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Abstract

The government, particularly the Food and Drug Administration ("FDA"), heavily regulates the life sciences industry. FDA actions can have an extraordinary influence on the fortunes of biotechnology companies. Timely FDA approval of a drug or medical device can permit a company to exploit an inviting market window. FDA product approval is, in turn, tied to clinical test results which demonstrate "efficacy" and safety. Delayed approval, unfavorable test results, or the denial of an FDA application may ruin a company. Beyond the FDA product approval process and related testing lie FDA inspections and the possibility that the government will investigate charges such as the submission of false data. Problems found by inspection or revealed by investigation can, in turn, influence FDA action on further product approvals. All of this makes regulatory events and clinical testing matters of great concern to both the managers of life sciences companies and investors in those companies. What biotechnology companies disclose--and decide against disclosing--about such events can influence the price of those companies' stocks. These disclosure decisions, therefore, can have important securities law implications. Inaccurate statements--and, under some circumstances, decisions to keep information about regulatory and testing developments within the company rather than including it in a public statement--may lead to private lawsuits, Securities and Exchange Commission ("SEC") enforcement actions, and even criminal prosecutions. This article addresses issues arising from disclosures about: a) FDA product approval, particularly predictions about such approval; b) Clinical tests; c) Communications with the FDA before product approval; and d) FDA inspections, government investigations, and the possible consequences of such actions. The recent adoption of Regulation FD emphasizes that life sciences companies must communicate information on these four key subjects directly, often making announcements in these critical areas to a market that has not been alerted by analysts who have anticipated the news. All of this increases the pressure on biotech executives who address the investment community. The Private Securities Litigation Reform Act (the "Reform Act") does not remove the possibility that shareholders will sue on allegations of inaccurate or incomplete disclosures. Some Reform Act protections require disclosing companies to take affirmative steps. Life sciences executives can find it difficult, in the particular circumstances they face, to take full advantage of the Reform Act's necessarily general provisions. Moreover, the Reform Act applies only to private suits by shareholders, not to enforcement actions by the SEC, which has been active in the biotech arena.

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