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AaiPharma Tries to Regain Its Footing in the Contract Drug Research Industry

Posted on: Thursday, 26 January 2006, 00:00 CST

By Sabine Vollmer, The News & Observer, Raleigh, N.C.

Jan. 26--A Wilmington company is counting on the Triangle to assist in its rebirth.

AaiPharma is trying to regain its footing in the contract drug research industry less than two years after executive fraud triggered a financial crisis.

The company is now emerging from bankruptcy, and a new management team made up mostly of transplants from industry giant Quintiles Transnational in Durham is aiming to boost revenue by as much as 50 percent over the next two years. To support that growth, Ludo Reynders, aaiPharma's chief executive, expects to hire at least 250 people, a significant number of them to rapidly expand the company's Triangle operations.

Reynders said a second corporate office in the Research Triangle Park area will be part of the expansion, and that he could envision a day when aaiPharma employs more in the Triangle than the nearly 400 people it now employs in Wilmington.

"There's no doubt about it: The RTP area is going to be very important for aaiPharma," he said. But that doesn't mean the company will move its corporate headquarters out of Wilmington in the near future. "That would be a slap in the face of the employees who stayed with the company through the bankruptcy," Reynders said.

Already, the company has opened a Phase I clinic in Morrisville, where generic drugs are tested in people before regulatory review. The clinic is aaiPharma's second Triangle facility. It increases the company's local employment to about 50.

It's a good time for a fresh start.

The contract research business is booming, analysts said. Increased regulatory scrutiny is leading to longer drug tests or trials with more participants. In addition, many drug makers are contracting out more of the testing because it is cheaper than doing it in-house. The fastest-growing segment of the business is for biotech and specialty pharmaceutical companies. These tend to be smaller and have fewer resources to develop new drugs in-house and pursue niches, such as treatments for heart disease, cancer or gastrointestinal illnesses.

It makes sense for aaiPharma to expand its presence in the Triangle, an area considered the U.S. capital of contract research organizations. But not only does the Triangle have one of the largest concentrations of CROs, it also is a biotech hotbed. That makes it easier to recruit new employees, Reynders said, and it gets the company closer to current and potential clients.

But success is not guaranteed.

The company plans to aggressively pursue new clients, mostly among biotech and specialty pharmaceutical companies and generic drug makers.

"Going there is going after growth," said James Kumpel, a Friedman Billings analyst who tracks the CRO industry. "But going there also creates challenges that are not the norm in the CRO industry."

It's a slice of the market with wildly differing interests, Kumpel said. Time is of the essence for makers of generic drugs. Biotech and specialty pharmaceutical companies want targeted expertise. A CRO pursuing that business needs forward-thinking management and employees whose expertise goes beyond working with large pharmaceutical clients, he said.

"We have to deliver a lot of new business," Reynders acknowledged. "We have to regain our position in the marketplace. But [coming] out of financial distress, we're really hungry. That gives us the right culture to focus on opportunities we otherwise wouldn't."

He can even imagine taking the company public again. AaiPharma's stock, which now sells for pennies, will stop trading when the company emerges from bankruptcy, which could be next month.

Just two years ago, aaiPharma was a rising star.

A series of key acquisitions in the late '90s had given the company -- then known as Applied Analytical Industries -- a new line of business testing experimental drugs in humans. A decision to add drug sales to the revenue mix a few years later coincided with the struggle by large pharmaceutical companies to fill their drug development pipelines. While traditional CROs floundered, aaiPharma flourished. Within two years, revenue increased 68 percent to about $237 million in 2003, according to filings with the Securities and Exchange Commission.

In August 2003, the company announced it was merging with CIMA Labs, a Minnesota company that had developed a method to turn injectable drugs into pills. Three months later, aaiPharma's stock was added to the Nasdaq Biotechnology Index. To become a member, companies must be worth at least $200 million in stock, and at least 100,000 of their shares must change hands daily. In January 2004, aaiPharma's stock traded as high as $31.85.

But in February 2004, aaiPharma's rise stopped abruptly when the company took a $16 million loss for returned inventory of an injectable asthma drug. In April 2004, the U.S. Attorney's Office and the SEC began investigations of the company's financial statements, including reported drug sales.

During the following 13 months, aaiPharma went into a free fall. It was sued by CIMA Labs, which said it would never have agreed to the merger if financial statements had been accurate. Revenue dropped, layoffs and attrition reduced the number of employees from about 1,300 to about 850, and the stock was delisted after plunging below $1 per share. Amid the turmoil, the company's chief executive and at least one board member resigned, and the former chief operating officer pleaded guilty to altering financial records.

Right in the middle of it all, Reynders took over as CEO.

His first thought, he said, was to buy the company and turn it around. He had left Quintiles, where he had built the international CRO business from scratch, the year before and was looking for something to do.

AaiPharma's creditors convinced him to sign on as CEO.

He began repairing the damage and restructuring the company's debts in bankruptcy, and now has five former Quintiles executives working for him.

Quintiles is "still part of my heart," he said. But that doesn't mean aaiPharma is going head-to-head with Quintiles. Both companies are full-service CROs, but Quintiles is best known for conducting international clinical trials for large drug makers.

"We don't want to do the same thing we did at Quintiles," Reynders added. "Why do the same thing twice?"

AAIPHARMA TIMELINE

1979: Applied Analytical Industries is founded in Wilmington as a chemical lab.

September 1996: Begins selling stock to the public.

November 2000: Name changes to aaiPharma.

2001: Begins buying the rights to drugs on the market as it changes its focus from helping pharmaceutical companies test new drugs to establishing its own product line.

August 2003: Announces plan to merge with CIMA Labs, a Minnesota company with a method to turn injectables drugs into pills.

November 2003: Stock becomes listed on the Nasdaq Biotechnology Index.

February 2004: Announces it will take a loss of nearly $16 million for returned inventory of an injectable asthma drug. Shareholders sue, alleging the company withheld financial information.

March 2004: Board of directors initiates an investigation of "unusual sales"; Philip Tabbiner resigns as chief executive, and Frederick Sancilio returns from semiretirement to lead the company.

August 2004: CIMA sues to get back $11.5 million after the merger between it and aaiPharma fails. CIMA claims it would not have agreed to the merger if aaiPharma's financial statements had been accurate.

September 2004: Founder and chief executive Frederick Sancilio retires again. Ludo Reynders becomes CEO. A second round of layoffs reduces the number of workers worldwide to about 930.

April 2005: Nasdaq delists stock.

May 2005: Files for bankruptcy protection.

June 2005: David Hurley, former chief operating officer and executive vice president, pleads guilty to fraud and conspiracy charges for his part in a scheme to inflate the company's sales results in 2003 by altering financial records.

July 2005: Sells pharmaceuticals division to Xanodyne Pharmaceuticals, of Florence, Ky., for $209 million.

January 2006: U.S. Bankruptcy Court approves plan to emerge from bankruptcy as a privately held company.

Sources: News reports and company Web site

--Compiled by news researcher Susan Ebbs

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AAII,

Source: The News & Observer

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