Is Failing to Disclose an FDA Form-483 Fraud? Investors, Legal Group Reach Opposite Conclusions

Posted 10 July 2013 | By Alexander Gaffney, RAC 

The relationship between regulated life science companies and their public investors is often contentious. Companies need investor money to finance company operations, such as clinical trials, but need to balance that money with the obligation to generate a return on the investment and to transparently report material information to investors.

And when things go wrong, companies can often feel the full legal brunt of their shareholders. In June 2012, for example, a judge upheld the right of investors to sue KV Pharmaceutical for purported lapses at a manufacturing plant run by a subsidiary, Ethex Corporation.

Also in June 2012, the US Supreme Court agreed to hear a case regarding whether Amgen misled its investors about the safety of its anemia drugs Aranesp and Epogen.  And in March 2013, a series of regulatory missteps by Impax Laboratories resulted in a threat of shareholder lawsuits against the company for allegedly breaching its fiduciary duties.

Genzyme's Bad Form 483

Now another such case is winding its way through the federal legal system-a case the Washington Legal Foundation, a prominent pro-industry legal advocacy group, says should be thrown out.

The case, in re Genzyme Corp. Securities Litigation, is currently before the US Court of Appeals for the Fifth Circuit, and involves the claim that the company did not immediately disclose all observations made in an inspection report issued by the US Food and Drug Administration (FDA) after an inspection of one of the company's manufacturing facilities.

That form, known as an FDA Form-483, details deficiencies found during an inspection, and the problems found therein can often be the precursor to a subsequent Warning Letter or enforcement action by FDA.

The October 2008 inspection of Genzyme, which yielded 16 deficiencies, was apparently not divulged to investors until March 2009, at which time the company's stock dropped. The release of the information had been prompted by a March 2009 Warning Letter by FDA and "significant FDA enforcement action," the foundation explained. The share price could eventually "fully recover" after the manufacturing deficiencies were corrected, WLF added.

But is it Fraud?

The question now before the Fifth Circuit is whether failing to disclose this Form-483 was an act of fraud by Genzyme toward its investors. In a brief, WLF argues that it is not.

"In the absence of evidence suggesting that such "observations" are statistically likely to lead to major FDA enforcement actions that would have a significant adverse effect on a company's finances, a drug manufacturer cannot be deemed to have intended to defraud investors," it wrote.

In the absence of such a finding, it continued, "frivolous securities fraud litigation will continue to be a plague on the business community."

A prior federal court in Boston, MA has already dismissed the case once after finding that the plaintiffs had failed to prove Genzyme acted to deliberately deceive shareholders, but the plaintiffs appealed, saying they needed time and the opportunity to discover evidence to prove their case.

But WLF noted that the plaintiffs can't merely infer this, noting that FDA issues thousands of Form 483s each year, with the majority not resulting in a Warning Letter, with even fewer leading to an enforcement action. The entire matter, it concluded, was really just a group of investors seeking to prove fraud through the benefit of hindsight.

WLF's Letter

Regulatory Focus newsletters

All the biggest regulatory news and happenings.


Most Viewed Articles