Bioanalytical Systems Inc. (NASD: BASSI)
Interview with: Peter Kissinger, Chairman and CEO
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Bioanalytical Systems Inc. –finding out what substances will work for Pharmaceutical Companies

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Biotechnology & Drugs

Bioanalytical Systems Inc.

2701 Kent Avenue West
Lafayette, In 47906
Phone: 765-463-5801

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Peter Kissinger
Chairman and
Chief Executive Officer

Interview conducted by:
Diane Reynolds, Co Publisher
March 2003

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.

Dr. Kissinger received a B.S. in Chemistry (1966) from Union College in Schenectady, New York and a Ph.D. in Analytical Chemistry (1970) from the University of North Carolina in Chapel Hill. Prior to joining the faculty at Purdue in 1975, Dr. Kissinger was a Research Associate at the University of Kansas (1970-1972) and an Assistant Professor at Michigan State University (1972-1975). Dr. Kissinger’s academic research has involved the study of modern liquid chromatography techniques and in vivo methodology for drug metabolism and the neurosciences. He founded BAS in 1974.

Dr. Kissinger has published over 220 scientific papers and has given more than 400 invited lectures. The Indiana Health Industry Forum honored him for his outstanding contributions to the Health Care Industry with their 1999 World of Difference Award. He was elected a Fellow of the American Association of Pharmaceutical Scientists (1998) and the American Association for the Advancement of Science (2001).

Company Profile:

Incorporated in the State of Indiana in 1975, Bioanalytical Systems, Inc. is a drug development firm providing contract research services and unique products for the pharmaceutical, biotechnology and medical device industries. It is a leading manufacturer of specialized instrumentation and accessories for liquid chromatography, in vivo sampling, veterinary medicine and electrochemistry. It was the first to introduce commercial electrochemical detector for liquid chromatography and continues to innovate in this and other trace analysis methodologies.

Its laboratories are in the USA and UK and a partner laboratory in France with Biotec Centre.

The major products/services include:

-           Electroanalytical Chemistry

-           Liquid Chromatography

-           In Vitro Diagnostic Products

-           In Vivo Sampling Products (Whole Blood and Membrane Sampling)

-           Veterinary Physiological Monitors

CEOCFOinterviews: Mr. Kissinger, please tell us about Bioanalytical Systems?

Mr. Kissinger: “Our business is one that is focused in a bridging area in drug development and that is between what we call discovery. Many people have read about genetics and chromeonics, and bioinfermatics and some of these obscure terms that are related to life science revolution in terms of looking at the way we discover new drugs that are potentially helpful for human disease. What we are involved in is evaluating the output from that science in terms of where it will produce drugs that are safe and effective in human use. We start in evaluating safety and effectiveness in laboratory animals and we carry up to clinical trials in humans. For example, we may take a potential new drug and do a mammalian species with that and try to understand where that new chemical goes, what it does, how fast it does it and whether there are any adverse side effects for the animal or human involved in the study. Therefore, this involves a great deal of a laboratory work, so we are very laboratory intense company.  We are “white coats” people so to speak.

We make measurements that are ultimately used by the pharmaceutical companies when they file with the FDA (Food & Drug Administration) to get drugs approved. Much of what we do is finding out which substances are not going to work and to do that as quickly as possible. This is a business in which you select very few from large numbers so we have to throw out a lot of potential new drug substances for various reasons, before we find a few that will be worthy in human use.  In a way, companies pay us to tell them that many of their potential new drugs are no good and are not going to work so that they can focus on their resources on the ones that will.

We are also unique in that we do this work both on a contract research basis to all major pharmaceutical companies and we manufacture products that we sell to such companies that they use in their own laboratories to get the same type of data that we get in order to file with the FDA. Of course, the end of the game is to try to find drugs that fight diseases like cancer, diabetes, cardio vascular disease and HIV. Those are a few that we have specialized in, which will have a big impact on human healthcare.”

CEOCFOinterviews: How are your revenues generated and what are the percentages generated for each area of your business?

Mr. Kissinger: “Pharmaceutical companies have two things they can buy from us, they can buy our experience and our talent in the same way they would use lawyers or accountants or anyone they would outsource work to or they can buy our products and have their own people work inside. Sometimes we work collaboratively where we are both on the project at the same time. The revenue stream at BAS in the last fiscal year is about 60% in contract research and 40% in products we’ve sold to pharmaceutical companies. In the upcoming year, that ratio will change to something like 75% or 80% contract research and 20% products, because we are bolting on several acquisitions in the contract research area.”

CEOCFOinterviews: Some pharmaceutical companies do feel that it is beneficial for them financially to outsource this part of their business and this is where your company comes in.

Mr. Kissinger: “We were smaller and less bureaucratic and we serve a number of different clients so when you are working with 25 different pharmaceutical companies your talent builds up, your experience level is based part on what you do with all of the others and that makes you more efficient than working with any one client. We’re like a law firm, the more cases lawyers work on the better they get. The more drug substances we work with for diabetes, cancer or cardiovascular disease, the more we know the rules and can operate more efficiently when the new one comes in. Further, our people are more trained and well focused and can deliver a data in a quality manner that is consistent with what the FDA expects.”

CEOCFOinterviews: Are you working with different chemicals and molecules each time?

Mr. Kissinger: “In general, we are working on a totally different chemical substances. Molecule we may see from Lilly, Merck, Abbott Laboratories, Bristol Myers or SmithKline would all be totally different from each other even if they were oriented in the same disease area.”

CEOCFOinterviews: You are also in the veterinary area as well.

Mr. Kissinger: “When we evaluate a new drug we are going to test them on animals and we do this not only for human medicines but for medicines that will be used for animals and veterinary purposes. We do this for companion animals like dogs and cats but also for horses, cows, pigs and all sorts of farm animals, which also an important part of the pharmaceutical business as well. Therefore, for a number of reasons we are involved in veterinary medicine. We also manufacture instruments that are used by veterinarians to take electrocardiograms of dogs and cats to diagnose potential cardiovascular problems. In fact, one of the reasons we are in that business is that it is a measure that we have to factor when we evaluate a new drug substance as well. It is not only the chemistry that we measure but it is also the physiological parameters like blood pressure and hematology and electrocardiograms that help us determine what the influence and impact of the potential new drug is on a given mammal.”

CEOCFOinterviews: Where is all of your research done?

Mr. Kissinger: “We actually are spread out geographically, with our BASI Northwest labs in Oregon and our Central Headquarters of BAS headquarters and lab in Indiana. We have a drug safety testing facility in Evansville, Indiana, which we are dramatically expanding right now as we speak. We are closing on an acquisition in Baltimore, which is another Bioanalytical and clinical trials site in downtown Baltimore and then we have two locations in the United Kingdom, one south of Manchester and another one southeast of Birmingham. We are spread out over the US and the UK because the pharmaceutical research environment in Europe is very strong, very important and the global companies that we work with range from California all the way across Europe and Japan, which is another area. There is not much of this type of work going on in areas like South America or Africa or Australia, there is some in India, however, it is focused primarily on North America, Japan and Europe.”

CEOCFOinterviews: The Company was first incorporated in 1975, since then what do you feel has been the major hurdles that this company has overcome?

Mr. Kissinger: “It doesn’t seem that far back to me, actually it feels like a very short time. We’ve changed directions a couple of times, starting out as an instrument business strictly making products for use in academic research. Then we determined that in order to grow we needed to reach commercial customers, so in the late 80’s we became very heavily engaged in the contract research end of the business which was an opportunity that had come up.   Pharmaceutical companies had decided that they didn’t need to be as vertically integrated as they once were and there would be advantages in outsourcing R&D, which is something they never even heard of back in 1980. Now this is growing at a very rapid pace where they are outsourcing more and more just like telecommunications and automobile companies.

One consistent phenomenon over the last ten, fifteen years is the rise of companies that are moving away from vertical integration toward outsourcing. That set the bandwagon that comes up and one of the struggles you have in business is that you don’t get stuck in a rut and when opportunities come up you try to grab them and run with them and they change the business model. Therefore, what you were doing five years ago is no longer valid in what you are doing today. Things change quickly so companies that stagnate tend to disappear. It’s frustrating from time to time but we enjoy doing new things and moving in a new direction if we see that is where we can make money.”

CEOCFOinterviews: With all that you have on your plate, can you integrate your acquisitions successfully and do you have the cash and or credit to do all of this?

Mr. Kissinger: “Those are excellent questions. I’m a strong believer in investing when things are down. For example, right now is an excellent time to do acquisitions, because the prices are lower and alternatives such as the IPO market, is virtually shut for very small businesses. Many people can’t raise equity; they have to work with debt capital in order to grow their businesses. This is all very nice for us. Because we have a reasonable balance sheet, we haven’t been highly leveraged. There are many small companies in our space looking to join into something bigger. We have a lot of international experience, which helps us. While it is unfortunate that the equity markets are largely closed not just to other companies but to us as well, we have enough assets, we have receivables and buildings that we own. Therefore, we are able to use those to finance acquisitions at this time.

What we are counting of course is the gamblers game. We are counting on the fact that the area that we are in is one that is very much needed, with outsourcing growing very dramatically, big pharmacy are going to have to do more of it and so we are trying to build capacity. I think Andy S. Grove (Chairman.)from Intel Corporation (INTC) said not too long ago that the capacity is strategy and we agree with that. When things turn and come back uphill, we want to have the capacity to grab more business. We don’t want to wait until the upturn happens, because it takes us about 18 months to put facilities in practice to meet FDA requirements and 6 months or so to integrate acquired companies.

We try to integrate globally, all of our IT infrastructure, our sales and marketing, our purchasing and try to look for economy scale across the board in HR and every other area including medical insurance. Getting all of that done does take time but it puts us in a nice position when we see the large number of drug substances coming out of the discovery company that needs to be evaluated for safety and effectiveness before they move on to big Pharma licensing agreements. It’s filling that gap, which is what we are really focused on and there is really a lot of business for that. Actually, in the last quarter, business has picked up quite nicely for us. It’s not a cakewalk at this time for any company, but as I frequently say, ‘I’m sure glad we’re not an airline’.”

CEOCFOinterviews: Why should an investor consider this company over any other company in this sector?

Mr. Kissinger: “We’re small but we think we can grow at a much faster rate than some of our larger competitors. Our market cap is very low so we think right now that we are pretty well near the bottom. Basically we have assets that are much greater than the value of our market cap which is interesting, but that is certainly true with other companies as well. It is a matter of when you call the turn. If you think things are going to turn back then we are very well positioned to grow. In the future, we have to bolt on more acquisitions, but we have a very clean regulatory on affairs, no problems in our history with the FDA and we think this just a very compelling business from a healthcare point of view. 

What really drives us at the end of the day is the aging population of baby boomers combined with the new drug discovery methodology. Big Pharma is replacing big blockbuster drugs with new novel technology that is safer, more effective and brings them good value, but they are all in a hurry to get work done. We have major clients in the pharmacy in Pfizer Inc. (NYSE : PFE),Eli Lilly & Co. (NYSE: LLY), GlaxoSmithKline plc (ADR) (NYSE: GSK) and going forward, we think our client list is high pedigree and that speaks highly for the quality of work that we do or we wouldn’t be talking to companies of that quality.

Both our product and contract research mix is unique to relatively few companies that do both. We win on the product side or if they want, they can contract with us to do research here. We like products when the gross margins are good and we like services because they justify very talented base of people who can help us become recognized and branded in the industry and help us develop our own products. In a way, the pharmaceutical industry helps us cover the expense in R&D for our products. By making our own products and using them to do contract research, the cost basis is much lower than some of our competitors who have to buy these products from us. That is the way it is. In the contract service business, we are a medium sized company. There are billion dollar companies in this business and they’re a large number of $5million dollar type companies. We are in the middle.”

CEOCFOinterviews: You seem to like geographic diversity.

Mr. Kissinger: “One thing we like is geographic diversity. We focus on the Biotechs on the west coast, we are very much involved in east coast, North Carolina the research triangle in Boston, and we have people up and down that whole corridor. We have two facilitates out there. In UK, we are the strong pharmaceutical R&D and we have liaison partners that help us in places like Japan and France which helps supplement our base business. We are aggressive about things even though we are currently small. I think as things turn we will be able to turn nicely.”

CEOCFOinterviews: Is there any one client you rely on more than the others are?

Mr. Kissinger: “That is an excellent question. I would say no. We have a fair amount of business with Pfizer Inc. (NYSE:PFE) and Pharmacia Corporation (NYSE:PHA).  Those two are now in the process of combining into one. You would think that would be a great threat to us, but between those two companies we work with them at about 20 different R&D sites around the world and probably on excess of 30 different projects. The business concentration is not there and what we do on all of these different projects is quite different. They are in different therapeutic areas and are managed from different locations like California, France, the UK and New York. I think the last time we looked, last year if they had been combined it would have been something like 30% of our revenue that will actually drop substantially in the coming year because of the acquisitions, because we bolted on. We don’t work on any one project that is every more than 5% of our business. There are many different substances and potential new drugs that we work on with smaller projects. Therefore, when projects are cancelled it isn’t as bad with us as it is with other companies that have a much greater concentration.”

CEOCFOinterviews: Did you start this company?

Mr. Kissinger: “I started it and I’ve been stuck here basically.  I’ve never had a promotion. I started it and printed up a business card and said I was the president and I’ve been waiting for a promotion ever since.”

CEOCFOinterviews: At one point there was a lot of education being put towards the technology industries with a shift away from healthcare, how did that impact you?

Mr. Kissinger: “I think that is true. I’d say three years ago with all of the discussions with telecommunications and dot coms, many young talented people were directed towards telecommunications and software and so called high technology, which needs semi-conductors and PDA’s and that sort of thing. However, we are in pharmaceutical technology, we’re high technology too. It’s just in life sciences instead of semi-conductors. Obviously, what has happened over the last three or four years has balanced things out a little bit. The life sciences have come back and look a little more attractive right now, although, everyone is slow right now there is no doubt about that. However, I think the recognition is clear, the Internet and all of that are extremely important and it is extremely important to our business because we use that technology all of the time. We are a dot com in a lot of ways. A lot of what we’ve done is due to telecommunications and Internet technology both for products and services. However, everyone recognizes that technology is not the magic bullet everyone thought it was back in 1996 and 1997.  It’s going to take a little bit longer. I think with the sobering of the whole process things have swung back into balance.”

CEOCFOinterviews: So you feel that everything is in order for you to grow your business.

Mr. Kissinger: “Many companies are a little bit down currently, so now is the time to pounce. Most people grow their business when they hear everything is going great and by the time they have everything in place to do great themselves then everything turns and goes sour. We would rather do it the other way and catch the wave just right.”

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