Firm Seeks to Cure Sluggish Sales
What do you do when your company is hamstrung by a pile of debt and shrinking margins in an industry rattled by price fixing, bad publicity and sluggish growth? If you’re Gale Bensussen, you reach for the stomach medication. Then you turn it into a hot-selling product.
The president of Carson-based Leiner Health Products Inc., one of the world’s leading manufacturers of vitamins and supplements, is now moving the firm aggressively into over-the-counter medications. The company’s generic version of the heartburn reliever Zantac, for example, posted $50 million in retail sales in its first six months on the market, according to company figures.
Analysts applaud this diversification as a quick response to slow sales in the company’s traditional vitamin business. But big challenges remain for a company known for its high-quality products and competitive prices. With margins and market share shrinking in key categories, Leiner is under pressure to find lucrative new niches and pare its massive debt to remain competitive in an industry being reshaped by consolidation.
“I wouldn’t bet against Leiner,” said Matthew Patsky, analyst with Boston-based Adams, Harkness & Hill Inc. “But they’ve got to find a way to get consumers to pay premium prices for premium quality.”
The company’s roots date to 18th century Budapest, where a clan named Leiner ran a rendering plant. Over the centuries, they perfected gelatin technology eventually used to make soft gel capsules. Today, Leiner manufactures more than 900 different dietary supplements and OTC medications. It employs more than 3,000 people and has facilities in the United States, Canada and China. Locally, the company has its headquarters, a research center and a packaging plant in Carson, along with a tablet-making facility in Garden Grove and a vitamin E soft gel plant in Valencia. With fiscal 2000 sales of $662.3 million, the company is one of the world’s largest manufacturers of supplements.
Still, Leiner is far from a household name. The family is no longer actively involved, but the company remains privately held and you won’t find the Leiner moniker on most items it produces. That’s because Leiner specializes in store brand or private-label products manufactured for the nation’s largest grocery chains, drugstores and mass merchants. Their client list reads like a who’s who of retailing and includes such behemoths as Wal-Mart, Costco, Rite Aid, CVS, Albertson’s and Safeway.
All told, the company controls about half of the $1-billion-plus U.S. private-label market for vitamins and supplements. The company also performs contract manufacturing for well-known companies such as Bayer Corp., whose One-A-Day vitamins are among the nation’s leading brands. In addition, Leiner makes its own Your Life brand of vitamins, which can be found alongside the private-label and national brands on retailers’ shelves.
That’s some valuable real estate considering that mass market sales represent the largest slice--37%--of the $15.4-billion U.S. market for vitamins, minerals, herbs and other supplements, according to the San Diego-based Nutrition Business Journal.
Trouble is, private label is the least profitable segment of the business. Retailers own their store brands and can change manufacturers on a whim. And it’s a category whose market share has slipped as nationally branded products backed by big advertising budgets have gained ground.
Profit margins are higher on Leiner’s proprietary Your Life vitamins, a so-called broadline brand priced above private-label products and lower than national brands. But sales of Your Life have declined 13% over the last four years to about $100 million after one retailer dropped the line and competitors such as Florida-based Rexall Sundown Inc. swiped market share with innovative products and lower prices.
“[Leiner is] in a tough position with Your Life, no question,” said Adam Ismail, financial analyst with Providence, R.I.-based Health Business Partners.
Your Life’s decline has helped to deflate Leiner’s gross profit margins, which shrunk to 19.6% in the first quarter of fiscal 2001 compared with 25% in the same period a year ago. Margins are also getting squeezed in its bedrock vitamins E and C, which account for about 30% of company sales.
In the case of vitamin E, the principal culprit is industry overcapacity. Vitamin C margins are shrinking in the wake of the much-publicized price-fixing scam in which manufacturers such as Leiner were overcharged by raw-material suppliers. Rather than join one of the class-action suits filed against the vitamin cartels, Leiner sued its suppliers on its own. Early settlements have yielded the company $21 million, and with more than 20 suits still pending, it will likely reap millions more.
But newly freed prices have set off a scramble for market share among vitamin makers, many of whom are slashing tablet prices faster than their raw-material prices are dropping. The squeeze has been particularly hard on Leiner, the nation’s leading producer of vitamin C.
“The market is very unstable right now,” Bensussen said.
He could be speaking for the broader U.S. market for vitamins and other supplements, whose sales have slowed considerably following several years of rapid growth. Mass market sales of vitamins are up an anemic 2.8% over last year, according to Chicago-based Information Resources Inc., while herbal supplements sales are down nearly 9%.
Industry watchers blame the slump on a variety of factors, including spotty product quality in a market teeming with more than 1,000 manufacturers and marketers. Emerging research contradicting marketers’ rosy claims hasn’t helped. The Food and Drug Administration in February issued a public-health alert about the potential dangers of taking St. John’s wort with other medications and studies questioning the benefits of antioxidants such as vitamins C and E, for example.
Couple the bad press with the lack of new blockbuster products and you’ve got an industry ripe for shakeout. Shares of public companies such as Natrol Inc., NBTY Inc. and Twinlab Corp. have been pummeled. Consolidation has already begun in earnest, led by Royal Numico. Over the last year the Dutch nutrition giant has put together transactions worth more than $4 billion to acquire U.S. supplement makers Rexall Sundown and General Nutrition Companies Inc.
Leiner isn’t sitting still in a changing environment. Last December it strengthened its presence in OTC pharmaceuticals by purchasing Canadian-based Granutec Inc. and Stanley Pharmaceuticals Ltd. for $60.2 million. The purchases have beefed up the company’s OTC product line with strong sellers such as the generic versions of the acid reducers Zantac and Tagamet.
It’s a good thing, too. If not for the acquisitions, Leiner’s fiscal 2000 sales and gross profit would have been lower than the previous year. But even the addition of Granutec and Stanley didn’t stop Leiner’s operating income from slipping 16.6% in fiscal 2000 to $39.2 million, while net income plummeted 52.4% to $4.9 million.
Other vitamin makers are feeling the pinch as well, but most aren’t as highly leveraged as Leiner. At the end of fiscal 2000 the company was carrying $344.1 million in debt, a portion of which is high-yield junk bonds. The heavy load is largely the result of a 1997 capital restructuring in which Connecticut-based North Castle Partners used a leveraged buyout to take a controlling interest in the firm.
Headed by Charles F. Baird Jr., the investment firm has taken stakes in a variety of businesses focused on health and aging, including California Day-Fresh Foods, a Glendora-based producer of juices and smoothies.
Baird defends Leiner’s capital structure as a viable alternative to public ownership. Some of that debt has funded new facilities, such as a state-of-the-art manufacturing plant in Fort Mill, S.C., and a gleaming new science center in Carson. These big-ticket expenditures have made Leiner one of the most efficient producers in the industry. But they are long-term investments that impatient Wall Street investors may not have been willing to make, Baird said.
“There are still a few people in this country who don’t think public [ownership] is the be-all and end-all of capital structures,” he said.
Baird is clearly making a virtue of necessity. Before forming North Castle, he was with AEA Investors Inc., a New York-based investment group that buys companies, improves their performance, then flips them for a tidy profit. AEA purchased Leiner in 1992 and attempted to take the company public. But market conditions and Leiner’s checkered financials thwarted those efforts, leading to North Castle’s leveraged buyout.
Leiner executives haven’t discounted the possibility of an IPO in the future. That’s not likely to happen any time soon, given the industry’s current doldrums. But the sector’s long-term outlook is decidedly bullish. At present, only about half of all U.S. adults take vitamins, meaning there are plenty of consumers left to target. In addition, older Americans traditionally have consumed the lion’s share of supplements. That’s good news for vitamin makers, given the rapidly aging U.S. population.
And though Leiner isn’t noted for developing cutting-edge products, its conservatism may prove to be a strength if the regulatory environment tightens. Some competitors scoff that Leiner was late to hop on the herbal bandwagon, and that it missed out completely on hot sellers such as melatonin.
“New products are what drives this business, but you won’t see them coming out of Leiner,” said one competitor.
But continuing controversy over newfangled supplements has some observers praising Leiner’s more cautious approach. The National Institute on Aging has questioned the long-term effects of hormone compounds such as melatonin, for example. And the Federal Trade Commission recently sued Rexall Sundown for making “false and unsubstantiated claims” for its new supplement Cellasene, which the company advertises as a cellulite reducer.
“We won’t put out a product unless there is adequate science behind it,” Bensussen said. “What we don’t do will tell you as much about our company as what we do.”
That still leaves Leiner as a high-quality, low-cost producer entrenched in a market segment that’s under tremendous pressure. Which is why the company is looking beyond private-label vitamins for growth.
It recently relaunched its Your Life brand with new packaging and promotion in an attempt to bolster sales. The company is also moving into alternative channels. It controls about 60% of the U.S. military’s vitamin business, and it manufactures supplements for multilevel marketing giant Herbalife International. The two companies have formed a joint venture in China, where they have built a manufacturing facility near Shanghai. The company also plans to leverage its tremendous North American production capacity by taking on more contract customers.
Leiner also figures to capitalize its existing relationships with mass market retailers to win additional shelf space for its growing stable of private-label OTC pharmaceuticals. That sector is currently dominated by Allegan, Mich.-based Perrigo Co. But Bensussen said Leiner is enjoying the new role of challenger, chipping away at the market share of an industry leader rather than the other way around for a change.
“Sometimes it’s better to be David” than Goliath, he said.
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In a Healthy Position
Carson-based Leiner Health Products accounts for half of the $1.25-billion market for store brand or “private-label” vitamins.
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Leiner Health Products: 50%
Perrigo: 30%
Pharmavite: 15%
Other: 5%
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Growth is up, but profit margins are down...
The company’s revenue has almost quintupled since 1992, aided by six acquisitions. But profit margins since 1998 are slipping because of competition.
Sales, in millions: $662.3 million
Profit margin: 19.6%
Sources: Leiner Health Products; SEC filings
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