OvaScience Debacle Proves SEC Risk Statements Matter

CAMBRIDGE, Mass. ( TheStreet) -- The crushing of OvaScience ( OVAS) shares Wednesday -- the stock is down 30% to $10 -- offers a very important lesson for all biotech and drug investors: Companies include risk statements in their SEC filings for good reason. These warnings are not just boilerplate language. Ignore them at your own peril.

OvaScience believes its infertility therapy Augment is a cellular and tissue-based product, and as such, could be marketed commercially without FDA oversight or review as drug.

Did OvaScience bother to ask FDA if it agreed with the company's decision to market Augment as a cellular and tissue-based product, also known as a 361 HCT/P?

No!

Here's OvaScience's SEC risk statement related to the regulatory strategy behind Augment:

Our current business plan assumes that the FDA will regulate AUGMENT as a 361 HCT/P rather than as a new drug or biologic and, therefore, AUGMENT will not be subject to premarket review and approval. If the FDA disagrees with our interpretation of the applicable regulations, disagrees with our characterization of the AUGMENT procedure or changes its position with respect to such rules and regulations, we may not be able to commercialize AUGMENT on the timeline or with the resources we expect, if at all. We could also be forced to halt human studies, remove the product from the market or be subject to substantial fines or other civil or criminal sanctions.

Guess what happened Tuesday night? FDA sent a letter to OvaScience disagreeing with the company's assertion that Augment is a 361 HCT/P. The agency advised the company to submit a Investigational New Drug (IND) application for Augment.

In other words, FDA considers Augment to be a drug that requires formal regulatory review and approval. Unless OvaScience can change the agency's thinking, the company is in for a long delay before Augment reaches the market. Already, the company has been forced to suspend enrollment in a U.S. study of Augment which the company hoped to use for marketing purposes.

Don't ignore the risk statements companies make in their SEC filings. They often come true, with painful consequences.

-- Reported by Adam Feuerstein in Boston.

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

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