Yesterday the Food and Drug Administration advised consumers to stop using Zicam, a zinc-based over-the-counter cold remedy, because its use has been associated with the loss of sense of smell.

Some 130 cases have been reported since 1999, when the product was introduced. The news affected three products: a nasal gel, a nasal swab and a product for children that already had been discontinued.

The news also affected parent company Matrix Initiatives MTXX. The stock, which had closed the day before at $19.24, stood at $5.78 after the announcement, a stunning loss of -70%.

It is not likely that Matrix can recover.  The company has suspended shipments of the product and has said it will refund customer’s money. To fight the FDA’s allegations, it must lock horns with a federal agency with unlimited resources and regulatory power, to say nothing of the PR nightmare that it now needs to dig itself out of.

As if all that weren’t enough, more than a few law firms are already seeking potential class-action clients who have experienced any adverse effects from using Zicam. The company itself has received more than 800 reports of Zicam users losing their sense of smell.

And the kicker? The company has less than $70 million in current assets, only $25 million of which is cash.

Zicam has dealt with reports of this side effect for years, though it has consistently maintained that it thinks the product is safe and says it wants to meet with the FDA.

In 2006, however, it paid $12 million to settle 340 lawsuits, and hundreds of additional lawsuits have been filed since. Though the FDA evidently has aware of the situation under the Bush administration, its new commissioner, Dr. Margaret Hamburg, appears to be taking a more proactive regulatory approach. She characterized the Zicam case as a “fairly large problem.”

Matrix had $101 million is sales last year, $40 million of which came from Zicam.

What this case illustrates more than anything is the dramatic power of the federal government to affect companies’ futures.

Andy Obermueller
Chief Investment Strategist, Government-Driven Investing