Cody Labs expansion indefinitely postponed

Parent company now looking for ‘strategic partner’ on project

Posted

Plans to substantially expand Cody Laboratories — in part with the help of a state loan — have been put on hold and the future of the project is unclear.

Lannett Company, which owns the Cody pharmaceutical manufacturer, announced in April that it had stopped work on the more than $50 million project. The project would dramatically increase Cody Labs’ ability to produce active pharmaceutical ingredients, and painkilling controlled substances in particular.

“As part of our focus on near-term opportunities, we have decided to suspend that significant expansion while we reassess the timing, risks and opportunities associated with the investment,” Lannett CEO Tim Crew told investors on a May 7 conference call.

The about-face from Lannett’s new management team came as the Wyoming State Loan and Investment Board was on the verge of finalizing a $23 million loan to help fund Cody Labs’ expansion. Building out the company’s facilities on Road 2AB, on Cody’s northern edge, was expected to create 57 new jobs at the medication-making business. About a third of the project was complete at the time it was “parked,” Cody Labs President Bernhard Opitz told the State Loan and Investment Board Thursday.

“... The project will move forward, is my strong belief,” Opitz said. “The question of the timing is the open question: Will it start within six months, 12 or 20 months? That’s an open question I can’t really answer at this point.”

He also said Lannett is looking for a “strategic partner” that can provide the resources to “restart the project once again.”

State Treasurer Mark Gordon, one of the state board’s five members, questioned if there might be a change in Cody Labs’ ownership — wondering if all or parts of the Cody company could be sold to an investor.

“It is not clear what the final outcome will be at this point,” Opitz said in response. The options could range from a company assisting Lannett “or somebody, to the other extreme, taking over,” he said.

Cody Labs — which has operations in an existing warehouse on Road 2AB plus its main building on Yellowstone Avenue — has seen no pullback from Lannett and is continuing to operate at the same volumes as usual, Opitz said in response to another question from State Auditor Cynthia Cloud.

Crew, Lannett’s CEO, told investors last month that the company is continuing to make “substantial investments” in Cody Labs and continues to see opportunities there.

Lannett has already started conversations with possible partners on the paused expansion “with a very positive response from a number,” Opitz said. He said “the promise of support for financing from the State of Wyoming ... is attractive for everybody we speak with.”

However, the change in plans could potentially alter how the state handles the loan, Gordon said.

In an interview last month, Gordon said that, prior to Cody Labs’ change in plans, the treasurer’s office was “very close” to finalizing the terms of the loan.

“I still think it’s an important part of Cody’s economy and I want to see it go forward,” he said last month of the expansion project. “We’ve done quite a bit of work to go through the Large Project Loan process to get ready to be able to award them their money; they’ve been a great company to work with.”

On Thursday, State Superintendent of Public Instruction Jillian Balow expressed some “trepidation” about the project being halted.

“I think the abruptness of this action is concerning and the fact that we were mid-construction on a multi-million dollar facility to expand business just stops,” Balow said. She also worried that Lannett could “pull the plug” after the new facilities were constructed in Cody.

Gov. Matt Mead echoed that thought.

“We like having it [Cody Labs] there and we hope it grows, but we don’t want just buildings,” Mead said. “We want production.”

Opitz said there should likely be more clarity in Lannett’s search for a partner within the next three to four months.

In appearance on KODI-AM’s Speak Your Piece program in April, Forward Cody CEO James Klessens said his economic development group was “disappointed” with the change in the plans, because they hoped to see a slew of new jobs added at Cody Labs in the coming months.

Asked what the delay might mean for Cody Labs’ future, Klessens said the company remains a unique and valuable asset for Lannett.

Perhaps most notably, Cody Labs possesses a rare license from the U.S. Drug Enforcement Agency to import poppy straw, which it turns into active pharmaceutical ingredients for painkilling drugs known as opioids. The license makes Lannett one of just two generic drug makers that are “vertically integrated” in the space — able to produce opioids from start to finish. Combined with a growing demand for pain management and the fact that products derived from controlled substances bring better margins, Lannett has seen Cody Labs as a key to future growth.

While profitable and expected to be in higher demand as the U.S. populations ages, opioids have also become a topic of national discussion because of their deadly potential for addiction and abuse. According to data collected and analyzed by the U.S. Centers for Disease Control, 42,249 people fatally overdosed on opioids in 2016 — including 50 people in Wyoming. Leaders ranging from the White House to the Wyoming Attorney General’s Office have said the country is experiencing an “opioid crisis.”

Carbon County commissioners recently sued a number of opioid manufacturers in federal court, alleging they used deceptive marketing practices to drive up sales of pain-killing medications. (Lannett is not one of the companies being targeted.) Teton County has also considered filing suit, according to reporting by the Jackson Hole News & Guide, though the Attorney General’s Office has urged commissioners to let the state take the lead.

Park County commissioners have not had any discussions, at least not publicly, about getting involved. At a June 2017 meeting, several commissioners questioned why people across the nation were viewing the opioid problem as one for elected leaders to solve.

In remarks to investors and analysts in recent months, Lannett CEO Crew has said he expects the market for painkillers to shrink.

“There are tragedies occurring across this country that must be addressed — and we welcome and support all those initiatives that we think at the end of the day will reduce the use of these products as they get back down to an appropriate base,” he said.

However, Crew has said he still sees “substantial” opportunity for Lannett to get more involved in the $13 billion market for generic painkillers; pain management drugs made up only 4 percent, or $26.3 million, of Lannett’s total sales in the last fiscal year.

Further, Crew noted people continue to suffer from debilitating pain.

“While, again, the appropriate use can’t be understated — these are tragedies occurring across the country — there is still also a lot of pain in this country,” he said.

Opitz, Cody Labs’ president, told the state board Thursday that the market for controlled substances slowed down in recent years, but has stabilized in recent months.

“The business that will come when this capacity [from expanded facilities on Road 2AB] is finally realized will be very stable and positive,” he said.

Crew, who took over as Lannett’s CEO late last year, similarly told investors he still believes in the opportunities of growing Cody Labs.

“However, the scale and the rate of our investment, the degree of vertical integration is what we’re reconsidering now at this time,” he said last month, adding, “We still have a fairly significant footprint in Cody, Wyoming, before the expansion. We continue to support that portion of our business accordingly.”

Optiz said Lannett’s “parking” of the project came with a shift in focus to shorter-term opportunities, that will generate money more quickly.

While Lannett leaders have not explicitly drawn the connection, the delay with Cody Labs also appears to be related to a new focus on paying down its debt: The company announced it was postponing the Cody project around the same time it paid $25 million toward the roughly $886 million worth of debt it was carrying at the end of the year.

Lannett took on almost all of that debt in acquiring Kremers Urban Pharmaceuticals for $1.23 billion in late 2015. The merger was viewed unfavorably by many investors. The CEO who made the deal, Arthur Bedrosian, agreed to step down last year.

“… Particularly with our new CEO on board, one of the focus points of Lannett now is to take down debt wherever and however possible,” Lannett CFO Marty Galvan said at an investor’s conference in March.

Galvan said doing so would give the company more flexibility and the extra money that the company paid this year will save the company $1.7 million in interest annually.

“I think they sat down and had some heart-to-heart discussions about, you know, do we need to take on an additional $25, $35 million in debt for one more project when we’re still paying a lot of debt service on the big project that they’d already taken on,” Klessens, of Forward Cody, said on KODI. “Things seemed to be ironed out and rolling well for the company the way it is. They made decent money last year, and I think … they did a Dave Ramsey thing: They said, ‘Let’s take care of some debt instead of taking more on.’”

In the company’s most recent quarterly filing, Lannett said it expects net sales to total $700 million this fiscal year, with a gross profit margin of 42 percent.

Comments