In early June, NBTY, Ronkonkoma, NY, placed a bid of $230 million to acquire Leiner Health Products, Carson, CA, according to NutraAnalyst, Salt Lake City, UT. At a June 9th auction, however, NBTY upped its bid to $371 million, its best and highest bid for the purchase of substantially all of the assets of Leiner, plus assumption of certain liabilities.

The agreement provides for a downward purchase price adjustment if the amount of actual working capital at the closing is less than $110 million, and for an upward purchase price adjustment if the amount of actual working capital at closing is greater than $110 million. NBTY expects to close the deal no later than September 2008.

Leiner filed for Chapter 11 bankruptcy this past March. In the May issue of Nutraceuticals World, “Word from Wall Street” columnist Adam Ismail reported on the implications of the Leiner bankruptcy. He said Leiner’s troubles go back to a 2007 audit of its OTC (over-the-counter) facility, in which FDA found the company to be out of compliance with regard to GMPs. The incident led to a recall, which eventually pushed the company to shut down operations at the facility entirely. The recall cost the company approximately $200 million, while ceasing OTC operations cost the company about $150 million in lost business.

“These quality control and quality assurance problems may have resulted in more than just lost OTC business, as some of its more conservative customers or customers that required both OTC and supplement manufacturing may have moved their supplement business elsewhere,” Mr. Ismail explained in his column. “Indeed, Perrigo, one of Leiner’s main competitors, said it alone had picked up about $100 million in sales as a result of the problems at Leiner, and it was more than just OTC business.” Perrigo was also rumored to be in the running to acquire Leiner at the June 9th auction. According to NutraAnalyst, the company had recently raised $200 million in debt to go toward a higher bid for the Leiner business.

The potential impact of this acquisition on the supplement industry overall could be significant, especially since NBTY is now the largest supplement company in North America. As highlighted in a recent NutraAnalyst “Breaking Analysis Alert,” NBTY already had the scale to impact raw material prices, and adding the Leiner business will only enhance their position. “Bringing the NBTY sourcing competency into the Leiner book of business could generate additional cost savings and result in further margin pressure on ingredient suppliers,” NutraAnalyst said. “NBTY has in the past been successful by being cost conscious and driving prices down where it is advantageous, so in the mass channel competitors will likely need more scale to succeed…Raw material suppliers may see a tighter squeeze on prices, particularly for the less common ingredients that do not behave like commodities.”

On the private label side, NutraAnalyst believes NBTY will have to work on stemming the flow of business to Perrigo. Regardless, the deal will significantly enhance NBTY’s shelf space, especially since Wal-Mart was Leiner’s largest private label customer.