The dietary supplement ingredient supply market is set to become more competitive with NBTY's planned acquisition of Leiner Health Products.

NBTY was the highest bidder at $371 million in a bankruptcy court auction to acquire Leiner, outbidding private-label OTC leader Perrigo.

The transaction was approved June 11 by the U.S. Bankruptcy Court for the District of Delaware. The firms anticipate closing the deal no later than September 2008.

Already a dominant player, NBTY with Leiner added will have increased leverage over setting prices for supplement ingredients (¹ Also see "Leiner Auction Outcome Will Shift Balance Of Power For Supplement Players" - Pink Sheet, 9 June, 2008., p. 3).

"All ingredient suppliers of size will be forced to recognize NBTY as a priority due to their volume requirements," said Scott Steinford, president of ingredient supplier firm ZMC-USA.

"At the same time, the ingredient suppliers will have to realize they themselves are merely one option to NBTY."

Mark Wright, president of contract manufacturer Health Wright Products, notes that NBTY's vertically integrated structure positions the firm to compete on one level with firms that are its customers on another level.

Wright said the deal's impact on industry rests with Leiner's former customers and NBTY. "If NBTY does not provide consistently better value than its competition, the customers are likely to defect simply to promote competition."

Steinford noted that while the expanded NBTY offers both challenges and opportunities to other industry players, it will be up to the "individual affected to adopt the change most beneficial to their own situation."

"Certainly they'll be concerned," NBTY CEO Harvey Kamil said, because the firm is a major customer of the supply business. The acquisition will help NBTY better serve its customers and make operations more efficient and effective, he said.

Steinford agrees that NBTY has "positioned itself to be diversified to the point of offering value-based services to a broader range of customers, potentially benefiting the consumer as a result of its efficiencies."

What Does NBTY Gain?

Under the agreement, NBTY will assume certain liabilities and price adjustments. Leiner expects the final price will be "in excess of $400 million."

Analyst Scott Van Winkle, managing director of Canaccord Adams, says the price is consistent with industry averages "given the margin structure."

Kamil said the deal will allow NBTY to add volume to the Leiner business nationally and internationally (see chart: " ² NBTY Net Sales Up For May ").

Among Leiner's greatest assets is its "human capital," which is "very, very important," Kamil said. Leiner President and CEO Rob Reynolds said the firms' agreement "contemplates that substantially all of our employees will receive employment offers from NBTY."

Leiner is "certainly a major player in house brands, private-label products - that is an asset," Kamil said.

Facilities on the West Coast and in Canada are also key assets, he said. "All the plants are state-of-the-art. They are fabulous plants."

Under the deal, the price NBTY pays will be affected by the amount of Leiner's actual working capital - the value of its product inventory and accounts receivable with payments owed to suppliers deducted.

The price will go down if the amount of working capital at the closing is less than $110 million, but will increase if the amount exceeds that level, NBTY says.

Perrigo Bows Out

NBTY increased its bid from the $230 million it opened with May 30. The June 9 auction was required after a second, higher bid was made.

Perrigo spokesman Art Shannon confirmed June 10 that the firm was the second bidder. "We made the best bid we could," but "we stuck with very stringent return-on-investment capital guidelines."

Wright pointed out Perrigo can potentially benefit "as the marketplace will recognize the value of fair competition." Even small manufacturers "can benefit as some customers simply will not want to partner with a company that in some ways will be a competitor," he said.

NBTY and Perrigo were rumored as likely buyers when Leiner filed for Chapter 11 protection in March, a year after putting its OTC operations on hold when FDA found discrepancies in good manufacturing practices at its Fort Mill, S.C., facility (³ Also see "Leiner Files For Chapter 11 Protection, Explores Selling Business" - Pink Sheet, 17 March, 2008., p. 6).

Kamil said June 11 NBTY will be looking into restarting Leiner's OTC operations in the U.S..

What Next In Leiner's Legal Affairs?

NBTY's winning bid comes with a Department of Justice investigation hanging over Leiner. In May, Leiner proposed to pay $10 million in restitution and plead guilty to a count of mail fraud to resolve allegations by the U.S. Attorney's Office for the District of South Carolina that the firm in December 2006 fraudulently indicated that certain drugs had passed stability testing (⁴ Also see "Leiner Proposes $10 Million Restitution To Enhance Its Value" - Pink Sheet, 19 May, 2008., p. 16).

The proposed plea agreement with DOJ has not been approved by the bankruptcy court. If approved, it would be entered in federal court in Columbia, S.C.

Kamil said "the acquisition does not consummate" unless the DOJ issue is "sealed, covered and done."

- Katie Stevenson (k.stevenson@elsevier.com)

NBTY Leiner Buy Intensifies Supplement Ingredient Competition

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