Foundation’s IPO Isn’t Bubbly, It’s a Jolt for Genomic Diagnostics
Foundation Medicine, the Cambridge, MA-based cancer diagnostic company, reminded me of the 2000 genomics bubble when it went public this week. The company sold its IPO shares at $18, and the stock (NASDAQ: FMI) almost doubled in its first day of trading, closing at $35.35, a 96 percent increase off an already bumped-up IPO price. That gives the company a market value of almost $1 billion.
This impressive rise represents one of two potential outcomes. It could be that either genomics is here to stay as a diagnostic tool and Foundation is a harbinger of this change. Or, this could be the peak of another bubble featuring a money-losing company hyped by scientific leaders but still unproven in the marketplace. In that view, Foundation’s IPO is not just hazardous to the company’s most recent investors. It may be damaging to the whole field of genomics-based healthcare and to biotech stocks in general.
Foundation faces a long road, but I am inclined to take the optimistic view. Genome sequencing is a powerful technology that has declined so much in price, so fast, that it has outpaced Moore’s law. The real value in sequencing is not the raw data, which are becoming a commodity, but rather the interpretation of that data for specific patients. In ways I will explain below, Foundation sits just at the nexus of that new data and its own increasingly powerful interpretation engine.
My first take-home from FMI’s monster IPO is, don’t worry so much about the company’s past losses ($22.4 million as of 2012, according to the IPO prospectus). Look instead at the amount of money raised ($106 million on top of $99 million raised since the company was founded in 2009) and consider its practical value: research funding.
When the 2000 genomics “bubble” was inflated, companies such as Incyte, Human Genome Sciences, Celera and Sequenom raised eye-popping amounts of cash at even more eye-popping valuations (one day in February, 2000, Sequenom hit a $4 billion market cap on nearly nonexistent revenue), there was no way for that money to create value in a reasonable time frame. What followed was a decade of retrenchment as one company after another started the arduous process of home-growing its own drugs (Incyte has notably succeeded at this) or shifting to a more sustainable business (such as Sequenom’s prenatal test for Down syndrome and other chromosomal abnormalities).
The fresh money for Foundation Medicine, plus the inevitable follow-on offerings, will fuel a powerful research platform that is in a position to discover and then apply a number of new insights into how genetics influence patients’ response to cancer therapies. That, in turn, has the chance to improve the success rate for physicians in treating cancer using both marketed and experimental drugs.
My second take-home is that the large fundraising gives the company a greater survivability in the absence (until now) of reimbursement. You don’t have to read the prospectus to know that one of the key risk factors for FMI is the lack of buy-in from payers. As Ben Fidler of Xconomy wrote, “Foundation began selling its diagnostic, known as FoundationOne, at the American Society of Clinical Oncology meeting in June, 2012. And while demand has been rampant—-some 1,500 physicians in about 25 countries have ordered the test since—FoundationOne isn’t covered by any plan. Rather, coverage is determined on a case-by-case basis, meaning the company is likely going to have to gather meaningful evidence from clinical trials to prove to payers that its test is making a big difference for patients.” Reimbursement is still a hurdle, probably the biggest. Hold a big IPO and voila—funding is there for these trials.
Personally, I am thrilled that Foundation’s approach reflects a strong shift toward using personal genetic tests (in this case whole genome sequencing) to drive medical care. The term “personalized medicine” has been overused for so long as to become a sad cliché. But changing a patient’s treatment based on a genetic test and especially initiating a treatment that would otherwise not have even been considered—that is a watershed. An idea like Foundation’s, in which you scan the genome of an individual patient for variations in more than 200 genes, is a medical reality today that was barely even conceivable five years ago.
Furthermore, Foundation hardly depends on its test revenues at the moment. The bulk of its revenues (something like 85 percent, I’ve heard) still come from partnerships with pharmaceutical companies. Its investors, both private and public, may well grant Foundation the time it will need to achieve reimbursement and make a compelling case to enough physicians to drive test adoption and growth.
Critics have correctly observed that there is little evidence for the utility of most of the genes on Foundation’s first panel, FoundationOne. Something like two hundred genes are assayed when barely 20 are known to be drivers of cancer. As I understand it, this is where Foundation’s entrepreneurial strategy comes into play. By aggregating data on the next 180 genes rather than focusing just on the 20 genes of known relevance to cancer patients, Foundation hopes to bring a much greater degree of clarity and utility to cancer therapy, which has traditionally been based on a brutal process of trial-and-error. Many patients (and their physicians) don’t have enough time or scientific insight to go through a series of single-gene diagnostic tests to find out which drug might be best for them. Even if patients demanded this one-at-a-time approach, it is not at all part of current medical practice. For the sake of cancer patients, I hope Foundation Medicine succeeds with its broader approach.
Critics have also observed that Foundation’s business model is predicated on the company being paid $5,000 or more for a test (according to Xconomy, recently out-of-pocket payment by patients or one-off payments from insurers have been running more at the $3,800 level). But the cost of sequencing is very low! Can’t the test be less expensive? Where does all that money go? The answer, to me, is clear: the money goes to research. The model reminds me of crowdsourcing, a funding mechanism that has just become a viable mechanism for funding biotech companies. In Foundation’s case, it is a way to raise money from people who have a real need (cancer patients), provide them with sufficient value (sequences of genes with known implications for cancer therapy) and then increase the incremental value of the test for the next round of patients.
To succeed, this approach has to scale. That is, insights obtained from the first 3,000 patients have to become more valuable for the next 30,000 and so on. There have to be increasing returns or else there will be a backlash at the level of pricing and adoption. In the absence of reimbursement, the only way to make this work is to raise a lot of money (through IPOs, secondary share offerings, pharmaceutical industry partnerships, self-pay from patients, international adoption or whatever) and pour it back into the company. The field of genomics spent several years wandering in the wilderness of “genome-wide association studies” (GWAS) which were supposed to identify canonical mutations that affected large numbers of individuals. That barely turned out to be the case. Now mutation hunters have come to the opposite conclusion: it is individual mutations, perhaps even those with an “N” of just one person, that will matter the most in improving cancer therapy. The company or entity that builds the largest database of these mutations—and applies them in cases where there is an “N” of two or 20—will become a go-to source for insight into specific patients’ cancers.
There are three dangers here: first, that scaling cannot be achieved quickly enough to justify reimbursement. The tests Foundation is doing are by their very nature outside of the parameters such as sensitivity and specificity that are traditional metrics for payers. So their results have to be so overwhelmingly good that payers change the rules in order to reimburse for the tests. That is likely to happen slowly if it happens at all.
Second, unless great insights arise from the additional genes, Foundation—with no real intellectual property on the content of its assay—will fall prey to commodity entrants offering tests at much lower price points. That is reminiscent of the dynamic I see playing out in non-invasive prenatal testing (NIPT).
Third, what if Foundation succeeds and gains insights from its database (paid for by patients) that lead to a true competitive advantage? Won’t there be a clamor for public release of Foundation’s data, similar to what happened when Myriad Genetics lost its Supreme Court case and no longer had patent coverage over its BRCA1/2 test? It will be interesting to see this play out.
In my view, Foundation’s IPO is a turning point that will only boost the many efforts to make the genome a powerful ally in the fight against cancer. Given the massive drop in sequencing costs and today’s vote of confidence, it will not take too long for similar insights into other diseases to follow.