Firm Hit With One-Year Ban By FDA After Testing Probe
By LAURENCE DARMIENTO
Staff Reporter
Laboratory test manufacturer Diagnostic Products Corp. is reeling under a Food and Drug Administration probe into the integrity of its clinical trials process. The agency has taken the rare step of halting all reviews of new company products for what will likely be at least a year.
The Los Angeles-based company’s stock, which reached a 52-week high in February, has plummeted 14 percent since it was revealed that the FDA had invoked its “Application Integrity Policy.”
The policy, which halts scientific review of all new product applications until the problems are remedied, is in place against only a dozen companies out of the thousands the agency regulates, according to an FDA Web site last updated on Dec. 18. The FDA’s action indicates that the agency has serious questions about the integrity of data Diagnostic Products submitted seeking approval of a new test.
“This is a huge hit,” said Spencer Nam, an analyst with SG Cowen Securities. “Companies like this running into an FDA issue is not a good sign.”
Clouding the FDA action further is a series of stock sales that insiders made amid the investigation. Chief Financial Officer James Brill admits that at least two Diagnostic Products’ officers sold shares after learning that the agency had not only visited the company’s premises as part of its probe, but also notified Diagnostic Products of specific problems that FDA investigators had found with its test application.
The FDA has not yet released the notifying Form 483, which was delivered on Dec. 31. But the problems it outlined were serious enough to lead to the invocation of the integrity policy and the resulting ban on product submissions.
Directors’ sales
The executives who sold shares, Sidney Aroesty, senior vice president of operations, and Robert DiTullio, vice president of regulatory affairs and quality systems, did not return calls. Aroesty is a director.
In all, four directors sold a total of $3.6 million in stock in February, before the company announced the existence of the probe, according to data from Thomson Financial. They include outside director James D. Watson, a Nobel Prize-winning British scientist who is a co-discoverer of the structure of DNA.
Brill defended the insider activity, saying they all came within a brief window during which such sales were allowed following the company’s fourth quarter earnings announcement in February. The results, which included record revenues, drove the stock to new 52-week highs.
Chairman and Chief Executive Michael Ziering added that Diagnostic Products, like other companies closely regulated by the FDA, had been questioned in the past without material consequences. The company has previously received Form 483s that were resolved once the company addressed the issues.
When first asked about the sales, Ziering said directors were not aware of the Form 483 when they sold their shares.
But Brill later clarified, saying that only outside directors were unaware of the FDA activity before they sold. He acknowledged that inside directors Aroesty and DiTullio, given their high-level positions, were aware of the activity at the time of their stock sales.
Brill maintains that neither Aroesty nor DiTullio sold their stock after the FDA’s integrity policy was invoked.
Brill won’t say when that happened, and FDA officials aren’t expected to post the document on their Web site for several weeks. He says he immediately issued a company-wide ban on insider stock sales, though he acknowledged the possibility that some of the outside directors’ sales took place after the internal ban was in place.
Watson sold 25,000 shares for $1.2 million between Feb. 19 and Feb. 25, according to data from Thomson Financial. Another outside director, Maxwell Salter, sold 19,667 shares for $973,742 on Feb. 19 and Feb. 20.
The company announced the FDA’s invocation of the integrity policy on March 3.
Brazilian operation
The FDA’s action arose out of the company’s application, submitted in early 2003, for approval of a test that can detect Chagas disease, which is found only in Latin America and stems from a parasitic infection. The application included data from four clinical trials, two conducted in Brazil and two domestically, Ziering said.
The FDA had questions about the application that resulted in a “back and forth” exchange with regulators, ultimately prompting them to make an on-site visit at the Los Angeles headquarters for several days in late November and early December, he said. The company subsequently received the Form 483, and Diagnostic Products responded to the document the first week of January, Ziering said.
As a result of the FDA’s action, Ziering said the company was conducting an internal investigation into the test application. He declined to specify what the problems are, but the company has acknowledged that the FDA found both “data integrity and procedure issues.”
“I am CEO and it happened under my watch, and I am not happy about it,” Ziering said. “We will make sure we put procedures in place so that it does not happen again, (but) I think the fundamentals of the company are strong.”
The FDA also has expanded the probe to past applications, although the company maintains any problems are “isolated” to the Chagas project. The other kits “have been performing in the market,” Ziering said.
But Jay Allen, a former veteran FDA investigator and administrator who now works for the Stelex consulting firm, said the agency normally only invokes the policy when it feels there are “multiple violations.”
“They will not implement that haphazardly,” Allen said. “There has to be absolutely critical documentation to show a serious problem or potential problem at this company.”
An FDA spokeswoman declined to comment on the ongoing inquiry.
Material impact
The FDA move to halt review of its applications comes after Diagnostic Products received approval for 74 tests for a new machine called the Immulite 2500 it is launching this year.
The company had only been expecting to submit one new application late this year for a new test for congestive heart failure, and has announced it believes it can resolve all FDA concerns within 12 months.
“It’s a short-term issue and should not have a long term impact. That is how the Street is seeing it right now,” said Nam, who nevertheless acknowledges there are concerns that it could affect company sales should it drag on.
As part of the process to have the FDA lift the integrity policy, Diagnostic Products has hired an outside auditor that will review its own internal investigation.
The auditor also will investigate independently in conjunction with the FDA.
In addition, even when the policy is lifted, Diagnostic Products will have to hire an outside firm to conduct its clinical trials, Ziering said.
Diagnostic Products makes machines that test for allergies, cancer, diabetes and other conditions. Its systems, which can retail for more than $100,000, are sold to hospitals, reference labs and doctors and others.
In 2003, 71 percent of all sales were overseas, with operations in some two-dozen countries. The FDA action doesn’t affect the ability to introduce new tests in the international market, Ziering said.
In February, the company announced record sales of $104.8 million for the fourth quarter ended Dec. 31, sending the stock to a 52-week high of $51.28 on Feb. 18. As of March 25, the stock was trading at $42.37.
