Sale of Tox Lab Company Attracted Multiple Buyers

When listed for sale, DrugScan drew interest of several investment firms and other clinical labs

CEO SUMMARY: In the midst of expanding their toxicology testing services nationally, DrugScan and DSI Medical Services (collectively Toxicology Holdings Inc.) hired a brokerage firm last year to pursue a sale of the two toxicology companies. Multiple potential buyers responded with interest. The buyer, ACM Global Laboratories—owned by a health system in Rochester, N.Y.—saw the acquisition of THI as a way to grow beyond its existing toxicology testing operations in Upstate New York and Connecticut.

WHEN A TOXICOLOGY LAB COMPANY outside Philadelphia put itself up for sale last year, it got just what any clinical laboratory would want from the offering: strong interest from multiple potential buyers.

That’s what happened with the sale of DrugScan and its affiliated company, DSI Medical Services, to ACM Global Laboratories of Rochester, N.Y., last month. (See TDR, Jan. 22, 2018.) DrugsScan is a toxicology laboratory, and DSI Medical is a third-party administrator that provides employers with such services as drug testing and physicals.

Having owned the company for nine years, the owners, including DrugScan President and CEO Anthony G. Costantino, PhD, and executives at Eureka Growth Capital, decided last year that the time was right to pursue a sale. DrugScan and DSI Medical retained Lazard Middle Markets to represent them in the marketplace, Costantino said.

“Lazard found numerous interested parties and we had a competitive process,” he explained. “Some were financial backers wanting to invest their capital and some were other lab companies.”

Although he would provide no other details and the terms of the final deal were not disclosed, Costantino said, “There was somewhat of a bidding war, and I’m definitely happy with the outcome.”

A Deep Pocket Partner

For DrugScan, ACM Global had two factors in its favor: It has deep pockets and was looking to expand nationwide. For ACM Global, DrugScan and DSI Medical had useful assets as well, including contracts with health insurers and operations nationwide.

ACM Global is a clinical and pathology lab affiliated with the Rochester Regional Health System, a multi-hospital integrated delivery system with $2.2 billion in annual revenue and 17,000 employees. The lab does 20 million tests annually and operates in more than 65 countries, most of which are for clinical trials.

To support its lab acquisition strategy, ACM Global wanted to expand beyond its operations in upstate New York and Connecticut. Those expansion plans made ACM Global an ideal partner for DrugScan and DSI Medical because the two companies in Horsham, Pa., also wanted to grow their toxicology testing business nationwide, Costantino told THE DARK REPORT.

Synergistic Expansion Plans

DrugScan has operations in 23 states and DSI Medical services operates in all 50 states. That national presence enables ACM Global to expand into those markets, said ACM Global President and CEO John Foley. Another key asset that made DrugScan attractive was the contracts it has with 114 health plans, which is four times the number of health insurance contracts ACM Global had before the acquisition, Foley added.

While DrugScan and DSI Medical were attractive acquisition targets when they were put up for sale last year, their beginnings were more humble. “DrugScan was founded in 1985 by Richard Cohn and Robert Tully,” noted Costantino. “They started it as a partnership focused almost exclusively on workplace drug testing with a little bit of forensic testing for police departments.

“Then, in 2008, we (meaning Eureka Growth Capital, Jack Bergstrom, Phil DuBois, Tim Johnson, and me) acquired DrugScan from the founders,” he added. “We did so because we saw tremendous opportunity for investment and growth in the toxicology space for a company that would have solid testing methods and high integrity in the marketplace.

Toxicology Lab Already Sees Less Revenue As Reduced Medicare B Rates Kick In

WHILE THE SAMPLE SIZE IS SMALL, it’s significant nonetheless that DrugScan has seen slightly lower payments from CMS as 2018 begins.

In 2017, payment rates from the federal Centers for Medicare and Medicaid Services ran slightly ahead of what CMS paid in 2016, said DrugScan President and CEO Anthony G. Costantino, PhD.

But this year, revenue is already dropping down again, he added.

“In 2017, our reimbursement levels for toxicology testing were better than we had in 2016,” he said. “But now, the reimbursement levels that we see look like they may go down again, just as we thought they might.

“Our first reimbursements from Medicare for toxicology testing this year are in line with what we expected from the 2018 Clinical Laboratory Fee Schedule,” he added. “In other words, they are lower than they were last year.

“We see about a 10% drop in the drug screening test codes and about a 2.7% drop in the definitive testing codes,” Costantino said.

“But, we’re a diversified toxicology laboratory and only about half of our revenue depends on reimbursement from Medicare and private health insurers,” he added. “The other half is all business-to-business relationships because we work with other clinical labs, pharmaceutical companies, state licensing boards, police departments, employers, and the like. They all need tox testing and that volume and their payments are holding steady, at least for now.”

Workplace Drug Testing Lab

“At the beginning, our initial plan was to be a workplace drug testing laboratory,” said Costantino. “However, the poor economy in 2008 and 2009 caused a dramatic decline in test volume because the majority of DrugScan’s work was preemployment testing. And, because few employers were hiring, there was less demand for those services.

“Seeing these trends, our response was to diversify our mix of clients,” recalled Costantino. “To do that, we pursued the credentials to become a clinical laboratory, which DrugScan did not have at the time. We needed CLIA certification and credentials to become a clinical laboratory and bill health insurance companies.

“Those credentials also included becoming a CAP-certified laboratory licensed in Pennsylvania to complement our SAMHSA certification,” he said. “Since then, we’ve expanded and now have a national footprint and a big healthcare and network insurance presence.

“In addition, DrugScan also developed a niche in the drug testing space. We also develop test abuse deterrent formulations of narcotics for pharmaceutical manufacturers,” Costantino said. “The FDA requires manufacturers to reformulate narcotic dosages into abuse-deterrent formulations so that they are not easy to crush or get them into an injectable or smokable form. That’s an important niche for us, particularly when there’s so much interest in that work, given the epidemic of narcotic-related deaths.

Turning Away Business

“One important challenge for any toxicology testing laboratory is to avoid being tainted by the behaviors and business practices of some in the industry, as evidenced by the various lawsuits from health insurers and charges and settlements with federal investigators for fraudulent testing and kickbacks paid to physicians to boost test volume,” explained Costantino. “Early on, we implemented a rigorous program to ensure that our business practices complied with relevant laws and regulations.

“From day one, compliance has been our mantra,” he added. “When we started, our owners were industry executives who had deep experience in operating clinical laboratories and they wanted to build a solid company that would last.

“As one example, we did not over-test,” stated Costantino. “Also, of course, we had a compliance policy, a compliance officer, and ongoing monitoring of operations so that compliance became part of our culture.”

Such a focus has not been come without cost. “Our compliance program has caused us to turn away business at times, because there are things we won’t do,” he explained. “Our compliance program has influenced the culture as well. The benefit is good employee retention because everyone understands the culture we pursue, buys into it, and are proud to work here.”

Looking Ahead

For Costantino, the deal was attractive because ACM Global wants to make DrugScan its toxicology center of excellence, which will allow the lab to continue to grow, he said. “We’ve always been in a growth mode, going from fewer than 30 some employees in 2008 to about 180 now,” he said.

“During that same time, our revenue increased more than five-fold,” he said. “With an infusion of capital from our new owners, we expect to increase test volume. In turn, that creates stability for our employees.

“That new capital will allow us to build out the space we have here and add new lab equipment,” he explained. “Another factor that will help is that ACM Global has significant inroads into various types of toxicology customers. We also expect there to be an expansion in the number of sales reps at DrugScan and ACM. That will allow us to capitalize on the opportunities in the clinical toxicology market.”

It is unusual to have a clinical laboratory company owned by an integrated healthcare system wanting to expand its geographical reach with toxicology testing services. This makes Drugscan an interesting lab company to watch.

Contact Anthony Costantino at 267-960-3400 or Anthony.Costantino@drugscan.com.

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