Leiner’s U.S. OTC Operations Face Regulatory, Competitive Obstacles

Leiner Health Products says the process of restarting its U.S. OTC operations is complicated by Dr. Reddy's Laboratories' termination of contracts to supply ingredients it needs to manufacture OTCs.

Carson, Calif.-based Leiner on June 7 said it is laying off about 540 employees as it consolidates its manufacturing and packaging operations.

The firm also said it needs FDA approval to restart its U.S. OTC manufacturing and must win back customers that have found other private-label suppliers.

Additionally, Leiner is considering entering litigation to attempt to force Dr. Reddy's to restore the contracts, which also gave Leiner exclusive access to OTC switch products the India-based firm develops. Leiner also contests Dr. Reddy's plan to enter the U.S. market as a private-label competitor.

According to an April 26 filing with the Securities and Exchange Commission, Leiner said it contends suspending its U.S. OTC manufacturing did not "provide any basis for DRL's right to terminate" the contracts.

"We believe that DRL's actions may make it more difficult to operate our OTC business without a material adverse effect on the results of operations, financial condition and long-term profitability of our OTC business," according to the filing.

"Our DRL situation is sensitive and the stakes are quite high," Leiner CEO Robert Kaminski said in a June 8 conference call.

"We are not optimistic that they view the remedies for their actions in the same ballpark as we see them. We will use our best efforts to try to come to a commercial resolution before we pursue any legal options," Kaminski said.

Leiner did not make agreements with alternative suppliers while working with Dr. Reddy's.

"We just had elected not to pursue those avenues because we believed we were married to Dr. Reddy's," Kaminski said.

"We have numerous people that want to partner with Leiner and can do ... most of the things that Dr. Reddy's had done for us in the past," he added.

Moving S.C. Manufacturing

Leiner said it will remove OTC drug and nutritional product manufacturing operations from its Fort Mill, S.C., facility while continuing manufacturing in its Garden Grove, Calif., and Wilson, N.C. offices and packaging in its Carson, Calif., facility. Eastern U.S. distribution operations will continue at the South Carolina facility, the firm said.

The firm voluntarily suspended its U.S. OTC manufacturing on March 20 after an unplanned FDA inspection at its Fort Mill facility generated questions about quality control and compliance with good manufacturing practices there (¹ (Also see "Leiner Suspends U.S. OTC Operations, Expects Perrigo To Meet Demand" - Pink Sheet, 9 Apr, 2007.), p. 5).

However, executives say they expect to resume U.S. OTC shipping of newly manufactured products before the end of the firm's fiscal 2008 second quarter, July-September 2007, but by mid July could start shipping "re-qualified" OTC products.

"We're confident that this consolidation will not impact our ability to supply our customers in the near or the long term. We believe that working together with FDA we will be in a position to begin resuming shipments of OTCs during our second quarter," Kaminski said.

Customers Find Other Suppliers

Kaminski said the firm will have to win back its customers from other OTC private labelers.

"Our customers, while supportive of Leiner, have had to find alternative OTC sources to keep them in stock while Leiner remediates its OTC quality platform," he said.

"Once the timing for reentry on specific products is clear we will deliver this information to our customers so that they can determine" whether to return to doing business with Leiner, Kaminski added.

However, he said he realizes it will be difficult to convince former or other customers to turn away from other private-label OTC suppliers.

"Speaking with our customers, I think everybody is aware of our commitment to FDA and coming out of this situation as best in class and quality. I don't think that's the issue," Kaminski said.

"The issue is we've had good competitors that have stepped up in this period and our customers are going to need to reward them."

Leiner executives and the firm hired to advise on the plant remediation work, Lachman Consulting Services, were scheduled June 12 to talk with FDA officials about progress toward resuming OTC manufacturing.

Kaminski said Leiner will describe the results of that meeting during the firm's fiscal 2007 fourth quarter earnings call on June 28.

According to the firm, its U.S. OTC business accounted for $200 million of the $800 million total sales for its fiscal 2007, with the remainder coming in vitamin and supplement sales.

In light of reduced revenues, Leiner plans to cut $50 million in costs, including $30 million through its operations consolidation and layoffs, which will happen in three to six months.

Leiner President and COO Robert Reynolds said the consolidation costs will reach $40 million, including $15 million to $17 million in the firm's fiscal 2007 and $22 million to $27 million in its fiscal 2008.

In addition to relocation and severance payments to laid-off employees, the consolidation costs include quality upgrades, remediation of plants, inventory re-proofs and reserves, Reynolds said.

Meanwhile, Leiner is working to prevent its OTC troubles from affecting its vitamin and supplement business, which is the firm's "bread and butter," Kaminski said.

"We're actually spending quite a bit of effort and resources just making sure that the quality surrounding our VMS business is at an all-time level of scrutiny," he said.

"Interestingly, a lot of the feedback that we're getting from our customers really is encouraging to us around our vitamin business. We continue to pull down new products, increasing our shelf space with our major customers."

- Malcolm Spicer ([email protected])