SEC targets biopharma tipster, hedge funders in insider trading suit

Top Secret

The Securities and Exchange Commission has nabbed another set of traders who allegedly profited off biopharma secrets. This time, their alleged source wasn’t a company insider, but a now-former official at the Food and Drug Administration. And the information at the center wasn’t potential M&A, but generics under review at the agency.

The SEC charged hedge fund managers Sanjay Valvani and Christopher Plaford for trading on tips allegedly provided by Gordon Johnston, a former FDA employee who’d moved on to an industry trade association. Johnston, who has been charged as well, obtained confidential information from agency insiders about prospective generic versions of enoxaparin, the feds say.

The fund managers reaped $32 million from insider trades ahead of public announcements about those enoxaparin knockoffs.

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Enoxaparin, a.k.a. Lovenox, was a blockbuster drug in Sanofi’s stable, threatened by copycat versions from Momenta Pharmaceuticals, Watson Pharmaceuticals and Amphastar Pharmaceuticals. The race between two generics for a 180-day exclusivity period was closely watched by investors, because the winner was likely to reap big sales as the sole generic--and dig deeply into Sanofi’s market share once it launched.

The companies sued and countersued over that 6-month monopoly, extended under the Hatch-Waxman Act to drugmakers first in line with a qualifying generic application.

Johnston allegedly gathered intel on the enoxaparin race as part of his job as FDA liaison at the industry association. He then passed it to Valvani, who in turn tipped off Plaford, the SEC says. Plaford also profited off of information from the Centers for Medicare and Medicaid Services about potential cuts to Medicare reimbursements for home health services, the agency says.

“We allege that Valvani’s formula for trading success was tapping Johnston to abuse his position of trust as a generic industry representative to the FDA and underhandedly obtain confidential information from his friends and former colleagues at the FDA,” said Andrew J. Ceresney, Director of the SEC’s Division of Enforcement.  “Valvani and his hedge funds made millions by trading on nonpublic FDA drug approval information not available to the rest of the stock market.”

After much back-and-forth with the FDA, Momenta and its partner, Sandoz, were first to launch a copycat version of the Sanofi blood thinner, and the generic quickly grabbed market share from the brand, racking up $1.28 billion in 2012 sales. Momenta's copy was so successful, in fact, that Sanofi dropped its own authorized generic.

Meanwhile, Amphastar was pulling out all the stops for its version, to be marketed with Watson Pharmaceuticals (now part of Allergan). It had been first to file for FDA approval, if second to market. The two companies went back and forth in court until 2013, when Momenta took its pleas all the way to the U.S. Supreme Court.

The charges cover a variety of SEC rules stemming from the Exchange Act and the Advisers Act. The agency is seeking disgorgement of profits from the insider trades, plus penalties, and permanent injunctions against future violations.

Those penalties aren’t as severe as those sought against another trader and a former Pfizer employee. Earlier this month, a former Oppenheimer & Co. investment adviser was arrested for trading on M&A information obtained from a now-former Pfizer supply chain executive. Those charges, prosecuted by the U.S. Justice Department, include a maximum penalty of 20 years in prison.

- read the SEC release

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