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Kendle International Valuation Analysis

MGSM 985A Entrepreneurial Finance Individual Assignment


Submitted to: Karl Rodrigues

Kendle History and Business plan It is more than one and half decade back when Kendle specializing in clinical research for pharmaceutical and biotechnological companies, testing the safety and efficacy of their new drugs was emerged. The founders, Candace Kendle and Chris Bergen plan is to ambitiously compete against the big players in the business despite its operation being limited to the US market. This created a challenge for Kendle since its main 5 competitors including Quintiles and PPD are spread worldwide. In this context, Kendles strategy was to acquire an existing Contract Research Organization (CRO) in Europe focused on increasing revenue. Kendle currently only operates in the US, relying on subcontractors to perform work in international markets. U-Gene and gmi are currently under evaluation as potential acquisitions to fulfil Kendles corporate strategy. Since Kendles entire revenue comes from CRO activity for pharmaceutical companies, it has a single business corporate strategy. Acquiring U-Gene and/or gmi will not change this single business corporate strategy. The growth of the pharmaceutical industry is 10% per annum compared to a CRO demand of 20% annually. Pharmaceutical firms need a single CRO to cater to all stages of different phases of research trials including data and research. These conditions result in a low degree of market uncertainty.

Future Growth Synergies Acquisition will benefit Kendle, U-gene and gmi through value and cost drivers. It will also become the sixth largest player CRO in Europe with a global distribution after acquiring UGene and gmi. Gmi conducts scientific trials from phase II to IV services, has higher margins, and specializes in health economic studies. Acquiring U-Gene will benefit Kendle by virtue of its resources and ability to conduct phase I trials. U-Gene and gmi will reciprocally benefit from less time between phase trials utilizing Trial Ware software and close customer alliances. This is in addition to Kendles established US market value and productive labor force.

Type of Synergy Topography Strength in time utilisation from phase trial

GMI More presence at various locations Time optimisation in phase II up to 22 days

U-GENE More presence at various locations Higher sales and growth

GMI+U- UGENE Strategic presence Decreased time span between Phase II trial 22 days, better than industry standard of 6 months to 12 months Emerging leader in skeletal disease, inflammation drugs and various therapeutic areas Operational cost benefits Complete life cycle of CRO

Services

Experience in health economic studies and training programs

Full service CROPhase I, II, III and IV

Greater margins

Higher margins compare to Kendle Phase II to IV services specializing in Phase III trials

Capabilities

Competitive leader in innovative disease cure Phase I facility

INDUSTRY ATTRACTIVENESS On pricing, buyer power is favorable since they require a high level of credibility and technical skill from CRO firms. Rivalry is high in the CRO industry due to fragmentation and differentiation of services. Low exit barriers exist due to a dependency on soft resources compared to more expensive fixed capital resources. Overall, this industry creates a very attractive acquisition environment.

Impact of acquisition Kendle, U-Gene and GMI are all better off after this acquisition primarily due to an increase of full service capability (phase I to IV) and end-to-end program management. All three firms increase their international presence and economies of scope.

Financial Analysis After conducted a three stage valuation for Kendle since it is in a high growth phase and a two stage model for gmi and U-Gene as they are in a stable growth phase. A projected income statement for a five year period with a constant growth model has created after the fifth year to determine the NPV of free cash flows Refer to Enclosure 2 and Enclosure 3. For a list of assumptions used in our financial analysis refer Enclosure 1. The valuation analysis

in Enclosure further assumes all equity and funding of acquisitions is through an IPO only. I estimated full synergy valuation of the combined company based on different acquisition options: only gmi, only U-Gene, acquiring both. This analysis shows that both gmi and UGene offer significant synergetic benefits to Kendle. The overall valuation of this combined business far exceeds the values of the companies before acquisition. Therefore, all three companies are assumed to be better off after the acquisition. Acquiring both companies also offers a far better economic valuation than acquiring only one company due to intercompany synergic benefits. It is evident that gmi offers more synergetic value than U-Gene when acquired separately.

Conclusion
Below are the analysed three options: IPO first, then complete acquisitions Acquire before IPO Acquire gmi first, IPO, then acquire U-Gene.

The analysis supports acquisition of gmi first, IPO and then acquiring u-gene details see in enclosure 4. Kendle has more chances of a successful IPO after acquiring gmi because of increased cash flow, resulting in a higher valuation after acquisition. Since gmi is willing to accept equity of about $2.8M, Kendle requires less funding through debt. Kendle can also learn from this first acquisition and leverage this experience for acquisition of U-Gene, potentially decreasing integration costs. Through this option it (Kendle) can successfully generate cash cushion to support its future growth. Scenario Analysis: In support of option to Acquire GMI first, IPO and then acquire U-Gene a financial analysis for three scenarios: no synergy, moderate synergy (base scenario) and full synergy was conducted. Moderate synergy is considered the most likely event, which determines an estimated valuation of the combined company of $98.8M and synergetic value creation of $41.8M.

Enclosure 1 Weighted Average Cost Capital

Cost of Equity Unlevered Rf MRP Ke

Rate 1.25 7.10% 7.5 16.48%

Cost of Debt NAB Credit Subordinated Notes Weighted Average Kd

Rate

Borrowed 6% 20 12% 10 8.13% 30 4.9%

Enclosure 2 Summary Table of three scenarios

Description 1998-99 Growth 2000-2001 Growth Terminal Growth NPV Kendle 1998-99 Growth 2000-2001 Growth Terminal Growth NPV gmi 1998-99 Growth 2000-2001 Growth Terminal Growth NPV- Ugene Total

Scenario1 Scenario 2 Scenario 3 No Synergy Base Synergy 62% 55% 62% 20% 27% 30% 4% 5% 6% 34,189.17 38,184.70 63,219.27 32% 55% 62% 32% 27% 30% 4% 5% 6% 45,146.28 32,956.81 39,104.42 21% 55% 62% 21% 27% 30% 4 5% 6% 16,286.51 95,621.96 24,333.50 95,475.02 45,146.28 147,469.97

Elcosure-3 NPV of three scenarios for each company

1997 CFO 1,609.15

1998 2,606.82 1,910.84

1999 4,223.04 2,650.31

2000 5,067.65 2,722.92

2001 Perpetual 6,081.18 2,797.52 49,409.60 22,729.88

PV1 1,377.69 NPV-Scenario1 34,189.17 EBITDA 1,399.65

2,169.46 2,068.12

3,362.66 3,205.59

4,270.58 4,071.09

5,423.63 2,829.25

25,885.52 24,676.38

PV2 1,334.27 NPV-Scenario2 38,184.70

EBITDA

1,609.15

2,606.82 2,009.38

4,223.04 2,857.95

5,489.96 3,261.92

7,136.94 3,723.00

95,761.50 49,954.24

PV1 1,412.77 NPV-Scenario3 63,219.27

NPV-GMI EBITDA PV1 NPV-S1 1,539.62 1,318.16 32,956.81 2,386.40 1,749.28 3,698.93 2,321.38 4,697.63 2,524.11 5,966.00 2,744.53 48,473.72 22,299.35

EBITDA PV1 NPV-S2

1,609.15 1,377.69 39,104.42

2,606.82 1,910.84

4,223.04 2,650.31

5,489.96 2,949.83

7,136.94 3,283.20

58,545.23 26,932.54

NPV-U-Gene CFO PV1 NPV-S1 EBITDA PV 1,291.34 1,105.60 16,286.51 1,291.34 833.12 24,333.50 2,001.57 833.12 3,102.44 3,940.09 5,003.92 1,514.58 23,882.33 18,804.99 1,562.52 1,145.35 1,890.65 1,186.54 2,287.68 1,229.20 2,768.09 1,273.41 22,490.76 10,346.42

833.12 1,514.58

EBITDA PV1 NPV-S2

1,291.34 1,291.34 45,146.28

2,001.57 2,001.57

3,242.55 3,242.55

4,215.31 2,264.95

5,479.90 2,520.92

73,527.79 33,824.96

Enclosure 4 Full Synergy through IPO

Synergy through IPO Acquisition of GMI Rate of growth Costs/Rev Acquisition of U-Gene Rate of growth Costs/Rev Acquisition of GMI and U-Gene simultaneously Rate of growth Costs/Rev 1998-99 2000-01 Perpetual 62% 20% 5% 0.79 0.79 0.79 62% 0.86 25% 0.86 5% 0.86

62% 0.79

30% 0.79

5% 0.79

Enclosure- Cash Cushion for third option

Description Cash from IPO Cash offer to U-Gene Equity to gmi Equity to Ugene Cash Cushion

1 33,000.00 14,000.00 2,800.00 1,600.00 14,600.00

2 39,000.00 14,000.00 2,800.00 1,600.00 20,600.00

3 45,000.00 14,000.00 2,800.00 1,600.00 26,600.00

Enclosure 5 Overview of three options IPO before Acquisition Acquisition before IPO Acquire U-gene before IPO and GMI after IPO The entire acquisition will be financed through equity +equity Acquire the company first will increase the value and hence better chance of high value when go for IPO Good cash flows and higher value for IPO

The entire acquisition will be financed through equity Consequence of public offering before any synergy will cause devalue of the company for IPO Less prudent strategy

The entire acquisition will be financed through debt Consequence of full debt before any public offering will cause devalue of the company for IPO Chances are loss the second acquisition through IPO due to less indications of successful IPO

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