Strategies : A Finger on the Pulse : Nichols Institute Bridges Gaps Between the Academic and Commercial Worlds

Among the mementos received by hundreds of women athletes who participated in the 1984 Summer Olympics are certificates declaring they are, indeed, women.

The documents were issued by Nichols Institute, a small medical laboratory in San Juan Capistrano that is virtually unknown among the general public but distinguished in medical circles.

It was the company’s reputation that led the U.S. Olympic Committee to its door and landed it a contract to verify the sex of all female competitors by analyzing the chromosomes contained in tiny bits of tissue scraped from inside their mouths.

The company was founded in 1971 by Dr. Albert L. Nichols, described as “probably the best-known endocrinologist in the country” by Joseph Keffer, president elect of the American Society of Clinical Pathologists. An endocrinologist is a physician who specializes in hormones.

As a young doctor in the late 1960s, Nichols said, he was impressed with the diagnostic breakthroughs developed in university laboratories but frustrated by the long delays in getting the new procedures into doctors’ offices and clinical laboratories.

So he established Nichols Institute to bridge the gap between the academic and commercial worlds of medicine by helping university researchers prepare their discoveries for the marketplace.

While it is not the only medical laboratory to introduce new testing procedures, Nichols Institute is unusual in that it invites to its facilities the scientists who have devised new diagnostic tests in the course of their university research. Most laboratories have in-house researchers.

‘Academic Associates’

At Nichols, the university researchers, called “academic associates,” control the process of modifying their tests for commercial application. Nichols gives them facilities and scientific and technical assistance to do the job, which typically takes about a year.

In exchange for the opportunity to sell the tests to hospitals and clinics at a profit, Nichols gives the academic associates fellowships and other financial assistance to help them continue their university research.

Nichols, 53, recalled that his idea of establishing a for-profit clinical laboratory that would enable university researchers to prepare their discoveries for a commercial market was originally considered a violation of academic standards.

But in recent years, Nichols noted, the tables have turned, and many universities have set up “technology transfer” offices with the dual purposes of advancing medical knowledge and raising funds for the campus by patenting new discoveries and collecting royalties.

“It is fascinating to me to think that something that once was scandalous has become the order of the day,” he said.

At Nichols Institute, originally located in San Pedro, success came first from what its founder knew best. Nichols guided his company to national recognition among medical researchers for its expertise in measuring the hormones that regulate a wide variety of body functions, ranging from blood pressure to fertility.

With Early Detection

One of the first tests that Nichols Institute marketed was one developed at the Los Angeles County Harbor UCLA Medical Center in Torrance for measuring thyroid hormones.

By applying the test to a drop of blood from a newborn, doctors for the first time could discover whether the child suffered from a deficiency of thyroid hormones that causes a type of mental retardation called cretinism. With early detection, retardation can be prevented with hormone supplements, Nichols said.

By establishing its testing expertise, Nichols Institute built a steady business by analyzing blood and tissue samples flown in daily from about 3,000 hospitals and clinics throughout the country.

In more recent years, the company has branched out from endocrinology to perform diagnostic tests in all fields of medical science, from genetics to toxicology, oncology and microbiology. It specializes in performing newly developed and complicated tests that are beyond the ken of most laboratories.

Since selling stock to the public in 1985, Nichols Institute has been enlarging its staff and facilities to take advantage of a burgeoning demand for high-tech laboratory services, sparked by new developments in bio-engineering and the medical industry’s new focus on cost efficiency.

Most of the $5 million raised when Nichols went public was spent on expansion. In an attempt to increase its market share, the company bought several clinical laboratories to expand its market, as well as to provide a ready-made customer list for its specialized tests. Nichols also expanded its computer system and pumped a portion of the proceeds from the offering into research and development.

Owns 70% of the Stock

To keep a grip on laboratory policies and foil hostile takeover attempts, Nichols said he has retained personal ownership of 70% of the Nichols Institute’s voting stock.

The institute moved to San Juan Capistrano in 1981, but bought 100 undeveloped acres on Ortega Highway, where it plans to build new headquarters and a “think tank” for visiting scientists. Nichols said he hopes the new facility will be complete in three years. He bought the acreage before Caspers Regional Wilderness Park was developed by the county around his property.

In the last two years, Nichols has been positioning itself as a one-stop laboratory for U.S. hospitals by more than doubling the number of diagnostic tests in its sales catalogue, to 1,200 from 520. That has helped the company more than double its revenues, to an estimated $55 million in fiscal 1987 from $23 million in its 1985 fiscal year.

The company’s earnings plunged from a $1.3-million profit in fiscal 1985 to a $108,000 loss in fiscal 1986--a drop that company officials attributed to expansion expenses.

But in fiscal 1987, the company’s earnings returned to about $1.3 million. The company expects bigger profits in 1988 and beyond, Nichols said.

Bonnie Perkins, a securities analyst with Chicago Corp., a brokerage firm that specializes in small companies with growth potential, said Nichols is still relatively unknown on Wall Street. “A lot of people haven’t heard of it,” she said.

Preferred Vendors

But she called Nichols “a top-notch company, very well managed, with a niche in the market.” Because of the company’s broad array of test offerings, she said, it can compete for the business of national hospital systems.

In May, the Voluntary Hospitals of America chose Nichols and the Mayo Clinic as its preferred vendors to provide diagnostic laboratory services to its 700 teaching hospital-members throughout the country. The contract was Nichols’ first with a nationwide hospital system.

Over the years, Nichols Institute has collected a roster of 30 academic associates, with whom it has collaborated to introduce 103 new diagnostic tests that can enable doctors to determine the best treatment for patients with breast cancer as well as the causes of bone disorders and stunted growth.

Nichols, who considers himself “first a physician,” is also a voracious student. He earned his bachelor’s degree at Loyola University in Los Angeles, attended medical school at Marquette University in Milwaukee, received a fellowship in endocrinology at Boston University Medical Center, and did post-graduate work at Massachusetts Institute of Technology.

He enrolled in an executive management program at Harvard University a few years ago when associates complained that he didn’t know how to read a balance sheet.

He said Nichols Institute should combine “the best of academic expertise and the best of business know-how.”

‘A Beach Bum’

But Nichols is not all business. He calls himself “a beach bum” who gets almost as excited about board sailing as about a new scientific finding. On workday mornings he sometimes leaves his Laguna Beach home with his sailboard on his car top, ready to drive the short distance from the lab to Dana Point Harbor at lunchtime to enjoy his hobby.

Nichols said in his formative years his hero was Roman emperor and philosopher Marcus Aurelius, “who said that if you really want to affect liberal causes, you have to lead a conservative life.”

So, while many others on university campuses in the 1960s were championing free speech and opposing the war in Vietnam, Nichols was working in various university research laboratories in Boston, caught up in a different revolution.

At that time, he recalled, the field of endocrinology was “completely revolutionized” by new procedures know as radioimmuno assays.

University researchers had learned to make antibodies that would latch onto specific hormones that were too tiny to be found by earlier laboratory methods. Nichols likened the process to using a lure to catch a fish in the ocean.

‘Here Was a New Tool’

By making the antibodies radioactive, he said, the hormones they adhered to could be readily detected in a test tube of blood.

“Suddenly here was a new tool that allowed us to study such things as stress reaction, hypertension, growth deficiency, fertility, energy metabolism and the immune system.”

But Nichols said he grew dismayed that the tests being developed by researchers were finding their way into clinical practice after only years of delay. For example, he said, it took about eight years before a test developed in the early 1960s to diagnose a shortage of growth hormones in children was widely used.

When commercial laboratories eventually tried to streamline diagnostic tests to make them more cost effective, the tests frequently lost accuracy, Nichols said.

Out of these concerns, he said, Nichols Institute was born.

NICHOLS INSTITUTE AT A GLANCE

ADDRESS: 26441 Via de Anza, San Juan Capistrano.

EMPLOYEES: More than 1,000.

TOP EXECUTIVES: Albert L. Nichols, president and chief executive; William A. Mahan, senior vice president, chief financial officer, and secretary.

BUSINESS: The company provides specialized clinical testing services to hospitals, laboratories and physicians. It also makes and sells diagnostic kits.

RESULTS: For the nine months ended Sept. 30, profit was $919,000, or 23 cents a share, on revenue of $40.9 million. For 1986, the company had a loss of $108,000 on revenue of $34.9 million.

STOCK PERFORMANCE: Traded on the American Stock Exchange, symbol LAB. Trading range for the last 52 weeks: high of $9.50, low of $3.875. Monday’s closing price: $6.125, down 25 cents.