Biotech Firm Learns Hard Lessons As Its Founder Seeks To Halt Slide

Applied Biosystems finds that as a start-up's glamour fades, it must stress a return to basics FOSTER CITY, CALIF. - The engineer who cofounded Applied Biosystems and made it into a superstar of the biotech instruments industry, only to step back and see it stumble, is back at the helm. And Andre Marion believes that what once worked for the company is also the surest route to its future success. "Success lies in the ability to take chances," says Marion, who returned to hands-on management of the Silicon Valley-based company in February. "When people really dive into their jobs, they achieve results, too." Marion, a former executive at Hewlett-Packard, joined with colleague Sam Eletr in 1981 to create the company and preside over its rapid growth. But internal dissension, increased competition, a poorly planned acquisition, and other factors have haunted Applied Bio-systems' sales, morale, and stock price in recent years. Marion believes he can turn the company around by refocusing attention on creativity, customer needs, and top-notch technology. He blames Applied Biosystems' problems on a few poor decisions and an extreme emphasis on budgets and financial goals that he says fostered a climate of fear and sapped the joy of invention that built the company. Others see it as a typical case of a company that thought its initial growth would last forever. "It's a very good company that's fallen on lean times, and management didn't know how to handle lean times," says Stuart Weisbrod, biotechnology analyst for Prudential Bache Securities in New York. "They misread the market." Marion is plotting a comeback with time-tested methods: cutting costs, boosting productivity, and launching new products. He's also considering a novel program that would develop future customers through training programs and university partnerships. Gene amplification technology already is creating new demand for Applied Bio-systems' DNA synthesizers. The biotech community has rapidly adopted the powerful technique, which enables researchers to duplicate minuscule amounts of DNA with great speed. Company executives also expect the Human Genome Project, the worldwide effort to sequence every gene in human DNA, to spawn fresh need for sophisticated instrumentation. Robert Brownlee, a Silicon Valley entrepreneur who sold his microliquid chromatography pump business to Applied Biosystems in 1984, points out that Applied Biosystems achieved its original success by giving young biochemists something they never had before. "If you produce the first product for these virgins [scientists without such equipment], you have a big value added, and you can charge a big price for your product," Brownlee says. "That's the reason Applied Biosystems did so well." Applied Biosystems built its early success on instruments that for the first time automated biotechnology processes in an easy-to-use format. Marion and Eletr founded the company in 1981 with $125,000 from four venture capital companies. Perceiving an open market for instruments serving the biotechnology industry, they hired key biochemists, mechanical engineers, and software specialists and licensed the chemistry and instrumentation for their first protein sequencer. In 1982, the company introduced the 470A automated protein sequencer, which assembles proteins by linking up their component amino acids in the prescribed order. In 1986, the company introduced the first automated, fluorescence-based DNA sequencer. Andre Marion found it easy to make the transition from engineer to executive. The Frenchman has always loved to create new products, equipment that people from a wide-ranging blend of disciplines can use. For him, management was an especially interesting way to continue the process. "I still get involved in the creation of new products and new ideas, but through people," Marion says. "So it's an added dimension in a way, where I have to bring people together." Marion holds an engineering degree from the Ecole Nationale Superieure D'Ingenieurs Arts et Metiers in both mechanical and electronic engineering. He came to the United States in 1964, applying his talents to technology ranging from automated typewriters to transaction recording systems for the retail industry. Marion enjoys working with scientific equipment because of the sophistication and creativity involved. "You have to stretch things to the limit," Marion says. "Oftentimes you have to develop something that doesn't exist." But Marion believes his strength as an entrepreneur and manager rests more on his faith in people than on his engineering skills. "I have the tendency to be very trusting. People feel that and are more prone to take risks, because they feel they are going to be supported," Marion says. "No one likes to fail, but that happens; and, more often than not, you get more knowledge in failure than you get in success." Marion was research and product development manager at Hewlett-Packard before venture capitalists invited him to help start a biotech instrumentation company. He and colleague Sam Eletr wrote up the business plan and set up shop in 1981. Marion served as vice president of engineering for two years, became chief operating officer, then chief executive and finally chairman. He advises new entrepreneurs not to worry about their credentials. "The role of the manager is not to know everything. That doesn't work," Marion says. "The role is to select, and attract, and hire the best possible people. And the next thing to do is to get out of the way." --S.L. The products were a hit, and Applied Biosystems flourished. In 1986 profits reached a hefty 20 percent of its $52 million in sales, and the company's stock climbed to an all-time high of $55 a share. Then the troubles began. Competitors moved in and demand slowed. Management also made some questionable decisions. At a cost of $23 million, Applied Biosystems bought Kratos Inc., the Ramsey, N.J., liquid chromatography division of Spectros International PLC in 1987. Kratos' optical detectors seemed a good match for technology from a recently acquired local firm, Brownlee Labs, to produce a new high-sensitivity chromatographic system for protein sequencing. But merging businesses on opposite coasts wasn't easy. Kratos' product line proved less profitable than expected, and the over-extended California managers found little time to help their older, more staid acquisition assimilate. New products were delayed. Revenue growth slowed and earnings dipped. On March 12, 1987, Chairman Eletr resigned - to preserve his health and sanity, he said as he stepped down. In one day, Applied Biosystems stock dropped from $42 to $30 a share. Cofounder Marion remained behind to steer the enterprise alone. "That was a hard time for me - and extremely taxing," he recalls. "I began to realize I could not go on [alone]. I began to look for the next management team." In October 1987 Irvin Smith, an instrumentation veteran from Abbott Laboratories, was brought in to manage the company. As chief operating officer, and then as chief executive, Smith installed structure and discipline, separating one function from another and routing decisions through a chain of command. Strict budgets and financial goals replaced a more fluid style. But the emphasis on efficiency and rigor, Marion says, broke the creative spirit that had kept Applied Biosystems in touch with customer needs. "Irv brought with him a management philosophy that was not compatible with the company - or myself," says Marion, who has since reassumed the titles of president and chief executive. "The majority of the company was really rebelling. Decisions were made from numbers, from data. The underlying assumption was that people are not to be trusted, but numbers are." Smith's strategy proved too much for Applied Biosystems to absorb. After some very strong quarters due to increased sales in Japan, revenue flattened and expenses grew. When key people threatened to quit, the board asked Smith to resign. Smith was forced out in February, leaving four consecutive quarters of disappointing earnings in his wake. In the most recent period, which ended March 31, sales dipped 1 percent to $42.6 million and earnings collapsed by more than half, to $2.2 million. In announcing its results, the company warned that its performance in the coming quarter would likely be worse. Applied Biosystems blames its current problems on a strengthening dollar, a slowdown in government funding for science in the United States and Japan, and the reduced margins for its machines - which sell for $12,000 to $220,000 apiece. These problems affect the entire industry, of course, but industry analysts say that Applied Biosystems' problems were compounded by an inability to adapt its research and sales approach to a maturing market. Applied Biosystems built new manufacturing facilities and hired sales and service staff in anticipation of a market that hasn't yet materialized, says Prudential's Weisbrod. Research labs and drug and biotechnology companies have bought all the instruments they need or can afford, he adds. Brownlee, who recently reached a settlement on a lawsuit brought by the company for starting up a business that it viewed as a competitor, believes executives will need to take more drastic measures and hire an operations expert if the firm is to repeat its successes. "I suspect they'll have to do a considerable amount of cutting of staff and even business activities to improve their earnings," Brownlee says. "I think [they've hit] a brick wall." Marion firmly rejects such suggestions as short-sighted. "I want to preserve the key assets of the company, which are the people. It took a long time to find the best, and we're not about to lose them," Marion says. "To return to a better level of profitability may take longer than Wall Street may expect, but I'm not going to lay off anybody." Marion, who professes a new perspective on leading Applied Biosystems, knows he faces a major challenge. He must work with a company that today is larger, more complex, and, hence, less amenable to the free-spirited management style that he once assumed. One approach is for the firm to make itself known to its future customers. The company is negotiating to place its instruments in biotechnology training centers or core research facilities at four universities - the University of Florida, the California State University system, the North Carolina State University, and Georgetown University - and the Wistar Institute in Philadelphia. Federal and state money would help pay for the training and possibly the instruments as well. Stephen Dahms, director of the California State University system's new Biotechnology, Education and Research Program, says that his school would be delighted to use Applied Biosystems equipment exclusively in the program's $2 million biotech core facility now being set up in San Diego. "They are recognized as the world leader in production of that type of equipment," says Dahms. "I've been impressed by their sales force and product line." But Dahms says that negotiations have been slowed a bit by the restructurings at the company. Another proposal would have put the PCR-Mate, with a price tag of $12,000, into undergraduate labs as part of a matching program. But that effort died for lack of a champion within the company. While the schools have responded enthusiastically to these overtures, marketing executives are cautious. They want to make sure the plan will really pay off by attracting new buyers. "If they don't maintain the instruments or train properly, the users will walk away thinking this instrument is too difficult to use or breaks down too often," says Patrick Carroll, U.S. sales manager for systems products. "It could give us a black eye." Within the company, there's also been some bickering as to whether the money would be better spent on research or on a different project - and about which universities would be the best candidates for the machines. For his part, Marion refuses to slice R&D, saying innovation and superior technology are the heartbeat of the company. He is now plowing about 13 percent of sales back into research, a level slightly higher than last year's. The company's R&D force numbers several hundred people - it won't give out the precise number - and their salaries absorb the lion's share of that budget, especially because Applied Biosystems had hired with expansion in mind. Marion says that instead of reducing personnel, he hopes to economize by raising employee pro- ductivity (measured by total sales divided by the total number of employees) to the 1988 level of $143,000 per worker. That would be an $18,000 improvement over current levels. He is also cutting back on travel, seminars, and some marketing expenses, as well as investments in new manufacturing facilities. The aim, he says, is to steer the company "back to the basics." Sally Lehrman covers biotechnology for the San Francisco Examiner.

Biotech Firm Learns Hard Lessons As Its Founder Seeks To Halt Slide

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