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Drugmaker Investor Lawsuits Backed by U.S. Supreme Court

The U.S. Supreme Court, allowing a suit over a withdrawn cold remedy, gave shareholders more power to sue drugmakers and biotechnology companies for failing to reveal indications about dangerous side effects.

The justices unanimously said Matrixx Initiatives Inc. (MTXX), acquired in February by HIG Capital LLC, must defend against accusations that it should have told investors that some users of the Zicam nasal spray and gel had lost their sense of smell.

Matrixx argued that drugmakers need not say anything until reports of side effects become statistically significant. The high court today rejected that argument, saying that less definitive evidence in some cases is enough to require disclosure under the federal securities laws.

“Given 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,” Justice Sonia Sotomayor wrote for the court.

The court also ruled against business groups in a second case today. The justices ruled 6-2 that, under a federal labor law, employers can’t retaliate against employers who orally complain about workplace conditions.

Matrixx stopped selling its Zicam nasal spray and gel in June 2009 after the Food and Drug Administration warned consumers the treatments may cause a loss of smell, a condition known as anosmia. Matrixx says it disagrees with the FDA’s findings. Other versions of the cold remedy remain on the market.

Link Alleged

Sotomayor limited the impact of the ruling by saying it “does not mean that pharmaceutical manufacturers must disclose all reports of adverse events.” She called those reports “daily events” in the industry.

In Matrixx’s case, the company allegedly “received information that plausibly indicated a reliable causal link between Zicam and anosmia,” Sotomayor wrote. She pointed to allegations that three medical professionals and researchers had compiled reports describing more than 10 patients who had lost their sense of smell after using Zicam.

The suing investors also pointed to lawsuits filed on behalf of nine people from October 2003 to January 2004.

“The inference that Matrixx acted recklessly (or intentionally, for that matter) is at least as compelling, if not more compelling, than the inference that it simply thought the reports did not indicate anything meaningful about adverse reactions,” Sotomayor wrote.

Company Confident

A lawyer representing Matrixx said the company is confident it will be able to refute the allegations when the case returns to a federal trial court in Arizona.

“There was certainly no intentional or reckless failure to disclose any information to the public,” said the lawyer, Michael Yoder, a partner at O’Melveny & Myers LLP in Newport Beach, California.

The investor suit seeks class-action status on behalf of people who bought Zicam from Oct. 22, 2003, to Feb. 6, 2004.

The case is Matrixx Initiatives v. Siracusano, 09-1156.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net.

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net

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