Foundation Medicine Lays Groundwork For $86M IPO

The appetite for biotech IPOs is as rabid as it has been in a decade. Will that good fortune seep into diagnostics? Now that Foundation Medicine has become the latest to step into the IPO queue, we’ll soon find out.

Cambridge, MA-based Foundation, a cancer diagnostics company backed by big names such as Bill Gates and Yuri Milner, and holding partnerships with 18 pharmaceutical companies, filed its IPO prospectus late Monday with the Securities and Exchange Commission. Foundation said it plans to raise as much as $86.25 million from public investors. It hopes to trade on the Nasdaq under the ticker symbol “FMI.”

Foundation has raised roughly $99 million in venture capital since it was founded in 2009. Its largest stockholders are Third Rock Ventures (30.9 percent stake), private equity firm Kleiner Perkins Caufield & Byers (16.6 percent), Google Ventures (11.5 percent), LabCorp (5.2 percent), Bill Gates’s Gates Ventures (5.2 percent), and Wellington Management (5.1 percent), according to the paperwork filed with the SEC.

Goldman Sachs, J.P. Morgan Securities, Leerink Swann, and Sanford C. Bernstein are underwriting the offering.

Even though Foundation has only been around for four years, it has attracted a ton of interest because of how it uses new high-speed/low-cost genomic sequencing technologies to create cancer diagnostics. Foundation takes a tumor sample from a patient, mines it for 236 of the most prevalent molecular abnormalities that could be causing that tumor to grow or spread, and sends a report to clinicians with information matching those alterations with targeted therapies and relevant clinical trials. This allows doctors to home in on specific abnormalities that appear to be driving an individual’s tumor, and then find targeted drugs or combinations that might have the best chance of working on that patient. This method is in stark contrast to today’s typical cancer diagnostics, which tend to look for a single genetic abnormality.

This approach has caught on with pharmaceutical companies who are looking to increase their success rates in R&D by picking the patients most likely to respond to their experimental drugs. Foundation said today it provides its services to 18 pharmaceutical and biotech companies, including Novartis, Sanofi, Celgene, Clovis Oncology, AstraZeneca, Agios Pharmaceuticals, and Johnson & Johnson.

Foundation formally began selling its diagnostic, FoundationOne, at the American Society of Clinical Oncology conference in June 2012. At first, it was designed to help with diagnoses in patients with solid tumors. By early next year, it expects to begin using the test to branch into diagnoses of blood-based cancers. The company said today that it believes the annual U.S. market opportunity for a diagnostic like the FoundationOne is $4.0 billion today, and will grow to $7.5 billion over the next several years as targeted cancer therapies become more and more integrated into treatment regimens.

Some 1,500 physicians in about 25 countries have ordered FoundationOne since it hit the market—including about 800 in the three months ending May 31.

This demand from physicians has put Foundation’s revenue on the upswing. It had $2.06 million in revenue in 2011 (mostly from pharma partners), $10.65 million in 2012 as it began marketing broadly to cancer physicians, and $5.2 million during the first three months of 2013. Despite the quick ramp-up of sales, Foundation suffered net loses of $17.33 million and $22.68 million in 2011 and 2012, respectively. The company said it expects those losses to continue in the near term as it expands and continues to invest in its business.

About 1,350 of its tests in 2012 were used by pharmaceutical companies, and 1,750 of them were done for physicians, the company said.

The average price per test in 2012 for its pharmaceutical customers was $3,700; for physicians it was $3,800, according to the S-1.

Foundation’s biggest challenge as a business will be tackling the reimbursement problem. Foundation’s test isn’t specifically covered under any plan—coverage and payment are determined by a third-party payer on a case-by-case basis. The company hasn’t yet submitted any claims to Medicare, the federal agency that covers many elderly cancer patients. Foundation will likely need to gather hard evidence from clinical trials—not just a collection of anecdotal patient success stories—to prove to private and government payers that patients are ultimately being helped by getting their test.

Foundation right now, for instance, is only collecting an average of $3,800 per patient on these tests despite a list price of $5,800 because of these ongoing payer negotiations.

Foundation said it plans to use the cash from the IPO to grow its sales force, fund the key clinical trials to support its reimbursement efforts, and help build out its infrastructure.

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