In the case, the judge ruled that front-loading your investor presentations with a bunch of boilerplate language about "safe-harbor" predictions and "forward-looking statements" that ought to be treated with caution does not allow you to stay silent about negative data that you know will affect the fortunes of your company. (The order was reaffirmed just before Thanksgiving.)
A pension plan that was invested in Wyeth stock (before it merged with Pfizer (PFE)) alleged that Wyeth CEO Bernard Poussot and others knew by 2005 that using Pristiq for post-menopausal vasomotor symptoms (hot flashes) carried increased risks of liver and heart damage. The ruling says:
Of the 707 participants [in a Phase III clinical trial], 27 suffered serious adverse effects ("SAEs"), including three coronary occlusions and two heart attacks.No one taking the placebo experienced a serious adverse event. Wyeth did not reveal this data to investors, however, and instead applied to the FDA for approval to market the drug as if nothing was wrong.
At the time, Pristiq was crucial to Wyeth's fortunes. It previous antidepressant, Effexor, was losing its exclusive patent protection and the company's two post-menopause drugs, Prempro and Premarin, turned out to be associated with blood clots and cancer. If the company could get Pristiq approved for hot flashes, it would be a double-blockbuster.
In 2007, however, Wyeth announced that the FDA turned down Pristiq for hot flashes. Wyeth's stock dropped more than 10 percent, losing $5.70 per share.
Between learning of the negative data in 2005 and the FDA's thumbs down in 2007, Poussot's team fed investors a stream of upbeat chatter about the likelihood of getting Pristiq approved for post-menopausal women:
February 9, 2006, Merrill Lynch Pharma Conference, CFO Kenneth Martin: The opportunity clearly is there. The market clearly is there. And if the profile of the product is where we hope it be, we think this is a â€"- this could be a very big opportunity. ... This is a drug that we're very optimistic about.Wyeth's defense was that safe harbor statements about future predictions ought to be treated with caution as "forward-looking statements" -- i.e. all the legal disclaimers you see in front of every investor presentation -- so Wyeth could not have predicted the FDA's decision.
October 5, 2006, annual investor conference, svp/president Joseph Mahady: [Pristiq] begins to really differentiate itself with its ability to reduce the frequency and severity of moderate to several [sic] vasomotor symptoms associated with ... menopause. ... [W]e predict that Pristiq has the potential to exceed $2 billion in peak sales, and that's the cost of the two indications that we've spoken about, MDD and VMS.
At the same conference, svp R&D Robert Ruffolo: We think that [Pristiq] will also be important for the vasomotor indication where â€" it would obviously be our intent for this drug to be used as another option for women who are suffering from vasomotor symptoms, which is the number one reason women will go to the doctor to seek treatment. ... In fact, the way Pristiq looks like it's positioning itself right now, it's a drug primarily for women's health.
The judge agreed with that, but he then ruled that managers' statements about Pristiq's safety were not forward-looking because Wyeth already had all the safety data in hand when the statements were made.
Wyeth also argued that the adverse events were not statistically significant, and that they were disclosed at a poster-session at an ob-gyn conference and in a single analyst's note to investors. The judge dismissed both of those arguments, as statistical significance is an issue of fact to be decided by a jury not a matter of law, and because the conference poster disclosure was too minimal to count as a disclosure to investors.
The case is a warning from the federal judiciary that sometimes CEOs and their lieutenants go too far in concealing negative data. Recently, the federal judiciary has sided with executives who lie to investors and to the federal government. Nonetheless it appears there is still a limit to judges' sympathy for managers who have difficulty disclosing the whole truth.