Matrixx Initiatives believes it has emerged with a plan for returning to growth and profitability after navigating the gauntlet of an FDA warning, product recall and millions in lost revenue in fiscal 2010.

Despite projected sales increases and upcoming launches for oral Zicam Cold Remedy products, the firm still contends with legal issues from alleged cases of anosmia, the loss of the sense of smell, linked to intranasal zinc-containing Zicam swabs.

"Obviously, we still face some storm clouds - notably, the significant product liability and economic class action litigation," said Matrixx President and CEO Bill Hemelt during a May 11 fourth-quarter earnings call.

The Scottsdale, Ariz.-based firm said it incurred slightly more than $2 million in legal expenses in the January-March period, and projects litigation costs of $1.3 million to $1.8 million per quarter in fiscal 2011.

Those expenses cover only legal defense and not the potential costs of settling with as many as 1,000 plaintiffs across federal and state courts, some of whose cases are consolidated.

"Obviously, our interest in even thinking about settlement is to get rid of the risk and obviously reduce that ongoing legal expense from hopefully the $1.5 million down to much less," he said.

Matrixx achieved a degree of closure with FDA, which sent the firm a warning letter in June 2009 regarding the safety of its two top-selling products (¹ Also see "Zicam Swab Platform Takes Center Stage In Matrixx Growth Plans" - Pink Sheet, 22 March, 2010.).

Hemelt said the costs of responding to the agency "should go away now," though he did not address the status of Matrixx's December 2009 lawsuit against FDA seeking information related to the warning (² Also see "Matrixx Initiatives Files Suit Against FDA On Unanswered FOIA Grounds" - Pink Sheet, 1 February, 2010.).

In a May 12 research note, Scott Henry of Roth Capital Partners points out Matrixx "is a small company without deep pockets," and though the firm survived the short-term recall fallout, the litigation still could cripple it.

Henry, a senior research analyst, pegs a settlement with plaintiffs as a 60 percent probability, with an estimated cost of $30 million.

The worst-case scenario, in which Matrixx loses the litigation and files for bankruptcy, stands at 35 percent probability, while the chance of Matrixx prevailing over the plaintiffs is 5 percent, Henry says.

Hopes For A New Year

Though Matrixx said it remains bullish on opportunities for its intranasal swab platform, its near future depends on the success of oral products.

The company will ship two new oral Zicam Cold Remedy stock-keeping units in July or August, Hemelt said, as part of the company's plan to regain profitability in fiscal 2011.

The firm's net sales dropped 79.5 percent in the fourth quarter to $6.3 million and reached $67.3 million, down 39.7 percent, for the full year. Matrixx absorbed a net loss of $23.6 million in fiscal 2010, compared to a $13.9 million net gain the prior year.

Henry calls Matrixx's fourth quarter "awful, as expected," with "few redeeming qualities," but the focus now turns to fiscal 2011.

The company's full-year guidance estimates 3 percent to 5 percent growth and net income between $2 million and $3 million.

"Obviously, this is not where we need to be in the long term, but it is a start," Hemelt said.

Projected double-digit growth for oral products -including Zicam Cold Remedy RapidMelts , Zavors and Liqui-Loz - likely will be offset by weak sales of multi-symptom and cough products, some of which "will probably fade away over the course of the next year or so," he said.

To boost its bottom line, Matrixx aims to bring down marketing and promotion expenses that soared in 2010 as the firm was forced to steer consumers toward its oral SKUs.

Marketing spend reached $25.4 million, or 38 percent of net sales, in fiscal 2010, said Matrixx Treasurer Bill Barba. Hemelt said the goal is to shift the percentage down toward 30 percent.

- Dan Schiff ( ³ d.schiff@elsevier.com )

Matrixx Projects Profit, But Zicam Litigation "Storm Clouds" Could Still Rain

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