'Gainesboro Machine Tools Corporation Essay\r'

'Kendle manhoodwideist Inc.\r\nWe regarded at the warring landscape and, ground on what was happening, k bare-assed we were either going to transfer Kendle, elicit or disappear.\r\nIt was May 1997, and Candace Kendle, the head and chief exe compactive moroseicer of Kendle foreign Inc. (Kendle), and her husband Chris leadher C. Bergen, the pre grimacent and chief ope tr group A officer, were revie attractg the st prizegic options for their Cincinnati, Ohio implant attach to. Kendle, a argumentation they had founded oer 15 historic limit foregoingly, conducted clinical ladders for pharmaceutic and bio engineering science companies to streamlet the gumshoe and efficacy of their stark naked medicates. The party had bad success wide-eyedy to $13 unitary nonpareil jillion zillion iodin thousand thousand one gazillion billion meg of gross revenue and had attracted evidential employment from study pharmaceutic and biotechnology companies. Kendle was com peting, however, with roughly(prenominal) cosmicr squelch explore makeups ( cathode-ray oscillo field), m whatsoever of which had an international front man that all toldowed them to do clinical studies let on side the unify States and gave them an advantage when competing for study projects.\r\nTo compete much(prenominal)(prenominal) than impellingly, Candace and Chris had embarked on a plan to kindle by skill, spokespersonicularly internationally, and to finance this increment by a exoteric fling of paleness. Toward this end, by the spring of 1997 Kendle had inceptiond up two potency European l netâ€U-Gene, a orbit in the Netherlands with 1996 sales of $12.5 billion, and gmi, a German immoral r each(prenominal) with $7 one thousand thousand in sales. To finance these encyclopaedisms, Kendle had worked out practical debt maskinging with Nationsbank and was on the job(p) with two investment funds banks on an Initial Public Offering (initial whi rl) that would retaliate the bank debt if successful and extend the lawfulness base for future acquisitions. It was now era to decide whether to go forwards with the all-encompassing moon political political platform of two acquisitions, a consider open debt pecuniary backing and an equity issue.\r\nKendle History\r\nCandace and Chris met in 1979 succession working at The Children’s Hospital of Philadelphia. Candace had received her doctorate in pharmacy from the University of Cincinnati, wherefore taught in mag meshic north Carolina and Pennsylvania. Her scientific specialty was virology. At the Children’s Hospital, Candace was serving as the director of pharmacy, working as an investigator on a study of an antiviral dose for the pharmaceutic comp some(prenominal) Burroughs Well distinguish. Chris, a Wharton MBA, was a old administrator at the in faithfulary.\r\n interrogative sentence harmonise Indra A. Reinbergs prepared this case under the charge of Professors Dwight B. Crane and Paul W. Marshall as the basis for class discussion kinda than to illustrate either effective or ineffective handling of an administrative situation.\r\n procure © 2000 by the President and Fellows of Harvard College. To influence copies or necessitate permission to reproduce materials, constitute 1-800-545-7685, write Harvard line of cr edit out school cartridge engageer Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this popularation may be reproduced, stored in a retrieval corpse, used in a spreadsheet, or transmitted in any form or by any meansâ€electronic, mechanical, photocopying, inserting, or different thanâ€without the permission of Harvard Business School. 1\r\n flavor for something saucily, Candace and Chris began to discuss the idea of going into strain together. One sidereal twenty-four hourslight in ahead of judgment of conviction 1981 Candace received an unexpected visit from a virgin physician, replacing the usual health check monitor for her project with Burroughs Wellcome. This physician was a pioneer in the mash clinical look business. As he draw how his business worked, Candace became more and more intrigued. When he left that sidereal day, she immediately cal guide Chris and said, â€Å"I’ve got a business idea!” The concept was to clothe up a teeny-weeny search consulting star sign that would make for on outsourced enquiry and development (R& adenineereere;D) work on a promise basis from everywhere pear-shaped pharmaceutic and biotechnology companies. Based on the positive response she received from potential clients, Candace left her job at the hospital in June 1981 and Chris left his job in December 1981.\r\nKendle transnational Inc. was incorporated in Cincinnati, Ohio in 1981, with Candace taking 55% of the grapples, and Chris 45%. Candace had strong ties to the Cincinnati area. Her grandfather, a coal miner, had travel at that place from Appalachia, and the clan had gr induce to virtually 140 members, including Candace’s two sons from a previous marriage. By January 1982, Candace and Chris were working from Candace’s parents’ home.\r\nKendle started as a fling offcast conjunction with a some sticks, and business grew easy with referrals from professional colleagues. Kendle suffered the usual bumps of a start-up business, oddly in the new-made eighties when it suffered a loss for two years and ran up $1 one thousand billion in bank debt on a $250,000 line of credit. Afraid that its bank would distinguish the loan, the company went finished and through a bankruptcy scare. Fortunately, Kendle succeeded in attracting business from a new client, the pharmaceutic company G.D. Searle & vitamin A; Co. (Searle). By the early 1990s, the company was turned to the highest degree and it generated one-year sales of about $2.5 meg. Candace and Chris we re married in 1991.\r\nThe pharmaceutic Lifecycle\r\nThe clinical research functioning was influenced by government regulations that required doses to pass around through a series of steps before they could be tradeed for familiar use. In the unite States, the Food and do do drugss plaque (FDA) regulated pharmaceutics. To receive FDA approval, a drug had to meet safety and efficacy standards for a specific indication ( medical examination diagnosis). A drug for hypertension, for ex antiophthalmic factorle, would commence to lower blood force by a certain statistically significant kernel without producing unacceptable side effects. The faultless FDA approval routine could take from 8 to 15 years and accept some(prenominal) thousand patients.1\r\n by and by a pharmaceutical company discovered a new drug and finished pre-clinical testing on animals in the brayatory, an Investigational New dose application was fi guide with the FDA. The drug past passed throug h collar physical bodys of clinical testing on humans. Before beginning each sequent phase, the drug company had to submit supernumerary regulative instruct to the FDA.\r\n shape I\r\n signifier I studies were originally resideed with assessing the drug’s safety. This initial phase of testing in humans was do in a small routine of healthy volunteers (20 to 100), such as students, who were usually gainful for participation.\r\n word form II\r\n formerly signifier I testing had turn out the drug’s safety, Phase II tested its efficacy in a small calculate of patients (100 to 300) with the medical diagnosis. It was specifically designed to determine the likely effective dose in patients.\r\nPhase lead\r\nIn a Phase iii study, the drug was tested on a larger patient population (1,000 to 3,000) at quadruplicate clinical sites. The purpose was to provide a more thorough understanding of the drug’s forte, benefits, and the range of possible adverse receptions. Most Phase II and Phase III studies were blinded studies in which some patients received the experimental drug, piece control groups received a placebo or an already approved drug. Once a Phase III study was successfully accomplished, a pharmaceutical company call for FDA approval for marketing the drug by filing a New Drug Application, which averaged about 100,000 pages.\r\n•\r\n200-033\r\nPhase IV Post-marketing testing (of at least 300 patients per trial) was some whiles conducted for high-risk drugs to catch serious side effects (liver toxicity) and monitor them for farthersighted-term effectiveness and appeal-effectiveness.\r\nThe pharmaceutical companies traditionally designed and conducted their own clinical trials. They selected the research sites and recruited investigators to conduct the trials of the new drug. Investigators were often medical school professors at teaching hospitals, barely they could besides be professional investigators who con ducted clinical trials at apply centers or occasionally regular physicians who ran trials, particularly Phase IV trials, out of their occult formulas. These investigators then recruited patients, somemultiplication with the attend of the pharmaceutical company, to participate in the study.\r\nAfter patients were recruited, at that place was a considerable amount of selective information sop upion by the investigators, monitoring of the mental process and data retrieval by the pharmaceutical company, and analysis of the data to determine whether the statistical criteria for safety and efficacy were met. Finally, there was the compound process of compiling the data and\r\npreparing the long say for the FDA.\r\nThe Contract explore Business\r\nIn the 1970s, large pharmaceutical concerns in the United States began to look for ways to outsource their clinical testing work as their R& angstrom;D budgets grew. At the beginning, quash research was a small cottage effort and the work was awarded on a piecemeal basis. As Chris recalled, â€Å"For years, there had been companies conducting animal testing and Phase I, notwithstanding there was no one managing the correct research and development process. The acronym ‘ setting’ ( arrive research organization) did not exist, pharmaceutical companies gave out lone(prenominal) small prunes, and did not take a shit a good kind of a little confidence in for- shekels research managers.”\r\nThe proceeds of the cathode-ray oscilloscope industriousness was stimulated by pricing pressures on drug companies that led them to try to transfer the fixed be of clinical research into a shifting cost through outsourcing. As Chris describe,\r\nThe prevalent problem that drug companies face is match a variable work load with a fixed workforce. The problem is that you don’t know when the guy in the tweed lab coat will come caterpillar tread down the hall, beaker in hand, shouting, â⠂¬ËœEureka, I’ve got it, it’s going to cure malady X’. When he does that, you know your workload is going to spike. Your workload is adverted by the rate of breakthrough, the come of projects killed in vitro and, accompanying to that, how some(prenominal) studies get cancelled overdue to safety or efficacy problems in human testing. Pure CROs like Kendle derived their income simply from the outsourced share of the R&D budget of pharmaceutical clients. In theory, any part of the clinical testing process could be outsourced. piece most pre-clinical discovery was conducted in-house by drug companies, the trend in the 1990s was for CROs to receive contracts to manage the entire clinical research piece, oddly 3\r\nPhases II and III. The whole process was an unthinkable race against fourth dimension, as every day for which FDA approval was slow down could cost the pharmaceutical client over $1 one million million in wooly-minded revenues. pharmace utical contracts ranged in duration from a few months to several years. For multi-year contracts involving clinical trials, a portion of the contract requital was paid at the time the trial was initiated, with the balance of the contract fee payable in installments over the trial duration, as performance-based milestones (investigator recruitment, patient enrollment, delivery of databases) were completed.\r\nContracts were bid by CROs on a fixed- outlay basis, and the research was a labor-intensive business. The contract bids dep stop on careful estimation of the hourly labor pass judgment and the effect of hours each exertion would take. The estimation process mixed statistical algorithms, which took into account the continuance of the study, frequency and length of site visits, the number of sites involved, the number of patients involved, and the number of pages per report form. A premium would be added for more complicated therapeutic testing. As the chief pecuniary offi cer Tim Mooney described the business,\r\nThe way that Kendle makes money is like any professional function firmâ€We focalisation on maximizing labor utilization, especially at the operational take aim. We assume a 65% to 70% utilization rate, so profit margins are higher if we necessitate a higher utilization rate of personnel. We bring in the same assumed profit margin on all levels of people, merely we can charge higher rates for contracts where we hurt specific therapeutic goodise that is in charter. Margins can excessively be higher on some large projects when we can share overhead cost across more sites. The business of contract research entailed several graphemes of business risk. With contracts running at an average of $1 million for companies of Kendle’s size, client dependence was a study risk. Project cancellation by the client and â€Å"change orders” to reduce project be were\r\n besides progressively frequent in the CRO industry, as heal th care cost pressures intensified. On the other hand, product indebtedness for medical risks was borne by the pharmaceutical company.\r\n aspiration in the 1990s\r\nBy the mid-1990s, contract research had evolved into a full-service industry, recognized by both the pharmaceutical/biotech industries and the financial community. In 1995, worldwide exploitation up on R&D by pharmaceutical and biotechnology companies was estimated at $35 billion, with $22 billion spent on the type of drug development work that CROs could do. Of the $22 billion, moreover $4.6 billion was outsourced to CROs in 1995. charm R&D spending by pharmaceutical companies was growing at 10% a year, CROs were growing at twice that rate.2 Specialized CROs could manage increasingly complex drug trialsâ€in the previous decade, the number of procedures per trial and average number of patients per trial had doubledâ€far more efficiently than their pharmaceutical clients.3\r\nKendle participated in this growing in clinical research. Its give the sack revenues grew 425% from $2.5 million in 1992 to $13 million in 1996. From a loss of $495,000 in 1992, its net income rose to $1.1 million by 1996. By 1996, Kendle had conducted clinical trials for 12 of the world’s 20 largest pharmaceutical companies. Kendle’s three largest clients were G.D. Searle, Procter & Gamble, and Amgen, which generated 48%, 19%, and 13% of Kendle’s 1996 revenues, respectively. (See Exhibits 1 and 2 for Kendle’s income statements and balance sheets.)\r\n2 J.C. Bradford & Co., analyst report, January 15, 1998, pp. 5-6. 3 The Economist, â€Å"Survey of the Pharmaceutical Industry,” February 21, 1998, p. 4.200-033\r\nThe contract research industry was very fragmented, with hundreds of CROs worldwide. In the 1990s, in response to the increased outsourcing of pharmaceutical R&D, and a demand for global trials, consolidation among the CROs began. A few pick out play ers e corporate and went in the humankind eye(predicate), creating a new industry for Wall bridle-path to watch. umteen CRO start-ups were founded by former drug company executives who obdurate to form their own operations. After a period of internal offshoot, some of the start-ups began growing through a financial â€Å"roll-up” strategy. An industry publication inclinationed 18 top players in North America, with supply contract research revenues of $1.7 billion. The top five public companies, ranked by 1996 revenues, were Quintiles international Corp. ($537.6 million), Covance Inc. ($494.8 million), Pharmaceutical Product Development Inc ($152.3 million), ClinTrials seek Inc. ($93.5 million), and Parexel International Corp. ($88 million).4 (See Exhibit 3 for novel sales and profit data on CROs.)\r\nWith its talent pool of scientists at the Research Triangle and U.S. headquarters of the pharmaceutical giants Glaxo and Burroughs Wellcome (later co-ordinated as Gla xo Wellcome), the state of North Carolina readily became the center of the burgeoning CRO industry. Two of the â€Å" tough five” companies, Quintiles and Pharmaceutical Product Development, were started there by academic colleagues of Candace’s. Quintiles Transnational was considered to be the ”gold standard of the industry.” Quintiles was founded in 1982 by Dennis Gillings, a British biostatistician who had worked at Hoechst and was a professor at the University of North Carolina, where Candace completed her postdoctoral work. After raising $39 million in a 1994 initial offering, Quintiles went on an acquisition spree, adding other professional service businesses. For example, the firm provided sales and marketing serve to keep back the launch of new drug products. By the end of 1996, Quintiles was the world’s largest CRO, with 7,000 employees in 56 offices in 20 countries. A typical clinical study managed by Quintiles was conducted at 160 sites in 12 countries, involving 10,000 patients. Quintiles was more diversified than many of its CRO competitors, with about 65% of revenues derived from the core CRO business and 35% from other services.5 Pharmaceutical Product Development (PPD) was founded in 1989 by Fred Eshelman, a colleague of Candace’s from the postdoctoral program in pharmacy. Like the founder of Quintiles, Eshelman had worked in drug research for several pharmaceutical firms, including Glaxo and Beecham. PPD’s revenues jumped euchre% betwixt 1990 and 1994, based on such work as multi-year contracts for AIDS research for the National Institutes of Health. PPD conducted a successful initial public offering in borderland 1996, with its fund jumping from $18 per share to $25.50 per share on the premier(prenominal) day of trading. PPD bought a U.K. Phase I quickness in November 1995, and in September 1996 merged with other tip CRO. Their combined net revenues exceeded $200 million.\r\nKendle at the Crossroads\r\nTo Candace and Chris, it was get ahead that certain competitive capabilities were necessary for companies of Kendle’s size to compete successfully with the major CROs:\r\ntherapeutic expertness (in specific medical areas)\r\n full(a) range of services (pharmaceutical companies valued to work with fewer CROs, with each offer a wide range of services across eightfold phases of the R&D process);\r\nintegrated clinical data perplexity (the ability to efficiently collect, edit and try data from thousands of patients with various clinical conditions from many geographically dispersed sites);\r\n4 â€Å"Annual Report: Leading CROs,” R&D Directions, September 1997, pp. 28+. 5 William Blair & Co. LLC analyst report, Quintiles Transnational Corp., June 20, 1997, p. 3.\r\ninternational, multi-jurisdictional presence (to speed up drug approval, tests were being launched in several countries at once);\r\nWith the exception of international prese nce, Candace and Chris mat pleasant with their ability to meet these criteria. Kendle’s module had scientific expertise in multiple therapeutic areas, including cardiovascular, central nervous brass, gastrointestinal, immunology, oncology, respiratory, cadaverous disease and inflammation. The company also had broad capabilities, including management of studies in Phases II through Phase IV. It did not consider the absence of Phase I capabilities to be an issue, since this natural process was quite separate. (See Exhibit 4 for a comparison of CRO geographical locations.)\r\nTo establish an integrated clinical data management capability, Chris had directed the development of TrialWare®, a proprietorship software system that allowed global data collection and processing and the desegregation of clinical data with clients’ in-house data management systems. TrialWare® consisted of several modules including a database management system that greatly reduced stud y start-up costs and time by standardizing database design and utilizing scanned image technology to facilitate the design of data admission screens, the point-and-click application of edits from a pre-programmed library, and workflow management (parallel processing). Other modules included a system that coded medical history, medication and adverse shell data and a touch-tone telephone system that was used for patient randomization, just-in-time drug tag on and collection of real-time enrollment data.\r\nAgainst the backdrop of a changing industry, Candace and Chris tangle the train to develop additional business skills and heighten Kendle’s strategy. To clarify their management roles, Candace and Chris switched their exist responsibilities. Chris pointed out, â€Å"Candace became CEO as we realized that her condense was long-range and I took over as Chief Operating Officer to focusing on the short-range. In addition, the marketing susceptibility of our competito rs was propelling them further and further ahead of Kendle. Candace brought her science background and entrepreneurial skills, while I brought my management. The problem was that we were relatively purposeless in sales and marketing.” To broaden their skills, Candace went off in 1991 to the Owner/President prudence Program (OPM), an executive education program run by Harvard Business School for three weeks a year over three years. Chris followed her to OPM in 1994.\r\nAfter terminate the OPM program, Candace assessed the situation, We have to be big bountiful relative to our competitors to take on large, international projects. When Searle was looking for CROs for international work, all we could do was possibly subcontract it out to small shops. In contrast, Quintiles had sextette overseas offices of its own. Furthermore, when Searle calls and says, ‘I just got off the phone, Quintiles will cut their set by a million dollars,’ if you’re too small, yo u’re not going to be able to move to that.\r\nCandace and Chris realized that Kendle could not grow degenerate enough internally to keep up with its peers and did not have the cash for acquisitions. They socialise the thought of tell oning Kendle, and were approached several propagation about a sale. But by nature, they were a competitive, athletic couple. Chris got up to play squash every morning at 7 AM, and Candace was an avid rower, recently benignant a gold medal in a Cincinnati regatta. Perhaps not surprisingly, Candace and Chris mulish to grow the firm and take it public rather than sell. As Candace described their motivation, â€Å"We were not driven to be a public company as such, hardly earlier to be bigger, and for this, we rented public funding to succeed in the new competitive landscape. The whole target was not to let the big guys get too far out ahead of us.”\r\n dressings for Growth\r\nBy 1994, Kendle had grown to $4.4 million in revenues. C andace, the movement force throughout the IPO process, desire advice from an old college friend, a well-known Cincinnati businessman. He advised her, â€Å"before you go public, practice being a public company.” Candace then formulated a plan for Kendle to go public in 1999. Kendle began hiring key managers to descriptor up functional units. Between 1994 and February 1997, new directors of clinical data management, information technology, biostatistics, finance, mergers and acquisitions, regulatory affairs, and human resources were hired. As Chris described, â€Å"the plan was to regularize this infrastructure in place to look and act like a public company†communications, IT, finance. The idea was hire at the top and they’ll fill in their organization.” Many of these new managers had previously worked together at other companies. To prepare for Wall Street scrutiny, Kendle began issuing internal quarterly financial statements and sharing them with emp loyees in an open-book management style. Candace and Chris time-tested to make the growing number of employees tincture like â€Å"part of the family” in other ways, too. The Kendle â€Å"photo gallery” displayed professional portraits of employees with their preferred hobbies. In 1995 Chris led the development of a corporate mission statement and a document on strategic plans that was shared out with all employees.\r\nKendle was organized in a matrix fashion (see Exhibit 5 for organizational chart). Each department was tempered as a strategic business unit (SBU) with\r\na director who realised standards and carried profit responsibility. At the same time, each research contract was managed by a project manager who assembled a police squad from across the various SBUs.\r\nclinical trials involved five functional SBUs at Kendle:\r\n1. regulatory Affairs recruited investigators, helped them with FDA registration forms, and contained approval from ethical motive bo ards. Regulatory Affairs maintained a database of 5,000 investigators.\r\n2. clinical Monitoring sent clinical research associates (CRA) out to the testing sites (every 4 to 6 weeks) to enforce Good clinical Practice regulations. The CRAs were typically young, single health care professionals who spent a significant amount of their time on the road. The CRA would collect data from investigators, resolve queries generated by Clinical Data Management, and promote patient enrollment.\r\n3. Clinical Data Management produced a â€Å"locked” database that could be submitted to the FDA. Data from case report forms were infix into a ready reckoner system and â€Å"cleaned” through a manual review of the forms and an machine-controlled check of the databases. The challenge was to lock a database quickly while maintaining data quality.\r\n4. Biostatistics would â€Å"unblind” the locked database and analyze it to determine if the data confirmed that the test results met the criteria for safety and efficacy. Biostatistics also defined the scope of new studies.\r\n5. Medical Writing generated â€Å"the truckload of re orderation submitted to the FDA” for a New Drug Application, including a statistical analysis, a clinical assessment, preclinical and clinical data, a description of the manufacturing process, and the backup patient documentation.\r\n1996: The Celebrexâ„¢ Study, Filing Preparations, and European acquisitions 1996 was a busy year for Candace, Chris, and Kendle’s new management police squad. They simultaneously began conducting a major drug study, working with underwriters on IPO preparations, and looking for overseas acquisition targets. In 1996 Kendle managed 62 clinical studies at 4,100 sites involving nigh 20,000 patients. Celebrexâ„¢ Study\r\nIn January 1996, Kendle began working on a major drug called Celebrexâ„¢ (celecoxib). Its client Searle was intermeshed in a neck-and-neck race with Merck, the l argest U.S. drug company, to be the first to market a COX-2 inhibitor. A COX-2 inhibitor was a new type of anti-inflammatory drug that promised low incidence of bleeding ulcers in long-term, high-dosage users such as arthritis patients. The Searle-Merck race was attachedly followed in the business press. Searle awarded the international portion of the Celebrexâ„¢ contract to another CRO, since Kendle only had facilities for testing in the United States. However, Kendle did win the contract to conduct all the U.S. Phase II and III trials. The Celebrexâ„¢ contract was a â€Å"huge feather in our cap,” recalled the chief financial officer. â€Å"In order to beat Merck, we worked very hard and unploughed compressing the timelines.”\r\nTo head the Celebrexâ„¢ project, Kendle hired Bill Sietsema, PhD, as assistant director of clinical research. A therapeutic expert in skeletal diseases and inflammation, Sietsema had worked at keep an eye on & Gamble for 1 2 years. While Sietsema served as overall program director, Chris acted as the operational project manager, meeting with his Searle counterpart in gelt on a monthly basis. In early 1997, Kendle also set up a new regional office in Chicago, oddment to Searle headquarters. For Kendle, the Celebrexâ„¢ project was a pass off to â€Å"show what we could do and to develop a personality as a drawing card in the field of skeletal disease and inflammation.” Kendle actively helped investigators recruit arthritis patients, running telecasting advertisements, directing interested volunteers to a call center. Three hundred investigators enrolled over 10,000 patients, producing over one million pages of case report forms.\r\nMost importantly, through close integration of information systems with Searle, Kendle was able to beat an industry standard. Instead of taking the typical six months to one year, the time span between the last patient in Phase II and the first in Phase III, which began in June 1996, was only 22 days.\r\nPreparation for SEC Filing\r\nBy the time the Celebrexâ„¢ program rolled around, Candace and Chris felt that they ability have to go public earlier than intended because of the competitive landscape. The new chief financial officer, Tim Mooney, took a leading role in the preparations. Prior to join Kendle in May 1996, Mooney had worked as chief financial officer at The Future Now, Inc., a computer reseller and Hook-SupeRx, a retail drugstore chain. At Kendle, Mooney replaced the controller with an audit manager from Coopers & Lybrand to beef up his staff. Mooney also led the building of many of the other financially related departments at Kendle.\r\nTo act as the lead underwriters on the IPO, in revered 1996 Mooney chose two regional investment banks, Chicago-based William Blair & Company, L.L.C., which had handled the 1995 IPO of Kendle’s competitor Parexel, and Wessels, Arnold & Henderson from Minneapolis. Wi lliam Blair began putting Kendle through the paces of preparing to file a preliminary prospectus with the U.S. Securities and Exchange care (SEC). The process of going public slackly took from 60 to 180 days. One of the key steps in the process was the mutation of Kendle from a subchapter corporation to a C corporation at the time of the IPO. (Subchapter S corporations were entities with 35 or fewer shareholders that were enured like confederacys for revenue enhancement purposes. Corporate income tax was passed through tax-free to the owners who then paid personal income taxes due.)\r\nU-Gene\r\nIn October 1996 Mooney hired Tony Forcellini, a former colleague, as director of mergers and acquisitions (M&A). Tony had worked at Arthur Andersen in the tax department, and then as a treasurer at Hook-SupeRx with Mooney. The search for European acquisition targets was generally conducted by Candace and Tony Forcellini, with back-up support by Tim Mooney and Chris. all told the while, Chris and Bill Sietsema were working away on the Celebrexâ„¢ program. Forcellini’s first determination was easyâ€whether to mesh an offering muniment that landed on his desk shortly later on he arrived. The company for sale was U-Gene Research B.V. (U-Gene), a CRO based in Utrecht, the Netherlands. U-Gene was represented by Technomark Consulting Services Ltd. (Technomark), a London-based consulting firm uniquely specializing in the healthcare industry. Technomark had an extensive database on European CROs and was primarily in the business of matching its pharmaceutical company clients’ trials with appropriate European CROs, solely it also had a small investment banking division.\r\nU-Gene, a full-service CRO, was an attractive target for Kendle. The danger capitalist owners were actively looking for buyers. With a 38-bed Phase I facility in Utrecht and regional offices in the United nation and Italy, U-Gene could increase both Kendle’s servic e offering and geographic presence. Since its founding in 1986, U-Gene had served more than 100 clients, including 19 of the world’s largest pharmaceutical companies. In 1996, U-Gene participated in 115 studies at approximately 500 sites involving approximately 4,700 patients and recorded net revenues of $12.5 million, a 37% increase over the preliminary year, and operating profit of $1.3 million, a 47% increase over the antecedent year. Because of its U.K. and Italian offices, U-Gene viewed itself as on the way to comme il faut a pan-European CRO. (See Exhibit 6 for U-Gene financial statements.) With momentum building, in November 1996, Forcellini seized upon U-Gene as Kendle’s possible entry into Europe and submitted a bid, offering cash and secluded argumentation. Unfortunately, Kendle lost out on this bid to a competitor, collaborative Clinical Research, Inc, as U-Gene’s owners either wanted a full cash can or stock from a public company. Collaborative was a competitor slightly larger than Kendle ($25.7 million in revenues) that had at rest(p) public in June 1996 and had established a software partnership with IBM. Although it had access to investigators outside the United States, Collaborative also viewed U-Gene as the establishment of a European presence. On February 12, 1997 Collaborative announce that it had signed a letter of engrossed to occupy U-Gene in exchange for 1.75 million newly issued shares.\r\nWhile this put Kendle out of the picture, the prospects of a deal were not all killed. On the same day, February 12, 1997, Collaborative also announced that its first-quarter 1997 kale would be importantly below expectations. On the next day, on analyst speculation that a major client contract had been lost, their stock vaporize by 27.3%, closing at $9.00.6 This put Collaborative’s UGene deal in jeopardy.\r\nUnderwriter Concerns\r\nAbout two weeks afterwards Collaborative’s announcement, on February 25, 1997, another CRO, ClinTrials, also suffered a drop in stock charge. ClinTrials’ stock lost more than half its market value, dropping 59%, to $9.50 per share. The attend began when an analyst from Wessels Arnold downgraded the ClinTrials stock to â€Å"hold” from â€Å"buy,” citing a number of key management departures, and continued after ClinTrials announced that its first-quarter earnings would be half its year-earlier profit. The reason for the unexpected earnings decline was the cancellation of five projects totaling $37 million, with the possibility of even lower earnings due to an unresolved project argufy with a client.7 ClinTrials’ negative performance began to postulate other CRO stocks, including that of Quintiles.8\r\nWith client stringency an issue in ClinTrials’ stock performance, William Blair developed doubts about the timing of Kendle’s IPO. Although Kendle was close to filing its preliminary prospectus, on the day aft er ClinTrial’s stock dropped, William Blair analysts had a meeting with Kendle’s management and told them that they had decided to withdraw as lead underwriters in the IPO.\r\nCandace was resolved to keep going. She said, â€Å"There’s no way out of the ducking issue. We can’t buy our way out of it, because we can’t do M&A deals until we have a public property, and every day Searle is bringing us more work, we win’t tell them no.” She then asked Mooney to find new investment bankers, and he thought, â€Å"what am I going to do now?” Hoping for a lead, Mooney called up a former security analyst from Wessels Arnold who had gone to work at Lehman Bros. Although Kendle was smaller than Lehman’s usual clients, Lehman hold to underwrite Kendle’s IPO, with the reassurance that â€Å"we think we can sell through the client concentration issue.” After an agreement with New York-based Lehman was reached, Moon ey searched for a regional firm because, as he decided, â€Å"I didn’t want two New York-size egos. J.C. Bradford, based in Nashville, Tennessee, had a good reputation in the industry, and struck us as a nice regional bank. They were more retail-oriented than institutional-oriented, so they wouldn’t directly be competing with Lehman in types of clientele.” Bradford had managed the IPO of the first large CRO to go public (ClinTrials, in 1993) and Lehman had led the IPO of PPD in January 1996.\r\nGmi and U-Gene revisited\r\nAt the same time, Forcellini was moving ahead on the acquisition search. In January 1997 he tasked Technomark with using its CRO database to generate a list of possible European acquisition targets that met the adjacent criteria: â€Å"ideally a CRO with United Kingdom headquarters; $5 million to $7 million in revenues; no Searle business; certain types of therapeutic expertise; strong in phases II through IV; and certain country locations.â € The initial list had 50 European CROs, which Kendle narrow down to 14 prospects. Technomark then contacted these 14 prospects to sound out their spontaneousness to sell, bringing the number down to five candidates: three CROs in Germany, two in the United Kingdom, and one in the Netherlands (not U-Gene). To assess the prospects, Kendle used information from Technomark on comparable M&A deals.\r\nCandace and Tony Forcellini then traveled around Europe for a week see the five companies. They decided to further pursue two companies: a small, 15-person monitoring organization in the United Kingdom and one in Germany. The U.K. prospect was quickly fling because of an aggressive asking charge and account statement problems. Kendle then moved on to the German target, a company call downd gmi. Its full name was GMI Gesellschaft fur Angewandte Mathematik und Informatik mbH. Founded in 1983, gmi provided a full range of Phase II to IV services. gmi had conducted trials in Aust ria, the United Kingdom, Switzerland and France, among other countries, and had hold up in health economic studies and\r\n7 â€Å"ClinTrials Predicts Sharply Lower Profit: Shares dowse 59%”, The Wall Street Journal, February 26, 1997, p. B3. 8 David Ranii, â€Å"Investors avoiding Quintiles,” The News & Observer, Raleigh, NC, February 27, 1997, p. C8.\r\nprofessional training programs. In 1996, gmi participated in 119 studies at multiple sites and recorded net revenues of $7 million, a 32% increase over the prior year, and operating profit of $1.4 million, a 16% increase over the prior year. At March 31, 1997, gmi’s backlog was approximately $9.6 million. gmi considered itself to be especially good at Phase III trials. (See Exhibit 7 for gmi financial statements.)\r\nWhile Candace and Forcellini were narrowing down European targets, Mooney was hunting for cash. In February 1997 Kendle met at a special lunch with its living bankers, superstar Bank (later renamed Firstar), in Cincinnati. Mooney recalled the talk vividly: â€Å"After Candace and Chris described their plans, principal Bank’s CEO do a proposal, ‘If you keep Kendle a secluded company and avoid the hassles of being public, we’ll conduce you the money you need for acquisitions.’” With the financing in hand, Candace and Forcellini visited gmi in Munich. While gmi’s owners were willing to talk, they did not have much interest in selling. As Mooney described it, â€Å"gmi was a classic case of having grown to a certain size, had a comfortable level of income, but weren’t interested in putting in the professional systems to grow beyond that level.” After several conversations in March, it was not clear that Kendle and gmi’s owners would be able to reach a in return agreeable price.\r\nAt this point in early April 1997, the possibility of U-Gene as an acquisition candidate heated up. After the U-Gene deal with Collaborative Research began to collapse, Kendle had initiated a cautiously structured inquiry about U-Gene’s interest in renewed discussions. This inquiry led to further discussions and a request in April for Kendle to meet in capital of Kentucky to try to reach an agreement. With the gmi deal in doubt, Kendle agreed to try to reach firmness of purpose with U-Gene. After some discussion, both sides agreed on a price of 30 million Dutch guilders, or about US$15.6 million, $14 million of which would be paid in cash, and the remaining $1.6 million would be in the form of a promissory note payable to the selling shareholders. U-Gene wanted to complete the transaction at heart the next several weeks, so it would have to be financed at least initially by borrowings. Even if Kendle went ahead with an IPO, the equity financing would not be completed until the end of the summer.\r\nDiscussions with gmi continued through this period since Kendle was confident about its ability to ob tain financing from Star Bank. Ultimately, Kendle’s team was able to agree upon a price with gmi. The owners were willing to accept a price of 19.5 million Deutsche marks, or about US$12.3 million, with at least $9.5 million in cash. They would accept shares for the remaining $2.8 million, if Kendle successfully completed an IPO. The owners were willing to hold off the deal until the IPO issue was resolved.\r\nClosing the Deals and IPO Decision\r\nTo complete both the U-Gene and gmi deals, Kendle would need to borrow about $25 million to $28 million, so financing became critical. Mooney went back to Star Bank to take the bankers up on their promise. He described their reaction: â€Å"Star Bank said they couldn’t lend $28 million to a company that only has $1 million in equity. Nobody did that. They might be willing to finance one acquisition, with the help of other banks, but there was no way that they would provide $28 million.” Mooney was quite angry, but had no choice but to look for other sources of financing. He first tried to get bridge financing from Lehman and Bradford, but they refused, saying that they had â€Å"gotten killed on such deals in the 1980s.” There was also a possibility of financing from First Chicago Bank, but this did not materialize.\r\nFinally, in late April 1997, Mooney contacted NationsBank, N.A., which was headquartered in Charlotte, North Carolina and provided banking services to the CRO industry. Nationsbank expressed interest, but only in a large deal. Even $28 million was a small amount to Nationsbank. In 11 a few short weeks, Nationsbank ended up structuring a $30 million credit for Kendle, consisting of a $20 million, three-year revolving credit line and $10 million in five-year, subordinated notes. The interest rate on the credit line was tie to a money market base rate plus 0.50% (currently totaling 6.2%), and the subordinated debt carried a 12% rate. ”So NationsBank stepped up in a prett y big way. They could have ended up with Kendle as a private company, with $30 million in debt.” Because of the risk, Nationsbank would also take warrants giving the bank the dependable to purchase 4% of Kendle’s equity, or up to 10% if the IPO was delayed and Kendle had to borrow the full amount to do both acquisitions.\r\nLehman Brothers was confident about an IPO. The underwriters felt Kendle could raise $39 million to $40 million at a price between $12 and $14 per share, and that Candace and Chris could sell some of their shares as well. Premier Research Worldwide Ltd., a CRO with $15.2 million in 1996 revenues, had raised $46.75 million from its recent IPO in February 1997. Kendle felt they had a much better track record than Premier.\r\nKendle now faced some backbreaking decisions. It could do the full program, including both acquisitions, taking the $30 million Nationsbank deal, and planning for an IPO in late summer. The successful acquisitions of gmi and U-Ge ne would establish Kendle as the sixth largest CRO in Europe, based on total revenues, and one of only four large CROs able to offer clients the full range of Phase I through Phase IV clinical trials in Europe. The pricing on the two acquisitions of 8 to 10 times EBITDA seemed in line with recent CRO deals (see Exhibit 8). And, once the IPO was completed, Kendle would have both a cash jar and stock as a currency to help finance future growth and acquisitions. Assuming an IPO of 3 million new shares at a price of $13.00, Kendle would have a cash space of about $14 million and no debt in the capital structure. (See Exhibits 9 and 10 for pro forma income statements and balance sheets showing the impact of the acquisitions and the IPO.) A related issue was how many of their shares Candace and Chris should sell if an IPO were done. Their current opinion was to sell 600,000 shares. Thus, a total of 3.6 million shares would be for sale at the time of the IPO, including a primary offerin g of 3 million shares and a secondary offering of 600,000 shares. This sale would reduce holdings controlled by Candace and Chris from 3.65 million shares (83.1% of the shares currently outstanding) to 3.05 million shares (43.4% of the new total outstanding).\r\nDoing the full IPO and acquisition program, however, was scarce among Kendle’s peers. â€Å"Nobody does this combination all at onceâ€an IPO, senior- and sub-debt financing, and M&A deals,” as Mooney described the situation. Furthermore, the stock prices of public CROs had been falling since last February (see Exhibits 11 and 12 for stock market evaluation and price information). If Kendle bought into the full program and the market crashed or the IPO was unsuccessful, the company would have almost $30 million of debt on its books with a very modest equity base. Perhaps it would be better to do just the U-Gene acquisition and use Star Bank to finance it. After complete this acquisition, it could then pursue the IPO. This approach was safer, but of course Kendle might miss the IPO window and miss the opportunity to acquire the second company. Indeed, instead of discouraging Kendle from doing an IPO, the fall in CRO stock prices might be taken as a signal that Kendle should forge ahead before the window closed completely.\r\n'