Why Pharma, Private Equity Want to Reshape Lab Industry

It’s not about the lab test...but the expensive drug indicated by the test

CEO SUMMARY: A disruptive force that involves precision medicine, pharmaceutical companies, and venture capital investors is poised to reshape the clinical laboratory industry. Genetic knowledge makes it possible to match cancer drugs to specific mutations. Pharma companies and professional investors recognize that control of diagnostic technologies and companion diagnostic tests enable them to gain better access to information on patients who would benefit from cancer drugs. For these reasons, pharma companies and others are investing heavily in clinical laboratories and diagnostic technologies.

WHILE LABORATORY LEADERS ARE FOCUSED on the urgent need to cope with deep cuts in clinical laboratory test prices and more restrictive managed care networks, a greater disruptive threat to the clinical lab industry is gathering momentum.

This threat is the control that pharmaceutical companies and venture capital investors are gaining over diagnostic technologies, patents, and intellectual property. The basis of this threat is companion diagnostic tests. It is a threat which could upend the historical control that the pathology profession and in vitro diagnostics manufacturers have on clinical laboratory testing and diagnostic technologies.

This disruption will not happen quickly. But market evidence is accumulating and several business transactions involving lab testing companies support this development.

The influence of pharmaceutical companies and venture capital in the clinical laboratory market was discussed in a presentation made at this year’s Frontiers in Laboratory Medicine (FiLM) conference in Birmingham, England, in January. THEDARK REPORT and the United Kingdom’s Association for Clinical Biochemistry co-produce the FiLM conference.

The speaker was William G. Morice II, MD, PhD, Chair of the Mayo Clinic Department of Laboratory Medicine and Pathology, and President of Mayo Medical Laboratories. He discussed how new developments in science, technology, and finance will influence laboratory medicine.

Since his appointment to this position in 2015, Morice has taken on new responsibilities, one of which is helping the leadership of Mayo Clinic understand the speed and direction of changes in clinical laboratory testing, gene sequencing, and precision medicine.

“I’ve spent the past three years working with the institutional leadership of Mayo Clinic, helping them to understand what we do in the laboratory,” he explained. “The reason for that—as most of us know—is that many of our physician colleagues and our administrative partners don’t understand the scope of the work we do and the importance we bring to healthcare.

“My role is to support the practice, which means that, in a place like Mayo Clinic, we cannot be about only the current state of medicine,” Morice said. “We have to create the future state.”

Doing so is particularly challenging today, given that the clinical lab industry is in transition, influenced by new disruptive factors it has not faced previously.

About these trends, Morice discussed three specific ones that Mayo Medical Laboratories considers to be disruptive. “First is massive parallel multi-analyte analysis,” he stated. “This is particularly true in the fields of next-generation sequencing and mass spectrometry.

“The second is high-speed, high-complexity computing,” said Morice. “This technology supports advances in machine learning and self-improving algorithms.

“Disruptive trend number three is the miniaturization of many technologies used in clinical diagnostics, as well as nanotechnologies,” he stated. “One example involves organic, light-emitting diodes which can deliver much lower limits of detection, compared to existing clinical laboratory instrumentation.”

Finance Is Disruptive Field

Finance is another field that will disrupt the clinical laboratory marketplace. In addition, Morice pointed out that both government and private payers will continue to influence how labs are paid and the stability of lab finances.

Morice added, however, that another source of change will have outsized influence on reshaping the services laboratories offer and how labs are organized to provide those services. “Compared to the past several decades, we are about to see pharmaceutical companies and venture capital investors become major drivers in clinical laboratory testing and anatomic pathology services,” predicted Morice.

Disruptive Financial Inputs

“We already have these entities putting disruptive financial inputs into the system,” Morice commented. “These disruptions are happening not just in the United States, but worldwide. We see, for example, a growing interest among pharmaceutical corporations and venture capital companies to invest in the laboratory industry.”

One early example of the financial influence pharmaceutical companies can have on the clinical laboratory marketplace was Novartis’ acquisition of Genoptix in 2011. In 2016, the Swiss-based pharmaceutical company had annual revenue of $48 billion.

“In 2001, Novartis introduced Gleevec, the first FDA-approved targeted therapy for cancer,” said Morice. “In 2011, that single drug accounted for $1.5 billion of revenue for Novartis out of $32 billion of its total pharma revenue.

Novartis Buys Genoptix

“In that same year, Novartis announced the purchase of Genoptix for $470 million,” he explained. “Genoptix started in San Diego as a private laboratory doing bone-marrow analysis. They’d go into the physician’s office, leave a test kit, and the physician would send the bone marrow to Genoptix for a full workup.

“At the time, academics and pathologists were confused about why Novartis would buy Genoptix. But in the financial industry, it was clear,” he said. “The annual revenue of Genoptix was $190 million. It was a shrewd move for this $48 billion pharma company to pay $470 million to then own a lab testing company that expanded its access to a yearly $1.5 billion cancer drug opportunity.

“The financial markets loved it because the deal made sense for two reasons,” Morice explained. “First, Novartis could grow the Genoptix revenue from the actual lab-test activity.

“The second reason, however, was perhaps the more important one: Having these bone-marrow specimens gave Novartis improved access to a $1.5 billion market for a single cancer drug,” he noted. “This deal was the first big notice that pharma was interested in the clinical laboratory industry.

“Since then, the numbers have gotten bigger,” he continued. “In 2015, sales of therapeutic drugs staged by a companion diagnostic test totaled more than $25 billion. To be prescribed, these drugs require a laboratory diagnostic test.”

A Parallel Trend

The explosion in knowledge about how genetic mutations are involved in cancer is a parallel trend that fuels growth in the number of drugs that require a companion diagnostic test.

“The number of cancers known to have mutations that can be targeted with a specific therapy is growing rapidly,” Morice stated. “With melanoma, for example, 73% of cases have targetable tumors.”

“In that $25 billion market, 90% of the sales are from oncology drugs, which fits right into the targeted therapy approach,” he added. “And 80% of those drugs are from three companies: Novartis, Bristol-Myers Squibb, and Roche. These facts demonstrate how a huge amount of revenue for these giant companies increasingly depends on the availability of a clinical laboratory to do the diagnostic test.

“It explains why pharma companies are interested in having greater control over the diagnostic technologies used in companion diagnostic tests for cancer, as well as the clinical laboratories that perform these tests,” Morice said. “Oncologists need these companion diagnostic tests to diagnose the patient and identify if a patient’s tumor has a genetic mutation that will respond to a specific cancer drug.

“These are the reasons why that first development in 2011—the Genoptix acquisition by Novartis—triggered a huge influx of capital into healthcare companies involved in clinical diagnostics and clinical laboratory testing,” he noted.

“Another milestone event in this trend is the story of Foundation Medicine,” he explained. “In 2009, Foundation Medicine was founded as a molecular information company, not a laboratory testing company.

“In 2012, Foundation Medicine launched its FoundationOne test in the U.S. market,” Morice stated. “This test is basically a cancer panel for targetable mutations. Three years later, in 2015, Roche purchased Foundation Medicine for $1 billion. For me, this was a real eye-opening moment.”

During conversations with biopharmaceutical industry leaders, Morice has gained insight into the drive of these companies to enter or expand their activities into genomic clinical laboratory testing.

Big Pharma, Venture Capital Investors Seek Control of Companion Diagnostic Tests

WHAT IS FUELING A NEW DISRUPTIVE TREND IN THE CLINICAL LABORATORY INDUSTRY is the growth in genetic medicine, particularly in the field of oncology. Research is uncovering genetic mutations in tumors that will respond to specific cancer drugs. Companion diagnostic tests are used to identify those gene mutations and help oncologists select appropriate therapies. William G. Morice II, MD, PhD, of Mayo Clinic and Mayo Medical Laboratories, used the table below to show which types of tumors have targetable mutations.

The table below shows the rapid and ongoing increase in the number of genetic tests available for physicians to order and use in patient care. The data is from Concert Genetics, which states that it can currently identify 69,104 genetic tests offered for clinical use. Of this number, 8,535 are next-generation sequencing tests. Concert Genetics predicts genetic testing will be a $10 billion market by 2024.

Drive Revenue From Drugs

“Roche has long-standing businesses in both laboratory diagnostics and pharmaceuticals. If you look at its purchase of Foundation Medicine, though, it was about more than just generating lab revenue,” Morice explained. “Roche recognized that the results of the FoundationOne test could drive revenue from the drugs that would be prescribed to cancer patients based on the results of this test.

“In 2015, Roche’s pharma revenue was $39 billion, and it had four or five key products,” continued Morice. “Today, it has a growing number of oncology drugs generating billions of dollars that depend on companion diagnostic testing.

“Foundation Medicine’s revenue was miniscule compared to that of a $50 billion pharma company,” he added. “But this lab company continues to grow, in small part because of clinical testing and in large part because of companion diagnostics.”

At this point, Morice encouraged pathologists and laboratory managers to understand the fundamental shift happening within the profession of clinical laboratory medicine. “These investments by pharma companies are twisting the existing paradigm within which most clinical labs operate,” he said. “Clinical laboratory professionals are trained to think about how to create knowledge that’s of value to the patient.

Value Proposition for Pharma

“But in today’s clinical testing marketplace, we see some lab companies creating knowledge that has a totally different value proposition for biopharma—distinct from the patient and the physician. And, as we know, biopharma companies are multibillion-dollar enterprises working to shape the future of healthcare.

“Biopharma companies are not alone in this arena,” Morice explained. “Venture capital companies are making similar forays.

“Within the investor community, there is now a growing school of thought that says the future is big data, and the greatest source of big data is in medicine,” he noted. “Venture capital companies recognize the value of big data and are looking for ways to invest in healthcare, particularly in laboratory medicine.”

One form of big data may come from the development of liquid biopsy tests. “New companies will use next-generation sequencing-based blood tests to look for circulating, cell-free DNA that is cancer-related,” Morice explained.

Concern Rising Among Health Insurers About Swift Increases in Genetic Test Costs

HEALTH INSURERS HAVE BECOME INCREASINGLY CONCERNED about the rising number and cost of genetic tests in the past few years, said William G. Morice II, MD, PhD, Chair of the Mayo Clinic Department of Laboratory Medicine and Pathology and President of Mayo Medical Laboratories.

“In the United States, there are almost 70,000 genetic tests available, including more than 8,000 next-generation sequencing panels,” he said. “Genetic testing is predicted to be a $10 billion market by 2024.

“This level of spending is getting payers’ attention,” he added. “Traditionally, the cost of clinical lab testing is a low proportion of the overall healthcare budget, but insurers are concerned.”

Morice has met with executives of UnitedHealthcare, one of the nation’s largest health insurers, to discuss spending for genetic tests. “They’re perplexed because genetic-test spending is rising dramatically, and they’ve heard how 20% to 40% of lab testing is unnecessary.

“What’s more, their data show that this testing isn’t being used properly, and they don’t know why because the coding system for genetic-testing reimbursement is antiquated,” he added. “As a result, they don’t have good data that tells them what they’re spending money on.

“If a payer’s business model depends on knowing what it is spending its money on, and the payer can’t do that, it is extremely frustrating,” he explained. “That’s why UnitedHealthcare and Anthem have started onerous, pre-authorization mechanisms for molecular and genetic tests to screen out inappropriate testing.

“Health insurers also know that companion diagnostics are driving targeted therapies,” Morice added. “Currently, these specialty pharmaceutical drugs make up 2% of the formulary. However, because of their high cost, they represent a disproportionate amount of total pharmacy expenditures.

“Health insurers recognize two things,” emphasized Morice. “First, what they spend on molecular and genetic testing is steadily increasing. Second, health insurers understand that companion diagnostic tests are driving up their costs for prescription drugs and they don’t have a good way to control that spending.”

Global Cancer Screen Market

“Currently, the market for this screening test is small, but it’s estimated to be a $1.3 billion market within four years,” noted Morice. “There are already estimates of a potential $425 billion global market for a screening blood test for cancer. That’s huge!

“If the future is to invest in big data, then liquid biopsies may be the perfect complement to drive healthcare through laboratory medicine,” he said. “To connect the dots, another venture capital deal will illustrate this point.

“In 2016, Illumina founded Grail,” Morice said. “Grail aims to develop a blood-based cancer-detection tool and has $100 million in capital. Its goal is to support lab testing for cell-free DNA.”

When Grail was founded, Jeff Huber, formerly of Google, was named Grail’s CEO. “So, the company’s first CEO was not a ‘lab guy.’ He was a ‘data guy’ from Google,” Morice commented. “Currently, Huber is vice chairman of the board at Grail. Previously, he worked at a company called Google X that described itself as being at the intersection of life science and computer science. Before that, Huber led the development of Google ads, apps, and maps.”

In the midst of the discussion about big data, Morice offered a warning and provided an example. “Not every foray into this area is successful,” he cautioned. “A case in point: OPKO, a pharmaceutical company that purchased BioReference Laboratories Inc. (BRLI) for about $1.47 billion in 2015.

“BRLI is a reference lab that’s about the same size as Mayo Medical Laboratories,” commented Morice. “The reality of the OPKO-BRLI deal is that OPKO did not have the straight connection between its business model and the capabilities of BRLI.

“After spending almost $1.5 billion for BRLI, the stock prices have fallen precipitously, and the president that OPKO installed to oversee BRLI operations, Gregory Henderson, MD, recently resigned,” he stated. “Opko is now searching for a new BRLI president. So, this strategy of having a large pharma company buying a clinical lab does not always work as designed.”

Morice outlined other ways that big data will be used in healthcare. He offered as one example the announcement in October 2016 that IBM Watson Health would work with Quest Diagnostics to launch IBM Watson Genomics. In an effort to combine computing power with genomic-tumor sequencing, the Memorial Sloan Kettering Cancer Center in New York will supplement Watson’s scientific data with OncoKB, a precision oncology knowledge base, to help physicians make treatment choices with cancer patients, as Quest said when it announced the deal.

Big data also will supplement health insurers’ efforts to manage population health, the goal of which is to keep patients out of the hospital.

“The only way to provide adequate healthcare for patients while slowing the growth rate of annual healthcare spending is to keep patients out of the hospital,” he said. “The drive to keep patients out of the hospital will drive disruption in laboratory medicine.

“These disruptions will include availability of lab tests in convenience-driven locales, such as pharmacies, and replacement of laboratory tests by wearable monitors,” he added. “Overall, these trends are beneficial not only to the economics of healthcare, but for individual patients through earlier disease detection and better disease management. As laboratory and pathology professionals, we must be ready to respond.”

 

“The message here is that pathologists and clinical laboratory scientists need to stay engaged because many non-traditional forces are investing massive amounts of money in laboratory medicine. If that’s the case, how do we keep our clinical labs and pathology groups relevant? Basically, we have to promote our role in healthcare. We have to embrace an uncertain future and stay informed about what is coming.”
William Morice, MD

Need to Stay Engaged

In closing, he added another caution. “The message here is that pathologists and clinical lab scientists need to stay engaged because many non-traditional forces are investing massive amounts of money in laboratory medicine. If that’s the case, how do we keep our clinical labs and pathology groups relevant?” he asked. “Basically, we have to promote our role in healthcare. We have to embrace an uncertain future and stay informed about what is coming.

“Also, our labs must leverage partnerships and relationships,” he added. “Here at Mayo, that means we have to be willing to work with other organizations that are outside of healthcare and with collaborators in other healthcare settings and in other industries. Given that there’s an ever-changing platform in big data, who are better positioned to do this work than those of us who work in the laboratory?”

Morice will be a keynote speaker at this year’s Executive War College in New Orleans on May 1-2. His session is titled, “How Pharma Money and Private Equity Investors Are Poised to Use the Coming Generation of Genetic Testing and Clinical Diagnostics to Reshape the Lab Test Marketplace.”

Contact William Morice, MD, PhD, at 507-284-8909 or morice.william@mayo.edu.

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