Eon Labs, Inc.

227-15 North Conduit Avenue
Laurelton, New York 11413
U.S.A.
Telephone: (718) 276-8600
Toll Free: (800) 526-0225
Fax: (718) 949-3120
Web site: http://www.eonlabs.com

Public Company
Incorporated: 1992 as Eon Labs Manufacturing, Inc.
Employees: 531
Sales: $329.53 million (2003)
Stock Exchanges: NASDAQ
Ticker Symbol: ELAB
NAIC: 325412 Pharmaceutical Preparation Manufacturing

Eon Labs, Inc. is a generic drug manufacturer that develops, manufactures, and markets a broad range of prescription pharmaceutical products. The company focuses on drugs that are difficult to make and it strives to introduce the generic equivalent of brand name drugs on the first day patent protection expires. Eon's pharmaceutical product line comprises more than 200 products representing various dosage strengths for 60 drugs. Nearly two-thirds of Eon's drugs rank either first or second in market share. The company operates two manufacturing plants, one at its headquarters in Laurelton, New York, and another in Wilson, North Carolina. The company is majority-owned by Hexal AG, the second largest generic drug manufacturer in Germany.

Origins

Eon sprang from disgrace and failure. Its predecessor company, Vitarine Pharmaceuticals, Inc. became engulfed in a generic drug scandal that made Eon's first years in business a trying time. Vitarine and a handful of other generic drug companies were accused of fixing prices, falsifying test results, and providing erroneous information on applications filed with the U.S. Food and Drug Administration (FDA). In 1991, Vitarine's director of research and development, Steven Colton, was sentenced to 27 months without parole. The company also was punished. Vitarine was fined $500,000 and barred from applying to make new drugs by being listed on the "application integrity policy list," the FDA's blacklist. The FDA also removed from the market about a dozen drugs sold by Vitarine, stripping the company of some of its best-selling drugs. With no way to make money on its past achievements and no way to develop new drugs, Vitarine wilted quickly from the intensity of the government's indignation. The company filed for bankruptcy and sold its assets to an investor group that included J.H. Whitney & Co., Citicorp Ventures, and Canaan Partners. The transaction was completed in 1992.

The investor group recruited Edward C. Shinal to the lead the new company, an enterprise named Eon Labs Manufacturing, Inc. Shinal, a former director of American Cyanamid Co.'s Lederle Laboratories, was given the task of rebuilding the company's reputation, a challenge the chief executive officer completed within several years of his appointment. Shinal tightened control over manufacturing, separating oversight of quality control from regulatory affairs, and implemented 250 new procedures to comply with FDA standards. Shinal also spent $4 million improving the equipment in the company's plant in Laurelton, New York, priming the company for its return from disrepute.

Eon overcame Vitarine's legacy of errancy in September 1994, when the company was removed from the FDA's blacklist. By the beginning of 1995, the company was well positioned to reap the rewards of Shinal's restorative measures. The company's relationship with the FDA had improved dramatically, a relationship of vital importance to any generic manufacturer and of particular importance to Eon, whose strategy hinged on moving quickly through the approval process. In February 1995, the FDA approved Eon's application to manufacture the drug Sulfadiazine, which was used to combat toxo-plasmosis, a disease associated with AIDS. Sulfadiazine was just one of Eon's stable of drugs. By the beginning of 1995, the company had 30 drugs in production, with applications filed for the introduction of 14 additional drugs. With this portfolio of drugs—and more to follow in the coming years—Eon prepared to enter a period of great promise for generic drug companies. During the previous decade, the size of the industry had increased significantly: In the mid-1980s, generic drugs accounted for 2 percent of the prescription drug market; by the mid-1990s, generic manufacturers generated $10 billion in revenue annually, accounting for 40 percent of the prescriptions dispensed in the United States. The generic portion of the market was expected to increase to 50 percent by the end of the decade. Between 1993 and 2000, the patents of 140 brand name drugs were scheduled to expire, releasing $25 billion worth of business to generic producers.

Hexal and Eon Joining Together in 1995

As Eon prepared for the potentially lucrative years ahead, it gained the support of a valuable partner. Small, independent drug companies such as Eon often forged partnerships and agreements with larger pharmaceutical concerns as a way to survive, alliances that helped small companies avoid being crushed in the highly competitive pharmaceutical industry. Eon formed more than a partnership in September 1995, when Hexal AG agreed to purchase one-half of the company. Hexal ranked as the second largest generic drug manufacturer in Germany, providing Eon with a massive parent company to foster its growth. Under the terms of the arrangement with Hexal, Eon had first rights to all the drugs made by its parent company and exclusive rights to market Hexal drugs in the United States.

When Hexal assumed half-ownership of Eon (J.H. Whitney owned the other half), the German company appointed one of its own executives to lead Eon. Bernhard Hampl, who received a Ph.D. in pharmaceutical chemistry from Ludwig Maximillian University in Munich, spent 15 years working for Cyanamid GmbH, where he served as the company's director of research and development and technical director. In 1995, he was hired by Hexal to explore the possibility of establishing a Hexal subsidiary in the United States, a job that led to his appointment as Eon's chief executive officer in October 1995. Under Bernhard Hampl's stewardship, which would continue into the 21st century, Eon developed a particular identity for itself in the generic drug industry. The company focused on developing generic drugs that were particularly difficult to make, either because of technological challenges, hard-to-find raw materials, or legal problems. Eon pursued the development of drugs few other companies chose to pursue, selecting drugs that positioned the company in less competitive niches of the generic drug market. The strategy placed a premium on execution, on the company's ability to overcome the particular problems a drug's development posed. In this area, Eon excelled, with Hampl recording encouraging success during the latter half of the 1990s.

Hampl's success convinced his German superiors to increase their commitment to the company. Between 1992 and 1999, the company's revenues increased from $10 million to $77 million. Profits were growing steadily, eclipsing $5 million in 1999. The financial results and Hampl's success in executing the company's strategy convinced Hexal to purchase the entire company in 2000. Hexal acquired J.H. Whitney's half of Eon and became the sole owner of the company. In the next few years, Hexal's investment proved to be shrewd, as Eon enjoyed the most successful years in its history.

Robust Growth in the 21st Century

Eon's success in the early 2000s rested on the execution of its operating strategy. The company selected drugs with what it called "high barriers to entry," leaving it less vulnerable to the competitive pressures of the drug industry. "They're not going after your typical commodity generics," an analyst explained in a February 14, 2004 interview with Investor's Business Daily. "A lot of the products may have two, three, or four competitors instead of 10, 11, or 12, so that certainly helps them on the margin side." Eon also endeavored, and in most cases succeeded, in being the first to market a generic alternative, introducing its version on the first day the patent protection on a branded pharmaceutical expired. By being the first generic on the market, Eon typically enjoyed a 180-day period granted by the FDA to market the drug without any competition, one of the rewards of moving expeditiously through the drug approval process. The exclusive marketing period gave the first generic entrant a jump on securing market share and higher profit margins because the price of the first generic alternative started high before the introduction of other generic alternatives drove prices downward.

Eon strove to be first to market with every drug it produced, a strategy that depended upon winning quick approval from the FDA. The company's compliance record with the federal agency, in sharp contrast with Vitarine's woeful transgressions, was exemplary, enabling Eon to move quickly and expand its portfolio of generic drugs. By the end of 2001, the company was marketing more than 80 generic drugs in various dosage strengths, ranking as one of the top five companies in the country in terms of gaining FDA approvals. At this point, the company was recording explosive growth. The addition of a second manufacturing plant in Wilson, North Carolina, in December 2000—a facility that was more than twice the size of the Laurelton plant—had provided a substantial increase in Eon's production capacity. Sales leaped upwards as a result, reaching $165 million in 2001, or more than twice the total generated two years earlier.

By the end of 2001, the stage was set for Eon's debut as a publicly traded company. Substantial debt had been incurred by Hexal's buyout of J.H. Whitney's interest in 2000, prompting management to file for an initial public offering (IPO) of stock to take advantage of Eon's vibrant growth. Eon's IPO was completed in June 2002, when it debuted on the NASDAQ at $15 per share. The offering raised $139 million in net proceeds. Hexal remained the majority owner of Eon, controlling nearly three-quarters of the company's stock.

Company Perspectives:

The employees of Eon Labs are dedicated to develop, manufacture and be first to market with a broad range of affordable multi-source pharmaceutical products to the U.S. healthcare community. Eon's professional team will progressively utilize modern technology and innovative thinking to apply the highest standards throughout our operation and processes.

Gains in Eon's stock value remained negligible for several months after the IPO, but once the financial community took note of the company its stock value began to increase sharply. By May 2003, Eon's stock was trading at more than $31 per share, having doubled in price since September 2002. Investors were watching a company astutely execute a strategy that delivered consistent financial growth. In 2002, sales increased to $244 million and net income soared to $43.2 million, nearly three times the total posted a year earlier. Attention from investors intensified in late 2003 when Eon broke with tradition and gave onlookers a glimpse at what the future held for the company.

In late November 2003, Eon received approval for Bupropion, the generic version of GlaxoSmithKline's 100-milligram antidepressant Wellbutrin. The drug, which generated between $250 million and $350 million in annual revenue, marked a significant departure from the company's practice of targeting drugs that drew the interest of only a few competitors. Wellbutrin was a blockbuster drug, one that attracted the attention of the biggest generic producers. Once it gained approval for Bupropion, Eon next demonstrated perhaps its greatest skill in rapidly bringing the drug to market. Analysts predicted Bupropion would be introduced by the end of 2004, but Hampl and his team began shipping their generic alternative in early February 2004.

As Eon plotted its future course, the company's foray into high profile, blockbuster drug manufacture suggested the adoption of a broader operating strategy. If Hampl chose to pursue making generic versions of branded bestsellers, there were numerous opportunities ahead for Eon to exploit. More than 30 of the top-selling 57 pharmaceutical products were expected to lose patent protection by 2008. Although nearly all of the company's achievements had been made by manufacturing drugs that many other companies avoided, its record of success offered ample evidence to support a wider strategic scope. By 2004, three of every four drugs produced by the company entered the market on the first day, or shortly thereafter, the patents for the branded drug expired. In the years ahead, Eon was expected to demonstrate its first-to-market capabilities with an ever increasing product line.

Principal Subsidiaries

Eon Pharma, LLC; Forte Pharma, Inc.

Principal Competitors

Alpharma, Inc.; Geneva Pharmaceuticals, Inc.; IVAX Corporation; Mylan Laboratories Inc.; Teva Pharmaceuticals Industries Limited; Watson Pharmaceuticals, Inc.

Key Dates:

1992:

Eon is formed to acquire the assets of Vitarine Pharmaceuticals, Inc.

1995:

Hexal AG acquires 50 percent of Eon.

2000:

Hexal acquires all of Eon.

2002:

Eon completes its initial public offering of stock, with Hexal remaining a majority owner.

2004:

Eon begins shipping a generic version of Wellbutrin.

Further Reading

Buckley, Bruce, "Wholesalers Look to Programs, Services to Sharpen Relationships at Retail," Drug Store News, February 17, 2003,
p. 52.

"Eon Labs," Drug Store News, June 17, 2002, p. 53.

Fugazy, Danielle, "No Longer a Secret, Eon Going Public," IPO Reporter, March 11, 2002.

Gondo, Nancy, "Fast FDA Approvals Give Eon Labs an Edge in Fierce Generic Market," Investor's Business Daily, February 17, 2004, p. B2.

Maiello, Michael, "Life Among the Ruins," Forbes, November 1, 2004, p. 178.

Reeves, Amy, "Eon Labs Inc.," Investor's Business Daily, September 9, 2002, p. A11.

Sisson, Mary, "Stock Watch: Eon Lab's Growth Formula Overheats Its Share Price," Crain's New York Business, May 19, 2003, p. 4.

—Jeffrey L. Covell