Matrixx Catches a Cold: Linking FDA and SEC Obligations

Any company selling FDA regulated drugs or devices routinely receives adverse event reports from the field. These reports are common – companies submit close to 1,000,000 such reports annually to FDA. While these reports often trigger FDA obligations, companies often do not believe that the securities laws would require them to publicly disclose these reports.

Earlier this week, a unanimous Supreme Court decided that plaintiffs in a securities class action stated a valid claim due to the failure of a pharmaceutical company to disclose adverse events associated with its product, even though the reports were not statistically significant. Matrixx Initiatives v. Siracusano (2011 WL 977060).

During 2003-2004, Matrixx sold an over the counter cold remedy called Zicam. This product accounted for about 70% of the company's revenues and was the key driver for sales and profit growth. In 2003, Matrixx announced that the upcoming cold and flu season would drive 50-80% increases in Zicam sales.

By 2003, press reports began surfacing that patients using Zicam suffered a loss of smell (technically called anosmia). Matrixx was, in fact, also a defendant in several product liability cases alleging a causal link between Zicam and loss of smell.

Matrixx continued to issue upbeat sales forecasts for Zicam and denied any medical issues with the product. In early 2004, in response to a press report about issues with anosmia, Matrixx issued a press release that stated, "Matrixx believes statements alleging that … Zicam … caused anosmia (loss of smell) are completely unfounded and misleading." Matrixx did not disclose the adverse event reports. The reports linking Zicam to anosmia became more widespread and the price of Matrixx stock plummeted. Siracusano sued Matrixx for various claims, including violations of Section 10(b) of the Securities Act of 1934 and Rule 10b-5.

Matrixx argued in its motion to dismiss that it had no obligation to publicly disclose adverse event reports unless those reports were statistically significant. Matrixx emphasized that FDA statutes and regulations make it clear that adverse event reports are not determinative of any causal link and often include what turns out to be inaccurate information. Requiring disclosure would, the company argued, result in making public scientifically meaningless information that would only confuse investors.

The Supreme Court unanimously disagreed. Relying on well-established precedent discussing the standard for materiality under Rule 10b-5, such as Basic, Inc. v. Levinson, 485 U.S. 224 (1988), the court refused to draw any "bright lines" based on statistical significance saying that such a rule could exclude information a reasonable investor would consider significant. The court looked to a number of FDA regulations and guidance documents that relied on factors other than statistical significance for making public health decisions. Rather than using statistical significance as a bright line test, the obligation to disclose adverse event reports is a fact intensive question that requires consideration of the source, content and context of the reports and factors such as:

• Whether the company has made positive product safety statements that must be put into context by a disclosure of adverse events;
• The importance of the product to current and future company performance;
• The frequency, number and severity of the reports; and
• Other, non-statistical information relevant to determining any causal connection between the product and the adverse event.

The court observed that, since that medical professionals and regulators routinely acted on the basis of causation that was not statistically significant, reasonable investors could do so also.

The court reaffirmed the central finding in Basic that an omitted fact would be material if there is a substantial likelihood that disclosure would have been viewed by reasonable investors as having altered the "total mix" of available information.

Clearly, Matrixx made things more difficult for itself by its aggressive campaign to deny the problems. The court noted that companies can limit what they have to disclose in order to comply with Rule 10b-5 by "controlling what they say to the market." The court pointed out that Section 10(b) and Rule 10b-5 "do not create an affirmative duty to disclose any and all material information." However, there are affirmative obligations to disclose material information that public companies must meet each quarter and when they access the public markets.

Publicly traded life science companies routinely receive adverse event reports every week. The kind of fact-intensive analysis the court found necessary to determine materiality is not easy and frequently must be conducted under very tight "real time" disclosure obligations. Companies need to ensure that they are aware of any adverse event reports and that their securities lawyers are working closely with their FDA counsel.

While the decision may be viewed as essentially a reaffirmation of prior cases on materiality, the plaintiff bar is more likely to read it as a green flag to claim that the failure to disclose any adverse event could be sufficient to defeat a motion to dismiss and force settlement of a class action alleging violations of securities laws. The bright line test the court rejected in Matrixx could have made disclosure decisions easier, but the fact is those decisions are never easy and minor changes in facts can lead to very difficult results.

Companies receiving adverse event reports face a dilemma. Delaying disclosure can provide the time necessary to evaluate raw data, which if prematurely disclosed, can confuse the market as to the likely consequences. However, while the data is being evaluated, companies must take care not to make misleading related public statements such as Matrixx did, that discount the effect or deny the existence of adverse event reports. It may also be appropriate for any company that is analyzing its disclosure obligations to create a blackout period barring insiders and the company from trading in its stock until after the analysis is complete.

The Matrixx decision reminds us that public disclosure may be required under the securities laws if adverse event reports would change the "total mix" of available information. Unfortunately, the court did not make the task of evaluating the possible impact of adverse event reports any easier.