MTXX Matrixx Initiatives Inc. (MM)

The Supreme Court on Monday considered how to set standards for when pharmaceutical companies must tell investors about incident reports involving consumers who experience adverse side effects after taking a drug.

At issue was a Matrixx Initiatives Inc. (MTXX) challenge to a securities-fraud lawsuit brought by a class of company investors alleging the company failed to disclose that some users of its Zicam Cold Remedy nasal gel and swabs reportedly lost their sense of smell.

The plaintiffs alleged that Matrixx received at least a dozen incident reports about Zicam between 1999 and 2003 that concerned the loss of smell, but didn't disclose them and continued to make positive statements about the over-the-counter drug. They alleged that Matrixx's statements were false and misleading and inflated the price of the company's stock.

Matrixx said the incident reports weren't statistically significant and didn't indicate a causal relationship between the drug and the users' adverse reactions. It said there is no valid evidence that Zicam Cold Remedy products are unsafe.

"All drug companies receive on an almost daily basis anecdotal hearsay reports about alleged adverse health events following the use of their products," Matrixx lawyer Jonathan Hacker told the court during an hour-long oral argument. "Those incident reports do not themselves establish any reliable facts about the drug's performance or its safety."

The plaintiffs' lawyer, David Frederick, said Matrixx was seeking a major change to the rules that govern the types of information that must be disclosed to investors.

Frederick said the incident reports should have been disclosed to investors because they were serious in nature, were backed by medical professionals and involved a key Matrixx product.

"All of these things go into the contextual mix that investors would regard as important in making an investment decision," he said.

A Justice Department lawyer, representing the Obama administration, also argued in support of the investors.

The high court expressed concern about the implications of both sides' legal arguments.

Some justices suggested that Matrixx's proposed standard--that companies should only have to disclose adverse events that are statistically significant--couldn't be correct.

"The FDA takes action all the time as to drugs...on the basis of findings that are not statistically significant," Justice Elena Kagan said. "Now, clearly in those cases the market has a right to know the very things that are going to make the FDA take action against a product and that are going to severely affect the product's value to the company."

But the court also appeared concerned about what a company was required do in instances where consumers report irrational drug fears that, even though they are unfounded, could cause a drop in the drug maker's stock price if disclosed to the public.

"It seems to me ridiculous to hold companies to irrational standards," Justice Antonin Scalia said.

A federal trial judge in Arizona originally threw out the plaintiffs' lawsuit in 2005, but an appeals court reinstated it in 2009.

Matrixx later received more incident reports on Zicam users who claimed to have lost their sense of smell. The company is facing numerous product liability lawsuits, and the U.S. Food and Drug Administration issued a warning letter to Matrixx in June 2009 concluding that Zicam products may pose a serious risk to consumers.

Following the letter, Matrixx recalled its Zicam nasal gel and cold-remedy swabs from the market. The company, however, disputes the FDA's claims.

The court is expected to decide the case by the end of June.

-By Brent Kendall, Dow Jones Newswires; 202-862-9222; brent.kendall@dowjones.com

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