Leiner Health Products describes a proposed agreement with federal investigators as a key to restarting its U.S. OTC business, but the firm's debt load makes it more likely the business will be sold.

In a motion submitted May 9 in its Chapter 11 bankruptcy case, the Carson, Calif.-based firm proposes an agreement with the Department of Justice to pay $10 million in restitution.

DOJ's ongoing investigation is one of the "biggest obstacles" to restarting Leiner's U.S. OTC business, according to the filing in U.S. Bankruptcy Court for the District of Delaware.

Leiner is "virtually unable" to resume selling private-label OTC products due to customers' concerns over the DOJ investigation, the firm's attorneys say.

When Leiner filed for Chapter 11 protection in March 2008, it said it was considering selling its business (¹ Also see "Leiner Files For Chapter 11 Protection, Explores Selling Business" - Pink Sheet, 17 March, 2008., p. 6).

The proposed DOJ settlement would enhance the value of its business, Leiner notes in a same-day release.

However, according to the motion, a continuing DOJ investigation "could severely diminish the quality of bids" received for Leiner's business.

In March, a group of lenders provided Leiner $74 million in debtor-in-possession financing. In the event the firm is indicted on criminal charges, the sponsors could demand accelerated repayment.

Leiner has good reason to preserve its business as much as it can, said Scott Van Winkle, managing director of equity research at the financial services firm Canaccord Adams.

Chances appear better for Leiner to sell than for it to re-enter the U.S. OTC market, he said.

"It was a good business," but Leiner has "lost a lot of business since this upheaval," Van Winkle told "The Tan Sheet."

"This has been a very long investment for their financial sponsor, so I would assume there's a good chance they're going to be sold," he added.

In addition to paying restitution at the amount agreed to by DOJ, Leiner would plead guilty to a count of mail fraud, according to the proposal submitted by attorneys with Richards, Layton & Finger of Wilmington, Del., and New York-based Kirkland & Ellis.

The attorneys say the criminal charge stems from allegation by the U.S. Attorney's Office for the District of South Carolina that the firm in December 2006 "gave the false appearance that certain drugs had passed stability testing."

Leiner suspended its U.S. OTC production and distribution operations in March 2007 and initiated a voluntary recall the following month after FDA found good manufacturing practices discrepancies at the firm's Fort Mill, S.C., plant (² Also see "Leiner Suspends U.S. OTC Operations, Expects Perrigo To Meet Demand" - Pink Sheet, 9 April, 2007., p. 5).

FDA granted Leiner permission to begin distributing previously manufactured OTC products in the U.S. upon approval by an agency-approved third party in September 2007, the same month DOJ launched its investigation at the Fort Mill facility (³ Also see "Leiner’s Return To U.S. OTC Market Complicated By FDA Warning, DOJ Inquiry" - Pink Sheet, 24 September, 2007., p. 12).

FDA's qualified approval of Leiner's re-entry into the OTC market did not resolve the DOJ inquiry, according to a motion for the proposed agreement.

The firm's customers "are obviously concerned" about the DOJ investigation, which "has been one of [Leiner's] biggest obstacles" to resuming its U.S. OTC business, the motion says.

Leiner has continued its OTC manufacturing and distribution in Canada as well as its vitamin and supplement business in the U.S.

Throughout DOJ's investigation, Leiner has lost vitamin and supplement product customers to competitors, the proposed agreement adds.

Since the firm shut down its U.S. OTC business, it has lost $50 million in vitamin and supplement market share and $10 million in profits from the sector. Leiner also has lost $40 million from cutting its vitamin and supplement prices "as a result of competitors' efforts to displace" the firm's products, according to the motion.

Leiner continued operating after restructuring in a 2002 Chapter 11 case (⁴ Also see "Leiner $30 Mil. Vitamin Price-Fixing Settlement Applied To Outstanding Debt" - Pink Sheet, 25 February, 2002., p. 4).

- Malcolm Spicer (m.spicer@elsevier.com)

Leiner Proposes $10 Million Restitution To Enhance Its Value

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