U.S. Supreme Court Rules That Drug Companies Must Report Adverse Events To Shareholders, Rejects “Statistically Significant” Risk Argument

Mar 25, 2011   
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On March 22, 2011, the Supreme Court ruled in a unanimous decision that publicly traded drug companies are required to disclose adverse drug events to shareholders in order to comply with their reporting requirements under 10(b)(6) of the Securities Exchange Act. In so ruling, the High Court rejected Matrixx Initiatives, Inc.s (“Matrixx”) argument that publicly traded drug companies need only report adverse events to their shareholders when there is a “sufficient number of reports to establish a statistically significant risk that the product is in fact causing the event.” A copy of the full opinion of Matrixx Initiatives, Inc. v. Siracusano can be read on the Supreme Courts website here.

This case stems from reported adverse effects of Zicam, a cold remedy which Matrixx manufactured until 2009. The suit alleged that for a five year period between 1999 and 2004, Matrixx received numerous reports from medical professionals and researchers describing more than ten patients who lost their sense of smell, a condition known as anosmia, after using Zicam nasal spray and gel. However, Matrixx failed to disclose these reports to its shareholders and instead made claims that the company was poised for growth. In 2004, ABC reported the link between Zicam and the loss of sense of smell. As a result of the report, Matrixxs stock price plummeted. Ultimately, in 2009, the FDA issued a warning to Matrixx that Zicam posed a threat to consumers and Matrixx recalled the product.

The plaintiffs in this case filed suit for securities fraud for failing to disclose material facts and information about the company. Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), makes it unlawful for any person to “use or employ, in connection with the purchase or sale of any security . . . any manipulative or deceptive device or contrivance in contravention of such rules and regulations” as prescribed by the Commissioner of the SEC. Under 17 CFR §240.10b“5(b), publicly traded companies may not omit or fail to disclose “material facts” and information which would influence the purchase or sale of securities. Matrixx argued that the materiality requirement for reporting adverse drug incidents can only be satisfied when a sufficient number of reports establish that there is a “statistically significant risk” from the use of a drug product.

In rejecting this argument, the Supreme Court found that the materiality standard announced by the Court in Basic Inc. v. Levinson, 485 U. S. 224 (1988) controlled. In Basic, the Court held that the materiality requirement is satisfied when there is “a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available.” Id., at 231“232. Justice Sotomayor, writing for the Court, found that determining materiality of an adverse event report is a “fact specific inquiry” and that, while “the mere existence of reported events” will not in and of itself be sufficient to satisfy the materiality requirement, “the source, content, and context of the reports” must be analyzed determine whether any particular adverse report is sufficiently material as to require disclosure. The Court further stated that “[a] lack of statistically significant data does not mean that medical experts have no reliable basis for inferring a causal link between a drug and adverse events. As Matrixx itself concedes, medical experts rely on other evidence to establish an inference of causation.” Here, given that the plaintiffs alleged that Matrixx received reports from medical professionals regarding at least 10 patients suffering from adverse effects, the Court found that plaintiffs had sufficiently alleged that “Matrix received information that plausibly indicated a reliable causal link between Zicam and anosmia.”

As a result of the Courts decision, the class action suit brought against Matrixx Initiatives, Inc. will proceed. For more information on the effect of this decision on your business, please contact us at contact@fidjlaw.com.