By Abby Lauer – Edited by Alissa Del Riego
Siracusano v. Matrixx Initiatives, Inc., No. 06-15677 (9th Cir. Oct. 28, 2009)
Opinion

The Ninth Circuit has unanimously reversed the U.S. District Court for the District of Arizona’s holding, which had dismissed a class action claim against Zicam manufacturer Matrixx for the complaint’s failure to adequately allege a violation of the Private Securities Litigation Reform Act of 1995 (“PSLRA”).

In an opinion written by Tashima, J., the Ninth Circuit held that the District Court improperly relied on a statistical significance standard to determine that the plaintiffs’ complaint did not allege “a material misrepresentation or omission of fact.” Siracusano v. Matrixx Initiative, Inc., No. 06-15677 at 18 (9th Cir. Oct. 28, 2009). Instead of determining materiality as a matter of law, the district court should have allowed the jury to conduct a “fact-specific inquiry.” Siracusano v. Matrixx Initiative, Inc., No. 06-15677 at 20 (9th Cir. Oct. 28, 2009). In addition, the Ninth Circuit held that the lower court erred in dismissing plaintiffs’ complaint for failure to allege scienter on the part of Matrixx executives. The court reasoned that the inference that Matrixx executives knew about the possible link between Zicam and anosmia (loss of smell) before issuing allegedly misleading statements is at least as likely as any plausible opposing inference.

Phoenix’s East Valley Tribune provides an overview of the case. For further discussion of the opinion and pleading standard precedents, see The D & O Diary. For more information about homeopathic remedies, including Zicam, see this recent Washington Post article.

Plaintiffs brought the original action in April 2004, alleging that Matrixx had information of a possible causal connection between Zicam use and anosmia but failed to disclose this risk and instead issued false and misleading statements to consumers.

The Ninth Circuit held that plaintiffs’ complaint satisfied the heightened pleading standards of past Supreme Court cases Twombly and Tellabs and thus should have survived a motion to dismiss. In its holding on the materiality issue, the court examined allegations in the complaint to consider whether information regarding a possible link between Zicam and anosmia was information a reasonable investor might consider significant. The court found that the allegations were sufficient to satisfy the pleading requirement under the PSLRA and held that the issue of whether Matrixx’s misrepresentations were material should be left for a jury to decide. On the issue of scienter, the court emphasized that Matrixx was aware of at least 14 complaints linking Zicam to anosmia at the time it stated that a causal connection between the two was “completely unfounded and misleading.” The court also found a strong indication that high-level Matrixx executives knew that the company was being sued in a product liability action on the issue of anosmia when they released the allegedly misleading statements. Viewing the complaint as a whole, the court held that the inferences of scienter drawn by the plaintiffs’ complaint were sufficiently strong for it to survive a motion to dismiss.

The decision is the latest in a series of setbacks for Matrixx. Following a warning from the FDA last June that Zicam products could cause anosmia, the company voluntarily withdrew two forms of the drug. Matrixx continues to maintain that anosmia is caused by the cold virus, which Zicam is designed to treat, and not by the drug itself.

The case will now return to the District Court for further proceedings. Whether or not the plaintiffs eventually prevail at trial may have substantial implications for Matrixx, which relied on Zicam Cold Remedy products for about 70 percent of its total sales at the time the action was initially filed.

Text of H.R. 1427
Summary

Last week, Rep. Henry Waxman and several other representatives unveiled the latest version of a bill designed to lower the price of drugs by encouraging generic competition in biological products (”biologics”). Biologics are products derived from living processes and used to prevent, treat, or cure human illness. Most drugs, in contrast, are synthesized using chemical reactions.  Biologics include products such as vaccines, blood-derived products, antibodies, and recombinant proteins (e.g. proteins that modulate the immune system, or proteins that induce the proliferation of red blood cells). Over the past 30 years, a revolution in recombinant DNA technology has propelled the sub-field of biologics from the periphery into prominence in the biopharmaceutical industry. Three of the top 10 best-selling drugs in the U.S. in 2007 were biologics (Enbrel, Aransep, and Epogen), and biological products now represent some of the most expensive drugs on the market; annual per-patient treatment costs for one expensive drug topped $300,000 last year.

The new bill, H.R. 1427, dubbed the “Promoting Innovation and Access to Life-Saving Medicines Act,” is intended to introduce price competition in biologics by granting the FDA clear authority to approve generic, or “follow-on” biologics, which are comparable in safety and efficacy to biologics already on the market. The new legislation is modeled on the Hatch-Waxman Act of 1984, which allowed generic manufacturers to gain market approval by showing that their products were interchangeable, or bio-equivalent, with previously approved products, without the need to preform additional clinical trials. Until now, the FDA has been reluctant to allow for this type of abbreviated approval for biologics, which have historically been regulated under a different legal regime from other drugs. Although, as described in this testimony by an FDA official, the story is more complicated. Some proteins that were initially purified from human and animal tissues, such as insulin and human growth hormone, were categorized as drugs when they first obtained FDA market approval. Today these substances remain regulated as drugs, even though they are now synthesized using recombinant DNA technology, like many biologics.

Previous attempts to create an abbreviated approval pathway for generic, or “follow-on” biologics, have stalled based on concerns that the new pathway will fail to ensure patient safety and protect the profits of innovator firms. A major sticking-point has been the inclusion, in some versions of the legislation, of a “data-exclusivity” provision that would prevent generic firms from gaining approval based on comparisons to an innovator product for 12-14 years after the innovator gains approval. The data exclusivity term would run concurrent with the term of any patents covering the innovator product. Data exclusivity would protect innovator firms whose patents have expired or been interpreted too narrowly to effectively block competition. The new H.R. 1427 attempts to compromise with innovators by offering shorter, 3- and 5- year periods of data exclusivity, similar to the periods currently available to other drugs under the 1984 Hatch-Waxman regime (a model suggested by Boston University Scholar Laurence Kotlikoff).

While the debate rages on over how best to protect investment by innovators under the new regime, few have raised the question of whether or not the new legislation will actually be successful in promoting generic competition. Lawmakers and lobbyists pushing for the extended period of data exclusivity appear to assume that once the pathway is open, it will be a simple matter for generic firms to reverse engineer the originator product. The success of the Hatch-Waxman regime has relied on the fact that most drugs are easy to reverse engineer — the process of characterizing and reproducing a simple chemical entity can cost as little as $100 million and take as few as 6 months. Once Hatch-Waxman removed the barrier of submitting independent clinical data, generic competition was immediate and dramatic: the share of prescriptions filled by generic drugs rose from 19% to 40% in the first decade following the act (as described in this FTC Comment).

By contrast, the process of reverse-engineering a biologic is much more complicated. As the FDA notes, biologics tend to be more complex, heterogenous, and harder to characterize than their chemical counterparts.  Unlike most chemical drugs, the particulars of the production process for biologics can have major effects on the structure of the end product.  Use of different cell-lines or small changes to the manufacturing process can lead to dangerous variations in the product that can be difficult to detect without additional clinical studies. The importance of the manufacturing process and use of particular cell lines means that a product may remain difficult to reproduce, even where elements have been disclosed in a patent application. The innovator biologics industry has argued that it would be impossible — at least in some cases — to design a follow-on products that could be safely exchanged with the innovator product. This assertion has prompted criticism that many biologics patents are actually invalid because they fail to disclose enough information to enable a person skilled in the art to make and use the invention. See 35 U.S.C. § 112

Such barriers to reverse-engineering biologics will cut into the effectiveness of the new legislation by making it difficult for generic firms to prove that their drugs are similar enough to the innovator product to gain regulatory approval without preforming additional clinical trials. Even Henry Grabowski, a Duke University economist who has argued for a 12-16 year data exclusivity period to protect innovation, admits that the new legislation will not work as well as Hatch-Waxman at promoting competition for biologics. In a 2006 paper published in Health Affairs, Grabowski estimated that even with an abbreviated approval process in place, technological and manufacturing barriers to copying would result in fewer follow-on biologics. Less generic competition means that prices are not likely to drop as dramatically for biologics as they had for simpler drugs following Hatch-Waxman.

The troubling implication is that some biologics will be able to maintain their monopolies — and resulting high prices — even after the new legislation takes effect. Even more troubling is the fact that no attempt has been made to generate new solutions to the new challenges presented by biologics. Instead, the debates have focused on which elements of the Hatch-Waxman regime, such as data exclusivity, will be incorporated into the new legislation.

Solutions do exist. One potentially simple fix to the problem could be to borrow from patent law and require the innovator firm to meet an additional disclosure requirement in return for the allotted period of data exclusivity. If innovator firms insist on an 12-14 year period of monopoly protection, it is reasonable and fair to ensure that when the period expires, generic firms will be allowed to compete. A disclosure requirement could ensure competition by giving generic firms the information and materials necessary to replicate the innovator product with a minimum of additional expense. This would mean, in many cases, requiring the innovator firm to share cell lines and disclose manufacturing processes that would otherwise be protected by trade secrets. Such a requirement would also assist with public safety by ensuring that generic biologics were as similar as possible to the innovator — reducing the danger of unexpected side-effects. Publication of the disclosure could be timed to coincide with the expiration of patent and data exclusivity terms, as a way to prevent generics firms from manipulating the system by seeking early entry.

The paradigm for generic entry developed for chemical drugs fails to address existing barriers to production of follow-on biologics.  If lawmakers do not recognize these problems and incorporate new solutions to overcome them, the new legislation will not be effective at lowering the price of biologics.

*For further discussion of biologics and data exclusivity, see the forthcoming Fall 2009 edition of the Journal of Law & Technology, featuring “A Longer Monopoly for Biologics?: Implications of Data Exclusivity as a Tool For Innovation,” a student Note by Sarah Sorscher.

Wyeth v. Levine
Supreme Court of the United States, March 4, 2009, No. 06-1249
Slip Opinion

On March 4th, the Supreme Court of the United States affirmed the judgment of the Vermont Supreme Court, holding that federal drug labeling regulations do not preempt state failure-to-warn lawsuits.  The Supreme Court held that compliance with FDA labeling requirements did not preempt Levine’s failure-to-warn claim based on what she alleged was defective labeling of Wyeth’s anti-nausea drug Phenergan. In so holding, the Court concluded that Congress did not intend to preempt state-law failure-to-warn actions.  It also rejected Wyeth’s claim that the Court should defer to an FDA statement, made in the preamble to a 2006 regulation, that state tort suits threatened the FDA’s statutory mandate.

Briefs and relevant court documents are available here at the SCOTUS wiki.  The SCOTUS Blog provides an overview of the case. Drug and  Device Law Blog suggests that the decision does not eliminate preemption alcims, but does make them far more difficult to win.  The Wall Street Journal Law Blog features an analysis of the decision.  The Volokh Conspiracy notes a decrease in deference to agencies.

The Court upheld a $6.7 million jury award to musician Diana Levine, who lost most of her right arm to gangrene after an IV-push injection of Wyeth’s anti-nausea medication Phenergan.  Levine settled her claims against the health center and clinician who administered the Phenergan.  She then sued Wyeth in state court, arguing that the pharmaceutical company should have revised its FDA-approved label to warn clinicians not to use the higher-risk IV-push method of injection for administering the drug. A jury ruled in Levine’s favor, determining that Wyeth was negligent and Phenergan was a defective product as a result of inadequate warnings and instructions.   On appeal, the Vermont Supreme Court affirmed, holding that the jury’s verdict was not preempted by federal labeling requirements because Wyeth could have warned against IV-push administration without prior FDA approval, and because federal labeling requirements create a floor, not a ceiling, for state regulation.

Justice Stevens wrote the majority opinion, joined by Justices Kennedy, Souter, Ginsburg and Breyer.  The majority reasoned that drug companies remain primarily responsible for keeping their warning labels up to date and complete despite federal labeling requirements.  It also concluded that Congress did not intend FDA oversight to be the exclusive means of ensuring drug safety and effectiveness.

Based on a statement made in the preamble of a 2006 FDA regulation, Wyeth had argued that the FDA’s statutorily prescribed role as an expert federal agency responsible for evaluating and regulating drugs preempted conflicting state requirements.  The majority acknowledged that agency regulation with the force of law can preempt conflicting state requirements, but it maintained that in each case the Court would perform its own analysis of the substance of state and federal law and not rely on agency proclamations of preemption.  The majority concluded that the FDA’s statement that state law frustrated the agency’s implementation of its statutory mandate did not merit deference.  Based on its reading of the regulatory history and background, the majority concluded that there was a longstanding coexistence of state and federal law and the FDA’s traditional recognition of state-law remedies was in place each time the agency reviewed Wyeth’s Phenergan label.

Justice Breyer concurred, emphasizing the narrow reach of the holding and clarifying that the FDA may still promulgate lawful specific regulations with preemptive effect.  Justice Thomas wrote a separate concurrence supporting the majority’s conclusion but not its reasoning.  Thomas expressed his skepticism of the Court’s current preemption doctrine, arguing that it lead to expansion of federal statutes and unconstitutional results.  He would only preempt state law where Congress explicitly provided for such preemption.

Justice Alito dissented, joined by Justice Scalia and Chief Justice Roberts.  Alito argued that the FDA was ultimately responsible for regulating warning labels for prescription drugs.  He would not have disturbed the FDA’s judgment that the approved label was sufficient to render the use of Phenergan safe.  Arguing that the FDA is better suited than juries to consider the interests of all potential users of a drug over a long period, Scalia emphasized that state tort law could not be used to impose a different labeling requirement than that required under federal law. Because a jury’s cost-benefit analysis in a single case could differ from that of the FDA’s, Scalia expressed concern that juries in all fifty states could contradict the FDA’s expert determinations, reducing the incentives for medical manufacturers to develop new medical products.