Genomic Health Seeks to Build Momentum For Healthcare Shift from Rx to Dx
Genomic Health is one of the big success stories of the past decade in the diagnostics business, and an early leader in the movement toward more personalized medicine. The Redwood City, CA-based company generated $150 million in revenue last year, saw sales climb almost 20 percent in the second quarter, and has reached cash flow break-even. So why is the company’s stock (NASDAQ: GHDX) down about 25 percent this year?
Twin threats of cost containment from federal healthcare reform and possible increased FDA regulation certainly are on some investors’ minds. Today, Genomic Health will talk in more detail during its quarterly earnings call about where this is all heading in the quarters and years to come.
Genomic Health has its work cut out in sustaining the quarter-by-quarter momentum it has built since it introduced its first marketed product in 2004. The diagnostic test, Oncotype DX, is designed to predict whether women diagnosed with breast cancer are likely to relapse after their tumors are surgically removed, and whether they are likely or not to benefit from a round of preventive chemotherapy.
In the six years since this test hit the market, Genomic Health has performed it for 160,000 women; it now charges $4,000 per patient. The company needs to constantly to justify the price, which it says can save Medicare an estimated $2,000 per patient by guiding doctors and patients to avoid futile rounds of chemotherapy that can cost the system $30,000 to $40,000 per patient plus the needless suffering from side effects. This has been a long slog for Genomic Health as it seeks to change the way doctors and insurers think about diagnostics, which are traditionally a low-cost, low-margin business that takes up less than 1 percent of the nation’s healthcare budget.
But fuelled by its early success at persuading doctors, patients, and insurers to pay for a predictive test, Genomic Health is seeking to take the next steps, expanding its reach across the breast cancer market and building a market for tests that predict relapses of colon cancer, kidney cancer, prostate cancer. This mission will take years, and Genomic Health will have to overwhelm insurers and government officials with proof that its tests are scientifically accurate, they influence medical decision-making, and they save the system money. But that’s what the company aspires to do.
“We put all our resources into the therapeutic side, doing the procedures and prescribing the drugs. Very little goes into diagnosing disease,” says Kim Popovits, Genomic Health’s CEO. “If you can move the dollars to predisposition, screening, and diagnosing better, and not spend 80 percent of the money in the last few months of life trying to do heroic things that mostly don’t improve quality of life and don’t extend life very long, that’s a great solution to the health dilemma. Right now, less than 1 percent of healthcare resources are put into diagnostics. That’s crazy.”
This conversation about the healthcare system is unavoidable when you sit down to analyze Genomic Health’s business, and the world it operates in, which I did a few weeks ago when I visited Popovits at her office in Redwood City.
Genomic Health was founded in 2000 when Randy Scott, a biochemist who previously co-founded another genomics company, Incyte (NASDAQ: INCY), was motivated to start something new— in part because he saw that all the genomic information he was helping produce couldn’t do much for a friend with cancer.
With early support from Kleiner Perkins Caufield & Byers, Versant Ventures, and TPG, among others, he and Genomic Health’s chief medical officer Steve Shak were off and running. They hit on the idea of obtaining breast cancer tumor samples that in some cases were 20 years old, and for which the ultimate outcomes of patients were already known. They looked at the tissue samples to see which genes were active, and how that was connected to the better or worse outcomes. The study was doable at a company because it didn’t require taking 20 years to run a clinical trial and wait and around to see results. Breast cancer was an obvious choice because it’s a big market—about 207,000 women in the U.S. are diagnosed with the condition each year, according to the American Cancer Society.
The company whittled down its original list of 250 candidate genes to a standard 21-gene test. The test was introduced on the U.S. market in January 2004, offering women and doctors a chance to see if their tumor was the kind that had a low, intermediate, or high risk of relapsing in the future.
Early on, the company realized that the information was useful, but not really enough, Popovits says. More work needed to be done to find out which patients were likely to benefit from chemotherapy. For example, a patient might have a low risk of recurrence, say 7 percent, but if preventive chemotherapy could drive that risk rate down to 1 percent, some women and doctors might opt for the chemo anyway. Data on that question, which made the findings more “actionable,” was presented at a medical meeting in December 2004, Popovits says. “Now all of a sudden the story came together,” she says.
That helped with the doctors, but none of it meant anything to the business until insurers got on board. Genomic Health had already spent $100 million on R&D for the test by the time it was introduced on the market, and had decided it was going to charge for the test based on the health economic value it delivered to the system, rather than just a slim mark-up beyond the cost of raw materials, and marketing. This was a radical notion.
“When you look at how diagnostics are reimbursed today, it’s activity-based. It’s the same as if you went to Genentech and said ‘we’re going to pay you for Avastin based on the number of steps you have in your manufacturing process.’ That’s how diagnostics work. We said that’s not going to work,” Popovits says. “We put $100 million plus into developing these tests. They will not be sold at $300 per test.”
This took a lot of convincing among private insurers. It took a lot of peer-reviewed scientific papers, recommendations on clinical best practices, and seeing other insurers slowly adopt reimbursement before things fell into place. The process to secure strong support for Oncotype Dx took about three to four years, Popovits says.
Even now, the test isn’t quite standard of care. Genomic Health has delivered the test to 160,000 patients in the U.S. with newly diagnosed breast cancer that hasn’t yet spread to the lymph nodes—which is a little more than half of the potential market. So the company is still actively pursuing more of that potential market, while looking to tap into more international markets, and to expand its reach in breast cancer by predicting relapse risk in women with breast cancer that has spread to the lymph nodes.
The company is also putting a huge amount of effort into expanding into tests for other forms of cancer but, as with the breast cancer test, this isn’t something that will happen overnight. Genomic Health, which has grown to 500 employees, has continued to invest big bucks—$35 million last year—in R&D. That’s more than significantly bigger diagnostics companies like Laboratory Corporation of America, Quest Diagnostics, or Myriad Genetics and Laboratories, Popovits says. More than half of that R&D spending went toward developing tests for other cancers besides breast cancer.
The latest thing to emerge from the lab is a new test for colon cancer risk, which was launched in January. The familiar pattern is holding here—Genomic Health needs to produce compelling data in peer-reviewed journals, win support from oncologists, and lay the groundwork one-by-one with insurers to persuade them to pay for it.
“We’ve demonstrated the science works, and the business model works. It took three to four years to get there for breast cancer. It will not that long with colon. We think there will be some leverage,” Popovits says, because payers are now familiar with the Oncotype Dx story, and the company can build on its existing relationships with the same decision-makers.
Still, there is a risk as the system lurches forward in the wake of the healthcare reform last spring. When Genomic Health talks about spending $4,000 on its test so that insurers can save a few thousand dollars per patient down the road, it might make logical sense, but a lot of bean counters naturally will fixate on why they are spending $4,000 in the first place for something that was never used before. After all, when more people are getting covered, overall costs go up, creating more pressure to scrutinize lots of expenses that may have been taken for granted before.
And Genomic Health has from time to time had to deal with the question of whether the FDA will try to exert more regulatory authority over its tests. The latest dust up came at a subcommittee hearing of the U.S. House Energy and Commerce Committee, which raised questions about whether to step up regulation of direct-to-consumer genetic tests like those offered by 23andMe and Navigenics. Without going into the alphabet soup of regulatory ideas, essentially Genomic Health’s test has been considered a laboratory developed test (LDT) and the FDA indicated after the hearing that it may issue new regulatory guidelines of LDTs. Genomic Health described the situation in the fine print of its latest 10-Q report with the SEC on page 30 and 31, for those who would like some more light reading on this.
Regulation of that kind could slow down the already slow and difficult road Genomic Health has to follow to really make money in this diagnostics field. But the potential is there to change how a lot of people think about healthcare, through actual applications of personalized medicine that are happening now, not 10 years in the future. Toward the end of our talk, Popovits was especially animated talking about a test for prostate cancer that is still at an earlier stage of development. If you could predict whether a man with prostate cancer has a slow-growing kind that almost surely won’t kill him, then you could guide the patient to avoid treatment that leads to all kinds of nasty side effects like incontinence and impotence. Giving men information about their prognosis could save a lot of unnecessary suffering, and expense, she says.
“This is going worldwide, it’s going to prostate, it’s going to renal, and it’s going to lung cancer,” Popovits says. “My personal feeling is this field on the verge of exploding, like biotech did.”