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Biosciences focus on the bottleneck and drug discovery is leading to above average
growth in revenues and above average margins
Harvard Bioscience, Inc.
84 October Hill Rd.
Holliston, MA 01746
Interview conducted by:
Graduated from Oxford University in
1985 with honours degree in physics.
Brand Manager Lux and Shield soaps
for Lever Brothers (Unilever) in London for four years.
Graduated with distinction from
Harvard Business School in 1991.
Strategy consultant with Monitor
Company in Cambridge, MA and Johannesburg, South Africa for four years. South Africa work was advising the African
National Congress on competitiveness and increasing GDP growth rate.
Put together VC backed deal to buy
Harvard Bioscience (ne Harvard Apparatus) in 1995 becoming President.
Harvard Bioscience we have grown from $8m in revenues in 1996 to guidance of $80m in 2003. Our products are used to accelerate drug
discovery. We went public in December 2000 on
the NASDAQ market and trade under the symbol HBIO.
Harvard Bioscience, Inc. (NASD: HBIO) is a global developer, manufacturer and marketer of
a broad range of specialized products, primarily scientific instruments, used to
accelerate drug discovery research at pharmaceutical and biotechnology companies,
universities and government laboratories worldwide. HBIO sells its products to thousands
of researchers in over 100 countries through its direct sales force, its 1000 page catalog
(and various other specialty catalogs), and through its distributors, including Amersham
Biosciences and PerkinElmer. HBIO has sales and manufacturing operations in the United
States, the United Kingdom, Germany, Austria and Belgium with sales facilities in Japan,
France and Canada.
Mr. Green, I know Harvard has a long history, how important is that to you today and what
is the current focus of the company?
Mr. Green: The company does have a very long history;
the company began in 1901 at Harvard Medical School under the name of Harvard Apparatus.
We changed the name of the company to Harvard Bioscience a few years back in order to
better reflect a much broader product line today than we had back when the company was
founded. Today, we focus on a broad range of tools, which are primary scientific
instruments, used by major pharmaceutical and biotech companies as well as major research
universities, to accelerate drug discovery. Every major pharmaceutical company and every
major research university is a customer of ours. We make scientific instruments to help
them to automate bench research.
CEOCFOinterviews: What distinguishes Harvard Bioscience from
other companies in your space?
Mr. Green: One of the things that distinguishes our
company from other small public companies in the tools for drug discovery space is that we
do have a broad product line; most of the other companies have a single product and a
single technology. We have made a very conscious business decision to pursue a broad
product line because this industry is characterized by very rapid technological change. We
think it is very high-risk as a business to be dependent on a single technology because
technology moves rapidly and the applications that drug discovery scientists are working
on move rapidly.
CEOCFOinterviews: Can you tell us about your distribution
Mr. Green: We have three separate distribution
channels. We have a capital equipment field
sales force worldwide. We have several OEM distributors; most of them are very big names
in the life science tools industry; such as Amersham Biosciences (the life sciences
business of Amersham plc LSE: NYSE: OSE: AHM) and PerkinElmer. Virtually every one
of the Mass Spectrometry companies is an OEM (Original Equipment Manufacturers)
distributor of ours. We believe in leveraging their distribution channels as well as our
own. We have a major catalog and website for distributing our lower priced products as
well. Those are our three distribution channels. We
tend to like products and product lines that have strong market positions within niches.
This industry of supplying tools to the pharmaceutical industry is a niche industry. There
are very few big product segments within the industry and we chose deliberately not to
compete head-on with the big instrument companies, on the contrary, we tend to work with
them for them to distribute products of ours that have a unique position. We use our own
sales force outside that around the world.
CEOCFOinterviews: So you are not defined by a signature or
Mr. Green: I dont think there is one signature
product that defines us as a company. Thats is one of the ways we are very different
to the one technology companies.
CEOCFOinterviews: Do customers know what they want when they
come to you or are you introducing products to them?
Both of those are true. With the more mature products under the Harvard Apparatus
name, which have been around for many years, our customers tend to know exactly what they
want. Some of our more cutting-edge technologies carry a price tag of a 100 to 300
thousand dollars. With those we are often educating the customer about a new technique and
a new approach. For instance, we sell a very important instrument, called COPAS, which can
be used to automate animal research. I am talking about worms, and flies and fish, which
can be handled in an automated fashion. Drug discovery scientists can now routinely screen
potential pharmaceutical molecules for activity in these living breathing organisms, at
over a thousand compounds a day. This is the kind of technology where there is a
significant education process with the customers about the technology and the use of
organisms like worms, flies, and fish in the drug discovery process. Therefore, it is a
mix of both educating customers to very new cutting-edge products and customers looking
for some of our products, which are very well established.
CEOCFOinterviews: Are there disposable parts to what you
Mr. Green: Primarily we sell scientific instruments and
there are some consumables that go with the products; the consumables are less than 10% of
CEOCFOinterviews: Do you need to maintain a large inventory,
and how do you handle that?
Mr. Green: I think we have modest inventory levels.
Gross margins are relatively high and since we are keeping these products at manufacturing
costs, and reporting cost rather than retail value, the cost of the inventory isnt
CEOCFOinterviews: Do you still develop any products on your
own, and how much of the R&D goes on at Harvard?
Mr. Green: We do develop product lines that we own and
manufacture. We have our own in-house engineering and scientific staff to create the next
generation of the products that we currently own. When we look for radically new
technologies, we typically do not try to invent those ourselves. If you look at the
history of the people who have tried to invent new technology by themselves, they usually
have incurred massive operating losses for many years before, if ever, achieving
profitability, and that is not our business model; our business model is to make money
every quarter. We have found it is more efficient and effective to buy small companies
once they have already reached the revenue stage, and we can leverage our strengths in
operational management and in sales and marketing. We can bring in those technologies,
once they have some level of proof in the market place, rather than trying to invent those
from the ground up, because it is a risky business to invent new technologies completely
from scratch. When trying to develop technologies that are more cutting-edge we will
typically only do that with a major pharmaceutical company who are willing to fund some of
that development work.
CEOCFOinterviews: You recently completed the acquisition of BTX®
Biomedical Corporation (GEB: AMEX and TSX);
tell us about that and how that fits into your strategy?
Mr. Green: BTX® is a small company; it is about 3 ½
(three-and-a-half) million dollars in annual revenues and it is what we call a tuck
under acquisition. We have made many acquisitions over the last six or seven years
and many of them are small product lines between one million and five million dollars in
annual revenues. These are very complementary to product lines that we already sell and
therefore we can really leverage the existing distribution channel we have whether it is
our relationship with OEM distributors, or whether it is through our field sales force or
our catalog and website. We tend to like expanding our product line by acquiring these
strong franchises in niche markets. BTX is going to be consolidated into our headquarters
here in Holliston, Massachusetts. We expect that to be accretive to our earnings per share
immediately upon moving it here. That is typical of the tuck-under
acquisitions that we do because we can leverage our existing infrastructure in terms of
general and administrative expense and also sale and marketing expense. We have done
several of these acquisitions a year for the past four or five years.
BTX has some upside associated with it as well. BTX has recently completed the development
of a new generation of technology for their core application area, electroporation,
which is a technique for getting drugs, DNA and RNA into cells. Electroporation,
I believe, will be a growth market going forward because of a new technique called RNAi
is the answer to many pharmaceutical researcher prayers for a way to accelerate a key
bottlenecks in the drug discovery process called target validation, which is
insuring that a protein molecule in the human body, is indeed, implicated in a disease. It
is very easy now with genomics technology such as the sequencing of the human genome, and
gene chips, to identify targets. It is much harder to validate that those targets are
genuinely implicated in a human disease. RNA
allows you to do that very quickly compared to historical ways of doing that, which had to
use knockout animals, which is expensive and slow. I think RNA
is something we are going to hear a lot more about in the future. BTX is the first to
market with a 96 well version of the technology which means it can be done in high
throughput which is a requirement for virtually all research today. Initial reaction from
customers even before the product had been officially launched was very positive.
CEOCFOinterviews: Im assuming that there are a
tremendous amount of patents involved in what you do; are there some areas where you are
the only people supplying this equipment?
Mr. Green: Yes, BTX, the 96 well example I just gave is
one. The COPAS instruments are unique to us; there is no one else who sells products like
that. We have patents elsewhere in our portfolio that protect key elements for our
technologies. I believe patents are not nearly as valuable as they appear to be to many
people in this industry. There are many small and unprofitable tools for drug discovery
companies. These companies have one hundred to two hundred patents. That doesnt
guarantee their commercial success. It can often be a distraction in pursuing all of those
patents because they are very expensive unless you really have a completely unique
solution. We prefer to put our efforts into sales and marketing and operating businesses
efficiently and we will get patents where we think they are justified. Generally, we are
not the kind of company that goes out and patents everything that moves.
CEOCFOinterviews: What are the areas of growth for you?
Mr. Green: We deliberately target our products to two
of the key bottlenecks in drug discovery. Drug
discovery is a very long and expensive process. It takes nearly a billion dollars to bring
a drug to market and it takes twelve to fifteen years; its a long and multi-step
process. Some of those steps are genuine bottlenecks. One is target validation and I think
and the BTX products can really help there. Likewise the COPAS products. Another one is ADMET screening. ADMET stands for
Absorption, Distribution, Metabolism, Elimination and Toxicology. That is what happens to
a drug once it enters your body. We have invested to create and acquire products that
target those areas.
In October of last year, we closed the acquisition of Genomic Solutions, which has a very
strong set of technologies in bottleneck areas in drug discovery, particularly the
purification of proteins, which is commonly used in target validation as most targets are
proteins. Genomic Solutions also sells some very strong technologies for crystallizing
proteins and that is an important step before doing x-ray crystallography. The beauty of
x-ray crystallography is that you can determine the exact shape of a protein and the exact
shape of a protein after a drug molecule is bound to that protein. If you perform those
steps, it becomes easy to rationally design your drugs. In other words if you know the
lock you can design the key. That is a way to
cut out a lot of the hit and miss. You may find it surprising but most drugs
are not rationally designed today, most are discovered by hit and miss which
is one reason it is so expensive.
We have deliberately built our portfolio of products, whether it is through internal
development or whether it is through acquisition, to focus on the bottlenecks in drug
discovery because we believe that is how we get above average growth in revenues and above
average margins. I think our track record, supports the validity of that strategy. Over
the last five years, we have seen revenues grow at a compound annual growth rate of 38%,
and we have seen pro forma earnings per-share over the last five years, grow at a rate of
23%. I think that strategy is validated by the strong performance of the company.
CEOCFOinterviews: Are there any geographic area that you
would like to increase your presence?
Mr. Green: We are already very widely distributed
around the world, both under our own brand names and also through our OEM distributors,
such as Amersham Biosciences and PerkinElmer, Inc. (NYSE: PKI). These two distributors
have about a thousand field people worldwide
between them. We can leverage their distribution channels by having these OEM
relationships into areas of the world and particular customers where we dont have as
strong a presence. We have field sales people in the United States, Europe, and Japan, so
we already cover the biggest markets on our own.
CEOCFOinterviews: What are your biggest challenges going
forward and how are you prepared?
Mr. Green: The biggest challenge for us going forward
is to increase the size of the company to the point where we get much greater stock market
recognition for what we do. As a business, we believe we have a fundamentally sound and
sustainable business model of high revenue growth and high earnings per share growth
within the tools for drug discovery space. The reality is we are about a 75 or 80 million
dollar run rate of revenues, company today. That is still very small to be a public
company, and I think as a result, we suffer a liquidity discount in our stock because we
are small and thinly traded. It is important for us to continue our growth and get
ourselves to the size that we cannot be ignored by the stock market anymore, and I think
by doing that we will see disproportionate returns to the stock price.
CEOCFOinterviews: Will growth come from higher sales or
increase in product line?
Mr. Green: I think it is both of those. But, I
dont think it is possible for us to get the significant growth we want without
further expanding our product line and I think there are many opportunities to do that. We
have been a very acquisitive company over the last five years and we expect to remain that
way; it is a core part of our strategy and not an add-on. We expect to be acquiring more
companies and product lines as we go forth because there is still significant leverage
opportunities in the large fixed cost areas of managing a field sales force and even in
managing catalog and websites. I foresee further acquisitions and because of the decline
in the public stock markets over the last couple of years the pricing of acquisitions has
come down substantially. Many companies that might have gone public two or three years ago
have no hope of going public today, therefore, they are much more interested in partnering
up with a company such as us. We typically are working on half-a-dozen or a dozen
potential acquisitions at any point in time. Right now, I think the opportunities for
acquisitions have probably never been better.
CEOCFOinterviews: About how much of your sales come from
catalog and website and is that an increasing area for you?
Mr. Green: Roughly our sales split about one third, one
third, and one third between the field sales force, the OEM distributors, like Amersham
Biosciences and Bruker Daltonics and the catalog website.
CEOCFOinterviews: In closing, what would you like to say to
shareholders and potential investors?
Mr. Green: I think the key thing to focus on from an
investor point of view is that we are in a growth market, and there arent very many
growth markets around these days. We are a profitable company, and always have been. I
think our financial performance speaks for itself; five years revenue growth at 38% and
five-year pro forma eps growth at 23%. I think simply recognizing those facts, which may
be buried in long documents like a 10-k filing, is the right thing to be focusing
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