PharmChem Stock Price, News & Analysis

PharmChem, Inc. (OTC: PCHM) operates in the medical laboratories industry within the broader health care and social assistance sector. According to company statements, PharmChem focuses on forensic drug testing using sweat and is described as a leading provider of sweat patches to detect drugs of abuse. Its business model has been characterized as cashflow generative and capital light, with operations structured to manage the specific risks associated with drug testing.

The company has emphasized that it has been operating virtually for many years. After closing its own laboratory in the past, PharmChem reports that it outsourced lab services and reduced its payroll to a small core team. It highlights long-standing relationships with its product and lab partners, as well as with customers who rely on its sweat patch drug testing services. The company notes that its employees have many years of combined experience with PharmChem.

Business focus and operating model

PharmChem’s communications describe a business centered on the sweat patch used to detect drugs of abuse. The company notes that there is a single laboratory that screens its specimens, and that reagents used to screen the sweat patch are sourced from a limited number of suppliers. PharmChem points out that these supply and processing arrangements are important to its ability to continue offering its drug testing services.

The company has indicated that it maintains sizable cash balances due to risks it considers unique to drug testing. These include dependence on a single lab for screening, reliance on one or two suppliers for certain reagents, potential regulatory requirements from the U.S. Food and Drug Administration (FDA) related to its 510(k) submissions, and obligations related to liability insurance deductibles. PharmChem states that it has implemented FDA-mandated Unique Device Identification (UDI) regulations, which are aimed at making product recalls more efficient and timely.

Corporate history and regulatory status

PharmChem reports that it filed a Form 15 in 2004 to deregister from the U.S. Securities and Exchange Commission (SEC) in order to reduce annual costs. This deregistration was described as part of a broader effort to conserve cash. The company has also referenced earlier decisions to close its laboratory and obtain stockholder approval authorizing the board to voluntarily dissolve and liquidate, as it deemed appropriate. Despite those steps, the company’s later communications describe a period of continued operations and financial improvement over subsequent years.

PharmChem’s shares trade on the OTC market under the symbol PCHM. The company has discussed corporate actions such as a modified Dutch auction tender offer for its common stock, approved by the board of directors, to repurchase a specified aggregate amount of shares within a defined price range. The tender offer was described as a mechanism to give shareholders the opportunity to tender all or a portion of their holdings.

Acquisition by Alcohol Monitoring Systems, Inc.

PharmChem announced that it entered into a definitive agreement to be acquired by Alcohol Monitoring Systems, Inc. Under the terms of this agreement, PharmChem shareholders are to receive cash consideration per share. The company stated that the transaction was unanimously approved by its board of directors and that it received support agreements related to a majority of its outstanding shares. The acquisition was described as the outcome of a strategic alternatives process in which the board considered options such as a sale of the company, merger, or other transactions.

Following the announcement of the agreement, PharmChem later reported that its shareholders approved the acquisition by Alcohol Monitoring Systems, Inc. at a special meeting. The company indicated that it expected consummation of the transaction to be effective at the close of business on a specified date, subject to customary closing conditions. These communications signal a transition in PharmChem’s corporate status from a stand-alone public company to being part of Alcohol Monitoring Systems, Inc.

Strategic alternatives and governance

Prior to the acquisition agreement, PharmChem’s board of directors announced that it was exploring strategic alternatives. The board stated that it would consider various options, including acquisitions, a potential sale of the company, a merger, or a debt-financed special dividend. The company indicated that it had set up a data room for interested parties and that the review process did not have a fixed deadline or guaranteed outcome. Ultimately, this process led to the definitive agreement with Alcohol Monitoring Systems, Inc.

PharmChem has also released communications relating to proxy contests and board composition. In one such communication, the company responded to an opposition slate of board candidates, emphasizing the experience of its existing board and management in forensic drug testing using sweat. The company highlighted its history of operating virtually, its focus on cost control, and its philosophy regarding cash balances and risk management.

Risk management and operational considerations

In discussing its operations, PharmChem has identified several key risk factors: reliance on a single laboratory for specimen screening, dependence on one or two suppliers for reagents used with the sweat patch, potential FDA requirements to re-file 510(k) submissions for review and clearance, and obligations related to liability insurance deductibles. The company has stated that it considers it financially prudent to accumulate cash to guard against these risks.

PharmChem’s board has described the business as having evolved after the closure of its former laboratory and the settlement of claims with vendors. Over a multi-year period, the company has reported improvements in sales, pre-tax income, cash flow from operations, and the repayment of debt, as well as dividends paid to stockholders. These historical statements are presented by the company to support its view that its business model has been beneficial to stockholders.

Position within the health care and social assistance sector

Within the health care and social assistance sector, PharmChem’s role is focused on drug testing using sweat patches rather than operating a traditional clinical laboratory. Its communications emphasize specialized expertise in forensic drug testing using sweat, long-term relationships with service partners, and adherence to regulatory requirements related to medical devices and unique device identification. The company’s later decision to be acquired by Alcohol Monitoring Systems, Inc. reflects a view by its board that PharmChem and its products would be more valuable as part of a larger organization.

Key points for investors and researchers

• PharmChem, Inc. operates in the medical laboratories industry with a focus on sweat patch drug testing.
• The company has described its business as cashflow generative and capital light, with virtual operations and outsourced laboratory services.
• PharmChem filed a Form 15 in 2004 to deregister from the SEC as part of cost reduction efforts.
• The company has highlighted risks related to single-lab dependence, limited reagent suppliers, FDA regulatory requirements, and liability insurance deductibles.
• PharmChem entered into and obtained shareholder approval for an acquisition by Alcohol Monitoring Systems, Inc., signaling a transition away from stand-alone public company status.