Inside the Lab Industry: Toxicology Niche Shows Both Promise and Headwinds

Precision Toxicology has only been operating since 2011, yet it has managed to accomplish a great deal in just three years. The San Diego-based lab grew rapidly after launch, with its payroll reaching some 80 employees. Its annual test volumes swiftly reached the six figures. It recently moved into a new 10,000-square-foot lab. Business is diverse, with orders coming in from all quarters of the country, particularly the Southwest and Midwest. Earlier this year, Precision had a bull’s-eye on its back—the right kind of target at a time when many labs are struggling to grow. It was acquired by BelHealth Investment Partners, a New York-based private equity firm that focuses on small to midsize companies. BelHealth wants to turn Precision into a household name in toxicology testing. “I am excited to have the resources and experience of BelHealth to help us accelerate our growth,” said Jason Hansen, Precision Toxicology’s chief executive officer and co-founder. “We . . . look forward to leveraging the vast resources and experience of BelHealth to build Precision into a leading national toxicology lab.” Although the terms of the transaction were not disclosed, it is clear that BelHealth has great hopes for Precision’s future. Within a few weeks of the deal being announced, it had installed Ken Whitfield as chief financial officer at the company. His last job was as comptroller for the city of San Diego. “The goal is to grow [Precision] as quickly as we can,” said Dave Sturek, a BelHealth managing director. Sturek noted that toxicology seemed an area where quick growth could be realized. “The segment has been very interesting to us. There’s been a lot of growth in the sector. We also thought there would be a lot of synergies given our current portfolio,” he said. Another of BelHealth’s holdings is General Genetics Corp., a New Mexico-based firm that conducts genetic and forensic lab testing. It is expected that both labs could eventually share customers, Sturek suggested. Another of its holdings, Linden Care, is the largest mail-order pharmacy in the U.S. that is focused on pain management. Sturek said BelHealth vetted about a half-dozen labs before making its decision. It was particularly interested in the efficiency of existing staff and scalability of operations, along with the fact that company was very focused on compliance. “We believe that Precision could double or even triple throughput without adding any more employees,” he said. The Precision deal is the second significant deal involving a toxicology lab and private equity firm this year. Aegis Sciences Corp. was acquired by Boston-based ABRY partners earlier this year. Headwinds Still Formidable But whether mergers and acquisitions in the toxicology testing niche is heating up remains to be seen. Industry observers say toxicology labs are facing a lot of headwinds, including increasing scrutiny from public and private payers for potential overtesting and consolidation among pain-management practices. In a recent report, the ratings service Standard & Poor’s said what it called “drugs-of-abuse testing” would experience above-average growth this year and in 2015. But IBISWorld, a Los Angeles-based research firm, estimated that the toxicology testing business grew by about 1.2 percent last year. That’s somewhat higher than the 1 percent annual growth in prior years but not exactly a stirring clip. “I don’t think the segment is as hot as it once was,” said Christopher Jahnle, a managing director at Haverford Healthcare Advisors in Paoli, Pa. He noted that Medicare fiscal intermediaries and even private insurance companies are beginning to eye testing volumes more closely. While deals are being consummated, they tend to be at lower valuations than a few years ago. Sturek acknowledged that there has been increased scrutiny on test volumes. “It’s a concern, but we felt [Precision] could grow through that,” he said. Yet for better or for worse, the United States is currently in a quasi-legal drug epidemic. That stems in part from the aging of the population, which has led to the prescription of more oral painkillers such as oxycodone. But such medication can be addictive, both from a physiological and financial point of view. Users often get hooked, while others sell prescription painkillers on the black market for $10 or more a tablet. That has made toxicology testing a two-pronged diagnostic: Many patients are being tested to ensure not only that they are not abusing such drugs but also that they are taking them as originally prescribed. It may be the only form of lab testing where a negative result can have potential ramifications as serious as a positive one. Workplace Testing on the Rise Again The prescription drug concerns, plus a growing push to legalize marijuana for both medical and recreational use, is also leading more employers to embrace drug testing for workers, both as a condition of an offer of employment and post-hiring. A white paper prepared by Alere Toxicology, one of the larger labs that focuses specifically on such testing, noted that 8.7 percent of Americans were illicit drug users in 2011. That’s up from 8 percent in 2008. And 47 percent of companies now conduct random testing, up from 39 percent in 2006. Nina French, a partner with Current Consulting Group in Philadelphia—which prepared the white paper for Alere—noted that while workplace testing began to “hit its stride” in the 1990s, price cutting among fierce competition became rampant. Oftentimes testing was tucked into a standard background check package, eroding margins. The huge job cuts and corporate belt-tightening during and after the Great Recession damaged the business further. French said the typical workplace toxicology test retails for between $9 and $25. That’s a fraction of the price for a prescription adherence test, which Jahnle said can retail for between $50 and $100. But French believes workplace toxicology testing is making a comeback. “The volume is picking back up,” she said, although it remains short of prerecession levels. Among the drivers: news and social media reports of adults and even adolescents misusing painkillers and stimulants such as Ritalin, which is usually used to treat attention deficit hyperactivity disorder, and the wider use of medical marijuana (which remains legal grounds for disciplinary action). Employers are under more pressure to ramp up productivity, which means they must ensure that workers are not impaired. However, the testing in both the workplace and pain management realms is becoming more sophisticated. French noted that workplace managers have to make decisions whether to test for drugs such as synthetic marijuana or bath salts—which can drive up prices—or to exclude conventional marijuana completely. And toxicology labs are also branching out into more sophisticated assays in the realm of environmental testing. For example, there are a variety of tests to determine human exposure to certain toxins that might be at or near a work site or other area containing hazardous materials. And toxicology labs are also conducting tests for drug manufacturers to determine whether certain compounds they are using to create new products have more of a potential to harm their customers than cure them. Some toxicology labs are going even further. San Diego-based Millennium Health (formerly Millennium Laboratories), for example, provides advanced analytics that can predict whether a patient will adhere to their prescribed medications. It also offers tests to better determine how individual patients will react to specific painkillers and other drugs. And despite his concerns about the future of the niche, Jahnle does believe there is potential for testing growth at clinics that provide behavioral health services for patients trying to recover from substance abuse. Although payments are typically set at Medicaid rates, that’s still better than the prices for workplace testing. And given the rise in both prescription and illicit drug use in the United States, demand is growing. “Toxicology labs might consider hedging their bets a bit and focus on those facilities,” Jahnle said. Takeaway: Toxicology testing is the one facet of lab operations that appears to have a bright future for many of the players.