Companion Diagnostics Creates New Sector For Testing Pharmaceutical Efficacy: High Growth Rates Seen For KRAS Mutation Testing As Predictive Biomarker For EGFR Inhibitors
January 27, 2010 - The Wall Street Transcript has just published Medical Research, Diagnostic Substances, Life Science Tools Report offering a timely review of the Diagnostic Substances sector. This Special Report contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. Please find an excerpt below.
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Dan Leonard is a Vice President at First Analysis Corporation who specializes in research and investment in life sciences tools and diagnostics, and other selected areas of the chemistry-enabled sector. He provides research coverage of leading private and publicly traded companies in his sectors. His work has been cited for excellence in the Financial Times.
Prior to joining First Analysis in 2002, Mr. Leonard was an Analyst in the life sciences division of Simon-Kucher & Partners, where he specialized in pricing strategy for pharmaceuticals. He earned an MBA from the University of Chicago and a bachelor's degree in economics from the University of Michigan.
TWST: What other opportunities are out there?
Mr. Leonard: Growth in the diagnostics industry is driven by a lot of new product cycles, and that is driven by technology. So one of the hotter spaces in diagnostics right now is molecular diagnostics, and that's just the name given for diagnostics tests where your target is nucleic acid. That's still a relatively new technology, and that's been able to create markets that didn't exist before - one of which, for example, would be HPV testing, human papillomavirus testing. And persistent HPV infection is a cause of cervical cancer.
Digene started marketing an HPV test several years ago, and they were later acquired by Qiagen (QGEN). And that market is still very underpenetrated, and it's a very fast grower for Qiagen. And that's why you have other companies, like Hologic (HOLX), which recently entered that market through its acquisition of Third Wave. Gen-Probe (GPRO) is entering that market; Roche (RHHBY) is entering that market in the U.S. in the next couple of years. So it's a good growth area.
You also are seeing some growth in companion diagnostics, or diagnostic tests used in conjunction with a pharmaceutical. So the result of the diagnostic informs upon your treatment decision of what pharmaceutical to use. So for example, KRAS mutation testing - mutation of the KRAS gene - is a predictive biomarker for response to EGFR inhibitors, such as Erbitux and Vectibix.
A paper published on this in The New England Journal of Medicine implicated the gene mutation with response of these drugs. The FDA then changed the label for both Erbitux and Vectibix to include this information. There are organizations such as The National Comprehensive Cancer Network, which updated their guidelines to recommend their oncologists to determine a patient's KRAS status as part of their pre-treatment workup for patients diagnosed with colon cancer. So that market is a growing market, and there are all sorts of others. Qiagen is a company that talks about having 15 partnerships with pharmaceutical companies to develop these companion drugs. So that could be a real market, each of those markets individually. The KRAS testing market, maybe that's only a $50 million market for the diagnostics manufacturers. But if you start stacking a bunch of $50 million markets on top of each other, you can get something that's meaningful.
TWST: What makes a company a good pick in the life sciences group?
Mr. Leonard: Right now I am more predisposed to recommending stocks that have a good amount of exposure to academic and government-sponsored research in the tool space because I think that's a good growth trend worldwide currently. I'm also recommending names that have good product breadth because there is a lot of competition for some of the companies that have a very niche and specific focus on one or two product areas. There can be pretty heavy competition. One of the big trends in life science tools, which I didn't mention, the big product cycle is next-generation sequencing. The cost of sequencing a person's genome has fallen dramatically in the past several years, and Illumina (ILMN) just came out and said they introduced an instrument which can sequence a genome for less than $10,000 in consumable cost.
There is another private company called Complete Genomics, which is currently selling human genomes for $20,000, and they expect to be selling them for probably around $10,000 at some point in 2010, and that's their all-in cost to the customer. So whereas with the Illumina tool, if you say it's a $10,000 genome, that's really only your cost of consumables, and your actual cost of delivering a genome is probably three times that. But for Complete Genomics, they sell it for $10,000 - that's your all-in cost. So that's an incredibly competitive area right now, and there are well north of a dozen companies that are trying to develop the next sequencing technology. Those areas for investment can be a little bit dangerous, but the stocks, if you pick them right, can work out phenomenally.
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