Hitting the Big Time : Thanks to Acquisition by Nippon, Irvine Scientific Is Poised to Claim a Larger Share of Biotechnology Field

When Irvine Scientific took out a full-page advertisement in a national trade magazine in July, a score of curious readers called to ask company officials where they had been hiding.

Irvine Scientific, a tiny Santa Ana company that develops serums and other chemical solutions used by the fast-growing genetic engineering industry, until recently didn’t have the money to advertise.

But times have changed at 18-year-old Irvine Scientific since Nippon Mining Company Ltd., a $5-billion Tokyo-based company, bought an 80% interest in it in August, 1987.

Nippon is an industrial giant that has principally made its mark in petroleum refining and metal smelting. Through Irvine Scientific it hopes to enter the potentially lucrative field of biotechnology--which the Japanese government has designated a high national priority.

Yukio Kasahara, president of Nippon Mining, has cited biotechnology along with electronics as new lines of business that the company is actively developing in Japan and abroad. Nippon’s interest in expansion of its electronics business was evident by its agreement Tuesday to buy Gould Inc., an Illinois-based computer and electronics firm, for $1.1 billion.

In its corporate literature, Nippon describes Irvine Scientific as “our foothold for our biobusiness in the United States.”

For Irvine Scientific, the purchase by Nippon means an infusion of cash to help the company gain a larger share of an expanding market for its products. The July advertisement in Biopharm Manufacturing magazine is evidence of the company’s new marketing efforts.

Nippon is supporting plans for the Santa Ana firm to develop new and more specialized products with larger profit margins, starting with the construction of a research and development laboratory and the hiring of a research director. And Nippon is shopping for additional biotechnology firms to acquire that may help to expand Irvine Scientific’s product lines.

Still at the helm of Irvine Scientific as president, chief executive officer and chairman of the board is Robert Jackson, who previously was the sole owner and retains a 20% interest.

Jackson said he became interested in the serum manufacturer in 1972 when he made a $60,000 investment in it. A year later, he left his job as a salesman at Beckman Instruments and became a co-owner of the firm, subsequently buying out his two partners.

But two years ago, Jackson said, it became obvious to him that Irvine Scientific needed more capital, and he began studying his options.

It was fortuitous, Jackson said, that he was introduced in October, 1986, to Nippon business scouts through Peers & Co., a New York investment banking company. Jackson said Nippon paid him a “more than fair” price for a controlling interest in the company. Neither Nippon nor Jackson will disclose the price paid. One of Nippon’s conditions for the transaction was that Jackson stay on as chief executive.

Jackson said Nippon has promised to provide Irvine Scientific with substantial capital. Over the last three months, he said, Nippon has poured almost $1 million into new equipment and will begin construction within the next three months on a $1-million research and development facility.

Jackson said Nippon spent its first months of ownership in lengthy planning sessions to determine how the company should grow. An emphasis on marketing and an expanded sales force already has helped to boost Irvine Scientific’s annual sales, which over the past year have risen 20% from about $5 million to just short of $6 million.

“In three years we will be double (in sales) what we are today and in five years we will become a major company in tissue culture and diagnostic products,” predicted Toshinobu Miyake, a Nippon senior engineer who came from Tokyo last November to take the post of vice president at Irvine Scientific.

Irvine Scientific is a low-technology company in the biomedical business, although it makes products used by very high-tech genetic engineering companies and university research laboratories.

Established in 1970

Irvine Scientific was established in 1970 as one of the first businesses on the West Coast to collect blood from cows at slaughterhouses and process it to make serum that scientists use in laboratories to grow mammalian cells. The cells in turn produce antibodies and other bioproducts that go into drugs.

Later, the company started manufacturing mixtures of trace metals, salts, vitamins, sugar and other nutrients that are used in cell production. Other Irvine Scientific products include cholesterol concentrates used in clinical diagnostic tests to determine whether patients have dangerously high cholesterol levels in their blood and chemical solutions for handling sperm and eggs during test-tube fertilization.

But because it deals in unpatented commodities, Jackson and Miyake said, Irvine Scientific’s profit margins have been narrow. In the year ended June 30, for instance, the company reaped net profit of only $191,549, despite almost $6 million in revenue.

Miyake said that Nippon chose to buy a controlling interest in Irvine Scientific partly because Nippon executives were impressed by Jackson’s management ability. Additionally, he said, Nippon officials felt it was wise for Nippon to start small in an industry it knew nothing about. Nippon is part of a wave of Japanese corporate investment in biotechnology. “Almost all companies in Japan--even steel companies--are aiming at biotechnology,” Miyake said.

Richard King, a Los Angeles business consultant specializing in Japan and other Pacific Rim countries, said he believes that biotechnology will be “a major area for Japanese/U.S. cooperation. The Japanese have the capital to bring to it, and the U.S. has the technical know-how. It is sort of a perfect match.”

F. Richard Nichol, chairman and president of the Institute for Biological Research and Development, a Newport Beach company that coordinates clinical drug testing for pharmaceutical companies, said that over the last decade he has seen Japanese companies license a significant number of their newly developed products to American pharmaceutical companies for sale in the United States.

Goal Is Fatter Profits

But he said Japanese firms more recently have tended to form joint ventures with U.S. biotechnology companies or buy into U.S-based companies. Their goal, he said, is to reap fatter profits by playing a larger role in shepherding new products onto the U.S. pharmaceutical market, which is the biggest in the world.

Nichol said the timing is ripe for foreign investors because emerging biotechnology firms in the United States are having trouble attracting venture capital and the stock market has been a difficult place to raise funds since the October crash. Also, he said, the depressed dollar has made U.S. companies seem relatively cheap to overseas investors. “Smaller companies that are strapped for cash are sitting ducks for foreigners to come in and acquire them or become minority owners,” Nichol said.

In the traditional manner of Japanese companies, Jackson said, Nippon is looking for a long-term return on investment.

He noted that the fetal bovine serum that Irvine Scientific manufactures--and which was featured in the Biopharm Manufacturing magazine advertisement--is used mostly in research laboratories rather than for commercial drug production. Only nine genetically produced drugs and vaccines have been approved by the Food and Drug Administration for sale in the United States.

But once the numerous drugs currently under development obtain FDA approval and go into mass marketing, Jackson predicts, “the need for fetal bovine serum is going to increase and the price is likely to skyrocket.”

“Japanese are very good at seeing where a market will be and positioning themselves,” Jackson said. “Think about it. Automobiles, cameras, clothing, electronics and now pharmaceuticals.” Another fortunate aspect of the Nippon acquisition, Jackson said, is that it will enhance Irvine Scientific’s marketing position in Japan, which has become one of the company’s biggest customers.

Japan Production Facility Due

Since the acquisition, Nippon has become Irvine Scientific’s trading company in Japan. And within two years, Jackson said, Irvine Scientific will build a production facility near Tokyo.

Miyake said Nippon’s purchase of Irvine Scientific is “small but important” because it represents the giant corporation’s newest strategy for breaking into the biotechnology field--after other strategies have fallen short of their objective.

For 17 years Nippon has sought to get into biotechnology without much success.

The company’s first move into the field was in joint venture with Gulf Oil Corp. on yeast fermentation projects. But Miyake said a project to mass-produce hydrocarbon-eating yeast as a high-protein feed supplement for farm animals was halted after Japanese housewives protested, contending that the yeast would harm the quality of meat.

Yet another enterprise attempted by Nippon and Gulf Oil to convert cellulose from plants into ethanol turned out to be prohibitively expensive. The only profitable business that emerged from the fermentation experiments, Miyake said, was the production of synthetic musk for perfume.

Miyake said that in 1983 Nippon dissolved its joint venture with Gulf and in 1985 established a Biobusiness Development Department.

Miyake, who is a principal planner within Nippon’s Biobusiness Development Department, said he believes that the future of biotechnology lies mostly in the pharmaceutical industry and that companies with marketable products like Irvine Scientific will be Nippon’s foundation in the field.

COMPARING THE COMPANIES

Irvine Scientific Headquarters: Santa Ana Sales: $6 million* Net Income: $191,500* Business: Makes cell culture serums and nutrient solutions for genetic engineering firms and university labs. Employees: 50 * for year ended June 30 Nippon Mining Co. Headquarters: Tokyo Sales: $5 billion** Net Income: $21 million** Business: Mining, petroleum refining, petrochemicals, manufacturing of mill products, electronics and specialty metals. Employees: 5,700 ** for year ended March 31, 1987