FDA: The Growing Use of Freedom of Information Act Requests for FDA Data by Life Science Stock Traders

The Wall Street Journal reported on the use of FOIA (Freedom of Information Act) requests by investment firms with the intent to learn more about companies regulated by FDA. The story covers a wide scope of information requests with a focus on investment firms attempting to learn about possible adverse event reports and issues arising from FDA inspections.

Using FOIA requests

When SAC Capital Advisors LP was weighing an investment in Vertex Pharmaceuticals Inc., the hedge-fund firm contacted a source it knew would provide nonpublic information without blinking: the federal government.

An investment manager for an SAC affiliate asked the Food and Drug Administration last December for any ‘adverse event reports’ for Vertex’s recently approved cystic-fibrosis drug. Under the Freedom of Information Act, the agency had to hand over the material, which revealed no major problems. The bill: $72.50, cheaper than the price of two Vertex shares.

SAC and its affiliate, Sigma Capital Management LLC, snapped up 13,500 Vertex shares in the first quarter and options to buy 25,000 more, securities filings indicate. The stock rose that quarter, then surged 62% on a single day in April when Vertex announced positive results from safety tests on a separate cystic-fibrosis drug designed to be used in combination with the first.

Finance professionals have been pulling every lever they can these days to extract information from the government. Many have discovered that the biggest lever of all is the one available to everyone—the Freedom of Information Act—conceived by advocates of open government to shine light on how officials make decisions. FOIA is part of an array of techniques sophisticated investors are using to try to obtain potentially market-moving information about products, legislation, regulation and government economic statistics.

Information arms race

“It’s an information arms race,” says Les Funtleyder, a longtime portfolio manager and now partner at private-equity firm Poliwogg Holdings Inc. “It’s important to try every avenue. If anyone else is doing it, you need to, too.”

A review by The Wall Street Journal of more than 100,000 of the roughly three million FOIA requests filed over the past five years, including all of those sent to the FDA, shows that investors use the process to troll for all kinds of information. They ask the Environmental Protection Agency about pollution regulations, the Department of Energy about grants for energy-efficient vehicles, and the Securities and Exchange Commission about whether publicly held companies are under investigation. Such requests are perfectly legal.

Some investors and officials at companies that make FOIA requests on investors’ behalf said in interviews that hedge funds and other Wall Street firms are increasingly using the open-records system to gather information relevant to investment decisions. They said FDA reports about pharmaceutical companies are of particular interest.

One of the quirks of the process is that the first person to ask for something is typically the first to get it—an incentive to dig for valuable information quickly, and an irritant to those who say all investors should get it at once.

Investors say they rarely make trades solely based on information obtained through the open-records law, but that such material helps them to piece together investment strategies or evaluate a company’s prospects.

Not improper and FDA protecting confidentiality

There is nothing improper about trading on information obtained through a FOIA request because the government has no duty to keep the information private.

Any individual, from local activist to political operative to investor, can file an information request under the law. Federal agencies that receive requests—Congress and some White House offices are excluded—are required to turn over information, using “the most efficient and least costly methods” to comply. Some areas are off limits, including information about national security, law-enforcement investigations and internal deliberations, such as whether the FDA might approve a new drug.

“The FDA takes very seriously its responsibility to protect confidential and trade-secret information received from companies we regulate,” an FDA spokeswoman said. “The agency has processes in place to ensure that sensitive information is appropriately removed.”

Number of requests

When an individual asks for government documents, that request itself becomes part of the public record. The Journal reviewed more than 100,000 such open-records requests since the beginning of 2008 and obtained hundreds of specific information requests filed by investors, along with copies of the documents that investors received from the government.

The precise number of requests from investors is impossible to tally because many come from third-party organizations that send requests on behalf of undisclosed clients—a thriving industry unto itself. One of them, FOI Services Inc., accounted for about 10% of the 50,000 information requests sent to the FDA during the period examined by the Journal. Marlene Bobka, a senior vice president at Washington-based FOI Services, says a “huge, huge reason people use our firm is to blind their requests.”

Requests are on the rise

Tony Chen, founder of Chicago-based FDAzilla, which collects information from the agency, estimates that his company has received more than three times as many requests from investors this year as in 2011. “There definitely has been a lot more interest from investors,” he says.

The government received 651,254 information requests during the year ended Sept. 30, 2012, up from 605,491 in the 2008 period. Not all agencies saw increases, especially those that now post routine information online.

Some agencies that handle market-sensitive information have seen requests rise. The SEC received three times as many requests in 2012 as it did a decade ago. Only the Department of Homeland Security and the Justice Department receive more requests than the Department of Health and Human Services, of which the FDA is part.

FDA drug approvals and the market

FDA decisions about drug approvals and safety can send stocks soaring or plunging, making its reports of special interest to investors. In recent years, the agency has ramped up oversight of drug companies. The FDA, which also regulates the food industry, recalled more than 9,000 products from the market in 2012, which was a 64% increase from 2008, according to an FDA report.

During the five years through 2012, the period analyzed by the Journal, SAC and its affiliates Sigma Capital and CR Intrinsic filed a total of 92 requests to the FDA, which appeared to be more than any other investment firm filing under its own name.

Other frequent FDA filers during that period include hedge funds Millennium Management LLC, HealthCor Management, Ridgeback Capital and Great Point Partners, and stock analysts for Citigroup Inc., C -1.23% RBC Capital Markets, Jefferies & Co. and Wells Fargo WFC -1.37% & Co.

Mr. Funtleyder of Poliwogg Holdings says information such as adverse-event reports on drugs can be useful for investors. “If [FDA data] was within the threshold of acceptability, you’d feel a lot more confident going forward with your investment,” he says.

Problems during new drug rollouts

Investors also use FDA information to scan the horizon for possible problems, for instance, during the rollout of a new drug. In February, hedge fund Kingdon Capital Management LLC asked the FDA for reports relating to a recently approved prostate treatment made by Medivation Inc., MDVN +0.21% a San Francisco-based pharmaceutical firm. Wall Street was interested in how the drug would compare to a rival medicine marketed by Johnson & Johnson.

The agency responded two days later with more than 100 pages of complaints it had received about people who reported health problems after taking the Medivation drug.

Kingdon cut its ownership to 306,000 common shares as of March 31, compared with 510,000 at the end of 2012, securities filings show. During that time, Medivation shares fell 8.6%, a decline analysts attributed to second-guessing about the potential market size for the new treatment and competition from existing products. Kingdon declined to comment.

FDA inspections

Investors are especially interested in Form 483s, facility-inspection reports that “are the most intimate look at what is going on inside a pharmaceutical firm,” says Ms. Bobka of FOI Services. Investors “love this stuff.”

FDA inspectors can enter and inspect any private facility that manufactures, processes, tests or packages drugs or medical devices that will be transported across state lines. Reports tend to include information about a company’s testing and manufacturing procedures, production capacity and compliance with federal rules.

The FDA says it performed 5,500 inspections of medical device and drug facilities in the 2012 fiscal year. In about half of those cases, the agency wrote up an inspection report detailing problems it found. The FDA produced 50% more inspection reports in 2012 than it did in 2008, according to agency figures.

The only way investors can get most reports is to send an open-records request to the FDA. Under a 1996 law, when the agency gets frequent requests for the same records—generally more than three—it has to make them public on its website. But there isn’t any specific deadline for doing so, says Christopher Kelly, an FDA spokesman. That means first requesters can get records days or even months before they are posted online.

Genzyme case study

In March 2009, Genzyme Corp., a drug manufacturer based in Cambridge, Mass., said the FDA had found problems with the primary manufacturing plant where it produced top-selling treatments for a variety of rare enzyme-related diseases. The announcement sparked a buzz on Wall Street and the stock plummeted. In an effort to find out how serious the problems were, SAC and a dozen other Wall Street firms sent document requests to the FDA seeking the inspection report.

Later that month, the FDA turned over to SAC a six-page report that detailed an array of problems. Among other things, the report disclosed that the inspection lasted nearly a month. The FDA also sent SAC letters between the agency and Genzyme officials that suggested the matter wasn’t going to be fixed quickly.

The FDA mailed the documents to SAC on March 30, 2009, one day before the end of the first quarter. Over the following three months, SAC and its affiliates reduced their combined stake to 127,000 shares, from 221,000 at the end of the first quarter, according to securities filings. Over the six-month period ending June 30, Genzyme shares declined 16%.

The FDA posted the Genzyme inspection report on its website five months after it was sent to SAC. Some pages were missing. It posted the entire file in March 2010, a year after SAC got it. Genzyme has since been purchased by French drug company Sanofi SAN.FR -0.37% SA.

Regeneron case study

Andrew Hack, an analyst for Millennium Management, has sent two dozen information requests to the FDA. In December 2011, he sought help from an agency staffer about a request for inspection reports for drug maker Regeneron Pharmaceuticals Inc. REGN -0.22%

Regeneron had won FDA approval for a new drug, Eylea, to treat a leading cause of blindness in the elderly. Sales were expected to take off—as long as the firm’s manufacturing facilities continued to meet FDA standards. Millennium owned 10,000 shares of Regeneron at the end of 2011.

In early 2012, Millennium received an inspection report from the FDA, which found no significant problems. Millennium tripled its ownership in Regeneron to 31,800 shares by March 31, 2012. Regeneron’s stock doubled during the first quarter of 2012 to $116.62.

Millennium’s positions reflect the aggregate holdings of separate trading teams and can’t be attributed to a single portfolio manager.

The FDA billed Millennium $23.10 to process the request. Two months later, on March 2, 2012, the agency put the inspection report on its website.