After months of anticipation, the US Supreme Court yesterday ruled Matrixx Initiatives was incorrect to insist that only statistically significant adverse events are required to be reported to shareholders, and allowed investors to proceed with a long-simmering securities fraud claim. The move has significance for drugmakers and biotechs, which filed briefs supporting Matrixx over concerns adverse event disclosures can be easily misinterpreted and lead to more shareholder lawsuits.
Here's the background: Matrixx Initiatives was sued for allegedly concealing side effect reports that its Zicam over-the-counter cold med caused people to lose their sense of smell, known as anosmia. By withholding the reports, shareholders argued Matrixx unfairly boosted the value of its stock. The Zicam nasal products contain zinc, which the FDA two years ago warned causes anosmia (see the health advisory), and Matrixx reluctantly recalled its products (see the statement).
For its part, Matrixx was challenging an appeals court ruling that reinstated a 2004 shareholder lawsuit alleging Matrixx received nearly a dozen adverse event reports but never disclosed them or an FDA probe into the reports, as well as two lawsuits by individuals who claimed Zicam caused them to lose their sense of smell. Matrixx argued it was not required to disclose the reports unless these actually showed side effects may be caused by using a drug.
But in early 2004, Matrixx stock was gyrating. After a Dow Jones report about adverse events, the stock fell, but rebounded after Matrixx issued a press release calling the news report "unfounded and misleading," and suggesting clinical trials showed no link between Zicam and anosmia. Not surprisingly, the stock recovered, but then plummeted after more reports about a possible link. The FDA identified about 120 adverse event reports and, during a subsequent inspection, found some 800 reports never filed with the agency (back story here and here).
The Supreme Court ruled unanimously against Matrixx: "Although in many cases reasonable investors would not consider reports of adverse events to be material information, respondents have alleged facts plausibly suggesting that reasonable investors would have viewed these particular reports as material," wrote Sonia Sotomayor. "Matrixx’s premise that statistical significance is the only reliable indication of causation is flawed. Both medical experts and the Food and Drug Administration rely on evidence other than statistically significant data to establish an inference of causation. It thus stands to reason that reasonable investors would act on such evidence..."
"The question is whether a reasonable investor would have viewed the nondisclosed information ‘as having significantly altered the total mix of information made available.' Something more than the mere existence of adverse event reports is needed to satisfy that standard, but that something more is not limited to statistical significance and can come from the source, content, and context of the reports... The complaint’s allegations, 'taken collectively,' give rise to a 'cogent and compelling' inference that Matrixx elected not to disclose adverse event reports not because it believed they were meaningless, but because it understood their likely effect on the market," Sotomayer concluded (read the ruling here).