Matrixx Initiatives says after weathering the storm of recalling two Zicam OTC homeopathic intranasal zinc-containing cold products, the firm's "real test" will come when the cold season reveals whether customers switch to oral delivery products.

In Matrixx's fiscal 2010 first-quarter earnings call Aug. 11, acting President William Hemelt said the firm will focus on two new oral cold remedy products it recently started shipping: Zicam Zavors and Zicam Liqui-Loz.

The Scottsdale, Ariz-based firm reported in a same-day release that its net sales for the April-June period dropped 18.7 percent from the year-ago quarter to $6.9 million.

Hemelt, who also is chief operating officer, said the decline is due to higher promotional spending in the quarter to support the firm's allergy and sinus products in addition to declining sales in stores and a lower reorder volume from retailers after FDA's warning letter.

A spokeswoman said Zicam Zavors and Liqui-Loz will be on retailers' shelves starting in September at prices comparable with the firm's other cold products.

The two products are indicated for reducing the duration of a cold when taken at the first sign of one, within 24 to 48 hours, she added. They were "developed to provide even more options for cold remedy products based on consumer preferences."

Zavors have a "crunchy shell with a soft chewable center" and Liqui-Loz "are soothing lozenges with tasty, liquid centers," the spokeswoman said.

Both products come in packages of 25, and each is available on Amazon.com for $11.04.

Hemelt said Matrixx is counting on the new products and the firm's five existing oral products to attract customers who used the firm's intranasal products and retain current oral product users.

The company has not yet provided an updated guidance for 2010, but it expects to better understand the full impact of the recalls once it begins receiving sales data during the cold season late in the year - "the real test," Hemelt said.

$22.8 Million Net Loss

During the call, Bill Barba, treasurer and director of investor relations, said the firm suffered a $22.8 million net loss in the quarter. In the year-ago quarter, the firm reported a $2.3 million net loss.

The loss includes a $9 million charge for the estimated costs of the recall and $23.9 million for other recall-related costs, such as "the impairment of goodwill and certain tangible and intangible assets," Barba said.

Hemelt said the $9 million will be reflected in the second quarter, July-September, but he declined to predict the total fiscal damage from the recall.

"The recall of two of our best-selling products has required us to take impairment charges, record reserves for customer returns and withdraw our sales and earnings guidance for the year," Hemelt said.

In May, Matrixx said it anticipated its fiscal 2010 net sales would increase 5 percent from the record level of $111.6 million in fiscal 2009. The firm projected net income growth of 10 percent from $13.9 million in the prior year and its earnings per diluted share to grow 15 percent from the $1.46 it reached in fiscal 2009.

Missing 40 Percent Of Sales

While Matrixx aims to focus consumers on its other products, the recalled items made up 40 percent - $44.6 million - of the company's 2009 total sales.

One analyst pointed out that by cutting the two recalled products from Matrixx's sales of $34 million in its year-ago second quarter, sales for the current quarter would total $20 million.

Hemelt said he "could not argue" with the calculation, but declined to predict the firm's second-quarter revenues.

Matrixx recalled the two products June 16 after FDA simultaneously issued a consumer alert and a warning letter detailing the potential risk of anosmia, or the loss of smell, due to use. The warning and a consumer alert came after FDA received 130 adverse event reports from consumers and health care providers.

While FDA cited adverse event reporting data, the firm already faced a number of lawsuits asserting the nasal products caused anosmia (¹ Also see "Zicam Case Shows FDA Takes Defining Adverse Events Seriously" - Pink Sheet, 22 June, 2009.).

Information To Sway FDA Pending

The warning allowed Matrixx 15 working days to submit a plan to remove existing inventory from the marketplace. Matrixx has yet to submit data to FDA in defense of the recalled products.

Hemelt said Matrixx is taking time to present the best possible argument that the products are safe and the recall should be reversed.

The firm has "been granted an extension of time to respond formally" to FDA on the matter, he said. "Obviously we want to ensure our response is as complete and accurate as possible."

Hemelt said the firm's goal remains to convince FDA to reverse its position that the products are a potential health risk and should be removed from the market.

"Our response will focus on the scientific support that we have compiled over the years that supports our position that these products are not unsafe as alleged by the FDA," he said.

Hemelt told analysts the firm would request a meeting with FDA when it finished its response, but declined to provide a timeline.

FDA said in its warning letter that Matrixx would need to file a new drug application for the products if it sought to market them in the future, but Hemelt said the company likely will not pursue the NDA route.

Counting On Brand Loyalty

Hemelt said Matrixx is operating under the assumption the two intranasal cold remedy products will not be on the market and it is testing new advertising strategies to shift consumers to its oral cold remedies.

He said recent polls Matrixx conducted suggest consumers' knowledge of FDA's action "has faded with time, which should continue over the next few months with the start of the cold season."

This trend indicates existing Zicam users will stay with the brand and not allow the recall to taint the line's reputation, Hemelt maintained. Retailers seem to be supporting the brand, he added.

Hemelt said the firm pushed the Zicam Zavors and Liqui-Loz products on retailers and that most retailers picked up at least one of them.

"I think our shelf space will still look very good. Obviously, placement is always an issue" and with some retailers it is good, while "other retailers could be better and we're working to try to improve on that."

Hemelt also noted the firm may increase marketing spend for intranasal allergy and sinus products because those sales have slowed, likely due to their intranasal delivery. Matrixx recalled intranasal cold products, not its allergy and sinus products.

Legal Expenses Adding Up

Hemelt also said while the firm will continue to defend against damages claims, the increase in personal injury suits related to anosmia that followed the recall will "result in higher legal expenses going forward."

He did not put a price on how much each case would cost, but said Matrixx's legal fees could be as much as $1 million per quarter.

Hemelt said there have been many cases filed and currently there is a motion to consolidate them, which would decrease the firm's legal costs.

He said he would not expect a substantial increase in legal fees for the current quarter but they would likely be up from the first quarter and up still more in the October-December period.

However, the firm's $30 million cash on hand "provides significant assurance that we will have sufficient financial resources to vigorously defend ourselves," Hemelt added.

- Katie Stevenson ( ² k.stevenson@elsevier.com )

Matrixx Launches Zicam Products To Rebound During Cold Season

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