Leiner Auction Outcome Will Shift Balance Of Power For Supplement Players

The auction of Leiner Health Products slated for June 9 will reshape the competitive landscape for the dietary supplement market whether the winner is Perrigo or NBTY.

Nutritional industry leader NBTY, the stalking-horse bidder, opened the bidding process for its largest competitor in the private-label supplement market with a $230 million offer May 30.

Leiner CEO Robert Reynolds confirmed June 5 a second "qualified bid from a significant company" has been made, but declined to identify the bidder.

According to Reynolds, the second bid initiates a June 9 auction. The buyer should be determined by close of business, he said.

OTC private-label leader Perrigo is almost certainly the second suitor, analysts say.

Both NBTY and Perrigo have been likely candidates to acquire Leiner since the Carson, Calif.-based firm filed for Chapter 11 protection in March.

Speculation about Allegan, Mich.-based Perrigo has been fueled in part by its May 29 filing with the Securities and Exchange Commission, reporting the firm has raised $200 million in debt in a private placement.

Spokesman Art Shannon would not confirm Perrigo is the second bidder and said the filing is "coincidental" with the timing of the Leiner auction.

The 1,000-Pound Gorilla

Supplement industry stakeholders are wary of how NBTY would tilt the playing field even more, because so much of the supplement ingredient market would be consolidated in one company.

"The resulting entity will be of such size that it will both dominate and direct almost all levels of the industry either directly or indirectly," said Scott Steinford, president of ingredient supplier firm ZMC-USA. He said the potential acquisition "provides both opportunities and obstacles to the entire industry."

Mark Wright, president of contract manufacturer Health Wright Products, said NBTY would have "a control of the manufacturing environment that would impact price and supply of the ingredients market."

Perrigo buying Leiner would lead to a more level playing field, Wright said. "I'm hoping NBTY doesn't come in and greatly raise their bid, but I guess only an auction will tell."

"Instead of having a 1,000-pound gorilla and everybody else being small, Perrigo can compete with NBTY more on the large level and keep things a lot more balanced in the marketplace, which then in turn, filters down to everybody else," he said.

Some worry that Ronkonkoma, N.Y.-based NBTY could essentially set prices for ingredients across most types of supplement products.

Kevin Salerno, president of E.T. Horn Nutraceuticals Group noted, "Once any one company gets over 50 percent of the market share in an industry, it becomes a worry." But an NBTY acquisition of Leiner would be positive for the industry in the long term because the firm is so diversified, the business "will pretty much stay in the same hands that it is in [now] from a supply standpoint," he said.

Previous NBTY acquisitions of Rexall and Solgar also raised concern among supplement firms, Salerno said, but those acquisitions have not had a negative impact on the industry.

And The Winner Is ...? Stakeholders Speculate

NBTY may have an edge over Perrigo because of its deeper pockets and experience with acquisitions, according to Salerno. The stakes also may be higher for NBTY, which could drive the firm to a stronger offer.

"I see NBTY coming out over Perrigo because if Perrigo does buy it, it would be a bigger threat to NBTY ... as far as competition in the marketplace," Salerno added.

Salerno noted Perrigo was rumored to be "a shoo-in to come in and take over Leiner." At the last second, NBTY jumped in, he said.

How Would Leiner Enhance Its Buyer?

Analysts say Leiner's three California facilities are the most valuable asset to NBTY. Leiner's manufacturing assets would allow NBTY "to optimize its manufacturing and significantly expand its West Coast manufacturing presence," Scott Van Winkle and Diederik Basch of Canaccord Adams say in a June 2 report.

They describe the acquisition as "opportunistic" with "relatively low risk" for NBTY. The analysts expect the acquisition would improve gross margins due to optimized facilities.

Salerno noted both firms would benefit from acquiring Leiner, particularly its West Coast assets. Perrigo has no facilities there currently.

With Leiner absent from the U.S. private-label OTC market, Perrigo has acquired a significant number of its retail customers and reported increases in OTC sales (¹ (Also see "Perrigo Fuels “Growth Engine” With Spending On New Product Pipeline" - Pink Sheet, 11 Feb, 2008.), p. 9).

Perrigo President and CEO Joseph Papa noted in the firm's latest earnings call the nutritional business is not as profitable as its OTC products. However, Perrigo "picked up incremental vitamin and nutritional business" from Leiner as well, he said May 6.

NBTY Chief Financial Officer Harvey Kamil told "The Tan Sheet" if it is successful in acquiring Leiner, it does not plan to revive the company's OTC business in the U.S., but will continue its Canadian business.

Leiner suspended its U.S. OTC operations in March 2007 following FDA's finding of discrepancies in good manufacturing practices at its Fort Mill, S.C., facility.

To resolve a Department of Justice investigation of the operations at its Fort Mill plant and to facilitate the sale of its business, Leiner in May proposed paying $10 million restitution to DOJ and pleading guilty to one count of mail fraud.

Leiner also filed for Chapter 11 in 2002 geared at restructuring (² (Also see "Leiner $30 Mil. Vitamin Price-Fixing Settlement Applied To Outstanding Debt" - Pink Sheet, 25 Feb, 2002.), p. 4). Since then, Leiner has struggled to compete with NBTY and Perrigo.

- Katie Stevenson ([email protected])