Stock crashed: Company that concealed information from investors slapped with fine

The Administrative Enforcement Committee of the Securities Authority imposed financial sanctions totaling NIS 1.85 million on Epitomee Medical, former CEO Dr. Dan Hashimshony, and board chairman and founder Dr. Shimon Eckhouse. The decision was made after it was found that the company included misleading details in two reports to investors at the end of 2023, when it reported the success of a clinical trial for a product it developed, but concealed data establishing that the results would lead to the cancellation of its major distribution agreement with Nestle.

Epitomee Medical, which was listed on the Tel Aviv Stock Exchange in 2021, is engaged in the development of a weight loss capsule that is ingested by swallowing. In 2020, the company signed a strategic agreement with the health division of food giant Nestle, under which Nestle would purchase the global distribution rights for the product. In return, Epitomee was required to receive approval from the US Food and Drug Administration (FDA), in exchange for eligibility for development grants amounting to tens of millions of dollars and sales royalties.

However, alongside the FDA requirements, higher and stricter efficacy targets were set in the agreement with Nestle. The agreement explicitly defined that if Epitomee received regulatory approval but failed to meet Nestle's stricter efficacy targets, the agreement would be canceled within 90 days (unless Nestle announced otherwise), and the company would lose a significant portion of the development grants amounting to tens of millions of dollars.

At the end of August 2023, Epitomee received the results of the clinical trial for the primary endpoints. The data showed that the capsule met the safety and efficacy targets required by the FDA, but at the same time clearly revealed that the company did not meet the high efficacy targets set with Nestle, which directly threatened the continuation of the agreement.

Despite already having the full data in hand, the company published two reports to investors, on September 4 and November 8, 2023, presenting only the positive aspect: The success of the trial and expected FDA approval. The critical information regarding the failure to meet the targets set with Nestle and the danger of contract cancellation was completely omitted. The market reaction to the partial reports was enthusiastic: Following the first report, the stock price jumped by about 80%, and following the second report, its price rose by an additional 29%.

Reality struck investors at the end of November 2023, when Epitomee issued a report on an "initial indication" from Nestle regarding failure to meet the agreement's targets, a report that led to a sharp drop of about 71% in the stock price. A few days later, in early December, the company announced that Nestle had permanently canceled the agreement, and the stock registered a further drop of about 7.5%.

The Administrative Enforcement Committee, chaired by attorney Dr. Ilana Lipsker Modai and with the participation of panel members attorney Lina Raskin Rivkin and attorney Tal Rabin Even-Zahav, ruled that both reports disseminated misleading information to investors due to the omission of material information. The committee emphasized that this was not a technical or secondary detail, but a figure that would have completely changed investors' perception regarding the significance of the trial results.

In the ruling, the committee noted: "As officers of a public company, they were negligent and failed to uphold the principle of proper disclosure, which instructs them to fully and accurately report material events in the company's life. In reporting the results of a trial critical to the company's business, they cannot report only the 'good news' and fail to address the less good news in real time, even if they hope that things will work out in the future."

Following the findings of the investigation, conducted by the Investigations, Intelligence, and Trading Surveillance Department at the Authority and managed by attorney Roy Kanarik from the Audit and Enforcement Department, it was determined that the company, the former CEO, and the chairman were negligently responsible for including the misleading details.

A monetary sanction of NIS 1.3 million was imposed on Epitomee Medical, along with a conditional sanction of an identical amount. Former CEO Dr. Dan Hashimshony was fined NIS 300,000, given a conditional fine of an identical amount, and banned from serving in a regulated body for one year. Board chairman and company founder Dr. Shimon Eckhouse was fined NIS 250,000, given a conditional fine of an identical amount, and banned from serving on the board of a regulated entity for six months.