Applied Bioscience International, Inc.

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Applied Bioscience International, Inc.

4350 North Fairfax Drive
Arlington, Virginia 22203
(703) 516-2490
Fax: (703) 516-2494

Public Company
Employees: 2,200
Sales: $181 million
Stock Exchanges: New York
SICs: 8734 Testing Labs; 8731 Commercial Physical Research

Applied Bioscience International, Inc. (APBI) is a leading provider of consulting services and contract research in the environmental and life sciences. When the company began, it concentrated exclusively on biological safety testing of Pharmaceuticals, foods, and chemicals. However, through a rapid series of acquisitions, APBI broadened its business to include a complete array of testing services for drugs and chemicals in the environment and in human subjects.

APBI got its start in 1986, when the company was created from two subsidiaries of IMS International, Inc. IMS had operations around the world that provided research services to the pharmaceutical, personal care, and chemical industries. In September of 1986, IMS incorporated APBI as a wholly owned subsidiary, which was comprised of Bio/Dynamics, Inc. and Life Science Research, Inc.; the two companies that previously had made up the Life Sciences Division of IMS Bio/Dynamics had been providing toxicological testing services at facilities in East Millstone, New Jersey, since 1961, while Life Science Research, Ltd., had conducted similar activities at its labs in Suffolk, England, beginning in 1972. On March 26, 1987, IMS divested itself of APBI, selling three million shares of stock in the company in the over-the-counter market. By April 2, the companys initial public offering had been oversubscribed and closed.

As a part of the fledgling contract research industry, APBI was hired to advise other companies on the development of products from the point of discovery to the point of sale. APBIs operations involved the testing of pharmaceutical, food, and chemical substances to make sure that they were not harmful in any way. The company specialized in drugs and chemicals, which were tested on animal subjects in special laboratories.

APBIs goal was to capitalize on the growing number of environmental and safety regulations imposed on companies bringing products to market. In addition to an ever-more-complex welter of regulations to navigate, controversy surrounding the use of animal testing made the option of contracting out for testing attractive to many companies. APBI took care of the complicated business of complying with regulations, and it also took the heat for using animals as test subjects in the process. To protect its customers from controversy, the company adopted the policy of not revealing the names of its clients.

At the end of its first year in business, APBI had 750 full-time employees and more than 360,000 square feet of office and laboratory space. Headquartered in New Jersey, the company was constructing another 62,000 square feet of space. After reporting a 35 percent increase in third quarter revenues as well as a 50 percent rise in earnings, APBI finished the year with $33 million in revenues on $2.8 million in sales, both up about a third from the previous year. These results garnered the company the honor of being named the 47th fastest growing small company in the United States by Business Week magazine in May of 1988.

That same month APBI announced that it had been selected to take part in the formation of a testing laboratory to be founded by the State of Victoria, in Australia. With APBIs management and technical advice, the state hoped to foster growth in biotechnology by using the laboratory to perform safety evaluations of foods, drugs, and chemicals. This was followed by the further expansion of its British operations, achieved with the purchase of Cambridge Applied Nutrition Toxicology and Bio-sciences Ltd. (CANTAB) in March of 1989. CANTAB and APBIs English unit had long been affiliated, and the acquisition was part of the companys strategic program of growth. It represented APBIs first move into the lucrative market for outside clinical services, which consisted of Phase I clinical trials for drugs, involving the use of healthy human volunteers. In addition, the company performed nutritional tests and other types of studies.

In the spring of 1989, controversy over APBIs use of animal subjects resulted in a brief dip in the companys stock price, as public pressure caused several cosmetics companies to debate an end to the use of animal lab subjects. Analysts questioned whether investors would ultimately wish to be associated with the controversial practice.

Later that year, in September, APBI announced a second acquisition, as the company continued its program to extend its services to include other aspects of the development process for pharmaceutical and agricultural chemicals. The Valdosta, Georgia-based Landis International, Inc., which APBI acquired for stock, managed testing programs for pesticides and other agricultural chemicals to determine their impact on plants and the environment as a whole. APBIs two acquisitions, CANTAB and Landis, together cost about $4 million.

With more than 170 corporate clients, Landis specialized in satisfying the testing requirements of the Environmental Protection Agency (EPA) and other regulatory bodies. In addition to research facilities in Georgia, Landis also conducted tests in California and Washington. In addition, the company operated a year-round testing facility in the Central American nation of Belize, allowing the company to conduct tests even during the winter months. These activities netted $2.4 million in revenues for 1989. In the wake of its Landis purchase, APBI merged two of its British operations, CANTAB and the Clinical Technology Centre (International) Ltd., a longtime subsidiary of Life Science Research, into a third entity, Clinical Science Research Ltd., in an effort to market their human subject testing services more efficiently.

By the beginning of 1990 APBI had racked up a strong record of double-digit growth in earnings and revenues. A large part of the companys growth came from its rapidly expanding overseas business. The company found 26 percent of its business in North America, 37 percent in Europe, and an equal amount in Japan. Because APBI had no facilities in the Far East, Japanese customers were required to send their materials to the United States or Britain for testing. Overall, APBI held nine percent of the worldwide market for biological safety testing.

In an effort to expand that market share further, APBI announced in January of 1990 that it would merge with the ENVIRON International Corporation. This privately held company, based in Arlington, Virginia, provided risk assessment and environmental risk management services. With field offices in New Jersey and California, ENVIRON provided a wide variety of services relating to human exposure to environmental toxins, including expert counsel and technical assistance in chemical risk assessment, toxicology, environmental liability assessments, remedial investigations, and litigation and regulatory advice. The company brought fiscal 1989 earnings of $1.17 million to the merger, which was completed in September of 1990.

By October of that year, APBI was reporting quarterly revenues up 30.3 percent to $25.3 million. The company reported a loss, however, because of the costs of the merger with ENVIRON, principally the write-off of rental fees on the companys corporate headquarters.

A month later APBI called off arrangements for yet another acquisition, when its plans for the $10 million purchase of the drug-testing laboratories of a Baltimore-based competitor, PharmaKinetics Laboratories, Inc., were cancelled. This move came in the wake of a scandal involving PharmaKinetics, in which the company had implicated its largest client in an illegal drug-switching scam, only to become the target of an investigation itself. Rather than get involved with the tainted operations, APBI withdrew from the tentative agreement at the end of 1990. Despite this setback, APBI announced its intention to press ahead with its plans for expansion, both internally and through acquisitions.

By 1991, APBIs efforts to expand and diversity its activities had begun to show significant fruit. Biological testing, which accounted for 100 percent of the companys revenues in 1988, had come to make up less than 40 percent of APBIs returns just three years later. Instead, one-third of the companys operations had to do with environmental testing and consulting, while 28 percent comprised clinical drug development research.

APBI diversified its operations further in September of 1991, when the company purchased the commercial laboratory business of the Environmental Testing and Certification Corporation (ETC), a wholly owned subsidiary of the OHM Corporation. This company operated three commercial laboratories that served the environmental services industry, performing sophisticated analyses of contamination in soil, water, and other environmental samples. With the purchase of ETC, APBI made another move towards becoming a complete chemical risk assessment company. As the owner of ETC, APBI would now be able to perform in-house many testing functions that it had previously been forced to subcontract out. ETCs facilities were located in Edison, New Jersey; Baton Rouge, Louisiana; and Santa Rosa, California. Together, these operations contributed $18 million in revenues in 1990.

Although the company felt that its operations were more complete with the addition of ETC, APBI still needed additional facilities. After searching throughout the contract testing industry for more than a year, the company announced in February of 1992 that it would merge with Pharmaco Dynamics Research, Inc., a company based in Austin, Texas, which conducted toxicology testing on humans in clinical trials. With the addition of Pharmaco, APBI became a fully unified provider of the complete range of services necessary to bring a product to market. APBI was now able to take an environmental or pharmaceutical substance from the animal testing stage, to human clinical trials, to final approval before the Food and Drug Administration. By joining with Pharmaco, which had an unusually high annual compound growth rate of 60 percent, APBI hoped to position itself as one of the two main players in the contract research and development field.

In addition, APBI hoped that its merger with the Texas firm would help it to bring some much-needed managerial expertise to its operations. During its period of rapid growth, the company had failed to install controls on its operations to unify its subsidiaries or create a strong marketing effort. As a result, much duplication of effort took place between the different units of APBI, and a lack of communication within the company meant that customers often received repeated sales calls.

After the merger with Pharmaco, APBI took steps to integrate its company organization and streamline administration, thereby reducing operating costs. Relying on the marketing management and information systems that Pharmaco had previously perfected, APBI moved to implement them throughout its entire organization. The company restructured its operations, dividing its subsidiaries and services into two groups: the Life Sciences Group, and the Environmental Sciences Group. In this way, APBI hoped to shift from a decentralized holding company to a better-integrated organization with central management. Due to the cost of the corporate restructuring, APBI reported a net loss for the first quarter of 1992. However, with this new framework in place, APBI hoped in the future to seek out aggressively and effectively a greater share of its market.

In June of 1992 APBI resumed its series of acquisitions when its subsidiary ETC purchased National Express Laboratories, Inc. (NATEX). This company ran three commercial laboratories in the South and on the West Coast, all of which took part in the U.S. Environmental Protection Agency Contract Laboratory Program. This meant that NATEX had contracts with the state environmental quality agencies in the areas that it served, and they were able to produce high level, litigation-quality data. The companys president was assigned by APBI to lead both the NATEX and ETC operations in the wake of the purchase.

The following month APBIs Pharmaco subsidiary opened one of the worlds largest overnight medical research facilities, with 198 beds, in Austin, Texas. This enhanced the companys ability to provide Phase I testing of new drugs. In this process, healthy human volunteers were given doses of a substance, and then blood or urine samples were collected at timed intervals to test the level of the drug remaining in the body. With the addition of the Austin facility, Pharmaco reported that its workload was at an all time high. This contrasted with the operations of other APBI units, as the overall economic downturn of the early 1990s caused a weakening in demand for consulting services and for animal testing services in the United Kingdom.

Indeed, despite Pharmacos strong showing, APBI reported a quarterly loss in December of 1992, as a result of the costs associated with its merger of Pharmaco and its overall restructuring of the Life Sciences Group, which included Pharmaco, Bio/Dynamics, and Life Science Research. For the year as a whole, the company showed slower than expected earnings. In addition to general economic conditions, which caused a large drop in corporate environmental expenditures, APBI cited increased expenditures in marketing and sales as a factor in its low returns.

Despite these disappointing results, APBI made a further acquisition in January of 1993, with the purchase of Ensys Environmental Products, Inc. Ensys marketed on-site test kits to detect the presence of such hazardous chemicals as PCBs and petroleum products in the environment. Its operations were added to those of APBIs ETC unit.

Later that month, APBI further restructured its holdings when it combined its Life Sciences operations into a new company to be called Pharmaco-LSR. The new company comprised 14 facilities in locations around the world, including the United States, England, France, Germany, Belgium, and Sweden. Pharmaco LSR hoped to provide complete, global product development to a wide variety of clients in a cost-effective manner. At the time of this shift, APBI also moved its headquarters from New Jersey to Arlington, Virginia.

By April of 1993 APBI was once again reporting lower than expected revenues. In response, the company launched a global advertising campaign, and undertook aggressive cost-cutting measures. Contributing to APBIs drop in earnings were losses from its ETC analytical environmental testing unit. In mid-1994 APBI announced that this unit would be spun off to join two other environmental labs in forming a new company that would operate under the name of one of the partners, PACE, Inc. APBI would retain ownership of PACE, Inc., which constituted 23 labs.

APBI had anticipated significant consolidation in the environmental laboratory business, which had an excess of capacity and resulted in cut-throat competition. In addition, the company saw the market for contract lab services, an industry pioneered by APBI, mature and grow more competitive. Although the companys rapid growth through acquisition and the growing pains it experienced due to restructuring and integration had caused its profitability to slow, overall APBI appeared able to maintain its leading position in these fields well into the late 1990s.

Principal Subsidiaries:

APBI Environmental Sciences Group, Inc.; Pharmaco-LSR International, Inc.

Further Reading:

APBI Merger With Pharmaco Creates Synergy, Portfolio Letter, February 17, 1992.

Collins, Beverly, Restructuring Hits APBI Earnings, Washington Times, December 23, 1992.

Environmental Health Company Merges With Research Firm, Washington Business Journal, September 17, 1990.

Lang, Steven, Consolidation Reshaping U.S. Lab Market as Two Deals Create New Giants, Hazardous Waste Business, May 18, 1984.

Merger With English Firm Will Allow Research Pooling, Washington Business Journal, May 21, 1990.

Southerland, Dan, Applied Bioscience Merges Three Affiliates, Washington Post, January 19, 1993.

Testing Firm Hurt by Bolar Scandal, Baltimore Sun, December 19, 1990.

Elizabeth Rourke

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Applied Bioscience International, Inc.

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