Kevin Jenkins Interview
Layth Matthews speaks with
Kevin Jenkins
The President and CEO of Westaim Corporation
On InvestorCanada.com
June 30, 2000
MATTHEWS: Today it is my pleasure to be speaking with Kevin
Jenkins who is President and CEO of Westaim Corporation.
Welcome Kevin.
JENKINS: Thank you Layth.
MATTHEWS: Kevin, first of all could you give us a brief history of
Westaim?
JENKINS: Westaim was spun out in 1996 out of another larger public
company and went public in the middle of 1996. Basically at that time
we had maybe 12 or so R&D projects as well as three cash flowing
businesses and a healthy balance sheet with over 150 million dollars in
cash and no debt. I was the first CEO of Westaim in 1996 and so we
took that company and we started to shape it basically saying, we are
certainly not going to be able to shepherd 12 technologies so we went
through a process with those technologies and the screen was, we
want technologies that have the potential to be very large companies,
500 million dollar market cap or higher, that are in fast growth sectors
and that can maintain high margins either because they have patents
or trade secrets that give them intellectual property that avoid their
ultimate product being a commodity.
So we went through a culling process, put that test against the various
technologies that were there and brought that group of technologies
down to three. Really we did that through 1997. We sold some. We
closed some. We spun one out. Then in 1997, of the three remaining
technologies we put a president in place for each one so the three
technologies which I am sure we will talk about are I-Fire, which is a flat
panel, hopefully one day “hang on the wall” tv, a biomedical company
and a company called Surface Engineered Products and we put
business teams in place and those three businesses basically got
launched in early 1998.
We have moved those forward in a process that we can talk about and
then in the year 2000, this year, in February, we had another
acquisition where we bought 22% of an e-business software company
based in Silicon Valley, called Savvion. So that's really our fourth
technology now and we view ourselves as a technology accelerator. I
am happy to expand on that when it is appropriate.
MATTHEWS: Well actually maybe it is appropriate to go ahead now.
What is a technology accelerator?
JENKINS: Basically we specialize in technologies that are late stage
development. Late stage R&D. So they are not embryonic. They
have gone through a number of gates and they have proven that they
can pass various tests, including attracting some initial dollars and we
come in, in late stage R &D and take the company through the first
three to five years of commercialization.
We find that companies at that stage generally have one or more of the
following gaps. They do not have business leadership. They have
good technical leadership but they do not have people who have the
appropriate business discipline. They need money and we have a
balance sheet now that has about 140 million dollars in cash still and
no debts. So we can invest but we come with a disciplined approach.
We don’t have a romance with these technologies. We are looking for
a 30 to 40% compounded annual return over five years. So we look at
a business case. Take it out in five years. Try to understand what the
potential is and if we think we can get those kind of returns, then we
can put the capital into the business and help the president not spend
half of his or her time running around shopping for money instead of
focusing on the key success factors for the business.
And then last of all, we bring a strategy and a focus to the business.
Our main two things that we get people to focus on is accelerating time
to market and partnering anything that is not core competencies, in
particular bringing in industry expertise. So often times, light stage
R&D companies are trying to hold things very close to the vest. It is a
secret. We want to perfect it and then we are going to go – ta da –
and show it to the world and we say, “no, we are going to move things
toward it being a reliable technology and then we are going to release
it into the marketplace and we are going to try to do it together with
partners. And so those are the disciplines and approaches we bring
to accelerate technologies in through the commercialization cycle.
MATTHEWS: Well it sounds like you are reducing your risk to some
extent by joining into the cycle a little bit later?
JENKINS: Yes that is right. We are basically saying that although we
have some expertise on developing technology, and even at the stage
we joined the cycle, there is still technology development going on. We
want at least the first product to be into the marketplace as quickly as
possible because feedback from customers is really the only reliable
feedback you can get. So that is right. There is some risk reduction
by the place we enter.
MATTHEWS: Kevin is there any consistency between a couple of, or
all of the various ventures that you are involved in?
JENKINS: There was consistency in, when I said that there were about
twelve different technologies in the early days, and that consistency
basically came out of a coatings expertise. So there is, at the core of
both our flat panel screen and our biomedical and service engineered
products, there is a coating expertise. But that seed of sort of
consistent technological background gets disbursed as you move into
very different markets. And in fact the businesses now, none of them
are even in the same city. I-Fire is in Toronto. Biomedical is in New
Hampshire and Service Engineering Products is in Edmonton.
MATTHEWS: Well it sounds like you develop some venture capital
expertise which you are able to apply further down the road?
JENKINS: You might call it late stage venture capital. Venture capital
means so many different things to so many people and one difference I
would say is, we don’t want to have too many technologies because
we want to stay very involved and make sure that we are always
confident and close enough to the business that we understand where
that 30 to 40% return is going to come from. And if that vision starts to
go away, to prune those businesses and move onto new things or to
pour more money in if the opportunity gets bigger. So whereas a
venture capitalist would probably have a portfolio of 20, 30, 40
businesses, we are trying to stay very hands on to three to five.
MATTHEWS: Right. Well it sounds like an investment in Westaim is
somewhat like an investment in a highly concentrated micro cap
technology fund?
JENKINS: Different people characterize us different ways. That
wouldn’t be inaccurate.
MATTHEWS: Well could you tell us briefly about some of the
developments at your individual business units and how close are they
to profitability, if they haven’t achieved it already?
JENKINS: Sure. The three I think that the market is focused on are
Biomedical, Savvion and I-Fire? And what Westaim Biomedical has
launched is a technology, we have invented a way to put silver down on
any surface. Silver is the best known anti-microbial in the world. Now
you and I may not know that but experts in the medical field know that
silver kills bugs, prevents infection and we have found a way to put the
silver down on gauze or an artificial hip or a catheter or any surface.
So we launched this product first into the burn wound market because
that is the most difficult infection area in the world. We launched it in
the middle of 1998 and so last year was the first full year of sales. Our
product is now in 90 of the 120 major burn units of North America. We
achieved 3 million US in sales in the first year the product was
launched. If you look at Biomedical products that is a fantastic
penetration. We got about 15% of the market in the first year. So we
chose burns not because it is a large market, it is actually a small
market but it is a very difficult indication and we wanted to prove the
efficacy of our product.
So having done that we are now moving, in the year 2000, into the
chronic wound market. A much bigger market, total market potential of
about a billion dollars US. We announced earlier this year that we
have had two products accepted by the FDA into the chronic wound
market. We are working on discussions with a couple of major wound
care companies that we would expect to conclude by the end of this
year and we will do, unlike burn, which we did on our own, we will do
chronic wound in conjunction with a partner, distributed by a partner.
And it is quite important because as you are looking for these larger,
more disbursed markets, it is not enough just that you have a great
technology. You also have to have the endorsement of a major industry
player and so we are seeking to get that and we hope to be launched
into that market later this year. We have already had a number of
people trying our product with chronic wounds and the anecdotal
evidence is unbelievable actually. So we are very much looking
forward to getting into that larger market.
MATTHEWS: So what you are looking for in a partner in this case and
perhaps in other cases is the distribution system for your technology?
JENKINS: Yes. That is the primary entry point and so when we talk
to potential partners, we are assessing what kind of distribution do
they have. Do they call on the people already that we would be
interested in. Do they have competitive products or will they show our
product as sort of the first thing, the best thing in their bag, so to
speak. But we also say what kind of brand name, what kind of
exposure do they have to the broader market because we have a
coating that may be able to coat other products that they have.
So it starts with distribution, then goes to what is their product line and
are there some applications where we could combine our platform
technology with products they have that do not have infection control on
them today. And then thirdly, what kind of research do they do
because they have been in more markets and have more customer
feedback than we do. So to the extent that we can jointly develop
some products together, we are open to that. So distribution is the
wedge but there are other aspects also that we are interested in.
MATTHEWS: So you have built Westaim Biomedical to a stage
where you are ready to consider partnership opportunities. How about
Savvion? Tell us about that.
JENKINS: Savvion is a company we invested in. We took 22%, we
were the first outside money into Savvion in February. They have now
concluded around bringing in investors in addition to ourselves from
the US, Japan and Europe. And basically Savvion is an e-business
infrastructure play. It is a technology that, whether you are a start-up
internet company or a major Fortune 500 company that sits on top of
all of your information systems, draws the information out of them,
organizes it into any sort of management report you want and then
distributes it and permits managers to set decision rules or intervene
in the process, all in real time over the Internet.
Now my view is, as we explain that, that sounds quite complex and one
is left with the feeling, well aren’t there a lot of people doing that? The
answer is no. There are not a lot of people doing it. The one main
competitor that we have encountered is a company named Vitria which
has a market cap around 6 billion US right now. And in some of the
competitions that Savvion has been in with Vitria, Savvion has been
the successful system chosen.
The system was launched, first one ever installed, was in January of
this year. So six months ago. And already has customers who are
increasing the number of seats, or the volumes that they have like
Cisco, Qualicom, Intel, Fujitsu etc. So it is in the infrastructure space
so it is a space that is still in favour and we would view that as a
opportunity to continue to build the order book to get some
relationships with supplier experts like accounting firms who generally
consult with companies, tell them what kind of systems they should be
installing and then move toward an IPO probably early 2001.
MATTHEWS: Now Kevin the Savvion product sounds very similar to
just generally an enterprise software solution like something that you
might get from SAP, for example. But I get the feeling it is different the
way you are talking about it.
JENKINS: Yeah it is very different and in fact a potential partner could
be SAP. It is very different in that it is thin client software so it can be
customized and installed very quickly. There is not a lot of hardware
nor a lot of hardwiring. It is in real time. It can be used wireless and it
is a much more robust and flexible system than some of the EAI
solutions that comes to one’s mind.
MATTHEWS: When do you anticipate that Savvion would be ready for
partnership or are they ready already?
JENKINS: Yes. They are ready. They just launched version 2.0 in
San Jose earlier this month and have started to announce a number of
partnerships already with different well-known companies dealing with
aspects of customer reactions like, if you think of the connectors. So
let’s say you are going to put a Savvion system in and you want your
Areba System and your SAP system and a couple of other systems to
talk to each other, each one needs a different connector. So we have
done a partnership with active software in that regard and so the fact
that a company like Active Software is willing to partner and supply our
customers is an awfully good endorsement also.
MATTHEWS: Right. Well Kevin let’s talk about I-Fire before we move
on.
JENKINS: In I-Fire at the moment is probably the reason why the
majority of investors follow our company. The fact is there is a lot of
value in other parts of the company. But I-Fire has the biggest single
identified market in that, “hang on the wall” tv between 25 inches and
50 inches diagonal which is the market we are targeting, is estimated
by Stanford Resources to be 66 billion US dollar market by the year
2004.
So it is a huge market and the fact is there is no consumer priced
“hang on the wall” tv today. The only “hang on the wall” technology that
is being advertised is based on plasma technology, a very complex
technology and you have probably even seen these in a store or seen
them advertised on tv but the 42 inch plasma screen costs between
$10,000.00 and $15,000.00 US. Our target price point would be
about $3,000.00 and so we believe at $3,000.00 and the research
suggests that $3,000.00 you have a consumer priced product that you
can sell at high volume. Our technology is much simpler. It is a
solid-state technology based on something called
electro-luminescence. So we are moving that. We are at a stage
today where we have a 17-inch screen that plays full colour video and
we have intellectual property on various aspects of the screen which
we are not aware of anyone else in the world who is working on the
similar technology. So at the moment, if you look at who are the
contenders for affordable, “hang on the wall” tv set, there is nobody
really around. Plasma is the only “hang on the wall” set available and
its price point is over $10,000.00 US and has been now for five years.
MATTHEWS: Now Kevin when you spin off these IPOs, whether in the
form of a partnership or ultimately some kind of an IPO, where does
Westaim cash in? Where do you actually expect to make your money?
JENKINS: You know that gets back to the return, I talked about a 30 to
40% compounded annual return over five years. So those are the exit
strategy questions are the questions that we are constantly asking
ourselves. It depends on the business and on market conditions but
our expectation would be that, with respect to Biomedical and I-Fire,
that there will be an appropriate time to do an IPO of a meaningful
minority of both of those businesses. And at that point Westaim could
take some money out.
Obviously we would want some that offering to go into the coffers of the
company being spun out in addition. So there are opportunities like
that. If you take the deal, one of the key points for I-Fire was that in
February, TDK Corporation of Japan, which is an 18 billion dollar
technology company known for their due diligence, signed a
partnership agreement with us and bought 2.5% of I-Fire in a deal that
was valued about 25 million dollars. That cash came into Westaim.
So there are different ways to monetize these as it becomes
appropriate to do that.
MATTHEWS: Now of the four projects that you have on the go Kevin,
which one would you say is the most important to Westaim in terms of
the most immediate and significant profit potential?
JENKINS: Well the profit potential as far as time frame, all depends on
when you are going to stop spending meaningful amounts of money on
R&D and start just milking the products that you already have in the
marketplace. So our approach today, when you look at Biomedical
and I-Fire, is that while TDK Corporation is going to have product in
the marketplace by the end of next year, we think the much bigger
opportunity is tv which we probably won’t have in the market until
2003. So the profit potential on that one is a little further out.
Similarly, Biomedical will have an earlier profit horizon, probably a
couple of years out also. But you can make it earlier or later
depending on how many R&D opportunities you find for different
products. You know how the capital markets assess these things so
they take the cash flow, discounting it back and you get a higher
discount rate the further out the cash flow is and so we are always
weighing off the potential prize versus the delay in profitability.
MATTHEWS: Right. And how would you see Savvion coming to
fruition?
JENKINS: Well Savvion, unlike many of these e-business companies
that one sees, probably would be profitable in 2002, 2003. The fact is
Savvion has been profitable. Savvion has about a six year history, and
has been profitable throughout that history. It is only going to be in
these two or three years where we are investing heavily in marketing
costs to get a dominant market position that will have some losses.
The losses are in the range, well all of which are funded by cash that
has already been raised.
MATTHEWS: Well now Kevin, your stock was recommended to us on
June 22nd by Roger Mortimer who is the portfolio manager of the AIM
Canadian Value Class Fund and it seems quite unusual for a value
manager to recommend kind of a technology incubator company. So I
was wondering why do you think Roger finds Westaim so attractive at
this stage?
JENKINS: Well we get these distinctions between value managers
and growth managers and certainly they are real distinctions. I am not
trying to diminish that and I can’t speak for Roger but I think why a
number of value managers looking for stories that have some earnings
momentum in them, are attracted to Westaim is that we are not a
concept.
We are not, gee we have this idea that we are going to raise some
money around the idea and then maybe if people buy into it, this is
going to be a huge company. There is a lot of value embedded in what
we have already. We have a screen. We have a deal with TDK. They
have committed to put 70 million US into it over the next couple of
years, build a facility. We are in discussions with tv manufacturers. We
have a biomedical product that had a fantastic launch into the
marketplace. So Westaim is not a concept stock. In addition, we are
active in three of the fastest growth sectors and so you don’t have to be
betting on this one product. It is not binary in that, oh if that product
flops. So there is value in the fact that even if we are not right on all
four, we are probably right in two or three.
MATTHEWS: Well last but not least Kevin, what would you say is the
greatest challenge facing Westaim and yourself over the next twelve
months to two years?
JENKINS: Well we are fortunate. One of the challenges facing many
technology companies is just how to raise cash to keep their costs
going. We are fortunate that that is not an issue for us. So probably
the biggest challenge is the businesses where Asian partners are
important and perhaps especially where the Japanese companies are
the biggest players. There is fantastic value, both for R&D and in the
marketplace on bringing them on side but it is a very long process. So
for a company whose claim to fame and main thing is pace, pace,
pace, to be in negotiations as we were in our latest transaction for 14
months, it is very rewarding to get the deal done, but it is quite a long
process. So I think probably the biggest challenge is to try and
accelerate that time frame and bring in high quality partners as quickly