The ongoing global outbreak of the novel coronavirus (COVID-19) raises important considerations for life sciences companies subject to U.S. Securities and Exchange Commission (“SEC”) disclosure and reporting requirements. As the pandemic continues to disrupt markets and industries worldwide, companies should carefully assess the risks that COVID-19 poses to their operations, ensure that those risks are accurately reflected in their SEC filings and investor communications, and carefully consider their disclosures to investors as COVID-19 risks rapidly evolve each day.
Below, we discuss guidance issued to date by the SEC, and takeaways for companies in the life sciences space—including biotechnology, pharmaceutical, medical device, and healthcare product and services companies—as they navigate their disclosure obligations in these uncertain and dynamic circumstances.
I. GUIDANCE ISSUED TO DATE BY THE SEC
March 4th Order. On March 4, 2020, the SEC issued an order (the “March 4 Order”) granting relief from certain reporting requirements to public companies affected by COVID-19. Subject to certain conditions, the March 4 Order affords a publicly-traded company an additional 45 days to make certain filings under the Securities Exchange Act of 1934 that would otherwise be due between March 1 and April 30, 2020, if the company could not meet the original deadline due to circumstances related to COVID-19. On March 25, 2020, the SEC issued an order (the “March 25 Order”) to extend the conditional relief afforded in the March 4 Order to cover filings due on or before July 1, 2020.
In its March 4 Order and accompanying release (the “Release”), the SEC also provided guidance concerning disclosure issues related to COVID-19. Specifically, the SEC emphasized that public companies should:
- “provide investors with insight regarding their assessment of, and plans for addressing, material risks to their business and operations resulting from the coronavirus to the fullest extent practicable to keep investors and markets informed of material developments”;
- “work with their audit committees and auditors to ensure that their financial reporting, auditing and review processes are as robust as practicable” given that “companies’ plans and responses to ongoing events can be material to an investment decision”;
- “take steps to avail themselves of the safe harbor in Section 21E of the Exchange Act for forward-looking statements”;
- “avoid selective disclosures” by broadly disseminating material information related to COVID-19; and
- consider whether “to revisit, refresh, or update previous disclosures” to the extent that previously-disclosed information becomes materially inaccurate.
The SEC also cautioned reporting companies to be mindful of restrictions on trading by corporate insiders in light of evolving COVID-19-related developments. Noting broadly that public companies should “consider their activities in light of their disclosure obligations under the federal securities laws,” the SEC Release advised that, where “a company has become aware of a risk related to the coronavirus that would be material to its investors, it should refrain from engaging in securities transactions with the public” and should “take steps to prevent directors and officers (and other corporate insiders who are aware of these matters) from initiating such transactions until investors have been appropriately informed about the risk.”
March 23rd Public Statement Regarding Market Integrity. The SEC reiterated this point on March 23, 2020 in a Public Statement Regarding Market Integrity by the Co-Directors of the SEC’s Division of Enforcement (the “Public Statement”), which served as a sharp warning against trading on material non-public information related to COVID-19.
“Given these unique circumstances,” the SEC’s Public Statement noted, “a greater number of people may have access to material nonpublic information than in less challenging times. Those with such access—including, for example, directors, officers, employees, and consultants and other outside professionals—should be mindful of their obligations to keep this information confidential and to comply with the prohibitions on illegal securities trading.”
In the Public Statement, the Enforcement Division further “urge[d] public companies to be mindful of their established disclosure controls and procedures, insider trading prohibitions, codes of ethics, and Regulation FD and selective disclosure prohibitions to ensure to the greatest extent possible that they protect against the improper dissemination and use of material nonpublic information.”
March 25th Disclosure Guidance Topic No. 9. On March 25, 2020, the SEC issued CF Disclosure Guidance Topic No. 9, reiterating and providing more detailed guidance on disclosure and other securities law obligations that companies should consider with respect to COVID-19 and related business and market disruptions. That guidance is discussed in depth in a related Goodwin client alert: SEC Extends COVID-19 Relief for Filing and Proxy Statement Requirements and Issues Updated Disclosure Guidance.
II. KEY TAKEAWAYS FOR PUBLIC LIFE SCIENCES COMPANIES
SEC DISCLOSURE AND REPORTING CONSIDERATIONS
Updates to Risk Disclosures
On January 30, 2020, SEC Chairman Jay Clayton noted in a public statement that “how issuers plan for that uncertainty and how they choose to respond to events as they unfold can nevertheless be material to an investment decision.” Relatedly, and as the SEC highlighted in its Release, public companies should “consider whether to revisit, refresh, or update previous disclosures” to the extent that developments related to COVID-19 have rendered those disclosures materially inaccurate. As an overall matter, the SEC is clearly encouraging companies to assess the risks they face due to COVID-19, and is encouraging disclosure even where companies may not be required to disclose such information until their next periodic filing. As the SEC noted in CF Disclosure Topic No. 9: “We encourage companies to provide disclosures that allow investors to evaluate the current and expected impact of COVID-19 through the eyes of management, and that companies proactively revise and update disclosures as facts and circumstances change.” The SEC noted further that it “encourages disclosure that is tailored and provides material information about the impact of COVID-19 to investors and market participants,” and that such disclosures may be “necessary or appropriate” in connection with companies’ risk factors (as well as in management’s discussion and analysis, the business section, legal proceedings, disclosure controls and procedures, internal control over financial reporting, and the financial statements).
The COVID-19 pandemic and its implications for public companies across all industries has evolved rapidly over the last few weeks in particular. Thus, companies should review their Form 10-K to assess whether the risk factors included are specific enough to cover the operational risks, delays, or disruptions that companies are now facing or believe they will face as a result of COVID-19. Risks that life sciences companies should consider include, for example: supply chain disruptions; disruptions from closures of facilities and manufacturing, stores, or offices; loss of employee hours from quarantines or other factors; productivity declines due to employees working from home; disruptions from travel restrictions; the effects of the economic slowdown; a decrease in demand due to quarantine, travel restrictions, social distancing or other factors; cybersecurity risks, including from employees working remotely; a lack of access to financial markets and uncertainty around the duration of the virus’s impact. If these risks were not adequately addressed in companies’ Form 10-K, companies should evaluate whether there has been a material change that warrants promptly updating its disclosures, and if so, how best to make that update (for instance, by supplementing disclosures in its next upcoming Form 10-Q, or by issuing a press release and Form 8-K in the interim).
The SEC has emphasized that risk factors should not include risks that generically apply to all companies facing the same macroeconomic event.[i] Given this, life sciences companies should ensure that their risk factor disclosures do not merely summarize global market disruptions or health risks, but instead identify the specific risks that COVID-19 poses to their businesses and operations. Companies that address these risks should update their forward-looking statement disclaimer language to address the effects of COVID-19.
Updates to Guidance
Relatedly, reporting companies should consider whether to revise or rescind previously-issued guidance in light of the impact of COVID-19 on their operations and forecasted financial results.
In the life sciences industry specifically, companies should evaluate how COVID-19-related developments may impact guidance that has been issued concerning ongoing or upcoming clinical trials and cash runway. For instance, life sciences companies should consider whether trial sites are reprioritizing resources or discontinuing research programs, whether patients are avoiding trial sites and trial participation in light of ongoing health concerns, whether manufacturing of the drug utilized in clinical trials can be manufactured, or whether trials are being put on hold or cancelled altogether as a result of the outbreak. Companies should also consider, in turn, the impact of these developments on clinical trial enrollment, dosing, readouts, and completion—and the impact of such developments on overall spending, earnings, or revenue guidance.
Companies that become aware they are going to miss guidance due to COVID-19 should consider whether to revise previously-issued earnings or revenue guidance and whether to pre-announce—i.e., to announce before their next periodic reports are due. Companies should also consider whether they should withdraw guidance altogether and inform the market that they do not intend to provide guidance on a going-forward basis for the remainder of the fiscal year given the unprecedented market disruption caused by COVID-19.
Life sciences companies seeking to keep their investors and analysts apprised of the impact of COVID-19 on their operations should also be mindful of their obligations under Regulation FD to avoid making selective disclosures of material information.
To that end, and as the SEC advised in its Release, companies should be sure to broadly disseminate information related to the outbreak through Regulation FD-compliant mediums (e.g., press releases, Forms 8-K, company websites). Company executives, for their part, should also ensure that their public statements are consistent with the company’s prior disclosures, whether in SEC filings or investor publications that the company has otherwise issued as the COVID-19 outbreak has evolved.
In addition, consistent with Matrixx Initiatives, Inc. v. Siracusano, 563 U.S. 27 (2011), companies that choose to speak to the market, whatever the format, should ensure that their communications on a given topic are complete, and avoid cherry-picking the information they share. While Section 10(b) and Rule 10b-5 do not create an affirmative duty to disclose any and all material information, companies should bear in mind that disclosure is required under these provisions when necessary to “make statements made, in the light of the circumstances under which they were made, not misleading.” As the Supreme Court noted in Matrixx, “companies can control what they have to disclose under these provisions by controlling what they say to the market.”
Companies should also bear in mind that they may be under a duty to update prior public statements to the extent that such statements are rendered misleading by later events. This inquiry is fact-specific, but generally, courts have recognized a duty to update where a clear, factual, and forward-looking statement containing some continuing representation that remains “alive” in the minds of investors becomes misleading in light of changed circumstances.
To shield against claims for failing to fulfill a duty to update, companies should be sure that forward-looking statements in written disclosures are accompanied by meaningful and specific cautionary language that makes clear that such statements are not intended to be “continuing” representations. Company executives speaking to the market should likewise be clear that forward-looking statements are not assurances, but rather are statements of future expectations based on currently available information, and that actual outcomes could differ as a result of various factors, risks, and uncertainties. As the SEC recognized in CF Disclosure Topic No. 9, “much of the disclosure that would address the types of considerations noted above would involve forward-looking information that may be based on assumptions and expectations regarding future events. We remind companies that providing forward-looking information in an effort to keep investors informed about material developments, including known trends or uncertainties regarding COVID-19, can be undertaken in a way to avail companies of the safe harbors in Section 27A of the Securities Act and Section 21E of the Exchange Act for this information.”
To coordinate COVID-19 messaging and communications, reporting companies should consider centralizing any such investor materials in a COVID-19-specific link or tab on the Investor Relations pages of their websites.
INSIDER TRADING CONSIDERATIONS
As the SEC cautioned in its March 4, 2020 Release and again in its March 23, 2020 Public Statement, public companies should also be cognizant of applicable restrictions on trading by directors, officers, and other corporate insiders as the fallout from COVID-19 continues.
Companies should carefully evaluate any trading activity — including buying or selling stock, or entering into, terminating, or amending Rule 10b5-1 plans—by any director, officer, or other corporate insider to determine whether they are in possession of material non-public information. If so, the company should close the trading window for directors, officers, and any other insiders until the material non-public information has been disclosed to the market. To ensure compliance, companies should be diligent in tracking individuals as they become aware of key COVID-19 related information likely to be material to investors. In so doing, companies should bear in mind that, as the SEC’s Enforcement Division noted in its Public Statement, “a greater number of people may have access to material nonpublic information than in less challenging times,” including, “for example, directors, officers, employees, and consultants and other outside professionals.”
We recommend that companies pay particular, and ongoing, attention to this issue in light of current market conditions and uncertainty. For instance, as executives may look to purchase stock as a show of support for their companies in these unsettled times, companies should analyze more frequently than usual whether trading windows need to be closed. Companies should be aware that FINRA is continuing to scrutinize trading prior to public disclosures (positive or negative) in this highly volatile market environment—and that this volatility may itself cause unusually large stock price swings likely to draw FINRA’s attention.
SECURITIES LITIGATION ISSUES AND CONSIDERATIONS
Finally, companies in the life sciences industry should be mindful that the market turbulence caused by COVID-19 will likely result in a wave of securities class action litigation in the coming weeks and months.
In recent years, such litigation has become increasingly “event-driven”: when a significant adverse event causes a drop in a public company’s stock price, shareholder lawsuits filed by the plaintiffs’ securities litigation bar often follow. These cases typically allege that the company knowingly failed to warn investors of a risk—to the company’s business specifically or its industry more generally—that later materialized. We expect that this pattern of adverse event-driven securities litigation will continue as COVID-19 continues to wreak havoc on global markets, and on public company stock prices.
To date, at least one company in the life sciences space, Inovio Pharmaceuticals, Inc., faces a COVID-19-related stock-drop securities class action. The Complaint in McDermid v. Inovio Pharmaceuticals[ii] alleges that Inovio’s stock price “more than quadrupled” after the company’s CEO claimed in February 2020 that Inovio had developed a vaccine for COVID-19. According to the Complaint, however, “in truth, Inovio had not developed a COVID-19 vaccine,” and, on March 9—after a short seller called for an SEC investigation into the CEO’s claim—Inovio’s stock price dropped by more than 70 percent. While Inovio is the first life sciences company to face a COVID-19-related securities class action, we anticipate that it will not be the last, as plaintiffs’ firms seek to capitalize on stock drops related to or attributable to the outbreak.
To mitigate the risk of liability, life sciences companies should carefully monitor events related to COVID-19 as they unfold; make precise, accurate, and timely disclosures; revisit previous disclosures to ensure they remain accurate as the pandemic evolves; and promptly update disclosures to the extent that they become materially inaccurate in light of ongoing developments. As noted in the SEC’s Release, companies should also review—and update, if necessary—cautionary language in connection with their public statements to ensure that they can invoke the protections afforded by the Private Securities Litigation Reform Act’s safe harbor for forward-looking statements accompanied by meaningful cautionary language.
Overall, while the ultimate impact of COVID-19 is unknown, it is critical that public companies in the life sciences space remain diligent in revisiting their disclosures to ensure transparency and accuracy in unsettled and unprecedented times.
[i] See, e.g., 17 CFR § 229.105 - (Item 105) Risk factors.
[ii] See McDermid v. Inovio Pharmaceuticals, Case No. 2:20-cv-01402 (E.D. Pa. Mar. 12, 2020) (Doc. 1).