Abaxis, Inc

views updated

Abaxis, Inc.

3240 Whipple Road
Union City, California 94587
U.S.A.
Telephone: (510) 675-6500
Toll Free: (800) 822-2947
Fax: (510) 441-6150
Web site: http://www.abaxis.com

Public Company
Incorporated: 1989
Employees: 217
Sales: $68.9 million (2006)
Stock Exchanges: NASDAQ
Ticker Symbol: ABAX
NAIC: 334510 Electromedical and Electrotherapeutic Apparatus Manufacturing

Abaxis, Inc., manufactures and markets compact blood analyzers for the human and veterinary diagnostics markets, selling its Piccolo systems to physicians and its VetScan systems in the veterinary market. Abaxis' analyzers employ small, single-use plastic discs called reagent rotors that contain all the necessary chemicals to perform a range of blood tests. The company's systems offer physicians and veterinarians the ability to perform multiple blood tests at the point of care with the precision equivalent to a clinical laboratory analyzer. Abaxis blood analyzers are capable of performing 27 diagnostic tests, a panel of 13 tests on veterinary patients and 14 tests on human patients, which covers more than 90 of the general chemistry tests normally used in medical and veterinary diagnostics. Abaxis maintains a 90,000-square-foot manufacturing facility in Union City, California, and sells its medical devices worldwide.

ORIGINS

It took more than a decade for Abaxis to begin to reap the financial rewards of its efforts in the medical device market, but once the company's patience and persistence began to deliver dividends, the results were promising. Abaxis was founded in April 1989, taking on scientific work first developed under the aegis of the Oak Ridge National Laboratory (ORNL) in Oak Ridge, Tennessee. The U.S. Department of Energy's largest science and energy laboratory, ORNL was established in 1943 as part of the Manhattan Project to assist in the search for a method to produce and separate plutonium. The laboratory's mission expanded in the decades that followed, moving ORNL into the fields of physical and life sciences, as well as energy production, transmission, and conservation. Among the numerous projects undertaken by the laboratory was work for the National Aeronautics and Space Administration (NASA) during the late 1980s that served as the genesis for Abaxis. Under a NASA contract, ORNL scientists began developing a small biochemical analyzer that could be used in space laboratories. Abaxis acquired the exclusive patent rights to the technology shortly after the company was founded, intending to develop a portable biochemical analyzer that could perform multiple blood tests from a single drop of whole blood.

Abaxis was founded by Gary H. Stroy and Vladimir E. Ostoich, two executives whose experience would be needed to guide their company through its developmental stage. Stroy spent the 1970s employed in various marketing and management positions at Smith-Kline Beecham, American Hospital Supply, Syva Company, and Miles Laboratories before launching his entrepreneurial career. In 1981, he cofounded LifeScan, a diagnostic test company that Johnson & Johnson acquired five years later. Stroy left LifeScan before it was sold, striking out on his own again in 1983 with the formation of another diagnostic test company, Biotrack, Inc. He spent six years as Biotrack's president and chief executive officer, leading the company until its sale to Ciba-Geigy AG in 1989. During his stay at Biotrack, Stroy worked with Ostoich, who served as the company's director of engineering between 1985 and 1987. Ostoich joined Biotrack after spending four years at Hewlett-Packard Company, where he was employed in a variety of engineering positions. He left Biotrack to join Proxim, Inc., a wireless data communications company, but then departed after only a year, reuniting with Stroy to help start Abaxis.

Although it would be years before Stroy and Ostoich could claim financial success with their start-up venture, Abaxis was poised to enter a lucrative and vital market. The company was targeting the blood-testing market in the patient-care setting, a new market created by advances in technology and a focus on reducing medical care costs. More than 20 billion blood tests were performed worldwide each year, and, increasingly, the blood-testing procedures were being performed outside central laboratories and closer to the patient to reduce costs. During the mid-1980s, handheld blood-testing devices were introduced, notably small, desktop instruments such as the Abbott VISION and the Kodak DT60, that enabled blood testing to be performed in doctors' offices and hospital satellite laboratories. The early devices were rudimentary, however, capable of performing only one test at a time and limited in the range of tests they could perform. They allowed testing nearer to the patient, but the financial and speed advantages were lost because of the inability of the early devices to perform multiple tests. The ideal device, Abaxis' objective as it started out, would be capable of performing the fewer than 50 different blood tests that accounted for 70 percent of all blood testing performed. There were more than 1,000 different tests performed on blood, but a portable, point-of-care instrument only needed to be capable of performing a relatively small number of tests to realize market success. Although Abaxis needed to focus on only providing a limited "menu" of tests, the challenge was daunting, requiring years of hard work and millions of dollars of investment to produce a desirable blood-testing device.

The pioneering work began in Oak Ridge, but it was continued with an eye for market introduction in Mountain View, California, Abaxis' headquarters as the 1980s ended. The company's first years in business were devoted purely to research and development work. Abaxis, without a product to market, generated no revenues and racked up losses with each passing month, creating a pressing need for capital. By the end of 1991, the company had developed a prototype of a point-of-care, blood-testing instrument using sophisticated microelectronic and optical technology, an $8,000 analyzer then-named "EPOC 2000" that was ready to begin field trials. For the year, the company spent $2.81 million on research and development, bringing its total deficit to $7.73 million, a sum management hoped to reduce by completing an initial public offering (IPO) of stock. Abaxis filed a registration statement with the Securities and Exchange Commission (SEC) at the end of 1991, revealing its intention to sell 1.75 million shares in anticipation of raising roughly $19 million. The IPO, completed in early 1992, exceeded expectations, raising $27 million that gave the company the financial resources to fund its development.

COMPANY PERSPECTIVES

At Abaxis our mission is to supply point of care blood analyzers to the medical market and the veterinarian market. Abaxis provides leading edge technology, tools and services that support best medical practices, enabling physicians and veterinarians to respond to the health needs of their clients at the point of care while operating economical and profitable practices.

Preparations for a new phase of operations began following the IPO. The company applied to the Food and Drug Administration (FDA) to market its blood analyzer, and began recruiting chemists and mechanical and electrical engineers to increase its workforce in preparation for advancing to manufacturing mode. "We're scaling up for manufacturing and marketing," the company's vice-president of operations explained in an April 27, 1992 interview with the Business Journal. "We've been a research and development company for the last three years. We're bursting at the seams in our current facility." Abaxis' 13,000-square-foot facility in Mountain View could no longer accommodate the company's operations, prompting Stroy, who added the responsibilities of president and chief executive officer in March 1992 to his duties as chairman, to search for larger quarters. He signed a lease for a 38,000-square-foot facility located in Sunnyvale, California, which became the base of the company's operations in mid-1992, giving it three times the amount of space it previously occupied to gear up for manufacturing its blood analyzers.

MARKET DEBUT

Abaxis focused its manufacturing and marketing efforts on two markets as it settled into its Sunnyvale plant, beginning what would be a lengthy battle to achieve profitability. The company introduced its first commercial product in July 1994, when its VetScan system was released for sale in the $600 million veterinary care market. Although it paled in comparison to the $15 billion human diagnostics market, the veterinary care market proved vital to Abaxis' survival, giving the company a source of revenue to sustain its operations. The company's model for analyzing human blood, marketed under the name "Piccolo," followed in November 1995, providing it with a two-pronged attack in the diagnostics arena. VetScan and Piccolo contributed to gradual revenue growth for Abaxis for the remainder of the 1990s, although each year ended with a sizable loss.

The company's business in the veterinary care market enjoyed greater success than its efforts in human diagnostics, aided by the addition of two customers with nationwide operations. Veterinary Centers of America began purchasing Abaxis' VetScan systems for its veterinary hospitals in September 1996 and VetSmart followed in March 1997, bringing the total number of installed VetScan systems to 767 by the end of 1997. On the human diagnostics side, Abaxis initially targeted branches of the U.S. military as potential customers for its Piccolo system, building on a relationship forged with the U.S. Navy in 1995. In March 1997, Abaxis was awarded a contract to provide the U.S. Navy and the U.S. Marine Corp with 345 Piccolo systems. Although contracts on both sides of the company's business represented strides in the right direction, Abaxis needed to improve the capabilities of its Piccolo system to realize its full potential. The company acknowledged as much in its annual filing with the SEC for 1997. "The company believes," an excerpt of its filing read, "that its current menu of 15 reagent test methods for its Piccolo systems are suitable for certain niche human market segments, such as the military, but are not broad enough to fulfill the diagnostic needs of physician's offices practices. One of the key factors to the company's future success depends on the company's ability to identify and develop new test methods that will allow the company to penetrate the human diagnostic market."

Abaxis' financial performance did not improve until the capabilities of its Piccolo system became more comprehensive. The company recorded substantial losses throughout the second half of the 1990s, posting an average annual loss of nearly $6 million between 1995 and 1999, while revenues increased from $1 million to $13.5 million. The results would improve markedly during the first years of the next decade as Abaxis scientists and engineers succeeded in broadening the range of tests the company's blood analyzer could perform, but before the company reached that critical point in product development, it expanded its operations. In 2000, after securing $6 million in financing, the company moved its manufacturing operations from Sunnyvale to a 90,000-square-foot plant in Union City, California. The new facility was capable of producing 20 million reagent discs annually compared to the 1.2 million discs the Sunnyvale plant could produce each year, giving Abaxis' management the manufacturing capacity to achieve its most ambitious aims.

KEY DATES

1989:: Abaxis is founded.
1992:: The company completes its initial public offering of stock, raising $27 million.
1994:: VetScan, developed for the veterinary care market, is introduced.
1995:: Abaxis enters the human diagnostics market with the commercial introduction of its Piccolo system.
2000:: Manufacturing operations are moved to Union City, California.
2003:: An increase in the number of tests performed by Abaxis' Piccolo system fuels financial growth.
2006:: Net income reaches a record high of $7.4 million.

A SUPERIOR PICCOLO BY 2003

One year after relocating its manufacturing base, Abaxis began to enjoy improved financial results, marking the beginning of prosperous times for the 12-year-old company. In 2001, Abaxis recorded its first annual profit, posting $188,000 in net income, which was followed by a more impressive $1.3 million gain the following year. The first years of profitability represented a milestone in the company's history, but the true turning point occurred in 2003, when an increase in the number of tests the Piccolo system could perform made the analyzer a worthwhile investment for most doctors and hospitals. The Piccolo system, after years of development, was able to fulfill 95 percent of the testing needs covered by the Centers for Medicare and Medicaid Service, allowing the company to more fully penetrate the human diagnostics market.

Between 2003 and 2004, the company's financial results reflected the change, with revenues increasing from $34.7 million to $46.8 million and net income swelling from $1.6 million to $4.8 million once a onetime income tax provision was subtracted. "Before," a company executive explained in a February 4, 2004 interview with Investor's Business Daily, "it was difficult to sell Piccolos because there were too many holes in the menu. When you have almost everything in the list of items they order, they'll look at buying the machine. That has helped us a lot." The advances in technology spurred Abaxis' management to capitalize on the market potential of the Piccolo system. "Until about a year ago," the Abaxis executive continued in his interview, "Abaxis' focus was on other things than sales and marketing—building the factory, completing the menu. Over the last year, our focus has been on sales and marketing."

As Abaxis pressed ahead with its marketing efforts in the human diagnostics market, the company's early results were promising. Between 2004 and 2006, the company's revenues increased from $46.8 million to $68.9 million, while net income increased from $4.8 million to $7.4 million. After years of incurring heavy losses, the company approached its 20th anniversary posting consistent profits, a record of success it hoped to continue in the years ahead.

Jeffrey L. Covell