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Drug Testing News

In your hair: Start-up betting on new drug-test technology


Posted Saturday, August 16, 2003 - 4:33 pm

By Ben Szobody
BUSINESS WRITER

Before the spring snow had melted outside Albany, N.Y., a biotech start-up flew top executives and advisers to Greenville to peddle a cloaked drug-testing invention to Upstate corporate heavyweights.
Strands of human hair were central fixtures in the mission. Decaf coffee served as a conceptual model.

The spirited group — including former Michelin North America managers and past R.J. Reynolds, Liggett Group and American Brands executives — mounted a challenge to what has become the "gold standard" of employment drug testing: human urine.

To test hair instead — and in a portable, suitcase-sized appliance — is what several of Greenville's corporate suits heard from the Schuylerville-based DrugRisk Solutions LLC. CEO David Brill, an M.D. with a tight smile, declines to name the Upstate firms involved in the talks, though there will "unquestionably" be major local partnerships announced this year, he said.

What he does say is that DrugRisk's brainchild could help health insurance firms peg smokers; give small contractors and big-time casinos the means to vet new hires almost instantly; and even alleviate the states' bath in red ink.

Drug testing experts say they've never heard of anything like Brill's contraption, though it could face competition from cheaper drug testing alternatives.

Already, shipbuilding giant Northrop Grumman is involved in the technology. Global contractor Bechtel will get a first look at the microwave-sized cube early next year.

The employment drug test circa 2003 has become more of an IQ test, Brill says, with "any one of 30 ways to beat urine." Only the stupid fail.

Still, the cost of a plastic cup and a dipstick has been hard to beat.

But DrugRisk will soon have its suitcase — what Brill calls a "clunker prototype" rolls out next month. So far, venture capital pockets and private investors have anted up more than $2 million without seeing the invention.

The firm currently operates from two New York trailers, with plans to grow a business of nearly $100 million in revenues within six years. It helps that federal regulations simply don't exist for hair testing.

Brill's chemical technology isn't new: DrugRisk soaks trace amounts of chemical substances from human hair the way caffeine is extracted from coffee.

It's the suitcase application that's novel. Brill won't say how much he plans to charge for the boxy invention, only that he'll follow the strategy of razor companies Gillette Co. and Schick- Wilkinson Sword, which hunt customers by distributing razor handles for nearly nothing, then marking up the disposable blades for a profit.

DrugRisk sales will depend on a disposable hair cylinder.

About 10 hairs — compared with 50 to 100 required for major laboratories — are sealed inside the tube, then the chemicals extracted without digesting the hair.

It's an InstaTest. A purging experience. "Microwave testing," Brill calls it.

His eventual aim is simple: sell out when the competition arrives and profits are thick.

Unlike any other

Testing experts say convincing small businesses to use portable drug tests — or truly selling the product en masse — could take a long time, and competition could come from alternative sweat and saliva testing methods, which are cheaper.

But at a lower cost than lab hair tests and less than 30 minutes' turnaround on individual tests, Brill's invention is unlike any other on the drug testing market, consultants and trade groups say.

In a wire-bound printout of a PowerPoint presentation, he outlines more than $900 million in potential product sales. Actual estimates to investors are much more conservative, though Brill said the numbers were intended to be beaten.

He plans to sell 4,000 of the devices by 2008 to the military, life insurance companies and maybe McDonald's.

Investors' cumulative return on equity, though negative or nonexistent in the first three years, could exceed 400 percent by then, he projects.

Dan Rawls, president of a small Piedmont contractor and a state representative for the National Association of Home Builders, said once small businesses understand the cost benefit of testing for drugs, they could buy into the DrugRisk product.

"Insurance is going crazy," Rawls said, and when combined with the cost of worker's compensation is among the biggest problems small construction outfits have faced over recent years.

Brill concedes DrugRisk doesn't have the marketing muscle to deliver its product to the small- and midsized businesses that are 80 percent of its potential market and where just 3 percent of firms test for drugs. So it plans to partner with insurance providers that will charge companies lower premiums in exchange for DrugRisk certification that employees are clean.

That could work for all but the smallest contractors, Rawls said.

"The client will get you" if a contractor is using drugs, he said. "It's automatic — you go to court, and they'll burn you to the bone right there."

Major corporations have long had the economies of scale to send employee hair samples to a laboratory for the more reliable testing method — drug use shows up over the preceding 90 days with a hair test, instead of the two- or three-day window for urine.

But hair tests have typically cost $60 to $80 per employee, unless testing is done at high volumes. The lengthy turnaround time also kept urine business flowing. Brill's DrugRisk product is portable, works in under half an hour and costs an average of $25 per test — in the same ballpark as the urine method, he said.

Rawls said that price tag is "probably a reasonable rate."

Laura Shelton, executive director of the Drug and Alcohol Testing Industry Association, said on-site urine tests can actually cost as little as $5 per test, and saliva versions can cost less than DrugRisk's price, too.

Brill counters that he's selling 30 times more information.

Ethical dilemma?

Some question the premise to begin with.

Theodore Rosen, director of the Organizational Behavior and Development program at George Washington University, said improved drug testing methods pose greater ethical dilemmas.

The workplace test leaves interpretation of harmful substances up to the employer, turns companies into enforcers and yields more information on an employee than superiors are entitled to know, Rosen said.

The issue, Rosen said, "is beyond ethical, it's emotional even."

"We certainly can measure much more accurately now a person who has used drugs in the past," he said. "The question of ethics is, when in the past, what is the relationship to current performance, and is there really a cost?"

But Brill doesn't flinch when describing how his secret could reshape hiring practices and health insurance plans at major corporations, manual- labor businesses and even the federal prison system.

Brill has raised $2.2 million for his enterprise, more than half from a single New York venture capital firm. He needs another $6.5 million in two years.

Projections to potential investors show nearly $100 million in fifth-year revenues, revised downward from earlier projections to reflect the economic weather and ensure the goal is beaten, Brill said. Net income in 2008 is projected at roughly $25 million.

Shelton said without knowing about DrugRisk, she's skeptical of the numbers.

"It's hard to think of a company coming out and having $100 million in revenue when the entire (employment drug testing) industry is only doing $767 million," she said. "That's spread out between a lot of companies."

Brill said he's targeting more than just employment drug testing, and his is a conservative estimate already.

"That's the way that you manage expectations for investors," he said. "You clearly do not want to miss expectations, you want to exceed them."

It's a look into Brill's method of wooing the deep pockets, a significant portion of whom are in the Upstate and Charlotte area, he said. Doug Cummins, a former executive with cigarette makers R.J. Reynolds and The Liggett Group and global carpet-maker Salem Carpet Mills, said Brill has a head full of industry knowledge that sits well with venture capitalists.

"He's very credible," said Cummins, now a DrugRisk director. "He comes across very well."

Brill talks of how to "capture investors' imaginations" with drug testing scenarios.

Say a state drug rehabilitation program switched from urine testing to the more reliable hair test. Where patients could have used another person's urine, or ingested masking agents, or simply abstained from illegal drugs for three days, the hair test would unmask the previous 90 days of substance abuse.

"It puts the relationship on a relationship of truth instead of unsubstantiated stories," Brill said. He believes state prisons and drug programs could cut costs dramatically by certifying drug-free inmates and workers and letting those who passed periodic hair tests live in the community.

Per person, it would cost about $100 a year to keep tabs on drug use.

Affecting bottom lines

Despite some naysayers, federal drug testing studies say the effects of employment drug testing are showing up on companies' bottom lines. But hair testers are still trying to bounce back from a series of damaging studies that showed various hair colors and racial factors could skew test results.

The studies were not valid, Shelton said, but the stigma remains for many employers.

Numbers abound to support workplace testing in general, but so do claims that drug-abusers do little financial damage overall to corporations and that government studies are biased.

A study of construction workers in 2000 and 2001 found an estimated 13 percent, or 785,000 workers nationwide, used illicit drugs according to the U.S. Substance Abuse & Mental Health Services Administration.

Another study using 1997 figures reported nearly 8 percent of all full-time employees use illicit drugs, with food preparation workers the heaviest abusers at nearly 19 percent.

Terry Hommel has studied substance abuse policies locally at Michelin, Fluor Corp. and Hartness International as a contracted medical adviser and said that based on findings in a 1992 National Institute on Drug Abuse study, a worker using illicit drugs today costs his employer roughly $13,500 to $18,000 per year in added worker's compensation, absenteeism, sick time and other factors.

"Time is money," Hommel said, stating that DrugRisk's product will likely be well received. She is on the medical advisory board for the company but not financially involved, she said.

Rosen, the George Washington professor, said he doubts federal drug agencies and their research interests can be trusted to release accurate numbers. Since testing began during the Reagan administration, the practice has crept further into the workplace than the drug abuse warrants, he said.

Where some occupations — take heavy machine operators — obviously need to be clean, "in a lot of other jobs is where the rub came, when you're a file clerk and they have you go for random testing," he said. "And then random testing turned out to be not so random all the time."

Accuracy spawns lawsuits

The simple accuracy of a hair test has already spawned invasion-of-privacy lawsuits, Hommel said, since the tests can expose other substances in a person's body, including prescription drugs and harmless chemicals.

The tests can show second-hand smoke, legal prescription drugs or recreational drugs that could be used away from the workplace, Rosen said.

"If I'm clean when I come in to work ... then what business is that of yours?" he said. "How far do we want to go with this?"

But Rosen said that if companies believe they'll save money by testing employees, they'll follow the green.

Hommel said hair testers have won court cases because they could prove scientifically that their methods were closely modeled after the federal government's testing guidelines.

"Hair," she said, "can do nothing but help employers."

Brill said DrugRisk is getting ready to roll out software policy wizards that will prevent abuses of its system. Initial models will be set up to detect only illegal drugs, although later stages will be able to highlight legal substances that could affect work performance.

Lee Cato, director of the state Department of Alcohol and Drug Abuse Services, said DrugRisk could benefit from the well-known beatability of urine tests, though he doesn't think hair testing is as fool-proof as advocates claim.

"It's just like anything else, if it's out there long enough people will figure out a way to get around it," Cato said. Still, "I can understand how a hair follicle testing program can be a lot more secure."

Needs FDA clearance to fly

Brill said DrugRisk can reach into the "hundreds of millions" in revenues within a few years, after which he'll entertain offers from interested behemoths.

That makes the firm a sort of high-dollar venture capital investment vehicle.

In the biotech sector, however, the gratification is delayed. Roughly half of his investors have no biotech investing experience, Brill said.

To crack the medical and drug rehabilitation markets, DrugRisk needs the Food and Drug Administration's 510(k) clearance that approves the product's competence. Brill doesn't plan to apply for the clearance before 2005 — the FDA requires 90 days before market distribution — and he said other markets could be tapped without the FDA stamp.

To explain the purported unlimited sales potential, he points to the government's 8 million-plus Department of Transportation employees who must be drug tested regularly. Or the sea of municipal police departments who do officer checks.

Brill also believes he can help McDonald's, which recently announced it would stop selling meat from antibiotic-enhanced animals, as well as state governments saddled with high costs from non-violent drug offenders.

Enter drug-free certification administered by DrugRisk.

"When you start looking at small employers and medium-sized employers, it's a little bit more of a sell," Hommel said.

Brill said once he partners with insurance firms, a win-win could be constructed: the insurer might be able to reduce premiums by a $1 increment, for example, but give the client 75 cents back and pocket 25 cents for itself, he said.

Greg Crowe, director of business health services at Bon Secours St. Francis Health System, said the roadmap is simple: show small businesses the money.

His St. Francis department sees 85 percent to 88 percent of all employment drug tests being done with urine.

"I still scratch my head and wonder, ÔWhy are we still doing this?' " when there's better technology, Crowe said.

If DrugRisk offers foolproof certification that employees are drug free, that could give some certified companies a bidding advantage on various projects, or put them a step ahead to nab government contracts.

"It's going to be pure and simple a matter of education," he said.

That could take awhile.

Marie Sitter, human resources manager for Span-America Medical Systems Inc. and past president of the Greenville Area Personnel Association, said drug testing "hasn't been one of the big topics" among local HR professionals.

It's also the kind of corporate decision that can gobble a lot of time.

"It would be one of the things a company would typically have some legal review on," Sitter said. "It takes a lot of thought, and it's not something where you can say, ÔOK, tomorrow we're going to start something.' "

Cato, the state drug services official, and Shelton, of the testing industry association, said many firms will likely wait and watch.

Brill is ready to break out.

He has a corps of big-business advisers and employees who have peddled their way into major glass offices like the ones at Bechtel and Northrop Grumman and unnamed local heavyweights.

He has one patent issued, two pending and two more coming. Another venture capital firm is mulling an investment.

He plans to ship prototypes to select firms in the first quarter of next year, then roll out the product in the Southeastern corridor from Birmingham to Raleigh-Durham — with Greenville at the nexus. It's the same place Brill's idea for the company was born, while he was corporate medical director for Michelin.

"In some ways we never left the Upstate," he said. His accountant, attorney and PR rep are still here. "We've been running dark for years now. Now we're going to come out into the daylight."