There are things that happen in this world, and things that don't. Gas prices only go up. Bo Jackson dominates in two sports. And biotechnology companies are long on promise and short on profits.
But gas prices are falling, and Bo is on crutches. And Life Technologies Inc. of Gaithersburg, which has been profitable for years, ruined the picture completely by paying a $52 million special dividend to the biotech firm's shareholders in March. Is it time to check up on death and taxes?
Life Technologies has quietly been making its mark as Maryland's most successful biotechnology company since it was formed by a merger of two companies in 1983. Sounds like a sexy story. But it isn't. Even though his choice of words isn't so blunt, J. Stark Thompson, company president and CEO, admits that Life Tech's secret is in being boring.
The biotech industry is dominated by companies that are trying to develop breakthrough drugs and pioneering diagnostic tests and devices. But Life Tech's business is completely different. Instead of researching blockbuster drugs, Life Tech sells products needed to invent drugs: enzymes that researchers can use to cut strands of DNA, fetal bovine serum (unborn baby cow's blood in which researchers can grow cell samples) and similar items.
"We think of ourselves as the hardware store in the gold-mining town," said Dr. Thompson. "In the truest sense of the word, we're not a biotech company. We're a supplier for life science research. . . . It doesn't mean we're against hitting home runs, but we're not going to go into therapeutics. If they hit a home run, we do pretty well ourselves."
In an industry where nearly everyone else is trying to hit home runs, Life Tech is, in Dr. Thompson's words, "a company of
singles and doubles," where the average invoice is measured in hundreds of dollars and a blockbuster product sells $1 million a year.
In an industry full of companies that have their eggs in one basket, pinning their hopes on developing a handful of products, Life Tech has 2,000 products it sells to 20,000 customers. It introduced 400 products last year alone. Its biggest customer, the National Institutes of Health, accounts for only 2 percent to 3 percent of its business.
In an industry where few publicly traded companies make money yet, mostly because they are still trying to develop these marvelous new drugs, Life Tech's biggest problem earlier this year was that it had $56 million in its pocket that it couldn't use, money that was skewing the company's return on equity, because cash in the bank earns so much less than the core business.
Two decisions in the past year -- the company's decision to get out of its diagnostic test-making business and the decision to turn most of its $56 million acquisitions war chest into the special dividend and begin paying regular quarterly dividends -- effectively mark the end of the beginning for Life Tech.
No longer will it be a classic growth company, as most biotech firms are, putting all of its money into developing the company's future at the expense of its shareholders' present. Instead, it is beginning to act like what George Shipp, a stock analyst who follows Life Tech for Scott & Stringfellow of Richmond, Va., called it in a recent report -- a "small capitalization blue chip."
In years to come, Life Tech won't grow as fast as some biotech companies that invent new drugs, but don't knock it. The company still says it will triple its annual sales to $500 million by 1997, and is investing heavily in research to make that happen. And it is trying to achieve that growth in a business that requires less capital and demands less risk than virtually any other facet of biotech.
Remember, a great singles hitter like Wade Boggs has a million-dollar contract just like Jose Canseco. And he strikes out a lot less.
"I think it's a little jewel," said Frederick Adler, a New York lawyer and venture capitalist who is chairman of Life Tech's executive committee. "In fact, it's not so little anymore."
All of this is a far cry from 1982, when Life Tech was two unrelated companies. One was GIBCO Corp., a subsidiary of Connecticut-based Dexter Corp. The other was then-struggling Bethesda Research Laboratories in Montgomery County.
Mr. Adler was brought in to be chairman in 1983, and M. James Barrett (now head of Genetic Therapy Inc. of Gaithersburg) became president and chief operating officer. In 1983, BRL merged with GIBCO, and GIBCO parent Dexter took more than a 60 percent stake in the newly created Life Technologies Inc.
GIBCO and BRL had specialties that were supposed to be -- and have proved to be -- complementary. GIBCO makes the cell media that researchers can use to grow chains of cells for research -- in Mr. Shipp's words, "food" that allows cells to grow at a controlled pace. BRL makes enzymes and other products that help researchers break down DNA -- the body's building blocks for growth -- or what Mr. Shipp calls the "scissors and paste" of molecular biology. Both of them help researchers chase the same goal -- inventing new drugs.
Dr. Barrett and Mr. Adler managed to fix almost all of the company's problems by 1988, when Dr. Thompson was recruited to become the new president and CEO. The one area still a problem was a diagnostic equipment business left over from BRL's days as an independent company. Dr. Thompson, a two-decade veteran of E. I. du Pont de Nemours & Co., was just the guy for both of Life Tech's challenges -- growing the company and fixing diagnostics.
His last job at Du Pont was director of sales and marketing for the company's North American diagnostics division.
Much more than Life Tech's two core businesses, diagnostics was a business typical of the emerging biotechnology industry. Diagnostics, like development of new drugs, is a business that depends on big jumps in scientific knowledge -- almost revolutionary, rather than evolutionary -- demands years of work, lots of investment and promises explosive commercial growth if the research develops a useable product. The trouble was that Life Tech couldn't make the business work.
The company's leading diagnostic device was a test for the human papilloma virus, which is thought to be a precursor of cervical cancer. If the science worked, the test could have -- and might still -- become a replacement for the Pap smear, a test credited with vastly reducing cervical cancer deaths but still considered imperfect.
Life Tech's test kit remained both expensive and dependent on radioactive ingredients. Both factors hurt its acceptance among the doctors who had to prescribe its use, said Margaret Smith, a securities analyst who follows Life Tech for Alex. Brown & Sons Inc. of Baltimore.
Last year, Dr. Thompson said, the time came to pull the plug. It was plain that the diagnostics division wasn't pulling its weight. Though the company's 1988 annual report had predicted that the sales of the HPV test would become "an established contributor" by 1989, the diagnostics business was still losing an estimated $4 million to $5 million annually. It looked as if it might take until 1994 or 1995 for the business to make a profit, Mr. Shipp said, where once 1990 or 1991 had been the target. And the whole area of papilloma diagnostics was drawing more competitors.
Most of all, the business wasn't meeting the standard that Dr. Thompson had set for Life Tech -- that the company have some clear competitive advantage in the field.
Dr. Thompson said he told a management group running diagnostics to find a competitive advantage so Life Tech could restructure its diagnostics strategy to use the advantage, whatever it was. He said he was as surprised as anyone when the management team decided that Life Tech didn't have any advantage at all.
"I really did not expect that to be the answer," said the company's 49-year-old president. But he added, "much of the technology was in the public domain. . . . We were building the foundation and couldn't fully reap the rewards."
The papilloma virus line of diagnostics was sold to Digene Diagnostics Inc. of Silver Spring in a deal that became final in December. Terms weren't disclosed at the time, but the annual report said it fetched $2.4 million, which equaled the book value of the unprofitable business, plus a note for $2.6 million payable in 1995-1997.
Ms. Smith of Alex. Brown praised the move as a sign of the maturity of Life Tech's management, because Dr. Thompson was able to pull Life Tech out of a field he had worked in for much of his professional life.
"We had so much on our plate that for us to continue an entrepreneurial activity diverted much of the talent of the company from the main [businesses]," Mr. Adler said. "It was an entrepreneurial activity and it was best off in the hands of an entrepreneurial company."
While Mr. Adler and management refuse to say that Life Tech isn't an entrepreneurial company any more, the management tools that Life Tech is using to succeed these days are closer to the tools of an established company than some sort of garage-based start-up firm.
"They do typical business school stuff," said Mr. Shipp. He points to Dr. Thompson's push to improve the quality of Life Tech's products, the strength of the training and technical support that Life Tech provides to customers, and the breadth of both the company's big in-house sales force and its product offerings as examples of the company's blue-chip approach.
Of course, one of the highest rewards that blue-chip companies provide to shareholders is a nice, steady return through a dividend. Life Tech crossed that barrier in late February, announcing that it would pay $3.50 a share as a special dividend and consider adopting a quarterly dividend policy. Dr. Thompson said a quarterly dividend is virtually certain to be adopted, with only the amount of the scheduled payout still in doubt.
"I had thought for two or three years about a dividend," Mr. Adler said. "There's nothing we've got on the horizon that will require cash. We're not a pharmaceutical company. We don't need to go through five years of clinical trials and spend $100 million [to develop new drugs]. The cash needs of our business are totally different. We starve nothing, and we're still running up cash."
With its cash reserves standing at $56 million at the end of 1990, up $7 million to $10 million over 1989, depending on how you look at the accounting, Life Tech didn't have much to do with all that money.
The classic entrepreneurial growth company would spend the money on research, or maybe make some strategic acquisitions. In any event, it would keep the cash in-house, and find something to do with it.
But Dr. Thompson said that Life Tech has already more than tripled its research and development budget since 1987, if the spending on the now-discarded diagnostics research is factored out, to about $13 million annually. And the cash was still piling up. So research was out. After all, there's a limit to how much research a company with $150 million in sales can profitably do.
Acquisitions were an even tougher way to get rid of all that money. Dr. Thompson said Life Tech was looking for acquisition targets with sales of less than $10 million -- hardly big enough to exhaust a $56 million cash hoard.
And he said the company couldn't find acquisitions on the terms it wanted -- sellers wanted prices that meant Life Tech would have to wait more than its goal of three or four years for the profits from the acquisitions to pay for the deal. Five or six years -- at least -- seemed to be more what the sellers had in mind.
"We saw a lot of businesses where the only way we could buy them was with long payback periods," he said, sounding not a bit troubled by his decision to walk away from the deals. "We decided we weren't going to pay for someone else's bad business. . . . Past five or six years, you're paying the old owners for what you bring to the business."
So here's poor Life Tech, still struggling along with $56 million in the bank. It wasn't all bad -- the cash added about $4.9 million to 1990's pretax earnings. But the cash was earning what cash earns -- about 8 or 9 percent. The return on every dollar invested in the core GIBCO and BRL businesses was more like 30 percent.
"Earnings from interest are nonsense," Mr. Adler said. "What are we, a bank? That's not our job. . . . It had become clear to me that there was a tendency to use the cash for acquisitions because it was there, and that's nonsense."
Dr. Thompson argues that paying out the dividend and boosting the return on equity will highlight just how well the core business is doing. He said that will help the stock price, which after all is the name of the game for a publicly held company. The stock had already been doing very nicely -- it jumped from $18.625 a share at the end of 1990 to $26 the day before the dividend was announced, and has since settled in around $22, the lower price reflecting the fact that the cash is now gone. Dr. Thompson also noted, in another context, that Dexter's stake in the company fell to 54 percent from 60 percent at year's end because so many officers and directors cashed in their stock options to put the special dividend in their own pockets. Mr. Adler's 6.3 percent stake commanded about $3 million in dividends from that one decision alone. Dr. Thompson's share would be almost $181,000, based on the stock options that the company's 1991 proxy statement said he exercised in March. Dexter would get about $28.6 million.
"If a company can't use its cash, give it to the owners," Dr. Thompson said.
But Dr. Thompson is adamant that the dividend doesn't mark the end of Life Tech's days as a growth company. There's more than one way to grow, he said, and Life Tech is getting ready to prove it. Life Tech used to say it would be a $500 million company by the mid-1990s, and still plans to be that big. The only change is that the target year is now 1997 at the latest.
"Ask me in a year if we're still committed to growth," he said. Chief financial officer Joseph Stokes said Life Tech's sales will still grow 15 to 20 percent with earnings rising faster by 1992, despite the loss of the interest income.
"We want to double or triple the size of this company, and we will," Mr. Adler said.
The formula will include acquisitions, new products that the beefed-up research budget will churn out, and riding the biotech industry's wave as more new drugs win government approval for commercial sale.
The company is also negotiating deals to buy the marketing rights to technologies developed by smaller companies, which should add to sales growth. This isn't a standard growth-company trick to be sure, because growth companies would usually be the ones selling the technology. But Dr. Thompson said Life Tech's established market position and sales force will be able to make it work. It's also a growth strategy that doesn't take much upfront cash because most licensing deals revolve around royalty payments rather than outright buyouts.
Even acquisitions are still not out of the question, with or without the cash pile. Dr. Thompson said the company is looking at up to three acquisitions.
The company has no debt to speak of, and still is generating cash from operations, so borrowing the money for acquisitions could be done "in three phone calls," Mr. Adler said.
Mr. Shipp said the trend that will really be Life Tech's best friend will be the growing commercialization of the biotech industry.
Commercialization will help Life Tech this way. If a biotech firm is trying to develop enough of a drug to get through clinical trials and win the federal Food and Drug Administration's approval to sell the drug, that company will buy small amounts of the things Life Tech sells. That's what many biotech companies are doing now.
When the same company is trying to make enough of an FDA-approved drug to sell it all over the world, they're going to need a lot of the things Life Tech sells. And with growing numbers of drugs now reaching late stages of clinical trials and seeking FDA approval, the number of biologically engineered drugs on the commercial market is expected to boom soon.
"Life Tech will send them a 75-gallon drum instead of a 1-liter bottle," Mr. Shipp said. "It's just a growth industry.
Life Tech's "luck" to be in the lowest-risk part of the biotech business hasn't gone unnoticed. A number of biotech firms in the Montgomery County area are also focused on the biotech services market rather than drug development. And different observers have different opinions on what it will take for other biotech support companies to follow in Life Tech's footsteps.
"It depends on Maryland's success in growing a production biotech market that would provide a base for the service firms," said Thomas J. Chmura, deputy director of the Greater Baltimore Committee. "As the commercial side of the industry grows, there's a bigger pie to divide up."
Dr. Thompson says it's not too late for smaller, younger biotech support companies to mimic Life Tech's success. But, he warned, it won't come easily.
"It's not too late. But someone who's entering now has to have a truly superior technology and the ability to develop a niche reputation," he said. "You couldn't persuade me to go run one of those companies."