London-based Sagitta Private Equity completed the funding of drug and alcohol testing company Medscreen Limited’s MBO in early April from its US parent, PharmChem, Inc. for a total consideration of £7 million. Sagitta provided GBP5.5 million in the deal, in addition to a GBP1.25 million senior-debt facility provided by Lloyds Bank, which Medscreen had already secured. However, the firm is in the process of refinancing the funding structure, which will eventually comprise equal elements of debt and equity. Sagitta is talking to three UK banks to arrange the refinancing.
Medscreen offers services to companies which are increasingly subject to regulatory pressure to cover their business operations with specific employee testing for drugs and alcohol misuse, and also companies that voluntarily see a need to offer such protection in their corporate framework.
“It’s a niche healthcare service provider, and the market it operates in is subject to some very attractive growth opportunities,” said Kevin Grassby at Sagitta.
Medscreen’s largest single client group is made up of companies from the maritime industry, comprising 50 per cent of its business. Since the Exxon Valdez oil spill disaster in 1998, that industry has introduced regulation that clearly checks all employees for potential substance abuse, on a pre-employment and spot-check basis. “It is the blueprint against which a lot of other industries are measuring themselves,” said Medscreen managing director Fiona Begley in London.
In light of many high-profile train and transport disasters in recent years, companies are embracing the idea of limiting potentially hefty court fines by ensuring adequate safety checks are in place. With these measures in place, courts are said to look more favourably on participating companies with effective programmes should litigation follow.
“In general, there is a greater concern about employer liability for acts committed by their employees,” said Grassby. And it is not just limited to a handful of industries. “It’s usually where there is capital equipment which could potentially be mishandled.”
Using this general guideline, Medscreen has attracted 350 clients based in 35 different countries around the world. As well as the maritime, rail and road industries, the company provides services for the oil, gas and chemical industries, including offshore installations. Also, a number of varied industrial contractors use Medscreen’s services.
Pre-employment checks can very quickly demonstrate if there are any existing concerns or any inherent liabilities in a new employee. And the constant vigilance of on-going spot testing is designed to find any irregularities, should they arise.
“It’s not completely a risk minimising tool,” said Grassby. Medscreen also offers customised education and training programmes for corporate awareness into the many varied issues. It also helps develop internal communication strategies.
There are push and pull factors which are driving the demand for the services Medscreen offers. The push side covers the regulatory issues which are, in turn, driven by the need to minimise the effects of potential litigation. The pull side can be defined by companies adopting better business practice, Begley explained. “Companies like Railtrack are one of the main drivers behind developing a framework,” she added.
While Medscreen provides services to companies in many different jurisdictions, they are all subject to regulatory pressures to monitor the safe execution of their businesses. Taking the UK as an example, the following pieces of legislation combine to ensure companies are providing sufficient cover:
* Misuse of Drugs Act, 1971: whereby an employer is required to ensure that it does not knowingly allow its employees to misuse substances in and influencing the workplace.
* Health and Safety Act, 1974: protection to cover employer, employees and extended to cover the general public.
* Transport & Works Act, 1992: governing the misuse of alcohol and illegal drugs relating to railways and tramways.
However, International Maritime Organisation-driven policies highlight the advanced stage that industry has reached in addressing the need to scrutinise the issue of testing. Most recently, the International Ship Management Code (ISM) 1998, stipulates that cover should be in place for identifiable and general risks.
The scope for European Union-wide legislation looks set to arrive, albeit with the usual time lag such legislation is always subject to. “Increasingly, we will see more pan-European legislation,” said Begley.
The acid test
What Medscreen offers more than other drug-testing companies is a sophisticated co-ordinated spot-check service, which underscores the complete randomness or an unbiased approach, explained Grassby. While the actual clients cannot be named because of confidentiality clauses, the following case study serves to illustrate how Medscreen operates.
Medscreen sells its services to a corporate client. It might sell its services to a shipping company with, say, 50 commercial vessels operating around the world. This might comprise a strategy whereby it tests the workforce on a pre-employment basis, everyone on an annual basis, and about 50 per cent of the workforce again, but this time on a spot-check random basis.
Medscreen, using the company’s shipping schedules, will work out a worldwide testing plan, randomly boarding ships without notice. The testing team might target a tanker docking at Singapore. The team boards the ship and takes a number of precautionary measures to ensure the tests are not subject to potential tampering. These include sealing taps and waste exits, and also staining toilets with blue dye to ensure no misuse in the testing process.
A urine sample which is the only form of sample Medscreen takes – is taken from an employee and split into two specimens. They are both bar coded and returned to Medscreen’s laboratory in east London. The importance here is to ensure a secure charge of custody. “This proves, by a court ruling, that it is tamper proof, right through to the testing process,” said Grassby. The urine test is examined for up to 14 specific substances.
If a test scores positive, then the second sample is sent off to an independent laboratory where the tests are undertaken once more. A test report is provided to the client, which also comprises qualitative analysis of the findings, thereby attempting to put any results into circumstantial context, should this be appropriate. Medscreen’s testing focuses on urine samples and does not feature blood, sweat and hair samples.
Like with any testing process, there will always be some avoidance methods people will attempt. The testers are experienced and not even the most sophisticated of fake bladders are a surprise. “There’s not much that the testers have not seen,” said Grassby.
However, the discovery of a positive test is not seen as the end of the process for many companies, Begley explained. Many companies would be keen to pinpoint the cause of the problem and help the individual overcome the use of or addiction to a substance, through a rehabilitation programme.
Far from seeing the role of Medscreen as a corporate policing tool, greater awareness is said to lead to fewer problems. “In some cases there are employees contacting Medscreen asking us for drug and alcohol programmes for their companies,” said Begley. “Once you have a policy in place, it adds protection.”
Research statistics by the UK’s Chartered Institute of Personnel Development last year show the UK lags behind the US. While UK testing tends to be more ongoing than testing in the US, which is more pre-employment-orientated, the number of companies with such policies in the UK is just 8 per cent, compared to 80 per cent in the US.
However, like most US trends, Europe is starting to follow suit. “Medscreen has the opportunity to capitalise on important trends in occupational healthcare,” said Grassby. “Corporate insurance policies have gone through the roof.”
While occupational healthcare may have been a low-priority issue for the boards of many large companies, with the fact that finance directors are now receiving demands for higher insurance premiums, the issue is being acknowledged as a more important one. “Occupational healthcare will become a more corporatised business in the future,” he added.
While many financial services companies have sophisticated on-going testing in place, many do not and are perceived to be taking high risks. But Medscreen is not looking at financial organisations as its next targets.
Growth for the company to date has been organic and has focused on its core industry groups, but Begley said that new industries are being targeted for future growth. Among these is the airline industry. “The aviation industry is not up to speed as much as the maritime industry in this field,” she said.
While there may have been some union opposition in the past, there is a growing and general acceptance that testing will lead to a safer working environment, if the correct chain of custody that it using accredited laboratories and procedures is implemented.
The key rationale behind the Sagitta investment in Medscreen is that this sector will continue to grow. It fits into the firm’s target of UK growth sectors and its investment range of between GBP2 million and GBP10 million. But macro factors such as an increasingly litigious society, corporate protectionism, employee care and financial risk management convinced Sagitta to invest. “It didn’t take us much time to get comfortable that the application of the business will grow,” Grassby said.