Insider Trading By Ex-FDA Official Puts Spotlight On 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 1980s and early '90s 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 generic's 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.

Two days earlier, Johnston pled guilty to four counts of securities and wire fraud. Three of the counts each carries a maximum prison sentence of 20 years and the fourth a maximum sentence of five years. The charges also carry a maximum $5m fine, 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 2011 and then was retained by the association as a consultant for four years. The SEC's complaint says Johnston used his GPhA position to obtain confidential information from former OGD colleagues.

FDA employees "could potentially face charges themselves or loss of their jobs," says an attorney involved in government investigations.

The case against Johnston could have widespread repercussions at FDA and its employees. While the generic drugs scandal involved FDA staff receiving bribes for favoring certain abbreviated new drug application sponsors, Johnston's case arose from employees sharing confidential information about the status of applications.

Like the previous scandal, though, the charges against Johnston could prompt congressional hearings and FDA internal investigations.

FDA referred questions about the case to the Department of Health and Human Services. An HHS spokeswoman noted the department's Office of Inspector General had been involved in the investigation. She said HHS could not provide additional information since the case is considered an open investigation.

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

'Other FDA Employees' Shared Confidential Information

The federal indictment charges Johnston with improperly obtaining confidential and material non-public information at OGD from a senior official 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," said an attorney who has been involved in government investigations and asked not to be named. "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 FDA Office of Chief Counsel attorney and a former assistant US attorney, noted that in response to the generic drug scandal, OGD implemented 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. One would expect the agency to be mindful of that when they are talking to former colleagues," Manning said.

In another recent case of an FDA employee charged with insider trading, FDA chemist Cheng Yi Liang in 2011 was charged with using the agency'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 against Johnston cover 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 December 2009 or 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 approving an ANDA for a generic Lovenox. Johnston passed the information to Valvani, whose fund increased four-fold its long position in Momenta and shorted Sanofi securities.

The SEC's complaint against Valvani and Johnston notes the senior OGD official is a division director who Johnston had mentored. It says the two had a decades-long relationship and 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 GPhA, although it 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. 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," the complaint states.

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

Blockbuster Generic And Others

At the time Momenta filed its ANDA, two other sponsors 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 stated 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 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 its 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 the two about the information Johnston provided. (Valvani was found dead in his home on June 20 in an apparent suicide.)

The case against Johnston may stem from 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.