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A Stock Price Dip Is Personal For Harvard Bioscience s David Green

David Green, the president of Harvard Bioscience, takes it personally when the company’s stock price takes a swan dive, like it did in May after the company announced disappointing first-quarter results.

He said that plunge cost him $10 million.

But, tell him that loss is only on paper, and the look you get will convince you of the pain he has incurred.

Green and Chane Graiziano acquired HBIO in 1996 and took it public in 2000, and today still hold some 18 percent of company stock.

You can’t get away from the stock price at HBIO. When you walk in the door of the Holliston, Mass., company headquarters in a suburban industrial park, there it is on a small board to the right of the receptionist’s desk.

Last week, BioCommerce Week visited Harvard Bioscience to speak to Green about the company’s growth opportunities in the molecular biology tools marketplace.

Why does the sign outside the door say Harvard Apparatus?

At the time we went public, we thought that Harvard Bioscience was a better way to describe the entirety of the business rather than Harvard Apparatus which really is a particular set of product lines.

Going public was a big event in the company’s history, and you did your initial offering in 2000. Would you do it again?

We were literally the last company in Massachusetts to go public and we were the last one or two to [go public in 2000]. We went public at $8. It was a great thing for Harvard Bioscience, absolutely the right move for us. It fundamentally lowered our cost of capital. We were venture-funded before then and even though we were debt- and equity-funded, our venture investors had an expectation of 30 and 35 percent IRR [internal rate of return], so that was effectively our cost of equity capital. Being public, our cost of equity capital has dropped significantly. And for a company like us — that is, an acquirer of businesses — we are at least partially dependant on equity capital.

Your product offerings are really not bleeding edge.

We are very intentionally not. That’s why I draw this distinction: There are a bunch of public, money-losing tools companies that I don’t find it useful to compare us to in terms of investors’ understanding of our story. The ones that I do find useful are people like Bruker Daltonics, with $250 million to $300 million in revenues, and not as profitable as we are, actually. But they are a tools company, mainly instruments, at least on the edge of profitability; and Affymetrix is the other one that has made a transition from being at the bleeding edge to being a commercially viable, profitable company.

In many ways we are different from other tools companies in that we are not a one-trick pony, we are not a one-technology company.

Our view is that this is an industry that has a substantial technological risk, and substantial scientific risk. You need to manage that risk. We believe that a lot of those one-trick ponies will be eclipsed by other technologies that will do end runs around their technological choice, no matter how good their patent position will be.

When you bought this business in 1996, what did you buy?

The idea was to buy a core business that had a very good franchise — the brand name was very well known and very well respected. Customers liked the products, and we saw it as a platform that we could build up because you had that franchise, because you had revenue.

At that time, a lot of operations of the business were very inefficient, and were very vertically integrated in terms of manufacturing. We had our own sheet metal shop, our own machine shop, our own painting. We outsourced all that and significantly improved gross margins as a result, and we relocated to this facility here, which was a lot lower cost than our previous facilities. So we significantly improved gross margins and then by introducing the next catalog, which was substantially larger than the original catalog, we greatly increased revenues. So the combination of growing revenues, and growing operating margins, we took the company with something under a million dollars in operating profit to several million dollars in operating profit and that enabled us to then take on debt financing to make smaller acquisitions. We made several smaller acquisitions that we then sort of tucked under our existing manufacturing structure so that we were able to buy businesses and pay the seller a fair price for the business, and get significant leverage by bringing it into a infrastructure that already existed in terms of facilities, manufacturing, buying, planning, that kind of stuff. So typically when we made acquisitions we were able to substantially increase the operating margin and again grow revenues because we already had our catalog distribution channel. So all we had to do was print the catalog. The first page costs you a million dollars, the last page cost you one penny. Adding another 20 or 30 pages to a catalog really cost you virtually nothing. Once you got these things set up on printing presses, running a few extra copies, a few extra pages, cost you virtually nothing. So we were able to add products at virtually marginal costs and improve the operating margins of the business and usually increase the revenues, too, because usually we were putting them into new distribution channels [through] the catalog. So what we were able to do is use that growth in operating margin to make more money and acquire the next company. We built it from $8 or $9 million in revenues in 1995 before we acquired it to practically a $100 million today.

The microarray market appears to have crossed the big part of the bell curve. Is your Genomic Solutions subsidiary reflecting that change?

You have to be very careful with the words you use. You have to distinguish microarray from gene expression. Historically, they have been synonymous because the only real application for microarrays was the high-density Affymetrix one, or the low-density applications.

I agree that the market for DNA expression, whether with an Affy GeneChip or a glass slide, has matured. Now, there is a big difference between a spotted-glass slide microarray business and photolithographic etched silicon business. You cannot synthesize proteins on a silicon substrate in the way you can synthesize DNA. The only way today that you can make the protein microarray is by spotting protein on a glass slide. I think it is better to look at the proportion of our business that is coming from protein applications than from DNA applications. I’m not going to tell you how much, but I can tell you that it is substantial.

Does this mean new instrument sales? If you already have a spotter, can’t it just spot protein as well as oligos or cDNA?

Good point. There are a substantial number of challenges to printing proteins on a glass slide microarray, which really aren’t handled very well by the first generation, the Pat Brown-era generation of arrayers. There are a lot of tricks of the trade to getting a protein to work well, it’s a very new art. It’s not standardized and not routine today and you really do need the current generation of instruments. Can you take one of the old generations of instruments and jury-rig it? If you are at MIT you could probably do it, but not if you are at Harvard Medical School.

In listening to the conference call, I think the word that came to mind to describe management’s feelings is vexed. You have been doing triage since May on Genomic Solutions.

I think surgery rather than triage. Surgery and then recuperation and rehabilitation. I think that is exactly right.

We went back to this specialist vertically integrated business unit structure. We split Genomic Solutions into two pieces, and we basically brought Cartesian back. Cartesian is now a standalone business unit run by a business unit manager. Patty Gray [Cartesian manager] has her own sales force, applications people, engineering, manufacturing. It’s not quite a freestanding company, but almost. David Byatt, the ‘B’ in PBA Technology, the proteomics company that is now Genomic Solutions UK, runs genomics and proteomics products lines.

At its current run-level of revenue, do you have a time frame for profitability for Genomic Solutions?

Yes, the target was Q3. It didn’t quite make it. But we expect it in Q4.

Where do you see innovation coming from?

Partnerships with big pharma. But to a lesser extent, the NIH and the FDA have become a lot more sophisticated about what they want to fund in terms of next-generation infrastructure type technologies. I think the NIH has done a very good job of laying out the roadmap. They have gone out and said this is an important enough piece of infrastructure, like building roads or telephone networks for the systems biology age, and said this is worth the government building that.

When do those seeds start to grow?

I think you have to look very carefully. When you look at acquiring a product line or licensing of a new technology, you really have to look at what are the chances of making good money out of that. And, [see] if the product is available for free from the government. The latest thing the NIH is now providing [is] a million-compound library. I’m not sure that I want to be in the compound library business if it is available for free from the [NIH]. It is far from clear to me that just because the NIH or the FDA is funding the infrastructure that immediately means there is a good commercial opportunity there. So I think there is a business strategy there that has to look where are the niches for tools providers that follow the direction that the NCI and NIH are setting that create sustainable business opportunities that aren’t going to be taken away from you by somebody else giving away the product.

That is one of the reasons we kind of like instruments and apparatus, because I don’t see government getting into the instrument production business. They may well get into the data-generation business, the software business, but I don’t see them getting into the instrumentation business. I don’t think you are going to see universities setting up instrumentation manufacturing, selling, servicing, and support infrastructures.

So when we look at the evolving view of systems biology, from a business point of view [the question] is, where are the apparatus that are going to help researchers to do all these experiments faster and get what I think is the heart of systems biology, physiological data as opposed to biochemical data.

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