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GRAS declarations and pump-and-dump scams: An exclusive interview with FDA

NASDAQ-traded firm Senomyx (SNMX) experienced a 26 percent stock price appreciation after media outlets mistakenly reported that its product had been approved by the FDA.
NASDAQ-traded firm Senomyx (SNMX) experienced a 26 percent stock price appreciation after media outlets mistakenly reported that its product had been approved by the FDA.
Photo by Robin Marchant/Getty Images

The already difficult job of picking the next hot stock has become even harder, thanks to fluctuating government regulations and inadequate research by members of the investment media. Last week, Examiner's coverage of Senomyx and its product Sweetmyx uncovered the fact that despite several media statements to the contrary, Sweetmyx had not received GRAS (Generally Recognized As Safe) status from the FDA. Barrons went so far as to rate Senomyx a "buy," and the company's stock (traded as SNMX on the NASDAQ) appreciated 26 percent.

Retractions were nearly impossible to find, despite the FDA clarification that Sweetmyx's GRAS designation had been made by a trade group, and not by the federal regulator.

This confusion is possible because of a loophole in GRAS regulations. According to CFR Title 21 Section 170, the FDA receives GRAS notices from manufacturers and either affirms or denies them. However, in 1997, the FDA issued a proposed rule -- a rule that never became final -- making the process for getting a GRAS affirmation from the FDA voluntary.

On March 12, the Allentown Family Health Examiner conducted an exclusive interview with Theresa Eisenman of the FDA's press office in order to understand the nature of GRAS status and the role of the FDA in affirming it. Some of the highlights of the interview are included here.

Examiner: [Inquired about the difference between a substance that is GRAS and a substance that is a "food additive."]

Theresa Eisenman: A food additive is a premarket approval, if you will, from FDA. The difference is that when a substance is GRAS, the scientific data supporting its safety is public available. It's recognized by a wide body of scientists and it's publicly available. If it's a food additive, it's not publicly available, but it's submitted to FDA for review.

If it's a GRAS determination, the company can make that determination. It's the same rigorous scientific determination supporting it.

Examiner: What stops a company from designating all its food ingredients GRAS?

TE: It's on the manufacturer to ensure that the product is safe and meets all applicable federal laws. At any point, the FDA can ask to see their data. The onus is always on the company to ensure that the product is safe.

Examiner: What about CFR Title 21 section 170? Doesn't this require FDA to affirm GRAS notices, after the cyclamate salts issue that came up during the Nixon administration?

TE: I'm not familiar with [cyclamate]. In terms of a GRAS determination, that's a voluntary program.

Examiner: How accessible does the data for a GRAS ingredient need to be?

TE: It has to be publicly available.

Examiner: What's the standard for "publicly available"? Being on MedLine (National Library of Medicine's database)?

TE: I wouldn't say that. It's scientific data -- the requirement isn't having that information in lay terms. It has to be in the public domain. Publicly available.

Examiner: Why would FDA have proposed the 1997 rule if the existing statute didn't require FDA affirmation of GRAS?

TE: I'll check on that proposal. For a self-determination of GRAS, the company does not have to notify the FDA.

The Allentown Family Health Examiner is still awaiting a response from the FDA to three questions:

  1. What is the citation from the Code of Federal Regulations (CFR) regarding the voluntary nature of GRAS affirmation; that is, what is the statute that indicates that GRAS designation may be entirely self-determined?
  2. Can the FDA clarify why the 1997 proposed rule (seeking to establish GRAS notification as voluntary) would be necessary, if the existing statute already made such notification voluntary?
  3. Where (CFR citation or Federal Register reference) are the FDA's standards for "publicly available" / "generally available" and for "consensus among qualified experts" defined?

Until these questions are resolved in the minds of the investing public -- not to mention financial media such as Barrons and Bloomberg -- issuing press releases regarding GRAS self-designation seems to be a simply way for a small public company to set up a pump-and-dump scheme. Large companies, such as Cargill, that intend to commercialize their products, may see a potential benefit from seeking GRAS affirmation from the FDA with an eye toward future litigation regarding the product in question. However, executives at small companies can benefit from stock price run-ups without ever commercializing the products that prompt these run-ups.

Is the Senomyx situation a pump-and-dump setup? That type of determination would be made by the SEC, and not by a health journalist, but a few facts bear keeping in mind:

It's hard to imagine a situation in which the GRAS determination could be said to be less compliant with the idea of "consensus of scientific opinion" and "generally available" or "publicly available." Marion Nestle has already pointed out the challenge that confusion over who awards GRAS status poses for consumers concerned about safety. It remains to be seen how the investment community's regulators will respond to the ambiguity.

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