North Castle Partners is reportedly in the second round of talks to sell its stake in Leiner Health Products to another private equity firm.

Bain Capital and Texas Pacifica Group are two firms that are said to be in discussions with the healthcare holding company. North Castle owns Leiner outright.

Bain Capital is headquartered in Boston, and has an investment history in more than 25 healthcare companies, including Impax Labs, Duane Reade and Dade Behring.

Texas Pacifica is a private investment partnership. No drug, supplement or vitamin manufacturers are reportedly involved in the bidding process.

North Castle currently is in talks with at least seven equity firms over a potential acquisition. A spokesperson for the firm said that North Castle remains committed to Leiner's growth going forward.

The transaction would be in the form of a recapitalization deal, where North Castle would likely swap debt for equity.

The price tag for Leiner, which recorded 2002 sales of $650 mil., likely would fall in the $700 mil. to $750 mil. range. Leiner is projected to record about $1.2 bil. in annual sales by 2009.

Any potential partner could look to Leiner's strong cash flow over the last couple of years and see assurances that the once-troubled dietary supplement and OTC drug maker could pay off its long-term debt over time.

Leiner has a 43% share of the vitamin, mineral and supplement mass channel market in the U.S., North Castle said.

Lately, the firm has focused much of its growth strategy in the nonprescription drug market. OTCs represent about 25% of Leiner's total business.

The company reached a 15-year OTC product develop-ment and marketing agreement with Indian generic drug maker Dr. Reddy's Labs in February 2003 (¹ Also see "Dr. Reddy’s Stakes Claim In U.S. OTC Market With Leiner Deal" - Pink Sheet, 3 March, 2003., p. 3).

Under the agreement, Leiner handles distribution, sales and marketing of OTC products while Dr. Reddy's oversees product development.

In March of 2003, Dr. Reddy's said that the partnership was running smoothly and that the two companies intended to actively look at possible Rx-to-OTC switch drugs.

Leiner now markets generic famotidine 10 mg (Johnson & Johnson/Merck's Pepcid AC ), ranitidine 75 mg (Pfizer's Zantac 75 ) and loratadine 10 mg (Schering-Plough's Claritin ) through an agreement with Genpharm and Pharmaceutical Resources, Inc. Leiner introduced its loratadine product in the summer of 2003.

North Castle's first investment in Leiner goes back to 1997, when annual sales were approximately $130 mil. The firm also has overseen Leiner's bankruptcy proceedings.

Leiner's serious financial difficulty began in 1998 - about a year after North Castle took an equity stake in the firm - when the company defaulted on an amended credit agreement.

In November 2001, Leiner filed for Chapter 11 bank-ruptcy protection in Delaware (² Also see "Leiner Chapter 11 Plan To Include New Capital, Credit, Debt Restructuring" - Pink Sheet, 12 November, 2001., p. 11). At the time, North Castle made a $20 mil. investment in Leiner to keep operations up and running. As of December 2001, the firm had accrued $494 mil. in total debt but only $353 mil. in combined assets.

In April 2002, Leiner received approval for its reorganization plan from the Delaware bankruptcy court.

Now that Leiner's operations are growing, North Castle appears ready to make a return on its investment. The equity firm has been in talks with potential buyers for some time now. The first round of discussions began in December 2003.

According to stakeholders, a deal is likely to be completed in the next few months. North Castle is looking to maintain about a 20% stake in Leiner after any sale is completed.

Credit Suisse First Boston is acting as the lead bank to handle the transaction. North Castle also has retained the services of Merrill Lynch.

Leiner Ownership Expected To Change Hands In Recapitalization Deal

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