Not passing the smell test

Recent Supreme Court decision in Matrixx v. Siracusano puts pharmas on notice about disclosure of adverse drug events after Zicam failures

Kimberely Sirk
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WASHINGTON, D.C.—The U.S. Supreme Court's March decision in Matrixx Initiatives Inc. v. Siracusano handeddown an unanimous ruling in support of a lower court decision that foundinvestors should be protected under securities laws from potential losses dueto companies not fully disclosing adverse drug reactions.
The case examined whether failure to disclosenon-statistically adverse data can give rise to fraud claims. Investors allegedthat Matrixx failed to disclose reports of a possible link between its leadingproduct, Zicam Cold Remedy, and loss of smell, rendering statements made byMatrixx misleading.
The trial court dismissed the investors' case, but theNinth Circuit Court of Appeals—and now the Supreme Court—ruled that investorsmay sue under federal securities laws.
The High Court's decision was clear in determining thatinvestors stated a claim against Matrixx related to Zicam and adequately pleadedmateriality under federal securities laws. Materiality is a legal concept bywhich it is proven there exists a substantial likelihood that the disclosure bythe company of the omitted fact would have been viewed by any reasonableinvestor as having significantly altered the "total mix" of information madeavailable to that investor.
Matrixx, for its part, countered with the assertion thatJames Siracusano and others who were part of the group bringing the action didnot prove materiality, or that the company acted with "scienter"—defined asprior knowledge of wrongdoing.
The court indicated in its opinion, authored by JusticeSonia Sotomayor, that there existed a "strong inference" Matrixx "acted withthe required state of mind," proving the company acted with scienter.
Matrixx and its supporters also honed in on the "bright-linerule." In effect, Matrixx claimed that since the adverse events were not as awhole statistically significant, the company did not err in not reporting them.
The high court in its ruling said the "materiality of theadverse event reports cannot be reduced to a bright-line rule."
"Although in many cases reasonable investors would notconsider reports of adverse events to be material information," the court said,"respondents have alleged facts plausibly suggesting that reasonable investorswould have viewed these particular reports as material."
Stephen Thau of the law firm Morrison and Foerster, andco-chair of the law firm's life sciences practice, was one of the authors of anamicus curiae brief filed in the caseon behalf of BayBio, one of the largest association of life-sciences companies in thecountry. BayBio consists of more than 400 member organizations engaged in orsupportive of research and development of life science products, and supportedMatrixx in its appeal of the Ninth Circuit's decision on the matter.
"We were advocating the bright-line rule which the SupremeCourt did not adopt," Thau says.
Thau explains that the court's ruling does not set aspecific requirement for disclosure of adverse events once a company learns ofthem. But once a fact pattern emerges that adverse events are known, includingbut not limited to product-liability lawsuits, a company must be certain thatwhat is communicated to the public—and investors—is not inconsistent with thatfact pattern.
"Life sciences companies frequently receive informationabout clinical trial results or adverse events," explains Thau. "The currentstate of the law creates significant risks that they'll be faulted in hindsightthrough securities fraud lawsuits—data that appears unimportant at first maybecome more significant as more data is collected, and data that at firstappears significant may turn out to be less so as more data is collected."
On the other side of the case, the AARP, the advocacy giantfor those over the age of 50, entered the fray with its own friend of the courtbrief, taking the firm position that scienter had been proven.
Its friend-of-the court brief asserted, in part, that the Matrixx case is important to persons 50and older because as more individuals participate in defined contribution plansconstituting their primary and sometimes exclusive retirement savings plans,stocks have become an increasingly important part of individuals' retirementasset portfolios.
"The court reinforced the proposition that an issuer is notrequired to speak," Jay Sushelsky, senior attorney with AARP Foundation, tells ddn, "but once it chooses to do so, itmust speak candidly and with careful consideration of the likely impact of itswords upon investors."
In sum, Thau explains, the Supreme Court chose to considerthis case, as in other instances, because disagreement existed among the lowertrial courts.
"This decision reaffirms the existing test to state a claimfor securities fraud," says Thau. "What this means for companies is that theyhave to be careful what they say. What they tell the public and investors mustbe complete, accurate and correct. Companies should take away from this thatthey should have in place processes that ensure that all relevant informationis analyzed and vetted when that information is to be used by people speakingon behalf of the company. Striking the right balance of what to say and whatnot to say, and when to say it, needs to be done with great care."

Zicam's troubled past
Concerns were raised about Zicam as far back as 1999, whenreports began to be filed with Matrixx's customer service line and the U.S.Food and Drug Administration (FDA) by individuals using Zicam and subsequentlyexperiencing anosmia, or loss of their sense of smell. Matrixx's own scientistscould not disprove the existence of the Zicam-anosmia link, yet Matrixx refusedto commission additional outside research to explore that relationship.
Then, in the face of widespread media coverage in 2004 of alink between the product and anosmia, Matrixx issued intentionally misleadingpress releases that falsely implied to readers that two prior studies hadtested for anosmia and returned negative results. The company continued to makestatements saying, among other things, that it was "poised for growth."
In addition, Matrixx's discussion of potential productliability litigation risks in its mandatory Securities and Exchange Commission(SEC) filings omitted the significant fact that an anosmia related lawsuit hadbeen filed against the company.

Kimberely Sirk

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