CODY, Wyo. — The Wyoming State Loan and Investment Board voted last week to approve an $11 million low-interest loan for pharmaceutical ingredient manufacturer Cody Laboratories. The approval came despite an ongoing federal grand jury investigation of Cody Labs’ parent company for possible antitrust violations.
That investigation by the U.S. Department of Justice, along with other unfavorable information about Philadelphia-based Lannett, Co., was not discovered or considered during a four-day review by the Wyoming Business Council of the company’s $33.8 million loan application.
On the same day the State Loan and Investment Board approved the loan, new information was published by Forbes, detailing what it said was Lannett’s 1,650 percent price hike for a generic anti-psychotic medication, as well as an ongoing dispute between Lannett CEO Arthur Bedrosian and the Internal Revenue Service, which claims Bedrosian owes more than $1 million in penalties and interest.
It’s unclear what role, if any, the federal antitrust probe or other adverse news about Lannett and its management might play in the final approval of the Cody Labs loan.
State Treasurer Mark Gordon, whose office is working to further review and facilitate the loan, said no final decision has been made, and he will consider all information about any company seeking state funds.
“That’s the sort of due diligence that this office is going to have to do,” Gordon said.
The Cody Labs loan and two other loans approved last week by the board were the first under a new large economic development loan program managed by the State Treasurer’s Office, which oversees approximately $20 billion in Wyoming investments.
Also approved were loans of $15 million each for a new fuel additives plant in Cheyenne and expansion of an activated carbon plant in Gillette. Due to limited funds, each of the three applicants received only partial funding of their full requests.
Proponents of the Cody Labs loan say it will help create dozens of new jobs and generate more than $4 million in state and local taxes over 11 years.
Funding priorities
Gordon said he would have preferred that the Wyoming Business Council had discovered and shared background details about Cody Labs such as the antitrust probe, Lannett’s failure to meet employment targets for a Pennsylvania economic development grant and the company’s earlier plans to expand without public funds. But board approval is not the end of due diligence in the process, and doesn’t guarantee a loan will be paid out, Gordon said.
Gov. Matt Mead will make the ultimate decision after the Treasurer’s Office crafts a final deal, which includes review by the Wyoming Attorney General’s Office.
Gordon was the lone loan and investment board member to cast a dissenting vote on the Cody Labs request. Though all three applications were strong, Gordon said, he chose to back only the carbon plant proposal.
With total loan requests far surpassing the limited money available in the large loan program, backing only one project would have left money for future proposals, and help create a revolving loan fund that would more likely ensure a reliable, long-term funding structure, he said.
Lannett is working to reduce its own long-term debt structure after accumulating outstanding debt of nearly $1.2 billion during acquisitions last year that helped it double in size and achieve record sales.
Much of the company’s profits came from a series of sharp price increases on generic prescription drugs, including some that have drawn fire from consumers and prompted congressional hearings as part of a growing federal focus on skyrocketing drug prices.
Rising prices
Lannett and other generic drugmakers have long maintained they help keep drug prices low by offering alternatives to name-brand medicines. But the company has become increasingly aggressive in raising prices. That includes what congressional documents describe as a 1,000 percent price hike for the generic heart medicine Digoxin, and a price increase of more than 700 percent for the generic gallstone medication Ursodiol.
But Lannett’s sharpest price hike yet appears to be what Forbes reporter Nathan Vardi detailed last week. Using data from the prescription tracking firm IMS Health, Vardi found a three-month period this year when Lannett raised the price of fluphenazine by 1,650 percent. The drug, available since the 1960s, is used to treat schizophrenia and other chronic mental disorders.
Forbes also detailed an ongoing legal dispute between Bedrosian, Lannett’s CEO, and the IRS, which is seeking more than $1 million in penalties and interest. In court documents filed by the IRS, the agency claims Bedrosian failed to properly report his holdings in a Swiss bank account.
Bedrosian is in Cody this week for a civil trial in District Court stemming from a lawsuit filed against him, Cody Labs and Lannett by Cody Labs founder Ric Asherman. Lannett acquired Cody Labs as a wholly owned subsidiary in 2007.
Bedrosian, 70, became president of Lannett in 2002 and was named CEO in 2006. During a break in court proceedings Monday, Bedrosian declined to answer questions, citing the ongoing trial. He referred questions to a company spokesman.
Lannett’s spokesman did not respond to a request for comment. The company has defended its pricing strategies, and said an internal review found it to be in compliance with all laws. The company continues to cooperate with investigators.
Bedrosian denies wrongdoing in legal filings related to the IRS case. He said in a statement to Forbes that the IRS actions against him were “unlawful in that I had relied on the advice of a professional accountant in determining how to report certain income and that I had relied upon the advice of an IRS revenue agent in determining how to proceed regarding the IRS’s inquiry.”
He also told Forbes that several factors affect Lannett’s drug prices, which “are managed by Lannett’s sales and production departments, not by me.”
Full disclosure
Because Bedrosian’s IRS dispute is unrelated to Lannett or Cody Labs, it was not listed in connection with litigation disclosures as part of the Cody Labs loan application. But a federal database of civil court filings includes the IRS matter. Those documents would have been available to the Wyoming Business Council if the state agency had conducted a search during its four-day review, which included an assessment of the “character and capacity” of the applicant’s management team.
In December 2015, Bedrosian spoke with with Maria Bartiromo on a Fox Business segment about Lannett. Her last question focused on Martin Shkreli, the widely reviled former hedge fund manager who bought a drug company and immediately imposed a 5,000 percent price increase for a drug used by AIDS patients.
“Well, kind of ashamed of him as an industry because he doesn’t represent the other 10,000 companies that don’t do things like that, and it’s unfortunate that we’ve been painted by that brush,” Bedrosian said of Shkreli. “It’s sad.”
Just a few months later, Lannett started sharply raising prices on fluphenazine.
Public trust
Most state government programs rely on public and legislative support for continued success and ongoing funding. And many voters in fiscally conservative Wyoming view some economic development efforts as “corporate welfare” or “picking winners and losers in the marketplace.” Which raises the question of whether giving public assistance to a company like Lannett is likely to erode public trust in a newly created loan program.
Gordon said that may be an issue for the Legislature to address. But he has the authority to attach certain conditions to any of the three newly approved loans, including requiring personal guarantees, limiting a borrower’s ability to take on additional debt or limiting dividends paid to shareholders.
Such terms, might matter little to a small, closely held private company. But they could prove to be unacceptable to a large, fast-growing public company like Lannett.
Gordon said he couldn’t comment on any pending legal matters facing any loan applicant.
“But if we’re not satisfied or feel like it’s an undue risk, it won’t move forward. I’ve done it before, and it’s never fun,” he said. “But I have to make the best decision I can for the state.”
Gordon said he was scheduled this week to visit the activated carbon plant in Gillette, and that he would continue working to review and facilitate all three loans in advance of a scheduled Dec. 30 deadline for reaching final terms. After that, if Mead approves, the loans should fund within six months.
Contact Ruffin Prevost at 307-213-9818 or [email protected].
