Diagnostics Are Warming Up in Era of Fast, Cheap Sequencing, Says MDV’s Rowan Chapman

2/7/11Follow @xconomy

Quite a few players in the movement toward super-fast, super-cheap gene sequencing see a mix of arcane science, breathless hype, and modest results. Despite a decade of talk about personalized medicine, nobody walks into a doctors’ office today and gets a universal test that can predict their medical future or give advice on how to avoid nasty diseases.

Yet when Rowan Chapman looks around today, she sees the next-generation of DNA sequencing as paving the way for specific diagnostic tests that would have been impossible to imagine before. And each of them can generate hundreds of millions a year in revenue in the not-so distant future.

“You’re going to see a lot of diagnostic applications enabled by next-gen sequencing,” Chapman says. “Without the throughput we have today, it would have been impossible, really cost prohibitive.”

Chapman, one of the featured speakers today at Xconomy Seattle’s “Computing in the Age of the $1,000 Genome” event, has been watching this field evolve over the past decade through her role as a partner focused on life sciences for Mohr Davidow Ventures. Her firm is riding high at the moment, a few months after one of its major investments, Menlo Park, CA-based Pacific Biosciences (NASDAQ: PACB), pulled off a $200 million IPO to support its new super-fast DNA sequencing machine. The PacBio instrument, and others from San Diego-based Illumina and Carlsbad, CA-based Life Technologies, are making DNA sequencing so fast and so cheap that they are improving business models for entrepreneurs with ideas for new kinds of diagnostic tests.

Diagnostics have traditionally been cheap commodity products that have never quickened the pulse of venture capitalists in the same way new biotech drugs do. Genomic Health (NASDAQ: GHDX) is usually held out as one of the paragons of the new wave of diagnostic companies. It has built a more than $150 million a year business on a single $4,000 test—based on hard-core genetic analysis—that predicts relapse rates of women with breast cancer. But there are many other genetic tests coming along, and they don’t have to follow that same model of a one-time, expensive test, Chapman says.

Chapman, like all VCs, loves to talk at length about companies in her firm’s portfolio—so the reader needs to keep that in mind. But there were two examples in the current Mohr Davidow portfolio she pointed to that are being enabled by the so-called next-generation sequencing.

First, there’s South San Francisco-based Crescendo Bioscience. This company has a molecular diagnostic test for patients with rheumatoid arthritis. This test, introduced to the U.S. market in November, looks at 12 different biomarkers in a blood sample to provide a quantitative measurement of the activity of inflammation at work in a patient with rheumatoid arthritis. It’s the kind of thing that doctors can use to see if a generic drug is effectively getting the disease under control—as opposed to the more subjective measurements of today, like looking at whether a patient’s knuckles are swollen, and asking patients if they feel pain.

A more precise scientific diagnostic in rheumatoid arthritis is potentially very big business. Three of the world’s top six best-selling drugs last year were biotech medicines for this condition, and related autoimmune disorders. The treatments cost upwards of $20,000 a year per patient, they don’t work for everybody, and even for those who do get relief, results can vary. Doctors and health insurers have an obvious interest in getting patients on the right drug quickly, to minimize wasting time and money.

Rowan’s second example is Emeryville, CA-based Tethys Bioscience. This company looks at the genetic profile of certain markers in the blood to measure the likelihood that a person will get Type 2 diabetes in the future. This test, which has a list price of $585 and can be taken more than once, is thought to help scare patients to change the bad lifestyle habits (lack of exercise, junk food diets, etc.) that can put them on the road to diabetes.

While that’s a higher price than most diagnostics, it’s also cheaper than daily needlesticks to monitor glucose or giving patients drugs like Merck’s sitagliptin (Januvia), Amylin and Eli Lilly’s exenatide (Byetta), or various forms of insulin. Since insurers are truly freaked about diabetes—UnitedHealth recently said it expects U.S. health spending on diabetes to total $3.4 trillion between now and 2020—it’s possible they might be willing to pay for a predictive test that scares people onto the straight and narrow. Tethys, which has been marketing its test since the second quarter of 2009, had sold more than 27,000 through the end of 2010, according to CEO Mickey Urdea. He says he expects annual sales to double in 2011.

Since next-generation sequencing is making it much faster and cheaper to do the R&D that underpins tests like this, the ultimate payoff of a $500-per-test product starts to look more attractive than it once did, Chapman says. Especially if these tests can be given to patients more than once to monitor their progress over time, she says. The diagnostic tests have extra value to insurers, she says, if they can help get people off expensive drugs that aren’t doing much good.

“The common theme you’ll see in diagnostics is we are looking for large markets where the diganostic is actionable,” Chapman says. “The doctor and the patient have to have something to do based on the new information. It’s not nice-to-have information. It’s information that will direct decisions.” She adds, “We are really looking at high-value decision points, with expensive therapeutic options.”

There are certainly plenty of risks here. The FDA has been making noise for years about whether to crack down and require more evidence before it will allow companies to offer molecular diagnostic tests. And insurers are certainly going to want to see hard data, published in top scientific journals, before they reimburse for a $500 test, much like they do for a $4,000 test.

Apparently, those risks don’t seem quite as daunting as they did over the past couple years. Chapman says that this year at the JP Morgan Healthcare Conference in San Francisco she picked up on a much more optimistic vibe than in the past couple years, when entrepreneurs were hunkering down and wondering if they’d ever get financing again for their ideas.

“I was pleased to see that people are just getting on and doing it, building their businesses,” Chapman says.

Mohr Davidow, she says, is also in position to be bold, and make new investments in life sciences, rather than just help existing portfolio companies eke out a living. “These are exciting times,” she says.

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