CEO SUMMARY: When executives closed the doors of Pathwork Diagnostics last month, the simple explanation was that reimbursement for its proprietary molecular diagnostic test was inadequate. Indeed, that was part of the story. But other factors played significant roles in impeding growth at this lab company. Here is an inside look at six factors which contributed to the lab firm’s closure.
WHEN PATHWORK DIAGNOSTICS, INC., ceased lab testing operations last month for its Tissue of Origin test, it was easy to conclude that a difficult reimbursement environment for molecular diagnostics was to blame.
Although technically not closed, the company has an agreement with creditors as of April 2. A message on its phone system told callers that it intends to resolve the issue within 30 days, according to a published report.
Indeed, inadequate revenue was a major cause for the lab company’s closure. But the story at Pathwork Diagnostics, located in Redwood City, California, is more complex. It has useful insights for other labs performing molecular diagnostics assays and genetic tests.
The flagship product of the company was its Tissue of Origin test. This is a microarray-based molecular diagnostics assay for cancer patients with tumors of unknown origin and where the cause of the cancer is undetermined. The Pathwork Tissue of Origin test was FDA cleared and designed to help oncologists begin targeted therapies.
Pathwork Dx performed this test in its Redwood City laboratory. That lab was certified by CLIA and accredited by CAP.
The following interview is with Mark McDonough, who was Vice President of Sales and Service at Pathworks Dx from September 2008 through the mid-2012. He is currently President and CEO at CombiMatrix Diagnostics of Irvine, California.
“In my opinion, there are at least six significant factors the led to the closing of Pathwork Dx,” McDonough said. “One factor was a decision to proactively pursue FDA clearance.
“With the benefit of hindsight, I would say that if it had to do it again, the company probably would not spend the time and money to obtain FDA clearance,” McDonough said. “Getting clearance for the Tissue of Origin (TOO) test cost the company millions of dollars from 2006 through 2008. Our FDA clearance for our frozen TOO test was obtained in July 2008 and it cost the company a substantial amount of the Series A and B funding.
“That is a large amount of money which could have been used elsewhere in the development of our lab testing business to develop and expand our testing portfolio,” he added. “Looking back, this is a difficult issue because leadership truly believed they were making a good calculation at the time.
“When I joined Pathwork, the assumption had been made that the reimbursement environment would get easier with FDA clearance,” McDonough said. “That did not prove to be the case. Our experience was that the reimbursement issue was not any easier after getting the FDA clearance than before.
“In one respect, at that time, the Pathwork Dx Tissue of Origin test was somewhat ensnared by the FDA’s declarations of its intent to regulate laboratory-developed tests (LDTs),” noted McDonough. “It is disappointing to think that any company would suffer as a result of proceeding in what it thought was the proper way to obtain regulatory clearance for its proprietary test, as Pathwork Dx did.
“But, at that time, it seemed that the largest lab companies with laboratory-developed tests didn’t want the FDA to make a fast decision on regulating LDTs,” he said. “Many great lab testing companies operate without FDA clearance. That is why some argue that FDA clearance is not currently a make-or-break factor with an LDT. That wasn’t the position at Pathwork Dx. We were in favor of the FDA ruling that everyone had to use a FDA-cleared test and the FDA has yet to make such a ruling.
Just One Test on the Menu
“A second factor—the issue of having just one test performed by our laboratory—is related closely to the third factor of inadequate market size,” he explained. “With just one test on the menu, it’s clear—again in hindsight—that we needed to be diversified and serve a much larger market, such as that for colon, lung, or breast cancer.
“Those lab companies that have been financially successful with just one proprietary test have targeted colon, lung, or breast cancer—three markets that are quite large,” stated McDonough. “If Pathwork Diagnostics could have diversified by adding another diagnostic test—particularly one that helps identify colon, lung, or breast cancer—that would have proved immensely helpful to us. Having multiple products to offer is a necessary strategy in today’s market environment and is more in line with my situation today at CombiMatrix.”
McDonough also observed that the Pathwork Dx Tissue of Origin test was performed after the primary diagnosis of cancer had been made. This increased the difficulty persuading referring physicians to order this test.
“As it was, our physician clients had patients with metastatic disease and pathologists had already done their immunohistochemistry testing on those patients,” he said. “To add our test at that point in patient care proved to be a difficult sell.”
Inadequate Market Size
The third factor contributing to the demise of Pathwork Dx was that the size of the market was inadequate to support the company’s business plan.
“In the early stages of our company’s development, it was estimated that the market for our test was about 150,000 patients a year,” continued McDonough. “After our sales force spent time speaking with the 8,000 oncologists who practice nationwide, we calculated that the number of cancers of unknown origin was much smaller.
“It was common for an oncologist to tell us that he or she would see about five to 10 cases each year involving a tumor of unknown origin,” he recalled. “That is a market of 40,000 to 80,000 cases per year, about half of the original estimates of market size.
“Ultimately, we established that this was the realistic size of the market for cancers of unknown origin,” McDonough commented. “That brings up the next reality about market size: The real market today is what your customers send you!
“We calculated that, based on the tests we ran and what we knew about the other leading competitor in this space, Biotheranostics, Inc., that the real market was about 25,000 cases annually. This is the number of patients we could reasonably expect to be referred for a Tissue of Origin test.
Estimating Market Size
“Biotheranostics is a good company and they are the first mover in this area of testing for cancers of unknown origin,” noted McDonough. “We estimate that, combined, the two companies were getting 7,000 to 8,000 tests per year.
“Further, we estimated that only about 30% of the patients who should get the test were actually getting the test,” he said. “If 7,500 cases represent 30%, then perhaps the total estimated market—based on actual volume—is 25,000 tests per year.”
This represents a sizeable gap between the more optimistic estimates of market size used by the test developers and venture capitalists when planning the launch of Pathwork Diagnostics, and the market realities identified after the sales force called upon oncologists and begin to generate case referrals.
This inaccurate and overly-optimistic estimate of the market size for testing of cancers of unknown origin encouraged the company’s organizers and investors to move forward to launch its proprietary test. Further, at these lesser volumes of test referrals, that market niche would produce much less revenue than what the company needed to cover its cost to do business.
McDonough recognized this aspect of Pathwork Diagnostics’ business strategy. “I don’t dispute the estimate of 150,000 cases of cancer of unknown origin per year—which is what the market likely will be in 2016,” he observed. “But when creating a market, every lab testing company must scrutinize what the market is today by data points that include what your physician customers say it is, along with the actual test volumes that its customers submit to the lab.”
The fourth factor was the type of specimen Pathwork Dx originally requested from the referring physician. “When we launched in summer 2008, our assay was only validated for testing on frozen tissue specimens,” said McDonough. “During that time, several data points revealed that frozen specimens would never become a generally-accepted source of tissue specimens.
“In early 2009, we converted and began accepting formalin-fixed, paraffin-embedded (FFPE) specimens,” continued McDonough. “Again, with the benefit of hindsight, if back in 2006, our company had decided to focus solely on FFPE, we would have given ourselves a much better chance for success and market share adoption. That late conversion was one factor that negatively affected our ability to build specimen volume to meet our goals.”
The fifth factor was the rather late compilation of clinical utility data. “Having clinical utility data is essential in this reimbursement environment,” he noted. “Obtaining reimbursement decisions from 2008 to 2011 was particularly difficult.
“Based on what we learned through hard experience, this is the time to have solid data on clinical utility,” he added. “Payers want evidence on how use of the proprietary molecular diagnostic test contributes to improved patient outcomes. However, in our earliest years, gathering that data was not the same priority for us as gaining FDA clearance, for example.
“Thus, the company lost several years by not making an earlier investment in collecting that data,” said McDonough. “We eventually had that data. But if we gathered it earlier, it could have made a bigger difference when we worked with payers to gain favorable coverage and reimbursement decisions.”
McDonough was careful to distinguish between the two types of data that are typically associated with a diagnostic test. “The reason we didn’t invest in clinical utility data was that we were convinced that our clinical validity data would carry the day,” he explained.
Clinical Utility Data
“Clinical validity data shows how accurate our test was and that is important to physicians,” he added. “But what is most important to payers is clinical utility data.
“In truth, doctors want both,” he continued. “Therefore, when we told the doctors that we were 90% accurate, that was enough for them to trust the results produced by the Pathwork Dx Tissue of Origin Test. But some physicians—and all the payers—regularly asked a different question.
“That question was, ‘how does this test affect a woman who is suspected of having ovarian cancer?’ and it was asked when the physician was uncertain,” he recalled. “They wanted to know if the test result would point them to a different treatment regimen that would improve outcomes by allowing the patient to live longer, for example.”
This marketplace experience demonstrates how swiftly clinicians are moving toward the concept of companion diagnostics, where a laboratory test result is used specifically to guide the therapeutic decisions of the referring physician.
With the tidal wave of new proprietary lab tests washing over physicians in recent years, they are skeptical of any new molecular diagnostic test. McDonough saw that market phenomenom. “If physicians or payers are skeptical about the performance of your proprietary lab test, you have to address that skepticism and show that you’re correct.
Clinical Utility Studies
“Pathwork Dx did those clinical utility studies two years too late,” he stated. “In August 2012, at the time I left the company, we finally had the clinical utility study results, but by then we had burned through our capital resources and our window of opportunity to build market share was lost.”
The sixth factor was variable reimbursement paid by government and private payers. From the launch of the Tissue of Origin test in 2006, adequate reimbursement was an ongoing challenge. “Rates were highly varied,” McDonough stated. “Our average price per case ‘all in’ was $2,500 and the price from Medicare was about $3,100.
“But there were other payers who thought the test was good but still they would arbitrarily pay us just $1,300,” he added. “Where there was no established code for our molecular test and others like it, payers paid whatever they wanted and our lab company had no recourse.
“It was late in the process when we obtained Medicare coverage at a very fair price,” McDonough stated. “If that Medicare reimbursement had come one year earlier, it would have been a game changer for Pathwork Dx.
“As it was, we were still fighting to get coverage on nearly every claim from private payers,” he said. “Plus, we essentially counted every Medicaid payer as zero.
“Not only was this financially devastating to a young lab testing company like ours, but it is sad because this is a test that helps people,” recalled McDonough. “We certainly don’t want to preclude certain patients from critical testing because of their financial situation.”
To be fair in his assessment of the closure of Pathwork Diagnostics, McDonough wanted to distinguish the impact from difficulties in obtaining favorable coverage and reimbursement decisions from government and private health programs compared with other business issues.
“I can’t downplay the reimbursement challenges because it’s a tough environment right now—particularly given how slow Medicare contractors are paying since the beginning of the year,” commented McDonough. “But the molecular pathology issues that currently exist with the Medicare contractors are not the reason Pathwork Dx is closing.
“At the end of the day, the cost of sales and marketing was high, and the cost to run the lab was high,” he noted. “When you look back, what happened to Pathwork Dx is sad. This test is something many of us were passionate about. But it’s all about capital, and it’s clear that we just couldn’t invest enough in sales and marketing to get that critical mass of volume needed to break even.”
A Test That Helps People
To conclude, McDonough said, “When I joined CombiMatrix, what was most appealing were the factors that were so different from Pathwork Dx: CombiMatrix offered a large portfolio of tests with a legitimately large market size opportunity of $600 million in the growing market of prenatal testing. The test portfolio helps parents and physicians make decisions and life preparations, and it is very rewarding.”
Pathwork Diagnostics: A Look at the Short Life and Times of the Lab and its Proprietary Test
LAUNCHING A PROPRIETARY MOLECULAR DIAGNOSTIC TEST OR GENETIC ASSAY into the clinical marketplace continues to be a high-risk business proposition. Last month’s closure of Pathwork Diagnostics, Inc., of Redwood City, California, is the latest example of this market dynamic.
The company had a relatively short life of just seven years. It was 2006 when Predicant Biosciences acquired a company named Pathwork Informatics (itself formed in 2003) and changed its name to Pathwork Diagnostics.
The company was organized around a single proprietary test, the Pathwork Dx Tissue of Origin test. It was designed to help physicians treating patients with cancers of unknown origin. The microarray-based gene expression test used proprietary algorithms and measured the gene expression levels of 2,000 genes.
The test was designed to help doctors determine the type of cancer a patient has in these difficult-to-treat cases. In turn, this information would inform treatment decisions. Pathwork Dx’s lab was CLIA certified and CAP accredited.
It is notable that Pathwork Dx twice obtained clearance for this test from the Food and Drug Administration. The first was in 2008 for use with frozen tissue samples. The second clearance was in 2010 for use with formalin-fixed, paraffin-embedded samples.
One published source says Pathwork Dx went through as much as $61 million in venture capital that was funded in three publicly-disclosed rounds. More capital may have been invested.
Medicare issued a positive coverage decision for the Tissue of Origin Test in 2011. In recent years, Pathwork Dx had conducted studies to demonstrate clinical validity and clinical utility. Some of these studies were published in the Journal of Clinical Oncology and the Journal of Molecular Diagnostics.
Adequate reimbursement for the Tissue of Origin Test was a constant struggle for the new lab test company. PGx Reporter published information from the federal Office of the Inspector General (OIG) on variability in payment rates among state Medicaid and federal employee health benefit programs (FEHBs) for several genetic tests, including the Tissue of Origin test. PGx Reporter wrote that the OIG’s findings were that this test “was reimbursed at above $900 by Iowa’s Medicaid program, but among FEHB plans the reimbursement varied from $5 to $38.”
Lessons Learned in Launch of Proprietary Gene Test
BASED ON AN EXCLUSIVE INTERVIEW with the former Vice President of Sales and Business Development at Pathwork Diagnostics, Inc., six factors were discussed as having a role in the failure of the company to achieve its original goals for revenue, specimen volume, and market share with its proprietary Tissue of Origin test. In no order of priority or significance, they are:
- At launch, the company pursued FDA clearance for its Tissue of Origin test but the clearance didn’t increase sales as the company hoped. That led executives to question the wisdom of investing in such clearance at this early stage in the lab company’s development.
- The market size for cancers of unknown origin was estimated to be much bigger than what Pathwork Dx found as its sales force canvased the clinical marketplace. The original estimate of 150,000 cases per year was lowered to as few as 25,000 cases.
- Pathworks Dx had only a single diagnostic test. It needed to provide a more diverse menu of molecular diagnostics assays to generate additional revenue and encourage more test referrals.
- Use of formalin-fixed, paraffin-embedded tissue specimens should have been done at the launch of the test, along with frozen tissue specimens.
- The company would have benefited by being faster at providing clinical utility data in direct response to the reimbursement questions from payers, thereby gaining more favorable coverage and reimbursement decisions earlier in the company’s business life.
- The reimbursement environment was challenging, particularly between 2008 and 2010. Reimbursement was highly variable and often inadequate to cover the cost of performing the test.