Monday, June 22, 2009

No Smell of Profits at Matrixx Initiatives

Matrixx Initiatives (MTXX-$5.55) confirmed that it received a warning letter from the Food and Drug Administration about several of its 19 existing homeopathic Zicam products, specifically Zicam Cold Remedy Nasal Gel and Zicam Cold Remedy Swabs. The letter cited consumer reports that the use of these products could cause a temporary or permanent loss of smell, known as anosmia. The company is complying with the FDA request, but management is seeking a meeting with the FDA to defend the scientific data demonstrating the products’ safety. Nonetheless, the resulting adverse publicity could damage public confidence and kill sales across all product lines.

"Matrixx Initiatives stands behind the science of its products and its belief that there is no causal link between its Zicam Cold Remedy intranasal gel products and anosmia," said William Hemelt, Matrixx Initiatives' acting president in a press release. "It is well understood in the medical and scientific communities that the most common cause of anosmia is the common cold, which Zicam Cold Remedy intranasal gel products are taken to treat. Given the enormous number of doses sold and colds treated, there is no reason to believe the number of complaints of anosmia received is more than the number that would be expected in the general population.”

Management says, “no reliable scientific evidence exists that supports the claim that Zicam causes anosmia and that no plaintiff has ever won a product liability case against the company.” Still, that has not stopped folks from trying, with hundreds of lawsuits having been filed against the company since 2003. As part of the overall attempt to wind-down product liability litigation connected with Zicam, the company did settle approximately 500 of these lawsuits in recent years—at a cost of about $12 million. In addition, the company has spent almost $17.9 million on litigation expenses in just the last four years.

Hemelt had previously noted on the
2009 earnings call (ended March 31) that net sales would grow five-percent in fiscal 2010, representing a targeted amount of approximately $117 million. Based on forecast, share-net was expected to come in between 10 percent –to- 15 percent higher, at about $1.61 to $1.68 per share.

The company had factored into 2010 guidance that perhaps 20 percent of the oral Zicam cold remedy line was at risk from increased generic competition—but now all bets are off until management meets with the FDA to review safety issues. In our opinion, an FDA mandate requiring new safety studies would likely sink Matrixx.

Investors seduced by Matrixx Initiatives’ clean balance sheet—approximately $4.25 a share in cash and zero long-term debt—might pause and reflect on the fact that product recalls and a predicted slew of new lawsuits challenging the safety of Zicam will quickly drain the $51 million in working capital. In addition, the company acknowledged in its
2009 annual report that it is did not anticipate receiving any significant reimbursements from its insurance carriers in 2010. As of March 31, Matrixx had set aside only $785,000 and approximately $2 million in reserves for product liability litigation and product recalls, respectively. Oops!

The actual fallout from product recalls and the resulting publicity nightmare (adverse effect on allergy relief swabs business) could prove to be the killer cold virus for Matrixx, as cold remedy products (intranasal and oral) constituted almost 73 percent of its $111.6 million in sales last year.

Editor David J Phillips does not hold a financial interest in any stocks mentioned in this article. The 10Q Detective has a Full Disclosure Policy.


Bill Edwards said...

This company has no future. Any day now it is going to be the target of a massive, company-destroying class action suit. Expect lawyers to pile on, both on behalf of injured consumers and irate investors. The domain (web address) has already been registered and is for sale. It's likely to be just one of many vehicles lawyers will use to educate consumers and investors, and attract plaintiffs.

onpointadvisor said...

The Zicam hysteria of 2009 signals a new era of federal control that puts enforcement ahead of writing the regulations. You can't change rules at half time. Read the real story at otc product news.

product liability insurance said...

I guess some win and some lose.. but you need to learn from every failure and conclude for future decisions.