Description
Matrixx Initiatives (MTXX) $12.00
(Millions)
Cap: 115
EV: 112
Cash: 4.7
Debt 2
I am recommending Matrixx Initiatives as an interesting research opportunity. I am presently biased towards the short side but acknowledge the depth of research that would be required to comfortably take one side or the other, as is the case with controversial stories such as MTXX....
Mattrixx Initiatives develops over the counter pharmaceutical products primarily used to treat the common cold and other sinus/throat discomforts. Its products are sold under the Zicam brand and include, nasal cold remedy, throat lozenges, among others. As recently as 2001, the company was focused on the chewing gum industry operating under the name Gum-Tech. In October 2001 Gum tech purchased Gel Tech from Zensano, acquiring the rights to the Zicam line of cold remedy products. With this acquisition the company morphed into Matrixx Initiatives.
For the nine months end September 30, 2004 the revenue mix of products:
Cold 56%
Allergy/sinus 27%
Cough 17%
Compared to the nine months ending September 30, 2003:
Cold 72%
Allergy/sinus 28%
Products in each category include:
Cold: 3 nasal & 3 oral
Allergy/Sinus: 4 nasal
Cough: 6 oral
Presently, the company is involved in 19 lawsuits involving 284 individuals who claim to have developed Anosmia (loss of smell) by using the Zicam Cold Remedy Nasal Spray. (supposedly they can still smell cold hard cash). This includes two class action lawsuits against management for failing to disclose information about the lawsuits in a timely fashion.
Zicam zinc based nasal spray is marketed as a cold remedy that reduces the lifespan of the common cold through the purported healing powers of zinc, administered in the “safe” form, zinc gluconate. Originally, the Zicam brand only included zinc based throat lozenges. The lozenge form of the product was well embraced by the consumer and MTXX moved to release the product in a nasal spray. Due to the lax homeopathic treatment FDA laws, Zicam nasal spray did not have to go through safety or efficacy testing before sale to public.
Thesis:
•Zinc based nasal spray Cold Remedy may cause Anosmia (loss of smell) leading to huge lawsuits
•Closet competitor recently pulled their zinc based nasal cold remedy product off the market but MTXX refuses to pull theirs
•4% insider ownership with no significant buys despite rigidly “standing by” product
•Low liquidity & hungry lawyers could bankrupt company even if Zicam does not cause Anosmia
•Low moat business and bad publicity from Zinc controversy could bring demise without successful lawsuits
•Most doctors do not believe it even helps the common cold
Zinc based nasal spray may cause Anosmia:
I spoke with a few Ear Nose and Throat Physicians to get a base sense for where they stand on the Zinc nasal spray controversy. The most knowledgeable physician I spoke with did not recommend its use. He claimed high concentrations of trace minerals such as zinc ions can kill nerve cells if exposed, and the American Journal of Rhinology 18, 137-141, 2004 also states this fact. Oddly enough, the olfactory receptors (smell receptors) in the nose are hair cells that replace themselves every 12 to 18 months. While mineral zinc will kills those cells, you would expect the Anosmia to be transient until the dead hair cells in the nasal cavity are replaced, unless the zinc permanently damages the organ, which the likelihood of is not well understood. While it was admitted mineral zinc can kill nerve cells and possess a toxicity, it is odd that none of the patients claim (or admit) to having regained their sense of smell.
Although Zicam is not based on a pure mineral zinc ion, it does contain zinc gluconate. It’s important to understand the difference between a pure mineral zinc and a compound like zinc gluconate. Some of the evidence skeptics use to blame zinc gluconate for Anosmia are outdated studies from the 1930s (possibly newer ones too) that show zinc sulfate responsible for causing Anosmia. While the date of that study should itself cause concern, the only difference between zinc sulfate and gluconate, according to my contacts, is speed at which the zinc ion dissociates, or is absorbed, both still contain zinc ions. He could not quantify the difference in absorption but concluded the sulfate formulation would be absorbed more rapidly. More rapid absorption by the nerve cells would likely result in a higher incidence of Anosmia, although victims claim "instant burning and loss of smell" upon immediate use.
A few other doctors I tried to reach at one of the top ranked Ear Nose and Throat hospitals could not comment on any subject related to the zinc controversy, as they were themselves expert witnesses in the lawsuits. I could not find out if they were representing the plaintiff or defendant. That would be important to this story.
Dr. Bruce Jafek MD at the University of Colorado, the most public Physician speaking out against the use of Zicam, has compiled evidence supporting the belief that zinc based nasal sprays are unsafe and cause Anosmia. In September 2003 he presented his findings at the American Rhinologic Society (ARS). His material can be easily found on the web. To add to the controversy, it was later discovered that Dr. Jafek’s son worked for an investment firm and was short MTXX stock at the time of his father’s presentation. I’m not sure how to read this, it certainly smells fishy but Dr. Jafek has continued to fight this product.
On February 19th 2004 MTXX issued an 8k explaining that a two-day meeting with a panel of physicians and scientists reviewed the current information available on Zinc based nasal sprays and found no cause for alarm. It should be noted that this study and others that have followed were paid for by the company. Newer company studies only involved trials on animals. Human trials are underway. It is funny to note that the “board findings” conclude Zicam spray does not even reach the olfactory receptors in the nose. Contacts laughed at this statement. The dispenser can discharge the fluid at least a few feet in the air and most nasal spray users are accustomed to inhale/sniff deeply, except our former president.
Competitor recently pulled their zinc based nasal cold remedy product off the market but MTXX refuses to pull Zicam:
Despite my natural skepticism to quickly believe either side of the zinc controversy, the fact that another company offering a popular zinc based nasal spray pulled their product is very alarming. In September 2004, Quigley Corporation (QGLY) pulled their Cold-Eeze zinc based spray off the market after lawsuits surfaced linking it to anosmia. A few months after the first lawsuit the company threw in the towel, stating “Cold-Eeze failed to develop the expected sales.” Just like MTXX, QGLY claims the product is safe, although a NY Post article points out that the product developer, Robert S. Davidson, has a Ph.D from the American University of Asturias, which was shut down by the Spanish Government for handing out bogus diplomas. (maybe someone should look closer at this co. too).
Other points:
With only 4% insider ownership and insignificant stock purchases over the last 3 or even 12 months at depressed stock levels I would like to know why management isn’t backing the product with their wallets. Although MTXX has product liability insurance I do not know the size of the policy. This information might be hard to source from the company because lawyers would use the information to sue at least to this threshold, but you can always try.
A doctor with a history in medical product/service lawsuits believed it would not be difficult for lawyers to force company to settle for at least 50k to 100k per client, regardless of the reality behind zinc based nasal products. At 75k this would be a 21.3m liability at the current level of pending cases with only 4.7m of cash on hand. If the lawsuits are defended successfully, the negative press still could tarnish the brand image of any Zicam product, zinc or no zinc. Safety aside, many doctors don’t even believe it has any medical science to back effectiveness.
Summary:
There are a number of ways to win this investment (product is unsafe, lawsuits settle and company takes hit beyond insurance liability, negative brand image hurts sales) and only one way to win (cloud clears and new products continue to do well). I'd like to speak with more experts to make sure the lawyers haven't dooped me, but it has all of the flags needed to make a good short.
Other questions to answer:
•More expert opinions
•Molar strength of zinc in gluconate solution and comparison to zinc sulfate
•Call Quigley to learn more about their decision to pull Cold-Eeze
•Contact Zensano and ask why they sold the brand and question their opinion of Zicam nasal spray
Risk to short thesis:
•Company is diversifying away from reliance Zicam cold remedy nasal spray with multiple new product launches that have boded well. (new products attributed to 15m in sales or 50% of the 9 month increase). If trend continues and lawsuits fade business might look attractive
•Greedy lawyers could be creating the cases of Anosmia
•Product insurance could cover lawsuits
•Difficult to prove one has actually lost sense of smell, doctors said test are very subjective. “Can you smell this?” - “No” – “Ok looks like you’ve got Anosmia.”
•Colds alone can cause Anosmia, among other natural causes
•Is this going to be a bad cold season?
(Millions) 2001 2002 2003 1Q04 2Q04 3Q04 4Q04E
Sales 16 23.5 43.5 13 3.5 17 22
EBITDA -3.6 1.1 6.1 5.3 -.5 7.8 4
Interest -.2 -.6 -.2
Taxes -3.7 -2.4 -.4 .7 -2.5 -3.5
Working Capital -.7 3.5 1.1 -2.6 -3.6 -7.3 3
CFFO -4.5 .3 4.5 2.3 -3.4 -2 -2.5
Cap ex -1.2 -.6 -.2 -.1 -.1 0 -.1
Free cash flow -5.7 -.3 4.3 2.2 -3.5 -.2 .9
(estimate)
Sales 55.5
2004E EBITDA 16.5
2004E FCF -.6
Catalyst
Outcome of lawsuits