Early Release of Drug-Test Results Raises Question of Fairness

Updated from 10:07 a.m. ET

Regulation FD seems to have done a good job of clamping down on the selective disclosure of potentially market-moving information, with one exception: disclosure by scientific research organizations that gain access to sensitive data as part of the clinical review process.

The loophole comes to light as the American Society of Clinical Oncology prepares to host its annual meeting in San Francisco, beginning May 12. The meeting has been likened to the Super Bowl of cancer-research confabs because of the blockbuster nature of drug companies' clinical research on experimental drugs that is disclosed at the conference.

ASCO, a nonprofit organization, prohibits the presenters and the media from sharing the drug test results, known as abstracts, with the public before the convention. But nothing stops analysts with that information from publishing research reports recommending the stocks of the drug companies involved. Nor is there anything to prevent those who have early access to the information from trading on it. While this may tilt the playing field toward the investment community and those with the early word, it may not violate the law.

ASCO distributes preliminary data to its 15,000 members weeks before the information is made public at the meeting. Those data end up in the hands of doctors and consultants hired by brokerages and investment funds to help ferret out good investments in drug companies. The data later go to non-ASCO members who are attending the meeting with the understanding that it will not be released to the general public. Share prices of companies with promising drugs often trade sharply on the much-awaited day the ASCO abstracts are released to its members, April 10 this year.

Meantime, companies involved in the research as well as the news media are prohibited from discussing the data, even though information is getting a thorough airing on Wall Street. Indeed, authors of the abstracts -- often sponsored by publicly traded companies -- are prevented, at pain of being removed from the crucial conference, from discussing their findings. Reporters who write about the information beforehand are barred from the conference.

ASCO maintains that it treats the public differently than the investment community because "this system has been in place for years," says Laura Livingston, a spokeswoman for the Alexandria, Va.-based organization. "The work of the investment analysis people goes on separately," she says, adding that she's not aware of any policies that govern how ASCO members treat information gleaned from the data that are restricted from the public's view. "We're not involved with that. We have no policies on it. It's a world unto itself."

In fact, if there are restrictions on the republishing of data in Wall Street research reports, ASCO isn't aware of them. It isn't clear if there is a violation of Regulation FD or another securities law because the publicly traded companies aren't directly disclosing the information, and they are the entities covered by the regulation. What's more, Regulation FD specifically allows technical workers and those who work outside of senior management and investor relations to participate in scientific conferences and exchanges.

What is obvious, however, is that information is finding its way into the hands of some investors while the public is expressly left out of the game, the very situation Regulation FD was supposed to prevent.

"This poses a significant dilemma for companies in terms of complying with their industry norms vs. adhering to Regulation FD," says Joshua Green, a securities lawyer with Venture Law Group, a law firm that caters to start-ups and publicly traded technology companies in Silicon Valley. Having said that, Green adds, "The central tenet of Regulation FD is that material information needs to be known by as many people as possible as quickly as possible. The fiction that you can release restricted information to thousands of individuals, many of whom are inexperienced in financial matters and think that it's going to stay restricted is just that, a fiction. This is a nontrivial problem."

ASCO's disclosure procedure would seem to be ripe for investigation by the Securities and Exchange Commission, which has sought to level the playing field for individual investors but also has avoided using Regulation FD as a blunt instrument with which to punish corporate America. David Martin, head of corporation finance for the SEC, declined to discuss the specifics of the ASCO situation. He says, however, that the issue of a third party disclosing material information on behalf of a publicly traded company -- whatever the motive of the various players -- raises interesting questions from a regulatory perspective. "I don't think you could just prop up an intermediary knowing full well what they were going to do with the information," he says.

ASCO seems primarily concerned that the information being discussed at its conference not find its way into the public's hands. ASCO has banned from its conference a reporter from TheStreet.com for publishing a preview article about the conference based on information contained in brokerage reports. It says numerous other media outlets agree to honor the embargo and ignore the data if they appear elsewhere. "Even if you get a third-party source for the information, it is embargoed," says another ASCO spokeswoman. "We've dealt with this issue before."

But the clinical organization isn't dealing with the impact its information is having on investors, who obviously are trading on its data.

For example, shares of Imclone SystemsIMCL, a New York-based company developing its first commercial anticancer drug, spiked 12% on six-times-average trading volume on April 10, the day ASCO posted conference abstracts on its restricted Web site.

A report by Merrill Lynch -- written midday on April 10, after Imclone's shares already had advanced $2 from the previous day's close at $33.70 -- is typical of a slew of research released on Wall Street on and after the day ASCO posted data to its Web site. Imclone is developing a drug, IMC-C225, that fights colon cancer, the second-largest cancer killer in the U.S. "This morning ASCO made available to its members the abstracts of its annual meeting," reads the Merrill report. "Among the most highly anticipated of these abstracts was" the result of a Phase II study of the IMC-C225 colon-cancer drug. (Successful Phase II trials with the Food and Drug Administration tend to suggest a drug will pass from being experimental to commercially viable.) "In the abstract the company reported positive results from the study. Based on the strong results, we believe that C225 will be approved for the treatment of metastatic colorectal cancer by year-end."

Merrill hardly is the only brokerage that noted the positive Imclone results ASCO disclosed to its members. "In the abstract book [for the conference], the drug showed a 17% response rate in double-refractory colorectal cancer patients," wrote CIBC World Markets on April 18. "This is a dramatic result, well above the 15% we believe the FDA will require for approval."

A spokesman for Imclone said, "The company has decided not to comment on this," and referred further questions to ASCO.

Imclone's shares are volatile. They traded as high as $41.80 Monday after a favorable report about the company's drugs appeared Sunday night on 60 Minutes but closed at $37.74, down 4%.