Issue:March 2016

MANAGEMENT INSIGHT – Why I Sold Xcelience: The Non-Linear Path of Decision-Making


I started writing for Drug Development & Delivery in 2008 with a six-part series on the lessons learned from the management buy-out that created Xcelience. Now I’ve sold the company to Capsugel. Some of you may be wondering, did I sell out? I plan to stay on with Xcelience/Capsugel, and to continue writing these articles, so it only seems fitting that I start the new year off by sharing with you some of the thought process that brought me to this momentous and very emotional decision, as well as some of the lessons I learned in the process.

 I hope that you will follow my reasoning. I’m not going to give you a chronological story. The decision didn’t come about in an orderly fashion.

I remember when I was a student of Microbiology in the 80s in Canada. All science students were required to read Thomas Kuhn’s influential scientific philosophy book, The Structure of Scientific Revolutions. At the time, I couldn’t imagine a duller book. Upon review, it hasn’t changed. And yet, something Kuhn said stayed with me through the decades.

Kuhn says that science doesn’t proceed in an orderly linear direction. We don’t progress from one theory to the next gradually, as each new piece of evidence arrives and alters the course of thought. Instead, Kuhn proposes thinking of an existing theory as a long-standing house. Each piece of evidence that arises to contradict that theory is like a new stone set on the roof of that house. More and more stones are placed on the house, but as long as the roof holds, the theory stands. Oftentimes, the roof stands long after the weight of evidence bearing down upon it seems unbearable. Then, one day, the roof collapses. A new theory is built in its place, using the new stones. Inevitably, we all look back with wonder at how that old house managed to stand so long when the new evidence clearly should have destroyed it long ago.

Major business decisions are no different. In August of last year, Xcelience was absolutely not for sale. Xcelience was my house, in more ways than one. There were four rather stupendous rocks upon the roof of this paradigm in my mind, and yet the roof held. A fifth was about to break it.

The first stone on my roof was technological innovation. To be able to offer complete solubility solutions, we were missing one piece of the puzzle: spray-dried dispersion (SDD) technology. Through its 2013 acquisition of Bend Research, Capsugel was a clear leader in this area. Other players desperate to move into the field have bought SDD equipment, but without experienced staff and engineers operating it, you are acting as hands and tools. I would not be one of them.

The second stone was disruptive technology. Uber is a disruptive technology that upended the taxi industry. I’ve been writing about this quite a bit lately, so it has always been near the edge of my thoughts. If such a disruptive technology were to hit drug development, being at the helm of a small business in such stormy waters is not a secure place to be.

The third stone was the hunger for capital. This is a really big stone, but I had been able to bear it so far. Xcelience was a private company with very little debt, but as the company got bigger, that was going to become harder and harder to maintain. The fees to play in the big leagues are proportionately big. Building a large lab, for example, costs a lot more than building a small one. Daily capital requirements grow with company size as well. You have to pay employees, vendors, and equipment suppliers before you can even begin working for clients, and then you have to wait to be paid. Quick access to working capital is imperative.

The fourth stone was market uncertainty. We’ve had 6 solid years of market expansion as an industry. What would the future hold? I remain optimistic, but also realistic. Nothing lasts forever. The next recession, big or small, will come at some point. What happens if we need capital and interest rates have gone much higher? What if I am forced to sell to a buyer that doesn’t know MY business. I would be relinquishing managerial control to people who don’t know my business like I do, and may not want to run it the way I do.

The stone that would eventually bring the house down is going to sound trivial in comparison to the others, but bear with me. It isn’t. I’m going to call it “the quest for an authentic partner.” Like a bachelor who tells himself he isn’t looking for a bride until he meets the right woman, I wasn’t looking for a buyer until I found the right one. Capsugel’s authenticity made me finally consider settling down for a sale.

Authenticity is what you want in a buyer, but it’s more than that. It’s what good, successful companies in the modern world are. It’s what customers increasingly look for. The days of slick, emotional mottos are slipping away. In the age of the Internet, customers are more sophisticated and educated in their buying choices. Even if you believe people can’t intuitively spot a fake, the digital age has given the market more transparency than ever. Facebook, Twitter, blogs, and 24-hours news are forcing companies to live up to their claims. No ad campaign can survive a thousand blog entries trashing your company.

Authenticity means you don’t oversell or undersell. You impart a true understanding of your product or service and what it can do for clients. Rather than making unrealistic – or unsustainable – claims, an authentic company speaks to its effort, its commitment, and its genuine capabilities. Any company that over promises is a red flag to clients. On the other hand, consumers are more forgiving of an authentic company when it makes a mistake.

In the pharma industry, authenticity is ascertained by word of mouth. Word of mouth is far more powerful than any ad or sales visit.

Unbeknownst to me, four of the five stones rested placidly on the roof of my house on a sweltering Florida day last August, when the knock on the door came. My paradigm stood. I was not for sale.

I was accustomed to the knock. About once a month for the past couple of years, I’ve had suitors call. I always listen. It’s good business to keep evaluating your options for the future. And let’s face it, it’s flattering. I’m not above vanity.

I always knew we would have to sell someday. Eventually the capital needs of our growth would force us to. The management team had a 5-year plan to prepare us for that moment. We were 2 years down that road, and right on target. To sell now would be to sell short. We had great plans, as yet unrealized. We weren’t ready.

Guido Driesen, President and CEO of Capsugel, was a familiar face. Guido has worked at Capsugel for over 30 years. Capsugel has a long-standing reputation as a dependable research-based manufacturer of high-quality capsules. In recent years, it has significantly broadened its capabilities with a comprehensive suite of technologies for designing, developing, and manufacturing a wide range of finished dosage forms. I also had first-hand experience with them as we had been working with Capsugel since 2006. Xcelience made a name for itself back then as the first company in North America to offer the Xcelodose® micro-dosing systems; a piece of equipment we purchased from Capsugel.

When Guido left my office, I turned to my network to confirm my impressions by word of mouth. In 2013, Capsugel bought two of my industry friends. First, it bought Encap Drug Delivery, in Scotland, led by Stephen Brown. I’d visited Stephen in Edinburgh in 2009 and we’d often enjoyed swapping stories about the Great Recession. Stephen assured me that Capsugel had allowed the company to operate with a great degree of independence, and no one had been laid off. In fact, Encap had increased both its sales and its headcount.

Later that same year, Capsugel bought Bend Research. We’d worked with Bend since 2010 and knew quite a few scientists there. I gave a call to Rod Ray, former CEO of Bend Research and current Scientific and Business Advisor to Capsugel, and asked him about his experience selling to Capsugel. He confirmed that the company had also given them great latitude for independence, and hadn’t let anyone go. As with Encap, Bend Research had increased both its sales and headcount.

Rod also told me that Capsugel had negotiated with Bend Research in good faith. As a small business owner, this was extremely important to me. There are only so many hours in a day, and running a company takes most of them. I knew that if I entered into this process with Capsugel, I couldn’t do so lightly. It would be draining.

In truth, it took even more hours than I imagined. First, I decided to open the process up to other bidders. I hired investment banker Neil McCarthy, of Fairmount Partners. Again, this is just good business; a fair process would give me peace of mind that I was getting the best deal possible for the company. That meant creating a bid book; a slick little book that provides an overview of operations. The bid book flushed out more serious bidders, including one which also would have made an excellent buyer. It was difficult to close that other door, but ultimately Capsugel made the best match for our capabilities and had the resources to take us to the next level.

Throughout the process, Capsugel was straightforward and trustworthy – just as Rod had said – in a way that is uncommon in the business world. When Guido presented his offer, he asked only that I not move forward myself unless I was serious and willing to follow through with selling the company.

I remember where I was when we had that conversation. I was in an Airbnb apartment in Bilbao, Spain; a stopover on the way to the CPhI. The cool fall air came in through the cracks of the windows. My wife swung in a little hammock in the living room beside me, listening to my half of the conversation with Guido. She had once wisely told me we had no choice but to put our life savings into Xcelience; we could never live with ourselves if we didn’t try.

It seems so obvious to me now, but that was the moment when I first realized it. I had to sell.

To view this issue and all back issues online, please visit www.drug-dev.com.


Derek G. Hennecke, 
President & CEO, Xcelience