Psychemedics Corporation

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Psychemedics Corporation

125 Nagog Park
Acton, Massachusetts 01720
U.S.A .
Telephone: (978) 206-8220
Toll Free: (800) 628-8073
Fax: (978) 264-9236
Web site: http://www.psychemedics.com

Public Company
Incorporated: 1986
Employees: 97
Sales: $23.4 million (2006)
Stock Exchanges: American
Ticker Symbol: PMD
NAIC: 621511 Medical Laboratories

RESEARCH BEGINNINGS IN 1977

PSYCHEMEDICS FORMED: 1986

INTERNET SERVICE DIVISION ESTABLISHED: 1999

PRINCIPAL OPERATING UNITS

PRINCIPAL COMPETITORS

RESEARCH BEGINNINGS IN 1977

Responsible for founding Psychemedics and spearheading its initial research were Dr. Werner Baumgartner and Annette Baumgartner. Born in Austria, Werner immigrated with his family to Australia after World War II when he was around ten years of age. After earning a doctorate in physical chemistry from the University of New South Wales in 1963, he went to Los Angeles to work at the Jet Propulsion Laboratory at the California Institute of Technology, where he became involved in researching organic compounds that could serve as superconductors. Four years later he began doing research for the U.S. Department of Veterans Affairs, and eventually became laboratory director at the Wadsworth Veterans Administration hospital in Los Angeles.

His wife, born in Germany, was also a chemist, and it was through her that he became interested in hair. In the late 1970s she pursued research for the U.S. Justice Department to develop a “chemical fingerprint” out of hair, the idea being to separate out proteins, trace elements, fats, and other elements to determine a unique signature for a person’s hair. Although the concept did not pan out, it prompted Werner Baumgartner to wonder if drug deposits left in hair could be analyzed using similar techniques. Moreover, it was well-established that hair and fingernails absorbed substances that entered the body, and theoretically could serve as a record of their introduction.

After several years of effort, Baumgartner was able to develop a technique to dissolve hair and its proteins while leaving organic substances untouched. Should drugs be included they could then be detected through the use of radioimmunoassay. Baumgartner gained acclaim by procuring some strands of hair from the 19th-century poet John Keats by purchasing a framed lock of hair from a Texas antiquarian book dealer. Despite the age of the hair, Baumgartner was able to detect that the poet, who died at the age of 26 from tuberculosis, had been taking an increasing amount of opium before his death, most likely used in the painkillers he was given. Baumgartner’s find created a minor sensation, enough to warrant a mention in a 1985 Time magazine cover story about drugs in the workplace.

PSYCHEMEDICS FORMED: 1986

After the Time article, Baumgartner and his wife were contacted by a pair of men offering to help them raise money to start a company to commercialize their technology. Thus, in September 1986 the Baumgartners and their partners incorporated Psychemedics Corp. and the company set up shop in Santa Monica, California. Naive about the ways of business, the couple found themselves involved with a pair of stock promoters. According to Forbes, “In January 1987 Kashner Davidson Securities Corp., of Sarasota, Fla., peddled $3.5 million of Psychemedics stock to the public at $2 a share, with the help of a St. Louis ophthalmologist and a former car salesman.” What the Baumgartners did not know was that “Kashner and its principals had been repeatedly fined and censured by the National Association of Security Dealers for record keeping. In addition, a Kashner employee had earlier embezzled money from customers’ accounts.”

Baumgartner was able to get money to continue his research, but the new company was poorly run. Its two presidents during the first two years after going public lost almost $3 million on revenues of just $800,000. “Any danger of bankruptcy was averted [in 1989],” reported Forbes, “when a group led by Boston-based investment banker A. Clinton Allen heard about Psyche-medics’ troubles and negotiated a deal to buy 54% of the teetering firm at 45 cents a share.” Other investors in the group that paid $1.8 million for a controlling interest in the company included Huizenga, John Melk, and Donald Flynn. News that such respected investors as these were in charge gave a boost to the stock, which immediately increased in price from 75 cents to nearly $3. The investment group then acquired another 4 percent stake in June 1990. The company’s headquarters, in the meantime, was relocated to the Boston area.

COMPANY PERSPECTIVES

Psychemedics Corporation is in the business of helping to eliminate one of our society’s most dangerous and pervasive problems: drug abuse.

Psychemedics began to pick up major clients at the start of the 1990s, including Steel-Case Inc. and Harrah’s Lake Tahoe Resort Casino, which both used the company’s hair test to screen job applicants. Helping the technique gain further acceptance in the marketplace, a U.S. district court admitted hair analysis in 1990. By the end of 1991 the company’s roster of clients numbered 200, resulting in annual revenues of about $2 million. Psychemedics also received a $2 million infusion of cash that year, the result of a private placement of stock by Allen & Company, and a new chief executive officer, Raymond C. Kubacki, Jr., who came on board in July of that year. Baumgartner became chairman of the board. Kubacki received an undergraduate degree from Harvard University in 1967, followed by a master’s of business administration from the school three years later. He then worked as an investment officer at Massachusetts Financial Service Company, and became a senior executive at ACME Cleveland Corporation and Reliance Electric Company.

After two full years with Kubacki at the helm, Psychemedics turned profitable, netting $953,000 on revenues of $6.6 million in 1993. The following year, the company achieved another milestone when Baumgartner received his first patent for the universal drug extraction procedure and immunoassay technology used to detect drugs in hair specimens. His initial patent application had been filed in late 1987. Then, in 1995, Baumgartner received an additional patent for a screening assay for marijuana, which was especially difficult to detect in subjects.

Revenues grew to $10.1 million in 1995, and net income totaled $1.6 million. During 1995 Psychemedics began marketing its hair analysis services to public and private schools. The company also began targeting the home market, introducing the PDT-90 personal drug testing service, which analyzed children’s hair submitted by concerned parents. They would then be notified by mail and told if their offspring tested positive for marijuana, cocaine, heroin, or other drug use. The service created an instant controversy. According to the New York Times, it “immediately raised concerns among school psychologists and advocates for children, who said that turning parents into drug testers could do more emotional and psychological harm than good in some families. And some lawyers and former government officials also raised questions about the accuracy of testing for drugs in hair samples.”

The U.S. Food and Drug Administration (FDA) also soon raised its own concerns, maintaining that the Psychemedics’ mail-in kit, which consisted of an envelope and instructions, required approval as a medical device, and therefore clinical trials were necessary. Facing a ban on the kit, Psychemedics went to court to challenge the FDA’s contention that the envelope was a medical device. “It’s made of paper; there’s nothing special about it,” maintained the company’s attorney, William Thistle. “It doesn’t diagnose anything.” In March 1996 the FDA dropped its objections.

Psychemedics completed its one millionth test in 1996. Sales increased to $12.2 million for the year, and net income approached $2.5 million, permitting a 3 percent stock dividend. The company’s largest customer, not surprisingly, was Huizenga’s Blockbuster Video, which accounted for about 15 percent of revenues. Psychemedics made its PDT-90 testing service available through more than 10,000 chain and independent drugstores in 1997 to further spur sales. At the same time, the company began to add corporate customers at an even faster pace, topping the 1,100 mark by the end of the year. As a result, revenues increased to $15.4 million in 1997, although net income remained flat at $2.5 million.

Psychemedics was also looking at international opportunities. In 1998 the company received a Japanese patent for its technology, which along with patents in the United States and Europe positioned Psychemedics to make its services available around the world. In the meantime, however, the company focused on the domestic market, where its technology continued to meet resistance from some quarters. For example, in 1998 hair testing made headlines when the Chicago and New York City police departments considered expanding its use beyond the testing of recruits to include all members of the 13,000-member force. The American Civil Liberties Union (ACLU) of Illinois urged Chicago’s mayor to refrain from using hair analysis, calling it inaccurate. While the ACLU objected to all drug testing because of privacy concerns, spokesperson William Spain said hair analysis was “the worst of the lot.”

INTERNET SERVICE DIVISION ESTABLISHED: 1999

Whether it was urinalysis or hair analysis, drug testing in the workplace had become commonplace in the United States, and not just for such safety-sensitive positions as truck drivers and airline pilots. It was also being done as well at private schools. As a result, by the end of the 1990s, drug testing had emerged as a multibillion-dollar industry. Competing against giant corporations that conducted less expensive urinalysis, Psychemedics continued to carve out its niche. In 1999 it conducted its two millionth test and positioned itself for further growth by establishing an Internet Service Division, which then launched several web sites where companies and individuals could arrange to have hair samples tested. For the year, Psychemedics increased revenues to $19.7 million, while netting $2.3 million.

KEY DATES

1986:: Psychemedics is founded in Santa Monica, California.
1987:: Company goes public.
1990:: Headquarters move to Boston area.
1994:: First U.S. patent is received.
1995:: Personal drug testing service is launched.
1999:: Internet business model is introduced.
2000:: Patents are received in five European countries.

As Psychemedics entered the 2000s, changing market conditions had an adverse effect on its business. Sales dipped to $19.2 million and net income to $1.7 million in 2000 because of the erosion of manufacturing jobs in the United States, especially in the automotive industry, which led to less hiring and a diminished need for drug testing. The company was able to obtain patents in Germany, France, Italy, Spain, and the United Kingdom, as well as a third U.S. patent in 2000. It also received FDA clearance on a hair test for opiates, and made a breakthrough by developing the first hair test capable of detecting Ecstasy. The following year, it received FDA approval for a hair test to detect cocaine, but matters grew only worse as the economy lapsed into a recession. Revenues in 2001 fell to $15.7 million and Psychemedics barely broke even, netting just $233,000. Business did not show much improvement the following two years, as revenues stalled around $16 million and net income settled around $1.2 million.

In 2003 Psychemedics hired the New York investment banking firm of Needham & Company to “explore all opportunities to increase shareholder value.” Clearly the company was up for sale at the right price, but no deals were made, and in 2004, as the economy improved, testing volumes increased and so too did the company’s fortunes. Revenues totaled $18.9 million in 2004 and improved to $21.4 million a year later. Net income jumped to $2.7 million in 2004 and topped $4 million in 2005. The following year continued to bring better results, as Psychemedics posted sales of $23.4 million and net income of $4.9 million in 2006. Through the first quarter of 2007, the company was on pace to enjoy a record year despite a challenging economy. The difference in the company’s performance was tied to a greater acceptance of hair analysis technology in the marketplace.