Molecular Diagnostics Are in a Rut. The Industry Needs the FDA

2/17/14Follow @xconomy

Some of the more exciting ideas in biotech are coming up in molecular diagnostics. There’s cool science at work. A number of tests have potential to cut down on overtreatment, reduce waste in healthcare, and give physicians clever new ideas on how to help patients.

But this industry, which accounts for less than 2 percent of healthcare spending, is stuck in neutral. If it’s ever going to grow into a bigger business that delivers lots of valuable information about health, the molecular diagnostics industry needs a tough, science-minded, credible regulator. It needs a thorough, predictable, and efficient third party who can comb through complex data sets and say with confidence what’s real, what’s clinically meaningful, and what’s BS.

Physicians, patients, and payers aren’t just going to do this by themselves.

Just like the pharmaceutical industry, the diagnostics world needs a strong FDA.

“We have to have some kind of pathway that gets rid of the uncertainty hanging over the whole space now,” says Kim Popovits, CEO of Redwood City, CA-based Genomic Health (NASDAQ: GHDX), a leader in molecular diagnostics.

Kim Popovits, CEO of Genomic Health

Kim Popovits, CEO of Genomic Health

While the FDA has done some things in recent years to improve how it reviews companion diagnostics that help guide treatments for cancer, there is still a vast swath of the diagnostics world that is lightly regulated at best. It allows for skepticism about these tests to fester among payers, and spawns fear among investors who worry the payers will never pay. “We’d like a process that has clarity and some certainty around how you do it,” Popovits says. “When you develop a drug, you go through Phase I, II, and III, and then you go to FDA. They say ‘yea or nay,’ and then you get reimbursed. That’s a process we need.”

For sure, the idea of tough, consistent FDA regulation of diagnostics isn’t new. The FDA has been making noises for years about getting more aggressive about regulating “high-risk” laboratory-developed tests (LDTs) that influence big healthcare decisions like how to treat a cancer patient—where the consequences of a false test can be dire. AdvaMed, the trade group for medical device and diagnostic companies, has said the FDA should regulate “higher-risk” tests. Industry leaders Brook Byers of Kleiner Perkins Caufield & Byers and Mara Aspinall of Roche’s Ventana Medical Systems unit co-wrote an op-ed for the Boston Globe in 2011 about why they think the FDA should bring more rigorous regulation to the diagnostics business.

“For one thing, both payers and physicians need and deserve to have confidence that the advanced diagnostic methods being used are reliable and accurate,” Byers and Aspinall wrote. “As it stands today, diagnostics are regulated by a variety of state and federal agencies, but there are, as yet, no clear policies in place for the approval of new molecular diagnostics.”

Not a whole lot has changed on the regulatory front in the last couple years, but a lot has changed in the technology world. Consider some recent diagnostics stories:

—Cambridge, MA-based Foundation Medicine (NASDAQ: FMI) introduced a test in 2012 that takes a tumor sample from a cancer patient and scans it for alterations in 235 cancer-related genes to see what might be driving the tumor. Like many other lab-based companies, Foundation Medicine’s lab is certified under the usual Clinical Laboratory Improvement Amendments (CLIA) standard—a pretty low bar. The company has published its analytical methods in a top peer-reviewed journal, going further than most of its peers. But the Foundation Medicine test is not approved by the FDA for providing a clinically validated, health-outcome altering diagnostic test. Medicare still hasn’t come out with a consistent policy saying what the test is worth. The result? Foundation Medicine has to fight tooth and nail, and negotiate with payers, to get reimbursed each time a patient gets its test.

The company, to its credit, acknowledges the barrier to entry is pretty low, and it’s willing to jump over higher regulatory hurdles. “The stakes are high. You have really ill patients. There are doctors without a lot of bandwidth to reconcile conflicting results. We have to be right in what we report out to oncologists and pathologists,” says Vince Miller, chief medical officer of Foundation Medicine. “As we continue in this era of precision medicine, the good news is that the value of molecular diagnostics in cancer should go up. We’re certainly prepared and hopeful that the barriers to entry and new standards will be raised as well.”

—South San Francisco-based Crescendo Bioscience just enjoyed a big success, being acquired by Myriad Genetics (NASDAQ: MYGN) for $270 million. Crescendo, another lightly regulated CLIA lab, developed a proprietary test that looks at 12 proteins in a blood sample of patients with rheumatoid arthritis. It’s the first-ever quantifiable way of measuring the molecular activity of this common inflammatory disease. It’s a radical new idea in a world where physicians—even in 2014!—basically just squeeze knuckle joints, ask patients how much it hurts, and then make a subjective judgment on what to do next. The Crescendo test has the potential to tell a physician when a cheap generic drug is holding the disease in check at the molecular level, or when a $20,000 a year biotech drug isn’t getting the job done. Without going through an FDA clearance process, Crescendo had a pretty easy path to the market. But it took Crescendo three years on the market before it could get Medicare reimbursement at $575 per test. After a decade of work and $100 million in venture capital, the company got to the point of $10 million a quarter in revenue—enough to entice Myriad to buy. Even after Medicare has signed off, Crescendo still has its work cut out explaining the value of its test to payers.

Genomic Health has sought to commercialize a new test for prostate cancer over the past year, and presented some solid clinical data about it last year at the American Urological Association annual meeting. But the service hasn’t truly caught on, partly because the company and the investigators who conducted the key prostate cancer study haven’t yet gotten the results published in a top peer-reviewed journal. Without results published in a peer-reviewed journal, the company can’t really talk turkey with payers. The peer-review process can take months, or maybe more than a year, and even then, peer-reviewers can’t provide the same level of scrutiny that full-time professional FDA staff can provide.

—Madison, WI-based Exact Sciences (NASDAQ:EXAS), has had an impressive run in the stock market over the past year, in no small part because of its unusual embrace-the-FDA-fully strategy. The company has developed a molecular test that screens for early signs of colorectal cancer in a stool sample—a less invasive approach than traditional colonoscopy. Although Exact could have taken a cheaper, easier route to the market by simply running a small clinical trial to show the test’s value, and then set up a CLIA lab, it chose to go the extra mile to satisfy the data hounds at the FDA. Exact Sciences is now preparing for a FDA advisory panel meeting on March 27, in which expert advisors to the FDA will debate the merits of Exact’s colon cancer screening test in public. Exact is actually in parallel talks with the FDA and Medicare, to both evaluate the quality of its data, and determine what it’s worth, in one fell swoop. “We felt (FDA approval) would be helpful in commercialization of the test, because more doctors would have confidence in it, and insurers would have confidence, as would the Medicare system,” CEO Kevin Conroy told me in November.

Naturally, there is a downside to submitting to regulation. It raises the barriers to entry for new market entrants, increasing the time and expense to develop new tests. Some tests probably won’t get developed that might be useful for patients. It would stifle some innovation. If the regulators are incompetent, excessively risk-averse, too slow, or deaf to the needs of patients, it could be a disaster. Somebody, i.e. the taxpayers and the companies themselves, is going to have to foot the bill for extra staff and resources to help the FDA carry out this expanded mission.

These all seem like reasonable trade-offs to me. In the pharmaceutical industry, we’re willing to accept a little less innovation so that we can be confident of a safe, effective, well-regulated U.S. drug supply. The FDA is far from perfect, but it’s pretty good at what it does. When the FDA messes up a drug review, it’s front-page news, which means that it’s still unusual and unexpected. It would be unthinkable for any politician to put the FDA out of the drug regulation business.

I happen to believe that some types of markets, especially those that are highly technical and high-stakes like the world of diagnostics, tend to function better with tough, trusted regulatory bodies. An unregulated Wild West free market is great if you’re selling books online or consumer smartphone apps. It’s not such a great thing when you’re talking about credit-default swaps or cancer drugs.

Professional medical societies already do set some standards, and sign off when they think a diagnostic test is well validated enough for standard practice. Peer-reviewed journals have a role here too, in separating good data from bad. Payers are increasingly building up some of their own expertise to make science-based judgments.

All of that effort can and should continue, but I would argue those things together aren’t enough to inspire confidence in molecular diagnostics. “There is a hodgepodge system vouching for quality of diagnostic tests,” says Brad Gray, CEO of Seattle-based NanoString Technologies, the developer of a molecular diagnostic test for breast cancer. “There’s no good housekeeping seal of approval on these products. We have to make a decision, as an industry, not just diagnostics, but the whole healthcare system, about what to do.”

These molecular diagnostics represent the long-awaited payoff from society’s investment the past couple decades in basic biology and genomics. And it’s precisely because of the long investment in basic science that we should make a corresponding investment in science-based regulation. I’m not saying every single test in the tens of thousands of labs around the U.S. needs to go through an FDA approval test—it’s just not practical and necessary for everything, especially for simple one-off blood tests in hospitals. But if we stick with the system we have now, society will get very few widely-used molecular diagnostic tests. A bit of well-crafted regulation, led by smart people at the FDA with the resources to do their jobs, could go a long way toward delivering on the promise of precision medicine.

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  • patrick mize

    Thanks for a great
    article. It is interesting that the premise of the article is “Please
    regulators, save us from ourselves”…. If the diagnostics industry regulated
    itself and set standards for the release / acceptance of assay performance, Clinical
    Validation and Utility, there would be far less of a problem. We are our own worst
    enemies. By allowing our fellow companies to market tests without proper
    development, clinical trials or reporting we set ourselves up for mistrust, low
    acceptance, confusion, and non-reimbursement. We let the situation stew for
    many years and finally the patient is put at risk and then the public cries for
    regulation. What then is the industry’s response? Whining about over regulation…

  • Stan Fleming

    Good article. While it touched on the potential dangers of increased regulation: “It raises the barriers to entry for new market entrants, increasing the time and expense to develop new tests. Some tests probably won’t get developed that might be useful for patients. It would stifle some innovation. If the regulators are incompetent, excessively risk-averse, too slow, or deaf to the needs of patients, it could be a disaster.” I am not sure the potential impact of the dangers are fully characterized or the alternatives thoroughly reviewed.
    As the Agency has raised the regulatory bar for the device industry, venture interest has waned and much of the development activity has shifted overseas. One should not underestimate the potential of peer-reviewed journals, the medical community and the reimbursement marketplace to efficiently identify quality diagnostics. Rigorous pharmaco-economic studies with reputable investigators published in independent journals can provide the basis for market adoption, even when company sponsored. The need for effective review could stimulate the launch of new journals.
    Before reflexively turning to the government to solve industry problems, we should first exhaust the possibilities of the market. We may find it can offer broader, more flexible, more responsive alternatives, better suited to the needs of growing an innovative industry. If that doesn’t work, diagnostics companies can always invite the government to take charge of their lives.

    • Chris H

      I agree whole heatedly with your views. To think that somehow the FDA regulatory process is somehow going to improve the industry is naive at best. Physicians generally know what is a good and bad diagnostic and make clinical judgements based on the evidence and just because a diagnostic has FDA approval doesn’t mean that it performs well, it just means it is safe and the data supports the claims.
      Adding in another 3 year delay to getting a diagnostic to market is just delaying the benefits that can be brought to patients.
      Do we really want to go down the big pharma route of 10 years $multi-million development lifecycles followed by drugs that cost $thousands per person per year for often marginal benefits in extended life?
      Sure, let the FDA intervene if diagnostic companies can’t justify their claims, physicians can demand to see peer reviewed research, but don’t fall into the trap of thinking the pharma approach will work for diagnostics without understanding the downsides

  • Pengguang Wu

    Some of clia labs seem to be the high school equivalent of GED. Good for printing in marketing brochure.

  • The FDA is my new Zeus

    Who regulates the regulators? Oh thats right.. The voter has infinite control over the FDA and everything the FDA does is error proof since they have competition keeping them honest (none) and never take donations from companies seeking regulatory capture (PDUFA). People who beg government to regulate them for safety fail to ever see the number of people the FDA has killed by getting in the way of otherwise safe treatments. The illegal street drugs are even more safe than their broken system. Be careful what you beg government to do. They have a long history of killing more people than diagnostic companies and its always in the name of keeping you safe through their monopoly of violence.

  • Anthony

    Why no mention of Seattle based Natural Molecular and their current woes with Medicare?