To disclose or not to disclose?

U.S. Supreme Court to hear arguments in shareholder lawsuit against Matrixx over drug Zicam; decision could impact adverse effect reporting requirements

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WASHINGTON, D.C.—The pharmaceutical and biotech industry and consumer court watchers await a U.S. Supreme Court hearing of an appeal by Matrixx Initiatives on a ruling that reinstated a class-action shareholder lawsuit alleging Matrixx's cold treatment Zicam led to a loss of smell in some patients. Matrixx's shareholders further allege that misleading investors by failing to disclose patients' reports, violates federal securities law.

The high court's decision could have wide-reaching effects on exactly what and how many "adverse effects" drug companies will be required to report—and when they must report them.

Matrixx contends that the number of incidents reporting a loss of smell following the use of Zicam was not statistically significant and, therefore, did not need to be publicly reported—or revealed to its investors.

However, as Dr. Charles Lee, a compliance officer for the U.S. Food and Drug Administration (FDA), states in court documents: "Loss of the sense of smell is potentially life-threatening and may be permanent. People without the sense of smell may not be able to detect life dangerous situations, such as gas leaks or something burning in the house."

Matrixx received customer complaints about Zicam and anosmia from 1999 to 2002. In 2003, it learned that two doctors were compiling data on at least 10 patients. Later in 2003, some individuals brought suit against Matrixx, alleging a loss of smell from using some forms of Zicam, according to court documents.

During that time, Matrixx officials expressed optimism about future growth in news releases and earnings conference calls and did not mention the allegations and lawsuits.

In early 2004, media outlets began to report the allegations, causing a decline in Matrixx's stock value. Matrixx officials countered by called the allegations "completely unfounded."

The district court dismissed the suit in 2006, saying the number of allegations Matrixx executives were aware of was not statistically significant. In late 2009, however, the appeals court concluded that was the wrong standard for a motion to dismiss and said questions of statistical significance should be decided during trial.
Matrixx eventually was sued by about 284 individuals in 19 states alleging a loss of smell due to some Zicam products, though some of those suits occurred after the class period for the investor lawsuit. Matrixx maintains that the patients' colds, and not Zicam, caused anosmia—or that simply suffering from a cold leads to a dulling of the senses and loss of smell.

The question presented to the high court is whether a plaintiff can state a claim under Section 10(b) of the Securities Exchange Act and U.S. Securities and Exchange Commission (SEC) Rule 10b-5 based on a pharmaceutical company's nondisclosure of adverse event reports, even if the reports are not alleged to be statistically significant.

The case began to unfold in December 1999, when Dr. Alan Hirsch, the neurological director of the Smell & Taste Treatment and Research Foundation Ltd., "called Matrixx's customer service line to inquire into the amount of zinc contained in Zicam nasal gel" and stated studies had indicated potential problems with "intranasal application of zinc."

According to court documents, on Sept. 20, 2003, Dr. Bruce Jafek of the University of Colorado School of Medicine and another colleague planned to submit their findings regarding 10 patients who had developed anosmia following Zicam use in a presentation to the American Rhinologic Society. Matrixx denied permission to use the Matrixx name or its products, according to court documents.

However, on Feb. 6, 2004, Jafek's findings regarding Zicam were ultimately disclosed on the national morning television show, "Good Morning America." By April that year, Jafek had evaluated more than 100 cases of anosmia following Zicam use, all of whom complained of "an 'immediate, severe burning' immediately following use of Zicam nasal gel, followed by a loss of smell. None of the patients had fully recovered, according to court documents.

According to the plaintiffs, in November 2003, Matrixx filed its third-quarter earnings with the SEC. Investors alleged that these statements were materially false and misleading because Matrixx "failed to disclose that a lawsuit alleging that Zicam caused anosmia had already been filed, and given the findings of the researchers at the University of Colorado, it was highly likely that additional suits would be filed in the future."

In January 2004, Dow Jones Newswires reported that the FDA was "looking into complaints that an over-the-counter common-cold medicine manufactured by a unit of Matrixx may be causing some users to lose their sense of smell."

In February 2004, Matrixx issued press releases stating that it was "not aware of an FDA inquiry into the safety of our intranasal zinc gluconate products . . . Matrixx believes statements alleging that intranasal Zicam products cause anosmia are completely unfounded and misleading. In no clinical trial of intranasal zinc gluconate gel products has there been a single report of lost or diminished olfactory function."

Jafek "has been documenting the cases from around the country, and there have been several lawsuits in at least five states. All along, Matrixx Initiatives, the maker of Zicam, said the product was safe," the lawsuit states. "But now it admits there are no studies dealing with the issue.

The issue is now in the hands of the U.S. Supreme Court. A decision expected by Independence Day, 2011.

BayBio files amicus curiae brief in Matrixx case

SOUTH SAN FRANCISCO, Calif.—BayBio, an association serving the life science industry in Northern California, filed an amicus curiae brief in the Matrrixx case in August. BayBio's brief states in part that the nation's leading biotechnology companies "are constantly inundated with adverse event reports and other data about the efficacy and safety of their products in clinical trials and on the market … Improper or premature disclosure of adverse event reports to the public may create false alarms that discourage participation in clinical trials or cause individuals to reduce their use of beneficial medications, thereby creating a different hazard."

"If not reversed, the Ninth Circuit's rule will require companies to make boilerplate disclosures that will add nothing to the mix of information already available to investors," says Stephen B. Thau of Morrison & Foerster LLP, BayBio's counsel. "Yet such disclosures will needlessly cause consumers to avoid using safe, beneficial drugs."

The legal standard for securities fraud articulated by the Ninth Circuit Court of Appeals in this case would require companies to "over-disclose" anecdotal information to the public markets, for fear that by not doing so, they could later be accused of fraud, Thau says.

"This increases the disclosure burden on companies without providing additional benefit to investors, who would then have to sort out the importance of this information on their own," Thau says. "Raising capital for biotechnology research is difficult enough already, and the Ninth Circuit's rule could make it even more so."
BayBio is an independent, nonprofit 501(c)(6) trade association serving the life science industry in Northern California. The staff and services of BayBio are paid primarily through memberships, sponsorships and event registration fees. BayBio provides these services through representatives in South San Francisco and through coalition partners in Washington, D.C.

"We think that it is important that the Supreme Court receive the benefit of the industry's perspective on the importance of the Matrixx case, and we are pleased to represent BayBio, which speaks on behalf of many of our most important life sciences companies," Thau says.

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