On March 22, 2011 the U.S. Supreme Court handed down a decision which is likely to have serious repercussions for companies in the bio/pharma tech space.  In MATRIXX INITIATIVES, INC., ET AL. v. SIRACUSANO ET AL., the Court rejected Matrixx argument that reports regarding the adverse effect of Zicam, its leading revenue generating product, were not statistically significant and therefore not material.

Noting that the analysis of materiality under the securities laws in fact specific, the Court appears to have relied heavily on two factors:

1. The methodologies and requirements of the FDA; and 

2. Public statements issued by Matrixx regarding its future revenues and  also that reports indicating that Zicam caused anosmia were “ ‘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.”

Methodologies and requirements of the FDA. As to the FDA methodologies, the Court noted, that “Both medical experts and the Food and Drug Administration rely on evidence other than statistically significant data to establish an inference of causation.  Because adverse reports can take many forms, assessing their materiality is a fact-specific inquiry, requiring consideration of their source, content, and context. The Court conceded that “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.”  Significantly the Court noted that the FDA defines an “[a]dverse drug experience” as “[a]ny adverse event associated with the use of a drug in humans, whether or not considered drug related.” 21 CFR §314.80(a) (2010). Federal law imposes obligations on pharmaceutical manufacturers to report adverse events to the FDA. During the relevant class period of the case, manufacturers of over-the-counter drugs, such as Zicam Cold Remedy, had no obligation to report adverse events to the FDA. However, in 2006, Congress enacted legislation to require manufacturers of over-the-counter drugs to report any “serious adverse event” to the FDA within 15 business days. See 21 U. S. C. §§379aa(b), (c).

Public statements issued by Matrixx regarding its future revenues. The Court Noted that Matrixx told the market that revenues were going to rise 50 and then 80 percent “when it had information indicating a significant risk to its leading revenue-generating product.”  And as  Court observed, Matrixx had not, in fact, conducted any studies and had “… received reports from medical experts and researchers that plausibly indicated a reliable causal link between Zicam and anosmia.”

The Court’s decision points to the importance of analyzing adverse product reports’ content and context and not relying on the fact that statistics may appear to render the reports merely anecdotal.  As always, public statements need to be made with care and with a  recognition that external factors can render what is said or even what is not said, actionable under the securities laws.