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(2) 9B06M031. rP os t. Page 2. Kohlberg Associates, started in 1989 by Peter Kohlberg, earned $7.5 million3 a year in healthcare consulting revenues, with a third of revenues coming from public-private partnership consulting (or learning how the private sector could work with the public sector and vice versa); another third coming from healthcare operations advice; and the last third from ethics and risk management advice. Most of KA’s clients were Canadian firms, while 20 per cent, were American firms. In 2005, KA employed 35 consultants in a workforce of 55.. op yo. Hughes had started with KA in 1990 and had worked hard to build up his healthcare research practice. He had 15 consultants and 10 staff members working with him and his team collaborated frequently with the teams of the other two KA senior partners, Jason Thime (Public-Private Partnerships) and Sarah Linqvist (Ethics Practice). For KA’s organization chart, see Exhibit 2. In considering his long-term career prospects, Hughes had once entertained thoughts of jumping ship from KA to Centinel or another healthcare-related firm. Although Hughes believed that he had not told anyone at KA about his longerterm aspirations it was possible that after a few drinks he had casually discussed his aspirations with a coworker during an office retreat the previous Spring.. On October 5, 2005, Hughes, on behalf of KA, had given the keynote address at a major Canadian healthcare conference. The topic of the speech was “False Advertising Hurts Us All.” The speech and Powerpoint presentation had been prepared, jointly, by Hughes and David Monk, senior director of a major Canadian healthcare research funding institution.. No. tC. During the speech, Hughes referenced GBN’s product, an NSAID, as only achieving 60 per cent of the efficacy rate touted by the firm. For his seven minute portion of the talk (Monk had responsibility for the other 13 minutes of the 20 minute presentation), Hughes had talked about false advertising in the Canadian prescription and over-the-counter market. As his area of expertise was in NSAIDs, Hughes, in his first Powerpoint slide, displayed a scanned copy of a 2005 GBN brochure which promoted its NSAID drug as being “the NSAID most recommended by Canadian physicians for treatment of arthritis.” In the title of that Powerpoint slide was the sentence: “Dubious Claim?” In his second slide, Hughes showed a background picture of a pile of papers (representing, in his opinion, academic research) with the words “GBN’s NSAID only achieves 60 per cent of the efficacy rate touted — 2004 Federal government-funded academic study.” Hughes was very familiar with the referenced academic study and he knew that GBN was in the process of challenging the study’s methodology. In addition, Hughes knew that the same study had found Centinel’s product to be “only 80 per cent as effective as advertised” but was not sure of Centinel’s reaction to that finding. In fact, he was not even sure that anyone at Centinel had seen the study as it was conducted at a university in Saskatchewan.. Do. There were no other words on Hughes’s first two slides and, as the conference proceedings were not being videotaped, Hughes could not recall if he had mentioned that GBN was disputing the study or that Centinel’s product was also found lacking. In fact, in an attempt to embellish his slides (and given that he had to cram his 15 minute presentation into seven minutes) he likely did not elaborate. Hughes was certain, however, that he had spent the first three minutes of his talk emphasizing the need for higher ethical standards in the medical community. “We have to hold ourselves up to a higher standard than we’ve done in the past,” he had admonished; “Our very reputation depends on it.” In January 2005, Hughes had been invited by Centinel, as part of their “Research-At-Lunch” employee presentation series, to give a talk about the state of the NSAID marketplace. He was aware of the competitive nature of the industry and only talked about the untapped potential for NSAIDs in under-. 3. All currency in Cdn$ unless otherwise specified.. This document is authorized for use only by Faisal Nazir at Institute of Business Administration (IBA) . Copying or posting is an infringement of copyright. [email protected] or 617.783.7860..
(3) 9B06M031. rP os t. Page 3. medicated places like Asia and South America. As far as Hughes recalled, he did not talk about GBN, a Canadian-run firm. At Centinel, there were many instances of researchers first invited to give a talk and then offered a consulting contract with the firm. Of Centinel’s core group of 35 NSAID researchers, 32 had first given a talk prior to receiving a lucrative invitation to join the firm. Hughes had received no such invitation as of yet. Hughes had dinner with Centinel’s senior executives and talked about general subjects. The dinner was held and paid for by Centinel at an upscale downtown Toronto restaurant. In front of the other invitees, some of whom were researchers from current Kohlberg clients, Hughes was asked by Centinel executives about his plans. He responded with something glib.. op yo. Dutifully, Hughes listed the Centinel presentation on his curriculum vitae (CV), uploaded it to KA’s publicly-accessible website, and promptly forgot about it. At KA, Hughes was in charge of healthcare research and produced a quarterly report on the state of the North American healthcare industry. He had three people working for him, two of whom were senior researchers. In subsequent updates of his CV, six pages in length, the Centinel section was reduced from one paragraph to one line.. KA had been working closely with David Monk’s group to secure government funding for additional research in the healthcare field. For KA, Monk, and the Canadian government, it would be a win-win-win situation: Kohlberg Associates would have a government-funded study contributing in the range of $350,000 per year to revenues for the next five years; the study would enhance the stature of Monk’s organization; and the Canadian government would be seen as being proactive in funding healthcare research, a priority item on its budget. But securing collaboration with Monk had not been simple: had taken Kohlberg two years to secure a meeting with Monk, and only recently did Monk, somewhat reluctantly, agree to research and deliver the joint study on advertising practices in the Canadian healthcare industry. Titled “False Advertising Hurts Us All,” it would be Monk’s first collaboration with any organization outside his research institution in the last decade.. No. tC. Though Hughes had checked all his facts, he had relied mostly on his three associates to put together the presentation. One of the associates had asked Hughes, the day before the presentation, if he wished to check the presentation over, or send it to Peter Kohlberg, seeing as the submission deadline was in two hours (the conference required presenters to submit their Powerpoint presentations on a compact disc, a week in advance for inclusion in the conference proceedings, but Peter had asked for a special extension on the deadline in light of some unexpected delays). Hughes replied that, no, the presentation was fine and should be sent immediately. The associate then hit the “send” button on the email message he had been composing, sending Hughes’ presentation to all conference participants. What Should Hughes Do?. Do. When Hughes entered his firm’s conference room on the morning of October 6, 2005, he had been intending to take a break from a report he had been preparing for a current project. Kohlberg Associates had television access in two of its conference rooms, and the television sets in both rooms were typically switched on during work hours. If the conference rooms were not in use by staffers or booked off for client meetings, employees were allowed to take their breaks and eat lunches inside. After the initial shock of hearing the allegations against him, a few thoughts passed through Hughes’ mind. First, he was not sure if Monk had seen the press coverage and if not, if the word would eventually get to him. Second, Hughes did not know if Kohlberg had seen the news as well. With only a scheduled client meeting at 2 p.m. in Toronto that afternoon, Kohlberg was very likely in his hotel room or gym, watching the morning news. “I don’t know where Peter is, but there’s half a chance that he caught the news”,. This document is authorized for use only by Faisal Nazir at Institute of Business Administration (IBA) . Copying or posting is an infringement of copyright. [email protected] or 617.783.7860..
(4) 9B06M031. rP os t. Page 4. thought Hughes. Kohlberg (and indeed, everyone at KA) had been keeping abreast of national news stories as the Canadian government was voting on a major bill to provide additional funding to Canadian healthcare firms, in an attempt to build a healthcare industry cluster in Quebec. In addition, Centinel was in the process of shutting down a Canadian plant, drawing the ire of the local community in which the plant was located, as production responsibility would then be diverted to Centinel’s lower-cost Mexican plant. Though neither Centinel nor GBN were current clients of Kohlberg, Hughes knew that Kohlberg was interested in Centinel’s troubles and mused that KA could provide consulting advice and that both firms could gain substantially from striking up a working relationship.. op yo. Returning to GBN’s press conference, Hughes realized that he had only caught the last half of the coverage and thus was not sure what GBN’s CEO, Brewer, had said in the first two minutes. Hughes wondered if he could afford to wait until the evening news to review the coverage. Walking over to his company intranet, Hughes saw that the most current version of his CV was up on his website, and that it had been downloaded by visitors 36 times in the last day alone (Hughes received automatic email notification every time a visitor downloaded his CV).. Do. No. tC. Hughes was alone in his firm’s conference room, seemingly frozen to his seat. Although the morning news was now over (the channel was reporting on the day’s weather forecast), Hughes continued to stare blankly at the television screen. Hearing a noise, Hughes turned slowly and noticed that the conference room door was ajar. Even with all his consulting training, Hughes did not know what to do, or if he should do anything at all.. This document is authorized for use only by Faisal Nazir at Institute of Business Administration (IBA) . Copying or posting is an infringement of copyright. [email protected] or 617.783.7860..
(5) 9B06M031. Exhibit 1. rP os t. Page 5. CENTINEL CORPORATION. op yo. New York-based Centinel Corporation had US$4.5 billion in revenues in 2004, up 20 per cent from the previous year. Net profit stood at 15 per cent of sales. Centinel operated in three business segments: Pharmaceuticals, Consumer Packaged Goods, and Industrial Chemicals. Centinel also operated other businesses such as contract manufacturing for pharmaceutical vehicles such as gelatin capsules, and was a wholesaler of bulk pharmaceutical chemicals. Pharmaceuticals, of which the NSAID business unit was a part, accounted for 85 per cent of Centinel’s sales in 2004. While it did not break out the numbers for NSAIDs, observers believed that NSAID sales accounted for a third of Centinel’s pharmaceutical sales and half of pharmaceutical profits. Centinel had three NSAID drugs that accounted for the majority of NSAID sales. Centinel’s pharmaceuticals business was highly regulated in all of the countries in which it operated. In the United States, the principal regulatory authority was the Food and Drug Administration (FDA). The FDA regulated the safety and efficacy of the products offered and Centinel’s research quality and manufacturing processes. This regulatory oversight was similar in other countries with the additional point that in some countries drug prices were regulated by the government. Centinel had a core group of 35 NSAID researchers who conducted research and evaluated potential opportunities for collaboration with educational institutions and other companies with the goal of furthering NSAID research. This team of 35 was well-regarded in the industry for their high ethical standards and rigorous research.. tC. Centinel conducted research internally and innovation by its research and development (R&D) group was key to its future success. Drug discovery, development and commercialization was time consuming, unpredictable and expensive. Observers estimated that Centinel spent, on average, $650 million to develop and bring to market each new drug. This process of discovery through to commercialization could take anywhere from two to 15 years. On average, only one out of many thousands of chemical compounds would prove to be both effective and safe from a medical perspective to be considered a candidate for an approved medicine. A drug candidate could fail at any stage of the process as a result of, for example, poor clinical trials, and/or regulatory uncertainty.. No. Centinel had a growing overseas division which accounted for 30 per cent of firm sales. Most of the opportunity overseas was developing business within rapidly ageing markets such as Europe and Asia. There, Centinel’s well-regarded reputation was a key factor in developing strong partnerships with the heads of state-run medical programs whose support was vital to Centinel’s success. GBN Healthcare. Do. GBN was Centinel’s key competitor in the global market for NSAID drugs. GBN had achieved 25 per cent sales and earnings growth for each of the past three years due to its strong product line-up and wellorganized business development department. In 2004, GBN achieved sales of $458 million and net profit of $90 million. Strong interest from hospitals in GBN’s U.S. market accounted for the majority of sales growth. In addition, GBN’s gross margins had grown while its effective tax rate had fallen due to a restructuring of its operating units to take advantage of corporate tax shelters and government assistance programs. The impact of the currency exchange rate, specifically the rise of the Canadian dollar relative to the U.S. dollar, was mitigated in part by the growth in gross margins. GBN’s healthy gross margins were due to effective cost controls, regular price increases and exclusive contracts at many hospitals in Canada and the United States.. This document is authorized for use only by Faisal Nazir at Institute of Business Administration (IBA) . Copying or posting is an infringement of copyright. [email protected] or 617.783.7860..
(6) 9B06M031. rP os t. Page 6. Exhibit 1 (continued). KOHLBERG ASSOCIATES. op yo. Due to its rapid growth in earnings, GBN had substantial cash reserves and was actively considering acquisitions in both Canada and the United States, according to observers. However, none of these reports could be confirmed. GBN was believed to be strengthening its R&D capabilities by seeking to acquire small drug firms who possessed well-regarded research departments. Growing its R&D core from seven researchers to over 30 was one of the key objectives for GBN over the next three years, according to a speech given by Robert Brewer, president and CEO of GBN. Researchers sought innovative firms who offered them substantial resources and flexibility with which to conduct their research, much of which was time-consuming, detailed work. Research often required collaboration not only within the firm but with others in educational institutions around the world. Excellent relationships were key to getting first access to review innovative discoveries, some of which could lead to the next blockbuster drug.. Kohlberg was a fast-growing health care consultancy that conducted firm and industry research in the global health care field. Kohlberg employed 55 personnel, of whom 35 were consultants. Peter Kohlberg had started Kohlberg in 1989 and had spent the first few years dealing exclusively with the public sector. It was only through the hard efforts of Peter and a core group of three partners that Kolberg generated annual revenues in excess of $1 million, for the first time, in 2000.. tC. Kohlberg focused on the issues that mattered to the Canadian health care industry: Understanding ethical boundaries; operating a successfully health care firm; industry direction; and public-private partnerships. Kohlberg’s consultancy services generated approximately $7.5 million in revenues in 2004, up 45 per cent from the previous year. The firm was in the midst of adding personnel, attracted to the firm for its unbiased reportage, knowledgeable consultants and its excellent reputation in delivering exceptional value for money.. Do. No. Kohlberg’s business had grown from advising on public-private partnerships with regard to the health care sector (for example, how health care investments should be made by the Canadian government looking to build a cluster of biotech firms in Quebec) to advising private sector clients on the state of the industry. Aside from the occasional competitor analysis report, where Kohlberg would be retained by a Canadian firm to evaluate that firm’s closest competitors, the bulk of Kohlberg’s revenues were generated by its research trends group. This research trends group produced a quarterly report on the state of the North American health care industry, which was widely read by stock market analysts, health care firms, researchers in educational institutions and government officials.. This document is authorized for use only by Faisal Nazir at Institute of Business Administration (IBA) . Copying or posting is an infringement of copyright. [email protected] or 617.783.7860..
(7) 9B06M031. Exhibit 2. rP os t. Page 7. ORGANIZATIONAL CHART. op yo. Peter Kohlberg Owner Managing Director. Jason Thime Senior Partner Public-Private Partnerships. Sarah Linqvist Senior Partner Ethics Practice. James Hughes Senior Partner Healthcare Research. 10 Consultants. 10 Consultants. 15 Consultants. 3 Staff. 10 Staff. tC. 7 Staff. Do. No. Source: Company files.. This document is authorized for use only by Faisal Nazir at Institute of Business Administration (IBA) . Copying or posting is an infringement of copyright. [email protected] or 617.783.7860..
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