Pharma

Kendle International: Acquire or be acquired; that’s the question

Kendle International seems to be caught in the awkward space between the biopharmaceutical industry’s first and second tiers, according to securities analysts quoted by the Business Courier of Cincinnati. For one analyst, that means Kendle should buy or be bought. For another, it means Kendle should acquire other contract research organizations (CROs) so it can […]

Kendle International seems to be caught in the awkward space between the biopharmaceutical industry’s first and second tiers, according to securities analysts quoted by the Business Courier of Cincinnati.

For one analyst, that means Kendle should buy or be bought. For another, it means Kendle should acquire other contract research organizations (CROs) so it can compete in the top tier of its industry.

“We’re only going to see biopharmaceutical companies become increasingly focused on late-stage CROs that can manage larger slugs of work,” Greg Bolan, a senior analyst with Wells Fargo Securities, told the Cincinnati Business Courier. That means Kendle should acquire other CROs to get bigger, right?

“Making acquisitions in emerging markets would be a way for Kendle to more rapidly increase its presence,” David Windley of Jefferies & Co., told the business courier.

Another vote for a Kendle acquisition, or two. Candace Kendle, the company’s founder, chairman and chief executive, told analysts in a February conference call that her company needs to keep its eye on mergers and acquisition opportunities, as well as business and geographic expansions.

But with a stock price of $17.74 (Monday’s closing price), more than $52 million of cash (as of Dec. 31), and a trend of consolidation in the CRO industry, you have to wonder whether Kendle isn’t ripe for the picking. Acquirer or acquired?

Kendle calls itself a “clinical research organization” because it manages clinical trials and data for its biopharmaceutical clients. The company also provides statistical analysis, medical writing and regulatory consulting for those trials, according to its annual report filed with the Securities and Exchange Commission.

Kendle is global. In fact, nearly two-thirds of it 3,640 employees work outside the United States, and the company has clients in North America, Europe, Asia/Pacific, Latin America and Africa. Kendle has invested in services and proprietary information technology to reduce clients’ drug development time and costs. It also has expanded in so-called “emerging markets,” like India and China.

That strategy should help Kendle win more business from drug companies, which have increasingly outsourced their drug development. But that strategy is fighting with some other trends in the drug development industry. The Food and Drug Administration has approved fewer new drug applications in the last year, according to Contract Pharma magazine. Fewer drug approvals discourage drug companies from spending on R&D, especially for early-stage development.

These industry trends–combined with a worldwide economic recession–have strained Kendle and other CROs, which have complained about a high number of  research proposal withdrawals, project slowdowns, cutbacks and cancellations in the last year.

“While there’s a great deal of commitment to outsourcing at the most senior levels of the biopharmaceutical industry, the process that is necessary before achieving genuine, hands-0ff, outsourcing management that will deliver the type of cost savings desired is a complex one,” CEO Kendle told analysts in February. “Overcoming these hurdles will take time. It is this time that will contribute to a flat 2010,” Kendle said.

“We are encouraged by the improved funding to the smaller biopharmaceutical companies,” she said. “We believe that the impact for CROs in the near term will be primarily in early-stage and smaller late-stage projects. We are also beginning to see the return of large biopharmaceutical partners with these smaller companies.”

Kendle’s latest acquisition, which was in 2008, was DecisionLine Clinical Research Corp., a clinical research organization in Toronto, Ontario, Canada, that specializes in conducting early-phase studies.

But even though the company supplies clinical development services for early-stage trials (Phase 1), the bulk of its business is in late-stage (phases 2 through 4) trials. And one of the company’s strategies is to gain market share by further penetrating the large (greater than $10 million in contract value) trial sector and expanding in mid-sized trials, according to its annual report.

So “late-stage” and “big” are where Kendle has put most of its recent efforts. “In a challenging environment, Kendle is probably undersized to effectively compete for scarce contracts in the big-size range,” Windley told the business courier. But with $154.5 million of convertible debt and a new $35.5 million credit line with “restrictive covenants” that could limit how it responds to business challenges on its books, is Kendle prepared to acquire?