Leapin’ lizard: Crown Laboratories revenue jumping
By Jeff Keeling
Crown Laboratories is on a roll. The Johnson City-based pharmaceutical manufacturer, best known for its Blue Lizard sunscreen, secured a $20 million credit facility last month that has CEO Jeff Bedard bullish on the future of a company that’s seen its peaks and valleys since its founding 15 years ago. Blue Lizard’s revenues are growing strongly, up 24 percent in the current fiscal year, which ends Nov. 30. Crown is firmly established as a contract manufacturer of dermatological creams. Bedard expects recent forays into branded topical prescription drugs, which have helped fuel growth at the management and R and D level, to keep overall revenue growth robust.
Inside Crown’s 188,000-square-foot building on Lafe Cox Drive, Bedard takes visitors past 30-foot-high racks of inventory. It’s almost all topical dermatology product, testament to Bedard’s three decades in the dermatological space. Giant vats in clean rooms fill with base creams until just the right moment, when lab-jacketed, hair- and beard-netted technicians turn a few dials to add active ingredients.
Since 2011, Crown’s revenues have risen roughly seven-fold, Bedard says, to $28 million in the year that ended last Nov. 30, “and we’re doing $36 million this year.” Crown ranked 19th nationally among manufacturers in Inc. Magazine’s Inc. 5000 rankings of private companies (based on 411 percent three-year growth through 2014). The growth, accompanied by more than 100 new jobs, put Crown at No. 1050 nationally, No. 11 in Tennessee, and No. 1 in East Tennessee.
“Our projections for ’16, because of some new drugs and this debt facility, is somewhere between $47 and $50 million,” Bedard says. “We think we can really build something that’s sustainable here… I’d like nothing better than to add on and create opportunities and expand our reach.” Bedard thinks $100 million revenues are reachable within five years.
Crown has within the past year recruited to the Tri-Cities seven new management-level employees, including two who are helping drive R and D: an experienced pharmaceutical researcher who worked for GlaxoSmithKline, Walter Thompson, and Dustin Cooper, one of the first graduates from a hybrid pharmaceutical development doctoral program developed by East Tennessee State University’s medical and pharmacy schools. Cooper, Bedard says, “did his PhD work on nanoparticles and drug delivery.”
Seven new high-level employees. Nanoparticles. It stands out even more considering that less than five years ago, Bedard barely had $7 to spare.
The cream being mixed up in Crown’s gleaming vats is triamcinolone – “TA,” as the Crown folks call it. An oft-prescribed mid-level potency steroid cream, TA spurred Crown’s 2011 turnaround, which came when Bedard was in danger of losing the company. “Last year we produced about 1.5 million 15-gram tubes of it, which accounted for about $8 million of revenue,” Bedard says.
To understand just how gratified Bedard is by Crown’s recent run of success, it helps to rewind further than TA’s arrival on the scene.
The base of the Crown – 1999-2000
By the late 1990s, Bedard, a University of Iowa graduate, had more than cut his teeth in the pharmaceutical business. Since entering the field in 1984, he’d grown with a successful entrepreneurial company (Stiefel Laboratories), and helped turn around another business. He wanted to create his own version of Stiefel.
“I had been in entrepreneurial companies before, but never with a controlling interest, so though I was involved I was always beholden to the majority shareholders,” Bedard says. “I really wanted to start something I could put my fingerprints on.”
Bedard had also made some good contacts. One was the late Don Kilday, a doctor of pharmacy with whom he had worked at a company called Herald Pharmacal in the early 1990s. Kilday was running his own small business, Med-Derm Pharmaceuticals, in Gray, and having success with Ulcer-Ease, a product to treat mouth/ulcers and canker sores that’s still in Crown’s portfolio today. “Late in 1999, we decided we were going to look at doing something together again,” Bedard says.
Bedard, meanwhile, who was living in San Diego, came across what would become the other two jewels in the company’s proverbial crown. One was Blue Lizard, a zinc oxide-based product being manufactured and sold in Australia. A friend of Bedard’s had seen the sunscreen at a World Congress of Dermatology session, and he and his family had used some while vacationing in Hawaii. “Mark calls me up and says, ‘this is the most amazing stuff I’ve ever used,” Bedard recalls. “You need to talk to this guy and see if you can get access to it.”
“This guy” was the son of an Australian pharmaceutical magnate. His dad ran Premium Pharmaceuticals and had given him the Blue Lizard line to oversee. The son had come up with one of the brand’s still-famous draws – a bottle that changes color when exposed to UV rays. Seeing another potential piece of a diverse revenue stream, Bedard worked out a three-year deal to distribute Blue Lizard stateside.
At roughly the same time, a small dermatology manufacturing company outside Birmingham, Ala., Del-Ray Labs, came up on Bedard’s radar. Greg Holmes, a pharmaceutical researcher, was running the company with just a few employees. Del-Ray was doing a couple hundred thousand annually selling around the Southeast, but had three things going for it that intrigued Bedard: a small but successful product line; four abbreviated new drug applications (ANDAs) the FDA had approved (generics, basically) that were yielding revenue; and manufacturing capability, albeit small. Holmes, who’s with Crown to this day, didn’t want the pressure of trying to grow his company.
“He knew he couldn’t sustain that over time, and he knew he had something of value. I bought the business from him for $125,000, and that was the basis to what we developed into Crown, because you had to have the manufacturing piece before you could really do much of anything else if you’re going to vertically integrate.”
Finding Johnson City, and the roller coaster decade
Shortly after the Del-Ray acquisition finalized, Bedard incorporated Crown in Tennessee at Kilday’s urging and began thinking about finding a larger manufacturing facility, visiting Tennessee to check into possibilities. After a few false starts, P.C. Snapp, then the Washington County Economic Development Board’s director, took Bedard to the old Baxter sterile glove manufacturing facility, realizing it might work.
“The ceiling tiles were hanging down and it was generally kind of dilapidated, but I meet with the plant manager and he says, ‘sure, I’ll lease you some space – how much do you need?’ So we take these offices, we spent about $30,000 rehabbing them, and we take one lab space back there. He’s charging me $1 a square foot, so it was really an opportunity I couldn’t pass up – and they were covering my utilities.”
Crown moved into the building it still occupies (and now owns) in April 2001. Bedard, with a history in sales, marketing and business development, suddenly had a new home, a new company, and a building he needed help turning into a company headquarters. Down in Birmingham, Holmes helped lead a ramp up of Del-Ray inventory, while former Baxter building superintendent Dick Zastudil helped build the machinery to start production in Johnson City.
Lizard rising and playing footsie
Later in 2001, Crown bought out Blue Lizard and began producing it in Johnson City, and continued to grow the market share of Kilday’s and Holmes’s products. In 2003, with Kilday and Bedard constantly on the road selling, “we started to see some upturn,” Bedard says. Employment increased to the low 20s, and Blue Lizard sales were growing. The sunscreen line with the catchy name and color-change bottle caught the eyes of a couple entrepreneurs out of the Chattanooga area, MB Racing owner Nelson Bowers and Steve “Toby” McKenzie, who had made his fortune in the check cashing and payday lending business. The pair flew up on a private jet to check out Crown in person.
“We do a pitch, they go back, we don’t hear from them for a couple weeks and then we just get a call and they say, ‘hey, we’re on our way up to the airport,’” Bedard recalls. “We sign a couple pieces of paper, they hand us a check for $1.5 million, get on the plane and go. It was very much how they did business at that time. To invest that $1.5 million and get $20 million back in three years was their expectation.”
So Blue Lizard hit the national scene, and Crown, Bedard says, “was hyper-focused on a category we didn’t fully understand, because none of us had been consumer product gurus, and we didn’t fully appreciate how much money it takes to grow a consumer product. It’s one thing to get a dermatologist to say, ‘go buy this, I want you to use this sunscreen.’ It’s a whole other thing dealing with the CVS’s and Walgreens’ of the world and getting distribution so that recommendation from a doctor actually turns into something.”
Blue Lizard grew quickly, pushing Crown’s employment numbers into the 30s. Yet, though “everybody said ‘that’s the sizzle,’” Bedard says, the strengths Holmes had brought to the table weren’t being cultivated. “Our eye fell off the ball for what Del-Ray had,” he remembers. “Those assets I was so enamored with in 2000 became not even second-fiddle, they were just sort of forgotten about, but fast forward and those assets are now the driving forces of this company.”
Turning a corner in the vast plant, Bedard runs into Holmes, who’s helping mentor the young Dustin Cooper. Holmes, whom Bedard calls, “a master chef when it comes to formulation work,” dutifully played along during the Blue Lizard go-go days, creating Blue Lizard’s baby formula in 2004, its sensitive skin formula in 2005 and its face formula in 2009. It was the Del-Ray legacy, though, that would lead to what Bedard calls “our first real transformational event,” in 2006.
Blue Lizard revenues had increased to about $4 million by 2006, when some folks from Novartis came by Crown’s booth at an American Academy of Dermatology event. Novartis was looking to compete with Dr. Scholl’s in the foot care category, and needed some over the counter products to pair with their signature product. “They said, ‘we like a couple of these old Del-Ray products that are on the shelf,” Bedard remembers.
Crown negotiated a deal with Novartis, complete with $14 million worth of business over 18 months and a ship date to Walmart just six months away. Crown had to buy tanks and packaging lines, install them, deal with the Novartis regulatory team and ramp up employment quickly.
“It was daunting, but I knew we had to do this, because it was $14 million in 18 months, and if it works we’re in fat city. Miraculously, we get it done and ship out a week early.”
So Crown pumped out Novartis products for 18 months, plowing the cash back into Blue Lizard and roughly quadrupling revenues to $16 million. Then the whims of corporate America struck and the foot products got cut in a rationalization. “It was 18 months of working like crazy, and then it all disappeared,” Bedard says. “We shipped our last purchase orders for Novartis in late 2007.”
Post-Novartis: Guido, personal challenges, and a run on the company
To fund a rapid production ramp up, Crown ended up in the arms of Southeastern Commercial Finance, an institution out of Birmingham. The credit deal involved “factoring,” Bedard says. If Crown received a $1 million purchase order, Southeastern would take ownership of that, then turn around and fund 85 percent of it. The company would charge an additional interest rate in the neighborhood of 15 percent.
“We did this because otherwise we didn’t have the cash to deal with the Novartis arrangement,” Bedard says, adding Crown had been working on a better credit arrangement when the Novartis deal broke. “So we went to Guido.”
Even after the Novartis deal dried up, Crown was profitable enough to have reached the verge of a new credit facility, $7.5 million of mezzanine debt with CIT, at an 11 percent interest rate. That would allow Crown to pay off Southeastern, “and have $5 million to grow the business as a revolver.” Then the economy started collapsing, and CIT ran into trouble of its own – just as Crown was poised to get Blue Lizard into the CVS, Rite Aid and Walgreens drugstore chains to the tune of about $10 million in additional annual revenue for 2008.
“We had worked hard to hit that distribution Holy Grail, but when the credit facility went away, we couldn’t fulfill the orders.”
Employment shrank to the low 20s and revenue to the $3.8 to $4.2 million range, Kilday and Bedard quit taking salaries, and to beat it all, Bedard endured a divorce and his father’s death in 2008. Minority owners McKenzie and Bowers pressed for a takeover.
“I literally remember going, ‘if this doesn’t get fixed, I’m going to be the guy in a cardboard box with three kids with a can on the corner.’ That was the reality I woke up to and faced every day, because I’m juggling paying off Guido every month, and trying to find financing in a world where the banking industry was gone, basically.”
In early 2011 McKenzie and Bowers came forward with a plan to buy the company for $400,000, keep the employees and put cash in to grow again – retaining Southeastern as creditor. Another group wanted to pay $200,000 for Crown and move its operations to Southwest Virginia. And Bedard wanted to keep his company.
“As the largest individual shareholder and somebody that had had the vision, I went on the offensive,” he says. That included looking at his LinkedIn contacts. One was Jonathan Rome, founder of The Pharma Network (TPN), which contracts with major retailers to provide private label generics. Bedard visited Rome in New Jersey, where TPN is located, and discussed one of the old Del-Ray generics, a version of triamcinolone, which Bedard thought could break into the TA market. That was all Bedard had to offer, and he was asking a lot in return. A shareholder meeting was a week away, and he wanted to come back with something substantive.
“I sit down with him and say, ‘look, I’ve got this drug, I’m going through an FDA approval to become a new supplier of the triamcinolone, I’ll have it ready for you to sell in about nine months, but here’s what I need: You need to give me a purchase order for $2 million for this, and I need $1 million cash today to take back today to finish the FDA work plus to run the company until we get this up and launched. He agreed to it.”
Bedard returned to Johnson City with a $1 million check and a supply agreement and presented to shareholders. “I said, ‘this company’s far more valuable than $200,000 or $400,000. Here’s a way out, and I’ve got a million dollars to work off of and we’ve got a purchase order for $2 million and we think we can get 20 or 25 percent market share in the generic space with this company – and this is the first of many deals.’”
Bedard’s argument won the day, and since then, when luck’s been involved it’s been good. Drug giant Covidian exited the silver sulfadiazine burn cream business and TPN bought it, with Crown as contract manufacturer. Then in 2012, the market leader, with 60 percent, had a manufacturing problem and the FDA shut them down. “That demand flows to us, so all of a sudden we’ve got $7 million worth of TA revenue and $12 million worth of silver revenue that came out of nowhere from a LinkedIn connection.”
Onward to nine figures?
Contract manufacturing and continued growth of Blue Lizard, largely in the online market, have driven growth since 2011. Going forward, Bedard expects to leverage a pharmaceutical development group led by the growing cadre of scientists at the company. Products will include generics – Crown has four ANDAs currently submitted to FDA – and proprietary drugs. Crown sent the FDA its first request for a new drug application in mid-September. “That would be our first venture into a non-generic, patentable, protected asset through the FDA,” Bedard says. He says Crown’s highest potential comes in branded prescription drugs. The company is expanding to 36 sales territories, and now has cash available for potential acquisition targets as well. In January, Crown will launch its first solid oral dose for skin infections.
“With generics, you’re out hunting to take existing market share,” Bedard says. “In the branded space, if you do your job well in the field, you’re growing the market. So when we go in with this new drug in January for skin infections, there certainly are things doctors are writing for skin infections now, but this is unique. So if we do a good job, the overall market for prescriptions should grow.”
Bedard is the first to admit risks remain. As far as the ANDA developments, other generic competitors could be working on versions of the same drug and dilute market share. With contract manufacturing, Crown’s buyers could decide a drug isn’t a core asset anymore, or choose a cheaper producer. Blue Lizard’s at risk from, “somebody coming out with a better mousetrap,” but Bedard says he thinks that core brand can continue growing. They’re looking at line extensions, including a lip balm, and have made their first meaningful spends in marketing this year, including becoming the official sunscreen of both the New York Yankees and Chicago Cubs and being a major sponsor of the upcoming Marine Corps Marathon.
Getting to $100 million will depend largely on Crown’s fortunes in the branded market. Bedard said the biggest question there is health care reform. “We’re not looking at truly unique molecules. We’re looking at different ways to deliver existing molecules, which if pharmacy benefit managers decide, ‘yeah, that delivers it better but the cost is greater than the benefit, and we’re going to block you and just allow generics in that space,’ that’s a risk.” But then, risks are something with which Bedard is quite familiar.