Embrex, Inc. History

Address:
1040 Swabia Court
Durham, North Carolina 27703-3989
U.S.A.

Telephone: (919) 941-5185
Fax: (919) 941-5186

Website:
Public Company
Incorporated: 1985
Employees: 309
Sales: $48.7 million (2004)
Stock Exchanges: NASDAQ
Ticker Symbol: EMBX
NAIC: 325414 Biological Product (except Diagnostic) Manufacturing

Company Perspectives:

The potential of Embrex's technology is significant. The corporate mission is clear: to provide ever increasing value to the global poultry industry via in ovo-based products.

Key Dates:

1985:
The company is founded by Harold V. Smith.
1990:
Randall L. Marcuson becomes the company's CEO.
1991:
The company is taken public.
1996:
Embrex turns its first annual profit.
2003:
A lawsuit with pharmaceutical giant Wyeth is settled.

Company History:

Embrex, Inc., is a publicly traded agricultural biotechnology company based in Durham, North Carolina, and dedicated to the development of in ovo ("in the egg") solutions for the poultry industry, including chickens and turkeys. The flagship product is the Inovoject System, the first automated way to vaccinate chicks before they hatch, which is capable of inoculating 60,000 eggs per hour. More than 80 percent of all eggs produced in the United States and Canada rely on Inovoject. Other mechanical products developed by Embrex are the Egg Remover System, which sorts out infertile and early-dead eggs before the vaccination process, and the Vaccine Saver Option, an add-on to Inovoject that also prevents the vaccination of infertile and early-dead eggs. In addition, the company is developing an egg-gender sorting machine to eliminate the time-consuming, invasive procedure of sorting chicks manually, an important step in the poultry industry. On the vaccine side of the business, Embrex offers Bursaplex Vaccine, a USDA-approved vaccine that can be delivered in ovo. All told, Embrex systems have been installed in more than 30 countries around the world.

Company Origins in the Mid-1980s

Embrex was founded by entrepreneur Harold V. Smith, a principal partner of the Synertech Group, a venture fund in North Carolina's Research Triangle Park. He had previously been involved in the launch of three biotech firms: Ecogen, Cambridge Bioscience, and Animal Diagnostics Inc. Prior to Synertech, Smith had been the chief executive officer of Novo Labs, a U.S. subsidiary of Denmark's Novo Industria, a major European pharmaceutical Company. It was during the 1970s that Novo Labs was lobbied by North Carolina's Governor Jim Hunt to build a plant in the state, an experience that brought the potential of biotechnology to the governor's attention and to the creation of the North Carolina Biotechnology Center. Synertech Group was one of the outgrowths of the state's interest in biotechnology. In 1985, Smith read news accounts in Raleigh's News & Observer and the New York Times about the explosive growth of the poultry industry and recognized that no one had yet attempted to apply biotechnology to poultry. "When I examined the industry," Smith told Business North Carolina in 1992, "I realized that poultry involved a large-volume, low-cost product to which you couldn't add much value after the birds were hatched. So I began to wonder whether you could add value before they hatched." Next, he learned about Jagdev Sharma, a scientist working with the U.S. Department of Agriculture who proved that chicks could be vaccinated before hatching, contrary to the prevailing belief. The USDA patented the idea and Smith acquired the exclusive rights through 2002 on a royalty basis. He incorporated Embrex in North Carolina in May 1985.

To fund the venture, Smith tapped investors he had previously worked with: United Kingdom-based Biotechnology Investments Ltd and Wayne, New Jersey-based American Cyanamid. All together, he raised $15.3 million in seed money. Smith decided to base Embrex in North Carolina, since poultry was a major industry in the state, and North Carolina State University housed one of the largest and most respected poultry science departments in the United States. Smith drew on that resource liberally, recruiting several of the school's professors and many of its graduates. To foster a good relationship with the school, Smith would funnel hundreds of thousands of dollars into the poultry science department in the form of contract research and grants. Smith also devoted a good bit of time to building an impressive board of directors, which would include the former chairman and CEO of Holly Farms Foods, Kenneth May, and former Governor Hunt, whom Smith had known from his days heading Novo Labs.

Late 1980s Focus on Research and Development

With all the pieces in place, Embrex began its research and development phase in 1986. What followed were four years of disappointment as the company's researchers struggled to design a machine that could commercially inject an egg to vaccinate against Marek's disease, which resulted in skin lesions and tumors of the nervous system and made the broilers unsuitable for human consumption. The first prototype was slow and had contamination problems because of cracking. Embrex eventually found a way to pierce the shell without cracking it by employing a needle that was smaller that a millimeter in diameter and featured a beveled tip. This mechanism, according to Forbes in a 2005 company profile, "creates a flap of eggshell that stays attached to the egg between the shell and membrane, rather than falling into the embryo." Forbes also offered a description of how the final Embrex system worked: "Three days before the eggs are due to hatch, workers feed them to Embrex's machine, a row of dangling injection heads equipped with locators. The injection head zeroes in on an egg, punches a hole in the shell with a hollow tube, pushes an inch inside the egg and squirts in the vaccine. Then the tube pulls out, to be sterilized and reused." This procedure was a far cry from the traditional method in which "workers grab the little fluff balls, jab them against stationary hypodermics ... then dump them into boxes." Each worker could only inoculate about 3,500 chicks an hour, and a typical vaccination line handling 30,000 chicks an hour required the services of 12 workers. The early Embrex system, which could handle 30,000 eggs an hour, needed only two workers. Moreover, chicks immunized in the shell proved to be better able to resist infections, and by not undergoing such rough treatment early in life they enjoyed shorter fattening periods, thus saving on production costs. Moreover, immunization by hand invariably resulted in a certain number of chicks being missed.

However, just as research and development took time, so would gaining the trust of the poultry industry. As the research began to result in a viable commercial system, Smith recruited a seasoned executive to lead Embrex into the initial marketing phase, hiring Randall L. Marcuson, who took over as chief executive officer on January 1, 1990. Marcuson came to Embrex from American Cyanamid, where he had been vice-president of Animal Health Products for the previous six years. Prior to that, he spent ten years with Monsanto Agricultural Products Company.

Smith stayed on as chairman and along with Marcuson began the process of tapping into the equity markets for an infusion of much needed cash. From January 1, 1986 through June 1991, the company had lost $14.3 million, burning through all but $1 million of its seed money. With the New York firm of Josephthal Lyon & Ross, Inc. acting as underwriter, Embrex made an initial public offering of stock in November 1991. The timing was excellent, as biotechnology stocks were the darlings of Wall Street at the time and many startups were commanding prices much higher than companies in other industries. Embrex hoped to sell 1.7 million shares in the $7 to $9 range, thus raising about $12 million. In the end, it netted $16.7 million. The company returned to the market two years later, raising another $10.8 million.

Gaining industry acceptance of the Inovoject System was not without some difficulty. In 1992, the first year that it was installed commercially, Embrex recorded revenues of $700,000. The key to gaining customers was the launch of a policy to allow hatcheries to use the system free on a trial basis for several weeks. The benefits of the automated system were so apparent that invariably the hatcheries became Embrex customers. Rather than sell the equipment, the company leased it on a per-injection fee basis. A major early step in landing business for Inovoject came in 1992 when Tyson Foods, the United States top poultry producer, agreed to convert one of its hatcheries to the automated system. Over the next two years, more Tyson hatcheries installed the Embrex machines, followed by the second largest poultry producer, Gold Kist Inc., and Perdue Farms Inc., the fifth-largest producer. As a result of increasing industry acceptance, Embrex enjoyed steadily rising revenues, so that in 1996 the company turned its first profit, $341,000 on revenues of $20.6 million. By now, Smith was no longer part of the company, having sold his stake in 1995 and moved on to other projects.

Embrex Well Established by 2000

While Inovoject was establishing itself in the U.S. broiler market, Embrex researchers were hard at work developing other in ovo products using the Inovoject System as a platform. In the meantime, the company continued to grow the balance sheet, as sales improved to $24.8 million in 1997, $28.6 million in 1998, and $33.8 million in 1999. Net income during this period grew from $1.8 million to $2.9 million to $5.7 million. Despite this steady growth, investors lost enthusiasm for Embrex, its stock generally trading between $4 and $6 and few shares changing hands. By 2000, the company had established itself in the poultry industry, inoculating more than 80 percent of all eggs produced by the North American broiler sector. It had been apparent for some time that the company would have to expand internationally if it were to grow beyond its status as a good little company with a dominant market niche. It was estimated that 70 percent of the world's broiler production took place outside of North America. As early as 1994, Embrex looked to Europe, forming a subsidiary, Embrex Europe Ltd., to tap into that market. In 1997, the company began marketing in Asia and a year later turned its attention to Latin America. Thus, by the end of 1999, Embrex had systems either installed or on trial in 29 countries. Because poultry diseases varied around the globe, Inovoject was used differently in each region. While Marek's disease was widespread in the United States, for example, it was less of a problem in Europe. On the other hand, Gumboro disease was a significant problem in northern Europe and Asia and of lesser importance in the United States. Inovoject was effective no matter what the vaccine, but the problem for Embrex was that the global market for Inovoject in the broiler sector was perhaps 900. By the autumn of 2000, Embrex was already approaching the 500 mark. Moreover, the company's original FDA license was set to expire at the end of 2002, which could possibly lead to new competition. Hence, for some time Embrex had invested a great deal of time and money in the development of new products. The most promising of them were a system to deliver multiple vaccines in a single shot; a vaccine for cocidiosis, an avian parasitic disease that attacked the chicken's digestive system; and an automatic gender sorting system. The gender sorting product was important because it could be used by both the breeder, layer, and broiler markets. Some broilers are grouped by sex in order to better distribute feed and enhance growth. The breeder and broiler producers, on the other hand, want to raise only hens for laying. In addition, breeders needed more females than males. As had been the case with the old method of vaccinating chicks, manually determining a chick's sex was a laborious process, accomplished in one of two ways: Either the feather length is measured when the chicks are a day or two old, a labor-intensive effort, or the genital area is opened and inspected, an expensive method that stresses the chick as well as workers' eyes. Embrex's automated approach sampled material in the egg that contained gender enzyme chemicals, which were then applied to a developed material, triggering a reaction that revealed whether the egg was male or female. The gender-determining system held great potential, possibly worth hundreds of millions of dollars in annual sales. However, to develop a commercial automated system required a long-term commitment and the resolution of a number of problems. In 2004, Embrex was still grappling with the system. During that year, the company received three patents alone related to the transferring of selected eggs to flats and the back filling of those flats.

Embrex's researchers worked on other fronts as well, developing the Egg Remover system and Vaccine Saver option. The company also developed a Bursaplex vaccine to prevent the infectious disease IBD, which weakened a bird's immune system, leading to stunted growth or death from other diseases due to a compromised immune system. IBD was widespread in Northern Europe, the Middle East, Asia, Latin America, and, to a lesser extent, the United States. In 2003, Embrex received approval on a vaccine to combat Newcastle Disease, a contagious disease that not only resulted in respiratory problems but lowered egg production and increased flock mortality. It was a serious problem in Asia, Latin America, the Middle East, and South Africa.

On some of its projects Embrex worked with industrial partners, but one relationship, forged with pharmaceutical giant Wyeth and its Fort Dodge animal vaccine maker, soured. According to Triangle Business Journal, shortly after Marcuson took the helm at Embrex, he "began courting partners for a European and African vaccine program." He first turned to his ex-employer, American Cyanamid, "but by the time the collaboration got its legs, American Cyanamid had been acquired, and the vaccine project was handed off to Fort Dodge. Embrex says it quickly noticed its new partner's interest fading." The alliance between the two companies was signed in 1995 to develop an in ovo vaccine for Bursamune, used to treat Gumboro disease, but in 1997 Wyeth acquired a Belgian company that manufactured post-hatch poultry vaccines. From the point of view of Embrex, Fort Dodge grew indifferent, thus obstructing development of the in ovo vaccine. In 2002, Embrex sued Wyeth for breach of contract and a year later the two parties reached a settlement in which Fort Dodge paid $5 million to Embrex.

Business grew steadily for Embrex in the 2000s, as sales topped $40 million in 2002, increased to $43.5 million in 2003, and to $46.2 million in 2004. Net income totaled $7.2 million in 2002 and $7.6 million in 2003 (inflated by the Fort Dodge settlement), before dipping to $3.3 million in 2004. Embrex, which was better versed than anyone about the inner workings of poultry eggs, was well positioned to enjoy even greater growth in the years to come. It would not be surprising if one or more of its development projects, such as the gender-sorting system, became a blockbuster product, transforming the small niche company into a much larger player in the worldwide poultry industry.

Principal Subsidiaries: Embrex Europe Limited; Embrex Sales, Inc.; Embrex BioTech Trade (Shanghai) Co., Ltd; Inovoject do Brasil Ltda.; Embrex France s.a.s.; Embrex Iberica; Embrex Poultry Health, LLC.

Principal Competitors: IDEXX Laboratories, Inc.; Neogen Corporation; Synbiotics Corporation.

Further Reading:

  • Cohen, Jeff, "Should You Scramble to Bet on Embrex's Best-Laid Plan?" Business North Carolina, March 1992, p. 46.
  • Hutheesing, Nikhil, "Robovet," Forbes, March 13, 1995, p. 142.
  • Ranii, David, "Durham, N.C.-Based Poultry Bioscience Group Gets $5 Million in Suit," News & Observer, July 1, 2003.
  • ------, "Embrex Loses Money As It Wins," News & Observer, April 30, 1994, p. D1.
  • Smith, Rick, "Sorting Eggs Is Big Business at Embrex," Business Journal, April 20, 2001, p. 22.
  • Zimmer, Jeff, "Egg-Injection System Pays off for Durahm, N.C.-Based Agricultural Biotech Firm," Herald-Sun, November 21, 2000.

Source: International Directory of Company Histories, Vol.72. St. James Press, 2005.