Telling a Half-Truth Doesn't Work for Drugmaker

Under securities law, a publicly disclosed half-truth is worse than no truth at all, according to an appeals court opinion filed this week involving Arena Pharmaceuticals Inc. The decision has an intuitive moral appeal. But it’s not at all clear that it makes sense from the standpoint of investors, who might be misled just as thoroughly by failure to disclose material information as they would be by partial disclosure.

The case arose from a scenario painfully familiar to anyone who follows or trades in pharma stocks. Arena was developing a weight-loss drug called lorcaserin, which had entered the stage of human clinical trials. At the same time, the Food and Drug Administration required lorcaserin to be put through a separate, nonclinical trial in rats to see whether it created an unacceptably elevated risk of cancer.