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Drugmaker's quick slide from the top

Drugmaker's quick slide from the top

Time is running out as KV struggles to overcome its checkered past and resume manufacturing.

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Not long ago, drug manufacturer KV Pharmaceutical Co. was a rising star in the health care industry.

A maker of women's health products and scores of generic drugs, KV had dozens of patents and a growing platform for a variety of medicines — from powerful painkillers to children's cough syrups.

By 2008, KV was considered one of the most successful publicly traded companies based in the St. Louis area, posting nearly $600 million in revenue and employing 1,700 people.

Today, it's a broken company with a criminal record.

Regulators say KV produced medicines of the wrong size that endangered public safety. Its products were pulled from pharmacy shelves, and its manufacturing has been idle for 15 months.

Short on cash with no meaningful revenue stream, the company has shed three quarters of its work force, including 289 layoffs last week. The drugmaker is still waiting for permission from the U.S. Food and Drug Administration to resume manufacturing — and the pressure is rising.

"It's a disaster," said Lawrence Solow, an analyst at CJS Securities, a New York brokerage and research firm. "If within six months they don't start generating revenues, they may end up in bankruptcy."

KV executives say they are embracing a new corporate ethic as they work to turn around the company's fortunes. David Van Vliet, interim chief executive, said the company is correcting deficiencies in its manufacturing processes to win FDA approval.

"We're trying to get back in the market with our products and prove that we can sustain the highest levels of compliance," said Van Vliet during a recent interview at KV's corporate headquarters in Bridgeton. "The goal is to get there as quickly as we can."

Until then, the once-thriving company is trying to hang on. Despite making huge cuts to its work force, KV plans to sell some of its long-held assets to meet payroll, including a division that processes raw materials for drugs.

But the company needs to get its products on the market again, analysts say. "It's a race against time," Solow said. "If they ceased to exist, it wouldn't be a shock."

criminal probe

Last month, a wholly owned subsidiary of KV Pharmaceutical — Ethex Corp. — pleaded guilty to two felony counts of criminal fraud for failing to report to the FDA that it was making oversize tablets that could be harmful to patients.

Essentially, investigators said, KV and its subsidiaries manufactured and sold dozens of different medicines without federal approval and tried to conceal its problems from federal regulators, according to court records.

As part of the plea agreement, the company was sentenced to five years of probation and ordered to pay $27.6 million in fines and restitution. No individuals have been charged in the ongoing criminal probe.

"KV's persistent inattention to important drug quality and manufacturing issues required the FDA to take a significant action against the firm and to monitor its behavior closely," said FDA spokesman Tom Gasparoli in Washington.

Critics note that the company has long struggled to make medicines that complied with industry standards.

KV was founded in 1942 by Victor Hermelin and Bob Keith, both of St. Louis. Hermelin, who died last year, was a chemical engineer who went on to hold about 100 patents, including one that allows pharmaceuticals to be produced in the now familiar time-release form. He was succeeded in 1975 by his son, Marc.

Even in its early days, KV's products, at times, were scrutinized. In 1947 and again in 1950, the company faced criminal charges for shipping vitamin capsules that had less than the required amount of vitamins.

In the early 1990s, the FDA raided its facilities and seized its drugs. Then, in 1995, the company pleaded guilty to federal misdemeanor charges for misbranding a children's antibiotic, paying $600,000 in fines and costs. Regulators concluded that the recalled drug could lose its potency prior to its expiration date.

Still, KV enjoyed a growth spurt over the past decade and won lucrative support from the local community. St. Louis County agreed in 2005 to issue up to $135 million in industrial revenue bonds to enable the drugmaker to expand its facilities in Brentwood, Bridgeton, and the Westport area. KV also was allowed to delay local tax payments for 10 years.

By January 2009, after running afoul with regulators, the company announced that it had ceased production. Two months later, KV signed a consent decree with federal prosecutors in which the company agreed to destroy all finished drug products in its possession, to refrain from manufacturing drugs and to change its manufacturing processes in compliance with the FDA.

The fallout from KV's shutdown has been enormous, as its value has plummeted by more than $1.4 billion since 2007. KV stock reached a high of $31.34 per share less than three years ago, but finished last week at $1.96.

"Bottom line is you just don't mess with the FDA, and this has happened again and again at KV," said Juli Niemann, an analyst at Smith, Moore & Co., a St. Louis brokerage house. "Trying to take shortcuts for profitability is a systemic problem there."

errant tablets

KV's most recent quality control problems were discovered in May 2008, when pharmacists in California and Canada reported grossly oversize morphine sulfate tablets that were produced by a KV subsidiary. Morphine, an opiate, is prescribed as a painkiller. The errant tablets were double doses.

KV initiated recalls of the tablets in June 2008, but failed to report to the FDA its discovery of oversize tablets of other drugs, including propafenone, which is prescribed for irregular heart beats, and dextroamphetamine sulfate, an ingredient in the attention-deficit disorder drug Adderall.

According to the U.S. attorney's criminal charges, an executive at KV considered options in July 2008 for responding to the firm's discovery of oversize tablets of two additional drugs.

One option was "to do nothing because the probability of oversized tablets is very low," Assistant U.S. Attorney Andrew Lay said in court papers. Over the objections of other employees, the executive chose the "do-nothing option."

The unnamed executive instructed multiple employees to "minimize written communications about KV's oversized tablet manufacturing problems and limit distribution and discussion of any documents discussing these problems," according to the prosecutor.

Before he was named KV's CEO, Van Vliet was the company's chief administration officer in the spring and summer of 2008. He said he was surprised then to hear about the firm's quality control problems.

"I was not the vice president of quality and not the CEO, and therefore, my role was to make sure the proper processes were followed and not to make a decision," Van Vliet said. "I was consistent in voicing my recommendations to the company that we … be forthright with the FDA."

He would not comment on whether any of his superiors at KV instructed him to help cover up the tablets' shortcomings.

In the months leading up to KV's recalls, former employees say supervisors encouraged them to skirt FDA protocol to meet the company's production demands.

Dwayne Spears, a former production worker who helped audit the company's Particle Dynamics division, said he was expected to alter chemical test results — including the size of particles exceeding guidelines — to meet FDA standards.

"They'd ask you to falsify records," said Spears, who was laid off a year ago. "There was a lot of little fudging going on in the paperwork. A lot of people had problems with that conscience-wise, but they knew they had to do it."

Spears, whose duties also included helping produce the heart drug metoprolol, said KV was deficient in keeping conditions sanitary. To prevent contamination or adulteration of drugs, a major cleaning of equipment and production rooms is required before any switch over between drugs, but Spears said that didn't always happen.

"Their cleaning practices were terrible," he said. "I'm amazed that their products weren't adulterated from (the start). Things weren't cleaned properly, including the machines."

Van Vliet said that whatever problems the company had in the past, they are being corrected. "Compliance is our No. 1 value in the company," he said.

Dr. Jay Sawardeker, the company's former vice president of corporate quality assurance/quality control, declined to comment.

KV has other troubles that extend beyond manufacturing issues.

The company faces at least 30 pending lawsuits from patients and their families who have accused KV Pharmaceutical of making and selling medicines that caused bodily injury and/or economic harm, including 15 wrongful death suits.

In addition, KV has more than 200 pending claims that may or may not get to court — 26 of those claims involve a patient's death. It also faces a $100 million suit from CVS Pharmacies for allegedly breaking a supply contract.

corporate shake-up

An investigation by KV's Audit Committee, comprised of three members of the company's board of directors, triggered a corporate shake-up that weakened the Hermelin family's control of the company.

Marc Hermelin, the firm's chief executive and founder's son, was ousted by the board of directors in December 2008, and Van Vliet was named interim chief executive. Hermelin's compensation in fiscal year 2008 totaled $8.7 million.

Hermelin's wife, Sarah Weltscheff, a senior vice president for human resources, and his son, David Hermelin, a vice president for corporate strategy, also were let go. Marc Hermelin, who owns a spacious home in Jerusalem, contends he resigned before the board fired him and is entitled to $36.9 million in retirement benefits.

Marc and David Hermelin and other members of the board of directors did not return phone calls seeking comment.

Often, companies run by family members, such as KV, struggle to shift their attitudes and bring in outside expertise to handle the complications of managing a larger enterprise, said Vincent Volpe, executive director of St. Louis University's Center for Entrepreneurship.

"Private businesses are accustomed to not having to share much information," Volpe said. "But when you're out in the public markets and have a company that's highly regulated, there's a lot of things to do."

The family also has been beset by infighting. In 2007, Victor Hermelin sued his son Marc in an attempt to remove him as trustee on a trust established to benefit the elder's wife and children.

Victor Hermelin's widow, Margie, said the rift between her husband and stepson began at least 35 years ago, when Marc Hermelin took over the company. She claims that Marc Hermelin duped his father by telling him that managers would quit unless the elder Hermelin resigned.

"Victor always wanted to do the right thing," she said. "He always believed in doing what the FDA wanted. But when his son took over the company, he did what he wanted. He didn't listen to anyone because he thought he was a genius. And Victor had problems with that. He got disgusted with his son."

Despite the recent turmoil, the Hermelin family and its allies remain the controlling shareholders in the company. Marc Hermelin and his son David Hermelin remain on the board.

trying to rebuild

Van Vliet says KV is in a different place today.

The company's audit committee recommended numerous changes in management and systems practices throughout the company, Van Vliet said. For example, he noted, the panel found that key decisions were being made without the benefit of legal counsel — a practice that aggravated the company's problems with regulators.

Meanwhile, the company is attempting to rebuild its business through cooperative ventures. KV has signed an agreement to market and sell Gestiva, a drug intended to prevent premature birth. Under the agreement, Baxter Pharmaceutical will manufacture the drug, and KV will bring it to market.

The company also has struck a deal with Purdue Pharma LP. Under the court settlement, Purdue will manufacture Oxycontin ER (Extended Release) tablets, and KV will sell those painkillers.

But ultimately, the company must start manufacturing pharmaceuticals again if it's going to survive, analysts say. And even then, there may not be a market for something produced by KV, said Kevin Kedra, an analyst at Gabelli & Co., an investment management firm in Rye, N.Y.

"Who's going to buy their product?" Kedra said.

Van Vliet, the former president of the St. Louis-based Angelica Corp., a health linen supplier, had been chosen by Hermelin to join the company in 2006. He served on the company's board of directors from 2004 to 2006, and was viewed as a potential successor for the CEO job.

He acknowledges there are challenges ahead but said the company has a plan that will restore its business and its credibility.

"This management team and board of directors is committed to becoming the highest responsible corporate citizens that we can be," said Van Vliet, whose salary is $525,000 a year.

But observers on Wall Street are hesitant to bet on the company's survival.

"Most people think they have a long road back," Kedra said. "There's a chance they may not make it back at all."

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