The numbers tell a sobering story at Brisbane, CA-based XDx. Ten years in business. Five years with a diagnostic product on the market. About $140 million of capital invested. And after all that, projections are that the company might start running in the black for the first time next year, its 11th year in business, 2011.
A couple of important things happened this year to help nudge XDx forward in its quest to build a business on a new breed of molecular diagnostic test. XDx’s product, used to help doctors determine whether a patient can safely say he or she isn’t rejecting a heart transplant, received some long-sought validation when a paper was published in April in the New England Journal of Medicine. A few months later, a key medical society included the XDx’s AlloMap test as part of standard practice guidelines for heart transplants.
XDx has long been one of the companies seeking to lead the way with molecular diagnostics, and it has long fought an uphill battle as it seeks to get insurers to pay $3,200 for a diagnostic test. Diagnostics, despite their ability to catch and prevent disease early, have always taken a backseat to the more lucrative and glamorous pursuit of creating new drugs. The worldwide market for diagnostics was about $42 billion in 2007 and is expected to grow at a 6 percent rate through 2012, according to Kalorama Information, a market research firm. That amount represents a pittance of the U.S. healthcare market, which is worth about $2.5 trillion a year. A company like XDx coming along with an expensive new diagnostic test has its work cut out in justifying to all the interested parties why it is worth the money.
Five years into this effort, when I visited his office in late September, XDx’s chief executive Pierre Cassigneul told me that he thinks the company will turn profitable for the first time in 2011. When I checked back yesterday, the company was standing by that forecast.
Still, it won’t be easy. His projections in September were that XDx would perform 7,500 to 8,000 of its noninvasive tests. Yesterday, I was told the actual figure this year will be “more than 7,000” tests. At that rate, XDx could generate more than $22 million worth of revenue for 2010, although it’s bound to be something less than that because of insurance reimbursement challenges. Clearly, winning over insurers is the next big challenge for this company.
“We now have learned how to work with physicians to overcome the healthy skepticism they have, and we’re now working with payers to overcome the healthy skepticism they have,” Cassigneul says.
XDx started on its journey in 2000. The company’s plan—backed by Kleiner Perkins Caufield & Byers, Burrill & Co., and TPG Ventures, among others over the years—has been to bring the potential precision of molecular diagnostics to the field of inflammatory disorders. This was thought to make a lot of sense because autoimmune diseases, in which the immune system goes haywire and attacks healthy tissue like a virus, are notoriously tricky to diagnose based on clinical observations from physicians. There are more than 80 different immune disorders that affect millions of people, and the company needed to focus on something specific first, Cassigneul says.
The decision was to go after the organ transplant business, where much uncertainty hovers around the question of whether a patient’s immune system will reject new organs as foreign. Unlike with diseases such as rheumatoid arthritis or lupus, whose symptoms wax and wane and no one knows really what causes them, there is a lot of scientific rigor built into the transplant process.
“You know exactly when it started, you know what the insult to the immune system is. These patients are extremely rigorously followed by doctors. You know what you’re looking for,” Cassigneul says.
So XDx focused on the heart transplant market. Doctors want to know after a heart transplant is performed whether the patient is rejecting the new organ or not. This seemed like a market ripe for disruption with a noninvasive blood test. The current standard, Cassigneul says, is a procedure in which the doctor slides a catheter through the patient’s jugular into the heart, pulling out a tiny biopsy sample. The doctor repeats this procedure weekly in the first months after transplant, when the risk of rejection is highest, then backs off to monthly or quarterly biopsies over time.
Heart transplants are a small market, with only about 2,100 procedures performed each year, and about 20,000 people living in the U.S. with transplanted hearts, Cassigneul says. But because immune rejection needs to be monitored chronically, and the average patient goes through 25 to 40 of these biopsy procedures over time, the potential market for a new test like XDx’s is thought to be about $100 million a year, Cassigneul says. Plus, the biopsy method needs to be read by a pathologist, and the results can be subjective, so the company figured there was room in the market for a precise molecular diagnostic. “We figured we ought to be able to provide something better,” Cassigneul says.
The XDx test, called AlloMap, measures the extent to which 20 genes are dialed on or off in a blood sample—what’s known as gene expression. The company’s proprietary algorithm is designed to enable doctors, with great 99 percent statistical confidence, to determine when a patient isn’t rejecting the new heart.
Tapping the market with this first-of-its-kind test has been a challenge of the sort that I can imagine business school case studies are made of. There are about 150 centers in the U.S. that perform heart transplants, so this is the kind of concentrated niche that a small company ought to be able to tackle with a sales force of about 10 people. But this is a relatively young medical specialty, and each place tends to do the surgery a bit differently, Cassigneul says.
Five years now after introducing its test, a bit more than 90 centers have used the company’s test at least once, and 38 of them have written it into their normal protocols for doing heart transplants, Cassigneul says.
Getting doctors to use this test, like many new things in medicine, is based on whether you can deliver convincing data that it’s worthwhile. XDx passed a key hurdle with a 600-patient study known as Image, which was described in April in the New England Journal of Medicine. The study found that the XDx test wasn’t inferior to the standard biopsy method, and enabled patients to undergo fewer biopsies, allowing for higher patient satisfaction. Four months later, the International Society for Heart and Lung Transplantation included the XDx product in its first set of professional guidelines for best practices.
Those were the two big validating events for XDx in the medical community this year, but that’s not enough for the company to declare victory. Reimbursement from insurers is the next step, and it’s a big one.
Because heart transplants are very expensive, patients are often in a pretty dire financial situation, Cassigneul says. Feedback from the field, especially from nurses, was strong that XDx shouldn’t place any extra financial burden on patients, through establishing a typical insurance-based billing procedure with co-payments. So when a doctor prescribes the XDx test, he or she doesn’t submit the bill for services to an insurer and then haggle over how much to get paid. Instead, XDx has agreed to carry that burden of insurance hassles as a company. So when a doctor prescribes the diagnostic test, XDx provides it, and then submits the bill to insurers and haggles to get paid.
This is where I’m sure the business schools would recoil in horror. It takes XDx about seven months to get paid by insurers, and between 30 to 40 percent of the time, insurers won’t pay, Cassigneul says. The company has to fight this battle, because its test is unique in medicine, and therefore gets filed under a “Miscellaneous” insurance reimbursement code—which is almost always a red flag for shenanigans in the claims department at health insurers. The company often asks doctors and nurses to get on the phone to help make sure insurers understand the test was performed, and it was considered medically necessary, Cassigneul says.
When I spoke with Cassigneul, he was in a pretty bullish mood, feeling confident that the New England Journal paper and the new clinical guidelines would help the company reach its sales goals and, eventually, turn a profit. He even got animated at the end of the conversation, talking about potential future diagnostics for those mass-market opportunities in autoimmune disease—lupus, for example. That would be the kind of test that could be taken by a lot more patients. But this year was mainly about winning over the skeptics, and building up a solid enough foundation to see if this model can turn a profit in its initial market, paving the way for tapping into even more fertile ground.
“We believe this will be the tipping point,” Cassigneul says.
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