Bioanalytical Systems founder fights to be heard

It took Pete and Candace Kissinger 33 years to build West Lafayette-based Bioanalytical Systems Inc. into one of the largest
contract research firms in Indiana’s life science sector.

It took just a year and a half for them to turn against the company’s new management.

The Kissingers quietly stepped down from the management team in August 2007—a departure that now appears forced. He had been
CEO; his wife had been senior vice president of research. They remain Bioanalytical Systems’ largest shareholders, with a
26 percent stake, according to the company’s latest proxy statement.

On April 6, the Kissingers sent a joint letter to Bioanalytical Systems’ board and the Securities and Exchange Commission,
outlining concerns about the company and its new management. A few days earlier, Bioanalytical Systems’ next-largest shareholder,
Wisconsin stockbroker Thomas Harenburg, filed a similar letter of his own.

In their letter, the Kissingers point out the company’s recent steep financial losses, which they say result from fast-rising
expenses, not the recession. They raise concerns about the departure of key longtime employees, such as Vice President of
Business Development Emilio Cordova and Chief Scientific Officer Ronald Shoup.

They also criticize the new management’s focus on "golden parachutes" and bonuses. And the Kissingers complain executives’
interests aren’t aligned with shareholders, since they own little or no company stock.

Bioanalytical Systems clearly has lost a lot of market confidence. Its share price dropped from $4.60 to just $1.25 between
Sept. 30 and April 2. The 73 percent decline personally cost the Kissingers nearly $4.3 million. Pete Kissinger calls that
a "secondary concern." The stock can recover, he said, if the company cleans up its act. Shares since have rebounded slightly,
to $1.59.

In a written response to IBJ‘s questions, Pete Kissinger, 64, expressed strong interest in personally helping steer the company
back toward profitability.

"I have no aspirations to rejoin the company as CEO, but both Candace Kissinger and I could bring a lot of value in helping
guide product development and relationships with the academic sector (esp. Purdue and the Indiana University School of Medicine),"
he wrote. "It does seem a little odd to have founders and 26 percent owners of the business frozen out like this."

Pete Kissinger, co-chairman of Purdue University’s Department of Chemistry, founded the company in 1974. Since leaving its
executive ranks he has taken charge of a pair of medical device startups: locally based Prosolia Inc. and West Lafayette-based
Phlebotics Inc.

Bioanalytical Systems, located in Purdue’s Research Park, has helped big pharmaceutical companies develop drugs for treating
everything from depression, AIDS and schizophrenia to cancer, diabetes and the flu. The firm has 281 full-time employees and
30 part-timers, and has annual revenue of $41.7 million.

The company’s CEO, Richard Shepperd, declined to answer IBJ‘s questions, but said in a statement: "The board is reviewing
the letters, both from Dr. Kissinger and Mr. Harenburg, and at the moment, we don’t have any comment."




Acerbic acquisition

Bioanalytical Systems went public on Nasdaq in 1997. Besides an exceptional run in 2001, it’s been a modest- to poor-performer
for investors.

Harenburg, who runs the Oshkosh, Wis.-based brokerage Carl M. Hennig Inc., said he bought his first shares in 1999 for about
$3.50. By summer of 2001, the stock briefly traded at $14.

"That was the good news," Harenburg said. "The bad news is I’ve been adding to my position over the years."

The company’s slow growth is one reason Pete Kissinger attempted to expand it via acquisition, a decision that ultimately
proved to be his downfall. In retrospect, Pete Kissinger said, it was the 2003 purchase of PharmaKinetics Laboratories, a
Baltimore-based company that provided services for human clinical trials, that was "a bridge too far."

"I did not adequately listen to the naysayers on this one," Kissinger wrote. "The lesson is clear: ‘Don’t buy
a cheap used car unless you appreciate the cost of a new engine, transmission and brakes at the get go.’"

Investment banker Joe Broecker, senior managing director of locally based Periculum Capital Co. LLC, has worked with Bioanalytical
Systems for decades. When the problems with the PharmaKinetics deal became clear, he said, pressure from the board of directors
to bring in "hard-nosed" new management peaked.

"Everybody viewed Pete as a scientific founder, an academic, not an operating guy," Broecker said. "That’s when the board
started to rattle its sword."

"I think Pete initially embraced [Shepperd] as a turnaround guy who could solve problems," he added. "He’s a very smart guy.
Once he understands what needs to be done, he’s all for it and embraces it."

Pete Kissinger wrote that Shepperd was originally hired as interim CEO on Oct. 1, 2006, for a four-month assignment to help
control costs. Shepperd’s previous job was chief restructuring officer of New Jersey-based Able Laboratories. He came aboard
on the recommendation of board member Les Daniels, a partner in a New York City private equity firm.

Shepperd’s role soon grew, while the Kissingers’ shrank. Although the company’s Web site still lists Pete Kissinger as "chairman
emeritus," his April 6 letter complains that he hasn’t been included in board matters, and hasn’t received board materials
or minutes.

"Pete is a very trusting guy," Broecker said. "He trusted how they’d deal with him and guess what? They locked him out."

Proxy fight

Under Shepperd, Bioanalytical Systems has had some success. After several years of losses, it eked out a $930,000 profit in
the fiscal year that ended in September 2007. But Broecker attributes that to the "low-hanging fruit" of headcount reduction.
At its peak, Bioanalytical Systems reported 375 employees. In its last annual report, the company listed 25 percent fewer.

In fiscal 2008, Bioanalytical Systems posted a $1.49 million loss. And 2009 is off to a rocky start, with the company losing
$1.57 million. Broecker fears it’s a sign that big pharma’s confidence in Bioanalytical Systems, which took decades to build
via trusted personal relationships, is eroding.

"When a company’s financial stability is in question, the life sciences industry runs as fast as they can from giving you
more work," he said.

Stockbroker Harenburg also is concerned about the sales pipeline. He complains about current management members not owning
"a stinking share" of the company. And his patience is running out.

"My feeling is if Dick [Shepperd] doesn’t get this company straightened around by the end of September … we need to begin
looking hard and fast for a new CEO," he said in a telephone interview.

Shepperd’s contract expires at the end of this year. Even so, the Kissingers face an uphill battle in their proxy fight, said
Steven Dolvin, a Butler University associate professor of finance with expertise in board issues.

For starters, he said, management holds most of the cards. Companies gather proxy votes over time. If the early returns trend
against management, he said, executives usually have plenty of time to contact and sway remaining shareholders.

What’s more, Dolvin pointed out, Bioanalytical Systems stock is mostly held in small proportions. Even if the Kissingers and
Harenburg join forces, they’ll still have a lot of lobbying to do to build a majority. Small shareholders are much more likely
to vote with their feet, he said, or to simply ignore their opportunity to vote.

"Generally, existing management is going to win out," Dolvin said. "Studies show in close votes, the insiders win 95 percent
of the time."