Quattromed : Failing the Taxpayer's Sniff Test

Quattromed : A test no taxpayer wants to take

The Estonian startup world was aflutter later week with the news that Tartu-based laboratory testing company Quattromed HTI was acquired by the German company Synlab. Exact terms of the deal were not disclosed, but given that Quattromed is a profitable and successful company, we can only assume the deal worked out well for both sides.

Interestingly, the acquisition received a lot less press than we expected, with most of the usual Estonian startup cheerleaders focused on an article in the Economist about Estonia last week, at least until the comments section of the article started going in a direction they didn't like.

Ok, there were two articles in Äripäev about the Quattromed acquisition, though details of the deal were lacking. We just expected this to be celebrated far and wide. After all, here is a company that was basically a spin-off of the esteemed Tartu University, employing over 150 people at offices throughout Estonia, and gets bought by a larger company. Isn't this how it's supposed to work? In our minds it is, except for one small detail we'll get to later. First, let's have a look at the business.

The Kind of Test You Can't Cheat On

A Quattromed lab in Estonia. Ignore the lab technician in a miniskirt.

So what does Quattromed do? Well if you've ever been to a doctor in Estonia and had some type of bodily sample taken for testing (blood, urine, your right arm), then it was probably tested by Quattromed. Because of the wide range of tests, and the special equipment needed to analyze the samples, it's difficult to do this in a hospital or doctor's office. Quattromed has the equipment and skills, and they have offices throughout Estonia, even in places like Võru, Elva, and Jõhvi.

Damn the diabetes, I want my Kalev Mesikäpp chocolate bar!

In fact, they offer over 200 tests, from testing your blood glucose and iron levels, to testing for chlamydia and HIV. So whether your weekend bender was spent at Club Hollywood with women of questionable repute, or at home with a box of candy bars at your side and Bridget Jones movies on the TV, Quattromed can test you on Monday. Just avoid candy bar orgies with club girls -- that will require more tests and things can get pricey.

"No Chlamydia here! I can't even spell it!"

So is this business sexy? Only to the point that many of their testing services are for STDs. It's actually kind of a boring business, and perhaps that's why it never got much press. However, we like it. Sometimes it's the boring businesses that make all the money.

Quattromed made over half a million euros in profit last year, and has seen revenues rise steadily the last few years. They also have great long-term prospects, for two reasons. First, the population in Estonia, like in the rest of Europe, is getting older. That means more health issues, necessitating more tests. Second, as medical technology advances, there will be new tests being developed to check for diseases.

Finally, this business is good for Estonia. They employ 150 people at their labs throughout Estonia, including in cities where there are few other good job opportunities, like Põltsamaa and Narva.

To summarize our take on it: the medical lab testing business is not going away, and Quattromed, as the market leader in Estonia, looks like it will maintain continued success in the market. It's no surprise they were acquired by Synlab. It's a good business, and we expect most operations and jobs will remain in Estonia after the acquisition, since it's not really worth it to fly blood samples to Germany for a 20 euro test.

Hey Taxpayer, Bend Over!

Bend over, taxpayer!

This all sounds great, until you dig a bit further into the details. In 2008, BaltCap acquired a majority stake in Quattromed (which was already profitable at the time). BaltCap, who we've written about before, is a venture capital fund.

So what they did is they acquired a controlling share in Quattromed, helped them build the company further, and now it has been sold off to Synlab. We assume Baltcap and Quattromed both made some money out of the deal.

Nothing wrong with that. That's how it works in most markets. BaltCap took a risk by investing in Quattromed, provided their expertise to build the company, and now profits when it gets sold off. Deals like this happen all the time.

Sadly, there's more to this story. After BaltCap acquired a controlling share in 2008, Quattromed received huge grants of taxpayer money, via EAS. In total, Quattromed has received 1,091,681 euros of taxpayer money!

The largest grant was given in 2010, well after the BaltCap acquisition, and the second largest grant was approved in May of this year. Surely Quattromed had already started talks with Synlab about the acquisition by then. Did that come up during the discussions? "Why yes, we're a profitable company and doing very well, but we still get free money from the taxpayer. What, they don't do that in Germany also?! Germany spends that money on roads!? That's crazy talk!"

This is not how it's supposed to work. It's not fair to other companies, and it's not fair to the taxpayer.

In unrelated news from last week, more than 1,000 children in Tallinn are without a place in public nursery schools, due to lack of funding. (And since we know you'll ask: Quattromed's taxpayer funding came from the ERDF and ESF funds, which are eligible to be used for projects like building schools for young people.)

Lessons Learned

What can we learn from this to prevent such nonsense in the future? EAS can easily ask their applicants for funding if they have already received private equity investment, and disqualify them based on that. In fact, there's even a handy list of all private equity investors in Estonia, and BaltCap is on the list.

What is troubling is that funding applications to EAS are apparently reviewed by a team of experts and even outside consultants. Did none of them think to simply search for Quattromed on Google? The BaltCap investment was reported about in Äripäev as well as on BaltCap's site. How did they not know?

We hope this was just a one-time oversight, and not the result of some old-boy's network (semuäri in Estonian) where certain people can just walk in the door of EAS and walk out with taxpayer money with few questions asked. Sadly, we know there are even more cases like this, and we'll be writing about these in the near future.