Pesticides and Staph Poison a Private-Equity Drug Maker to Death

(Bloomberg) -- Michael Musso had been on the job only a few days in July as Product Quest Manufacturing’s new boss when the head of quality control told him that its over-the-counter drugs made for brands such as CVS and Walgreens were contaminated with potentially deadly microbes. Things went downhill from there.

A dozen recalls followed, which would have been bad enough, but a federal investigation had already found that a second factory was contaminating other human products with a pesticide that Product Quest was making on the same equipment, regulatory and court filings show. Major customers fled in mid-August, and it didn’t help that the company, controlled by private equity firm Kainos Capital, had been in default since at least September 2016, court papers show.

By Sept. 7, Product Quest was bankrupt, leaving its factories shut, about 600 people out of work and the owners to ponder how its 2015 buyout went so wrong. The collapse left a long list of creditors ranging from vendors like Federal Express to lenders like Carlyle Group LP and Blackstone Group LP’s GSO Capital Partners, according to a September court filing.

People involved in the process declined to discuss Product Quest’s demise or didn’t respond to messages seeking comment for this article, and Kainos says it hasn’t been involved for a year. But Musso, the company’s interim chief executive, didn’t mince words in his declaration to the bankruptcy court. He cited “ineffective senior leadership, employee turnover, extensive product quality issues” as well as “operational cost overruns, ineffective production standards and poor pricing practices.”

Carlyle, Madison

Kainos bought Product Quest in August 2015 for undisclosed terms, with lenders including Carlyle and Madison Capital Funding helping to provide an initial $20 million revolving loan and a $120 million term loan, according to Musso’s declaration filed in the bankruptcy. The sum eventually swelled to $153.6 million.

It looked like a good fit for Kainos. The Dallas, Texas-based private equity firm has invested successfully in consumer products such as Slimfast Foods Co. and Ghirardelli Chocolate, and its co-founder and managing partner, Andrew Rosen, had once worked at Carlyle Group as an associate, according to the Kainos website.

Product Quest was started in 1995 by John Regan, the former head of operations for Hawaiian Tropic, known for its sunscreen lotions. Regan expanded from sunscreen into cosmetics, over-the-counter drugs and prescription medicines made at plants in Daytona, Florida and Kannapolis, North Carolina. Until recently, court filings show, customers included chains such as CVS, Rite-Aid, Walgreen’s, Walmart and Target, and brands such as L’Oreal and Valeant.

FDA Warning

Regan initially stayed on at Product Quest until December 2016 when he was replaced by William Smith. But financial and operational difficulties grew, and in September 2017, senior lenders exercised their right to replace everyone on the board of managers, according to Musso’s declaration. The board also hired turnaround firm Conway MacKenzie as an adviser.

Matters were made worse by a U.S. Food and Drug Administration inspection in October 2017 of the North Carolina plant in Kannapolis that found cross-contamination between “topical human drugs and several pesticides,” according to an April 2018 warning letter. It threatened seizures and injunctions if Product Quest didn’t correct the violations.