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Landing a Keeper (from Matrixx Initiatives)…

Reading SEC filings every day is a little like standing on the river bank, rod in hand, waiting for a bite. (Admittedly, a river offers nicer scenery than the view from our offices, but we like not having to deal with the mosquitos and sunburn.)

However, the point is: We catch a lot of interesting things. We throw the little ones back without batting an eye. We scale and fillet the lunkers, season them nicely, and serve them up over on FootnotedPro. But then there are all the ones in the middle—.

In this afternoon’s post, we’re focusing on one of those. It’s too interesting of a catch to throw back, yet the company’s market cap is only $41.6 million — too small to merit a FootnotedPro report. So here it is — a hot and tasty fillet, just for our readers.

We caught it while trolling the annual report that Matrixx Initiatives, Inc. (MTXX) filed yesterday. Matrixx — the Scottsdale, Arizona-based company that sells dietary supplements and over-the-counter products to treat colds and allergies — continues to have difficulties with the Food and Drug Administration (FDA). Some forms of Zicam are at the heart of the dispute. It’s a product that Matrixx claims ——deliver[s] a dose of ionic zinc to the oral mucosa and reduce the duration of the common cold.

In mid-June, 2009, the FDA sent Matrixx a warning letter about complaints that Zicam Cold Remedy Nasal Gel and Zicam Cold Remedy Swabs had caused some users to lose their sense of smell. The agency also asserted that the company should have filed a new drug application and it should have warned users about that risk. The company disagreed with the FDA but recalled the products anyway.

Many months passed, but neither party changed its position. The FDA refused to reverse itself, and the company ——reiterated its position that there is no valid scientific evidence that Zicam nasal Cold Remedy products are unsafe—

The filing then disclosed:

—The recall of Zicam Cold Remedy Nasal Gel and Zicam Cold Remedy Swabs, and the subsequent litigation have had a material adverse impact on our business. The recalled products accounted for approximately 40%, or $42.5 million, of our fiscal 2009 net sales. The recall required us to record a $9.2 million reserve and take impairment charges of $23.9 million. Our primary focus during fiscal 2010 was to convert consumers that used our nasal Cold Remedy products to our oral Cold Remedy offerings. As a result, our promotional and marketing support during the 2009/2010 cold season primarily focused on repositioning Zicam oral Cold Remedy products and attracting new users to the Zicam franchise.

The filing also disclosed that as of May 30, 2010, there were 112 personal injury cases (involving 279 plaintiffs) and 15 economic injury cases (involving 31 plaintiffs) pending in the federal court system.

Matrixx states that it regards the claims in the lawsuits [some of which allege that customers lost their sense of taste, too] are ——scientifically unfounded and misleading and we disagree strongly with the FDA’s allegations that Zicam Cold Remedy nasal gel products may be unsafe and that they were unlawfully marketed. The company bases its position on —cumulative science, scientists, and rulings in prior lawsuits.

Ultimately, the courts will have to determine whether the specific forms of Zicam are safe enough for consumers to use. But — in the meantime — the shareholders will foot the bill for that fight.

Image source: SF Brit via Flickr

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