The federal government says materiality should be the standard for deciding when firms must disclose information about problems to shareholders, arguing that Matrixx Initiatives presents a "false choice" between disclosing all information or only that considered statistically significant.

In a brief filed Nov. 12 with the Supreme Court, representatives of the Department of Justice, Securities and Exchange Commission and Department of Health and Human Services support many of the points argued by Matrixx shareholders in their litigation with the firm over disclosure of information about an alleged link between its Zicam intranasal gels and anosmia.

DoJ, through the Solicitor General, represents the federal government before the Supreme Court. The brief notes SEC administers and enforces federal securities laws.

The case's outcome will affect whether companies can be sued for failing to disclose adverse event reports that are not statistically significant.

The government makes clear its stance that statistical significance should not be the threshold for disclosing information.

The Power of Suggestion

"Data showing a statistically significant association are not essential to establish a link between use of a drug and an adverse effect," the government attorneys write.

Information suggesting the presence of an adverse effect "may be important to a reasonable investor even if it does not prove that a causal link exists," they say.

This argument reflects the position shareholders take in their brief filed Nov. 5 (Also see "Matrixx Misled Shareholders About Zicam Problems, Investors Allege" - Pink Sheet, 15 November, 2010.).

The government notes a suggestion of an adverse effect may be important to investors because it can cause reasonable consumers to stop buying a product they perceive as risky, citing the anti-nausea drug Bendectin (doxylamine and vitamin B6).

Bendectin sales plummeted following media reports about children born with physical deformities after their mothers took the drug during pregnancy, "despite FDA's contemporaneous finding that no causal link existed."

The brief also says reports of serious adverse events often attract regulatory attention absent statistically significant evidence of causation.

Matrixx understates "the importance of adverse event reports by emphasizing their limitations without explaining the manner in which FDA actually uses such reports," the agency representatives add.

Information suggesting the presence of an adverse drug effect "may be important to a reasonable investor even if it does not prove that a causal link exists," the government argues.

When FDA took regulatory action against Matrixx, it did not cite statistically significant evidence, the government says. Rather, FDA cited the agency's receipt of more than 130 reports of anosmia associated with use of zinc-containing Zicam intranasals.

FDA's enforcement action also noted "the relative paucity" of AERs for other widely used intranasal cold products and scientific literature analyzing the effects of zinc on olfactory function, according to the brief.

Further, FDA officials inspecting the Scottsdale, Ariz.-based homeopathic product manufacturer's facility asked why the firm had not submitted some 800 AERs it had on file ("FDA Uses 'Unusual' Action To Get Matrixx's Zicam Off The Market," "The Tan Sheet" June 29, 2009).

A Dim View Of "Bright Line"

Much like the shareholders, the federal agencies argue Matrixx's proposed statistical significance standard would create a "bright line" rule that goes against Supreme Court precedent, and that withholding information contradicts congressional intent when writing relevant securities law.

The Supreme Court "soundly rejected" a comparable rationale for the bright line rule proposed in a 1988 securities litigation case, the government writes. The high court's ruling explained that disclosure and not "paternalistic withholding of accurate information, is the policy chosen and expressed by Congress."

Quoting a previous Supreme Court decision, the agencies say, "courts should trust investors to make informed decisions" rather than assume "investors are nitwits, unable to appreciate – even when told" AERs by themselves do not establish a conclusive causal link.

Government: Matrixx Presents "False" Choice

The government also strikes at the heart of an argument made in an amicus brief industry groups filed in support of Matrixx, that the disclosure of too many AERs would result in a flood of unnecessary information (Also see "Trade Groups Back Matrixx On AER Disclosure In Supreme Court Case" - Pink Sheet, 6 September, 2010.).

"The choice that petitioners offer the Court – adopt a statistical significance threshold or force companies to disclose every report of an adverse effect to stave off liability – is ultimately a false one," the government brief says.

In fact, applying the materiality standard would not require firms to disclose every event, but "would sometimes permit a company to withhold adverse drug information," the government maintains.

The brief lists several hypothetical examples, including a single report of an adverse event from an anonymous source, a dozen reports of a dozen different adverse effects, or even numerous reports of an adverse effect if "the effect was minor and transient relative to the drug's benefit and the drug sales did not contribute meaningfully to the company's revenues."

Zicam AERs Met Materiality Standard

Although the federal agencies' brief concedes disclosure of adverse events would not be required in some cases, it says this case is not one of them.

The agencies say the AERs are material because much of the information about Zicam and anosmia was provided by experts.

Further, they say drug-induced anosmia is a relatively serious side effect; Zicam did not have a new drug application approved by FDA; and several of the facts alleged suggest a plausible causal link between Zicam and anosmia.

Finally, the government attorneys note "the fact that Matrixx's stock fell 23.8% the day after" a TV news program report on the anosmia AERs "supports the conclusion that omitted information would have been important to a reasonable investor."

Since withdrawing its zinc-containing nasal gel and gel swab from the market, Matrixx has hoped to transition customers to its oral Zicam products while also developing other nasal swab products.

The recalled gel swabs made up 40% of annual sales, with the swab outselling the gel two to one (Also see "Zicam Swab Platform Takes Center Stage In Matrixx Growth Plans" - Pink Sheet, 22 March, 2010.).

Matrixx's sales dropped substantially for several quarters following the gel and swab recall and its income also flagged partly due to growing legal costs. But the firm's net income grew slightly to $5.3 million, or a diluted 57 cents per share, in its most recent quarter even as its net sales dropped more than $4 million from the year-ago quarter to $21.3 million (Also see "Matrixx Expects Income Turnaround From Seasonal Sales" - Pink Sheet, 1 November, 2010.).

By Carolyn B. Phenicie

Government Weighs In For Shareholders In Matrixx Supreme Court Case

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