Code of best practice for reporting by life science companies

By Robyn Baker and Vanessa Baic.

Key Points:
While compliance with the Code doesn't automatically mean you've met all your disclosure obligations, it is unlikely a company that complies with the requirements of the Code will breach its continuous disclosure obligations.

Life science companies often find it difficult to determine when, and the extent to which, disclosure should be made under ASX Listing Rule 3.1. The fields in which most life science companies operate, especially start-ups, are such that they are often confused as to:

• what information is "material" so as to warrant disclosure; and
• how to communicate that information in a manner which is meaningful to the investment community.

For example, factors such as long lead times and the highly confidential nature of research projects (which investors may not fully comprehend) make it difficult to determine what and how information should be disclosed. The situation in which Solbec Pharmaceuticals Limited found itself (discussed in our last Insights article) where it elected to pay a $33,000 penalty from ASIC for disclosing potentially misleading results from a clinical trial, is a recent example of the difficulties life science companies face in complying with Listing Rule 3.1 and the ramifications of not doing so.

To help overcome some of the problems faced by life science companies, on 25 October 2005 the ASX and Australia's peak biotechnology industry body, AusBiotech, released the world's first Code of Best Practice for Reporting by Life Science Companies. The Code provides a useful framework of issues that life science companies should consider in meeting their disclosure obligations under Listing Rule 3.1.

Obligation to disclose

A company listed on the ASX is obliged to comply with the continuous disclosure obligations contained in the Listing Rules. These continuous disclosure obligations are complemented by the requirements under the Corporations Act 2001 (Cth).

ASX Listing Rule 3.1 requires that as soon as a company becomes aware of information that a reasonable person would expect to have a material effect on the price or value of the entity's securities, then the company must immediately disclose it to the ASX.

The Act obliges an entity listed on the ASX to notify the ASX of information which:

• it has in its possession which is not generally available; and
• a reasonable person would expect to have a material effect on the price or value of the entity's shares.

Although there are some exceptions to the requirement to disclose, they are not easily triggered and companies should exercise extreme caution before seeking to rely on any of these exceptions.

The Code in brief

The Code is aimed to complement ASX Listing Rule 3.1 by providing guidance on the type of information that is:

• material and is required to be disclosed to the market; and
• the amount of detail that should be provided to the market in relation to each disclosure.

The key rationale behind the Code is to bridge the perceived "information gap" between investors and life science companies by identifying the factors of their operation and assets that drive the companies’ value. Effective and informative communication by life science companies will enable investors to better assess a company's value and prospects.

Some of the key areas covered by the Code are:

Intellectual property rights

The Code focuses on the intellectual property rights represented by patents and recognises that patents are an important consideration in the valuation of life science companies. The Code highlights the importance of a full disclosure of information regarding patents at the time of their grant and on a periodic basis afterwards. Information disclosed should include:

• title of the patent;
• PCT (patent) number;
• priority and filing dates;
• status and patent number in key jurisdictions;
• identity of any assignee; and
• the commercial significance of the grant.

The making of a patent application is not usually material and would not require disclosure to the market. However, if disclosure is made, it must be made clear that there is a risk that a patent application will not be granted.

The Code also highlights that significant opposition to patents and litigation relating to intellectual property rights such as infringement claims, should be disclosed.

Licensing and other commercially significant arrangements

In terms of licensing arrangements, the Code provides that companies should disclose, amongst other things, the following information:

• the nature of the licence (exclusive or non-exclusive);
• the subject matter and scope of the licence;
• details of termination clauses; and
• royalty rates or other events that trigger payments.

The Code also provides a non-exhaustive list of other commercial arrangements that may require disclosure under Listing Rule 3.1. These are:

• material transfer agreements;
• R&D collaborations;
• supply agreements;
• co-marketing agreements;
• joint ventures; and
• partnerships and alliances.

The Code notes that in relation to each of these arrangements, the company should provide investors with a meaningful indication of its commercial significance, including the risks associated with the arrangement, while taking commercial sensitivity into account. The Code stresses that the company should take particular care not to mislead investors regarding the value and significance of the arrangement.

Clinical trials

The Code acknowledges that it is difficult to set out guidelines for disclosure for clinical trials as the requirements may differ depending on the nature of the trial (i.e. human therapeutic, animal or generic trials). The Code provides that the key phases in the disclosure of clinical trials are:

(a) Commencement of the trial

The goals, structure and protocol of the trial should be disclosed in detail. This includes information such as a description of the endpoints, number of trial subjects, trial locations, trial standards and the expected duration of the trial.

(b) Changes to the trial program

Changes to the trial program may include changes to the endpoints of a trial or significant delays in progress.

(c) Results of the trial

The Code provides that results of clinical trials should be disclosed regardless of whether the outcome is positive or negative. Care should be taken to ensure that the results are described in a clear and meaningful way. To do this, the following information should be provided:

• the trial protocol such as the number of trial subjects, drop out rate, subject selection criteria and characteristics of the control group;
• a description and analysis of the endpoint results. The Code, however, also recommends keeping regulatory concerns in mind when interpreting results. Note that it is not expected that results in the form of raw data be provided, but rather that the statistical significance of the results be explained; and
• a statement regarding the implications of the trial results for the further development and potential sale of the product being tested. If applicable, how the clinical trial relates to a relevant regulatory process should also be disclosed.

Regulatory matters including filings

The Code provides that companies who are developing pharmaceutical products should disclose the outcomes of applications for permits and/or certifications from regulators. Similarly, these companies should also disclose:

• other arrangements related to their ability to comply with regulations regarding clinical trials and the manufacture of commercial products; and
• factual information regarding advances or delays in the progress of regulatory or clinical development.

Other areas covered by the Code include the disclosure of:

• Research and development (for example, non-clinical efficacy studies);
• Medical devices (including the regulatory process for approval of devices and quality control of devices);
• Agricultural biotechnology and animal health (this makes clear that the Code applies to these industries as well as pharmaceutical companies);
• Consultants' reports;
• Manufacturing (for example, product recalls);
• Key staff appointments and departures;
• Periodic reporting of activities including product development;
• Financial reporting; and
• Terminology (namely, the use of plain English definitions for technical terms for the benefit of investors).

Although the Code is designed to encourage best practice in reporting, it is not mandatory. Further, compliance with the Code does not necessarily guarantee compliance with the continuous disclosure obligations under the ASX Listing Rules. However, it is unlikely a company that complies with the requirements of the Code will breach its continuous disclosure obligations. Accordingly, it is in the interests of life science companies to comply with the Code.

The Code is online here. It is written in plain English and is easy to follow. Life science companies should familiarise themselves with the Code and put mechanisms in place to ensure they comply with its requirements.

For further information, please contact Robyn Baker.