Leiner Health Products Inc. Business Information, Profile, and History

Company Perspectives:

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History of Leiner Health Products Inc.

Leiner Health Products Inc. regards itself as the world's largest manufacturer of vitamin supplements and herbs. With manufacturing and packaging/distribution plants in both the United States and Canada, the company produces over 25 billion tablets annually of its Your Life brand of supplements as well as manufacturing private label brands for mass retailers, drugstores, supermarkets, convenience stores, military outlets, and warehouse clubs. Over 64,000 retail establishments, including 52,000 in the United States, sell supplements made by Leiner. Among Leiner's retail customer base, Wal-Mart Stores and Costco have the largest share, commanding 30 and 11 percent, respectively, of 1999 sales. Leiner claims the distinction of being the first company to make supplements according to the strict standards of the United States Pharmacopoeia (USP) Convention. In addition to nutritional supplements, Leiner sells branded and private label nonprescription pharmaceuticals, such as pain medications and cold remedies, and also the Bodycology brand of skin and hair care products. With the contribution of companies it acquired in the late 1990s, Leiner Health Products plays a major role in the growing self-help movement by providing nutritional supplements and nonprescription products to consumers.

1970s-90s: Early Incarnations

In 1973 P. Leiner & Sons, America, Inc. started a new vitamins division that two years later began producing Your Life Vitamins, its most prominent brand name. In 1979, a group of P. Leiner managers and Booker PLC, a food conglomerate based in the United Kingdom, purchased the vitamin division, renaming it P. Leiner Nutritional Products Corporation. According to company literature, this predecessor firm in 1980 was the first company to introduce a line of natural vitamins that had no sugar, salt, artificial colors, or preservatives. Other industry firsts occurred in 1982 with the introduction of outer cap safety seals for vitamin containers and the use of nutritional data directly on labels. In 1984 P. Leiner Nutritional Products became the first to offer single-serving multivitamin packages for convenience stores. In 1986 P. Leiner continued to innovate by introducing to chain drugstores the first vitamin/drug interaction program. Two years later the firm began offering customers the first toll free hotline for vitamin products, the kind of service more consumers appreciated and even expected as part of the self-help movement.

While the Leiner products gained popularity, its own corporate structure was somewhat mercurial. In 1984 P. Leiner Nutritional Products went public, trading on the American Stock Exchange. That year management had agreed that Booker would own no more than a 49 percent stake in P. Leiner. By 1989, however, P. Leiner had lifted that restriction, and Booker proceeded to buy up stock that by 1991 would give it 60 percent ownership of P. Leiner.

In late 1991 Booker informed P. Leiner that it intended to sell its entire 60 percent ownership; it planned to leave the health products industry as part of a reorganization to reduce its debt. Booker offered P. Leiner first choice in buying its 3.2 million shares out of a total of 5.3 million common shares outstanding. However, P. Leiner CEO Michael Leiner turned down the offer in order to avoid further debt himself. For the fiscal year ending March 31, 1991, P. Leiner earned net income of $5.4 million from revenues of $135.3 million.

In January 1992 new owners based in New York took over P. Leiner. A New York company called AEA Investors Inc. set up Leiner Health Products Group Inc. in Delaware, and in May 1992 Leiner Group became a holding company by paying Booker about $90.9 million to purchase P. Leiner Nutritional Products. The same month Leiner Group spent $24.7 million to acquire XCEL Laboratories, Inc., a private firm that made over-the-counter pharmaceuticals under private-label contracts. In 1993 XCEL was merged into P. Leiner Nutritional Products, which then changed its name to Leiner Health Products Inc.

When Leiner's management decided to expand the company in 1993, they received tax, relocation, and job-training incentives to move to Arizona, Nevada, and Colorado. However, they chose to stay in Carson, California, purchasing two vacant 250,000-square-foot warehouses in the area. The local government funded a $600,000 conveyer bridge to connect the two buildings, and the state government offered some tax credits. Leiner President Gale Bensussen related in the July 28, 1994 Los Angeles Times that, 'We didn't really think anybody in the government would care if we packed up our bags and left. Pleasantly, we were dead wrong.' Government incentives prompted Leiner to buck a recent trend among companies leaving the state in droves. (In 1992, 140 companies and about 18,000 jobs left southern California; 44 firms and 7,100 jobs left the following year.)

With its upgraded and expanded facilities, Leiner Health Products was able to meet voluntary standards set by the U.S. Pharmacopeia (USP) Convention. In the summer of 1994, Your Life Vitamins became the first vitamins meeting these voluntary standards for solid dosages (tablets or capsules), including disintegration/dissolution times, weight variations, strength limits, and limits to control harmful bacteria. While USP's role was not to verify that Leiner or other companies actually complied, the standards helped ensure that vitamin and other health product companies would not be found guilty of false advertising through inaccurate labeling.

Other challenges to the industry came from special interest groups. For example, after testing calcium supplements and calcium-containing antacids from over 20 companies, the nonprofit Natural Resources Defense Council (NRDC) found that most of those products exceeded the California legal state limit of 0.5 micrograms of lead per 1,000 milligrams of calcium. Thus in the fall of 1996 the NRDC sent notice to several California companies that it intended to sue them for violating California's law. In early 1997 Leiner Health Products, the nation's largest manufacturer of calcium supplements at the time, agreed to a settlement with NRDC to avoid a legal battle. Leiner decided to use chelation, an existing technology, to remove virtually all lead from its calcium supplements sold under the Your Life brand or sold as private label brands in large retail chains.

Following Leiner's action, the NRDC and the California Attorney General negotiated with several other calcium manufacturers, which also agreed to reduce the amount of lead in their supplements and antacids. These developments were significant given the possible dangers of lead poisoning, especially to pregnant and nursing women and their fetuses or young infants. Moreover, The National Academy of Sciences in 1997 recommended that adults under age 50 should increase their daily calcium intake from 800 to 1,000 milligrams and those over 50 should consume 1,200 milligrams. With few Americans getting even the old daily recommendation, the use of supplements was expected to increase.

Expansion Through Acquisition in the Late 1990s

In January 1997, Leiner Health Products purchased Vita Health Company Ltd., a Canadian firm that manufactured about 350 different kinds of nutritional supplements. Its five main products were vitamin C, vitamin E, multivitamins, glucosamine, and herbal products, although it also made OTC pharmaceuticals, including pain relievers and items to treat coughs and colds. Vita Health operated a 100,000-square-foot manufacturing and distribution plant in Winnipeg, Manitoba. In 1998 the firm changed its name to Vita Health Products Inc., and VH Holdings Inc. was set up as a subsidiary of Leiner Health Products to oversee Vita Health Products.

By 1999, Leiner Health Products was operating two main manufacturing plants in the United States. Its 138,500-square-foot facility in Garden Grove, California, made most of the firm's vitamins, while its 51,250-square-foot plant in Kalamazoo, Michigan, produced most Leiner over-the-counter pharmaceuticals. At Leiner's Carson, California, headquarters, the company ran a distribution and packaging center. In an effort to consolidate some of its operations, Leiner closed packaging/distribution centers in Ohio, Wisconsin, and New York, choosing to house those operations at a new facility in Fort Mill, South Carolina. By April 1999 the 680,000-square-foot Fort Mill plant was completely operational, including its tableting and laboratory capabilities.

Leiner Health Products in December 1999 announced it had completed its purchase of almost all assets of Granutec, Inc., a subsidiary of Ontario, Canada-based Novopharm, Ltd. With manufacturing/distribution plants in Largo, California, and Wilson, North Carolina, Granutec was the 'fourth-largest distributor of private label, over-the-counter (OTC) pharmaceutical drugs,' in the United States, according to a Leiner press release. 'With this acquisition, Leiner will become the nation's second largest supplier of private label OTC products,' management asserted. Such products accounted for $2.6 billion in the consumer-driven self-help movement. However, Leiner CEO Robert M. Kaminski added that expired patents of $12.6 billion worth of prescription drugs in 2002 would expand the private-label OTC market even more. In addition to acquiring Granutec's private-label products, Leiner also benefited from Granutec's expertise using the 'Abbreviated New Drug Application' process to convert prescription drugs to over-the-counter items.

Through its subsidiary Vita Health Products Inc., Leiner also purchased substantially all assets of Stanley Pharmaceuticals, Ltd., a Vancouver, Canada-based subsidiary of Novopharm that made and distributed private label OTC drugs and vitamins. At the same time Leiner began a partnership with Novopharm's 200 research and development scientists.

Leiner Health Products sold basically three types of supplements under its flagship Your Life brand. First, it sold a complete line of specific vitamins and minerals, multivitamins, and various combinations. Second, it offered its trademarked Body Benefits Paks intended to help consumers with particular needs. That included a choice of two core multivitamin Paks plus a choice of various supplements in the company categories of Bones & Joints, Immune Booster, Circulatory & Heart, Energy, Memory, and Healthy Moods. Third, Leiner sold over 30 kinds of herbal products, including ginseng, echinacea, St. John's Wort, cranberry, garlic, papaya, kava kava, and ginkgo biloba. It sold a total of over 500 vitamin and herbal products in more than 10,000 stock keeping units (SKUs), whether in its own Your Life brand or private labels. In addition, Leiner marketed over 100 over-the-counter products in about 2,000 SKUs for relief of pain, cough, cold, or digestive problems

Leiner was selling most of its products through mass market retailers, unlike competing supplement firms, such as Twinlab Corporation, which sold primarily to health food stores. Leiner estimated that it made 20 percent of all vitamins sold through mass retailers in the United States and over 50 percent of private label brands sold by mass retailers. Leiner sold its vitamins to America's ten largest drugstores, including American Drug Stores, Walgreen Company, Eckerd Corporation, CVS Corporation, and Rite Aid Corporation. It also sold to eight of the ten major supermarket chains, such as Winn-Dixie Stores, Albertson's, A & P, Lucky Stores, and Safeway.

Leiner Health Products recorded net sales of $626.9 million in 1999, up from $502.1 million the year before. It also ended the year with net income of $10.3 million, compared to a net loss of $17.4 million in 1998.

As it prepared for a new century in the vitamin business, Leiner entered the electronic commerce field, becoming the main supplier of a Web-based retailer called HealthQuick.com. With America Online owning five percent of its equity, HealthQuick.com offered over 1,000 SKUs of various supplements and also healthcare and bath and skin care products. Founder Herbert Haft had set up this new business to offer discount prices and no shipping fees for orders over $20.

Under the executive team of Gale K. Bensussen, Robert M. Kaminski, Kevin J. Lanigan, and Charles F. Baird, Jr., Leiner enjoyed good times; consumers were buying more vitamins and nutritional supplements than ever before, in spite of some critics who alleged that many if not most vitamins were unnecessary with a good diet and otherwise were overpriced.

In any case, the big boom came in the sale of herbal products. For example, in 1997 consumers spent over $12 billion on natural supplements, almost double what they spent in 1994. In addition, more studies indicated the possible benefits of vitamin supplements and herbal products. The federal government established an agency to study alternative healing, including herbalism, during this time.

Challenges, however, came in the form of increased competition. Upstarts entered the supplement industry because of the increasing consumer demand and also because most vitamins and herbal products could not be patented, unlike prescription drugs. Leiner in 2000 faced some tough challenges, especially as much larger firms for the first time entered the vitamin and herbal arena.

Principal Subsidiaries: VH Holdings Inc.

Principal Competitors: Rexall Sundown, Inc.; NBTY, Inc.; Perrigo Company; American Home Products Corporation; Bayer A.G.; Bristol-Myers Squibb Company; Twinlab Corporation; Murdock Madaus Schwabe; Nature's Sunshine; Weider Nutrition International Inc.

Chronology

• Key Dates:

• 1973: P. Leiner & Sons, America, Inc. launches a vitamin products division.
• 1975: P. Leiner begins production of Your Life brand vitamins.
• 1984: P. Leiner Nutritional Products Corporation goes public.
• 1992: Leiner ownership changes hands and company acquires XCEL Laboratories, Inc.
• 1994: Leiner's Your Life supplements become the first vitamins to meet USP standards.
• 1997: Company acquires Vita Health Company Ltd. of Canada.
• 1998: Company starts consolidating its packaging and distribution at its new Fort Mill, South Carolina, plant.
• 1999: Leiner purchases Granutec, Inc. and Stanley Pharmaceuticals Ltd.