97). The example is modified from the one given by Prof. John Coates III in connection with the Mergers & Acquisitions class at Harvard Law School on 13 March, 2002.
 Gallagher v. Abbott Laboratories, 269 F.3d 806, (7th Cir. 2001)
 In re Alliance Pharmaceutical Securities Litigation, supra note 25 at *12.
 Here it is worth mentioning, that an important factor for an investor when considering an investment for a high technology and know-how based company, such as a company developing drugs, is the competence and track record of the management team. The ability to manage and make wise decisions, concerning inter alia the drug development process, is thus converted into the value of the security.
 See also: Alan N. Salpeter & Harly Hutchins, supra note 94 at 349, who conclude, that “[t]he most promising line of defense under the recent caselaw concerns scienter”.
 Demarco v. Depotech Corporation, supra note 88 at 1231.
 Id. at 1231.
 In re Medimmune, Inc. Securities Litigation, supra note 32.
 Id. at 964.
 Id. at 967.
 Id. at 967-968.
 Alan N. Salpeter and Harley Hutchins, “Recent Developments Help the Defense of Drug Companies in 10b-5 Cases”, Supra note 94, footnotes omitted.
 See for example cases In re Biogen Securities Litigation 179 F.R.D. 25; 1997 U.S. Dist. LEXIS 22372 (D. Mass., 1997), In re Medimmune, Inc. Securities Litigation, 873 F.Supp. 953 (D. Maryland, 1995), In re PLC Systems, Inc. Securities Litigation, 41 F.Supp.2d. 106 (D.Mass., 1999), Warshaw v. Xoma Corporation 74 F.3d 955 (9th Cir., 1996), In re Columbia Laboratories, Inc. Securities Litigation 144 F.Supp.2d 1362 (S.D.Florida, 2001). In re Ribozyme Pharmaceuticals, Inc. Securities Litigation 119 F.Supp. 2d 1156 (D.Colorado, 2000) and the cases mentioned in section 6.1.1 above.
 Walsingham v. Biocontrol Technology, Inc., supra note 39.
 Id. at 677-678.
 The defendants tried to argue, that the statements made would be qualified as forward-looking. The court rightly stated that “[n]either the bespeaks caution doctrine nor the safe harbor provisions of the Reform Act insulates a defendant from liability, however, when a statement misrepresents a historical or current fact” Id. at 678. Relating to the choice of keeping silent or speaking the truth (the ever-present duty not to mislead), see In re Par Pharmaceutical, Inc. Securities Litigation, 733 F.Supp. 668, 675 (S.D.N.Y., 1990).
 In re Biogen Securities Litigation, supra note 81.
 TIMI is the acronym for Thrombolysis in Myocaardial Infarction, Id. at 29.
 ACC stands for American College of Cardiology.
 In re Biogen Securities Litigation, supra note 81 at 25-34.
 Id. at 36.
 In re Medimmune, Inc. Securities Litigation, supra note 32.
 Supra note 127 at 40.
 It is for example stated in case In re Copley Pharmaceutical, Inc. Securities Litigation, 1995 WL 169215 (D.Mass) that Copley Pharmaceutical, Inc’s. “success was due, at least in part, to its reputation for quality and strict compliance with FDA regulations”.
 cGMP is an abbreviation from “Current Good Manufacturing Practices for Finished Pharmaceuticals”. In re Copley Pharmaceutical, Inc. Securities Litigation, supra note 131 at 1.
 Id. The Company further stated in the acquisition agreement entered into with Hoechst the following: “The business of the Company and its subsidiaries [were] not being conducted in violation of any applicable law, ordinance, rule, regulation, decree or order of any domestic or foreign court or governmental entity, including, but not limited to, the Federal Food and Drug and Cosmetic Act and the rules and regulations thereunder and all applicable rules, regulations and policies of the Food and Drug Administration, except for violations which in the aggregate do not and would not have a material adverse effect on the business, operations or financial condition of the Company and its subsidiaries taken as a whole”. Though such statement was made for the purpose of an acquisition agreement, it was nevertheless used as evidence in the trial. The agreement was supposedly found in the SEC databases and was available to the public. The court did not assess the “in connection with” prerequisite in this connection but evidently took for granted that the statement in the agreement had “entered the market”.
 Supra note 131 at 5.
 In re Par Pharmaceutical, Inc. Securities Litigation, supra note 123 at 672.
 Id. at 674-675 see also the numerous cases referred to in the case at fore to which the defendants tried to base their argument.
 Id. at 675.
 Id. The court concluded “...even though no duty to make a statement on a particular matter has arisen, once corporate officers undertake to make statements, they are obligated to speak truthfully and to make such additional disclosures as are necessary to avoid rendering the statements not misleading”.
 Id. at 673.
 Oran v. Stafford, supra note 21.
 Id. at 279.
 Id. at 281.
 Id. at 10.
 It is worth noting here that total mix of information affecting AHP’s market capitalization is completely different that of a smaller drug manufacturer or of a biotech company.
 Oran v. Stafford, 226 F.3d 275, 284, (3rd Cir., 2000) citing In re Carter-Wallace, Inc. Sec. Litig., 150 F.3d 153, 157 (2d Cir. 1998).
 Oran v. Stafford supra note 145 at 285.
 964 F. 2d 272, 281 (3d Cir. 1992).
 Oran v. Stafford, supra note 145at 285.
 See section 3.1 above and V. Kip Viscusi et al, supra note 65 at 1469, where it is argued that FDA should have the primary responsibility of the labeling and thus labels approved by the FDA should be immune to private tort litigation.
 Here the court quoted the famous Basic, Inc. v. Levinson –case supra note 97 at 239 “Silence, absent to duty to disclose, is not misleading under 10b-5.”
 Regulation S-K, Item 303(a)(3)(ii)
 The basic argument for the court is that the materiality standards for Rule 10b-5 and SK303 differ significantly and that the “demonstration of a violation of the disclosure requirements of Item 303 does not lead inevitably to the conclusion that such disclosure would be required under Rule 10b-5. Such a duty to disclose must be separately shown” – the court quoted the case Alfus v. Pyramid Tech. Corp., 764 F.Supp. 598, 608 (N.D. Cal. 1991), see Oran v. Stafford supra note 145 at 288.
 Demarco v. Depotech Corporation, supra note 88.
 Id. at 1219.
 In re Medimmune, Inc. Securities Litigation, supra note 32.
 Id at 966.
 66 F.Supp. 2d 669, 677 (W.D. Pennsylvania, 1998).