Tiny DDI Faces Crucial Battle With Parent : Licensing Fight Clouds Firm’s Hopes for Future

A battle over technology-licensing rights between Disease Detection International in Irvine and its former parent company puts the very existence of DDI at stake just as the tiny medical-technology firm has begun seeing dollar signs in its future.

DDI, founded in 1985 as a unit of Environmental Diagnostics Inc. and taken public in a January, 1987, stock offering that netted $4.5 million, last week signed its first sales contract with giant E.I. du Pont de Nemours & Co.

In the past two weeks, DDI’s stock price has doubled from 12 1/2 cents to 25 cents a share, indicating that investors believe that the company’s efforts to market its products may soon pay off.

On Wednesday, DDI President H. Thad Morris said the contract calls for Du Pont to purchase $500,000 worth of DDI’s medical-diagnostic kits through December. He described the agreement as an interim pact and said the two companies are negotiating a long-term relationship.

DDI, which has 19 employees and has lost $1.9 million since its founding, generated a mere $3,000 in product sales in all of 1987.

But even as the future brightens, Environmental Diagnostics has launched a proxy contest to replace all five DDI directors. The company is awaiting Securities and Exchange Commission approval of its proxy-solicitation material.

So to Morris, who gets $85,000 a year as DDI’s president, as well as to company Chairman James G. Watt, the former U.S. Interior secretary who so far draws no compensation from DDI, the looming proxy battle is a lot more than a means of settling a licensing dispute.

It is a declaration of winner-take-all warfare.

Environmental Diagnostics--which was founded in Irvine in 1983 and moved to Burlington, N.C.--still owns 25% of DDI’s stock.

The company wants to elect five new DDI board members, all of its own choosing. The proposed slate includes Environmental Diagnostics President James D. Skinner and one of its board members.

Environmental Diagnostics Vice President Diane Balcom says her company doesn’t want to take control of DDI, just install a board that will renegotiate a technology-licensing contract to Environmental Diagnostics’ liking.

Morris--the point man on DDI’s defense team--says that Environmental Diagnostics does, indeed, want to seize control of his company.

“They told us that the agreement they want is that Environmental Diagnostics manufactures everything,” he said.

The pending proxy battle--a process in which each side solicits the support of shareholders--is expected to culminate in a stormy shareholders meeting on Aug. 31.

In interviews Wednesday, Morris and Balcom shed new light on the rift between the two firms--which until recently shared Watt as chairman and current DDI director Arden Kelton as president.

Balcom said her company believes that DDI has violated a licensing agreement executed when it was spun off from Environmental Diagnostics in 1977.

That agreement allowed DDI to use technology developed by Environmental Diagnostics and called for the two firms to share equally in any improvements or modifications to the technology.

DDI in December filed for a patent on what it claims is a new technology for developing certain diagnostic tests. The company maintains that because the technology was developed solely by DDI, it is not subject to the licensing agreement.

Environmental Diagnostics responded by unilaterally canceling the licensing agreement with DDI. Balcom said the firm told its former offspring that it had no right to market the tests developed with the new technology.

DDI, however, has gone ahead with its marketing plans, maintaining that Environmental Diagnostics has no claim to the new technology and acted improperly in canceling the agreement.

That prompted Environmental Diagnostics to launch its proxy contest.

Morris said the original agreement between the two companies called for binding arbitration in the event any dispute arose. He said that Environmental Diagnostics’ decision to launch a proxy fight rather than to call for arbitration proves his contention that DDI has become a hostile takeover target.

Balcom said there was no need for arbitration because “we feel we had the right to terminate the agreement. We granted the license to them and our legal counsel determined that DDI violated the agreement by refusing to share an improvement on our technology.”

Morris said Wednesday that he does not know whether Environmental Diagnostics has attempted to get Du Pont to withdraw from its marketing agreement with DDI. Balcom refused to comment when asked if her company had approached Du Pont, and Du Pont officials could not be reached for comment.

DDI has developed a series of diagnostic tests that can be used to determine immunity to several infectious and parasitic diseases, most of which can cause birth defects. Currently, the tests can be run using only blood plasma--which increases the cost of the test and causes a delay while the patient’s blood is separated in a lab.

Next week, however, DDI plans to submit clinical data to the Food and Drug Administration, showing that the tests can be performed in a doctor’s office using whole blood. DDI officials said in an earlier interview that the tests would be sold to doctors for about $3 each.

Morris is upbeat about the future for his company--providing the Environmental Diagnostics challenge can be beaten.

DDI is expected to defend itself by warning the 6,000 or so shareholders who own the remaining 75% of DDI’s stock that Environmental Diagnostics wants to seize the company and strip it of its marketable products.

Already, he said Wednesday, the battle has cost DDI.

The company decided Tuesday to postpone its annual meeting, which was to have been held that day, rather than face a special meeting to resolve the proxy contest.

“It cost us $57 to postpone,” Morris said, “and we’re mad about that.”