Lab Companies’ IPOs Go Two-for-Three in November

It’s been a busy IPO season for companies with proprietary molecular and/or genetic tests

CEO SUMMARY: This fall, a parade of molecular and genetic test companies moved forward with initial public offerings (IPOs) of their stock. In September, Foundation Medicine raised $106 million from its IPO. Encouraged by this success, three different companies proceeded with IPOs during November. The IPOs of Veracyte and Oxford Immunotec raised $58 million and $64 million respectively. Meanwhile, CardioDx, which had hoped to raise up to $92 million, pulled its IPO.

DESPITE DIFFICULT FINANCIAL TIMES for the clinical lab testing industry, companies with proprietary molecular diagnostics tests have been willing to offer initial public offerings (IPOs) this fall.

Last month, three companies decided to test the waters and attempt to sell stock to the public. Two of the IPOs were successful and the third IPO was pulled from the market.

First up was Veracyte, Inc., of South San Francisco, California. Investors liked the stock and on November 4, Veracyte announced that the IPO had raised net proceeds of $58 million. The company’s stock now trades on NASDAQ under the symbol: VCYT.

Veracyte’s Proprietary Test

Veracyte markets the Afirma Thyroid FNA Analysis. This proprietary assay is used to test thyroid nodules previously diagnosed by cytopathology as indeterminate. Studies show that the assay can reclassify a significant number of these cases as benign, thus giving patients a more definitive treatment option.

For third quarter 2013, Veracyte performed 12,417 tests. The retail price of the Afirma Thyroid FNA Analysis is $4,275.

The second lab test company to complete an IPO during November was Oxford Immunotec. This company is based in Oxford, United Kingdom, and its offices in the United States are located in Marlborough, Massachusetts.

On November 22, the company announced that its IPO in the United States had raised $64 million. Its stock trades on NASDAQ under the symbol: OXFD.

The proprietary molecular test sold by Oxford Immunotec is the T-SPOT.TB test. This assay is designed to detect latent tuberculosis (TB). Experts estimate that one-third of the world’s population has latent TB. About half of immigrants arriving in the United States have latent TB.

Oxford Immunotec reported revenue of $28.6 million for the first nine months of 2013. It says that about 50% of its sales come from the United States. The company also noted in public documents that its T-SPOT.TB test is covered under CPT 86481 and Medicare’s national limitation amount for 86481 is currently $103.

Buoyed by the success of Veracyte’s IPO, another Silicon Valley lab testing company was prepared to initiate an IPO during November. CardioDx, Inc., of Palo Alto, California, wanted to sell as much as $92 million worth of stock. However, on November 14, CardioDx said that had pulled the offering. Company officials stated that the market conditions for an IPO were poor.

Test For Atherosclerosis

The proprietary test sold by CardioDx is Corus CAD. From a blood specimen, it looks at 23 distinct messenger RNA sequences associated with atherosclerosis. The company says that “CardioDx’s Corus CAD test is the… only commercially available blood-based gene expression test that provides a current-state assessment for non-diabetic patients with symptoms that are suggestive of obstructive CAD. Corus CAD helps clinicians rule out obstructive CAD as the cause of these symptoms.”

For the first nine months of 2013, CardioDx performed approximately 14,100 tests and generated revenue of $5.1 million. Retail price for this test is approximately $1,200.

Earlier this fall, Foundation Medicine of Cambridge, Massachusetts, successfully completed its IPO. The offering closed on September 24 and raised about $106 million. The company trades on NASDAQ under the symbol: FMI.

Proprietary Molecular Assay

The company offers a proprietary molecular assay called FoundationOne. It is described as “a fully informative genomic profile to identify a patient’s individual molecular alterations and match them with relevant targeted therapies and clinical trials.”

The list price for the FoundationOne test is $5,800. During the third quarter of 2013, Foundation Medicine performed 2,577 FoundationOne tests.

It is significant that four lab testing companies with proprietary molecular diagnostic assays or genetic tests were willing to test the IPO waters in recent months to gauge investor interest. It is also significant that three of the four IPOs were successfully funded.

After all, in the realm of molecular and genetic testing, the year 2013 has not been kind to many laboratories, not the least because of Medicare’s snafu on how it handled implementation of the 114 new molecular CPT codes that became effective on January 1, 2013. Similarly, private health insurers have been equally tough on coverage guidelines and pricing for proprietary molecular diagnostic assays this year. (See TDRs, April 15, 2013, and June 17, 2013.)

Thus, investor willingness to buy up the stock of three different companies with proprietary assays shows that some investors still see opportunity in molecular and genetic testing.

Arguing Clinical Value

In fact, each lab company that tested the IPO waters this fall would argue that its proprietary test delivers clinical value and informs the physician in a way that can positively alter the course of treatment for the patient. At the same time, each company is expanding the number of physicians who are willing to order these tests when it is appropriate.

This success is in contrast to the financial struggles seen at many other laboratory organizations. Throughout the course of 2013, a number of lab testing companies closed their doors for good or were sold. (See TDR, November 11, 2103.)

Clearly the market trends in clinical laboratory testing are mixed at this time. The American healthcare system and the lab test marketplace are both in the midst of sorting out winners from losers. Thus, pathologists and laboratory executives need to stay nimble and refocus their lab’s services to better meet the changing needs of their referring physicians.

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