After years of success, Harlan Laboratories caught in debt vise

Harlan Laboratories Inc. has maintained an extremely low profile since its founding by Howard Harlan 82 years ago in Indianapolis. As a result, few probably realize the company has grown to 2,600 employees in 12 countries or that it is the world’s second-largest provider of animals—from rats and mice to guinea pigs—for scientific research.

It’s a niche that can draw the ire of animal activists, even though Harlan Laboratories says it is “dedicated to the humane care and use of research animals.” So the company’s under-the-radar approach to doing business is understandable.

But these days, the company is catching flack for an entirely different reason—a massive debt load that could lead to financial crisis by next summer.

Harlan Laboratories may violate loan covenants in the next three to six months, and its ability to refinance a $280 million loan that matures in July 2014 is “highly questionable,” according to a report by Moody’s Investor’s Service Vice President Jessica Gladstone.

It’s unclear if the privately held company has an escape plan brewing. Reached by phone, CEO Hans Thunem was mum about the company’s efforts to address its debt troubles. “We are not going to comment on that at this point,” he said.

Central Indiana’s life sciences community has a big stake in a successful outcome. Harlan Laboratories, which has its headquarters in Allison Pointe and an outpost in Cumberland, employs about 330 people in the area and has annual sales of $326 million.

Refinancing bid fails

Things were looking up as recently as February, when the company appeared on the verge of pulling off a $305 million refinancing. But the deal fell apart and was shelved in April, according to Standard & Poor’s Ratings Corp.

In addition to having too much debt, “Harlan has had a number of operational missteps that have hindered performance. … A number of restructuring programs over the past several years has created some operational instability and personnel turnover,” Moody’s said in an Aug. 30 report.

The ratings agencies say the company is not performing well enough to attract lenders. And even if it could engineer a refinancing, it likely would struggle to make the required payments. By Moody’s tally, Harlan’s “adjusted debt” is a whopping 7.5 times its so-called EBITDA, earnings before interest, taxes, depreciation and amortization.

The hefty debt likely is an outgrowth of the 2005 sale of majority ownership in Harlan to the San Francisco-based private equity firm Genstar Capital. Terms were not disclosed, but private equity players typically buy businesses via leveraged buyouts, ladling debt on the balance sheets of the firms they acquire.

Genstar—which declined to comment—could save the day if it’s willing to pump in additional equity, rating agencies say.

Standard & Poor’s said in an April report that its negative outlook reflects “our view that the company will need to either reduce debt levels (perhaps through a sponsor contribution) or show at least some improvement in operating performance before the capital markets will accommodate a refinancing.”

Adding to the challenge is malaise in Harlan’s other big business segment, contract research. Harlan is a relatively small player in the field, which has experienced a shakeout since drug and biotech firms launched cost-cutting programs from 2009 to 2011.

‘Sticky’ customers

Harlan is in a stronger position in the research animal business, which has high barriers to entry and a “relatively sticky” customer base, according to Moody’s. But long term, technological advances pose a significant threat, with increasingly sophisticated computer modeling reducing the need for lab animals, the rating agency said.

Even so, Moody’s and S&P cast Harlan as a solid company. It has a diverse roster of customers in the private sector, universities and government, and more than half of the sales come from outside the United States.

But heavy debt, which can juice returns when things are going well, can turn on you quickly—a reality that now bedevils Harlan’s management team.•