Hauser, Inc.

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Hauser, Inc.

5555 Airport Boulevard
Boulder, Colorado 80301-2339
U.S.A.
Telephone: (303) 443-4662
Fax: (303) 441-5800
Web site: http://www.hauser.com

Public Company
Incorporated: 1983 as Hauser Chemical Research, Inc.
Employees: 310
Sales: $66.7 million (2001)
Stock Exchanges: Over The Counter
Ticker Symbol: HAUS
NAIC: 325411 Medicinals and Botanical Manufacturing; 541330 Engineering Services; 541380 Testing Laboratories; 541710 Research and Development in the Physical, Engineering, and Life Sciences

Hauser Inc. is a leading producer and supplier of natural product extracts, botanical raw materials, and related products to the dietary supplement market in the United States. Hauser manufactures extracts from botanical raw materials using its proprietary extract and purification technologies. Hauser and its subsidiaries are able to process and distribute products to the dietary supplement market, including branded product sellers. The company also provides cross-disciplinary laboratory testing services, chemical engineering services, and contract research and development aimed primarily at the pharmaceutical, dietary supplement, and food-ingredient industries. These services are provided through the company’s wholly owned subsidiary, Hauser Technical Services, Inc., which consist of laboratories in Boulder, Colorado and Shuster Laboratories in Quincy, Massachusetts. The laboratories provide process research and development, custom manufacturing, and testing services for the pharmaceutical industry, as well as failure analysis, material identification and suitability testing, and product design validation for the medical device industry. In addition, the laboratories provide services to the natural product field, including development of extraction and isolation processes, analytical method development, and custom manufacturing and analysis of the chemistry of natural products. The company operates two other subsidiaries, including Botanical International Extracts, Inc., a distributor of bulk dietary supplements, and ZetaPharm, Inc., a distributor of bulk fine chemicals, excipients, and generic active ingredients. The type of products sold through ZetaPharm include bulk vitamins, dietary supplements, over-the-counter pharmaceutical ingredients, and food additives. These products are sold to various producers and processors of health food, pharmaceuticals, food and beverages, and dietary supplements.

1980s: Company Is Founded and Flourishes

The company was founded in 1983 as Hauser Chemical Research, Inc. by two research chemists, Randy Daughenbaugh and Dean Still, to provide services in contract research and development in chemical and process engineering. Although the two chemists had not selected a market niche upon founding the company, they soon developed a proprietary extraction technology for isolating and purifying plant and animal compounds at higher yields and lower costs than conventional methods. As a result, Daughenbaugh and Dean at first entered into small research and development contracts that soon led to profitable supply agreements based on their proprietary extraction technology.

In 1987 and 1988, Hauser won contracts from the National Cancer Institute (NCI) to isolate anti-tumor and anti-Aids agents from natural sources. As a result of these contracts, the company soon began supplying the National Cancer Institute with paclitaxel, a non-patented compound extracted from yew trees that first showed promising results in the treatment of ovarian, breast, and other cancers in clinical trials by NCI. Paclitaxel is an anti-tumor agent that exhibited effective activity against several types of cancer, especially refractory ovarian and refractory breast cancer. It is an anti-microtubule agent and represented the first of a new class of potential anti-tumor compounds. Microtubules are intracellular structures that serve to regulate cell division, cell shape, cell motility, and intracellular transport. Paclitaxal, which worked by attacking the cancer cell division process, constituted a new and novel compound that differed from all previously discovered cytotoxic agents.

By the late 1980s, the National Cancer Institute had spent more than $30 million on Paclitaxel research. Nonetheless, although Hauser had perfected an extraction technique to produce Paclitaxal, the product was far from being marketable. The NCI therefore decided to seek bids to produce and market a drug based on the paclitaxel compound. The rights were awarded to a partnership between Hauser and Bristol-Myers Squibb. The three-year partnership agreement between the two companies called for Bristol-Myers to spend more than $100 million to complete clinical studies and get the drug to market. Hauser, having developed the chemical extraction technology, would produce the paclitaxel for Bristol-Myers. The agreement with Bristol-Myers comprised Hauser’s largest contract since its founding and provided almost all of the company’s revenues until 1994, when it was terminated by Bristol-Myers Squibb.

Acquistions and Diversification in the 1990s

In January 1990, the company acquired Hauser Laboratories, Inc. for 400,000 shares of its common stock. The company’s acquisition was made with the aim of expanding the interdisciplinary laboratory testing and chemical engineering skills of its technical services unit. In the same year, the company formed Hauser Northwest, a wholly owned subsidiary, to facilitate the collection of yew bark for the production of paclitaxel. In May 1994, the newly formed Hauser Northwest acquired substantially all of the net assets of Ironwood Evergreens, Inc., an Olympia, Washington-based company, to retain and expand its bark harvesting capabilities in the Northwest. This acquisition gave Hauser four business units: pharmaceuticals, natural ingredients, technical services, and secondary forest products. In July 1995, in a further effort to find new sources of revenue, the company acquired 100 percent of the stock of Shuster Laboratories, Inc., an independent consumer products research and development firm and contract laboratory based in Quincy, Massachusetts, and Atlanta, Georgia.

The company pursued these acquisitions as part of a strategy to diversify its products and to become a multi-customer producer of special products from natural sources. Nevertheless, prior to 1995, virtually all of the company’s revenue derived from the production and sale of paclitaxel to the Bristol-Myers Squibb Company. Taxol, the brand name drug produced from paclitaxel and marketed by Bristol-Myers, proved to be of significant use in chemotherapy treatments for ovarian and breast cancer. As a result, Taxol was enormously profitable for Bristol-Myers, becoming its second-largest seller. For tax and diversification reasons, Bristol-Myers developed its own operation in Ireland to manufacture paclitaxel and terminated Hauser as a supplier in 1994 after the agreement between the two companies had ended. The termination of the Bristol-Myers agreement sent sales plummeting, causing Hauser to reduce costs to minimize operating losses by restricting salaries, benefits, and travel.

Hauser tried to rebuild its paclitaxel business by entering into a multi-year, world-wide, and mutually exclusive supply agreement in May 1994 with the American Home Products Company. The agreement called for Hauser to supply bulk paclitaxel to American Home Products. At the same time, the two companies signed a collaborative research and development agreement, providing for the cooperative development of new products derived from naturally or synthetically produced taxanes. Under the terms of this agreement, American Home Products would fund the research and development program and be granted the option to sell exclusively throughout the world any effective product that could be used for drug therapy of human disease. In turn, Hauser would supply American Home products with any such bulk products and receive royalty payments resulting from the development and selling of the finished products.

During 1995, the company also entered into a research agreement with Dovetail Technologies, Inc. to produce research on a novel class of compounds that had demonstrated anticancer activity in animal studies. Hauser planned to provide chemistry and manufacturing services for Dovetail’s proprietary compounds, which appeared to reinforce the body’s innate ability to fight cancer by augmenting the immune system. In the same year, Hauser initiated technical and business plans to enter the nutraceutical market, which encompassed a broad range of natural products aimed at supplementing dietary intake with added nutrients. The U.S. market amounted to over $200,000 million in 1995 and was anticipated to grow at more than 20 percent per year. The company had already been producing such products as liquid and dry herbal extracts of echinacea, valerian, Siberian ginseng, Panax ginseng, goldenseal, and chamomile. The company believed that its expertise in the production of special products from natural sources and extensive regulatory experience positioned it well for growth in this market. As a result, Hauser began producing nutraceutical products that could be consumed as supplements in liquids, capsules, or tablets, or as ingredients in processed foods.

In 1996, the company began producing sanguinaria extract, a natural antimicrobial, for Colgate’s Viadent toothpaste and oral rinse products. The company also entered the market to produce and sell natural flavor extracts, an estimated $3 billion market per year worldwide. Hauser believed that there was a continuing trend in the United States toward the use of natural products, including the use of natural flavors and botanical extracts. The company’s extracts were marketed under its brand name NaturEnhance Flavor Extracts, which encompassed fifty flavor extract products. These were used in ready-to-drink beverages, yogurt, dressings, ethnic foods, teas, and other natural products. Hauser also began producing coffee, tea, and vanilla flavor extracts for use in beverages, ice cream, yogurt, baked goods, teas, and other applications. Other extracts in this product line included black pepper, tarragon, basil, sage, thyme, oregano, and chili pepper for use in sauces, soups, stews, frozen entrees, juices, salsa, and dressings.

Company Perspectives:

Hauser, a customer-connected company, develops, manufactures, and markets superior natural products and offers unsurpassed technical services. The company is comprised of Botanical International Extracts, Inc.; ZetaPharm, Inc.; Hauser Laboratories; and Shuster Laboratories.

In 1996, Hauser also entered the natural food additives market with the goal of rapidly building a quality line of products and becoming a world leader in the development and manufacture of natural food additives. Food additives comprise products that act as preservatives, stabilizers, colorants, antioxidants, and nutritional additives. In addition, the company began manufacturing for commercial sale a line of rosemary extracts that protected the flavor and quality of foods and beverages.

In December 1996, the company was incorporated under the laws of the state of Colorado under the new name Hauser, Inc., successor company to the Delaware corporation, Hauser Chemical Research, Inc. By this time, the company’s technical services division, which included Hauser Laboratories and Shuster, was providing more than 3,000 consulting and testing projects for thousands of clients each year. These project ranged from multi-year research, development, testing, and consulting programs for Fortune 100 companies to simple water tests for homeowners. The company offered clients contract research services and process and product development in a variety of chemical, engineering, and food technology applications. In addition, the company provided analytical services concerning a variety of materials, including pharmaceuticals, botanicals, and medicinals, paints and coatings, plastics, petroleum products, and metals.

Challenges in the Mid-to Late 1990s

Despite Hauser’s efforts to diversify, in 1996 the company decided to sell the net assets of its secondary forest products subsidiary, Hauser Northwest, Inc., a money losing operation, in order to retain cash for its core business and improve the company’s operating position. The divestiture of Hauser Northwest meant that Hauser would no longer harvest its own yew bark in the Pacific northwest and would instead rely on nursery grown, cultivated yew trees to provide acceptable raw material for processing paclitaxel. In 1997, Hauser and its customer, Yew Tree Pharmaceuticals, were named in a lawsuit filed by Bristol-Myers in the Netherlands, alleging patent infringement in Europe concerning the production of paclitaxel. The lawsuit stemmed from efforts by Bristol-Myers to maintain its monopoly over the production and marketing of its cancer fighting agent, Taxol. On July 24,1997, the District Court in the Netherlands ruled against Bristol-Myers, denying the company’s request for an injunction to halt Yew Tree from selling their paclitaxel-based product.

In 1998, Hauser set aside $1.5 million to cover product returns, development costs, and legal fees after shipments of Panax ginseng to PharmaPrint, Inc. were found to be contaminated with quintozene, an agricultural-crop fungicide that causes liver damage. The presence of the fungicide had been discovered in tests on random samples of the shipment. As a result, PharmaPrint rejected Hauser’s shipment of ginseng and notified the Food and Drug Administration out of concern that the contamination could affect other ginseng products on the market. Hauser consequently halted all Panax processing and shipments until the matter was resolved with regulatory authorities.

In its continuing efforts to resurrect the paclitaxel business, in 1998 the company signed a non-exclusive agreement to supply bulk paclitaxel to Immunex and its collaborative partner, IVAX Corporation. In a related development, Hauser announced that it was terminating the exclusivity portion of its relationship with Yew Tree Pharmaceuticals for the supply of paclitaxel. This move meant that the company would continue to supply paclitaxel to Yew Tree for its product Yewtaxen, but would enable Hauser to provide the compound to other companies for marketing in Europe.

Nevertheless, the company’s major focus was on expanding the herbal extracts business. In this regard, in December 1998, Hauser announced that it was merging with three subsidiaries of the Zuellig Group N.A., Inc. and Zuellig Botanicals, Inc. The merger with Zuellig Botanical Extracts, Inc., a subsidiary of Zuellig Botanicals, Inc., and with Wilcox Drug Company, Inc. and ZetaPharm, Inc, subsidiaries of Zuellig Group N.A., both quadrupled Hauser’s size and created the leading U.S. supplier of herbal extracts, botanical raw materials and related products in the rapidly growing nutritional industry. At the close of the merger, Hauser issued 2,515,349 shares of its common stock to Zuellig Group N.A. and Zuellig Botanical Inc., constituting 49 percent of the outstanding shares of Hauser stock. Hauser’s existing officers and public shareholders owned 51 percent of the remaining shares of the newly combined company. In connection with the merger, Wells Fargo Bank, N.A. provided a $35 million line of credit and a $10 million fixed loan in support of the merged companies. Hauser also assumed approximately $21 million in bank debt of Wilcox, ZetaPharm, and Zuellig Botanical Extracts. In addition, the merger agreement, which was finalized on June 11,1999, called for the new organization to be headquartered in Boulder, Colorado, and operated under the Hauser name. Simultaneously with the merger, the company effected a one-for-four reverse stock split in order to increase the market price per share of common stock to comply with Nasdaq’s listing requirements of at least a $5.00 minimum bid price. Because of the significance of the merger, Hauser was required to reapply for listing on the Nasdaq National Market Exchange.

Key Dates:

1983:: Hauser Chemical Research, Inc. is founded.
1990:: The company acquires all outstanding stock of Hauser Laboratories, Inc.
1995:: The company acquires all of the stock of Shuster Laboratories, Inc.
1999:: The company merges with business operations connected to the Zuellig Group N.A., Inc.
2000:: The company terminates the operations of Wilcox Natural Products.

With this renewed focus on herbal extracts, Hauser decided to sell its paclitaxel business, which had never regained substantial profitability after the 1994 expiration of the Bristol-Myers agreement. In fiscal years 1997 through 1999, the company’s operating losses in the paclitaxel business had resulted primarily from the failure of customers to renew their purchase contracts. The company planned to use the cash from the sale of the paclitaxel operation to invest in the more promising Nutraceuticals and Technical Services units. The company also made organizational changes within its subsidiaries to improve operating costs. Hauser consolidated its raw material purchasing activities under the Wilcox division and combined its sales and marketing operations under the Botanical International Extracts unit. In addition, Hauser Laboratories and Shuster Laboratories were combined into one business unit called Hauser Technical Services, Inc.

Nevertheless, the merger and the organizational changes did little in the immediate term to bolster the company’s revenues. For fiscal year ended March 31, 2000 Hauser reported a net loss of $28,374,855, compared to a net loss of $29,736,106 in fiscal year 1999. As a result of these financial struggles, the company’s stock declined precipitously below one dollar per share, causing the company’s common stock to be officially delisted from the Nasdaq on November 1, 2000. The delisting stemmed from the company’s lack of compliance with the Nasdaq’s listing requirements that call for a minimum bid price of $1.00 and a minimum public float value of $5 million. The company’s common stock, however, was eligible for trading in the over-the-counter market. The company, which tried to appeal the delisting of its shares, had been experiencing significant operating losses stemming from a worldwide oversupply of dietary supplement products leading to low prices and declining revenues.

Developments and Difficulties in the New Century

In January 2001, the company announced what it considered a significant development in having reached agreement with the Whitehall-Robins Healthcare division of American Home Products Corporation to jointly develop a new dietary supplement. The agreement called for a two-year exclusive collaboration between the two companies. Whitehall-Robins was a leader in the research and development, production and marketing of a broad range of consumer health care products, with U.S. sales of approximately $1.7 billion in 2000.

Nevertheless, despite the Whitehall-Robins contract, Hauser’s financial difficulties continued into 2001. Due to continuing operating losses, during fiscal year ended March 31, the company terminated the Wilcox subsidiary and liquidated its remaining inventories, exiting the sale of botanical raw materials. The decision to terminate the Wilcox operations stemmed from the significant decline in market prices for the natural product raw materials sold by Wilcox during fiscal 2000. In July, the company reported a net loss for 2001 of $33.3 million, compared with a net loss of $28.4 million in 2000. The company stated that its financial performance reflected efforts to reduce costs and restructure operations in order to return to profitability. To further stem the financial hemorrhaging, the company announced in August 2001 that it was selling the Hauser Contract Research division, which specialized in the extraction, purification, chemical modification, and production of fine organic chemicals from natural sources. By the first fiscal quarter of 2002, the company had begun to make progress, narrowing its net loss to $618,000 from a net loss of $1.9 million in the corresponding quarter in the previous year. By the end of 2001, the company had reorganized around three principal business segments: dietary supplements, pharmaceuticals and food ingredients, and technical services. In spite of the economic recession in 2001, Hauser’s aggressive restructuring appeared to be positioning the company for possible future profitability in the herbal extracts and nutritional supplements industry.