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CHAPIN WILL APPLY $23.7 MIL. IN EXPECTED IPO PROCEEDS TO ACQUISITIONS

Executive Summary

CHAPIN WILL APPLY $23.7 MIL. IN EXPECTED IPO PROCEEDS TO ACQUISITIONS and internal expansions of its blood and biotech product distribution business. "The company intends to use a substantial portion of the proceeds of this offering to fund its proposed acquisition program," the company said in a March 26 prospectus for an initial public offering. Chapin is registering 2 mil. shares at a proposed price of $12-$14 per share. Underwriters are Kidder, Peabody and Sutro & Co. Corona, Calif.-based Chapin was founded in 1974 as a distributor of therapeutic plasma fractions. The firm began distributing biotechnology pharmaceuticals in 1988. Net sales have increased sharply since then, from $14.5 mil. in 1987 to $25.7 mil. in 1988, $30.7 mil. in 1989, $50.7 mil. in 1990, and $56.4 mil. in 1991. The private company's after-tax earnings are difficult to evaluate. Operating income (before compensation to the owner Mark Johnson) was $6.5 mil. in 1991, down from an unusually strong $15 mil. in 1990. As of 1991, biotech product sales had grown to represent 28.4% of Chapin's sales, or $16 mil. Biotechnology products are expected to "contribute an increasingly greater percentage of the company's overall sales." "The company generally does not enter into written agreements with its biotechnology pharmaceutical suppliers," the prospectus says, "and purchases its inventory requirements pursuant to purchase orders issued from time to time in the ordinary course of business." Biotech manufacturers "typically offer their products to several large full-line wholesale drug distributors on substantially similar terms as those offered to the company." Chapin noted that it "is one of a limited number of companies that have entered into a distribution agreement with Centocor for the distribution of HA-1A [Centoxin]." Centocor, however, said April 15 that it will need to develop more efficacy data prior to approval of HA-1A (see previous T&G). As part of its planned expansion of its biotech distribution business, Chapin wants to "develop strategic alliances with emerging biotechnology companies," the prospectus says. Particularly, the firm wants to offer use of its 14-person sales force "well in advance of product introduction dates," thereby helping start-ups "to limit sales and marketing costs associated with the introduction of new products." Chapin has one co-marketing agreement in place, with Hoechst- Roussel for its granulocyte-macrophage colony stimulating factor Prokine. In return for promoting Prokine, Chapin receives a monthly payment "equal to a prescribed percentage of Chapin's Prokine sales," the prospectus says. The co-marketing agreement was signed in November. Prokine-developer Immunex (which markets the product as Leukine) filed suit against Hoechst this month, alleging breach of contract ("The Pink Sheet" April 6, T&G-9). Chapin also distributes Leukine, according to the prospectus. Other products distributed by Chapin include Genentech's Activase and Actimmune, Amgen's Epogen and Neupogen, Ortho's Procrit, Connaught's Cytogam, and Astra's Foscavir. The majority of the company's business, however, comes from the distribution of fractionated blood products. Chapin bills itself as "the only national plasma products distributor to have established supply relationships with all seven of the nation's fractionators," which are Alpha Therapeutic, Armour, Baxter, Immuno-US, Miles, New York Blood Center, and the Swiss Red Cross. In 1991, the company noted, profit margins on blood products was 28.4%, compared to 3.4% for biotech products. The company maintains that its "critical care product expertise and established customer relations," its "capability to accommodate specialized storage and handling requirements" and its "financial strength to maintain adequate levels of inventory" make it an attractive biotech distributor. "Due to the high cost of biotechnology pharmaceuticals...health care providers are placing a greater emphasis on inventory management," Chapin noted. "In order to effectively maintain a just-in-time inventory or otherwise minimize inventory costs, health care providers must have access to a reliable supplier." Another reason Chapin may have sought to enter the biotech distribution business is to ensure access to synthetic blood products resulting from biotechnology. "Several companies in the U.S. and abroad are currently attempting to develop and produce a cost-effective artificial or genetically engineered substitute for albumin, the company's principal plasma product," the prospectus notes. "The company will endeavor to update its product line to include the most cost-effective and technologically advanced products." Chapin was founded by CEO Mark Johnson, formerly employed by Cutter Labs in sales and marketing. Johnson will own 63% of the company post-offering. Senior VP-Strategic Planning Norman Miller joined from Baxter. Among Chapin's directors is Marsam Pharmaceuticals President Marvin Samson.

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