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CEOCFO CEOCFO Monthly Analyst |
"To print this page go to file and left
click on print" Bioanalytical Systems, Inc. –
providing services and products to the pharmaceutical industry, showing real sales and
earnings growth
Healthcare Bioanalytical Systems,
Inc. 2701 Kent Avenue Peter Kissinger Interview conducted by CEOCFOinterviews.com BIO OF CEO: Peter T. Kissinger, Ph.D. is
Chairman, President and CEO of Bioanalytical Systems, Inc. in West Lafayette, Indiana and
remains on the faculty of Purdue University as part-time Professor of Chemistry.
Bioanalytical Systems instruments are
used in research laboratories worldwide to facilitate neuroscience and diabetes research,
pharmaceutical research and clinical chemistry. The company’s goal is to support the
advancement of human health care by providing the tools that help scientists perform
innovative analytical chemistry and animal science. New
products on the market:
Mr. Kissinger: We were founded in 1974, with academic origins. I am a chemistry professor, and our business evolved over time from my work in academic biomedical science. We started out primarily focused on central nervous system diseases and manufacturing instrumentation, which our customers could use for monitoring and understanding chemistry of the brain. We’ve continued to study diseases of the central nervous system including Alzheimer’s disease, manic depression and schizophrenia. More recently we’ve broadened our focus to include diabetes and infectious disease.CEOCFOinterviews: What would you say is your most recent and exciting news? Mr. Kissinger: The most recent thing we’ve announced that has received a great deal of attention is our new product, the Culex®, which is a robotic blood sampling device used in preclinical pharmacokinetics. Whenever a new drug is developed, it must be evaluated to determine how its concentration varies as a function of time, first in laboratory animals and then in humans. In other words, when you take a tablet or are given an injection, it is very important for scientists and physicians to understand how the concentration of that drug changes as it enters your system, as it circulates through your blood, passes perhaps into the brain or other tissue and ultimately is excreted. Therefore, as scientists we monitor that process. We have to take samples from blood and tissue and do analytical chemistry on those samples in order to determine concentrations of various substances, the drug itself and other endogenous compounds that give an indication of whether the drug is working or not, or whether it is safe or not. Hence, our device, Culex, provides an automated means of collecting very small and precise volumes of blood from laboratory animals, thereby improving throughput and reducing labor costs substantially for pharmaceutical companies. CEOCFOinterviews: With whom do you do most of your business? Mr. Kissinger: Most of our business is done with the pharmaceutical industry. There is now a fusion of biotech and pharmaceutical, with many pharmaceutical companies becoming biotechnology companies. Likewise many biotechnology companies are doing their work in order to feed new ideas into the pharmaceutical industry. We do work with both the pharmaceutical and biotechnology industries, but we also support medical device companies. CEOCFOinterviews: When in the drug development process is your work done? Mr. Kissinger: Our involvement in the process really begins at what we call “preclinical research.” We are not actively involved in discovery. Therefore, I think it’s useful to mention what we do not do as a company. We do not participate in genomics, proteomics, combinatorial chemistry, high throughput screening and bioinformatics. Those are the hot words on Wall Street about the drug discovery process. What we do is a little more pragmatic, and I must say, substantially lower in risk. We take candidate drugs that come out of that discovery process, we evaluate their safety and effectiveness in laboratory animals, and then carry that on to the first studies in human clinical trials. CEOCFOinterviews: What would you like investors to understand about the Culex? Mr. Kissinger: What I would like investors to understand is that it is the first iteration of a family of products. We now have in development what we’ll call Culex II and Culex III, and we’ll have a continuing stream of augmentations of this product line over at least the next three years. We have a lot going on in house, and we are doing this jointly with about ten major pharmaceutical companies that are actually using the Culex product and are feeding us suggestions for enhancements. This wonderful sharing of ideas with major pharmaceutical companies with revenues in the $5 billion and up range, and several in the $30 billion range, has helped us improve our own productivity in this preclinical space where we operate. These major companies are willing to take the time to share their thoughts with us about what our engineers, scientists and software people can do to improve this product. They are not competitors with us in any way. They are much bigger companies, and their goal is to get drugs out to help sick people, and secondarily but still important, to boost share prices. Therefore, anything we can do to help them with productivity is attractive to both of us. CEOCFOinterviews: Can you detail your revenue platform for us? Mr. Kissinger: Our revenues are derived in two ways. About 60% of our current business is in contract research services which we supply to pharmaceutical companies, biotech companies, and to a lesser extent, medical device companies. The other 40% of our business is in products that we manufacture and sell to the same companies. Therefore, it’s not unusual for us to help our clients solve a measurement problem they have in their own laboratories, either by supplying them with products or by having them contract with our own scientists. Hence, we mix the products and service business and we blend it in a way we think provides many synergies for us financially, and that benefits our clients. Based on their own workloads our clients can decide if they want us to help them with an issue they have at their own site, or if they want to contract us to do the work in our laboratories. CEOCFOinterviews: Is it possible to balance the revenues between your products and services? Mr. Kissinger: We’d like to balance them at about 50-50, and there are advantages to both. The product side is very attractive because the gross margins are substantially higher, and it’s easier to scale up. The service business is attractive because it supports a lot of talented people in house who give us ideas for our products business and who get us introduced to the key people at our client companies who will buy both products and services. We really like the mix of the two just as, by analogy, IBM these days has a high percentage of their revenue coming from services, whereas previously they were primarily selling and leasing computer hardware. We are in a similar situation because we began primarily as a products business, but currently our service revenues have been growing substantially faster. CEOCFOinterviews: Do your products generate revenues from disposables? Mr. Kissinger: We have what we call an annuity effect with both products and services. On the products side, there is a razorblade component that needs to be used on a continuing basis. Therefore, we have a nice stream of high margin supply items that sell along with our instrumentation and software. In addition, we have service contracts and software updates on a regular basis. Once we have a client in place for our products, we look forward to a continuing stream of revenue from those customers over time. In the service business, once we get started with a new drug candidate we often spend years on multiple contracts. We are only interested in front line, state-of-the-art new chemical entities (NCEs). We do little with generic pharmaceuticals. We like the top tier novel drugs and once we start working with a client on a substance like that, very frequently we see a financial annuity from work on hundreds of projects related to that NCE over many years. Furthermore, we work with the drug not only prior to its being approved, but also after its approval by the FDA. In several cases we have twelve years of continuous work, with hundreds and hundreds of projects on major drugs, even five years after they were approved by the FDA. This is because we give the pharmaceutical companies no reason to change horses. By doing good quality work in a timely fashion we help pharmas protect their franchise in the new proprietary drug which is often selling at over $500 million per year. After approval, pharmas look for line extensions, new indications and combination therapies based on their drug, and often try to extend their patent position. CEOCFOinterviews: How many product categories do you have? Mr. Kissinger: There are several thousand BAS products in sum total, including instruments and the supplies that go with them, divided into three major categories. We have chemical separation products, electrochemical products used in analytical chemistry and biosensors, physiology products which include our new blood sampling device called the Culex and microdialysis probes, as well as veterinary electronics that we manufacture under the Vetronics name. We have Vetronics products for cardiology, pulse oximetry, blood pressure and respiratory monitoring in laboratory and companion animals. These products are sold to toxicology laboratories and veterinary clinics. CEOCFOinterviews: How much of your products come from your own research and development efforts and how many were acquired? Mr. Kissinger: The Vetronics product line came to us through an acquisition several years ago, but the majority of our products are developed in house, and some are developed jointly with our customers. The customer may recognize a problem and see how we could potentially help them solve it. We also have license agreements with universities and co-develop products under federal grants from time to time. We don’t believe we are the only people with good ideas. We will share and work with others who have novel ideas, wherever they come from. Our people are, on average, very highly educated with 80% of our employees being university educated and 40 doctoral level personnel on our staff. In addition, we have an outstanding scientific advisory board with experienced people who can help us review technology and assess its value. CEOCFOinterviews: Can you tell us about your recent announcement of a partnership with a French company? Mr. Kissinger: That is an excellent arrangement we have with a company called Biotech Centre in Orleans, France. They are a preclinical contract research organization, a small company, and they will be working with us on liaisons with major R&D centers throughout France. France has an excellent profile in pharmaceutical research and development, and this year we have just introduced our Culex product into Europe. Biotech Centre will be using the Culex in their own research and providing a demonstration and support center for the pharmaceutical industry in France, and perhaps in several other European countries as well. We are very excited about this. CEOCFOinterviews: What percentage of your revenue goes toward research and development? Mr. Kissinger: Our internal R&D is typically about 9 to 10% of sales. In some cases, we’ve been fortunate in knocking that number down a little by obtaining grant money from the federal government. The federal government gives incentives to small companies, that is companies with fewer than 500 employees. Those incentives are grants to stimulate job creation and new technology. That has really helped us quite a bit, and we’ve been fortunate to get several of these grants every year from NIH and NASA. CEOCFOinterviews: In building on your product offerings, do you see product development or acquisitions being your focus in the future? Mr. Kissinger: We continue to do both, looking for ideas wherever we can find them, whether it is with universities or with other companies. Acquisitions are also a major part of our future. We are in an industry that is quite fractured, with many talented people in very small companies. Therefore, over time we’ve brought some of them into the BAS family with considerable success. In addition to Vetronics, we’ve also acquired a laboratory in the United Kingdom and early on we acquired a software firm in State College, Pennsylvania which has been successful for us. A preclinical toxicology lab in Evansville, Indiana joined our family about two years ago. As you can see, we have an active acquisitions program. We regularly review about 100 companies and identify a half a dozen or so that we are working with on an active basis, considering the possibility of whether M&A activity, partnerships or joint ventures would make sense for us. CEOCFOinterviews: Can you detail your competition in both products and services? Mr. Kissinger: On the contract research side, we compete with our clients, companies like Pharmacia, Pfizer, Eli Lilly, GlaxoSmithKline and Abbott. This is because they need to make a decision about whether they are going to outsource the work to a company such as BAS or keep it in house. On the service side, our clients represent our major competition. However, depending on their workload, if we do quality work on schedule they will come back to us repeatedly rather than adding internal resources. We can generally do things faster and at a lower cost. When we work with smaller companies such those with sales in the $1 billion range or below, they do not have the internal infrastructure and talent base that we have in the niche areas on which we focus. Therefore, with those companies the outsourcing to us is strategic, rather than tactical as it is with the large companies. There are contract research firms that we compete with, but also cooperate with. Several of the larger ones are Covance, Quintiles, MDS Pharma, PPD, Parexel, Kendle and AAI Pharma. Several of these are very large and we think perhaps too broad to do all the work well. Because of our focus and the fact that we are small and lean we can regularly respond to clients much more quickly than our larger competitors can. We try to keep that speed of response very much in mind. On the product side, in the separations area the major competitor is Waters Corporation, a sizable company manufacturing liquid chromatography equipment as we do. We focus in very small niche markets where we have an advantage based on the applications support we provide to customers. There are a number of other major instrument manufacturers in separations chemistry, including Agilent and Shimadzu from Japan. In the electrochemistry business, which is a very small market with limited growth potential, there are perhaps a half dozen small companies participating in that area, virtually all of them smaller than BAS. Finally, in the physiology product line, we approach niches that are unattractive to the larger companies which focus, for example, on human medicine. We focus in areas that are complicated enough and require enough investment that we don’t get too much competition from the garage level outfits either. Hence, we try to aim in the middle where we have some competitive advantage. CEOCFOinterviews: How big are the products and services markets? Mr. Kissinger: The services market for laboratory support for drug development from preclinical onward is about a billion-dollar market. Therefore, it is very substantial. As a $25 million company we have a lot of room to grow, and we plan to do just that. On the products side, the separations science and analytical chemistry markets are on the order of $3 billion, but we don’t exercise our skills in very much of that. Therefore, perhaps within the niches we approach, the market is more in the $50 million area, and that would be similar for our physiology products, with our electrochemical market being a bit smaller, maybe somewhere in the $25 million range globally. CEOCFOinterviews: What do you feel you have to do to see your company effectively grow over the next year? Mr. Kissinger: We’ve already launched two brand new product lines, one of which is the Culex®. The other is Epsilon, an analytical workstation for chromatography and electrochemistry. Both of these started shipping in the last year, and clearly we see for fiscal 2002, which begins October 1, that these are going to be a big part of it. Moreover, we already have customer acceptance from the early adapters of these products and we expect substantial acceleration of sales for both. What is so exciting about Culex and Epsilon is they are both platform products to which we can add new capabilities quarter by quarter. We also designed the products so they are compatible with future enhancements. In our service business, we have already begun a 50,000 square foot addition at our Evansville, Indiana preclinical drug safety testing operation and hope to bring that on stream late next spring. We will also break ground in the spring for a new preclinical pharmacokinetics facility in West Lafayette that will add some new capabilities. We feel that bringing on this additional capacity will be key for us. We are also adding a lot in terms of information technology and robotics for process improvement and greater productivity so we can get more sales per employee. That will be very important to sustaining our competitive position, and also to putting some earnings on the bottom line. Those are the major initiatives. CEOCFOinterviews: Do you see your company continuing to drive revenues as you have recently? Mr. Kissinger: We see ourselves as a nice potential $100 million business. How long it will take to get to that level is hard to say, and clearly we can’t commit to that, but we are pushing in that direction with our acquisition program, new product development and the new services we are adding. Our target annual growth rates for sales and earnings are 20%, and clearly we will do whatever we can to meet that. If we complete some acquisitions, that would give us an opportunity to exceed those numbers. However, there is always the shadow of the current economic problems, but so far we’ve looked especially good as a micro cap stock over the last six months, to some extent because of how bad everyone else has looked. It’s been difficult in telecommunications, semiconductors and computers and so on. Healthcare is a bit protected from these recessional tendencies. Ultimately, if things go too deep too fast, then pharmaceutical R&D could be cut back which would certainly impede our growth rate significantly, especially if the government exercises more regulatory controls, for example on drug prices. However, we don’t see that happening. Enough of those negative thoughts. We will stick with our mission. CEOCFOinterviews: Is your growth and the struggles of other investment opportunities the reason you think Wall Street has been good to you of late? Mr. Kissinger: Yes, I think Wall Street has been very good to us because generally the investment community once again recognizes the value of real sales and earnings. We are a DOT-COM in some respects, but we are very successful in the way we use the Internet. Of course, recession in auto parts, heavy manufacturing and telecommunications leaves many investors looking for a place to put their money. It seems from my visits to the street that there is a greater interest in value investing in the micro cap area now. A year or two ago we were reading articles declaring that sales and earnings really didn’t matter. Unlike the biotechnology sector where many of the companies have no sales and show losses every month, we do have sales and we do have earnings. Therefore, I think that with this change in investor sentiment it’s been attractive to take a look at us. With regard to our year-to-date growth in stock price, there have been weeks when we have had the largest gain year-to-date on the entire NASDAQ. Now, that’s not saying a lot because many people have had trouble, and we don’t glory in others’ troubles. Nevertheless, we were ignored for a long time. For 24 months we were totally ignored, with all of the news being about the DOT-COMS and the Internet, and we couldn’t get a press release to be looked at. Now that’s changed and we’re getting many calls and doing interviews because investors are looking for somewhere they can find some good news, and we have some. We are really doing pretty well. CEOCFOinterviews: Are you comfortable with your current cash and credit position, to drive your company forward? Mr. Kissinger: Very much so, and in fact we keep our cash position very low. Many analysts on the street ask us why our cash is so low. Well we keep it low so we don’t pay a lot of money in interest, and that helps us earn money. We are not interested in being a savings bank; we have many opportunities so in the event we generate cash, we utilize it to grow further. We have credit lines; we have a nice balance sheet with wholly owned facilities that we can mortgage to raise cash, virtually in an instant. Therefore, we don’t have the same problems that many biotechnology companies have in working out of leased space, with leased equipment and with no inventory and no receivables. Those sorts of companies really need to raise equity every time they run low on cash. In our case however, we have plenty of assets on which we can borrow, for example, to close out smaller acquisitions and to add equipment. That is another reason we like the balance of products and services. The products business gives us a nice inventory, receivables and physical assets to borrow against to keep in a very respectable position with regard to cash. We also generate about a million dollars in new cash flow every quarter that we can employ and invest in ourselves. CEOCFOinterviews: What would you like to say to current shareholders and potential investors in closing? Mr. Kissinger: I would like investors to remember that there are small micro cap companies out there that actually do earn money, have sales and are working on very important problems in human disease, and we are one of them. We’re very proud of what we’ve done in working with anti-infective agents, HIV and top line antibiotics. In addition, we are proud of our contributions to central nervous systems diseases such as Parkinson’s and Alzheimer’s diseases and manic depression. The two leading schizophrenia drugs were projects we worked on in house, and we also did a fair amount of work on Viagra, supporting Pfizer’s development of that product. Sales of drugs we’ve worked on with our client companies total well over $15 billion every year. Those drugs were, in one way or another, touched by our products and services at Bioanalytical Systems so millions of people are benefiting from work we’ve done. Being a very small company, we are especially proud of seeing patients overcome their disease, in part based on our contribution to the process. One of the things BASI needs to do for Wall Street is to attract more institutional investors . . . to get to the point where we would need a secondary offering that will significantly increase our float. Clearly, we need to be a bigger company than we are, and we are looking very seriously at how to use the equity markets to make that happen. We are looking at some acquisitions that are of greater size than those we’ve done in the past to accelerate our growth. I’m concentrating quite a bit of my efforts on that right now.
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