TECHNE Corporation

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TECHNE Corporation

614 McKinley Place NE
Minneapolis, Minnesota 55413
U.S.A.
Telephone: (612) 379-8854
Fax: (612) 379-6580
Web site: http://www.techne-corp.com

Public Company
Incorporated: 1981
Employees: 494
Sales: $130.9 million (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: TECH
NAIC: 334516 Hematology Instruments Manufacturing 541380 Testing Laboratories

TECHNE Corporation is a holding company whose main operating subsidiary is R&D Systems, located in Minneapolis, Minnesota. Since 1976, R&D Systems has been making hematology controls, which are used to verify the accuracy of blood analysis instruments. Starting in the late 1980s, however, the company’s developing Biotechnology Division began to eclipse the Hematology Division as the centerpiece of TECHNE’s operations. The Biotechnology division manufactures specialized proteins, including antibodies and cytokines, that are used by scientists in research laboratories. TECHNE’s products are used to investigate possible therapies for multiple sclerosis, wound healing, AIDS, and tumor growth. TECHNE is the world’s leading manufacturer of cytokines, which are purified proteins that act as communicators between cells, stimulating or halting growth, or changing a cell’s function. The company also sells assay kits, which are prepackaged kits used to test for the presence of a particular molecule. The Biotechnology Division now accounts for approximately 85 percent of TECHNE’s revenues. The company has a subsidiary in England, R&D Systems Europe Ltd., that distributes TECHNE’s products in Europe. R&D Systems Europe has a sales subsidiary in Germany known as R&D Systems GmbH. TECHNE’s president, chairman, CEO, and treasurer is Thomas Oland, who first came to the company as a consultant in 1980. Oland’s work ethic and stable, frugal management style are often cited as the basis for TECHNE’s record of steadily increasing revenues for more than a decade.

A Rough Start: 1977-85

David Mundschenk founded Research and Diagnostics Systems in Minneapolis in 1976. The company specialized in hematology controls—precisely measured blood samples that could be used to calibrate laboratory instruments and act as controls in blood tests. R&D Systems’ first product, a Platelet-Rich-Plasma control, was introduced in 1977.

The company performed poorly in its early years. By 1980 R&D Systems was faltering, directionless, and deep in debt. Late that year Roger Lucas, a company executive and former professor of biochemistry at the State University of New York, met an accountant named Thomas Oland. Lucas hired Oland to liquidate the company. Oland, however, saw potential in R&D Systems’ hematology products and negotiated with creditors to give the company time to introduce its newest blood product. In 1981 R&D Systems became only the second manufacturer in the world to introduce a Whole Blood Control with Platelets. The product was well-received and bought time for the company to get back on its feet. Oland continued working with R&D Systems as a consultant.

In 1983, however, a misstep by the company founder plunged the company back into an unfavorable situation. Mundschenk bought control of Hycel, a French maker of hematology products, for only $50,000, unaware that the company had an oversized debt load. Oland examined the company’s finances and found that Hycel owed a corporate client $800,000. When R&D Systems’ board of directors found out about the ill-advised acquisition, they threatened to shut the company down unless Oland took control. As a result, Oland became CEO, and biochemist Roger Lucas headed up a division as chief scientific officer.

The competent leadership now in charge at R&D Systems attracted the attention of two venture capitalists. Investors George Kline and Peter Peterson owned a shell company known as TECHNE Corporation. They had founded the company in 1981 to pursue profitable acquisitions, and took it public in 1983. In 1985, acting on faith in Oland’s management ability, TECHNE bought R&D Systems for about $1.9 million. R&D Systems was subsumed into the corporate shell.

Development of Growth Factors: 1986-90

That year R&D Systems also began development of a new product line. The new products were specialized proteins known as human cytokines. Cytokines are produced naturally by the body and control the growth, development, and functioning of cells. Researchers saw great therapeutic potential in the molecules, including making wounds heal faster, stimulating bone growth, and stopping the growth of certain cancer cells. A full understanding of cytokines would allow researchers to determine exactly how a protein would act on a cell and give them the ability to target specific health problems with few side effects. As a result, cytokines were in demand at government and university laboratories.

TECHNE’s investment in the development of cytokine growth factors contributed to a $487,000 loss in 1985. The next year, TECHNE spent $675,000 on research in the new field. Research focused on a protein known as TGF-beta, short for “transforming growth factor.” At the time, TGF-beta was the second of only three proteins that were able to stimulate or suppress the growth of cell tissue. R&D Systems was the only commercial supplier of the product, and was able to sell it for the equivalent of $9 billion an ounce, mainly to researchers for laboratory applications.

The development of growth factors followed naturally from TECHNE’s hematology operations. The company’s hematology controls were produced largely from pig blood. TGF-beta was found in the blood’s platelets, so TECHNE was able to use its ready blood supply to isolate the protein using a proprietary method. Oland saw great potential for TECHNE’s protein growth factors. He told the Minneapolis Star and Tribune in 1986, “We think that our long-range future will be in growth factors. We think it’s the hottest new field in science, and we just hope we can keep pace with it.” His optimistic view seemed to be corroborated when, in October of that year, the scientists who had discovered growth factors 30 years earlier received a Nobel Prize for medicine.

TECHNE’s research operations took another step forward in 1988, when the company hired several molecular biologists who had been laid off by another Twin Cities company, Molecular Genetics. The biologists helped TECHNE reduce its production costs by developing a way to grow materials in bacteria rather than buying blood and tissue for processing from vendors. That year the company officially formed its Biotechnology Division.

Steady Growth in the 1990s

The production of growth factors became a central aspect of TECHNE’s operations. By the early 1990s the company was positioned to make acquisitions that would confirm its reputation as a leading producer of cytokines. In August 1991 TECHNE bought the research reagent and diagnostic assay kit business of Amgen Inc., a California-based biotechnology firm. The acquisition went smoothly because it involved a transfer mainly of inventory and property, rather than personnel. The sale gave TECHNE the right to sell Quantikine diagnostic kits.

Later that fall, TECHNE sold its French subsidiary Hycel, the company that had aroused such dismay when Mundschenk first bought it in 1983. Although the sale of Hycel resulted in some lost revenue at TECHNE, growth in the company’s main subsidiary, R&D Systems, made up for the loss. Revenues for 1991 were $22.3 million, and net income reached $1.96 million, a 17 percent increase over the previous year. Under Oland’s leadership, similar growth rates continued through the end of the decade.

Several factors accounted for TECHNE’s steady increase in revenues. Because the company’s products were developed for use in biotechnology research rather than for the therapeutic market, TECHNE did not have to contend with stringent product approval guidelines at the U.S. Food and Drug Administration. The company was able to cultivate long-term relationships with university and government research centers, which ensured reliable demand for its products.

Industry insiders also gave Oland much of the credit for TECHNE’s success. When he took over the leadership position in 1983, he applied his personal habits of careful money management to the company. Corporate Report said he ran the company with a “miser’s touch” in a 1999 article in which Oland was profiled as one of the top underpaid CEOs in Minnesota. In the article, analysts praised Oland’s work ethic, noting that he left the office at 9 p.m. most nights. Coworkers agreed that he worked incredibly hard, and said he had few interests outside of the company. George Kline, one of the founders of TECHNE, was quoted as saying, “He is one of the rare people who puts shareholders and employees first and his own financial well-being second.” The Minneapolis business periodical City-Business also took note of Oland’s low-key, effective management style. A 2000 article said he was hard-working and media-shy, preferring to let the company’s performance speak for itself. “Tom is absolutely dedicated to the company. It’s his baby, so to speak, and he likes to be very much involved in all aspects,” research analyst Chad Simmer told CityBusiness.

TECHNE’s steady growth continued through the 1990s. The company bought British Biotechnology Products (BBP) Limited in 1993 for $2.3 million. The firm had maintained a distribution agreement with R&D Systems for several years before the sale. BBP eventually became the headquarters for TECHNE’s European research and development unit. The company was renamed R&D Systems Europe, Ltd., and continued to distribute products from R&D Systems in Minneapolis. The acquisition of BBP pushed TECHNE’s revenue to $40.3 million for 1994, up from $28.7 million the year before.

Company Perspectives:

“We truly are providing the research community with products that are helping mankind advance its knowledge of the biological processes that control our lives, from the embryo through adulthood.”

—Thomas Oland, chairman, CEO, and president

Overseas expansion continued in 1995, when TECHNE established a sales subsidiary in Germany with an office near Frankfurt. Germany was TECHNE’s largest European market. Expansion at home also continued apace. TECHNE added 80,000 square feet to its offices in 1993 and planned another 90,000-square-foot expansion in 1996.

In 1997 TECHNE carried out a restructuring of its European operations. The company decided to focus on its core cytokine-related products and pulled some underperforming molecular biology products from the market. In the summer of 1998 TECHNE managed to remove its chief competitor from the market, acquiring Genzyme Corporation’s research products business for about $65.5 million. The Genzyme unit had reported sales of about $15 million in 1997. The acquisition added approximately 4,000 customers and 350 products, including antibodies, proteins, and research kits, to TECHNE’s existing base of 8,000 customers and 1,900 products. TECHNE was now the world’s leading source for cytokines and related products.

The Genzyme unit’s sales were lower than expected after the acquisition, but only because former Genzyme customers rapidly converted to R&D Systems products. Overall sales for 1998 once again showed steady growth. Net income for 1998 reached $15.2 million on sales of $67.3 million, compared to net income of $6.7 million on sales of $47.7 million three years earlier.

Rise and Fall of Biotechnology: 1998-2002

The biotechnology market as a whole experienced substantial growth in the late 1990s, and TECHNE blazed ahead with a series of acquisitions. TECHNE bought the reagent business and immunoassay patents of Cistron in 1999. Cistron had worked with TECHNE as a partner for many years, but decided that it wanted to withdraw from the production of research reagents and concentrate on the research and development of therapeutic applications instead. TECHNE paid $750,000 for Cistron’s unit. The following year TECHNE increased its ownership in the drug developer ChemoCentryx and acquired research and diagnostic market rights to all products developed by the firm.

For the past decade, TECHNE had been a well-kept secret on the stock market. Oland avoided media attention and expected the company’s performance to speak for itself. In late 1999, however, investors discovered TECHNE and pushed the company’s share price from $30 to $160 a share in the ten-month period ending July 2000.

In the fall of 2000 TECHNE filed a lawsuit against Amgen, from whom it had bought two units in 1991. Since the sale, Amgen had been supplying TECHNE with a product known as Erythropoietin in a cooperative agreement. Amgen said that they had mistakenly failed to invoice for the product and demanded $27 million in back payments. Oland countered that it was unreasonable to demand payment after failing to notify TECHNE for nine years that payment was due, especially since TECHNE had only made $2.7 million in sales related to Amgen’s product. The companies went to court, and in January 2002 the court judged in Amgen’s favor. TECHNE settled the litigation in May 2002 with a $17.5 million cash payment to Amgen.

The lawsuit had little effect on TECHNE’s ever increasing revenues. Net income was up 60 percent in 2000 to $26.6 million on revenues of $103.8 million. In the fall of 2001 TECHNE invested in Discovery Genomics, a company located in Minneapolis that worked on determining the function of individual genes. In an arrangement similar to the ChemoCentryx deal, TECHNE acquired about 40 percent of Discovery Genomics and won the right to develop antibodies and immunoassays for proteins discovered by the company, and sell them on the research market free of royalties.

The terrorist attacks in New York and Washington, D.C., on September 11, 2001, as well as the litigation settlement with Amgen and a general cutback in the biotechnology industry, hurt TECHNE’s stock price in 2002. Nevertheless, the company continued to perform well in the area of operations. Sales in 2002 were $130.9 million, compared to $115.4 million in 2001. Due to the Amgen settlement, net income fell slightly from $34.0 million to $27.1 million in 2002.

TECHNE continued introducing hundreds of new products each year, thus bolstering revenue from older products whose sales had leveled off. The company’s products were frequently mentioned in scientific journals. In 2002 the company appeared poised to continue its long-lasting upward trajectory.

Principal Subsidiaries

R&D Systems Europe, Ltd. (U.K.); R&D Systems GmbH (Germany); R&D Systems, Inc.

Principal Divisions

Biotechnology Division; Hematology Division.

Key Dates:

1976:: David Mundschenk founds Research and Diagnostics Systems.
1980:: Thomas Oland comes to R&D Systems as a consultant.
1981:: George Kline and Peter Peterson found TECHNE.
1983:: Oland becomes head of R&D Systems following an ill-advised decision by Mundschenk.
1985:: The shell company TECHNE buys R&D Systems.
1988:: TECHNE forms a Biotechnology Division to produce specialized proteins.
1991:: TECHNE buys Amgen’s research reagent and diagnostic assay kit business.
1993:: TECHNE buys a British biotechnology company, founds a European division.
1995:: TECHNE establishes a sales subsidiary in Germany.
1999:: TECHNE buys Cistron’s reagent business and immunoassay patents.
2002:: TECHNE’s sales reach $130.0 million after more than a decade of steady growth.