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Supreme Court to Address Adverse Event Disclosure in Matrixx Initiatives, Inc. v. Siracusano

Posted Dec 07 2010 11:33pm

Photo by The Gifted Photographer via Flickr

Photo by The Gifted Photographer via Flickr

On January 10, 2011, the Supreme Court will hear oral argument in Matrixx Initiatives, Inc. v. Siracusano, a case involving a pharmaceutical company’s duty under securities law to disclose adverse event reports that is “ perhaps the most significant business case in the Supreme Court this term.

Under the Zicam brand name, petitioner Matrixx manufactured over-the-counter intranasal zinc sprays and gels to treat the common cold.  Because the products at issue were homeopathic preparations sold over-the-counter , they were not subject to the Food & Drug Administration’s rigorous prescription drug approval process or, at the time, the requirement that adverse event reports be submitted to the FDA.  Between the end of 1999 and the beginning of 2004, Matrixx became aware of but did not make public reports of between 12 and 23 (the parties disagree on the exact number) patients who complained that taking Zicam had caused them to experience persistent anosmia (loss of their sense of smell).

The central issue in the case is whether the reports of anosmia ever become material under Section 10(b) of the Securities Exchange Act of 1934, such that Matrixx had a legal duty to disclose them to investors.  (The test for materiality is whether a reasonable investor would consider the information important in deciding to buy or sell the company’s stock.)  Matrixx argues that the reports were not material because they were not statistically significant, while Siracusano contends that it adequately pled materiality “by pointing to facts including, among others, the expert physicians who had concluded … that a causal link existed between intranasal Zicam use and persistent anosmia; the seriousness of persistent anosmia and the threat it posed to Zicam as Matrixx’s principal revenue source; and the actual movements of Matrixx’s stock price after the truth came out[.]“  The Ninth Circuit sided with Siracusano and Matrixx appealed.

The question of whether and when adverse event reports are pharmacoepidemiologically significant is a difficult one, for a number of reasons.  For one, a company will know of a certain number of adverse events but it will not know how many adverse events occurred that were not brought to its attention and it usually will not know how many times the product was used without incident.  Matrixx emphasizes in its briefs that it knew of, at most, 23 adverse events while millions of units of Zicam were sold.  Even if the number of adverse events and the number of times a product was used can be estimated, a company must then determine the “background rate” of the reported adverse event.  In this case, Matrixx had to determine the percentage of people not using an intranasal zinc product who go on to develop anosmia.  Finally, the causation determination can be made more difficult by any number of confounding factors.  In this case, anosmia can be caused by the common cold the very condition that Zicam was developed to treat a phenomenon called “confounding by indication.”

The question of when adverse event reports are legally significant is difficult too.  Negative information about a pharmaceutical product can trigger duties across legal and regulatory regimes, but not all negative information is alike in significance.  Companies have to exercise judgment.  For example, a company can be held liable in tort for failing to warn patients and/or doctors of a product’s risks, but it cannot respond to this legal risk by adding any and all adverse event reports to the product label, due to the FDA’s concerns about information overload.  Similar concerns obtain in the context of securities disclosure.  Matrixx argues that “[t]he Ninth Circuit’s rule would effectively compel pharmaceutical companies to disclose all [adverse event reports] (to avoid potential securities fraud liability), flooding the market with trivial or meaningless information that would only obscure genuinely important information and thereby undermine sound investment decisionmaking.”  Siracusano counters that Matrixx ignores the “[l]egions of professional securities analysts and investment advisers” who help the nationwide securities markets assimilate massive volumes of information, including nuanced statistical information, about public companies.

In this case, Matrixx responded to concerns raised about Zicam by announcing that “alleg[ations] that intra-nasal Zicam products cause anosmia (loss of smell) are completely unfounded and misleading” and that the “safety and efficacy of zinc gluconate for the treatment of symptoms related to the common cold have been well established in two double-blind, placebo-controlled, randomized clinical trials.”  This show of confidence seems to have been ill-advised.  As Professor Barbara Evans explained in a recent article , double-blind, placebo-controlled, randomized trials are typically designed to test efficacy hypotheses.  While participant safety is monitored, there are almost never enough participants to produce “even high-quality observational evidence of safety.”  Matrixx eventually acknowledged that it did not know whether there was a causal relationship between Zicam and anosmia and it has since withdrawn the products at issue from the market.

Regardless of the outcome in Matrixx Initiatives, Inc. v. Siracusano, companies will likely continue to be faced with difficult judgment calls about disclosing adverse event reports.  As Siracusano suggests, even if the Supreme Court adopts a statistical significance or broader scientific reliability requirement, it is unlikely to get into specifics, e.g. “to adopt a threshold of p < 0.05.”  Companies will continue to be well-advised to consult expert regulatory counsel.  The advice Jacqueline Wolff and I gave in a 2004 article in the Business Crimes Bulletin still applies:

“[L]egal and regulatory review of promotional materials is an accepted and oftentimes required practice in the pharmaceutical industry. A company may wish to consider expanding the jurisdiction of review committees to cover sections of financial filings, press releases, analysts’ calls and all public statements relating to any matter within the FDA’s jurisdiction. Indeed, the SEC has suggested as much. In a Nov. 25, 2002 cease-and-desist order against the General Counsel of ICN Pharmaceuticals, the SEC found that he should have consulted with regulatory counsel before issuing a press release addressing the status of ICN’s new drug application.”

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