When Kirby L. Cramer thinks about Tosca, it's not the arias from Puccini's opera that run through his mind.
Cramer's Tosca is the Toxic Substances Control Act -- legislation passed by Congress in 1976 requiring that all industrial chemicals, including the 45,000 already in use, be tested for poisonous or cancer-causing qualities. t
Tosca should mean a lot more business for Cramer's Vienna-based company.
Cramer is chairman of Hazelton Laboratories Corp., the nation's biggest tester of pharmaceuticals, pesticides, chemicals and food additives. It is also the major supplier of animal care equipment and a major breeder of beagles and primates, some of the animals used in biological tests.
Cramer concedes that the testing requirements in the Toxic Substances Act, now being implemented by the Environmental Protection Agency, will provide an important source of revenue for Hazelton in the decade to come. However, unlike some Wall Street analysts who see Tosca as the future for Hazelton and other biological laboratories, Cramer thinks Tosca "is only the cherry and the frosting on the cake. It is a cake that is pretty well-based. Our growth has come from pharmaceuticals and consumer products."
Hazelton President Donald P. Nielsen, who founded the company with Cramer in Seattle 13 years ago, said there is only one contract in the company's backlog that is related to Tosca requirements, although he said the number should grow as EPA begins to outline the testing procedures for the various chemicals already on the market. To date, EPA has released testing guidelines for fewer than 50 chemicals.
"Even so, acute studies [those performed on rodents within a time frame of 90 days based on these guidelines] are expected to generate about $1 million in revenues for Hazelton in this fiscal year [which ends June 30] and five times as much in fiscal 1982," according to David Jonsson, an analyst with Bache Halsey Stuart Shields Inc.
About 60 percent of Hazelton's $43.2 million in income last year came from biological testing, and the percentage has been growing each year. Another 30 percent comes from the manufacture of laboratory equipment, while the remaining 5 percent derives from the breeding of research animals.
Along with the increase in testing required by Tosca and the growth of new products that need screening, Hazelton stands to benefit in nearly all its operations from foreign countries' increased interest in testing.
The company is ready to expand its testing facilities to meet what is expected to be increased demand over the next decade. Last November the company issued $18 million in stock -- the proceeds of which still are sitting in the bank -- to ensure it has the funds to expand when it needs to. Cramer said the company will begin work in the near future on a $10 million laboratory in Sterling, Va., near Dulles. The company has a 103,000-square foot building there.
Jonsson of Bache estimates that between now and 1985 Hazelton's revenues from biological research will grow 25 percent a year. Cramer predicts that by 1985 the company's revenues will climb to $100 million. Of that, he estimates, "I'd be surprised if $20 million was due to Tosca."
However, a fifth of total revenues is a sizeable portion to attribute to one government act, despite the desire of Cramer and Nielsen to play down Tosca's contribution to the firm.
And Hazleton, which has its roots planted firmly in all areas of the biological testing business, is in a good position to benefit from the need for increased testing, even if it doesn't get the testing contract itself.
"As the company is put together, it is a three-legged stool. We can do the study for a client in our own laboratories, in our own cages with our own animals," said Nielsen. "But if he does his own study, we can still sell him the cages and the animals. Most new laboratories are equipped with our cages."
Clearly the most profitable operation is to do the whole study and, with the exception of major companies such as Dow or Du Pont, most chemical companies are not equipped -- and cannot afford to be prepared -- to do the expensive and rigorous testing required of new materials. Drug companies that do their own testing usually want result from an independent laboratory that corroborate what their scientists have determined.
Studies are expensive. The so-called acute evaluations, which can take a week or so and are designed mainly to develop some benchmark for the toxicity level of a compound, cost about $250,000. A full-blown long-term study that may take two or more years (some as long as 10) can cost $1 million or higher. At any given time, Nielsen said, there are roughly 400 studies -- from the quick ones to the elaborate variety -- being conducted in Hazelton's facilities.
A comprehensive study of a compound -- be it a food additive, a chemical or a drug -- will look for toxic or carcinogenic properties through three generations of animals, including the study of fetuses from each generation -- a science called teratology.
Nielsen said the most important source of testing revene for Hazelton is agricultural chemicals. Next come pharmaceuticals, although the importance of drugs and pesticides is almost a tossup. Ten years ago, he said, pharmaceuticals were by far the most important revenue producer for the company. But new-drug development is an area of the chemical industry that has declined sharply in the past decade.
A steady decline in new drugs could be a fly in Hazelton's revenue ointment. But Nielsen said he thinks that patent laws will be changed in the future to permit drug companies to hold on to proprietary profits longer than they normally can now. Furthermore, he said, an additional source of testing revenues for Hazleton and other biological laboratories is the fledgling genetic engineering (or recombinant DNA) industry, in which bacteria are harnessed to produce specific compounds.
"Before any of those compounds hit the market," and the industry is still in the laboratory stage, "they will have to be tested," he said.
After pesticides and pharmaceuticals, petrochemicals and industrial chemicals are the most important sources of Hazleton's testing revenues, followed by soaps and detergents, food additives and cosmetics.Hazleton also did most of the research on the potential hazards of soft contact lenses, testing the product on rabbits.
Most cosmetics are tested on bunnies, as well. Although pigskin is more similar to human skin than is the hare variety, a shaved bunny comes close enough for testing purposes.
Today's Hazleton Laboratories Corp. has a 120-acre laboratory facility in Vienna, a laboratory in Reston where animals breathe toxic substances and a large laboratory in Great Britain. It has manufacturing facilities in Cincinnati and Aberdeen, Md. The company breeds its beagles in Cumberland, Va., and raises its rhesus monkeys in 600 corn cribs on a 208-acre place at Alice, Tex. "We're probably the biggest user of corn cribs in the country," Cramer says. Late last year the company bought a primate-breeding laboratory in West Germany, where the company hopes to provide biological testing for Germany's chemical industry.
The company has 1,200 employees -- about 750 in the lab, 300 in manufacturing, 100 in animal breeding and the rest at corporate headquarters.
Cramer's and Nielsen's Hazleton Laboratories Corp. had humble beginnings. The two business school graduates -- Nielsen from Harvard, Cramer from the University of Washington -- met in Seattle, Nielsen's hometown. They set up shop there as Environmental Sciences Corp. in 1969, in the basement of an old A&P food store.
Cramer said the pair decided to enter the life science field because it was growing rapidly and had no "clear leader." Economists would say it was an industry with few barriers to entry. Although Cramer and Nielsen were enamored with doing biological research, they used as their entry vehicle a company that had developed an automatic laboratory animal care system. "We bought out an inventor," Cramer said.
Over the years the company has acquired 17 more companies or divisions of other companies, the first few being equipment oriented. The key acquisition was Hazleton Laboratories Inc. in 1972.
Lloyd Hazleton founded the laboratories that still bear his name in 1946 in Vienna. The biological testing facilities grew apace. "He built nearly a building a year for 20 years," Cramer said. "Then in 1968, he got an offer he couldn't refuse from TRW."
At that time TRW, like many other major technology companies, was racing headlong into space. TRW saw Hazleton as an important place to develop its space medicine. Hazleton had its own animal breeding facilities, which did not fit in with TRW's plans, so Environmental Sciences Corp. bought Hazleton Research Animals from TRW in 1970.
By 1970, however, a year after the United States put the first man on the moon, the once-lavish space program was being cut back. Like all space program contractors, TRW was having its problems. Its need for a space medicine program was diminished, and in Hazleton Laboratories otherwise did not fit in the corporate structure, Cramer said.
TRW, which earlier had sold Hazleton Research Animals to Cramer and Nielsen, approached the pair about buying the laboratories. "TRW was very accommodating to us in the structuring of the financing." By 1972, Cramer and Nielsen, who had planned to live their lives in Seattle, moved from Cincinnati (where they had relocated after an earlier acquisition) to the Washington area.
"After we bought Hazleton, we discovered we had a 'Tiffany' of a name," Cramer said of the firm, which already had a reputation in biological research. Cramer and Nielsen's Environmental Sciences Corp. name gave way to Hazleton Laboratories Corp.
"Now [in January 1972] we were a major laboratory, a major laboratory equipment manufacturer specializing in life science equipment and a minor breeder, although major in canines," Cramer said. The primate breeding came later, when Hazleton correctly perceived that India would ban the exportation of monkeys.
In 1978, Hazleton Laboratories made the one acquisition it regrets, the environmental sciences division of Nalco Chemical Co. The business generated little but losses and lower revenues than Cramer and Nielsen wanted. The division's chief activity was production of environmental impact statements for new nuclear utility plants. The division also monitored functioning nuclear plants and kept track of chemical waste from other industrial customers.
"The idea was to keep the utility base (95 percent of the division's business was with utilities) and move into other industrial areas," Nielsen said.
That was before Three Mile Island, 20 percent interest rates and a general decline in energy consumption in the United States. Now nuclear plant construction virtually has halted. Hazleton just disposed of much of its 1978 purchase but kept a nuclear laboratory in Chicago. The company monitors emissions from 13 of the 72 nuclear plants in the nation, dominating the upper Midwest, according to Nielsen. The company also kept the part of the division that monitors chemical effluents.
But out went the environmental impact studies unit, "which lost more than $2 million in fiscal 1980 [which ended June 30] and the first half of this [fiscal] year," according to analyst Jonsson. He said Hazleton's profitability should "improve materially."
Hazleton earned about $2 million on its $43.2 million in 1980 sales. That compares with $1.6 million in earnings on $36.8 million in sales for fiscal 1979 -- a 25 percent jump in earnings and a 17 percent rise in revenues.
For the first six months of fiscal 1981, revenue growth slowed. The company had sales of $22.1 million in the six months ended Dec. 31, 1980, a 3.7 percent gain over the $21.3 million in sales during the six months ended Dec. 31, 1979. Profits rose from $1 million to $1.19 million, a 19 percent rise (although because the company issued 880,000 new shares of stock in November, per-share earnings rose 4.7 percent, from 43 to 45 cents).
The sale of the environmental impact unit should help improve Hazleton's earnings for the final six months of the fiscal year. The company has a large and growing backlog of testing orders (it was $33.6 million on Dec. 31, 50 percent higher than the year before).
The $18 million that Hazleton has sitting in the bank -- proceeds from its stock offering last November -- will add to earnings for the next few months, too. At today's interest rates, the cash should earn a tidy sum until Cramer and Nielsen put it to work building new facilities in Sterling to handle the expected increase in demand for biological testing.
That demand will not go away, even if the Reagan administration's desire to reduce regulation results in a less-wholehearted enforcement of Tosca than might have occurred under another administration. Tosca-related research will dribble out over the decade, rather than pour forth in one year. EPA took four years to develop the guideline for tests for the first 42 chemicals -- out of 45,000 chemicals on the market.
Even assuming that many of the chemicals -- especially those with limited use or low profit margins or both -- will be abandoned by chemical companies rather than subjected to costly tests, analysts estimate that Tosca will generate between $1 billion and $3 billion in additional revenues for the life sciences industry before testing is completed. The industry now generates about $500 million in revenues.