In Tough Diagnostics World, Will Ruling Out Cancer Be Good Business?

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away from unnecessary surgery, saving $200 million in medical costs (the company’s own estimate).

The list price for the test is $4,875, but that’s not what insurers pay. (Medicare, for example, reimburses at $3,200 per test.) Revenues from Afirma have roughly doubled each year since 2012 to reach $38.1 million in 2014, thanks to several insurers that included it in their coverage once they were convinced that the test would change the way physicians practice medicine. “If the clinical question you chose to answer is not changing care, or not delivering value to the physician, patient, and payer, no one is going to pay for it,” says Anderson.

As far as I could tell, there are no other rule-out molecular diagnostics on the market. So far, only Afirma has provided an independent outcome study of the type Dartmouth’s Welch would like to see, and even that was of small sample size. It was published in early 2014, following 339 patients at five medical centers whose thyroid nodules were tested with Afirma. The test found 71 of the samples were benign, and those people steered clear of further procedures, which in other instances might have included surgery to remove the thyroid gland and a lifelong dependence on synthetic hormones.

Only one of the 71 test results was a false negative—the growth was found later to be malignant. Veracyte’s Anderson acknowledges it was a small sample size. She says the medical centers are working on a larger study but can’t say when more data will be published. (The lead author of the original study, a thyroid specialist at Brigham and Women’s Hospital in Boston, did not respond to questions.)

Anderson stresses that Veracyte isn’t only making rule-out tests. When it can find a way to resolve diagnostic ambiguity and avoid unnecessary procedures by “ruling in” disease, it will build those products, too, with tests for the rare, aggressive medullary thyroid cancer and for idiopathic pulmonary fibrosis in the works. “You always have to be thinking about the pipeline in this business,” says Anderson.

Veracyte remains in spend mode, with a $29 million net loss in 2014. First quarter 2015 sales, all from Afirma, were $11.2 million, with a $7.6 million net loss.

“To have a successful diagnostics company in this environment is a real challenge,” says Scott Allocco, a consultant at SPJ Healthcare Strategies and co-chair of the industry group BIO’s personalized medicine and diagnostics committee. “Bottom line is, all the money is in the drugs.”

Diagnostics are a tough business for three big reasons. Companies generally have to launch products and spend at least a couple years with little to no revenue, because insurers need real-world evidence before reimbursing. Second, the ever-lower cost of sequencing means more medical centers will be doing a lot of molecular diagnostics themselves. Third, the U.S. Supreme Court ruling in 2013 to prevent the patenting of genes means companies can no longer have exclusive rights to the detection and analysis of isolated genes, as Myriad Genetics once did with mutations that carry higher risk of breast cancer.

It’s now a race to serve up what Invitae CEO Randy Scott calls “generic genetics.”

Scott brought one of the first genetic cancer tests to market with Genomic Health, and now at Invitae (NASDAQ: NVTA), based in San Francisco, he wants to fold as many tests as possible into a one-stop-shop service. “The whole space is now wide open,” he says. “The [Supreme Court] decision is driving down prices and driving up competition.”

Amid the tumult, high-flying Foundation Medicine (NASDAQ: FMI) is the latest to take a hit. Last week it lowered near-term revenue estimates, with Medicare payments no longer expected this year. Investors lopped $7, or 24 percent, off its share price the next day. The stock fell $2 more Friday, to $20.30, only to inch back up yesterday to close at $21.94.

Allocco says companies like Veracyte can use algorithms based on several genes (or other factors) as “one means of protecting your business model. You might not have intellectual property around the algorithm, but it’s a trade secret no one can determine. There’s a lot of ‘magic’ in these tests that’s hard to quantify. And that’s intentional.”

It turns out Anderson knows first-hand the dangers of biopsies. She lost her father last year when a needle inserted through the wall of his chest to take a biopsy resulted in a lung puncture. He never emerged from the intensive care unit.

Her father had stage four metastatic lung cancer; if the biopsy hadn’t killed him, the cancer would have. “In some ways he was blessed to have gone fast,” Anderson says.

But plenty of people who undergo the procedure and a host of others don’t have cancer. We’re growing ever more sophisticated about—and giant businesses are built around—creating treatments for sick people. We’ll now find out whether companies like Veracyte and Indi can make a go of helping people who aren’t really sick avoid too much medicine.

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