Local drug, supplement maker signs pact with Indian supplier. (Up Front).

Leiner Health Products, one of the nation's largest manufacturers of private label over-the-counter drugs and nutritional supplements, is looking to the expansion-minded Indian drug industry to fuel its own growth.

The privately held Carson firm has signed a 15-year deal to become the exclusive marketer of OTC drugs developed by Dr. Reddy's Laboratories, India's third-largest drug company.

The move will provide Leiner, a supplier to Wal-Mart Stores Inc. and Costco Wholesale Corp., with a steady stream of new products in a business that promises to get bigger. Over the next five years, a projected $21 billion in pre scription drugs are expected to be converted OTC status.

Leiner President Gale Bensussen said the deal allows the company to focus on its ma keting strengths while relying on Dr. Reddy wider capability to manufacture a stead stream of new products.

"What we have done is cobbled together our expertise in store branding and major chain marketing with their expertise in R&D an product development," he said.

Leiner is the nation's largest manufacture of store-brand vitamins and nutritional supplements, and the second largest supplier of store brand OTC drugs, including painkillers, cough and cold medications and antacids.

The company filed for Chapter 11 Bank ruptcy Court protection in February 2002, an emerged after 42 days with a prepackage plan. The plan provided Leiner's bond holder with about 25 cents on the dollar for some $80' million in outstanding debt, said Pete Shabecoff, a partner with North Castle Partners, Connecticut-based a private investment firm that now owns Leiner.

Return to profitability

The company's troubles were largel caused by a sudden price drop in raw material in the vitamin market that left it with loads a overpriced inventory it sold at a loss to retain market share, Shabecoff said.

However, the company, which does no release earnings, expects it will be profitable on about $575 million in annual revenue in the fiscal year ending on March 31, said Chief Financial Officer Rob Reynolds.

Dr. Reddy, based in Hyderabad, India, manufactures bulk supplies of active pharmaceutical compounds that are used by other companies to make finished drugs. It also manufactures its own generic drugs, as well as branded drugs it sells in India and other less developed countries.

It is among several Indian drug companies that have been employing their price advantage to expand overseas in recent years.

U.S. sales already account for about a third of Dr. Reddy's .annual $340 million in revenues. More than half of that comes from its bulk compound sales, with the rest from sales of generic prescription drugs. Last year it became the first Indian drug company listed on New York Stock Exchange.

Leiner, which has plants in Carson and South Carolina, may manufacture some of the drugs using the active ingredients supplied by Dr. Reddy. That decision and others will be made by an executive committee that includes management from both firms, including Reddy Chief Executive G.V. Prasad, who also is taking a position on Lenier's board.

Past relationship

"If you can find a good partner over there that has the ability to manufacture at lower rates and lower expense structures, that of course makes sense," said Derek Leckow, an analyst with Barrington Research who follows the OTC market.

Dr. Reddy already supplies Leiner with two antacid compounds for its OTC line, including ranitidine, the active ingredient in Zantac. The Indian company expects the agreement will allow it to substantially expand its OTC sales in the United States, said Artie Rokkam, Dr. Reddy's director of investor relations.

"Lenier is committed to private label sales where we have just started out," she said. "It makes a lot of sense."

The company currently has 19 applications pending before the Food and Drug Administration seeking permission to sell generic drugs that are losing patent protection. Some of those may also go over the counter, Rokkam said.

Leiner has a similar partnership with PAR Pharmaceutical Inc., a New York manufacturer, to distribute generic prescription drugs.

Other Indian pharmaceutical makers have sought out U.S. partners.

Cipla, India's second largest drug company, has arrangements to supply bulk pharmaceuticals to two American companies.

Cipla and Ranbaxy Laboratories Ltd., India's largest drug company, have a combined 81 applications before the FDA to sell generic pharmaceutical compounds in the United States. Analysts say the companies are taking advantage of India's low labor costs but highly skilled work force to expand outside their home turf.

"India has skilled pharmaceutical companies." Leckow said.

Meanwhile, the U.S. vitamin market has undergone a revolution in recent years following the government's breakup of a cartel that supplied key ingredients for manufacturers.

F. Hoffman-LaRouche Ltd., a Swiss company, and BASF AG, a German competitor, paid $725 million in fines in 1999 after acknowledging they colluded to fix prices. A Hoffman official in the case was convicted of criminal charges.

The U.S. Department of Justice called the case the largest criminal antitrust conspiracy ever uncovered, and estimated it cost U.S. consumers $5 billion from 1990 to 1999.

It also caused the precipitous drop in raw material prices that caught Leiner off guard and led it to file bankruptcy. The company was also hurt by a general industry slowdown after hot sellers such as vitamin E and St. John's wort slowed down, Bensussen said.

Through bankruptcy, the company also restructured its business. It dropped 63 small customers to focus on supplying bigger retail chains. That had the result of substantially reducing it administrative and manufacturing costs and raising margins, he said.