You rarely, if ever, see hedge funds, drugmakers, venture capitalists, and diagnostic companies rally around any single idea in biotech. But that unusual cast of characters is coming together to put their money to work in a startup, Cambridge, MA-based Foundation Medicine.
Foundation is announcing today it has snapped up $42.5 million in its Series B financing, giving it a total of $86 million of investment since its founding in late 2009. This round is unusual in that it brings together a quartet of investors that normally stick to public companies—Deerfield Management, Casdin Capital, Redmile Group, and one other unnamed fund—with strategic corporate investors that include Laboratory Corporation of America, Roche Venture Fund, and WuXi Corporate Venture Fund. That crew joins Foundation’s original investor, Third Rock Ventures, and two other VCs who previously invested—Kleiner Perkins Caufield & Byers and Google Ventures.
This high-profile and diverse group of backers was attracted by Foundation’s first-of-its-kind cancer diagnostic test. The idea is to take individual tumor samples from a patient, and cast a wide net to see what’s happening inside them, by analyzing the 200 of the most common molecular abnormalities that could be driving the growth and spread of that tumor. This is different from traditional cancer-marker tests which specifically have been designed to look for one thing a doctor suspects might be the problem—such as whether a mutated K-RAS gene is driving a patient’s colorectal cancer. By looking broadly across the genome, and putting together a summary report for the doctor on what’s normal and abnormal in the patient’s tumor, the hope is that Foundation’s technology will give the doctor new ideas on which targeted drug or combination of drugs will have the best chance of working for the individual patient.
Foundation first started selling its test last fall, and saw physician demand surge almost immediately on word of mouth. The buzz continued among leading doctors at the American Society of Clinical Oncology (ASCO) meeting in June, when Foundation started actively marketing the test. The startup isn’t saying how many orders it has processed in its first three months of active marketing, but it has seen “significant growth” in usage each month in 2012, which accelerated post-ASCO, even without having a national sales force in place, says CEO Mike Pellini. So far, the Foundation test, which has a list price of $5,800, has been ordered by 400 physicians in 16 countries. While that’s a small percentage of practicing cancer physicians, many of those customers are apparently happy with what they are getting, because three-fourths of the orders for the Foundation test are from repeat customers, Pellini says.
The new financing “is a testament to the fact that Foundation Medicine is a different kind of company,” Pellini says. “We’ve come a long way in only two years. The clinical availability of our test is changing the way cancer is treated, and investors have taken notice.”
Alexis Borisy, a partner at Third Rock who co-founded the company and remains its chairman, said he sees the company delivering on its original vision. “The core focus of the company since we were first sitting around the table has been to make cancer genomic analysis a reality in day in day out real world, everyday clinical practice,” Borisy said via e-mail. “We felt that many patients and their physicians would benefit from an understanding of what had gone wrong in the specific programming code of their cancer…..that having this information in day in day out practice could transform the practice of oncology and make a big difference for doctors, for patients’ lives, and for our healthcare system…..I think we all still feel this passionately.”
Foundation currently has 70 employees and, with the new financing in hand, it plans to hire more people across various functions of its business, from R&D through sales and marketing, Pellini says. When asked if this financing might be an alternative to an initial public offering for Foundation, Pellini said he didn’t think so, but rather “it’s the next step in the company’s development.” Pellini adds: “We’ve tried to build this company a little differently. We wanted to get to market very quickly, get clinical adoption, have multiple opportunities with pharma companies, and medical oncologists.”
Pellini wouldn’t comment about whether the deal was designed to pave the way for an IPO, but reading between the lines, some signs point in that direction. Today’s announcement of the deal, for instance, includes an endorsement from Bill Slattery, the influential (and rarely quoted) hedge fund manager at Deerfield Management. Clearly, Slattery’s comment in the announcement about Foundation “changing the way cancer is treated” is being aimed at a major-league financial audience. This also isn’t the first time Foundation has shown up on public investor radar screens—it gave a presentation at the Goldman Sachs healthcare conference in June.
Foundation, like any young company making its way, still has a huge amount of work in front of it. Pellini said he’s got four main objectives coming out of today’s financing—to build up the commercial team; to develop more infrastructure for performing its tests; to run long-term clinical studies that it will need to move beyond the early-adopting physician audience and to win broad insurance reimbursement; and to develop more products.
Despite the encouraging trend with early adopters making repeat orders, Foundation will need to broaden its user base to really have an impact on how cancer is treated. Although 400 physicians is a good start, there are more than 10,000 oncologists in the U.S. alone. And while Foundation has seen encouraging adoption in the early days by “thought leader” physicians at the top academic centers like MD Anderson Cancer Center in Houston, an estimated 75 to 85 percent of U.S. cancer patients are treated in community oncology offices, which tend to adopt new technologies at a slower rate.
Pellini says he’s carefully watching where Foundation’s demand is coming from, and he says he’s happy to see demand increase from community oncology practices, which now account for about 60 percent of all of Foundation’s orders.
The repeat business, and the community oncology acceptance of the orders, are a couple of key indicators of future success that Foundation and its new investors going to watch very closely. Other than the sheer volume of tests, the success with repeat orders is the most important thing to happen to Foundation this year, Pellini says.
“It’s one thing to get an oncologist and a patient to try a comprehensive molecular profiling approach. If patient is sick, and neither the physician or patient is ready to give up, they are going to try it,” Pellini says. “But it’s another thing to have an oncologist order the test again. When they order a test for a second, fifth, tenth, or fiftieth time, it means they got the results, they understood the results, and the results helped them think about how they were going to treat the patients. All those pieces have to come together.”
Insurers are one other critical constituency that Foundation needs to win over. So far, Pellini will only say “Foundation One is being reimbursed at various levels by all payers we’ve submitted the tests to. I can’t think of a payer off hand that has flat-out rejected payment for Foundation One.”
In the early going, Foundation has had some varying success with insurance reimbursement based on leading physicians being willing to get on the phone and “go to bat for their patients and Foundation One,” Pellini says. But longer term, both the physicians and the insurers will need to see lots and lots of data.
Right now, Foundation has put together “a series of anecdotes” in which patients have gotten the test and it had some measurable impact, Pellini says. The company, mindful of the need to gather hard evidence of benefit beyond a few success anecdotes, is gathering data on the cost-effectiveness of its system, the impact it has on medical decision making, and the long-term outcomes for patients, Pellini says. Different payers will want to see different data sets before they become comfortable with making reimbursement for the test standard, Pellini says.
Although the hard-core biostatistics and medical evidence community tends to frown on anecdotes as the flimsiest kind of support for a claim, Foundation is beginning to see patterns that pharma customers and insurers are taking seriously, Pellini says. Foundation has gained much of its early support from pharma partners like Sanofi, Celgene, and Novartis that are using the test to help them identify patients likely to benefit in large, long-term, well-controlled, randomized clinical trials that are the gold standard for medical evidence.
“What we’re hearing from pharma company leadership and from payers is that while anecdotes are anecdotes, when you start to see patients responding to treatment who were unlikely to respond to any other approach, and you don’t just have one case or two cases, but you have 5, 10 or 20 cases, the evidence does have merit,” Pellini says. He added: “We’re starting to see a series of anecdotes come together, and to us, it provides further assurance.”
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