SRI is taking steps to sustain revenue stream

When Robert "Bob" Lonergan took the helm of Southern Research Institute in Birmingham four years ago, it was a nonprofit at a crossroads.

The scientific research organization, steeped in 60 years of government contracts and commercial testing, lacked a self-sustaining revenue stream and had stalled financially.

That's not to say top quality research and development of drugs to combat cancer and infectious diseases wasn't at an all-time high. The institute was also garnering intermittent headlines for advances in its engineering, homeland security, automotive and environment and energy divisions.

In 1999, The University of Alabama at Birmingham stepped in to cover the institute's debt, but Lonergan says the temporary financial difficulties were only a symptom of a more complex problem: SRI wasn't reaching the audience - or the markets - it needed to keep its products and its potential in an exploding biotechnology industry visible.

Without additional resources to facilitate reinvestment in the organization and its infrastructure, Lonergan says, that debt cycle was a history SRI was doomed to repeat.

And one look at the caliber of scientist SRI is able to attract told Lonergan the status quo needed to be eradicated from the employee handbook immediately or the institute would become nothing more than a training ground for for-profit companies savvy about smart growth and development.

Today, the scientific research organization has:

• Spun off its 30-year-old in-house drug delivery group into Brookwood Pharmaceuticals Inc., a for-profit company that in turn acquired the Ohio-based external polymer manufacturing business of Alkermes Inc., to be operated as a subsidiary called Lakeshore Biomaterials Inc.
• Taken its drug discovery division commercial by partnering with New-Jersey-based Schering-Plough Corp. for a $1 million initiative to develop compounds that could potentially treat infectious diseases.
• Watched the sixth anti-cancer drug developed in its laboratories, clofarabine, receive FDA approval.

And Lonergan says, "We're just getting started."

Liberating assets

A newcomer to the life sciences contract research business, Lonergan joined SRI after a nine-year stint with glass and building materials giant Owens Corning.

He says the model for jump-starting a flailing operation has less to do with background than solid teamwork, and capable employees were never an SRI issue.

The time had simply come, he says, for Southern Research to reinvent itself and evolve with the industries it serves rather than risk being left behind.

"We're going to have to find more ways to liberate the assets we have and align them with opportunities and markets for growth," Lonergan says.

And while the CEO is pleased with the visible strides SRI has made in the last two years, improvement is a constant, metamorphic cycle rather than an end.

The first step, he says, was sending the right message to the more than 600 employees on SRI's payroll.

"Doing what (our employees) do is very, very hard, and when the leadership doesn't send messages that are consistent with that, it creates opportunity for dissent," Lonergan says.

And while SRI's turnover rate hovers around the industry average of 16 percent, Lonergan says no management team can ever afford to kid themselves into thinking they've "got the best deal on Earth."

"People have options, and that's why you have to make sure you're paying attention to them and care about them," says Lonergan, arguing that the often-touted "we-just-can't-get-good-people-around-here" refrain he hears from industries across the board is a "wimp's excuse" to cover up the fact their company or organization doesn't have a compelling enough proposal.

So how did the backslide happen?

"You just get out of tune, out of touch. Ten years pass, and you have a problem," Lonergan says, adding, "For Southern Research, the bill came due. We had to come to grips with the new reality and move on."

The challenge, he says, is not in identifying what you're doing wrong but in recognizing what you've done right and how you can build on that momentum.

"That's what creates positive energy and gets people moving to produce. Then, good leadership gets out of the way and lets their folks do what they were hired to do," he says.

Going commercial

Tina Rogers, vice president of SRI's Drug Development segment, is one of those leaders excited by the new direction.

Rogers, who has worked at Southern Research for a total of 15 years since 1981, has run the gamut from technical staff employee to management to senior scientist.

She sees the move as a means to ensure future success.

"We've never really considered ourselves a business - in fact, a lot of the people who come here come from the academic world - but more like a university that didn't have the teaching responsibilities," Rogers says.

Confusion emerges, she says, when academics grapple with a nonprofit venturing into commercialization, as that situation tends to clash with their personal world views.

"When they see this shift to a focus on the bottom line, there's an automatic assumption that something must be wrong and we're going out of business, when really it's just that our expectations for what we are and where we want to be down the road have changed with the times," Rogers says.

Increasing profit margins, she says, is a first step for drug development. That means re-evaluating some of the segment's mainstay government contracts that don't produce a strong enough return on investment.

"Basically, we're trying our best to look more like a commercial contract research organization and that means we're going to need to invest in new equipment, new programs and new technologies. That level of investment requires new funding sources, and if we'd realized that 30 years ago, I don't think we'd have so much catching up to do," Rogers says.

'Execution' and 'growth'

Enhancing commercial viability is difficult, Lonergan says, and "the price of admission was execution and growth -- execution meaning whatever you agree to do today you must do to the best of your ability, and the growth side speaks for itself. Without growth, you're just feeding on yourself."

So how does a nonprofit justify spinning off for-profit entities? It's all part of the evolution necessary to survive in an environment dominated by giant pharmaceutical and biotechnology companies, he says.

"It's about being self-sustaining. If we're no longer looking to the government just to fund us but taking those funds and reinvesting them in ourselves, then that growth becomes sustaining," he says. "We're going to have entities in this place where people will invest in us not just because of the value of what we're producing but because there's a direct return on their investment."

Arthur Tipton, president of Brookwood Pharmaceuticals, says spinning off also allows his operation to build long-term value rather than operate from quarter to quarter; but, more importantly, he adds, it immediately brings three decades of research and progress to a more visible market.

"It's strange. You rename yourself, get new business cards and start telling people what you've told them all along, but for some reason the new package makes them take notice," Tipton says. "At least among the investing public there's a big difference between calling yourself a pharmaceutical company and calling yourself an institute."

And while Tipton considers Brookwood Pharmaceuticals its own separate entity, he says the beautiful by-product is the constant desire to see everything that goes out Brookwood's doors benefit SRI.

"Drug delivery is a nugget of wealth that exists within Southern Research, and I hope we can enhance the value of that, both for what we're doing and for Southern Research as well," he says.

And that's exactly the level of collaboration Lonergan believes is necessary for SRI to realize its potential.

"Our objective is to create those vehicles for revenue, and we have some tremendous assets," he says. "We have some drugs in the pipeline, some drugs in the clinic, 26 patents pending, not to mention what we believe to be potentially substantial royalty streams over the next five to 10 years from clofarabine."

Focus on value

Packaging, Lonergan says, will be key to attracting substantial investors, and Brookwood Pharmaceuticals is an excellent example of reshaping an existing perception.

"It's just more valuable to present these assets in a different light," he says. "We have to package all of this in a way that could attract investors. I believe - and our team believes - we have more to sell than almost any other biotech," he says. "No other company can say they have six of the top 26 (FDA approved) cancer drugs ..., but to also have six more in the pipeline and 26 patents pending - that should help us attract some serious support."

More importantly, money equals value, he says, and if you focus on creating value, you'll make money.

"I think there's plenty of money out there," Lonergan says. "I just have to work on my proposition, and my phone is ringing. (Investors) think there's value at Southern Research, and value matters."

With internal efficiencies at an all-time high, Lonergan says, Southern Research Institute's gross profits for services are growing between 3 percent and 5 percent a year. Producing between $30 million and $35 million in intellectual property has helped Southern Research eliminate its debt, he says, preparing the organization to tackle a backlog of business that "almost equals our annual revenue."

Lonergan estimates Southern Research is about five years into a two-decade recovery and evolution process. Still, given the promise of products like clofarabine, visible results could be realized in half that time.

"Clofarabine will help, but we have to make sure we do something smart with it and about it," Lonergan says.