The recent U.S. Supreme Court decision in Matrixx Initiatives, Inc. v. Siracusano could have implications for all life sciences companies in capital-raising and M&A transactions.

Disclosure decisions by publicly traded life sciences companies likely will be further complicated by the finding that adverse event reports need not be statistically significant to warrant disclosure; they need only meet a “something more” standard. The Matrixx decision may also affect the standard privately held companies apply to each representation and warranty provided in stock purchase agreements for capital-raise transactions and in stock or asset purchase agreements for M&A transactions.


The plaintiffs in the case, investors in Matrixx, alleged that the company failed to disclose a possible link between its leading product, Zicam Cold Remedy, and the loss of smell. The Supreme Court unanimously found that, if the facts are ultimately determined to be true, the complaint adequately stated a claim that the Matrixx disclosures contained misleading misrepresentations and omitted material information about adverse event reports—even though the reports were not statistically significant.

Between 1999 and 2004, Matrixx received reports from medical experts and researchers that indicated a possible link between Zicam use and loss of smell; four related lawsuits were also filed against the company. In October 2003, Matrixx publicly stated that it expected revenues to increase more than 50 percent. In January 2004, it indicated that it expected an 80 percent increase. At the time, Zicam was Matrixx’s leading revenue-generating product.

In January 2004, when the FDA said it was investigating complaints that a Matrixx over-the-counter cold medicine might be causing a loss of smell, the company issued a press release stating that allegations that intranasal Zicam products caused loss of smell were unfounded and misleading. Matrixx issued a similar press release after a Good Morning America report in February 2004.

Matrixx argued in court that “adverse events associated with a pharmaceutical company’s products cannot be material absent a sufficient number of reports to establish a statistically significant risk that the product is in fact causing the events.” Absent statistical significance, it argued, such reports are only anecdotal evidence that a user experienced an adverse event.

The Supreme Court, deciding the case on March 22, 2011, rejected that argument, refusing to establish a bright-line materiality test. The test for determining materiality remains “whether a reasonable investor would have viewed the nondisclosed information as having significantly altered the total mix of information made available.” The Court clarified that “the mere existence of reports of adverse events—which says nothing in and of itself about whether the drug is causing the adverse events—will not satisfy this standard. Something more is needed, but that something more is not limited to statistical significance and can come from the source, content, and context of the reports.”

The Court noted that Matrixx had reports from three medical professionals about 10 patients who experienced adverse events, had received previous studies demonstrating a biological link between intranasal application of zinc and loss of smell, and had not conducted any of its own studies. The Court also noted, in deciding that investors would likely have considered this information significant, that Zicam Cold Remedy allegedly accounted for 70 percent of Matrixx sales.

The Court concluded that the plaintiffs had adequately pleaded scienter (intent). Matrixx had hired a consultant to review the product, asked one of the complaining medical experts to participate in animal studies, convened a panel, and prevented one of the complaining medical experts from using Matrixx’s name in a presentation. Further, Matrixx issued a press release suggesting that studies confirmed that Zicam does not cause loss of smell although it had not conducted any studies related to loss of smell and the scientific evidence at the time was inconclusive. The Court determined, “Matrixx elected not to disclose the reports of adverse events not because it believed that they were meaningless but because it understood their likely effect on the market.”

The materiality analysis has always been fact-specific, but following Matrixx, it is more so, and there do not appear to be any general rules of thumb. When evaluating materiality, it is critical to consider all of the facts and circumstances. While one or two adverse events may not support a determination of materiality individually, Matrixx demonstrates that, when considered in the aggregate, there may be sufficient reasons that such events are material. Licenses and M&A documents often use the securities law materiality concept in representations and warranties. Therefore, companies will need to conduct this materiality analysis when determining disclosure in representations, warrants, and schedules to these documents.

Publicly traded companies making voluntary statements, such as through issuing earnings guidance or press releases, may undertake a duty to update such information, and therefore would have to monitor changing facts and, possibly, disclose negative information. However, if the company does not voluntarily disclose information in this manner, it would have more flexibility in the timing of disclosure. Thus, a more conservative approach would be to refrain from making voluntary statements. But if a company chooses to do so, it should carefully balance the information and not overemphasize positive events.

Finally, it will be more difficult to get complaints dismissed. Plaintiffs will likely allege a broader list of facts and circumstances in an effort to show, in the aggregate, that the defendant made material misstatements or omitted material information.

For more information on how Matrixx might affect your company, please contact Douglas M. Fox at 410.528.5505




Copyright © 2011 by Ballard Spahr LLP.
(No claim to original U.S. government material.)


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