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Memo to biopharma executives: when talking to shareholders, take care to tell the whole truth and nothing but the truth.

That’s the message delivered this week to Arena Pharmaceuticals after a federal appeals court ruled on Wednesday that shareholders can proceed with a lawsuit alleging the company deliberately withheld crucial information about a potential problem with a widely anticipated diet drug.

At issue was a series of statements Arena executives made in 2009 about the progress they were making in winning US Food and Drug Administration approval for the Belviq diet pill. At the time, the drug was one of three forthcoming such medicines — which were being developed by different companies — that were closely tracked by physicians and investors, given the dearth of treatments for the overweight.


Over several months, company executives made or issued statements expressing confidence that the pill would be approved, because safety and effectiveness had been demonstrated through clinical trials and animal studies. Here’s the rub: while the reference to animal studies mentioned the need to ensure there was no risk that cancer seen in rats could develop in humans, Arena did not disclose a dispute about study results with the FDA.

In fact, Arena knew for years that a rat study showed its pill caused rodents to develop cancer and the FDA wanted evidence this was not a threat to people, according to court documents. But not until September 2010 — when Arena documents were disclosed in advance of an FDA advisory meeting to review the pill — did it became publicly known that Arena and the FDA had a “highly unusual” exchange about the study results.


The disclosure sent Arena stock plunging 40 percent in one day.

This subsequently triggered the shareholder securities lawsuit, which a lower court dismissed three years ago. By then, the FDA approved Belviq after determining the drug has passed muster, but shareholders pressed their case, claiming they lost money because Arena executives failed to disclose information that should have been made public all along.

And a Ninth Circuit Court of Appeals panel agreed. Despite the high hurdles set by the Private Securities Litigation Reform Act, which places a burden on shareholders to prove a company intended to deceive investors, the court ruled the shareholders successfully made a compelling argument why Arena executives should have disclosed the concerns about the rat study.

The shareholder “theory is simple,” the court wrote. “At the same time [Arena executives] touted the safety and likely approval of [Belviq], they referred to the animal studies supporting the FDA application. But once they raised the animal studies, [they] were obligated to disclose the rat study’s existence to the market. Failure to do so, in [the shareholder’s] view, demonstrates scienter (a legal term that refers to a willingness to deceive). Recognizing that this is a close case, we agree.”

As the court noted, “at the time [the] statements were made by various Arena officials in 2009, Arena knew that the animal studies were the sticking point with the FDA … It was also not true that Arena had ‘all of the data in hand’ or that ‘everything that (they had) compiled so far’ was ‘favorable.’”

For its part, Arena executives maintained they were engaged in a good-faith dispute with the FDA over the results of the rat study. An Arena official declined to comment on the ruling.

Interestingly, the court drew parallels with a case involving a company called Matrixx. In 2011, the US Supreme Court ruled that investors suing a drug company for securities fraud may rely on the failure to disclose reports of adverse events. In that instance, Mattrix for several years received reports of a side effect with a cold remedy — the Zicam nasal spray — but did not disclose that some people lost their sense of smell even while talking up its prospects.

Whether the shareholders prevail remains to be seen, of course. The ruling only means that the shareholders get to fight another day. But the court is sending a signal that if drug makers are going to describe trial results and discussions with the FDA, they should not dress up information, a common predilection in a world where exciting investors is a high priority.

  • Arena greenhorns forgot first principles:
    1) FDA ALWAYS has the gun.
    2) Therefore don’t provide them the ammunition. If it was significant enough the agency would have raised it on their own, but nobody is smart enough to know when that would have occurred.

    By raising the issue of the rat tumors, the company probably thought they were doing due diligence, but the minute they raised the issue it became material information subject to shareholder disclosure.

    The FDA doesn’t hand out gold stars; hollow point bullets is more up their alley.

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