Drug and Alcohol Testing, What's the Deal?

Arrowpoint Advisory's Karen Dawaf discusses how drug and alcohol misuse has widespread social and financial implications but it is also creating exciting business opportunities.

The drug and alcohol problem

Drug and alcohol misuse is a highly complex issue with widespread social and financial implications. The UK is dubbed the 'addiction capital of Europe' with alcohol and drug related problems costing society over £36 billion per annum, the majority of which is health, crime and social care related.

• Over a third of adults have taken drugs at some point during their lifetime and c.1.2 million individuals are affected by drug addiction in their families.
• Alcohol is the third biggest risk factor for illness or death with c.1.6 million adults in the UK showing signs of alcohol dependence.

Prevention

The UK Government is actively engaged in targeted prevention, early intervention and harm reduction. Research carried out by Public Health England indicates that the benefits of this approach to society are reduced crime, better public health and a lessened financial burden on society. However in order to prevent, one must first be in a position to identify and detect the problem. With the support of the courts, Local Authorities and employers, the demand for drug and alcohol testing in the UK is at an all-time high and growing fast.

Detection & demand

As methods of drug and alcohol testing have evolved, the results have become more accurate and reliable which in turn has driven demand. A combination of increased awareness of the benefits of testing, ever-improving accuracy and technological advancement has created a testing market worth an estimated £167 million in the UK. It is expected to increase to £231 million by 2019 due to significant and growing demand from sectors requesting testing, such as family law, workplace and law enforcement. Within the UK, testing is largely relied upon as evidence within child protection cases whilst workplace testing is an area of increasing growth and exciting potential. The global market is worth £3.8 billion, dominated by North America.

With demand growing, attention turns to supply, the testing providers.

Supply

The competitive landscape is highly fragmented, with few key players dominating market share. Barriers to entry are high due to:

•   accreditation requirements;
•   quality standards;
•   scarcity of trained laboratory and reporting scientists;
•   reputational risk; and
•   capital investment.

As a result, new market entrants are in short supply and there is a significant opportunity for market consolidation particularly for those looking to enter the market, grow market share or diversify their service offering.

Outlook for M&A

M&A activity in the UK has been limited, the last transaction of significance was the acquisition of initial industry consolidator Concateno by Alere in 2009 for £149m, representing 11.9x historic EBITDA.

In a market primed for consolidation with attractive growth prospects, increasing demand and limited supply, there is a compelling rationale for both strategic acquirers and Private Equity investors to explore M&A in this sector.

Sources: Public Health England, Connell Consulting

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