Oops! Arena's CEO Neglects to Mention Diet Drug Causes Cancer in Rats
Arena Pharmaceuticals (ARNA) CEO Jack Lief's failure to tell investors that his diet drug causes cancer in rats is a perfect example of why the U.S. Supreme Court should rule in a pending case that drug companies do have a duty to disclose adverse events linked to their drugs even if management believes they are not statistically significant.
Lief certainly knew about the rat cancer link in Lorqess (lorcaserin) by Aug. 13, 2010, when Arena filed a briefing with the FDA urging it approve the new drug. But Arena didn't disclose that to the public until mid-September, when the briefing documents became public, according to Forbes. Unbeknownst to investors for all of August and half of September, Arena's August briefing said (see page 42):
In rats, and almost exclusively male rats, tumors were found in multiple organs primarily at the highest dose, which provided an exposure that was 56-fold greater than human and was clearly above the MTD [maximum tolerated dose].The day after the FDA voted not to recommend approval, Lief told a conference call:
There is an immense amount of data generated in drug development, ... We did not, and still do not believe that the data's relevant to humans and, as such, did not believe it was material to investors.The FDA has since asked Arena to provide it with more information on why Lorqess causes cancer in rats.
That's why the Supreme Court ought to follow the advice of the U.S. Solicitor General in its amicus brief in Matrixx v. Siracusano. In that case, Matrixx (MTXX) failed to disclose that it was receiving complaints that consumers who used its cold remedy Zicam were losing their sense of smell. Even though by October 2004 Matrixx had been sued by 284 individuals, the company didn't admit there was a problem -- because it wasn't "statistically significant," the company said -- until 2009, when the FDA finally took the product off the market. The solicitor general argues that hiding behind statistical significance is wrong, and that SEC law ought to require companies to disclose bad news if a reasonable shareholder would think its important:
... an omitted fact is Â""materialÂ"" if there is Â""a substantial likelihood that a reasonable shareholder would consider it important.Â""Lief may be technically correct that the cancers in rats won't appear in humans, but he cannot say that for sure. History shows Lief's "you don't need to know" logic is bogus: ARNA traded at $7.34 before the vote; it's now below $2. The rat-cancer thing was crucial to the FDA vote, and therefore crucial to the value of Arena's stock. If you bought ARNA before Sept. 16, it would have been nice to know that the company was sitting on some curious rat cancer data before you were ambushed by it in mid September.
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