In its 35 years, Leiner Health Products Inc. grew to be the nation’s leading manufacturer of store brand vitamins and other supplements, with its products sold by major retailers such as Wal-Mart and Costco.
But in the last five years, the Carson company has filed for bankruptcy protection twice and it looks like it’s heading for a sale.
It was Leiner’s rapid expansion from supplements to private-label over-the-counter drugs that led to multiple regulatory investigations, a succession of management shakeups, and now a second bankruptcy filing.
The company ran afoul of U.S. Food and Drug Administration regulations on safety and quality last year. It closed a major manufacturing plant in South Carolina and issued a product recall. Its problems culminated with a Chapter 11 filing last week, which was the result of debt from a 2004 bond. The previous reorganization came after the post-9/11 economic downturn.
“Although we had taken many steps to address the challenges facing our business, they were not enough to offset the cost of our substantial debt obligations,” Chief Executive Rob Reynolds said in a statement.
Reynolds became CEO in January when he replaced Bob Kaminski. Chief Financial Officer Kevin McDonnell also left.
This time Leiner’s private equity owners, Golden Gate Private Equity Inc. and North Castle Partners LP, are ready to sell the troubled vitamin and drug maker to a competitor.
Leiner was founded in 1973 as a vitamin and supplement company, and moved into the over-the-counter drug market in 1992 with the acquisition of Xcel Laboratories Inc. Since then, Leiner has bought other OTC and vitamin companies as well.
Began to struggle
North Castle became an owner of Leiner in 1997 as part of a leveraged recapitalization. But the company began to struggle in 2001 and filed for Chapter 11 the next year.
After the vitamin-maker reorganized, Golden Gate came on board during a 2004 recapitalization that included a sale of $150 million in bonds.
Backed by the capital infusion and a new alliance with one of India’s largest drug companies, Leiner appeared well on the road to recovery until last year’s problems in South Carolina.
In January 2007 an employee at the Fort Mill plant reported problems to the FDA. Among the whistleblower’s allegations was that the company manipulated quality test results and falsified records about product impurity controls, according to court and regulatory records.
The problems affected the company’s versions of generic painkillers such as ibuprofen and acetaminophen, according to reports. Also cited was the allergy medication loratadine.
Company officials at the time blamed the problems on local managers. They suspended operations and by summer closed the manufacturing side of the plant, laying off 540 workers and converting it to a distribution center.
In late 2007, Leiner said the U.S. Department of Justice was investigating the problems at Fort Mill. In January of this year, SEC filings state that the company’s financial problems led it to close its other over-the-counter drug plant in Wilson, N.C., and outsource all remaining OTC drug orders.
The convergence of forces pushed Leiner to the edge.
“You make a mistake that shuts down part of your business for a while, you can get in to a lot of trouble if you also have taken on a lot of debt to grow,” said Derek Leckow, an analyst with Chicago-based Barrington Research.
No additional layoffs are expected as a result of the bankruptcy, the company said. A Leiner spokeswoman did not return calls for comment.
Leiner said in its Chapter 11 announcement that it had arranged for about $74 million in secured financing from UBS AG and General Electric Capital Corp. to continue its day-to-day operations while a sale is discussed.
Bankruptcy filings show Leiner’s debts total nearly $436 million. The largest amount is the $150 million that the company owes bondholders.
In the 2003 reorganization, the company’s bondholders got about 25 cents on the dollar for about $80 million in outstanding debt.
Among several hundred vendors and customers on the creditor list is Dr. Reddy’s Laboratories in Mumbai. The Indian company agreed in 2003 to a supply and marketing deal.
Dr. Reddy’s cancelled that agreement last year, citing Leiner’s problems with the FDA. Leiner said it owes Dr. Reddy’s $4.7 million.
Leiner has threatened to sue Dr. Reddy’s. But in November it announced a similar deal with Wockhardt USA Inc., a subsidiary of another large Indian pharmaceutical company.
Though Leiner is privately held, it files reports to the Securities and Exchange Commission because of its bond issues. In November, Leiner said sales fell 27 percent to $126 million in its fiscal 2008 second quarter, about $55 million of that due to the loss of over-the-counter sales.
It’s not a hopeless case, though.
Leckow of Barrington said Leiner has assets, intellectual property and distribution relationships that would be attractive to a potential buyer.
“You could see one of its competitors, or another Indian drug company that wanted to enter the U.S. market being interested,” he said.
Wockhardt’s Mumbai-based parent could be a buyer, even though it acquired a U.S. drugmaker last October. Perrigo Co., an OTC drug and supplement maker in Michigan that trades publicly might also be interested.
Leckow said that Leiner has a $500 million business in the vitamin space compared to Perrigo’s roughly $150 million. Executives at Wockhardt and Perrigo did not return calls for comment.
