Due Diligence

by Michael A. Kahn

  I was taking notes as she talked.

  “One more thing,” she said. “I found those Federal Express receipts. The ones for the files that I shipped to SLP’s lawyers. It was a lawyer in Chicago. His name is Barry Brauner and he’s at the firm of—”

  “Scott, Dillard and Marks,” I said.

  “That’s right. You know him?”

  I groaned. “I’m afraid so.”

  “He has the documents. According to my inventory list, he also got a set of disks with a copy of the information on Bruce’s computer. I guess someone made a copy for him. Anyway, I sent everything up there exactly a week ago.”

  I told Karen that I would have a messenger service send someone down within an hour to pick up the package for Professor Goldberg. Which got me thinking about the real Professor Goldberg. I gave him a call. His secretary said he was teaching his advanced antitrust seminar but ought to be back in the office in twenty minutes.

  I looked down at my notes. Société Lyons Pharma-ceutique? I flipped through my Rolodex and called Bob Ginsburg—a law school boyfriend turned investment banker at Bear Stearns. We had survived a brief romance that, in classic Cambridge style, got derailed over politics. He was a conservative Republican—one of those pro-life, pro-death types—who was, in that absolutely maddening fashion typical of conservative Republicans, lots of fun, very sweet, and wonderfully thoughtful when not enmeshed in the Cause. We parted friends, and over the years he’d been a terrific source of the types of information that investment bankers possess.

  I reached Bob Ginburg’s secretary. She said he was on the other line and took my number. I returned the other three telephone calls. During the third call, which was with a gabby bankruptcy attorney in Kansas City, Jacki walked in with a note that red: Mr. Ginsburg in on line 1. I covered the mouthpiece and told her to tell him I’d be with him in a minute or so. I finally got rid of the bankruptcy attorney and took Bob’s call.

  As I hoped, he knew all about the Société Lyons Pharmaceutique and their acquisition of Chemitex Bioproducts. “Sure,” he said. “Heller ran that company into the ground. I think SLP may be getting a good deal.”

  “Who’s Heller?”

  “Sammy Heller. He was chairman of Chemitex Industries until they filed for bankruptcy last year in Detroit.

  “Chemitex Industries is the parent company?”

  “Right. Just another victim of the eighties. Once upon a time, back in the seventies, Sammy Heller had a nice little company in Michigan called the Pontiac Chemical Corporation. Ironically, they manufactured solvents, which was just about the last time Sammy was solvent. He got hooked up with a couple of renegade investment bankers who’d left First Boston. They had him form a holding company called Chemitex Industries and took him on a buying spree—junk bonds up the wazoo and all kinds of weird financings,”

  “I sense a bankruptcy on the horizon.”

  “Bingo. As the cash flow got tighter the bankers started squeezing him. When the notes and bonds began coming due, they sent in their workout goons to stop the hemorrhaging. When that didn’t work, they started foreclosure proceedings and Sammy filed Chapter Eleven.”

  “Is the company still in bankruptcy?”

  “Yep. There’s been a trustee appointed to sell off each of the operating companies.”

  There was a sudden banging noise from the other room. It sounded like a file drawer slamming shut.

  “Goddammit!” Jacki hollered. Then another bang. “Oh, shit!”

  “Hang on, Bob.” I stood up and put my hand over the mouthpiece. “Jacki?” I called.

  “Sorry,” she answered in a subdued voice from the other room.

  “Are you okay?”

  I heard a sigh. “I’m fine.”

  I leaned forward, trying to peer around to Jacki’s secretarial station, but I couldn’t see her. “You sure?” I asked.

  Another sigh. “Yes.”

  I sat down and uncovered the phone. “Sorry, Bob. Go ahead.”

  “Is anything wrong?”

  “I don’t think so.” I looked down at my notes. “You were saying that the French company is buying Chemitex Bioproducts out of the bankruptcy?”

  “Right. There may be some real value there, too. Pierre Fourtou—he’s the chairman of SLP—has become a real bottom fisher in the States. He’s bought three or four companies out of bankruptcy in the last few years. Chemitex Bioproducts might be a gem. It used to have a good name. You know who founded it, don’t you?”

  “No, who?”

  “Your hotshot senator, the Great White Liberal Hope of the Democratic party.”

  “Douglas Armstrong?” I said, flabbergasted.

  “You got it. Chemitex Bioproducts used to be called Armstrong Bioproducts. Once upon a time Douglas Armstrong was a fine, upstanding businessman, before he fell into the clutches of you bleeding-heart liberals.”

  “Don’t start that again, Robert,” I said with grudging good humor, recalling our Cambridge days. “Armstrong’s company, eh? I knew he once had a pharmaceutical company, but I didn’t realize it became Chemitex Bioproducts.”

  “Armstrong was in the Senate by then. Sammy grabbed it in a hostile takeover in late 1987 and changed the name to Chemitex.”

  “Listen, Bob,” I said as I jotted down notes, “you guys do mergers and acquisitions. I’m trying to get a sense of what’s typical. Does it sound normal for a chemical engineering consultant to spend two months doing due diligence on this deal?”

  “Well, for some deals that might be overkill, but not for SLP.”

  “Why do you say that?”

  “Pierre Fourtou’s lieutenant is a guy named Levesque. Rene Levesque. He has final say on all the deals, and he’s supposed to be an absolute data demon. They call him the Doctor of Due Diligence. Every deal takes longer when he’s involved because of the amount of information and the level of detail he demands.”

  “Would a chemical engineer be competent to do due diligence on a pharmaceutical company’s files?”

  “A pharmacologist might be more familiar with certain aspects of the files, but someone with a chemical engineering background could handle it with the right reference materials.”

  “What kind of due diligence would he do?”

  “Think about it. What are a pharmaceutical company’s biggest assets? The drugs it already has on the market and the drugs that are still in the development phase. Everyone knows what drugs are on the market. In Chemitex’s case, their Hope Diamond is still Phrenom.”

  “That’s theirs?”

  “You bet. It’s what Douglas Armstrong founded his company on, and it’s still a popular treatment for arthritis. But everyone already knows about Phrenom. You wouldn’t need to do much due diligence on that drug beyond checking the sales numbers and evaluating the trends. The crucial due diligence is to figure out whether Chemitex has something big in the works. To do that, you have to examine the R and D files, evaluate the trade secrets, figure out what’s in the works. We did some work with McNeil Pharmaceutical last year—”

  “I’m sorry, Bob. Can you hold a sec?”

  “Sure.”

  There was an odd snuffling noise coming from the other room. I listened for a moment. “Jacki?” I called.

  No response, just more snuffling. Then the sound of her blowing her nose. I set the receiver on my desk and walked to the doorway. My secretary was hunched forward, her shoulders shaking. “Jacki, what’s wrong?”

  She turned toward me. Her mascara was streaked down her cheeks and her wig was slightly askew. She shook her head in frustration as she stood up. “Look,” she sobbed, gesturing toward her leg.

  I moved close enough to spot the tiny run in her stocking. It was just below the knee, along the calf of one of her massive legs.

  “I’m so damn clumsy,” she said, her lips quivering. “This is the t
hird pair of pantyhose today. The third! They cost me four dollars each.”

  “It’s not so bad, Jacki,” I said gently. The poor thing looked like she was on the verge of estrogen shock.

  “Maybe not yet,” she moaned, waving her arms, “but just wait. In an hour it’ll be all the way down to my toes.”

  I kneeled by her leg and studied the run. I looked up with a smile. “We can stop it.”

  She gave me a puzzled look.

  “Do you have some clear nail polish?” I asked.

  Jacki thought for a moment and shrugged helplessly. “It’s at home.”

  “Check the bathroom down the hall,” I said as I stood up. “I think I left some in the medicine cabinet.”

  She blew her nose. “What do I do with it?”

  “I’ll show you.” Then I remembered Bob Ginsburg. “Good grief.” I hurried back to my desk. “I’m sorry, Bob.”

  “What’s happening out there?” he asked.

  “My secretary had a problem. It’s okay.”

  “What kind of problem?”

  “Well, uh, with her pantyhose.”

  “Pantyhose?”

  I giggled. “Just a run.”

  “Just a run? Hey, tell her I’ll buy her a new pair. She sounds sexy.”

  “What?” I said in surprise.

  “I love her voice. Deep and husky.”

  “She’s not your type, Bob.”

  “How do you know?”

  “Trust me.”

  “Describe her.”

  I chuckled. “Well, she’s tall.”

  “Blond?”

  “Actually, yes.”

  “Sounds better every minute. Built?”

  I chuckled. “You mean chest size?”

  “Well, sure.”

  “Big.”

  “How big is ’big’?”

  “At least forty-two inches.”

  “Praise the Lord.”

  I could barely keep from laughing. “Tell you what, Bob, I’ll fix you two up next time you’re out here.”

  “You’re a true pal, Rachel.”

  “Don’t thank me, yet. Meanwhile, back to business. You were telling me about some work you did with a pharmaceutical company.”

  “Oh, yeah. The due diligence stuff with McNeil Pharmaceutical. Do you know anything about the economics of the drug industry?”

  “Not really,” I admitted, taking notes.

  “You can’t sell a new drug in the United States without first going through an incredibly rigorous system of approvals supervised by the Food and Drug Administration.”

  “I knew that much.”

  “Well, that’s where the economics come in. On average, it takes eight to ten years and fifty to eighty million dollars to bring a new drug from the original concept through the FDA process to the market.”

  “Wow.”

  “Exactly. Moreover, the odds against a new drug surviving all the way are steep. The guys at McNeil had statistics showing that only one out of every four thousand drugs that undergo preclinical testing ever makes it to the market. Even if you get past the preclinical phase to the human testing stage, which is pretty far down the process, your odds of making it to the market are still only one of five. You know what that means?”

  “I’m not sure,” I mumbled as I finished scribbling: 1 out of 5—human testing to market.

  “It means that you’ve got to do some serious due diligence before you have a sense of what a pharmaceutical company is really worth. For example, you need to find out the status of the IND applications.”

  “The what?”

  “IND. It stands for Investigational New Drug.”

  “Let me write that down.”

  As I was scribbling, Jacki came in. “I found it,” she whispered, holding up a bottle of clear nail polish.

  “Bob, can I have one more pantyhose timeout?”

  “No problem. Tell your secretary I’m falling in love long distance.”

  I rested the receiver against my neck. “Here’s how you do it,” I said to her, reaching for the bottle of nail polish. I unscrewed the top. “Come closer.” She did. I slid out the brush and leaned toward her leg. “Just like this. Put a little dab at the end of the run. Let it dry. It’ll keep the run from getting any longer.” I leaned back with a smile, screwed on the top and held it out to her. “There. All done.”

  Jacki gave me a look of gratitude as she took the bottle of nail polish. “Thanks so much, Rachel.” She glanced down at the stocking. “That’s wonderful.”

  I lifted the receiver to my ear. “I’m back,” I said to Bob.

  “Wow, that’s better than phone sex.”

  “Back to business, stud.” I glanced at my notes. “IND. You said it stands for Investigational New Drug. What’s that?”

  “Okay. When a drug company has finished all of its preliminary testing on animals and wants to move to the next stage of the approval process, which is testing the drug on humans, it files an IND application with the FDA. Among other things, the IND describes the drug and the human testing the company proposes to do. Accordingly, part of the due diligence is to review the pending IND applications. That will give you a sense of what the company might be able to bring to market four to six years down the road.”

  There was more. According to Bob, the due diligence should also include a review of the NDAs, or New Drug Applications, which is the final step in the FDA approval process, filed after the proposed drug has passed the human testing stage and is ready to bring to market. In addition, the due diligence should include a review of the R&D files to determine whether there are any projects or proposals that might be worth pursuing. As Bob explained, Chemitex might not have had the capital to pursue some of the concepts still stuck in R&D, while SLP has money to burn. For an information fanatic like Levesque, two months spent reviewing IND, NDA, and R&D files would be money well spent.

  I thanked Bob for his help, told him I would buy him dinner next time I was in New York, and promised to introduce him to Jacki when he came to St. Louis. I was organizing my notes when Benny returned my call. I filled him in on what I had learned that afternoon. He offered to drop by the library to try to locate the newspaper article on the Miami shooting death of the Smilow of Smilow & Sullivan.

  “If I find it,” he told me, “I’ll drop it off at your house on my way home.”

  “Better yet, stop in for dinner. I’ll get us some Chinese takeout.”

  “You got a deal, gorgeous.”

  “Bring your portable computer.”

  “Oh?”

  “Bruce’s secretary made me a copy of everything off the hard drive of his computer. I’m sending a messenger down to pick up the disks. Maybe the answer is on one of those disks.”

  Chapter Eight

  Benny leaned back and rolled his eyes in ecstasy. “Oh, God, that’s good.”

  I winked. “What did 1 tell you?”

  “What’s it called?” he asked.

  “Kung Pao Squid. Try the Fresh Clam with Ma-La Sauce.” I slid the white take-out carton toward him. “It’s even better than the squid.” Using my chopsticks, I leaned over and lifted out a squid. I popped it in my mouth and chewed slowly, savoring the tastes.

  “Where is this place?” he asked.

  “In Olivette. Across from the bowling alley.”

  I watched as Benny spooned some of the Fresh Clam with Ma-La Sauce onto his plate. We were having dinner at my house. Benny shoveled in a mouthful, chewed for a bit, and gave me a look of appreciation.

  “Good, eh?” I said.

  He swallowed and nodded. “Excellent find, dude.”

  “I take that as a compliment,” I said with a tolerant smile, “even though it comes from a man whose idea of a great Oriental experience involves a set of pulleys and a heavily se
dated JAL stewardess.”

  “A man can dream, can’t he, Miss Gold?”

  Ozzie sat in the corner of the kitchen, intently watching us eat. He was a big fan of Chinese food. Although he preferred Cantonese over Szechuan style, I was sure he wouldn’t let provinces get in the way of leftovers.

  I took a sip of beer and glanced down again at the copy of the newspaper article Benny had brought with him. It had appeared on the front page of the St. Louis Post-Dispatch almost two years ago, under the headline:

  ST. LOUIS ENGINEER KILLED

  IN MIAMI CROSS-FIRE WHILE

  WALKING BACK TO HOTEL AFTER DINNER

  The article described the shooting death of Milton Smilow, one of the name partners of Smilow & Sullivan.

  “I don’t like it,” I said.

  “What’s not to like?” Benny asked as he twisted off the cap of another Dixie beer.

  “It says here that Hiram Sullivan was with him in Miami up until the shooting.”

  “So what?” Benny leaned over, scanned the article upside down. He pointed to a paragraph in the middle of the story. “Sullivan said that when they left the restaurant Smilow decided to walk back to the hotel instead of riding in the cab with him.”

  “I still don’t like it.”

  “For chrissakes, Rachel, you think Sullivan shot his own partner from the cab? Come on! Read the papers, watch the news. It’s open season on visitors to Miami. It’s like a fucking video game come to life down there. And anyway, what’s his motive?”

  I shrugged. “I don’t know. I just don’t like him, I guess. He was a total jerk when I went to see him.”

  “Just because he’s an asshole doesn’t mean he’s a killer.”

  “At this point, Benny, everyone’s a suspect. Listen to this: you saw that Bruce’s time sheets showed that he did eight hours of work on some personal matter for Sullivan, but there’s no evidence of what he did.”

  “Big deal. Think back to when we were associates at Abbott and Windsor. Remember some of the personal family bullshit the partners made us do? Traffic tickets, insurance claims. Shit, do you remember that uncontested divorce I handled for Bryce Carville’s second cousin? The babe who married the sailor?”