Andrx Refocuses, Prioritizes Strengths

By John Dorschner, The Miami Herald

Sep. 30–At Andrx’s $200 million manufacturing plant in Davie, a laser machine drills a tiny hole in a pill, flips it over and pushes it to a second laser, which drills a tiny hole in the other side.

About 85,000 times an hour, the machine does this, creating Metformin XT tablets for diabetics. A digital photo is taken of each pill to make sure the holes are of the right size and location. That’s crucial because the holes allow the active ingredient to seep slowly into the body for controlled time-release.

The complexity of this process is both Andrx’s strength and perhaps its weakness as the company is poised to become the largest publicly traded pharmaceutical firm in Florida, after Israel-based Teva Pharmaceutical Industries completes its purchase of Miami-based IVAX later this year.

Like IVAX, Andrx manufactures generic drugs, which have been subject to brutal price competition. Andrx’s solution has been to specialize in difficult-to-make generics, which have few competitors and therefore less pricing pressure.

But the plant’s complex manufacturing process has caused concerns from the Food and Drug Administration, which is insisting that Andrx improve its quality controls before the FDA will approve any of the 30 new drug applications Andrx has submitted for approval.

“In the short term, it’s business as usual,” says Chief Executive Thomas P. Rice. “We’re making and shipping product.”

Andrx has responded with plans for corrective action to the FDA’s complaints, and Rice says Andrx and FDA officials will meet “probably in the next several weeks” in an attempt to resolve the issues.

“We have a compliant plant, and we are working to improve our quality,” says Rice. “It’s a continuum.”

In investors’ eyes, Andrx has been a faltering company. Five years ago, its stock traded over $80. When Rice took over 18 months ago, it was around $26. Since then, it has slid to $15.

Its most recent quarterly report showed revenue of $259 million and net income of $8 million.

Rice has been trying to turn the company around by concentrating on the basic mantra of chief executives, “focusing on our core strengths.” In Andrx’s case, that means difficult-to-manufacture generics and the company’s distribution business, Anda, which is a wholesaler of 6,000 generics for Andrx and many other companies, selling primarily to 25,000 small pharmacies throughout the United States.

Last December, the company decided to sell its money-losing branded business. The workforce dropped from 2,100 to 1,700, mostly by losing sales personnel scattered throughout the United States.

Rice also canceled plans for a huge plant in North Carolina. “I love Fort Lauderdale,” he says, although his family still lives in Maryland and he gets a $79,600 annual allowance for a Broward apartment and commuting expenses. (That’s in addition to the $2.3 million in annual salary, bonus and options, according to Andrx’s public filings.)

Rice says he has been reluctant to uproot his family because his son is a senior in high school. “We’re committed to South Florida,” he says of the company.

Under Rice, Andrx has put $45 million into an expansion of its Davie plant and another $20 million in a pilot plant in Davie, plus the leasing of 165,000 square feet for packaging and quality control in Sunrise.

He has also made dramatic changes in the management team. Among the new members are Nicholas F. Cappuccino, executive vice president and chief scientific officer, a pharmaceutical veteran most recently with Sandoz, and Anne Kelly, a one-time FDA staffer who is senior vice president for quality.

“We’re creating a new culture and a new team,” Rice says. “With that kind of change, you’re going to see people come and people go.”

Gone earlier this month was Chief Financial Officer John M. Hanson, who announced his resignation. Angelo Malahias, Andrx’s president who had been CFO from 1996 to 2004, added the CFO title to his responsibilities, but is to receive no additional salary added to his annual base salary of $460,000, according to the company’s public filings.

“It’s all about personal chemistry,” Rice says of the CFO shuffling.

Also gone in September was Scott Lodin, executive vice president and general counsel. He had been hired by Andrx co-founder Alan Cohen in the mid-1990s.

Lodin had experienced a “diminishing of his duties,” says Rice, as new executives were brought in and he decided to resign. “He did a wonderful job, [but] probably is not a person who is more savvy when it comes to regulatory legal management of products.”

With a termination agreement from earlier management, Lodin was given a $2 million severence package. Reached Thursday evening, Lodin said he had no coment. He has gone back to work for Cohen in his various business interests.

Andrew Forman, an analyst with W.R. Hambrecht, thinks Lodin may have been let go because of the company’s unexpected loss of a patent battle involving Concerta, a Johnson & Johnson drug for attention deficit disorder.

“They fumbled on the goal line, and somebody had to answer for that,” says Forman.

Andrx had invested $4 million in making a generic Concerta in anticipation that it was going to get six months of exclusivity, but J&J filed a late patent application on the drug, and another drug company apparently out-maneuvered Andrx, filing a reply to the J&J application a day before Andrx replied, causing Andrx to lose its lucrative exclusivity.

Rice says Lodin’s leaving had nothing to do with Concerta. “It was very amicable . . . a planned departure.”

Some analysts believe that Andrx, like IVAX, could become a take-over target. “With all the price competition [in generics], we’re likely to see more consolidation,” says Michael Krensavage of Raymond James.

Rice says he’s not planning on a merger. “We’re doing everything everyday to run the company for long-term success,” he says, but can’t dismiss an offer if one came up. “We do what’s right for shareholders.”

Some analysts continue to have strongly negative feelings toward the company. Matrix USA, a New York-based broker-dealer, lists Andrx as a sell, “because the company is losing shareholder value at a rapid pace,” says Matrix analyst Ivan Feinseth.

But others believe the stock price has fallen so low that it’s now worth looking at. Merrill Lynch last week switched Andrx from neutral to buy.

Forman at W.R. Hambrecht also rates Andrx a buy: ‘Management’s fumbling [by their own account] of Concerta and now this announced FDA action doesn’t exactly raise investors’ confidence for execution going forward. Having said that, we believe that these uncertainties are embedded in Andrx’s stock price.”

Some big players are moving in. MMI Investments, a New York firm, has increased its stake in Andrx to 8.3 percent of the company’s shares — a $115 million investment.

Earlier this year, MMI aggressively tried to dump the chief executive in another company it was invested in, NDCHealth. An MMI spokesman said he had no comment about Andrx.

CEO Rice remains positive. “We’re preparing the company for growth.” The company has built up about $120 million in cash or equivalents. “We think there are opportunities out there for the company to invest in, and we have the cash to do it.”

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