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Biotech News Biotech - A framework for Disclosure In brief: The ASX has recently drafted the "Code of Best Practice for Reporting by Biotechnology, Medical Device and other Life Sciences Companies" to govern biotechnology reporting methods. Lawyer Mark Malinas provides an overview of the proposed framework and impacts on listed Biotechnology companies. |
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- Background
- Why is there a need for the Code?
- ASX Continuous Disclosure Rules
- The Code "in brief"
- Impact of the Code on Listed Biotechnology Companies
- Implementation of the Code
Background
People who are familiar with the practices and activities of biotechnology companies usually have the skills necessary to interpret events which impact on the value of biotechnology companies. In contrast, the common investor or adviser with little knowledge of biotechnology can have difficulty in making informed decisions from media releases and publicity provided by biotechnology companies. Biotechnology still remains a complicated and relatively new sphere. Biotechnology companies regularly make announcements such as "X to commence Clinical Trials" or "X signs $100m deal with Y". Such announcements are often made with great publicity and are followed by a flurry of trade in that company's securities. However, it is unclear whether investors or advisers are able to accurately interpret the technical jargon contained in such announcements and make an accurate evaluation of the information disclosed.
On 29 January 2004, AusBiotech welcomed the initiative by the Australian Stock Exchange (ASX) to develop new listing and reporting standards for biotechnology companies. In April 2004, the ASX and AusBiotech launched the "Code of Best Practice for Reporting by Biotechnology, Medical Device and other Life Sciences Companies" (Code). The Code is currently in draft form and subject to comment before being finalised, which is expected to occur within 12 months. The Code aims to establish a framework for disclosure for biotechnology companies to ensure investors and advisers and the market generally, can accurately evaluate the events disclosed.
Why is there a need for the Code?
There are a number of reasons for the implementation of the Code. These are:
- there is a general lack of understanding about
biotechnology in the investment community;
- to increase investor confidence;
- to promote rigorous reporting practices;
- to enhance the level of communication between
companies and investors; and
- to serve as an educational tool for the investment community.
ASX Continuous Disclosure Rules
Obligation to disclose
A company listed on the ASX is obliged to comply with the continuous disclosure obligation contained in the Listing Rules of the ASX (Listing Rules). This continuous disclosure obligation is complemented by requirements under the Corporations Act 2001 (Cth) (Corporations Act).
The requirement in Listing Rule 3.1 states:
Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity's securities, the entity must immediately tell ASX that information.
Accordingly, unless an exception applies, the company must disclose all price sensitive information to the ASX (and the market) as soon as it becomes aware of such information.
Exceptions to disclosure
Disclosure under Listing Rule 3.1 is not required where each of the following conditions is satisfied (refer to Listing 3.1A):
- a reasonable person
would not expect the information to be disclosed; and
- the information is confidential, and ASX has not
formed the view that the information has ceased to be confidential; and
- one or more of the following applies:
- it would be a breach of a law to disclose the
information;
- the information concerns an incomplete proposal or
negotiation;
- the information comprises matters of supposition or
is insufficiently definite to warrant disclosure;
- the information is generated for the company's
internal management purposes; or
- the information is a trade secret.
The company must meet its continuous disclosure obligation as soon as any one of paragraphs (a), (b) and (c) is no longer satisfied.
For example, any information which is not confidential does not qualify for the exceptions from disclosure. It is therefore essential that information which is to be withheld is and remains subject to strict confidentiality obligations and is not leaked. If the information has been leaked, even in breach of a duty of confidentiality, it is no longer confidential, and disclosure of the information to ASX will be required.
Disclosure may also be required if ASX forms the view that the information has ceased to be confidential.
In any event, information will have to be disclosed if a reasonable person would expect it to be disclosed, regardless of the fact that it is confidential and falls within any of the categories in paragraph (c) above (eg, it is a trade secret or relates to an incomplete proposal).
False market
Under Listing Rule 3.1B, if ASX considers that there is or is likely to be a false market in the company's securities and asks the company to provide information to it to correct or prevent a false market, the company must provide the information. The company is required to give ASX this information even if the exceptions to disclosure (as set out in section 3.2 above) apply.
ASX is likely to consider that there is or is likely to be a false market in a company's securities if:
- the company has information that has not been
released to the market (eg, because the exceptions to disclosure (as set in
section 3.2 above) apply);
- there is a reasonably specific rumour or media
comment in relation to the company that has not been confirmed or clarified by
an announcement to the market; and
- there is evidence that the rumour or comment is having, or ASX forms a view that the rumour or comment is likely to have, an impact on the price of the company's securities.
The Code "in brief"
The Code provides for a disclosure framework for specific subject matter. We have briefly summarised the key components of the Code below.
Patents
The Code acknowledges the intellectual property rights represented by patents and that patents are an important consideration in the valuation of biotechnology companies. The Code recognises the importance of a full disclosure of information regarding patents at the time of their grant and at regular intervals afterwards.
Some of the information required to be disclosed at the time of the grant of a patent are:
- title of patent;
- PCT (patent) number;
- priority date;
- filing date; and
- identity of the assignee.
The Code does not require that details of patent filings be disclosed, however, it recognises the significance of patent filings and that there are circumstances where "balanced and informative disclosure in respect of them is warranted". The Code also indicates that details of patents granted should be included in the relevant company's annual report.
Licensing, collaborations and partnerships
The Code recognises the nature and terms of transactions in relation to intellectual property assets and the value they generate for biotechnology companies. These transactions include, for example, licensing, collaboration and other partnership arrangements. The Code states that it is important, when disclosure is made, for biotechnology companies to provide the market with information which will enable the market to make a "proper assessment of the market significance of the transaction to the company".
(a) Licensing
In terms of licensing arrangements, the Code provides that companies should make disclosure of:
- the subject matter of the licence (and the
use of the subject matter);
- the nature of the licence (exclusive, sole or
non-exclusive);
- the scope of the licence;
- termination clauses; and
- royalty arrangements.
(b) Partnerships and Collaborations
In terms of partnerships and collaborations, the Code provides that companies should disclose information on the responsibility of the parties to supply resources and the nature of those resources. The Code also calls for disclosure of the conditions of the arrangements relating to termination and the treatment of intellectual property upon termination.
While such arrangements are generally disclosed by biotechnology companies amid much fanfare and publicity including the announcement of the quantum of the value of the deal, the Code provides that companies should avoid giving "undue prominence" to potential revenue from these arrangements. The Code provides that key assumptions underlying any figures should be provided as well as a breakdown to identify key items including, income, milestones and an analysis as to timing of payments made.
Clinical trials
The Code recognises that it is difficult to set out disclosure for clinical trials, as those trials may be testing for a wide variety of uses, for example, human therapeutic, diagnostic or animal trials. Key phases in the disclosure required of clinical trials are:
- commencement of the trial (the
disclosure here should include the standards to which the trial will be
conducted and the objectives of the trial);
- changes to the trial program;
and
- reporting of results (clear and unambiguous reporting).
The Code provides detailed descriptions of the information which should be disclosed at the commencement and conclusion of each clinical trial.
Key staff appointments and separations
The Code provides that appointments of key staff (ie management and scientific) should be considered material events and should be disclosed. Similarly, people removed or separated from these positions should also be disclosed.
Periodic reporting of activities and cash flow
The Code recognises that companies involved in R&D should be providing periodic reports of their R&D activities and summaries of expenditure incurred on those activities.
Terminology
The Code recognises the complex nature of scientific terminology may make it difficult when comprehending that company's announcements. As such, the Code provides that announcements should be expressed in terms that facilitate evaluation by investors. The use of glossaries is encouraged.
Confidentiality
The Code recognises the importance of confidentiality in the practices of biotechnology companies. The Code provides that companies have systems in place to maintain confidentiality of information that is not appropriate for release to the market under Listing Rule 3.1A.
Impact of the Code on Listed Biotechnology Companies
The Code, if implemented and followed by listed biotechnology companies, will provide for enhanced disclosure by these companies within a common framework. The move to implement a disclosure regime for listed biotechnology companies is reminiscent of the development of a tailored disclosure regime for mining exploration companies during the rapid expansion of that industry in the 1970's. The disclosure will provide investors and advisers with access to material information and ensure that the information disclosed may be more easily evaluated.
The framework provided by the Code works together with the requirements of the Listing Rules. The Listing Rules contain the obligation of disclosure and exceptions to that obligation. The Code sets out details of the disclosure to be made. Of course, the Code does not cover all areas relevant to biotechnology. It aims to provide a framework for disclosure of the types of information particular to biotechnology companies.
Implementation of the Code
At this time, the ASX is receiving comments on the Code. It, together with AusBiotech, aim to implement the Code by the end of 2004. We will monitor closely the progress of the Code.
For further information please contact Craig Henderson +61 3 9613 8899
