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CEOCFO CEOCFO Monthly Analyst |
Providing Solutions
Healthcare James L. Herbert Interview conducted by: Ceocfointerviews: Neogen’s
products cover many areas, including food safety, animal safety and life science. Please
talk a bit about your different product areas. Mr. Herbert: The overall mission of Neogen is to provide
solutions for both food and animal safety. The company is divided into two synergistic
divisions, food safety and animal safety. This structure recognizes that the safety of the
food on our plates is heavily influenced by the health of food-producing animals on the
farm, as well as safe processing and handling after it leaves the farm. This safety link
has been emphasized with Europe’s much-publicized outbreaks of “mad cow”
and foot and mouth diseases. To ensure the safety of our food, we supply disposable
diagnostic test kits that can be used to detect harmful organisms or disease-causing
agents that can be found throughout the food system. Our tests are easy to use, rapid,
inexpensive, and accurate. Our animal safety division also markets a complete line of
diagnostics for animals, as well as veterinary instruments, veterinary pharmaceuticals and
nutritional supplements. Our life sciences group operates under our animal safety
umbrella. The group offers tests to detect abused drugs, as well as tests and reagents for
the research and diagnostic industries. Ceocfointerviews:
Does Neogen have a test for mad cow disease? Mr. Herbert: We don't. There really isn't one other than a
postmortem test, which isn’t much help to ranchers. Mad cow is an example of a
problem that ties food and animal safety together. The areas that we do attack more
vigorously are pathogenic food bacteria that can originate on the farm, and have the
potential to make it all the way to our dinner plates, such as Salmonella. We have tests
that diagnose the presence of Salmonella, and other food-borne bacteria, anywhere along
the food supply chain. Ceocfointerviews:
What did the acquisition of Gene-Trak bring to the table as far as new products and
offerings? Mr. Herbert: We are
determined to grow internally and through synergistic acquisitions that fit into our
markets and product approaches. Gene-Trak is an excellent fit. Gene-Trak developed a
technology that utilizes genetic probes to detect bacteria. Our approach to detect
bacteria has been to make antibodies that attach themselves to those bacteria. So, we were
seeking the same objective, but with different tools. We think the DNA probes are more
specific in some cases, and in other cases our antibody approach is more successful
because it is easier and quicker. The gene probe system is also almost totally mergeable
with our other products. We will be able to manufacture the products in our own facilities
in Lansing. Our sales organization is already in place. So, Gene-Trak brings several
things to the table: a new technology; a market base of about $3 million; and operations
that merge easily with our existing business. Ceocfointerviews:
Will Gene-Trak become part of your food safety operations? Mr. Herbert: Yes, Gene-Trak
will fall under food safety for now. The technology can be expanded to cover a number of
other diagnostic tests as we look into the future. In fact, we have a large probe library
that will allow us to do that. But, initially, we are only marketing Gene-Trak products to
detect food-borne bacteria. Ceocfointerviews:
What is your customer base? Mr. Herbert: Our customer
base goes all the way from individual farmers and veterinarians in the field, to the world’s
largest food producers and animal care product distributors. On the food safety side, our
rapid detection tests for E. coli O157:H7, a dangerous bacterium found primarily in beef,
and aflatoxin, a by-product of mold growth in grains that is a known carcinogen, have
earned contracts for use by USDA regulators for many years. We market food safety products
to all phases of food production and distribution, from growers and ranchers, to
regulators and large, well-known food processors. Likewise, our animal safety products are
marketed to the spectrum of animal caregivers, from consumers via distributors, to the
largest veterinary operations and veterinary product distributors. Ceocfointerviews:
Do you operate on a global basis? Mr. Herbert: We do. In our
recently completed fiscal year, our revenues from outside the United States and Canada
were about 20% of our total revenues. International opportunities represent a huge growth
potential for us, as food and animal safety concerns know no borders. Our revenue
potential is probably double outside the United States as opposed to inside, so obviously,
the international market is a key focus as we work to sustain our record of substantial
growth. Ceocfointerviews:
What is your growth strategy going forward? Mr. Herbert: First, we are
in a growing market, which keeps revenues from existing products growing as the market
expands. We also believe we can continue to gain against our competition. We think we can
grow organically at the rate of 20% a year. We will also continue to have opportunities to
grow through acquisition. Our markets are now still fragmented, as expected with young
business industries. We think we are in a position, with a strong balance sheet and strong
position in the market place in sales and marketing, to be a consolidator in many of our
markets. Ceocfointerviews:
Where do you see the GMO issue in food safety? Mr. Herbert: The issue of
genetically modified organisms is a little bit confusing. There are two pieces of the GMO
market. One piece of the market is the ability to identify genetic modified products
because of the concern they may contain something harmful. Obviously, those people who are
concerned have a right to know. We have a couple of products that are in this market that
are not real significant as far as our total revenues are concerned. Another is a belief
that improved plant genetics will be able to provide a number of new products for the
marketplace. With improved plant genetics, there will be a need to have a diagnostic test
that can identify value. We think that clearly there is a market going forward for rapidly
and inexpensively identifying genetically improved plants. We do have some licensing
agreements with some of the plant breeders that we expect will help us to move forward in
this piece of the market. I expect that this will be a bigger part of our business as we
move through the rest of this year and into next. Ceocfointerviews:
Neogen has been moving at a pretty steady pace. What
do you account for the steadiness and growth of your company? Mr. Herbert: We are quite
proud of the fact that we have sustained a steady growth rate. For more than 10 years
we've shown growth compared to the prior quarter in 38 of 42 quarters. That's a solid
growth record. Our shareholders expect
us to show progress every quarter. So, we manage our research and development efforts, as
well as our markets and expansion, so we can continue to show those quarterly
improvements. I think that it is just as important, or more important, to couple top line
growth with bottom line growth and to continue increasing earnings per share. Our
acquisition strategy has been very helpful to be able to show that consistency. As an
example, last year, our total revenues were up to 48% and our operating profits were up
80%. That means we are able to carry a good percentage of the additional revenues through
to the bottom line. Ceocfointerviews:
Why is Neogen a good investment for potential investors? Mr. Herbert: There are many
reasons. One, we're in a proven growth market and proven growth markets are pretty
valuable for investors. With the kind of growth rate and earnings Neogen is producing, we
are undervalued. If you look at what the analysts believe we will do in the next fiscal
year, we are currently trading at the range of a 17-19 PE, whereas, our peer groups are
trading in the 30 PE plus range. The second issue is our financial stability, including a
strong balance sheet. We have continued to generate cash each and every month. Last year
we generated $2.5 million in cash while spending about $2 million in supporting accounts
receivables and inventory to take advantage of new opportunities. Three, I think that we
would be characterized as recession resistant. Even during a recession, people still want
to eat safe food. We are not going to disappear or decline rapidly in the event of a slow
down of the economy. These reasons, and others, make us a good choice for investors
looking forward. Ceocfointerviews:
What are you doing to promote Neogen in the investment community? Mr. Herbert: We have our
own investor relations in-house. We stay close to the market and continually communicate
with investors and potential investors. At this point, three analysts follow Neogen and
write research reports on us: Roth Capital, Redchip Partners and Hilliard Lyons. We
continue to improve our Web site so potential investors can easily get a pretty good idea
of what we are about. Obviously, we've got all our SEC filings in place. We have been more
proactive in the past number of months in appearing before investor groups to tell our
story. We realize that's one of the important jobs as management of a public company. We have to sell our products, but at the same
time, for the benefit of our shareholders, we have to make certain that we do what we can
to point out the advantages of owning stock in our company.
Ceocfointerviews:
Is there anything you would do differently with your company if you had the chance to do
it again? Mr. Herbert: Well I'm sure
I would, as hindsight is 20/20. Knowing the future is a much easier proposition than the
environment in which we, and all companies, operate: trying to use our experienced insight
to predict future market needs and future moves of our key competitors. To be sure, we
might have allocated some of our resources differently if I would have had a flawless
crystal ball. As chief executive of the company, probably the biggest issue I struggle
with is at what point do I invest monies and when is the right time to invest additional
resources on growth so as not to jeopardize the earnings of the shareholders.
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