New test for Medtox Scientific

Forget the stock market and the gross domestic product. For a really good gauge of the economy, consider Medtox Scientific Inc.

The New Brighton-based company is mostly known for providing drug testing services to employers. But business has been off lately and it's not hard to see why. With companies hiring fewer people, there's simply less demand for those ubiquitous urine cups.

"When the economy is strong and people are hiring a lot, our business does very well," said Jim Schoonover, a Medtox vice president and chief marketing officer. "We are a very good barometer for the broad economy. When the economy starts to slow down, we start to see customers slow down the amount of people they are hiring, so our business slows down."

But Medtox is hardly sitting still. The company is aggressively expanding its clinical lab business, offering new testing services for cancer, sexually transmitted diseases and drug-resistant bacteria. Medtox is particularly interested in the $200 million Twin Cities market, where it's trying to court local doctors for business that would normally go to laboratories in Chicago and Kansas City.

Faced with a weak economy, CEO Richard Braun says he is trying to "recession-proof" Medtox by focusing on less cyclical services. Employers may not always hire, but doctors will always perform Pap smears.

"I sort of wished we done it a little faster, based on current conditions," Braun said. The clinical lab business "is a little more recession-proof and it isn't seasonal and there is not as much volatility. It's a way to diversify what we do."

Diverse source of revenue

That Medtox was able to grow sales in this economic climate is impressive, said Steven Crowley, an analyst with Craig-Hallum Capital Group in Minneapolis. Still, the hiring slowdown will continue to hurt Medtox, although efforts to capture the business of local doctors from national competitors should help blunt the impact, Crowley said.

Like most small stocks, Medtox has taken a beating on Wall Street. The company's shares closed Thursday at $8.39, down 53 percent since late August.

But Crowley believes Medtox has positioned itself nicely once the economy recovers. And if the company's local strategy succeeds, Medtox could be an attractive acquisition target, perhaps from the very competitors it seeks to dethrone, he said.

Quest Diagnostics Inc. and Laboratory Corp. of America (LabCorp) dominate the national market. But neither operates a lab in Minnesota, which means a doctor would need to ship a blood sample out of state.

Medtox's pitch? A local lab can not only offer quicker turnaround times but also provide better customer service. Some of that argument makes sense, experts say.

Of the $200 million Twin Cities market, Braun figures he can peel away up to $100 million over time, a nice bump considering Medtox's sales last year totaled $80 million.

However, Quest and LabCorp can offer a wide variety of services and better pricing for clients who need large amounts of testing, Breckenridge said.

Debra Privett, a lab manager for Health Check Laboratories in Annandale, said she used to send out specimens to California for specialized testing and would get results back in four or five days. Privett switched to Medtox because the company could offer results back in hours.

Now "I don't have the doctors breathing down my neck," she said.