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Leiner files for bankruptcy

Leiner Health Products on Monday filed a petition for Chapter 11 bankruptcy and said it will explore selling the business, according to a U.S. Securities and Exchange Commision filing.

The announcement follows a turbulent year for the over-the-counter generic drug and vitamin maker that included a U.S. Food and Drug Administration inspection at its Fort Mill plant, drug recalls, layoffs, plant closings, a U.S. Department of Justice investigation and a management shakeup.

The Carson, Calif.-based company said it has arranged for about $74 million in financing to continue its day-to-day operations while a sale is discussed. A small work force still is employed at Leiner's former plant and current distribution center off Carowinds Boulevard. Chief Executive Officer Rob Reynolds said no layoffs are expected as a result of the bankruptcy.

"Although we had taken many steps to address the challenges facing our business, they were not enough to offset the cost of our substantial debt obligations," Reynolds said in a statement Monday. Company officials declined to comment further.

While Leiner hasn't produced any over-the-counter drugs since last spring, the company said it plans to continue making generic vitamins, minerals and supplements during the sale process.

A tough year

Controversy has swirled around Leiner and its products since January 2007, when an employee inside the company's Fort Mill plant reported violations of good manufacturing practices to the FDA. Among the allegations: the company manipulated quality test results and falsified records about product impurity results, according to an affidavit filed in U.S. District Court last year.

An FDA investigation at the Fort Mill plant followed and a list of violations were found, including allowing drugs that failed quality tests to remain in the market, failing to adequately train staff, not cleaning equipment to standards and not identifying black specks found in some pills, according to an FDA report obtained by The Herald.

Common painkillers (ibuprofen and acetaminophen) and allergy medication (loratadine) were among the drugs listed in the report.

After the FDA probe, Leiner shut down all over-the-counter drug manufacturing and distribution last year. In April, it recalled all of its over-the-counter products from store shelves, and in June laid off 540 Fort Mill workers, changing the Fort Mill production facility into a distribution center.

The company's over-the-counter products formerly were sold as store brands at Wal-Mart, CVS, Costco and other retailers.

Last fall, the company confirmed it was being investigated by the U.S. Department of Justice related to the FDA issues in Fort Mill. And in early January, Leiner closed its only other over-the-counter drug plant in Wilson, N.C., and outsourced all remaining orders for over-the-counter drugs, according to SEC filings.

Former Leiner CEO Bob Kaminski and former Chief Financial Officer Kevin McDonnell also were replaced earlier this year.

Leiner officials repeatedly have declined to comment on the FDA and Department of Justice investigations. Federal officials also have declined to comment.

Leiner still 'attractive'

Derek Leckow, an analyst with Chicago-based Barrington Research, said in spite of the bankruptcy, Leiner will offer "attractive assets" to a potential buyer. He said the company's manufacturing facilities and intellectual properties likely will attract interest from several companies.

"There's some real value, if they are truly looking to sell," he said.

Leiner's chief competitior, Michigan-based Perrigo, on Monday did not respond to inquiries about its interest in purchasing Leiner.

Leckow said Leiner was a fast-growing business and wasn't in financial trouble before its FDA woes began in early 2007. He said the company's debt had grown as it expanded in recent years. The debt, combined with the cost of recalls after the FDA probe and the loss of income, likely led to the bankruptcy, he said.

"One of the main things that happened is they incurred all the expenses without making money in the meantime," Leckow said. "If you fail to recognize the risks involved with all the regulations, it can lead to this type of thing."

In its most recent financial report, Leiner said it lost $72.4 million in sales in the second quarter of fiscal year 2008, down to $125.6 million, compared to $198 million in the second quarter of 2007. Of the losses, the company attributed more than $55 million to the loss of over-the-counter sales.

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