Halvor Jaeger practises what he preaches about corporate governance. And then some.''As a matter of principle,'' the founder, controlling shareholder and chief executive officer of LAB International Inc., who is also a physician, won't let managers of his contract research and drug development company sit on the board of directors. And that includes him.
"The board is supposed to control management and you can't control yourself," he said.
Shareholder rights activist Bill Mackenzie, president of Fairvest Corp., said LAB's model is rare.
"We're always promoting boards to have in-camera meetings without management present because, if they want, they can always invite management to address the meeting. This is certainly a workable formula."
Dr. Jaeger said LAB's chairman, German lawyer Gunter Knorr, spends about one week each quarter at the company's Laval, Que., offices.
"Occasionally, the board lights a fire under me, but that's what they're there for. At the same time, I engage them to work for the company and when I need some contacts in industry, I use them."
Dr. Jaeger, who emigrated to Canada from Germany in 1995, figures he'll take a seat on the board when he no longer has an active role in management.
That day isn't likely to come any time soon.
Rather than follow a typical biotech business model of boom or bust, Dr. Jaeger's profitable preclinical contract research business is now helping to finance a drug development arm at LAB based on inhaling dry powder formulations of generic drugs and new compounds with single and multidose inhalers.
The company plans to have its three lead drugs -- a powerful pain reliever for cancer patients, a growth hormone for body wasting in AIDS patients and an anti-asthmatic -- in Phase II clinical testing this year.
It is also negotiating a European sales and distribution deal for its fentanyl pain blocker, which it hopes to have on the market in 2006, as well as several contracts to develop formulations of other companies' drugs so they can be administered with LAB's inhalers.
Dr. Jaeger is no stranger to contract research.
In 1979, three years after graduating from medical school at the University of Ulm in Germany, he founded a company similar to LAB. He sold that company in 1996.
"We were doing some early drug development work back then, but there was never enough investment money in Germany for drug developers," he said.
After arriving in Canada, Dr. Jaeger formed another contract research firm that he sold in 1999 to MDS Inc. of Toronto for $12-million and Ethypharm SA of France for $6-million in a deal that allowed him to retain LAB's current preclinical or animal-testing base, which went public two years ago.
"The sale to MDS was all about raising money for drug development, which is excluded from my non-compete [agreement]with MDS," he said.
For nine months ended Sept. 30, 2003, LAB posted a loss of $1.1-million or 4 cents a share on revenue of $10.7-million, reflecting increased spending on drug testing.
To reduce risks and costs and accelerate its drug program, LAB uses its own contract research staff to work on in-house projects as well as continuing contracts for about 300 clients.
Dr. Jaeger said LAB selected drug inhalation as its core therapeutic area because oral delivery is not possible for protein-peptide drugs, inhalation offers a faster alternative to painful injections, the market potential is huge, especially in asthma, and there are only about a dozen competitors worldwide.
For example, the company has already shown its fentanyl anti-pain formulation can enter the blood stream and become active in about five minutes, compared with 30 minutes for pills.
"That can be significant for someone suffering from intense cancer pain," he said.
And rather than rely on fluorocarbon aerosols, which are being phased out because of environmental concerns, LAB's inhalers depend on a patient inhaling a prescribed dose of medication into the lungs.
"As a German, and more environmentally charged than many North Americans, technology that can protect the [Earth's ozone layer]is important," Dr. Jaeger said, adding that the company's "dry powder inhalation program should be a solid platform for the next 10 years."
In building LAB's drug arm, Dr. Jaeger has used his international contacts to make several strategic acquisitions, including Toxicological Research Centre Ltd. in Hungary and Focus Inhalation Oy of Finland, which has drug development and manufacturing capabilities for inhalation products and sells a dry powder anti-asthmatic in Europe.
LAB also has a pipeline with rights to another five molecules that will stay on the sidelines until the company raises additional financing, something Dr. Jaeger is not eagerly pursuing at LAB's depressed stock price, which closed yesterday at $1 on the Toronto Stock Exchange.
The company has about $12-million in cash, plus about $4-million in annual operating profit from its contract research arm to complete its three Phase II studies.
"Getting new drugs is not the problem," Dr. Jaeger said, noting his connections with LAB director Hans Hoffmann, a member of the executive board of LTS Lohmann Therapy-Systems AG, a leading maker of transdermal products in Germany.
"LTS has data on hundreds of drugs that didn't make it through the skin but almost did, and these are ideal candidates for lung delivery."