On March 22, 2011 the US Supreme Court issued its decision in Matrixx Initiatives, Inc. v. Siracusano,1 in which it rejected the application of a bright-line rule that reports of adverse events related to the use of drugs and other products regulated by the US Food and Drug Administration (FDA) which do not rise to the level of statistical significance are immaterial as a matter of law under the federal securities laws. The Court’s decision requires medical device and pharmaceutical companies to evaluate the materiality of adverse event reports in light of the total mix of information available to them.

Respondents, plaintiffs in a securities class action suit, alleged that Matrixx Initiatives, Inc. (Matrixx or the Company) failed to disclose material information regarding its drug product Zicam Cold Remedy (Zicam), arguing that the Company should have disclosed reports suggesting a possible link between use of Zicam and a condition called anosmia, or the loss of the sense of smell. Matrixx argued that, by not alleging that the Company had received a "statistically significant" number of adverse event reports in comparison to the total number of doses of Zicam dispensed, Respondents’ complaint failed to adequately allege that these events were material facts and that the Company acted recklessly in not disclosing them. In amicus briefs supporting Matrixx’s position, drug and medical device manufacturers urged the Court to adopt a bright-line rule that such reports are material only if the number of adverse event reports reached statistical significance. The amici argued that, absent statistical significance, adverse event reports are merely anecdotal evidence that do not provide a scientifically reliable basis for identifying potential safety signals, and that the failure to adopt a bright-line rule would only serve as an incentive for boilerplate disclosures that add nothing to the mix of information already available to investors.

The Court rejected Matrixx’s arguments, concluding that the materiality of adverse event reports cannot be reduced to a bright-line rule based on "statistical significance," and that the determination of whether a company must disclose particular adverse event reports requires a contextual, case-by-case analysis that is dependant on the mix of information available.2 As a result of this ruling, FDA-regulated companies must conduct a careful, and ongoing, review of the adverse event reports they receive in order to determine whether and when the information becomes material in light of all the circumstances including the nature of the events and the profile of the product and, if so, whether it must be disclosed based on the company’s prior statements to the market.

SEC Disclosure Requirements for FDA-Regulated Companies

Section 10(b) of the Securities and Exchange Act makes it unlawful for any person to "employ, in connection with the purchase or sale of any security …, any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors."3 Securities and Exchange Commission (SEC) Rule 10b-5 implements this provision by prohibiting companies from "mak[ing] any untrue statement of a material fact or …omit[ting] to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading …."4 To establish a violation of §10(b) and Rule 10b-5, a party must show: "(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation."5

Pursuant to the US Supreme Court’s decision in Basic v. Levinson, an omitted fact is material if there is "‘a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available.’"6 Basic involved the materiality of merger negotiations, and the defendant argued for a bright-line rule that preliminary merger negotiations are material only once the parties to the negotiations reach an agreement in principle.7 The Court rejected this argument, indicating that "[a]ny approach that designates a single fact or occurrence as always determinative of an inherently fact-specific finding such as materiality, must necessarily be overinclusive or underinclusive."8

In recent years, the SEC, in coordination with the FDA, has increased its scrutiny of investment communications by FDA-regulated companies. For such firms, the status and results of clinical trials and marketing approval applications, and safety signals divined from reports of adverse events received following FDA approval, are among the key drivers of a company’s financial prospects. In turn, such information is often of critical importance to the investment community. Thus, pharmaceutical and medical device companies must strike the right balance between conveying favorable product developments and attributes while also disclosing, but not overstating, the product’s risks. This difficulty is compounded by the fact that data and information on drugs and devices are subject to varying interpretations. The Matrixx opinion, by reiterating the applicability of the "total mix" standard for disclosure of adverse event reports,9 leaves FDA-regulated companies to make complex disclosure decisions often based on incomplete, limited or conflicting information regarding the risks and benefits of their products.

Matrixx Initiatives, Inc. v. Siracusano

Respondents claimed that, in an effort to maintain artificially high prices for its securities, Matrixx violated §10(b) of the Securities Exchange Act and SEC Rule 10b-5 by making untrue statements of fact and by failing to disclose material facts necessary to make the statements not misleading. Specifically, Respondents asserted that Matrixx knew but failed to disclose complaints that Zicam may have caused some users to lose their sense of smell and that, as a result, several product liability lawsuits had been filed against the Company.

Matrixx moved to dismiss the complaint, arguing that Respondents failed to plead the elements of material misstatement or omission and scienter. The US District Court for the District of Arizona granted the Company’s motion to dismiss, finding that Respondents failed to "present evidence of a statistically significant correlation between the use of Zicam and anosmia so as to make failure to publically disclose complaints…a material omission."10 The District Court’s decision followed the bright-line rule, which had been established in some circuits, that a lack of statistical significance rendered facts not material.11 The US Court of Appeals for the Ninth Circuit reversed, holding that the District Court had erred in requiring an allegation of statistical significance to establish materiality.12

Before the Supreme Court, Matrixx — supported by numerous drug and device manufacturers13 — argued for extending the bright-line rule followed by some circuits that adverse event reports are not material facts unless there is sufficient volume to establish a statistically significant risk that the product is causing the particular outcome.14 However, the Court rejected this approach as one that would "‘artificially exclud[e]’ information that ‘would otherwise be considered significant to the trading decision of a reasonable investor."15 The Court noted that such an outcome would be inconsistent with Basic.16 According to the Court, the argument in support of a bright-line rule relied on a flawed premise that statistical significance is the only reliable indication of causation. The Court cited several other sources of information17 relevant to an assessment of a risk to health posed by a product, which it noted are routinely used by FDA and medical experts to identify safety signals.18 The Court concluded that, "[g]iven that medical professionals and regulators act on the basis of evidence of causation that is not statistically significant, it stands to reason that in certain cases reasonable investors would as well."19

The Court held that the materiality of particular adverse event reports must be determined by conducting the "‘fact-specific’ inquiry" set forth in Basic, which, in this context, would consider the "source, content, and context of the reports."20 Under the Basic standard, the mere existence of adverse event reports may not, in and of itself, be material, and thus, drug and device manufacturers are not absolutely required to disclose all adverse events to investors. The Court acknowledged that, given the nature of the drug and device industry, in which products are used by thousands of individuals every day, the fact that a user experienced an adverse event does not necessarily mean that the particular product caused that outcome. Because of this, the Court concluded that "[s]omething more" is needed to accurately determine "whether a reasonable investor would have viewed the nondisclosed information ‘as having significantly altered the "total mix" of information made available.’"21

The "something more" required by the Court is a contextual inquiry that takes into account the nature and extent of the information known to the Company and what information the Company has already disclosed to the market. For example, in applying the "total mix" standard to the facts of the Matrixx case, the Court cited the following determinative facts:

  • Zicam accounted for approximately 70 percent of the Company’s sales22
  • Matrixx had received information suggesting a link between Zicam and anosmia from three medical professionals about more than 10 patients23
  • Nine plaintiffs had initiated four product liability suits against the Company24
  • Matrixx was aware that medical researchers’ findings regarding the link between Zicam and anosmia were presented at a national medical conference25
  • Medical researchers had made Matrixx aware of studies demonstrating a biological causal link between intranasal application of zinc (the active ingredient in Zicam) and anosmia26
  • Before Matrixx was made aware of these studies, the Company had not conducted any research of its own relating to anosmia, and, as a result, it would have had no basis for rejecting the findings out of hand27
  • Despite knowing all of this information which indicates a significant risk to its leading revenue-generating product, Matrixx had previously told investors that revenues were going to rise 50 and then 80 percent28

Viewing these facts as a whole, the Court concluded that the Respondents adequately alleged that information possessed by Matrixx "plausibly indicated a reliable causal link between Zicam and anosmia," which suggested "a significant risk to the commercial viability of Matrixx’s leading product."29 As such, the adverse event reports that Matrixx had received were "material facts ‘necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.’"30


The Court’s refusal to adopt a bright-line rule may make it more difficult for FDA-regulated companies to dispose of securities class actions on a motion to dismiss. Importantly, however, the Court noted, that "[e]ven with respect to information that a reasonable investor might consider material, companies can control what they have to disclose under these provisions by controlling what they say to the market."31 Matrixx thus underscores the need for an FDA-regulated companies to be circumspect in the way it presents information to the market, and to conduct a "contextual inquiry" regarding the materiality of adverse event reports, as well as other safety and efficacy data and information, that it receives. Such a "contextual inquiry" will require a considered review of safety information that is known to the company, an evaluation of its impact and reliability, and consideration of its significance to the reasonable investor in light of the total mix of information that has been provided in previous disclosures.