Insider Trading By Ex-FDA Official Puts Spotlight On Current Agency Practices

After Office of Generic Drugs Deputy Director Gordon Johnston left FDA, he joined GPhA and 'tricked' a former colleague into sharing info on generic Lovenox on behalf of a hedge fund he was secretly working for, SEC says.

Gordon Johnston was at FDA during the generic drug scandal of the late 1980's and early '90's and helped the Office of Generic Drugs implement reforms, so it is ironic that two decades later he is at the center of another scandal.

Johnston, former deputy director of OGD, pled guilty to securities fraud and wire fraud relating to insider trading of information about the status and approval of Momenta Pharmaceuticals Inc.'s generic version of Sanofi's blood thinner Lovenox (enoxaparin) in July 2010. He obtained the information from a former FDA colleague, an OGD Division Director, and passed it onto a hedge fund portfolio manager who made approximately $25m in trading profits when FDA announced the approval.

Gordon Johnston

On June 15, the Securities and Exchange Commission announced insider trading charges against Johnston and two hedge fund managers, and the US Attorney's Office for the Southern District of New York unsealed criminal charges against Johnston in Manhattan federal court.

Two days earlier, on June 13, Johnston pled guilty to four counts of securities and wire fraud. One of the counts carries a maximum sentence of five years in prison and the other three counts each carry a maximum sentence of 20 years in prison. The charges also carry a maximum fine of $5m, or twice the gross gain or loss from the offense.

Johnston, 64, worked at FDA from 1987 to January 1999, the last five years of which he was OGD deputy director. He was the Generic Pharmaceutical Association's VP of regulatory sciences from 2003 to 20011 after which he was retained by the association as a consultant for four years. The SEC's complaint says Johnston used his position at GPhA to obtain confidential information from his former OGD colleagues.

FDA employees 'could potentially face charges themselves or loss of their jobs,' an attorney who has been involved in government investigations said.

The case against Johnston could have widespread repercussions against the agency and its current employees. While the generic drugs scandal involved FDA staff receiving bribes for favoring certain ANDA applicants, Johnston's case arose from employees sharing confidential information about the status of applications. Like the past scandal, it could prompt congressional hearings and FDA internal investigations about how this situation could have happened.

FDA referred questions about the case to HHS. An HHS spokesperson noted that HHS' Office of Inspector General had been involved in the investigation. She said HHS could not provide additional information since the case is still considered an open investigation.

GPhA had no comment other than to note the time Johnston worked for the association.

'Other FDA Employees' Shared Confidential Information

The US Attorney's indictment charges Johnston with improperly obtaining confidential and material non-public information from a senior official at the Office of Generic Drugs, referred to as Individual-1, "among other FDA employees," and then providing the information to an investment fund portfolio manager.

"That allegation suggests, according to the government, that a number of FDA people improperly provided confidential material non-public information to this former FDA official," an attorney who has been involved in government investigations but asked not to be named said. "It may be true that individuals in that action could potentially face charges themselves or loss of their jobs."

Hogan Lovells partner Meredith Manning, a former attorney in FDA's Office of Chief Counsel and a former assistant US attorney, noted that in response to the generic drug scandal, the OGD implemented a series of rules which addressed sharing of information about the status of applications.

Here the issue is the "agency's relationship with former employees who have gone through the revolving door and are consultants," she said. "One would expect the agency to be mindful of that when they are talking to former colleagues."

There has been one other case in recent history of an FDA employee being charged with insider trading. In 2011, FDA chemist Cheng Yi Liang was charged with using the FDA's drug application tracking system to make $2.27m through insider trading (Also see "Insider Trading Bull's-Eye: FDA Chemist Charged With Using Agency's DARRTS NDA Tracking System For Improper Trades" - Pink Sheet, 29 Mar, 2011.).

'Banter' And 'Triangulating' Questions

The US Attorney charges cover the period from about 2005 to about January 2011, during which Johnston was retained as a consultant for investor Sanjay Valvani, a portfolio manager at Visium Asset Management. The indictment states that for a monthly consulting fee Johnston provided "political intelligence" related to the likelihood and timing of FDA approval of ANDAs. The government notes that Johnston received hundreds of thousands of dollars in total for his consulting work.

The charges state that in late December 2009 or early January 2010, Johnston obtained information from the senior OGD official, including information maintained in an FDA internal document tracking the progress of ANDAs, which indicated OGD was moving toward approval of a generic Lovenox ANDA. Johnston passed the information on to Valvani, whose fund then increased its long position in Momenta by four-fold and shorted Sanofi securities.

The SEC's complaint against Valvani and Johnston notes that the senior OGD official is an OGD division director who Johnston had mentored. It says the two had a decades-long close and personal relationship and that Johnston took advantage of their friendship to obtain confidential information and relay it to Valvani. The complaint says Johnston concealed the fact he was a hedge fund consultant and used his role as a representative of a generic drug trade association (GPhA, which is not cited by name) to obtain the information.

"In his calls and meetings with the FDA official, Johnston asked 'indirect' and 'triangulating' questions designed to obtain information not publicly available," the complaint states. "Through such questions and by using his friendship with the FDA official and his role as the Generic Drug Trade Association's representative to the FDA as a pretext, Johnston was able to trick the FDA official into providing specific information that confirmed that an enoxaparin ANDA was still being considered and informed him of its progress through the review process."

During calls and meetings with the FDA official and other OGD personnel "Johnston engaged in banter about issues of concern to Valvani, such as the enoxaparin ANDAs, in order to glean nonpublic information," the complaint states.

A Blockbuster Generic And Other Drugs

At the time Momenta filed its ANDA, two other companies had enoxaparin ANDAs pending, Amphastar Pharmaceuticals Inc. and its partner Watson Laboratories Inc., and Teva Pharmaceutical Industries Ltd.

FDA said the review for generic enoxaparin, a low molecular weight heparin, was as complex as it expected the average biosimilar application to be, and prior to approval the agency came up with criteria to show a generic's sameness to the brand. FDA approved Momenta and marketing partner Sandoz Inc.'s enoxaparin ANDA in July 2010 (Also see "FDA Approves Momenta/Sandoz' Lovenox Generic Without Need For Clinical Studies" - Pink Sheet, 23 Jul, 2010.).

As the first generic, it became a blockbuster, garnering $1b in annual sales in 2011 (Also see "Managing The World’s First Blockbuster Generic: An Interview With Sandoz’s George" - Pink Sheet, 20 Feb, 2012.).

While the government's case focuses on enoxaparin, the complaint notes that Johnston exchanged information about other generic applications, including those for generics of Sanofi's Taxotere (docetaxel), Salix Pharmaceuticals Ltd.'s Xifaxan (rifaximin), King Pharmaceuticals Inc.'s Skelaxin (metaxalone), and an FDA decision about new chemical entity exclusivity in connection with FDA's review of applications for generic versions of Shire PLC's Vynase (lisdexamfetamine).

The complaint says Valvani sent Johnston a list of ANDAs and issues he was interested in and cites emails and phone calls between Johnston and Valvani about the information that Johnston provided.

The case against Johnston may have arisen as part of the government's investigation of Visium. Bloomberg reported in April that Valvani had been placed on paid leave from Visium, which was under an investigation by the SEC and Department of Justice.