Game over: RDI files for Chapter 7

FOLEY, Ala. - Before Katrina punched the lights out of the Gulf Coast, another kind of storm - a perfect storm - swept through the offices of RDI and ravaged the business of a once thriving respiratory medication and vial distributor. On Sept. 2, the company filed for Chapter 7 bankruptcy and former RDI executive Marty McClantoc, now owner and president of Core Products, has acquired RDI's assets. RDI shut down operations in late July. "If you want any comment about RDI, you're going to have to call the company," said Ed McGoogin, an official at Healthcare Business Credit Corp., RDI's largest creditor. Calls to RDI are redirected to Sun Capital Partners, owners of RDI. Calls to RDI Vice President David L. Krelein were not returned. That's no surprise, say sources close to the RDI debacle, who say that Sun Capital is trying to cut and run from a venture they thought they could resell for huge profits but that turned into a low-margin, white elephant. "[Sun Capital] likes 50-60% margins, but when you get down below 10, and EBITDA doesn't look so good, they just stopped putting money into it," said one insider. RDI's margins, like margins across the respiratory medication market, suffered a wrenching blow under the Medicare Modernization Act. Reimbursement dwindled from one of the more attractive thresholds in the business to a formula that reckoned the average wholesale price plus 6%. These cards were on the table when Sun bought RDI in early 2004, but the threat of a tougher market didn't spook RDI. The acquisition surprised many in the respiratory medications industry at the time, but Sun proved to be undaunted. "We saw the Medicare issue as both a potential challenge and an opportunity," a vice president at Sun, Ben Emmons, said at the time. One insider later said that Sun was blind-sided by the MMA. After the MMA, the price of vials dropped by half, which was bad enough. But in November of last year, RDI's five-year deal expired with Acadiana Plastics Manufacturing, manufacturer of the Stat vial. The bulk of RDI's profits were coming from the sale of those vials, but Sun appears to have taken the security of that contract for granted. The partners brought in Keith Trowbridge, former CEO of Liberty Medical Supply, to try to rescue the company, but RDI went into a freefall instead. Trowbridge, who resigned from RDI in July, scrambled to find a vial to replace the Stat vial, but the time between the identification of a new vial manufacturer and a new product proved perilous. The customers who wanted the Stat vial started buying it from APM. "By the time you could get it from China and get the two going APM had already put their fangs and teeth into [the business]," said another source. "At the end of the day people have to get their medications and they need to go to the sources." Complicating matters further was the allegedly high price that Sun paid to RDI's former owner, Rick Powell, who'd been sentenced to one year in prison and excluded from doing Medicare business for 18 years after revelations about his role in a mail and wire fraud scheme involving respiratory medications. The payments on the debt used to buy the company made for the final nail in the coffin, say insiders.