Kendle Case discussion
The Kendle case has a number of takeaway points to discuss:
1. Changing industry drives strategy response. Kendle is outperforming its much larger peers in revenue growth and net income margin in a rapidly growing industry due to increasing pharma outsourcing of CRO services. Above industry average growth and profitability usually signal sustainable competitive advantage but client needs are changing to have one source of Phase 1-4 services on a global basis. Combined with the keep-the-CEO awake at night issue of customer concentration (50% to one customer; 80% to three customers), Kendle’s strategy needs to adapt. Even with a strong client reference for Celebrex at Searle, Kendle must grow in scope of services offered and geographic areas served or face likely strategic challenges 2. Strategic responses are either sell or acquire. Organic growth options aren’t going to result in sufficient change on a timely basis. Selling the company based on comparable EBITDA multiples (use FCF or EBITDA multiples whenever possible to best estimate market prices) in the industry for public companies results in a price of approximately $25m. It’s unlikely that Kendle will sell at above industry average multiple since significant operating cost synergies (Kendle is outperforming others in margin) are unlikely; some revenue synergies due to client reference and software may exist but revenue synergies are rarely valued for premiums. So, the $25m value is reasonable. Determining if the company is fairly valued based on market multiples, one needs to compute a DCF to determine economic value. If economic value is less than market prices, consider selling. If economic value is more than market prices, don’t sell. The Kendle excel file on BB shows the economic value to be approximately $28m. Therefore, don’t sell. 3. European acquisitions are viable strategies but risky. U-gene and gmi add missing services in the CRO value chain,...
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