Limited oversight in Cody Labs loan review

A screen capture of the live stream of the New York Stock Exchange shows Lannett Co. CEO Arthur Bedrosian, third from right, as he is joined by members of the Lannett management team to ring the opening bell on Dec. 30, 2013.

A screen capture of the live stream of the New York Stock Exchange shows Lannett Co. CEO Arthur Bedrosian, third from right, as he is joined by members of the Lannett management team to ring the opening bell on Dec. 30, 2013.

CODY, Wyo. — The Wyoming State Loan and Investment Board votes Thursday on a proposed $9.87 million low-interest loan for pharmaceutical ingredient manufacturer Cody Laboratories, a move proponents say will help create dozens of new jobs and generate more than $4 million in state and local taxes over 11 years.

But two other companies are vying for limited funds from the same state loan program, and the vote comes as Cody Labs’ parent corporation faces growing scrutiny over its generic prescription drug pricing. Philadelphia-based Lannett Co. has increased prices on some of its key generic drug products by more than 800 percent in recent years.

And based on interviews with public officials, key players involved in sponsoring and evaluating the loan were unaware of an ongoing U.S. Department of Justice grand jury investigation of Lannett and a handful of other generic drugmakers for possible antitrust violations.

The Cody Labs loan application was submitted on Aug. 31, just four business days days before it went to a vote before the WBC board, allowing little time for detailed staff analysis, and even less time for board review.

Proponents of the loan say it is needed to keep Cody Labs in Wyoming in the face of tempting offers from other states. But no local or state official interviewed for this story could cite a single specific competing economic development offer for the Cody Labs expansion.

Court documents show that Lannett, a publicly traded company with projected 2017 revenues of $700 million, was at one point moving forward with a plan in recent years to fund part of its Cody expansion without public money.

And public securities filings suggest that Lannett hasn’t always lived up to its obligations in at least one past economic development deal in its home state of Pennsylvania.

Partial funding

Cody Laboratories, a wholly owned subsidiary of Lannett acquired in 2007, requested a $33.8 million loan to help fund a $45 million expansion of its existing pharmaceutical manufacturing and storage facilities in Cody.

The Wyoming Business Council board last month unanimously approved loaning Cody Labs $9.87 million after the company and two others applied for a total of $83 million in loans. The available funding pool has less than half that amount available. Following staff recommendations, the board approved partial funding for all three applicants, including $17.4 million for construction of a Cheyenne fuel additives plant and $6.5 million for expansion of an activated carbon plant in Gillette.

At current market rates, the interest rates for the loans would be just over 2 percent.

Cody Sen. Hank Coe led the effort to create the state loan program that was initially tailored for Cody Labs, and later modified to accommodate any qualified applicant. Coe said it was a shame there was not sufficient funds to fully cover all three requests.

Coe attended last month’s WBC board meeting, and said Cody Labs President Bernhard Opitz was “pretty disappointed” that the board didn’t approve full funding.

“The limited funding that you showed right now makes me concerned if that’s enough to convince our board” to move forward with the project, Opitz told board members.

Lannett “receives from every state that they’re in, and some that are not yet present, ideas how to work together to enhance (economic) development,” Opitz said.

Coe said Opitz has previously alluded to public assistance offers from other states, but has never “put any specifics on the table.”

James Klessens, president of the nonprofit Forward Cody economic development group, said Friday that he has often heard Lannett say it was fielding economic development offers from other states, but that he has never seen any specific competing bids.

‘Show me some love’

Forward Cody has worked with Cody Labs since 2010 to secure public funding to help finance the company’s expansion. Those plans have evolved over the past six years, starting with a planned but unrealized $2.5 million warehouse addition at the company’s existing Yellowstone Avenue plant, and now centered around a proposed $106 million, 20-acre campus built in phases at an industrial site in north Cody.

A site plan shows the layout of a proposed Cody Labs pharmaceutical manufacturing and storage campus in north Cody, Wyo. The company is seeking state funds to help pay for construction of a new $45 million production facility.

A site plan shows the layout of a proposed Cody Labs pharmaceutical manufacturing and storage campus in north Cody, Wyo. The company is seeking state funds to help pay for construction of a new $45 million production facility.

Klessens said he met with Lannett CEO Arthur Bedrosian two years ago, and Bedrosian was “basically saying, ‘Show me some love. Show me that the state of Wyoming wants this.’”

Some of that love came in 2015, when Forward Cody secured $2.5 million in public funds from WBC to help build an 11,000 square-foot warehouse it leases to Cody Labs in north Cody.

Klessens said Friday that Cody Labs has consistently sought public funds to help finance local expansion efforts, and has never expressed a willingness to build new facilities without public assistance.

But a sworn statement Klessens made in July indicates otherwise.

A signed affidavit submitted by Klessens in connection with a pending employment and real estate lawsuit filed by Cody Labs co-founder Ric Asherman against his former employers at Lannett details the complex history of the company’s efforts to expand in Cody.

According to the affidavit, discussions between state and local economic boosters and Lannett had stalled in 2012 when the company opposed a contractual clause that would have required a public hearing and a vote before Lannett could purchase a publicly funded facility being considered.

Lannett and Cody Labs “were adamant that there be no such contingency,” Klessens states in the affidavit. On Nov. 15, 2012, “we were notified that the Lannett entities would pursue the project through private financing and were withdrawing from further negotiation for state funding for the project,” he states.

Cody Labs then moved forward without government involvement, signing a planning and design contract with a Cody architecture firm, Klessens states in his affidavit.

But “I was unwilling to let the project die,” he states. Klessens continued lobbying local legislators to secure public assistance for an expansion, and his efforts since then could result in more than $12 million in state funding for a company that his affidavit states was at one time moving forward without seeking government money.

Both Coe and Klessens said it’s possible that Lannett doesn’t need Wyoming funding to expand Cody Labs, a sentiment echoed by Park County Commissioner Loren Grosskopf, who also volunteers as treasurer for Forward Cody.

But a low-interest loan is an important gesture showing a company that state and local entities are serious about recruiting or retaining a key business, Grosskopf said.

He said an economic development loan makes it more likely a company will stay, and helps bind a business to a city, but he was unaware of any competing offers.

Though Coe and Grosskopf back the $9.9 million loan to Cody Labs, neither had a vote in its approval. Nor was either elected official aware of the federal antitrust investigation of Lannett.

Coe, Grosskopf and Klessens all said the Cody Labs build-out will expand the already significant role the company has played in greatly boosting the local economy, and it will return dividends that far outweigh the public contribution.

‘Character and capacity’

In considering a loan or grant, the Wyoming Business Council analyzes a project’s likely economic impact, and requires that any funds awarded will increase employment or stimulate the local or state economy.

WBC analysts must also assess the “character and capacity” of the applicant’s management team.

Josh Keefe, the WBC economic development finance manager who reviewed Cody Labs’ loan application, said he checks to ensure company managers have the necessary expertise to accomplish their stated project goals. It does not, for instance, involve a personal credit check such as a bank might require, or a criminal background check, as some Wyoming municipalities require before granting a liquor license.

“We don’t go that detailed, like a bank might,” Keefe said. “You can get out on the Internet and surf and find out just about anything you would like to with a little bit of work.”

Keefe said Monday that he was unaware of the federal antitrust investigation, but that he “would assume that there’s probably always some kind of litigation going on” with a company of Lannett’s size.

In fact, the WBC loan application form has an entire page that requires borrowers to disclose any “threatened or pending litigation.” On its application, Cody Labs referred to Lannett’s most recent Securities and Exchange Commission annual report, which includes a brief disclosure statement that references the federal investigation, a Connecticut state antitrust investigation and several pending civil lawsuits alleging that the company illegally colluded with competitors to raise and fix the prices of generic medicines.

Keefe said board members would have seen a web link to that document in their staff analysis, but “we don’t bog them down with the whole 300-page report.”

WBC analysts must also consider how an applicant performed after receiving prior public economic development assistance.

In the case of Cody Labs, Keefe said he checked to see how things worked out with Forward Cody’s use of the 2015 grant of $2.5 million for a new warehouse.

Fulfilling promises

“You can make a phone call and check up on someone and see how it’s going,” he said. “It seems like everyone’s been working well together. We do check to make sure everyone’s fulfilling their promises.”

But Keefe said he did not do any research into economic development projects involving Lannett outside of Wyoming. Nor does the loan application appear to require disclosure of any such information, regardless of project location.

According to a publicly available 2012 annual report filed with the SEC, Lannett received a $500,000 equipment and machinery grant in July 2004 from the Pennsylvania Department of Community and Economic Development.

The filing states that if the company failed to comply with requirements of the grant, including employment targets and other provisions, the company “would be liable to repay the full amount of the grant funding.”

The filing states that Lannett “reached a formal agreement” with state officials in June 2011 in which “the Company was required to repay $90,000.” A company spokesman said Lannett failed to hire the required number of new employees mandated under the grant agreement. The company was asked to provide a copy of the agreement with Pennsylvania, but did not.

Keefe said he was unaware of the Pennsylvania grant, and thus, WBC board members were also not informed of it before their vote last month.

Unlike the Pennsylvania grant, the Wyoming loan does not include specific performance benchmarks or fund-recovery provisions, Keefe said.

Keefe was unsure whether the WBC board had previously voted to approve public funds for a company facing a pending antitrust investigation, but said he had only worked for the agency for six months.

He said it “would have been nice” to know about the DOJ investigation and issues with the Pennsylvania grant before last month’s vote, and that both are factors “that probably need to be looked at.”

But with only four working days to review the Cody Labs loan application before the board voted, Keefe said it was a challenge “turning all that around and getting all the due diligence done.” It is unclear how much time board members had to review the application before they unanimously approved it.

Megan Overmann Goetz, a Laramie attorney, is one of more than a dozen private citizens who volunteer as WBC board members to evaluate economic development applications. She also serves as the director of the Laramie Economic Development Corporation.

Goetz said Monday that she didn’t recall how much time she had to evaluate the application.

“I remember feeling like the staff did a good job to let us know” key information, she said, but she also could not recall if she had been aware of the federal grand jury investigation or the Pennsylvania grant issues before she voted.

Goetz said she felt WBC did a good job of holding applicants accountable, and was not concerned that the large loan program did not include clear accountability benchmarks or clawback provisions.

The large loan program is new, Goetz said, and “sometimes you need to operate at the speed of business.”

“I’m confident the Business Council will continue to work with the State Treasurer’s Office and the Legislature to determine appropriate metrics” for public funding of businesses, she said.

Goetz said she was unaware of any competing economic development offers for the Cody Labs project.

Room for improvement

There’s lots of room for improvement in how WBC and local economic development groups operate, said Dan Neal, a Democratic candidate for Casper’s House District 56.

Neal, a former newspaper editor and public policy advocate, has long pushed for greater accountability in Wyoming’s economic development efforts.

He said in an email that a publicly traded company like Lannett, valued at almost $1 billion, “ought to be able to address its own capital needs,” and that WBC should explain “why a company the size of Lannett is feeding at the public trough.”

“Wyoming people victimized by price gouging for generic drugs will want to hear the WBC’s rationale,” he said.

Lannett said an internal review by outside counsel found no wrongdoing in its pricing practices, and that it will continue to cooperate with investigators.

Lannett spokesman Robert Jaffe said in an email that “Lannett has substantially increased the number of employees at Cody, and made significant investments to expand Cody’s manufacturing capacity and upgrade its machinery and equipment.”

Jaffe said a key element of Lannett’s growth strategy is to “continue to broaden Cody’s drug development program and product offering,” and that Cody’s expansion will boost local economic activity. He said other states have worked to recruit Lannett’s business, but did not cite specific examples.

The State Loan and Investment Board, made up of Wyoming’s five statewide elected officials, will meet to consider the Cody Labs loan and other public funding requests on Thursday at 8 a.m. in the Wyoming Department of Transportation Auditorium at 5300 Bishop Boulevard in Cheyenne.

Gov. Matt Mead has final approval of the projects after the board’s review.

Contact Ruffin Prevost at [email protected] or 307-213-9818.

About Ruffin Prevost

Ruffin Prevost is founding editor of Yellowstone Gate, an independent, online news service about Yellowstone and Grand Teton parks and their gateway communities. He lives in Cody, Wyo., where he also works as the Wyoming reporter for Reuters news service. He worked from 2005-10 as the Wyoming reporter for the Billings Gazette and has also been managing editor of WyoFile.

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