Lessons From The Courtroom

By Author: Steven Johnson
Total Articles: 490
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Over the decades, we have grown used to all the exaggerations and outrageous claims made to sell existing products. That's all part of the game played by the people in marketing to persuade us to part with our money. But it's relatively unusual to see the same levels of exaggeration in the world of high finance. This December sees the settlement of a case that's been rumbling through the courts for a couple of years. The reason for settling? Tom Wiggans, the ex-CEO of Connetics Corp, is now running as the Democrat candidate for governor of Kansas. The backroom staff probably thought it might harm their candidate's chances if the case continued into election year. So the company paid to make the case go away. Needless to say, the Republican candidate immediately went on the attack, calling Tom Wiggans a fraud. Where is the beef in all this?

We need to go back a few years to the announcement by Connetics that a new drug for the treatment of acne was under development. This market is worth a billion and more every year, and the promise this new drug would give the company a slice of the action brought investors running to ...
... buy shares. As evidence of the company's confidence, it began to go through the FDA process to apply for a licence to sell the drug. The first phase of clinical trials was announced. You must understand this was costing the company millions. The pharmaceutical industry does not spend these millions unless it is reasonably confident of the outcome. The stock market valuation rose. Unfortunately, lab tests in 2004 discovered that 55% of all mice given the product developed malignant tumors on their skin. Any linkage between a skin product and cancer is always fatal to an FDA application. But the company decided to reassure investors that all the evidence collected to date showed the new drug was safe and effective. New investors continued to enter the market and the stock value kept on climbing. At a strategic moment, Board Members sold off their stock and, shortly afterwards, admitted concealing the results of the Mouse Study. The stock value plunged and a group of investors led by trustees for the Oklahoma teacher's pension fund stated a class action. The Securities and Exchange Commission also imposed fines for misleading investors and selling the stock based on inside information.

Such are the temptations of capitalism. When so many millions of dollars are dangled in front of a company, senior officers can decide fraud is the way to get the dollars when medical science fails. It does not matter whether Wiggans was a part of the fraud. The voters will decide what is important. The important message is that the system of regulation worked to keep a dangerous acne treatment off the market. No matter what the company wants, it cannot ignore the FDA. The results of all key trials and tests must be disclosed. However, there is a certain irony in the market for acne products because the best drug currently on sale, accutane, causes damage to a fetus. Women must take strict contraceptive measures before starting the course of treatment. Such is the demand for an effective acne treatment, accutane is sold despite the dangers. Shame Connetics' problems were cancer. That's always a big no.