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Tickers in this Article: MTXX, JNJ, QGLY
Most of the time stock analysis covers companies with market caps greater than $1 billion. Occasionally, however, a situation comes along that begs for coverage despite being below this threshold. There's a lot to like about Scottsdale-based Matrixx Initiatives (Nasdaq:MTXX) and its Zicam nasal spray cold remedy. The micro cap competes with much larger companies like Johnson & Johnson (NYSE:JNJ) and Schering-Plough as well as fellow micro-cap Quigley Corporation (Nasdaq:QGLY). However, the company's world came crashing in back in June.

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FDA Warning
On June 16, Matrixx received a warning letter from the federal agency responsible for the safety of food and drugs in this country. The Food and Drug Administration was warning consumers to avoid using Zicam's nasal spray and swabs because it had 130 reported cases where users suffered from anosmia, which is a loss of smell.

The warning was a deathblow to the company's sales and stock price. When you have a product that accounts for 40% of overall revenues and 60% of profits and you're no longer allowed to sell it, it doesn't how big you are, it will threaten your very existence.

Upon hearing the news, investors drove the stock into oblivion, taking it from $19.54 a day earlier to $5.78 by the close of trading on June 16. The result was a 70% decline in its stock price eradicating $127 million in value because a federal agency may have acted in haste. Unfortunately, once the genie's out of the bottle, there's nothing you can do but create a plan of action and that's exactly what management did.

Moving Forward
CEO William Hemelt set in motion a series of moves that would send a clear signal to both its customers and investors that it was dealing with the situation in a forthright and transparent matter. It immediately recalled the products costing the company $10 million, not to mention future lost revenue. Hemelt said this about the recall, "Withdrawal of these products will have significant repercussions on our business."

He didn't candy-coat it; it was a kick in the groin that will take time to overcome. He went on to suggest lawsuits were inevitable, all the while pleading with the FDA for some sort of explanation for its warning; after all, the agency knew about the loss-of-smell issues since as far back as 2006, when Matrixx faced a class-action lawsuit.

On November 16, the company wrote the FDA asking for substantive information why they did what they did. So far, they've chosen to remain silent. Given what's at stake here, I find it puzzling that the government wouldn't be more forthcoming.

Second Quarter Results
With almost a full quarter under its belt without its two best-selling products, the company has done pretty well considering. Revenues dropped 24% in Q2 from $33.6 million to $25.6 million and earnings per share 36% from $0.86 to $0.55 year over year. Many companies in this recession who aren't facing such dire consequences have reported revenue and earnings decreases similar to Matrixx. Considering the environment, Matrixx's latest report could definitely been seen as a victory.

While the company expects to incur a net loss in 2010 on revenues of $65-$70 million, there are some positives to consider moving forward. For one, the second quarter saw revenues for its oral version of the Zicam Cold Remedy increase by 53%. Secondly, its Q2 gross margin of 73% was 400 basis points higher than last year's and lastly, the company is sitting on $2.49 a share in cash.

Although much of that cash will likely go to further legal costs, it's good to know that you can buy this stock for $4.20 and cash per share accounts for almost 60% of the purchase price. It wouldn't take much to drive its stock back to double-digits and beyond. Perhaps an FDA admission it acted hastily would do the trick. Time will tell.

The Bottom Line
While there are never any guarantees, those with a nose for this kind of payday, not to mention the stomach for it, could be looking at one of the more attractive speculative bets of late-2009 and early-2010. At the very least, it's worth a second sniff. (To learn more, see Chasing Down Biotech Zombie Stocks.)

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