Editorial: Leiner, The Value Chain, And Cost of Quality

By Len Monheit

Apparently, some time later today we’ll see whether the big get bigger or if there’s a new kid in town. Of course I’m referring to the closing date for bids for the assets of Leiner Health Products, with industry giant NBTY already vested with a $230 million qualifying bid. Rumor last week was that Perrigo had entered the game after securing a $200 million private placement from institutional investors and I’m sure its not only NBTY competitors or Leiner customers wondering who’s going to come out on top.

As I mentioned in my blog last week, there are at least two really critical issues that the current environment points out. The first is the size and market strength of NBTY, already proving ‘impactful’ on the market as a whole. With the assets of Leiner under its belt, obviously value chain clout increases significantly, measured as purchasing power and a number of other decision making capabilities.

One industry source I regard very highly had this to say:" The potential NBTY acquisition of Leiner provides both opportunity and obstacles to the entire industry. The resulting entity will be of such a size that it will both dominate and direct almost all levels of the industry either directly or indirectly. NBTY has already established itself as the largest and arguably the most efficient vertically integrated operation in the nutritional industry. The size and the efficiency of NBTY rival many organizations across a number of industries. NBTY is already a multiple of size to its next largest competitors so it stands to reason that this acquisition will clearly produce an organization that has exponential not incremental power and influence. It will be the mutual responsibility of suppliers, customers and NBTY to work cooperatively to insure the changed environment is one which supports long term growth and support of the entire industry. "

There is another aspect to this asset acquisition that bears watching as well. Currently, many of those owed money by Leiner are presumably in a state of uncertainty over the timing at very least of payment of their claims, if not the security of payment in general. In my blog, I pointed to the list of top 30 Largest Unsecured Claims (http://www.leinerinformation.com/1_10448.pdf - page 23 of the 27 page pdf.). This list makes interesting reading with several familiar names, and also provides some insights into the industry value chain. Presumably, there are also numerous other industry entities that didn’t quite make this list, all waiting with bated breath this week.

Several industry companies had refused to present terms to Leiner in recent months and had been operating on a COD basis to manage their exposure as the tale unraveled. Obviously these organizations are currently less vulnerable than others, proving that it takes more than a good product and appropriate marketing and opportunity in order to produce a business success. Considering that the demise of this iteration of Leiner stemmed ultimately from an FDA inspection and 483 notification of deficiency, can we attribute the current circumstances in whole or in part to the ‘Cost of Quality’ (or lack thereof)? In my mind, the answer is an unequivocal, yes. It’s ironic that these latest moves take place as the largest companies in our industry face the compliance date for supplement GMPs in two weeks. One thing I am certain of is that this won’t be the last ‘cost of quality’ we hear about.

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