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Foundation, Roche Deepen Ties as Genentech Vet Steps in for CEO Pellini

Xconomy Boston — 

[Updated, 2:37 pm ET] Two years ago, almost to the day, Foundation Medicine celebrated its biggest announcement ever. Roche had just paid more than $1 billion for a majority stake in the cancer diagnostics company in a sweeping collaboration that sent Foundation’s shares to all-time highs.

Fast forward to today, and Cambridge, MA-based Foundation (NASDAQ: FMI) is announcing an executive transition.  Effective Feb. 6, Mike Pellini (pictured), who has run the firm since 2011, is vacating the CEO chair and shifting to chairman of the board. Troy Cox, who runs Roche-owned Genentech’s big cancer drug portfolio, will step in as CEO. Third Rock Ventures partner Alexis Borisy, who had been Foundation’s chairman, will remain on the company’s board.

[Updated w/ comments from Pellini] Though the addition of Cox as CEO deepens the ties between Roche/Genentech and Foundation, Pellini says Foundation “remains an independent operating company.” “It’s reasonable to expect that the best candidate to take the helm would come from Roche/Genentech,” he says.

Foundation analyzes tumor and blood samples from cancer patients and provides suggestions of treatments targeted to each patient’s genetic profile. It has developed several such tests: FoundationOne, a diagnostic for solid tumors; FoundationOne Heme, for blood cancers; and Foundation ACT, a “liquid biopsy” test meant to identify a variety of cancers from bits of tumor DNA in the blood rather than tissue samples. With these tests, Foundation looks for hundreds of cancer-related alterations in patients’ DNA and uses that information to suggest treatment options to doctors, who read the reports through an Internet portal. For pharmaceutical companies, Foundation’s tests help identify the right patients for clinical trials and serve as so-called companion diagnostics for targeted drugs—like a new test Foundation sells to help identify women eligible for treatment with the recently approved ovarian cancer drug rucaparib (Rubraca).

The company, founded in 2009, raised almost $100 million from a variety of backers, among them Third Rock Ventures, Google Ventures, and Kleiner Perkins Caulfield & Byers. The 2015 Roche deal—in which the Swiss firm bought 15.6 million Foundation shares for $50 apiece—was a huge endorsement of its efforts. Roche owned 60.1 percent of Foundation as of the end of September 2016, according to the company’s last quarterly filing. Roche has launched FoundationOne in several international markets since the two companies started collaborating, Pellini says.

Yet Foundation has struggled. At a $18.30 apiece Thursday close, shares currently trade just a hair over Foundation’s $18 IPO price in 2013, and far below the highs they shot to after the Roche deal. It’s been a multi-year slog for Foundation to win reimbursement for its molecular profiling tests—particularly from Medicare, which accounts for roughly 30 percent of its total tests in the U.S. Foundation began submitting claims to Medicare in 2013, but a payment backlog has grown as it still has yet to be paid for them. As of September 30, 2016, Foundation hasn’t been paid for a total of 31,401 tests for patients covered by commercial payers and 26,106 tests for Medicare patients, SEC filings show. The company has received a “small amount of revenue” from claims for FoundationACT since it began submitting them in August.

As it has battled with insurers, Foundation has seen its net losses grow each year.

While revenue for its tests grew from $36.6 million in 2014 to $49.2 million in 2015, growth has slowed this year—Foundation generated $28.3 million in test revenue for the first nine months of 2016. In the meantime, the company lost $90 million in 2015 and is on track for a bigger loss this year, with $77 million in net loses over the first three quarters of 2016 as it has tried to expand and invest in new products.

But Foundation has a key development ahead. Last year it filed for what’s known as a “parallel review” of FoundationOne by both the FDA and the Centers for Medicare and Medicaid Services. Such a review helps test makers simultaneously get seek approval and a coverage determination from the CMS. Foundation hopes to get a decision next year. If it were to succeed, its revenue could swing upward significantly.

In the meantime, Pellni says Foundation gained some traction on the payer front last month. Palmetto GBA, Foundation’s Medicare contractor in North Carolina, outlined coverage guidelines for molecular profiling tests like FoundationOne in cancer types such as melanoma, colorectal, and ovarian cancer. Palmetto previously drafted coverage guidelines for tumor profiling in lung cancer as well.

“We believe these [decisions] represent positive momentum” while the company works through the parallel review process, Pellini says.

Here’s more on Foundation and its 2015 deal with Roche.