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Buying the Spin-off
ENTREPRENEURS by Janet Leiser | Senior Editor
Managers led a buyout of a Tampa pharmaceutical division when the Canadian parent company decided to spin off small business lines to improve profitability.
In the 10 months since Derek Hennecke led the multimillion-dollar management buyout of MDS Pharma Services' pharmaceutical formulation division in Tampa, revenue has grown 40%.
Hennecke was in charge of three business lines for Canadian-based MDS Pharma Services, including facilities in Tampa, Seattle and Montreal, when the 10,000-worker corporation announced plans early last year to divest seven smaller units to improve profitability.
Hennecke sought help from colleagues at Renaissance Executives Forum, a CEO roundtable, in buying the pharmaceutical contract research organization (CRO) last May.
"The possibility of becoming an entrepreneur always appealed to me," says Hennecke, who has an MBA from Erasmus University in Rotterdam, The Netherlands. "It's great. I'd never go back. Being able to set the direction and work quickly with the management team is much more invigorating.
"I'd rather do something than talk about doing it," he adds.
Hennecke declined to say what he and the other managers paid for the CRO, now called Xcelience LLC, except that it was a multimillion-dollar deal, and he's the majority owner.
The company, which now has 60 employees, has been in a 24,000-square-foot office near Tampa International Airport since 1997. Xcelience has about 59 competitors in the early-stage pharmaceutical formulation process, but none are based in the Tampa area, he says. Most are in the Northeast, California and the Midwest.
"The reason we're in Tampa is access to good workers," Hennecke says. "And it's nice for our sponsors (clients) to come down here to Florida. We're close to the airport. They can see a project in the morning and take a flight home at night."
Xcelience scientists focus on the initial formulation of drugs, mostly in capsule or liquid form, for other companies.
"We take in other products and develop in clinical studies to help the sponsor get into phase one clinical studies," Hennecke says.
Most of the firm's customers are from the United States, but some are from Japan and Europe.
The company operates in a regulated industry where it's estimated to cost about $800 million and 10 years to develop a drug and get it to market, he says. Since patents are only good for 17 years, it's important to get a drug to market as soon as possible.
"Speed is important to our sponsors," he says. "They have to get to clinical studies quickly. Through technology we're always stressing we can find the best solution for their problem."
Xcelience projects revenue of $10 million this year, up from $6 million in 2006. Still, the company doesn't plant to grow too quickly.
"In a regulated market, it's important to control your growth," Hennecke says. "You can't grow too fast and strip out the quality.
The first thing sponsors are looking for is quality. If we grew too fast and hired the wrong people, we'd jeopardize that."
Hennecke's former employer, MDS Pharma Services, faces problems related to quality control.
The Food and Drug Administration said in January that inspections revealed serious concerns about drug testing done by MDS Pharma Services on hundreds of medicines pending federal approval or already on the market. The contract company, part of MDS Inc. of Mississauga, Ontario, agreed to audit its own work, but that wasn't enough for the FDA, which appealed directly to drug makers.
The FDA said MDS Pharma Services failed to identify and fix sources of contamination in tests that measured drug levels in the blood of patients. The company is also accused of failing to validate and document the accuracy of its testing methods.
The FDA said it has no evidence of problems with the quality, purity or potency of the affected drugs. Still, the agency is sending more than 1,000 letters to drug companies, asking them to reevaluate the results of tests performed by MDS Pharma Services between 2000 and 2004.
Hennecke says those issues have nothing to do with Xcelience. "We were never part of that problem," he says. "We were a completely different unit."
Still, the investigation shows just how important quality control is for a pharmaceutical contract research organization, where people's lives ultimately depend on a drug's safety.
"If we make a mistake on that, all the data that's generated afterward is in jeopardy," he says. "If anybody along the way does anything less than absolutely perfect, at the very least the studies will have to be redone or the drugs thrown off the market. Celebrex (a pain medication for arthritis) is an example."
Hennecke attributes Xcelience's recent growth to its employees.
"We've got the right people, really dedicated scientists with the right enthusiasm," Hennecke says. "We hire very experienced people from the industry."
As for the CRO industry, it's highly fragmented and growing.
"If you prove yourself to a sponsor, they're going to stay with you," he says. "Quality and speed are the most important to sponsors. We don't want to overprice, but it's the third most important thing to our clients."
As far as Renaissance Executive Forums' role in the buyout, Hennecke says he had help from some of the best in the Tampa Bay area, including Pat Duffy, president of Colliers Arnold; Steven Pinney, a senior vice president of Mosaic (formerly Cargill); Malcolm Teasdale of Teasdale Worldwide; Karen Arnold, owner of Interior Design Services; Dean Akers, CEO of Ideal Image; Sol Fleischman, partner in Fleischman Garcia; and Darrell Smith, partner in Shumaker, Loop & Kendrick LLP.
"They really helped from the beginning to the end," he says.
REVIEW SUMMARY
Entrepreneur. Derek Hennecke
Company. Xcelience LLC
Key. Growth in the highly regulated pharmaceutical industry must be slow and deliberate to ensure quality.
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