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Wharton grads parlay friendship into fast-growing medical-test company.
Evan Jones remembers hatching the idea while sharing a beach house at the Hamptons on New York's Long Island. His partner, Chuck Fleischman, thinks it emerged earlier. After all, they'd known each other since college — Jones' best buddy from high school ended up being Fleischman's close friend in college. And both Jones and Fleischman had earned their MBAs at Wharton before ending up in New York City in the late '80s.
"He married his college sweetheart, and I married my college sweetheart," Fleischman recalls. "As young couples, we spent many years enjoying each other's company in New York." Their families took skiing and whitewater rafting trips together.
Wherever the idea began, the two men found that they shared a common goal — they wanted to do something more than just make big salaries as a venture capitalist, in Jones' case, or an investment banker, in Fleischman's. They wanted to create a company that would make a difference in people's lives and, at the same time, show that America could compete technologically with anyone in the world.
"During the late 1980s, the Japanese were really eating America's lunch on technology," Jones says. "A lot of people were going into venture capital and the service industries, and Chuck and I felt like young people should go into building companies. We both wanted to do something meaningful."
And
they have. Today, Jones is chairman and chief executive, and Fleischman,
president and chief operating officer of Digene, a Gaithersburg, Md.,
maker of medical tests. Among its products is a more-accurate test
for cervical
cancer. Digene's test detects human papillomavirus, which causes
99 percent of cervical cancers. The traditional test, called the Pap
smear, relies on visual
examination of cervical cells. Annually, about 35 million women in the
United States are screened for cervical cancer, and about 13,000 cases
of the disease
are diagnosed.
Initially, doctors used Digene's test as a follow-up when Pap smears came back positive. But it's gaining widespread acceptance as a primary means of screening. As a result, Digene reported earnings, including one-time tax gains, of $21.5 million in fiscal 2004 on sales of $90.2 million. It was the company's first annual profit.
Those sorts of results would have been hard for either Jones or Fleischman to imagine back in the early 1990s when Jones would pay company bills out of his personal checkbook.
Both men had quit their jobs in 1990. Their conversations around the pool in the Hamptons and over dinners in Manhattan had led to a strategy for starting a biotech company that was uniquely suited to their Wall Street-honed skills. They didn't follow the usual route, starting with a technology — an idea — and using its promise to persuade investors to put money into building a company around it. Instead, they went out and raised $8 million for what was, in essence, a venture fund. They then went looking for promising young companies to buy.
Their search led
them to Digene, which had spun out of a University of Maryland incubator.
By the time
Jones and Fleischmann arrived,
it was
afflicted by
a common ailment among startups — it was running out of money.
They bought the company in the summer of 1990 and then, that December,
acquired the medical-diagnostic
division of another firm.
They were wary of relying on venture capitalists to fund the
company's
growth. "I didn't want VCs to be in position of putting
us out of business," Jones explains. So they drew on personal
funds and those of a few angel investors. Early on, they worked
in the same office at a partners' desk,
joined in the middle.
Their breakthrough came in 1995 when the U.S. National Institutes of Health endorsed their approach to cervical-cancer screening. In May 1996, they took Digene public, raising $30 million. "As late as February 1996, we had only a week of cash to fund payroll," Jones says. Money from the stock offering enabled them to do the costly and extensive clinical trials that federal regulators require before a new drug or medical test can be sold to consumers.
"We spent the first half of the '90s creating the technology platform
and the second half of the '90s validating it," Fleischman says. "And
we've spent the first half of this decade commercializing
it." The
company's stock, which trades on Nasdaq, returned 102.7
percent over the five years that ended in mid-October, compared
with a loss of 11.1 percent over
the same period for the Dow Jones Total Stock Market Index.
The two men say skills they acquired at Wharton — Jones graduated
in 1983, Fleischman in 1986 — have assisted them in their entrepreneurial
journey.
Jones, who'd majored in biochemistry at the University of Colorado, had begun his career in the research and development side of the medical-products business. "I didn't have a strong grounding in finance or how to really read financial statements," he says. "So Wharton gave me an analytical framework. We're involved now as a public company in looking at stock-option expensing and, when we're using the Black-Scholes model [for option valuation], that's no problem. We learned that at Wharton."
Fleischman, a history major at Harvard University, too, credits Wharton for teaching him rigorous ways of framing business problems, "whether it's the financial analysis of a new project, the statistics involved with a clinical trial or an inquiry into the role of currency fluctuations on our overseas business," he says.
Plus, in the early days, when Digene was unprofitable and its cervical-cancer test unproven, their MBAs made them "quite comfortable in the jungle of New York," he adds. "And it was clear when we'd introduce ourselves that it got a noticeable reaction."
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