University of Michigan Food History Essay Word count at least 600 Question: In modern times humans have increasingly become separated from the sources of

University of Michigan Food History Essay Word count at least 600

Question:

In modern times humans have increasingly become separated from the sources of their food. What factors have caused this transformation, and what have been some of the effects of this “alienation from nature”?

Writing requirement:

1) THESIS STATEMENT. Make sure you address all parts of the prompt/question, and be specific. For example, if you are answering question 1, you must address both parts of the prompt – the factors causing separation from food sources AND the effects of this separation. (“Urbanization and the mass factory production of food during the Industrial Revolution caused humans to be increasingly alienated from nature and their food sources. The most important long term effects have been environmental pollution and cruelty toward animals.”) Your thesis statement needs to state your complete answer, which you will then go on to “prove” with specific examples in your essay.

2) OUTLINE/STRUCTURE. As you set up your outline (see template in midterm essay module) make sure that in addition to a clear thesis statement you’ve written down strong topic sentences and specific examples for each paragraph. In your midterm essays many of you started off with great ideas but did not provide specific examples. For example, if you wrote “Crops from the Americas led to many important changes in Europe,” you should go on to define what crops and what exactly those changes were; did the population increase because of corn and potato consumption? Provide a statistic, tell me where and when this happened. Once you’ve given your specific examples you should explain why and how this helps prove your thesis.

3) CONTEXT. Remember to address the “Five Ws” in your essay – who, what, when, where, and why – especially as you are setting up the historical context.

4) TEXTUAL SOURCES. Some of the readings that will help you most in your final essay prep:

Question 1: Cronon (“Nature’s Metropolis”), Pollan (Botany of Desire), Opey’s (“Chitlin Circuit”) S
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LAB INTERNATIONAL INC.
potential investors / institutional buyers of LAB Pharma: Angel investors that are particular interested in the drug
David Jagodzinski wrote this case under the supervision of Professor James E. Hatch solely to provide material for class discussion.
The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have
disguised certain names and other identifying information to protect confidentiality.
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Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca.
Copyright © 2009, Ivey Management Services
Version: (A) 2009-04-20
INTRODUCTION
It was early March 2006, and Andrew Reiter, chief financial officer (CFO) of LAB International Inc., was
faced with a significant fundraising decision. Although a number of alternatives were being considered, a
proposal to sell1 one of the company’s two divisions in the form of an initial public offering (IPO) had
been recently presented to the company as part of a pitch by Desjardins Securities (Desjardins). This
alternative was the focus of Reiter’s attention.
LAB INTERNATIONAL INC.
LAB International Inc. (LAB) was a Canadian health-care company founded in 1998. LAB currently had
two distinct operating units: LAB Pharma, which focused on developing drug therapies that could be
delivered via inhalation, and LAB Research, which provided preclinical contract research services to the
pharmaceutical and biotechnology industry. LAB began as a contract research organization (CRO) and had
operations in Canada, the United States, Denmark and Hungary. The LAB Pharma subsidiary was created
in 2004, following the acquisition of a Finnish pharmaceutical company focused on inhalation
technologies. LAB was based in Laval, Quebec, and had approximately 450 employees.
LAB Pharma
LAB Pharma’s focus was the development and manufacture of inhaled therapeutics. The lead product of
the subsidiary was a novel fast-acting formulation of fentanyl, a widely used opiod analgesic that was
administered using the company’s European-approved TAIFUN dry powder inhalation platform. The
product was currently in Phase IIa studies for the treatment of breakthrough cancer pain. (See Exhibit 1 for
1
In the field of finance, the term “spinoff” usually refers to a new firm created by a company from the assets of a division of
the company. The shares are simply given to the company’s existing shareholders. Alternatively, if the shares of the new
firm are sold to the public through an IPO, the new firm is often called a “carveout.”
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a description of the phases of drug development.) The company was near completion of the recruitment of
subjects and hoped to have preliminary results by the end of the second quarter of 2006.
If the company’s development plan was achieved, the company would then conduct additional Phase II and
Phase III trials and be able to have the product on the market by late 2009. The product would likely be
licensed to another company, which would result in the receipt of milestone payments at the end of each
phase of trials and a royalty stream for numerous years thereafter. Analysts2 had estimated that if a license
were successfully negotiated, it could result in an upfront payment of $US10 million, milestone payments
of US$22 million and a royalty rate in the 10 to 15 per cent range, which would amount to roughly US$5
million to $US12 million per year, depending on the market size and competitive environment. The
company was in the preliminary stages of seeking out a licensee.
LAB Pharma’s pipeline also included growth hormone–releasing hormone (GHRH), a product that
targeted malnutrition in patients with chronic renal failure and in persons with other growth-hormone
deficiencies. GHRH was currently being studied in a pilot Phase II trial, and results were expected in mid2006.
Another pipeline product was calcitonin gene-related peptide (CGRP), which had completed Phase I
studies for the treatment of asthma. The company had initiated preparation for a Phase II trial and expected
to soon begin enrolment of subjects.
LAB Pharma’s two proprietary inhaler platforms, TAIFUN and LABHaler, could deliver LAB Pharma’s
own products and potentially those of third parties. TAIFUN had been approved for use in a number of
European countries.
LAB Pharma’s main activities took place in Turku, Finland, while a smaller team was based in Laval,
Quebec.
Over the next 12 months, the LAB Pharma business unit hoped to achieve a variety of value-creating
milestones:
•
•
•
•
•
•
•
Completion of the fentanyl TAIFUN Phase II program and preparation for Phase III
Completion of CGRP Phase II study and the GHRH Phase II pilot study
Out-licensing of one or more of the development products
Licensing the use of the inhalation platforms for third-party product development
Acquisition of additional platform delivery technologies and innovative product offerings through cosponsored programs, joint ventures and/or strategic alliances
Increasing the scale of European manufacturing capabilities and identifying a U.S. manufacturing
partner
Aggressively pursuing synergistic acquisition opportunities
Although many potential milestones could occur over the next year, due to the research and development
nature of the business, most were uncertain and relied on either positive outcomes from clinical trials or
locating potential partners for licensing, manufacturing or distribution.
2
Source: Maher Yaghi, “LAB International Inc. — Is Breaking Up Hard to Do?” Desjardins Securities Inc., February 15,
2006, p. 23.
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LAB Research
LAB Research provided preclinical contract research services to the pharmaceutical industry through five
facilities located around the world, a number of which had been recently acquired. The five facilities had a
combined space of 269,000 square feet and almost 400 employees. With these acquisitions, LAB Research
had a base of more than 500 biotech and pharmaceutical clients worldwide and performed more than 700
studies yearly. (See Exhibit 2 for an overview of the CRO industry and Exhibit 3 for a summary of the
company’s worldwide facilities.) Conduct research on very specific area of the product, the companies can outsource part
CRO -> Contract research operation
of their scope to these CRO companies Eg. The toxicity of the drug
The focus of LAB Research was to become the pre-eminent provider of preclinical support services to the
bio-pharmaceutical industry worldwide by executing the following business strategy:
•
•
•
•
Providing a full spectrum of preclinical services
Increasing geographical presence in low-cost areas
Continuing investment in additional capabilities, equipment, processes and facilities necessary to
sustain profitable growth, high-quality levels and timely service
Maintaining strong client relationships by broadening the service offering with an emphasis on timely
They need to have lower research cost than the pharms. They probably have specific facilities and
execution.
experienced professionals to conduct experiment, that makes it having a lower cost in the research. For
pharms that do not have such resources but with only a few drugs to develop, it is more cost efficient to
outsource those research to these CRO companies.
LAB Research differentiated itself from the competition:
•
•
•
The Montreal facility offered tax credit relief and access to university biological expertise (with five
major universities).
LAB’s facility in Denmark (Scantox) had an international reputation for scientific expertise in the use
of specialized animal models in drug development programs.
In Hungary, the structure provided an extremely low-cost overhead, easy access to European
community markets, and a skilled and stable workforce.
LAB’s CRO revenues had significantly increased since the company went public in 2002 as a result of the
Danish and Hungarian acquisitions. Revenues in 2005 were more than $46 million, up from just $15
million in 2003. The European operations now provided a significant portion of the CRO’s revenue and,
thereby, an increased dependence on the European pharmaceutical industry and foreign exchange risk.
However, the European acquisitions also acted as a natural hedge to LAB Pharma’s Finnish operations.
FINANCIAL STATUS AND CASH FLOW POSITION
LAB’s recent income statements, balance sheets and statements of cash flow are seen in Exhibits 4, 5 and 6
respectively.
The LAB Research division provided the company with ongoing access to capital through its ability to
generate strong cash flows. LAB International had recently obtained $12.3 million in cash from a private
placement. It had also negotiated a sale-leaseback of one of its facilities that netted $2.7 million for the
company. As a result, the company currently had approximately $16.9 million in cash. LAB’s drug
development burn rate3 was approximately $0.85 million per month, and the company had capital
expenditure requirements of approximately $3.5 million for 2006.
3
The burn rate refers to the net cash required to operate a company over a period of time, such as one month.
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Stock Price Performance
Andrew Reiter, the CFO, noted that LAB International’s stock was trading at $1.09 per share, 5 per cent
off its 52-week high of $1.15 per share, which resulted in the company’s market capitalization of $76
million. The stock price had been volatile over the past year, trading at a low of $0.63 per share in June
2005. (See Exhibit 7 for recent stock price performance.)
Reiter felt that the current stock price did not accurately reflect the true value of LAB International. His
meetings with several institutional investors had reinforced this view. A recent research report by Claude
Camiré of Paradigm Capital highlighted the view of “the street.”
We believe LAB trades at a “holding company” discount. As such, we believe the
company is ripe for a “shareholder value” maximization strategy, the easiest of which is to
monetize its fast growing and profitable LAB Research division.
At the current market capitalization . . . we believe this represents the value solely of the
LAB Research segment. If LAB can monetize its value, we believe investors will be left
with a well funded innovative drug company with a drug technology platform and three
drugs in clinical trials.
In essence, we believe LAB’s market cap represents less than the fair value of the LAB
Research business offering LAB Pharma as a “Free option.”4
Another research report by Maher Yaghi at Desjardins Securities echoed this view:
Our investment thesis for LAB is derived from the fact that the market does not fully value
the company’s ‘hybrid’ structure and a catalyst of some sort is required for investors to
alter their views on the valuation of the company . . . . As such, we believe that
management should consider splitting up the company in order to provide investors with
two pure play companies having distinct individual prospects and risk profiles rather than
a hybrid company that is not fairly valued by the market.
Reiter was concerned that the market appeared to be focused on the undervalued stock
rather than what the company had been attempting to achieve with its two divisions.5
ALTERNATIVES BEING CONSIDERED
One option available to Reiter was to continue the company as it was and to keep ownership of both
divisions. Under this arrangement, Reiter would continue with the current funding model of using excess
cash flows from the CRO division to meet some of the needs of the LAB Pharma division and periodically
returning to the market for additional capital to meet the remaining need. However, the LAB Research
division was also in need of cash because it planned to expand its Laval facility and the Hungarian and
Danish facilities in the future. By transferring much of its cash flows to the LAB Pharma division, LAB
Research would have fewer funds to invest in its own facilities and would need to look for alternative ways
to raise cash. In January 2006, LAB Research had signed an agreement to expand its Laval facility, and the
$8.5 million renovation would soon be under way. An additional $25.5 million in expansions were also
4
5
Claude Camiré, “LAB International Inc. — More Than a Puff,” Paradigm Capital Inc., March 16, 2006, p. 3.
Maher Yaghi, “LAB International Inc. — Is Breaking Up Hard to Do?” Desjardins Securities Inc., February 15, 2006, p. 28.
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being contemplated to be carried out over the next three years. These expansions would allow the LAB
Research division to increase the number of its animal rooms, which, in turn, would increase revenue.
Moreover, funding the company was expected to become more difficult and, as trials for the three products
progressed, further cash needs would increase significantly. Thus, LAB would need to go to the market
more frequently. However, the company had just raised $12.3 million in December 2005 and would need
to wait until at least the fall before attempting to raise additional capital. The ability to raise capital at that
time would be very dependent on the company’s research progress and market conditions at the time, both
of which were highly uncertain.
A second option was to sell the LAB Research division outright to a private equity firm or to a competing
CRO. This option would provide cash fairly quickly; however, given that the competitors knew that LAB
was looking to sell one division to raise cash for its other division could mean a reduced selling price,
compared with other potential sale options. Attracting the interest of private equity investors in a firm that
was as small as LAB could also be difficult. LAB Research generated approximately the minimum level of
EBITDA to attract the attention of private equity firms, and its need for additional capital for expansion
would make selling the company that much more difficult. This option would have the benefit of providing
several years’ funding to the cash-intensive Pharma division, the division that had the greatest (albeit risky)
upside potential.
A third option would be to sell the LAB Pharma division to another firm, such as a pharmaceutical or a
drug delivery company. This option would be attractive because it would result in selling off the division
that continually consumed cash and would solve the funding issue at the company. One of the drawbacks
to selling the LAB Pharma division would be that LAB would be essentially admitting that it made a
mistake in purchasing Focus Inhalation Oy. As a result, investors might be reluctant to fund the company
in the future. Second, Reiter did not know what he could receive for the division because the market did
not seem to be attributing much value to the LAB Pharma division. Also, with three products in
development for three completely different indications, finding a company for which the product portfolio
would be a fit could prove to be very challenging.
THE NEW PROPOSAL
Issues to Consider
Over the past several months, Reiter and LAB had been meeting with investment bankers to discuss how to
increase shareholder value. A proposal by Desjardins Securities (and one echoed by several research
analysts) recommended that LAB spin off one of its divisions into a separate entity, so each division would
be valued independently.
In contemplating a spinoff, Reiter and LAB had several issues to consider. The first was whether to sell the
entire entity in a single transaction or to arrange a staged transaction. A single transaction would allow
LAB to make a clean exit from the business and remove any secondary transaction risk. However, by
performing a staged transaction, a depressed valuation at IPO could be corrected in the future after the
market became comfortable with the new entity.
A second issue to consider with a spinoff was whether the spinoff would include a treasury or secondary
component. By simply selling the stock in the subsidiary, the remaining LAB entity would receive the full
amount of funds less the transaction costs. By having a secondary component to the transaction, the
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subsidiary would also be issuing additional shares from treasury to use for its own needs. However, by
having the secondary component, the size of the issue would also be increased relative to simply selling the
company’s shares in the subsidiary. Thus, the size of issue that the market was willing to fund at one point
needed to be considered.
Another potential alternative would be to spin off a division in the form of a stock dividend to current LAB
shareholders. If the company chose this route, no potential valuation issue would need to be considered
because the market would price each company automatically. With this option, the company would need to
consider the price at which each piece would potentially trade at ex-dividend. Lastly, although avoiding a
valuation challenge, this option would not result in any financing to LAB or to the spun-off entity.
At his last meeting with the bankers, Reiter had inquired about the costs of a potential transaction.
Desjardins Securities indicated that it would seek cash fees of 6 per cent of gross proceeds in the event that
LAB Research was spun off. If LAB Pharma were to be spun off, Desjardins would seek cash fees of 7 per
cent of gross proceeds and an additional 7 per cent of issued stock in the form of broker warrants equal to
the terms of warrants issued in associated with an the offering, if any.6 If the dividend option were chosen,
Desjardins would seek 2 per cent of the transaction value and act as transaction advisor to the company.
Lastly, legal fees associated with drafting a prospectus and documents to split the company up, auditing
costs and other transaction costs would total approximately $2 million. If the dividend option were taken,
then the costs would be approximately $1.5 million.
Valuation of the Spinoff
While reviewing the Desjardins pitch in more detail, Reiter noticed that the bankers had used several
methods to value each subsidiary. For the LAB Research side, the bankers used comparable company
analysis and discounted cash flow analysis, whereas for the LAB Pharma side, their primary tool was
relative enterprise value analysis.
LAB Research: Comparable Company Analysis
The data on comparable companies is provided in Exhibit 8. When Reiter reviewed the provided
comparable companies, he noted that they included many of the public entities in the CRO space.
However, he wondered whether the comparables should be further modified in accordance with the size of
the company bec…
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