Drowning in money
How much money did the private test providers make from COVID?
Back in 2018, Randox was a relatively small and not very successful company, with turnover of £118m and a tiny pre-tax profit of £167,000. In the notes to its accounts, it admitted that it had incurred an event of default under its bank loan facilities due to poor financial performance. In April 2020, it extended its accounting period by six months from 31 December 2019 to 30 June 2020 to buy itself more time before filing its accounts. When it eventually reported the 18 month figures for the period ending June 2020, it revealed a loss before tax of £16.4m on turnover of £218m, following heavy exceptional write-offs.
Of course, the pandemic was to change all of that, as Randox's testing infrastructure and capabilities put it in pole position to benefit from the profit bonanza that COVID was about to deliver. Following the extension of its accounting period by six months, the first date when it would need to file any accounts covering the pandemic period would have been March 2022. But the UK government helpfully gave companies another three month extension to allow companies "to prioritise managing the impact of Coronavirus". Randox would I am sure argue that this allowed the company to focus on ramping up testing services and that they played a vital role in helping the UK deal with the pandemic. It did of course also have the side benefit that they got another three months before they were forced to reveal quite how much money they had been making.
Unsurprisingly, the company delayed releasing the accounts until the last possible moment. But they have just filed the accounts for the year ending June 2021.
A brief reminder of the timelines
Before we go through the figures, it is worth reflecting on the period that is covered by these accounts.
Randox were involved in two main COVID testing markets. The first was the government’s "Pillar 2" testing programme, which got going in late June 2020 and continued on until very recently. In the chart below I've shown the volume of pillar 2 tests conducted, broken down into Randox’s 2020/21 financial year (in blue) and the following financial year (in red).
Source: UK Government statistics, GridPoint analysis
The other big market they were involved in was the travel testing market. Here, they were not paid directly by the government. However, the government created a huge market from nothing by mandating arrivals tests from "qualified" suppliers, and Randox quickly got itself into a market leading position, in part by doing "referral" deals with all the main airlines.
The financial results just released by Randox only cover the start of the travel testing boom that was kicked off by the government’s travel testing requirements. Firstly, travel testing only really got going in early 2021 and initial volumes were relatively low, as not many people were travelling. Volumes continued to grow exponentially after that, reaching a peak in August 2021. Since then, they've been dropping back as the government started to reduce the arrivals testing requirements. For Randox, the total available market in their 2021/22 financial year was 4.5 times larger than applied in 2020/21.
Source: UK Government statistics, GridPoint analysis
How important has each market been to Randox?
You can see from the scales on the previous charts that the pillar 2 programme was much bigger overall. The total pillar 2 tests conducted since the start of the pandemic have reached 285 million, whilst the total arrivals tests added up to only 16m. There will also have been some departure tests, but in volume terms, the UK government market was probably about 10 times the size of travel, although not all of it was accessible to private providers.
It a company statement, Randox commented on the overall revenue from UK government contracts:
"Randox can also confirm that, while £776.9m of DHSC contracts were awarded to Randox during the pandemic, payments from DHSC to March 2022 have amounted to £419m."
Why is there such a big difference between these amounts? Perhaps the government is just really slow at paying its bills? Or did middle-men syphon off over £350m? The most likely explanation is a bit more boring, representing the difference between values in contracts that extend out into the future and what was actually purchased during the period. If you look at the government's contract award database, I found the following significant contract awards to Randox and I’ve shown the stated value and the start and end dates of the contracts.
| Value | Start | End |
|---|---|---|
| £133m | March 2020 | April 2020 |
| £346.5m | October 2020 | March 2021 |
| £60m | April 2021 | March 2022 |
| £52.5m | August 2021 | November 2021 |
Both of the first two contracts clearly related to the 2020/21 year and about 25% of the third does too. That adds up to £495m, with about £100m relating to 2021/22 if you include the fourth contract. Randox were also listed under four massive multi-party framework contracts which were awarded in Spring 2021 covering the following two years. Those contracts added up to £22 billion, so it is easy to imagine that the remaining £180m relates to those and also see why they wouldn't have received most of that money yet.
My best guess is that most of the £419m they received by March 2022 was booked as revenue in the financial year 2020/21. Total revenue for the year was £619m, so I think this accounts for most of the £500m increase in revenue compared to historical levels.
When it comes to the travel market, we saw earlier that it hadn't really got going in Randox’s 2020/21 financial year. There were a total of 2.9m arrivals tests done in that period, so allowing a 50% markup for the departure test side, I'll estimate a market of 4.4m tests. We know that Randox has been one of the leading providers in the UK, so if they got a 30% share, perhaps that would be 1.3m tests. We know the price they were charging, which was around £45 per test, so that would represent about £60m of revenue. A small, but almost certainly high margin contribution to the results of the year.
Randox’s recently released accounts said that the company had carried out 23 million COVID tests "at the time of writing". Since the accounts were approved by their Board only on the 8th June 2022, that suggests that this represents their total volumes up to fairly recently. Let's redo the sums on the likely volume of travel tests Randox has carried out to date. Total arrival tests to date are 16 million, adding a 50% markup for departure tests and giving them a 30% share would suggest 7.2 million travel tests, leaving 15.8 million government pillar 2 tests. If that equates to £491m, that would give you about £30 per test, which seems about right. I'd like to believe that the government will have secured some kind of discount on retail prices.
To sum up, in 2020/21 we probably have £120m or so of revenue which is "non-pandemic related". Pillar 2 government revenue added up to close to £400m and there was circa £60m of travel test revenue. That still leaves about £30m unaccounted for, which may also be pandemic related services like sales of tests to companies. Or perhaps I’ve been too conservative with my estimates of travel related tests. For 2021/22, the government business looks like it has fallen back quite a bit as the government has secured alternative sources of supply, whilst the travel test revenue has probably grown to something like £265m.
How profitable was all this business?
Spoiler alert: hugely.
If you exclude exceptional items (we'll come back to those in a bit), the company made an operating profit margin of 52% during the year. To put it another way, its cost per test was less than half what it was charging, even after allowing for overheads.
This doesn't come as much of a surprise to anyone who was paying attention. Many people commented that the cost of COVID tests in other countries was typically half what it was in the UK, or even lower where governments subsidised the cost.
The headline pre-tax profit for the year was £274m, but that was after £44m of "exceptional items". Excluding that, profits reached a cool £318m. For a business that was in some financial distress before the pandemic, that's quite a windfall.
How to hide all the money?
It seems clear that the company knew that the sheer scale of their windfall profits would be politically sensitive. As well as delaying the release of their accounts, it looks to me like they did everything they could do bring down the headline profits.
One of those tactics was to make accounting provisions for everything they possibly could. That's where the exceptional items come in.
The first £16m of exceptional provisions relates to write-downs of intangible assets. This was R&D money they spent in earlier years which they had capitalised on their balance sheet. The logic for the impairment was that R&D projects had been put on hold in order to focus on COVID testing and that there was a risk that the commercial viability of the projects might therefore now be compromised.
The next £22m of provisions came from writing off the cost of a new COVID testing machine they developed and found didn't work and a new testing facility in Donegal they built, which they say they are not now using.
There is a write-off of almost £4m for costs relating to testing errors which occurred in 2017.
Maybe all of these are fair enough "prudent accounting" decisions and perhaps also reflect bad investment decisions made during the pandemic. But I'm sure the decision to make these write-offs was heavily influenced by the fact that they were drowning in money and had some incentive to try to hide how big their profits were.
The rest of the exceptional write-off consisted of items to do with "related parties". That's a topic which I think deserves its own section.
Related parties
Whilst Randox is a privately owned company registered in the UK (Northern Ireland), its parent company “Randox (IOM) Limited”, is registered in the Isle of Man, an off-shore tax haven. That company is controlled and I assume largely or fully owned by Dr Peter Fitzgerald, who is the CEO of Randox and one of its only two directors. Isle of Man companies don't file public accounts, so we can't follow the trail to the ultimate parent company.
Dr Fitzpatrick seems like quite a colourful character and there has been some speculation about his links to government ministers. I won't go into that here and if people are interested, I will defer to the fount of all knowledge, wikipedia.
In any event, the company's accounts are riddled with references to related party transactions with Fitzgerald or the other director, Richard Kelly. I’ve listed some of them here:
Randox invested £602k in Celix Ltd, a company owned by Fitzgerald, the value of which they almost immediately wrote off following a review of its valuation.
Dr Fitzgerald benefits from a £33k interest free "current account" facility. Well, it is important to have a little petty cash.
A £100m interest free loan was made to the IOM holding company. I wonder where the money went from there?
£24m of loans to Fitzgerald owned property companies were written off. That was nice of them.
£125k of consultancy fees were paid to Richard Kelly's company.
£1.7m was loaned to a company in which Richard Kelly is a director, converted into equity and then written off. Not very good with those investment decisions, are they?
Some of these are fairly small beer, but when the company defended the money it had made from government contracts, they said that no dividends had been paid out to shareholders. That's pretty disingenuous, as it looks to me that something like £125m of cash or value has been taken out of the business and diverted to connected parties.
How much of a windfall has Dr Fitzgerald got from the pandemic?
Let us assume that the main difference between the £776.9m of contracts obtained from the UK government and what Randox has been paid so far relates to timing. We know that the margins they make on that are around 52%, so that’s profits of about £400m.
Based on my earlier calculations, Randox has probably earned another £325m of revenue from the travel testing programme over the last two years. With selling prices of £45/test versus circa £30 for government business, the margins on that are almost certainly higher. But they will also have higher costs selling directly to consumers, so let's be conservative and assume that margins net out the same at 52% which gives profits of £170m.
I'll also give them the benefit of the doubt and accept that Randox incurred losses on other projects by diverting their attention to COVID testing. Call it £50m. That still leaves over £500m of windfall profits for the company. And remember that this pretty much all accrues to one man, as far as I can see.
Nice work if you can get it
What you think about this will of course very much depend on your political inclinations. Some will say that Randox and Dr Fitzgerald deserve every penny they have made. The profits are payback for R&D investment in previous years and the pandemic would have been worse for the country if companies like Randox had not been able to step up to the plate and deliver testing capacity.
As I pointed out in earlier posts, Randox was one of the more "reasonably priced" suppliers when it came to travel tests. I'm only focusing on them here because they were the market leader and I can get the data. Remember that the government did 285 million pillar two tests. If 50% of that went to private suppliers, that could add up to windfall profits of over £2 billion. On top of that, profits on the 16 million arrival tests mandated by the government probably added up to £400m or more across all suppliers. Departure tests could easily add another £200m or more of profits.
I'm not a great fan of windfall taxes. But it does seem odd to me that the testing companies and the politicians that handed out these lucrative testing contracts are not under more scrutiny at a time when the travel industry and many other companies are still struggling to recover from their losses during the pandemic.
But of course we are all distracted by the Conservative party leadership contest, in which a certain Grant Shapps has put himself forward as future leader and Prime Minister, boasting about his record of delivering results. Since he is the man responsible for the UK’s travel testing programme, I’m sure that Dr Fitzgerald would whole-heartedly endorse Mr Shapps’ track record in that regard.
