ProposalFine Chemical & Biologic

Products

Prepared by: P. Scott Waterhouse

Copyright: 2011

Background Highlights

University of Cincinnati w/ MA Economics Minors in Chemistry & Math 1st half of career with Fortune 500 in finance, operational,

strategic & product planning. Lots of international. CFO of $400 million energy company. Transition to operations, line & general management with

Sigma Chemical in 1988. ICN Biomedicals & W. Europe for ICN Pharmaceuticals. Biopharmaceutical Company start-up. Chemdex – B2B Internet start-up Start-up tech consulting & LBOs 20 years in Fine Chemicals & Biologic Products.

Outline

What

Why

How

Details

Appendix – Product Examples

What?

Build a $80 to $150 million revenue

company through acquisition and organic growth that manufactures and distributes fine chemical and biologic products to the worldwide life science market.

What?

The life science industry is huge, complex,

highly fragmented, growing and very profitable.

There are numerous opportunities to consolidate segments of the industry through acquisition and claim large profits and extremely high rates of return.

How? - Overview

1. Acquisition of several complementary companies.

2. Operational integration to achieve:

• Efficient product distribution.• Effective & expanded global sales & marketing.• Enhanced research & product development.

3. Product acquisition & market development strategy.

4. Resulting in an enterprise with:

• Top line growth exceeding overall market growth.• Solid, industry norm profit margins.• Consolidated profitability substantially higher than the acquired

components.

Why?

Overwhelming customer need.

It’s been done successfully.

We know how to do it.

Numerous opportunities.

Highly profitable, stable, growing & “low risk” business.

Why? Overwhelming Customer Need.

Difficult and costly to find, qualify and purchase the right product for highly specific applications.

Sourcing mistakes & delays are very costly.

Typically 150+ suppliers to multiple facilities.

Very high transaction cost per purchase order.

( Customers value quality, availability and reliability over price.)

Why? It’s been done successfully.

CN Biosciences

• 5 acquisitions from 1992 to 1997

• Achieved “critical mass”, expanded customer base & increased GPM.

• Strategic acquisition by eMerck in 1999

• $150 million purchase price

• 3 times sales

• 14.5 times EBITDA (Many instances of high multiple strategic purchases; Ambion, Chemicon et. al.)

Why? We know how to do it.

Experience

• President, ICN Biomedicals (turn-around)• V.P. Operations, Sigma Chemical (industry leader)

Unique Knowledge

• Dozens of companies seen at a detailed level while qualifying suppliers.

• Supplier lists at major labs through Chemdex• Screened ~300 to a list of 43

Why? We know how to do it.

Results

◦ Increased GPM at ICN from 43% to 56% in one year.

◦ Brought 8 LBO candidates to evaluation.

◦ ICN, Qbiogene, Operon, [ Undisclosed:CDA ]

Built the supply chain for Chemdex• 150 contracted partnerships.• More than 300 negotiations.• Touched more than 450 suppliers.

Why? Numerous opportunities.

A huge, complex and highly fragmented industry.

$37 billion market.

Dozens of product categories.

Hundreds of thousands of products.

Thousands of manufacturers, most small.

Worldwide customer base.

Engineer a valuable enterprise by acquiring leading product-market combinations within this complex matrix.

Why? Highly Profitable & Stable

Techne Corp. 2009 2008 2007 2006 2005

Net Sales (millions) $264.0 $257.4 $223.5 $202.6 $178.7

% Gross Margin 79.0% 79.5% 79.1% 77.4% 79.4%

% After Tax Margin 39.9% 40.2% 38.1% 36.2% 37.0%

Sigma-Aldrich 2009 2008 2007 2006 2005

Net Sales (millions) $2,147 $2,200 $2,038 $1,797 $1,666

% Gross Margin 50.7% 51.3% 50.8% 51.2% 50.9%

% After Tax Margin 16.2% 15.5% 15.3% 15.4% 15.5%

How? Strategy Summary

• Achieve critical market mass through multiple acquisitions.

• Add profitable and higher growth “Niche” products to a Platform Company.

Definition: Platform Company

A company of sufficient size with the core infrastructure to have the capability to market and distribute products directly to end use customers in multiple markets & internationally.

Scalability?

Strategy – Target Company Profile

Revenues

◦ $5 to $40 million.◦ Less than 20% direct to end-user. ◦ More than 80% within home country.

Profitability

◦ GPM on direct sales of 52% to 65%.◦ Distributor discounts of 20% to 30%.◦ Discount on sales to competitors more than 30%.◦ Pretax profit margin of 4% to 10%.◦ Low debt.◦ Consistent, positive cash flow.

Strategy – Target Company Profile

Products

◦ 200 to 4000

◦ Often specialized in a single application, process or technique.

◦ May have patented technologies.

◦ Often weakly supported with technical and customer service.

◦ Nearly 100% self manufactured.

Strategy – Target Company Profile

Management

◦CEO is the owner/founder. Usually with a science background.

◦Receptive to a combination, buy-out or other strategy to build a solid, sustainable business.

◦Little managerial depth.

◦Often a strong technical employee responsible for manufacturing and product development.

◦Short on general management and marketing capabilities.

Strategy – Target Company Profile

Other

◦Usually a single manufacturing facility.◦ISO 9001 & 13485 certified.◦Weak Internet presence.◦Poor pricing execution. Additional margin of 10% to 20% may be

available.◦Minor catalog. Often not more than a price list. ◦Low visibility to potential customer base.◦Technically innovative, but lacking capital.◦Motivated toward security rather than growth.◦Product quality good. Delivery often not reliable.

How? Strategy Summary

Operational integration will create a powerful foundation to build the business through:

◦ Direct product distribution to end use customers*

◦ Improved quality, availability & reliability

◦ Expanded global sales & market reach

◦ Improved research & product development

◦ Modern business processes

How? Strategy Summary

Profitability will be increased by:

◦ Higher GPM from direct distribution to customers *

◦ Rationalizing manufacturing & complementary product lines

◦ Spreading fixed cost burdens over higher volume

◦ High marginal contribution from incremental revenue

How? Strategy Summary

Revenue growth with improved marginal contribution will result from:

◦ Combining customer bases: acquired products to existing customers; existing products to newly acquired customer base.

◦ Access to new geographic markets – achieving a 50/50 sales mix.

◦ New products – Internal

◦ New products – As a Reseller

◦ Enhanced product marketing, including Internet sales.

◦ Access to Bulk Sales/Trading or Tender business.

Profit Leverage from Direct Distribution

Target Company New Company

Revenue Sources:

Direct Sales 25% 80%

Sales to Competitors 50% 0%

Distributor Sales 25% 20%

Gross Margin:

Direct Sales 65% 72%

Sales to Competitors 35% n/a

Distributor Sales 42% 50%

Overall Gross Margin 44.25% 67.60%

Strategy – New Company Profile

A leading market position in 2 to 4 product categories.

Greater than 80% of sales directly to end-users.

A modern Internet site where customers can easily locate, qualify and order products.

Cost economies in physical distribution and facilities.

Improved control and reliability over distribution.

Strategy – New Company Profile

Integration of marketing programs and addition of resources necessary to market effectively by Internet, catalog, trade-show promotion, general product promotion and advertising.

Improved company resources to support the customer.

Access to a broader technology toolbox.

A planned, prioritized and effective product development program.

A global company.

NDA Company Example

( $ in millions ) @ Purchase @ Sale

Revenue $32.3 $54.4

EBITDA $4.4 $5.7 $14.7

Gross Profit Margin 42.3% 42.3% 67.6%

Purchase/Sale Price $32.3 $54.4 $108.8

Debt & Cash $3.7 $2.9

Revenue Multiple 1.0x 1.0x

EBITDA Multiple 7.4x 9.7x 7.4x

Multiple on Investment 2.6x 5.8x

IRR 21%

Incremental SG&A Expense $4.9

Development of the Idea

Sigma-Aldrich

◦ 80% GPM◦ Concerned customers.◦ Little management sophistication.

ICN Biomedicals

◦ Manufacture almost nothing.◦ Customers searching for products.◦ High, increasing margins. Lots of new business.◦ Small, specialty suppliers.◦ Management buy-out?

Development of the Idea

Chemdex

◦ In depth with supplier development & good at it.◦ Loads of business & industry intelligence.◦ Confirmed all that I had been thinking.◦ Contacts

Buy ICN Biomedicals

◦ Package the idea◦ THP◦ Research◦ Expanded Strategy

Products

Fine (Synthetic) Chemical Biologic

Products

Fine Chemical: a chemical element or compound of known purity with specific performance characteristics related to molecular structure often modified through chemical synthesis.

Biologic: a chemical compound or process naturally occurring within biologic organisms. The tools and techniques for assessing or modifying biologic compounds is different from synthetic chemistry.

Products

Alfa Aesar is a leading fine chemical company & division of Johnson-Matthey.

Organic reagent chemicals used in research are one of several product categories.

Products

R&D Systems is the main brand name for Techne Corp. products.

Products for molecular biology & cell research are a leading product line.

Products

Sigma-Aldrich is the market leader in biological reagents.

Among Sigma’s line of products is an extensive offering of antibodies. Antibodies fight bacteria & viruses.

Products - Example

Fine Chemical: Acetominophen (Tylenol)

Biologic: Agarose (used in electrophoresis) extracted from Seaweed

Product - Example

Electrophoresis is a common biologic technique for measuring and separating proteins and DNA.

The basic chemicals that comprise the genetic code; adenine, thymine, guanine & cytosine are isolated for research from salmon sperm.

Products - Example

Titanium – a non reactive metal often used in protective coatings and paints.

Many synthesized variations of titanium meet differing application requirements.

Products - Example

Solvents – one of numerous fine chemical categories. Solvents are used to dissolve, clean or decontaminate.

Solvents used in biotech research & applications require ultra high levels of purity.

Products - Example

Acetone is a common solvent also used in household applications.

eCommerce Dynamic

Products are numerous and extremely complex. It is difficult and costly to locate primary suppliers. The supplier base is huge and fragmented. The customer base is huge and fragmented. The market is global. Purchase specifications and decisions are made primarily

by individual laboratory or facility and scientist. Accessibility is the key. eCommerce is an EQUALIZER.