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Zicam Recall Blamed for Matrixx Loss

Aug 11, 2009 | Parker Waichman Alonso LLP

Matrixx Initiatives, the maker of recently recalled Zicam Nasal Cold Remedies, reported a larger-than expected first quarter loss of $22.8 million, or $2.49 per share.  In a press release, the company blamed the fallout from the Zicam debacle for the disappointing results.

Earlier this summer, the U.S. Food & Drug Administration (FDA) warned consumers not to use three Zicam nasal cold remedies. The agency said it had received 130 reports of anosmia—loss of sense of smell—in people who had used the product. Following the FDA alert, Matrixx Initiatives recalled two of the products: Zicam Cold Remedy Nasal Gel and Zicam Cold Remedy Swabs. The company had already withdrawn Zicam Cold Remedy Swabs, Kids Size, the third product named by the FDA.  

At the same time, the  FDA issued a Warning Letter to Matrixx.  In the letter, the FDA said Matrixx had failed to inform it of 800 anosmia reports linked to the recalled cold remedies. Matrixx has admitted that it did not pass along those reports to the FDA, but has maintained that its legal counsel advised it was not required to forward those reports to the agency. In the Warning Letter, the FDA warned the firm that the products cannot be marketed without agency approval and also stated that the three Zicam nasal remedies did not include adequate warnings about the risk of loss of sense of smell.

Since the Zicam recall,  the company has been named in several class action lawsuits filed by people who blame the nasal remedies for their loss of smell.  It also faces a class action lawsuit filed by investors that stems from the recall.

Matrixx is now reporting that revenues for the first quarter   of fiscal year 2001 fell 18.7% year-over-year to $6.92 billion, falling short of analyst estimates of $8.96 million.  The company took a $9 million charge from the Zicam recall, and a goodwill impairment charge of $23.9 million related to the recall.

"The FDA Warning Letter has had a material adverse impact on our business and generated significant publicity. 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," Matrixx acting COO Bill Hemelt said a statement.  "In addition, there has been an increase in legal activity on several fronts associated with this issue, including plaintiff attorneys soliciting for clients alleging anosmia due to our products; class action complaints alleging advertising and consumer fraud; and a class action securities lawsuit alleging public disclosure violations."