Laurence A. Weiss
Mark Hoogland

Recent Matrixx Initiatives decision muddies requirements set forth in Carter-Wallace over a decade ago.

Are publicly traded drug companies required by the federal securities laws to disclose reports of adverse drug experiences that they learn of during ongoing clinical trials? For years, a decade-old federal appeals court decision, In re Carter-Wallace Sec. Litig., has provided guidance on this matter.

Under Carter-Wallace and subsequent federal court decisions, disclosure is required only if and when those reports “provide statistically significant evidence that the ill effects may be caused by—rather than randomly associated with—use of the drugs and are sufficiently serious and frequent to affect future earnings,” or, absent a statistically significant link, if the company has actually reached the conclusion that, as a result of the safety issue, the drug is unlikely to be approved or marketed.

But in the recent Matrixx Initiatives case (Siracusano v. Matrixx Initiatives, Inc.), the Ninth Circuit Court of Appeals (which creates binding precedent for federal courts in nine Western states including California) criticized Carter-Wallace—becoming the first appeals court to do so—and held that there may be additional circumstances in which disclosure to investors may be required. Notably, the Matrixx Initiatives court stated that the disclosure determination depends on each case’s unique facts.

Matrixx Initiatives did not involve clinical trials of new drug candidates, and its different factual context should limit its precedential value in securities cases involving adverse events that arise during clinical trials of new drug candidates. But until subsequent court decisions clarify the situation, the case creates some unwelcome uncertainty regarding whether a company that learns of adverse events in the course of ongoing clinical trials may still rely on the Carter-Wallace standard or must instead undertake a context-specific analysis to determine whether even inconclusive adverse event reports must be disclosed to investors.

Matrixx Initiatives

Matrixx Initiatives concerned the Zicam Cold Remedy, a homeopathic nasal spray containing zinc gluconate gel, which was sold as an over-the-counter treatment for the common cold and accounted for approximately 70% of the company’s sales. Investors alleged that Matrixx received reports from physicians that a number of Zicam users had developed anosmia (loss of smell), but the company initially did not reveal the incidents of anosmia to investors and later, in the face of press reports and product liability lawsuits, denied that there was sufficient evidence to establish a link between Zicam and anosmia.

The Matrixx Initiatives court reversed a lower court’s dismissal of the case, allowing the investors an opportunity to prove their securities-fraud allegations. The court’s reasoning focused on two elements of a claim under the federal securities laws: (1) “materiality,” or whether the omitted information would be considered significant to a reasonable investor; and (2) scienter, that is, whether the company intended to deceive investors or acted with “deliberate recklessness.” 

Regarding materiality, the court ruled that the alleged accumulation of reported incidents of anosmia could be material to investors even if not statistically significant. As to intent, the court concluded that the company’s knowledge of the adverse events and lawsuits affecting its main product, and its failure to disclose them, alone satisfied the scienter element. Had the court applied the Carter-Wallace approach, it likely would not have reached either of these conclusions.

Rationale in Clinical Trial Cases

Although Carter-Wallace itself involved adverse events that arose after the drug had been approved for marketing by the U.S. FDA, the vast majority of federal trial courts to have confronted the issue have applied the Carter-Wallace approach in granting early dismissals of securities claims against companies that learn of adverse events during ongoing clinical trials prior to FDA approval. They have done so with good reason.

Early reports of adverse events are typically inconclusive, and further analysis is required to determine whether the adverse event may have any impact on the future of the drug-development program. Even numerous adverse incidents may turn out to be unrelated to the drug. Unless the adverse events are statistically significant or otherwise lead the company to reach conclusions about the future prospects for the approval and marketing of the drug, investors themselves have little basis on which to evaluate the potential effect of adverse events on their investment, rendering the fact immaterial. Indeed, investors may be more likely to be misled as informed by inconclusive adverse events.

It is true that FDA regulations broadly require drug sponsors to review all safety information received from any source and promptly report to the FDA all serious and unexpected adverse experiences associated with the use of the drug (see 21 C.F.R. § 312.32). But it would be a mistake to conflate this broad reporting requirement with the disclosures required under the federal securities laws.

Early reporting to the FDA serves the agency’s regulatory function, including protection of patient safety. Early reporting also permits the FDA’s experts to consult with the drug sponsor and to play a role in making the determination whether adverse events are significant or not. Investors have no such comparable access, and no similar need for inconclusive information.

Of course, companies must be careful not to make affirmative misrepresentations about the status of a clinical trial. But accurate reporting of “progress” and “encouraging results” are not rendered misleading by the nondisclosure of inconclusive safety data.

As another federal appeals court recently explained in affirming the dismissal of securities claims against Biogen Idec, “the receipt of an adverse report does not in and of itself show a causal relationship between [a drug] and the illness mentioned in the report. Some adverse events may be expected to occur randomly, especially with a drug designed to treat people that are already ill.”

The Biogen Idec court also acknowledged that the “investing public is well aware that drug trials are exactly that: trials to determine the safety and efficacy of experimental drugs. And so trading in the shares of companies whose financial fortunes may turn on the outcome of such experimental drug trials inherently carries more risk than some other investments.” 

Finally, courts applying the securities laws in other product-development contexts recognize that even seemingly insurmountable problems that arise in the course of a development project may be resolved without meaningful impact on the ultimate marketing of the new product, and therefore ordinarily need not be disclosed to investors.

As one court has explained, “problems and difficulties are the daily work of business people. That they exist does not make a lie out of any alleged false statement.”  The Carter-Wallace approach acknowledges that the appearance of adverse events in clinical trials is simply one manifestation of this common phenomenon. Adverse events that initially appear troubling may ultimately turn out to be unrelated to the drug.

In some instances, a drug may be approved for marketing notwithstanding the presence of a safety risk (for example, with cautionary labeling, patient monitoring, or use restrictions). As a result, the mere knowledge by the company of adverse events represents a problem to be solved, not a material fact to be disclosed to investors.

Aside from a small number of federal trial courts that have reached decisions inconsistent with the Carter-Wallace approach in cases involving adverse events from clinical trials, for more than a decade Carter-Wallace has provided a sensible basis to determine whether disclosure is required under the federal securities laws. Now, companies and their counsel should be aware of the Matrixx Initiatives decision and its potential to influence the decision whether to disclose adverse events that may arise during ongoing clinical trials.

Laurence A. Weiss ([email protected]) is a partner and Mark Hoogland is an associate at Hogan & Hartson LLP. Web:

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