Zila, Inc.

5227 North 7th Street
Phoenix, Arizona 85014-2800
U.S.A.
Telephone: (602) 266-6700
Toll Free: (800) 922-7887
Fax: (602) 234-2264
Web site: http://www.zila.com

Public Company
Incorporated: 1980
Employees: 241
Sales: $77.6 million (2000)
Stock Exchanges: NASDAQ
Ticker Symbol: ZILA
NAIC: 325412 Pharmaceutical Preparation Manufacturing

Zila, Inc., based in Phoenix, Arizona, is a manufacturer and marketer of pharmaceutical, biomedical, dental, and nutraceutical products. Its operations have been organized into three groups—Pharmaceuticals, Professional Products, and Nutraceuticals—which manufacture and distribute the company’s line of products through its principal subsidiaries. The Pharmaceutical Group consists of the wholly-owned subsidiary Zila Pharmaceuticals, Inc. and produces over-the-counter (OTC) and prescription mendicants, including its Zilactin line (its signature OTC products for treating canker sores, chapped lips, toothaches, and teething pain), Peridex prescription mouth rinse (for treating gingivitis), and the OraTest oral cancer detection system. The Professional Products Group operates through Bio-Dental Technologies Corporation, a wholly-owned subsidiary that, in turn, is the parent company of Ryker Dental of Kentucky, Inc. (dba Zila Dental Supply), a national distributor of professional dental supplies. Zila Dental markets the products of dental supply manufacturers, selling about 500 items via mail-order, telemarketing, and direct sales operations. The Nutraceuticals Group consists of Oxycal Laboratories Inc. and its two subsidiaries: Inter-Cal Corporation and Oxycal Export, Inc. The Nutraceutical Group makes and distributes Ester-C (a unique form of Vitamin C) and a line of botanical ingredients, including Palmettx (a saw palmetto product). Zila sells its nutraceutical products in over 40 countries.

1980–87: Dr. James Tinnell Founds Company and Begins Marketing Zilactin

Zila Pharmaceuticals, Inc., which would later be transformed into Zila, Inc., was organized and incorporated in Nevada on September 12, 1980. It effectively went into research and development operations the following year. The company’s founder, Dr. James E. Tinnell, who graduated from the University of Arkansas School of Medicine, had been in private practice since 1965, but in 1979 he had begun limiting his work to the treatment of herpes virus patients at the Herpes Clinic in Las Vegas, Nevada. Between 1974 and 1979, he had served as the resident physician for a major casino and hotel in that city. Tinnell’s interest in developing a medicine for fighting herpes was a major incentive for starting up the company.

In 1983, Zila named Joesph Hines president and CEO. Hines came over from Desert Valley Cos. Inc., a Phoenix-based, management consulting firm, which, from 1976 until 1983, he both owned and operated. He also brought pharmaceutical industry experience to his new job. Between 1966 and 1976, he had served as CEO of several subsidiaries of Dart Industries, formerly named Rexall Drug and Chemical Co.

Until the late 1980s, Zila relied almost exclusively on Zilactin for its revenues. Introduced in 1985, Zilactin, the company’s first product, was a patented, non-prescription mendicant initially used for treating various mouth and lip sores, including canker sores and fever blisters as well as abrasions caused by orthodontic devices. It was a medicated gel that created a protective film in the mouth and helped ease the pain of such sores. Relief lasted up to six hours, which was much longer than relief afforded by competing products, even such long-established salves as Sterling Winthrop’s Campho-Phenique and Del Pharmaceutical’s Orajel. Through professional detailing and sampling, Zilactin soon established itself as a very solid base for the development of Zila’s whole line of products. The national introduction and marketing of Zilactin in 1985 was financed by Daleco Zila Partners, a California limited partnership, which put up about $3.3 million, and its general partner Daleco Technology Management Inc.

1988–90: Expansion and New Products

Under a reorganization plan, in 1988 Zila Pharmaceuticals, Inc., reincorporated in Delaware, became a wholly-owned subsidiary of the newly created Zila, Inc. and was merged with and into it. The surviving corporation, Zila, Inc. would thereafter serve as parent company to additional subsidiaries, including Zila International Inc., Zila Ltd., and Zila Merger Corporation.

Investors in Zila anticipated a favorable outcome to the company’s efforts to increase the sales of Zilactin. Among other things, in that year the firm sought FDA permission to market Zilactin with additional applications as an approved ointment for treating genital herpes and shingles. It also anticipated receiving permission to place the American Dental Association’s seal of approval on its product. Expecting a surge in future sales, the company filed a registration statement with the SEC for a secondary offering of 7,125,023 shares of stock to be offered by more than 100 individual and institutional investors, including Hines and the company’s financial backers, Daleco Zila Partners and Daleco Technology Management Inc.

At that time, Zila was still a developer and marketer, not a manufacturer. It had only nine full-time employees. A California company actually made its products. It was also a small operation, selling only about $3 million in ointments in the fiscal year that ended on July 31. It was also just treading water, having logged losses over the previous five years. Its estimates were that it had gained only a 4 percent share of the oral hygiene market by 1989. But its future was certainly looking up.

Events justified the optimism. Among other things, the company turned the financial corner by the end of its 1989 fiscal year, realizing a net income of $124,118 on sales of $2.56 million. The previous year it had inked a loss of $264,975 on revenues of only $1.22 million. In 1990, Zila negotiated an agreement with Bausch & Lomb Inc., giving that company the exclusive rights to manufacture its line of oral health care products outside the United States. It also had new products on the market: ZilaBrace, a gel for abrasions on the inner cheek; and ZilaDent, for treating gum sores caused by dentures. It was also readying another product for the market, Zilactol, a liquid for treating HSV-1, an oral virus infection.

1991–95: Growth Through Increased Sales in Zilactin

Until 1991, Zila leased a Phoenix facility on Thomas Road in Phoenix, but in that year it bought a 16,000 square-foot building at 5227 N. Seventh Street in the same city. According to records, Zila paid $600,000 for the two-story structure. The company began using only a third of the space and leased out the remainder to the Center Against Sexual Assault and other tenants. The building continued as Zila’s headquarters into the next century.

By the year it moved, Zila had achieved some financial stability. It held $1.1 million in cash assets, was completely free of long term debt, and had a net working capital of $1.44 million. It was, Hines assured company shareholders, poised for yet stronger growth. Strategies to achieve it called for developing more new products and markets as well as expanding and diversifying through acquisitions and mergers. Still, into 1996, Zila’s primary focus remained on producing and marketing its four major OTC items in its Zilactin family line of mendicants:. Zilactin, a protective gel for canker sores, cold sores and fever blisters; Zilactin-B, a protective, benzocaine based film for relieving the pain of mouth sores; Zilactin-L, a liquid version for treating developing fever blisters and cold sores; and Zilactin-Lip, a lip salve used to prevent sun blisters and to treat cold sores and chapped lips.

1996–97: Diversifying Through Mergers and Acquisitions

Iin August 1996, Zila entered into a merger agreement with Bio-Dental Technologies Corporation. Under its terms, Bio-Dental merged into Zila Dental Supply, a wholly-owned subsidiary of Zila created for the purpose. Bio-Dental was a dental supply firm which, through its own subsidiaries, marketed a wide range of professional dental supplies and computer-based dental technology systems. Basically, the parties to the merger viewed it as a “pooling of interests” transaction.

In January of the next year, 1997, The Supply House also became part of Zila Dental Supply. The Supply House had started operations in 1990, when it purchased San Diego Dental Supply, a small dental products distributor in San Diego, California. The new company began marketing on a larger, nationwide scale, using field sales representatives as well as telemarketing and direct mail advertising to extend its market coverage. In 1994, The Supply House acquired Ryker Dental, which, because Ryker was located in Lexington, Kentucky, increased the company’s marketing efficiency. Until Zila Dental Supply emerged, Zila had still only had its single, Zila Pharmaceutical division.

Company Perspectives:

Our company’s mission is to develop and/or market worldwide innovative healthcare products in core competency categories where we can achieve a leadership position. Our goal is to continuously increase corporate value by fulfilling the potential of our current products and technologies, expanding into new markets, and adding synergistically through acquisitions and partnering.

Zila also acquired Peridex from Proctor & Gamble in November 1997. Peridex, first introduced by P & G in 1987, was a prescription antibacterial oral rinse used for treating gingivitis and reducing plaque. It was the first such rinse to receive the American Dental Association seal of approval for its use. Although terms of the sale were not disclosed, P & G decided to sell off the successful product in order to focus the dental product segment of its business on toothpaste.

Despite its fairly bold acquisition strategy, Zila experienced some growing pains in the 1990s, even in 1997, when its annual revenue soared way above what it had ever been before. It reached $38.7 million that year, up from just $6.8 million the year before, roughly six times as much. But the company also logged a $6.5 million net loss. It would rebound though, first in 1998, when its revenue took another big jump, reaching $62.1 million, which gave Zila its first profitable year since 1993.

1998–99: Going Online and Focusing on Core Divisions

It was also in 1998 that Zila Dental Supply took to the Internet, launching an online order entry system designed to provide customers with a quick and easy means of ordering products from any location. Included among its features was the Personal Shopping List, which facilitated the replenishing of supplies by providing users with a log of their previous orders.

Two measures taken near the end of 1999 positioned Zila for continued expansion through its acquisition strategy for growing its core divisions-its pharmaceutical, nutraceutical, and dental supply businesses. In October, the company sold its Cygnus Imaging unit; then, in December, it sold its Practice Works software division. Cygnus Imaging, with a price tag of about $4.0 million, went to Procare Laboratories, Inc. of Scotsdale, Arizona; while Practice Works, for about $4.65 million, went to InfoCure Corporation of Atlanta. In addition to intensifying its business focus, the combined sales of almost $8.7 million gave Zila new capital for its growth plans.

Some of the funds were to used on Zila’s Inter-Cal Corp.’s new 65,000-square-foot manufacturing facility, which got under construction in Prescott, Arizona, in the fall of 1999. Growth in Zila’s nutraceutical area was being fueled the health industry’s increasing demand for a Vitamin C product line. But some of the funds were also slated for Zila’s pharmaceutical and dental supply subsidiaries, still the mainstays of the company. Among its principal investments were funds spent on developing and producing OraTest, the company’s new and extremely promising oral cancer detection system.

2000 and Beyond

In 2000, while waiting for FDA approval of OraTest, Zila was busy revving up sales of that product abroad, where it already had obtained permission for its sale and distribution in 16 countries. The company’s plan was to develop professional respect for the diagnostic product worldwide. Meanwhile, at home, Zila contracted with ILEX Oncology Services, Inc. to act as its representative of the product with the FDA. ILEX Oncology Services conducts clinical tests and has a well established reputation as a leader in the field of cancer research. If approved, OraTest holds the promise of producing annual revenues in excess of $500 million, with no competitive product even on the market horizon. In July 2001, the company got a boost from a study conducted on OraTest at Johns Hopkins University and reported on in the American Association for Cancer Research’s Journal of Clinical Cancer Research, which found that OraTest was a very powerful oral cancer detection product.

Zila also developed other products at the turn of the century, including Zila Pro-Wash and Zila Pro-Scrub, antiseptic hand washes and scrub for use by healthcare professionals. The roll out of these two products commenced in May 2001, with plans for marketing them through exhibits at major dental and medical shows and through major telemarketing campaigns.

While growth and diversification created difficulties for Zila through the 1990s, particularly in 1997, by 2000 the company’s financial situation had considerably improved. Its sales rose to $77.6 million that year, producing a net income of $2.9 million, its best on record. Furthermore, although it recorded a loss in its 2001 fiscal year, in its fourth quarter its revenues were up from the previous fiscal year. Zila, it seemed, had finally reached the financial stability that partially eluded the company through the previous decade. Thanks to the prospects of OraTest as well as the increased sales of its other new and established lines, Zila’s future growth potential looked extremely promising. However, it should also be noted that the company was seriously considering selling off its dental supply subsidiary, a move that would bring major changes in Zila’s corporate complexion and focus. As of the fall of 2001, that divestment, if not a certainty, remained a strong possibility.

Principal Subsidiaries

Oxycal Laboratories Inc.; Zila Pharmaceuticals Inc.; Zila Dental Supply; Zila Technologies, Inc.; Innovative Swab Tech Inc.

Key Dates:

1980:

Dr. James E. Tinnel founds Zila Pharmaceuticals, Inc. as a Nevada corporation.

1983:

Joseph Hines is elected company president and CEO.

1985:

Company introduces and begins marketing Zilactin.

1988:

Zila Pharmaceuticals is merged with and into Zila, Inc., incorporated in Delaware.

1991:

Company purchases two-story Phoenix building for its operation.

1993:

Zila introduces OraScan in Canada.

1995:

Company enters a 56-country product distribution agreement with Proctor & Gamble Co.

1996:

Company acquires Bio-Dental Technologies Corporation, which becomes a wholly-owned subsidiary of Zila.

1997:

Zila acquires Peridex oral rinse from Procter & Gamble and The Supply House.

1998:

Zila acquires Oxycal Laboratories and its Inter-Cal marketing subsidiary.

1999:

The company sells Cygnus Imaging to Procare Laboratories, Inc. and Integrated Dental Technologies to InfoCure Corporation.

2001:

Zila acquires Innovative Swab Technologies from National Healthcare Manufacturing Corporation.

Principal Divisions

Pharmaceutical Group; Nutraceuticals Group; Professional Products Group.

Principal Competitors

Advanced Nutraceuticals, Inc.; Darby Group Companies, Inc.; Del Laboratories, Inc.; Henry Schein, Inc.; Patterson Dental Company.

Further Reading

Gonzales, Angela, “Phoenix Pharmaceuticals Maker Buys Headquarters Building,” Business Journal-Serving Phoenix & the Valley of the Sun, February 4, 1991, p. 10.

——, “Zila Inc. Entering Toothpaste Market, Negotiating with ADA,” Business Journal-Serving Phoenix & the Valley of the Sun, May 4, 1992, p 2.

——, “Zila Zeros in on Growth Plans after Selling 2 Units,” Business Journal-Serving Phoenix & the Valley of the Sun, November 5, 1999, p. 7.

Luebke, Cathy, “Zila Reaping Reward of Work on Oral Cancer Aid,” Business Journal-Serving Phoenix & the Valley of the Sun, November 26, 1993, p. 19.

Stern, Jonathan, “Phoenix Firm Betting Its Future on Medicine to Fight Herpes,” Phoenix Business Journal, January 27, 1986, p. 17.

Tigner, Rochelle, “Zila Shareholders Register to Sell 7.12 Million Shares,” Business Journal-Serving Phoenix & the Valley of the Sun,” April 17, 1989, p. 7.

“Toothache Swabs a Hit for Zila,” Chain Drug Review, June 7, 1999, p. 174.

“Zila,” On Wall Street, June 2000, p. 87.

“Zila Prepares to Launch Oral Cancer Screening System,” Chain Drug Review, July 3, 1995, p. 271.

“Zila’s Teething Gel a Success,” Chain Drug Review, June 29, 1998, p. 214.

—John W. Fiero