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MRIGLobal: An institute on the edge

MRIGlobal President Tom Sack knows his institute needs to diversify its client base in the face of declining federal financing.
MRIGlobal President Tom Sack knows his institute needs to diversify its client base in the face of declining federal financing. The Kansas City Star

Swing open the heavy glass doors and step into the serene lobby of MRIGlobal’s headquarters near the Country Club Plaza.

The black tiled floor is spotless. A large antique scientific scale gleams under glass. Photos of Henry Kissinger, Margaret Thatcher and other notables hang on a wall, recipients of awards from the research institute.

But the dignified setting overlooking the Nelson-Atkins Museum of Art belies the urgency inside.

For years, the federal government injected gushers of cash into the non-profit institute for national security projects and renewable energy research. Money from the economic stimulus package after the 2008 recession drove the institute’s revenues to record highs.

But the government in general has been slashing its support for research and development, and the flow of money from the stimulus ended. The institute has been a casualty, with its revenue plummeting. Last year it fell by a quarter, from a peak of $683 million in 2012 to $498 million.

MRIGlobal, facing leaner times, is making cuts and scrambling for work.

“We’re not-for-profit but also not-for-loss,” said Tom Sack, the institute’s president and CEO. “The last few years have been challenging.”

The 70-year-old institute was founded as the Midwest Research Institute at the end of World War II by Kansas City business leaders. They were intent on keeping scientists and researchers in the area after war-related work ended.

Charles Kimball, who was a big promoter of Kansas City and the institute, was its leader from 1950 to 1975, and since then it has had a handful of CEOs. The top leader before Sack, Michael Helmstetter, became CEO in 2009, but after the institute’s revenue began declining he resigned last year to pursue other unspecified opportunities.

The institute has some of the world’s most sophisticated laboratories, and its work has ranged widely. Cancer research has been a big focus, as was rocket fuel development. It’s done research on transistors, electronic circuitry, microwave technology, cable TV, medical equipment, food and clothing for astronauts. It even perfected the melt-proof coating on M&M’s.

In 2011, it was renamed MRIGlobal, a nod to the fact that it had become a far-flung operation with a global impact. Its emphasis now is mainly on energy research and helping the U.S. in its war on terrorism. It recently designed a robot that mimics soldiers’ movements to test chemical warfare safety suits.

It relies on two chunks of revenue. The smaller portion comes from the labs it owns and operates in Kansas City and elsewhere. Those revenues topped out at $132 million in 2011 and were down to $98 million last year.

The biggest chunk, the golden goose accounting for 80 percent, comes from the National Renewable Energy Laboratory in Golden, Colo., the government’s primary research lab for renewable solar and wind energy.

The government owns the lab, and MRIGlobal is a co-manager. In 2012, money from the government stimulus boosted revenues the institute gets from the lab to $556 million. But last year, that crashed to $399 million.

There’s also a gnawing concern whether MRIGlobal and its partner in running the lab, Battelle Memorial Institute of Columbus, Ohio, will retain the management contract when it comes up for renewal soon. Losing the contract would be a huge blow.

To adjust, last year it reduced expenses in the labs that it owns by $31 million. Payroll was slashed $7 million, an 11 percent cut, and those labs now have 500 employees, with 350 of those in Kansas City. Most of the Kansas City employees work at its headquarters and the labs there.

The institute also ended a once-promising project to turn algae into biofuel and raised $870,000 by selling off greenhouses and agricultural equipment.

The energy lab has reduced its workforce from 1,900 to 1,640 employees.

MRIGlobal’s leaders say that while government contracts will still pay a lot of the bills, they want to diversify the sources of government revenue by adding contracts for work beyond national security and defense.

They’re encouraged in part because revenues for fiscal year 2014 are expected to be roughly the same as last year. And in one bright spot, in July the institute renewed a 10-year, $63 million contract from the National Institute of Environmental Health Sciences to analyze chemicals that could cause cancer or genetic defects.

Global health initiatives such as vaccine research and quicker detection of infectious diseases could hold new business. And it could snag more work from pharmaceutical companies and tap commercial possibilities in its own research.

Similar plans have been hatched in the past with mixed results. But Sack said he’s optimistic the institute can shift from reliance on the government.

“We can’t just hope for a federal contract,” he said.

Energy lab in play?

The Midwest Research Institute started the energy lab in 1977 after fighting off competition from other research groups that wanted to put the lab in Georgia or Texas. Colorado donated the land for what was then called the Solar Energy Research Institute.

The lab has experienced its own financial roller coaster, with its budget decimated under President Ronald Reagan. It recovered from those lows, and under President Barack Obama enjoyed record budgets, mainly because of the economic stimulus money.

Now, with the end of stimulus money, the budget “is basically steady after inflation,” said lab spokesman George Douglas.

MRIGlobal knows not to take the lab for granted.

In 2008, the institute’s managment contract was renewed but only after it partnered with the much larger Battelle. The two formed the Alliance for Sustainable Energy to manage the lab and they share a performance bonus. In 2013, that was worth a maximum of $6.7 million.

But last August, MRIGlobal and Battelle were blindsided when U.S. Department of Energy extended the management contract for 20 months instead of the five-year option in the contract.

“I don’t know why they wouldn’t extend it,” said Sack.

In an email response to questions, the energy department said MRIGlobal and Battelle were meeting the “performance expectations identified by the department.” But the lab had just completed a new facility to test how renewable energy and energy efficiency affect the electricity grid and more time was needed to assess that work.

“The 20-month option was determined to be in the best interest of the government,” the department said.

Douglas, the lab spokesman, said lab officials were confident it would eventually get the full five-year extension. And observers said it’s not unusual for a federal agency to initially extend a contract for a shorter period.

The contract will be up for grabs again in 2018. Could MRIGlobal lose the lab in the next round of competive bidding? There’s no guarantee.

Jefferson Tester, a professor of sustainable energy at Cornell University and an MRIGlobal board member, said a political decision in awarding the contract is a wild card. But the institute has a long history with the lab and good evaluations for its stewardship.

“MRI has a legacy commitment to the laboratory and that stands them well,” he said.

Smaller labs also dealing with cuts

In the Kansas City area, besides its headquarters and laboratories, the institute runs a national repository in North Kansas City that distributes chemicals to researchers developing cancer drugs. And it has its Deramus Field Station near Grandview for agricultural research.

But it also has labs and offices in Florida, Maryland, Virginia and Washington, D.C., with 150 workers mainly involved in national security and defense.

Besides the energy lab in Golden, it also manages the much smaller SolarTac in Aurora, Colo., Owned by a consortium of private companies, it field tests renewable energy equipment. It has less than a dozen MRIGlobal employees.

The recent budget cutbacks haven’t kept the labs from ground-breaking work. Just a couple of months ago, it finished a piece of equipment — called RoadBlock — that sends a signal to a satellite if a vehicle is hit with an improvised explosive device like those used in Iraq and Afghanistan.

Many thought the technology was impossible. To transmit the vehicle’s location so a rescue can be quickly launched and potentially save lives, it needs to work in a microsecond before it’s destroyed by the explosion.

The fact remains, though, that according to documents filed with the IRS in 2010, more than 90 percent of the institute’s revenues from its smaller operations, except for SolarTAC, were from the government. By 2013, that had risen to more than 95 percent.

And the revenues continued to mainly come from the U.S. Department of Defense and Department of Homeland Security.

“Keeping contracts going isn’t easy,” said Bill Hall, chairman of MRIGlobal’s board of directors. “But we have strong Department of Energy and Department of Defense relationships.”

Matt Hourihan, director of the research and development policy program at the American Association for the Advancement of Science, said researchers across the country are struggling to cope with steep funding cuts. Since 2010, the Department of Defense has slashed research and development spending by 24 percent. Its proposed budget in 2015 calls for another drop.

Constrained budgets are expected to stick around for the next few years.

“It’s definitely widespread, and it’s the new normal,” Hourihan said.

Adapting to change

MRIGlobal will have to adapt to thrive again. A history of flexibility shows that it can.

For instance, in the 1970s it snagged work from the U.S. Environmental Protection Agency to develop tests to detect and measure pollutants so environmental laws could be enforced.

That work eventually faded, but the same chemists on the EPA project also had the skills to detect deadly compounds in chemical weapons. They helped design testing protocol that contributed to the Chemical Weapons Treaty in 1993.

But by the late 1990s. the institute held “a slow ticket to mediocrity,” James Spigarelli, a former MRI CEO, told The Star in a 2003 interview. “I saw the handwriting on the wall. We needed new revenue streams.”

The institute was a bystander in the 1990s as the human genome was being mapped because it lacked the biological expertise and facilities to win that kind of work. To remedy that, it hired biologists and purchased a lab in Florida that specialized in biochemistry.

When the Sept. 11, 2001, terrorists attacked, it was geared up to help the government fight chemical and biological threats.

Spigarelli, who was CEO from 1999 to 2009 and now serves on MRIGlobal’s board, said in a recent interview, “We need to look at other options all the time, as one thing goes down, we need to find other things to do.”

One alternative it’s considering is how to make money from commercializing its research. The institute holds a relatively modest 80 patents, largely because the rights are claimed by the entities that have hired it. But the government has signaled it wouldn’t object if the institute pursued some commercial ventures.

But it’s been down that path before, with mixed results.

Several years ago under Spigarelli’s leadership, it considered operating an Internet marketplace for specialty chemicals and offering buyers its technical expertise. That venture didn’t go anywhere and was dropped.

Its most serious effort at commercialization came post-9/11. Anthrax-tainted letters that killed five people, including two Postal Service workers, showed that a detection system was needed. The institute had a device that could help and a previously formed for-profit subsidiary, MRI Ventures, that could sell it.

The device, called SpinCon, consisted of a spinning membrane and liquid and had been tested at Children’s Mercy Hosptial to collect allergans and fungi in the air. It could also easily be used to collect anthrax spores.

MRI Ventures formed Sceptor Industries Inc., taking a partial ownership share, to sell the device. The company earned a $42 million contract to provide SpinCon as part of the anthrax detectors used by the Postal Service.

But Sceptor ended up being sold, said Steve Lufkin, then president of MRI Ventures. He said the institute came to realize that the nonprofit institute’s research base wasn’t a good fit with a for-profit enterprise.

“It was a completely different animal,” said Lufkin, who soon left the research institute to start his own company.

MRIGlobal’s current leaders believe lessons were learned and that there’s still potential in commercializing research. RoadBlock, the device that detects IED incidents, can also work in other types of explosions.

“We have the intellectual property rights,” said Bob Conklin, director of intelligence, surveillance and reconnaissance at the institute.

Adding ‘rainmakers’

Whatever its future, the institute is going into it with a beefed-up board of directors.

Once dominated by an old guard of Kansas City businessmen, MRIGlobal now is directed by a mix of local professionals and “people with specific scientific expertise or who can give us insights into Washington, D.C., that can be helpful in terms of contracts,” Hall said.

Recent board additions include retired U.S. Air Force Gen. Richard Myers; Tester, the sustainable energy expert; Barbara Atkinson, retired head of the University of Kansas Medical Center; Alex Garza, a Homeland Security expert in the medical field; and MRIGlobal’s current and previous presidents, Sack and Spigarelli, both credentialed scientists.

But, Hall acknowledged, almost since founder Kimball retired, “We don’t have anybody who’s done the building of relationships in the private sector. We have to begin a long building of relationships.”

Sack said that is starting to be done. And he said the board also has directed him to spend more time in Washington because of the dominance of the institute’s federal contract work. Financial gifts from foundations or others won’t be rejected, he said, but what the institute really wants is more work.

“We prefer to go out and earn our money,” he said.

To reach Steve Everly, call 816-234-4455 or send email to severly@kcstar.com

To reach Diane Stafford, call 816-234-4359 or send email to stafford@kcstar.com.

Through the years

1943 Midwest Research Institute charter obtained by area business leaders.

1944 Institute opens for business; first president, Harold Vagtborg, leads $250,000 startup fundraising campaign.

1947 10-acre tract purchased next to University of Kansas City to be institute’s eventual headquarters.

1950 Charles Kimball becomes second president.

1952 $1 million fundraising drive to build headquarters.

1955 Headquarters building opens on Volker Boulevard.

1957 Deramus Field Station, 42-acre research site in Grandview, donated to institute.

1961 First NASA contract obtained.

1964 First U.S. Arms Control and Disarmament Agency contract.

1970 Second building opens at headquarters site.

1975 John McKelvey succeeds Kimball as president.

1977 Institute wins contract to manage SERI, the Solar Energy Research Institute in Golden, Colo.

1984 Institute forms alliance with Lenexa company, Chemsyn Science Laboratories, to test drugs under development

1987 Institute opens facility in Washington, D.C.

1991 SERI becomes a federally designated national lab, the National Renewable Energy Laboratory.

1993 Institute wins contracts with both Ford Motor and General Motors to develop fuel-efficient vehicles.

1998 -Institute begins sharing NREL contract with Battelle Memorial Institute and Bechtel National.

1999 James Spigarelli becomes president; institute forms research alliance with University of Kansas; institute begins managing Brevard Teaching and Research Laboratories in Florida.

2000 Institute buys Florida lab.

2000 Institute incubates Chemfinet Inc., an Internet chemical supply company based on MRIGlobal intellectual property. The company was sold Feb. 7, 2001.

2002-2004 $8 million investment campaign secures $3 million each from Hall Family Foundation and Ewing Marion Kauffman Foundation.

2002 Institute forms a for-profit company, Sceptor Industries Inc., based on SpinCon air-monitoring product, holding one-third ownership.

2003 Sceptor Industries Inc. gets major federal contract for anthrax testing.

2009 Michael Helmstetter becomes president; with others, institute wins National Energy Technology Laboratory contracts.

2011 Changes name to MRIGlobal; wins 5-year cancer research contract with National Institutes of Health; acquires industrial building in North Kansas City.

2013 Thomas Sack becomes president.

Federal research and development funding

Percent change from fiscal year 2010 to 2014

Commerce: +38.4 percent

Applied Energy Programs: -12.2

General Science: -3.7

Health: -6.2 percent

Environment: -8.8

Agriculture: -12.5

Defense: -23.9

Transportation: -15

Source: American Association for the Advancement of Science

MRIGlobal annual revenues

2009: $388 million

2010: $548 million

2011: $626 million

2012: $683 million

2013: $498 million

Source: MRIGlobal (by fiscal year)

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