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Click here to view Analyst
interview with:
Karen
Gilsenan, First Vice President,
Covering: Specialty Chemicals
Merrill Lynch
Sigma-Aldrich - a chemical company
with
unrivaled scientific knowledge and
more products than anyone else
Basic Materials
Chemical Manufacturing
NASD: SIAL
Sigma-Aldrich Corp.
3050 Spruce Street
St. Louis, MO 63103
Phone: 314-771-5765
David Harvey
Chairman and
Chief Executive Officer
Interview conducted by:
Walter Banks
Co-Publisher
CEOCFOinterviews.com
January 2002
Bio of CEO,
David R. Harvey serves as Chairman, President and Chief Executive Officer of
Sigma-Aldrich Corporation, a $1.2 billion global life science company headquartered in St.
Louis, Missouri. Dr. Harvey joined the company in 1974 as Vice President of European
operations. In 1981, he moved to Milwaukee, Wisconsin becoming President of Aldrich
Chemical. He served as Chief Operating Officer of Sigma-Aldrich Corporation from
1986 until 1999 when he was named as President and Chief Executive Officer. In
addition to these duties, he also became Chairman of the Board in 2001. Prior
to joining the company, he worked from 1965 at Shell International Chemical Company in
various international sales and marketing activities. Dr. Harvey holds a Ph.D. in
Chemistry from Oxford University
About Sigma-Aldrich Corp.
Sigma-Aldrich (NASDAQ:SIAL) is a leading Life Science and High Technology company.
Its biochemical and organic chemical products and kits are used in scientific and genomic
research, biotechnology, pharmaceutical development, the diagnosis of disease and chemical
manufacturing. It has customers in life science companies, university and government
institutions, hospitals and in industry. Sigma-Aldrich operates in 33 countries and has
over 6,600 employees providing excellent service worldwide.
Sigma-Aldrich is committed to the success of its Customers, Employees and
Shareholders through leadership in Life Science, High Technology and
Service.
Sigma-Aldrich offers the research community 200,000 products with 85,000 listed in
its general catalogs and another 115,000 in its rare chemicals library. Through
interaction with customers, Sigma-Aldrich determines what technologies and products they
need to move forward in their research. This close interaction is driving their expanded
R&D program. Many innovative products are in the pipeline to further their leadership
position.
They have five well-known chemical brands. Each one addresses a defined area of
customer needs and has earned a reputation for quality and performance:
Sigma - Biochemicals and Reagents for Life Science Research.
Aldrich - Organics and Inorganics for Chemical Synthesis.
Fluka - Specialty Chemicals and Analytical Reagents for Research.
Supelco - Chromatography Products for Analysis and Purification.
Riedel-de Haen - Laboratory Chemicals and Reagents for Research and Analysis.
Sigma Diagnostics provides reagents and instruments to clinical laboratories,
hospitals and physicians.
Through its family of brands, Sigma-Aldrich offers the widest range of modern
research products, fine chemicals, and diagnostic products and the highest level of
customer commitment. Their combined aim is to deliver quality products, technical
expertise, global availability and convenient purchasing methods.
CEOCFOinterviews: Mr.
Harvey, please give us a brief history of Sigma-Aldrich?
Mr. Harvey: “The
company goes back just over 50 years. It was started by entrepreneurs here in St.
Louis, MO, on the biochemical side and in Milwaukee, WI on the organic chemical side. For
the two companies, as is the case with most entrepreneurs, the early years were tough
going, but by 1975, when they merged, they came together with total revenues of about $40
million. $10 million of that was on the organic side, that's the Aldrich part of the
business. On its Sigma side, the biochemical side, we had $30 million, giving us a total
of $40 million. Since the amalgamation, the company has grown to where today it has sales
of about 1.2 billion dollars, and is now one of the top 150 chemical companies in the
world.”
CEOCFOinterviews: How
long have you been with Sigma-Aldrich?
Mr. Harvey: “I've
been with Sigma-Aldrich since 1974, and in fact I joined the company just before the
merger of Sigma and Aldrich. I joined on the Aldrich side of the business. My initial role
for both Aldrich and Sigma-Aldrich was as Vice President of European Operations. I came to
the United States in 1981, when I became the President of Aldrich Chemical Company. I was
named the Chief Operating Officer of the company in 1983, and became the CEO two years ago
and the Chairman and CEO exactly a year ago. Therefore, I have a long history with the
company going back 27 years.”
CEOCFOinterviews: What
would you say is your most recent and exciting news?
Mr. Harvey: “I
think the most exciting news as we look forward is our real push into biotechnology. If
you look at our total business of 1.2 billion dollars, we have over 200 million dollars in
the biotech area. Furthermore, we have just opened our new R&D facility in St. Louis,
which is a 55 million dollar investment and is the largest single investment in the
history of the company. We are staffing it with about 100 scientists initially, and all of
this activity is geared to what's going on in studies of the human genome.”
CEOCFOinterviews: How
much of your business does the biotech area represent?
Mr. Harvey: “Of
the 1.2 billion dollars that we have, about 75% of it goes into research applications.
That 75% can be split further, with two thirds of that going to our scientific research
division. What we are supplying here are small bottles of chemicals for basic research in
life science and high technology. The other third of the research business, which is
just over 200 million dollars and represents 20% of our total business, is in
biotechnology, and here you are looking at kits with helpful application information. If
you look at the remainder of the Sigma-Aldrich business, we've got about 20% of our
business in the fine chemical division, and here we sell larger quantities of the products
that we sell to researchers. Finally, we have another 5%+ in the diagnostics
business.”
CEOCFOinterviews: Can
you give us a breakdown of what you are looking for in growth for each sector?
Mr. Harvey: “We
have four business divisions. The plan we have is to take the scientific research part of
our business, which is currently 55% of our business, and grow that at 8%. We are aiming
to grow the biotechnology business at 12%, the fine chemical business at 12%, and
diagnostics at 10%. Therefore, overall as we look ahead our aim is to grow the total
business, emphasizing internally, 10% top and bottom line, with another 2% growth coming
from acquisitions. In addition, our aim is to get the return on equity back to 20%, and
we've achieved that level in years gone by. It fell to 14%, but this year should end up to
about 17%, and next year we hope for 18%, and within a couple of years we should have a
return on equity of 20%.”
CEOCFOinterviews: What
is your growth strategy for the different areas of your business?
Mr. Harvey: “If
you look at our growth strategy, basically you have ask yourself what the core competence
is at Sigma-Aldrich, and is it sustainable, because without that no company has a future.
First, our core competence really is the sheer number of products that we have. We list
more products than anybody else does in the world, with about 85,000 products and we make
40,000 of them. We also add more products per year than most companies list. Therefore,
it's really building on that knowledge base that drives everything. Secondly, the service
that we give drives growth, because we back up the sales of these products. We have sales
offices in 33 countries, we have 15 distribution centers, and it's worth noting that over
55% of our business is outside of the United States, with 45% in the U.S.
Another competency is certainly the Internet. If you look at our sales over the
last 5 years, they've gone from zero to the first year doing $10 million, the second $20
million, then to $40 million and in this year doing $80 million. Hence, of our research
business, over 10% of our business now is coming via the Internet, and quite candidly,
that has really surprised me. With our great success with the Internet, we see that as a
competitive advantage in the future. It's a fact that anyone can develop an ordering
system on the net, but the key is really what is behind it, what sort of information can
you put on the net, and our advantage is that we have a tremendous amount of information.
Thus far, we have recorded about one third of our information on the net, and we are
hoping to put the remaining two thirds on the net in the coming years.”
CEOCFOinterviews: Can
you give us a breakdown of your sales and marketing outside of the Internet?
Mr. Harvey: “Regarding
our sales world wide, we supply about 60,000 companies or different entities, and probably
supply as many as a million people world wide. If you look at the breakdown of the
products in slightly more detail, what you'd see of our sales, and these are all direct
sales, 40% go to the pharmaceutical industry, 30% go to universities, 20% goes to the
chemical and allied industries and 10% goes to hospitals. Therefore, we have a very
diverse customer base.
I think what's worth noting here also is that our business is pretty recession
proof, because even in a tough economy, the pharmaceutical companies are still investing
enormous sums as they try to develop the next wonder drug. Additionally, people are still
being educated at the universities, and unfortunately, people tend to get sicker or spend
more time getting treatments during a recession. Hence, the only part of our business,
which is susceptible to a declining economic climate, would be the chemical and allied
industry, and at best only half of that or 10% of our total business might be affected.
Therefore, we are pretty recession proof and we have not seen any impact so far.”
CEOCFOinterviews: In
building out your business is your focus now more on building products than needing to add
customers?
Mr. Harvey: “Both
are important. Most of our products are sold in very small quantities, much smaller than
your typical jar of coffee. The whole strategy is to have more products than any other
company and to combine those products into kits for ease of use. As an example, to bake a
cake you need to buy the various ingredients. With a kit, you would buy a mix of needed
ingredients, which are ready to go, all you would then need is the instructions, and
that's really the focus of the biotech area, relating back to these kits. As for
customers, new scientists are entering the field all the time and we want to make sure
that they regard Sigma-Aldrich as a key supplier.”
CEOCFOinterviews: Can
you tell us about your name recognition in the various industries, and where customers
could find your products outside of the Internet?
Mr. Harvey: “Sigma-Aldrich
has been in business a very long time, and our products are as well known in the
laboratories throughout the world as Coca-Cola is to the general consumer. If you were
looking for a product in this particular area, you normally would go to Sigma-Aldrich.
With regards to finding the products, in the good old days it was always via a catalog. We
have as many as 3.5 million catalogs in the marketplace, which is many more than anyone
else, and they are looked upon as the gold standard. Therefore, that would be the first
place a customer would look, the second being the Internet.”
CEOCFOinterviews: Outside
of R&D, how else do you add product?
Mr. Harvey: “We
add product through a combination of R&D and acquisitions. As I mentioned we have
about 85,000 products and about 40,000 are manufactured so in doing the math, about 50% of
them are developed and produced in house. The other 50% we will buy directly from other
suppliers. Acquisitions have added another 2% of our sales growth over a period of time.
Therefore, as we look forward, 2% of our additional sales would also come from
acquisitions.”
CEOCFOinterviews: Are
you then functioning as a sales agent?
Mr. Harvey: “We
are in a way, but I think that there is a basic difference in that we add value to the
materials we buy from a company. We may purify it, and we certainly would analyze it and
put it into our bottles to provide the customer the quantity they need. So when
customers buy our product, they are absolutely certain that they are getting a first class
product because it has gone through the Sigma-Aldrich quality system.”
CEOCFOinterviews: Where
do you position your company with its competition?
Mr. Harvey: “In
looking at the various sectors in the research market, which is about 7.6 billion dollars
growing at 6%, we have sales over $800 million, so we have a world market share of over
10%. The largest company in that area is called E. Merck in Germany, and they have a
company in the U.S. called VWR. Sigma-Aldrich is number two in this market. The difference
between us is basically that they tend to have about 90% of their sales in commodities,
with 10% in specialties, and for us it's the reverse. Hence, that's one reason that we are
much more profitable in this particular sector than they are.
The next level of competitors, really are biotech companies such as Applied
Biosystems, Becton Dickinson and Amersham, which are all top-notch companies.
If you then move to
the fine chemical business, which is 20% of our sales, that is a much larger market that
is in excess of 50 billion dollars, growing at about 4%. What's interesting in that market
is that there is no supplier that has more than a 2% market share. Therefore, it's a very
splintered market and if you do the analysis, Sigma-Aldrich would probably be in the top
25 companies in the world in that particular area, making us a major player.
The final market is
diagnostics, and although we are very small in that market, it is a very attractive market
of 20 billion dollars, growing at about 5%. We have sales in the 70 to 80 million-dollar
range. That particular market is dominated by 7 companies that own 75% of the market and
the biggest ones would be Hoffman LaRoche, the Swiss company, and number two would be
Abbott Laboratories (ABT). Therefore, there is some pretty strong competition in that
area. However, if you look overall, asking the question of 'How does Sigma-Aldrich
compete?' we really compete because we have this unrivaled scientific knowledge and more
products than anyone else. We also have the broadest range of biotechnology capabilities.
If you look in the area of biotechnology, Sigma-Aldrich is a major player in all of the
sub sectors, and there are many sub sectors, but we play a major roll in all of those
areas.
When I talk to financial analysts I always tell them that if you are going to
remember anything about Sigma-Aldrich, remember that we have unrivaled scientific
knowledge. That is the key, because we have more science knowledge in this company than
any other company in the world. If you contrast us with the largest companies such as
Dupont, which is the largest chemical company in the world today, followed by Dow and
BASF, those companies tend to have about 10,000 products compared to our 85,000.”
CEOCFOinterviews: Do
you have the cash and or credit to continue to build out your business?
Mr. Harvey: “We
have changed the capital structure of our company over the last two years. At the moment
we have a capital structure which is about one third debt, and two thirds equity, and we
feel very comfortable with that. Cash from operations is generally sufficient to cover
operations, working capital and facilities needs.
With regards to acquisitions, we would not have any problems making those that we
desired to. Most of the acquisitions that we would be looking at would be on the order of
$20 million in annual revenues and you’d be paying anywhere between 2 to 3 times
that. Therefore, we are not looking at a lot of money and we certainly have the cash
and the resources to make these acquisitions. If you look at acquisitions today, some of
them are probably going for 2 to 8 times sales. In the last two years, the equity market
has gone down substantially, so you would also expect the price that is being paid for
companies to have gone down, and even though the buyer is expecting that, the seller is
still looking at multiples that were prevalent a couple of years ago. Having said that, I
think that it's important to note that 75% of all acquisitions do not work out. Therefore,
we've been very careful and judicious and I would like to emphasize that we are not trying
to build this company on the basis of acquisitions.
We've really changed the culture over the last couple of years to get it back on
an accelerating growth path. The underlying sales growth rate in 1999 was 6%, last
year it was 8% and this year it will be 10%, all currency adjusted. As that shows, we are
currently on track to hit our sales growth target. If you look at the earnings per share
during that same time, the numbers have been 9%, 19% and 9%, so that looks pretty good and
you could say that sales and earnings per share have grown very nicely. The problem has
been that in over the last two years two thirds of our earnings per share growth has come
from stock buy back, because we've bought back a lot of our stock. We've bought back over
30% of it, which has helped the earnings per share. The other third came from operating
income. As you move forward, obviously we are not going to continue that rate of acquiring
our shares. Therefore, we've really have to get more profitability out of the operations,
and that is what we are aiming to do as we look forward to next year and the year
after.”
CEOCFOinterviews: Where
do you see your greatest sales growth coming from in the future?
Mr. Harvey: “What
we've seen is that the USA and Europe have grown pretty much the same over the past 5
years. You would expect that because for example our market share in the U.K, Germany, and
some of the big markets is pretty much the same as what we have here in the United States.
Where we've seen much faster growth over the last 5 years has been international, which
has been growing at a rate of 1.5 to 2 times the rate of sales in the USA and Europe.
Therefore, as we look forward over the next few years, we see the greater growth coming
internationally, from places such as Japan, Korea, and the Far East. We are seeing that
pattern this year with our international sales growing much faster. In fact one of our
success stories over the last couple of years has been developing in Japan. Japan today is
now the third largest market for us, with number one being the United States at 45% of the
sales, and second is the U.K. Japan is number three having already overtaken Germany.
Hence, as we look ahead over the next couple of years, there is no question that Japan
will be the second largest market for Sigma-Aldrich. In fact, you'd expect that because
generally, if you look at the total markets what you see in the chemical industry, if you
compare America with the second largest producer and consumer of chemicals, which is Japan
and Germany, the ratio is 3 for the United States, 2 for Japan and 1 for Germany.
Therefore, you would expect that Japan should be the second largest market for us, but as
most know, it's quite tough to do business in Japan.”
CEOCFOinterviews: In
closing, what would you like to say to your current shareholders and potential investors?
Mr. Harvey: “First,
if you want to have a part of the developing biotech market, then Sigma-Aldrich is a good
place to be for the simple reason that we have growing markets, we are a market leader and
we are going to be around in a few years time. If you look at the biotech market in
general, there are possibly 4,000 companies worldwide, and of course, a lot of those will
not be around in the future, because there is a lot of speculation and they are all trying
to develop the new drug. However, in the meantime, Sigma-Aldrich can make a very nice
living by supplying the necessary reagents – in miners’ language the picks and
shovels - to those companies.
Secondly, this is a company, which has a very strong balance sheet, and is aiming
to get its return on equity to 20%. Therefore, you're looking at a company that will grow
at 10% top line and 10% bottom line, with the potential for acquisitions to increase this
by another 2%, giving a return on equity of 20%. If you look at all of the public
companies in the United States, with about 10,000 companies listed on the New York Stock
Exchange and Nasdaq, there are only 150 companies that are greater than 1 billion dollars
in annual revenues, with a sustainable growth of 10% top line, 10% bottom line with a
return on equity of 20%. Therefore, you'll find that we are a premium company.”
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