Digene's Long Road Towards a Blockbuster

After spending a decade developing its technology and product development capabilities, centered on testing for human papillomavirus, the cause of cervical cancer, Digene Corp. is growing its top line and finally gaining visibility. Now, the question is whether it can validate its test clinically and secure its market position, which means dislodging an entrenched cytology infrastructure. If successful, the company could become a superstar. On the other hand, its proprietary position could be undermined by other cervical cancer markers that appear downstream of initial HPV infection and have a higher correlation with disease. And Digene's focus on the HPV product opportunity has limited its efforts in developing its core technology at a time when other companies are dedicating significant resources to similar efforts.

Digene has established itsbona fides in HPV testing. But will its assay change medical practice and make the company a superstar?

by Mark L. Ratner

• After spending the last decade developing capabilities in technology and product development, manufacturing, and clinical validation, Digene is growing its top line and finally gaining visibility.

• Digene's strong HPV IP portfolio is, in some respects, reminiscent of Chiron's stranglehold on hepatitis C testing. Recently published clinical data have validated the use of the company's FDA-approved adjunctive molecular test for HPV, the cause of cervical cancer, following an ambiguous Pap smear.

• But to establish this test as a primary cervical cancer screen means dislodging an entrenched cytology infrastructure. And Digene's position could be undermined by other markers that appear downstream of initial HPV infection and have a higher correlation with disease.

• The company believes its Hybrid Capturetechnology also has applications in genomics research. However, its focus on the HPV product opportunity has limited its efforts in developing HC at a time when other companies are dedicating significant resources to similar efforts.

Reading the five-year-old IPO prospectus for Digene Corp. , one can't help but be struck by the degree to which it has followed the commercialization strategy it articulated at that time—a strategy that reflects a longstanding awareness of the lengthy clinical challenge it faces.

In fact, Digene has been deliberately following the same plan since 1990, when it was taken over by the current managers: chairman and CEO Evan Jones and president, COO, and CFO Charles Fleischman. Their idea was to develop Digene's nucleic-acid based signal amplification test platform, called Hybrid Capture(HC); apply the technology to testing for human papilloma virus (HPV), now understood to cause cervical cancer in better than 99% of cases; gather the clinical data necessary to drive change in existing medical practice, which is focused on visual examination of cells from a Pap smear; build a franchise around cervical cancer screening using HPV; and thereby establish its credentials as a developer and maker of molecular diagnostics focusing on women's health.

In some respects, Digene's story evokes elements of two of diagnostics' most important recent major successes: Because screening for cervical cancer is central to women's health testing, if Digene succeeds in making molecular testing for HPV the industry standard, which is its stated intention, the company's dominant intellectual property position could enable it to control that market the way Chiron Corp. has used its hepatitis C patents to dominate the blood banking business. (See "Chiron's Blood Screening Gambit: Checkmate or Stalemate?" IN VIVO, December 1999 [A#1999800266.) In marketing, Digene's strategy is reminiscent of Cytyc Corp. 's unrelenting medical education and reimbursement campaign to replace traditional Pap smears, a long-term investment that only over time has driven change in medical practice and enabled Cytyc to garner a nearly 50% (and still rising) share of the Pap market with its ThinPrep liquid-based, automated Pap smear slide preparation system.

But unlike a test for hepatitis C, an HPV test is not a direct measure of disease but of its causative agent, which results in cervical cancer in only 5% of cases. Digene, unlike Chiron, therefore will presumably face competition from tests based on other, downstream markers—or panels of markers, including but not limited to Digene's proprietary high-risk HPV subtypes—that better correlate with disease progression.

The question for Digene is whether, Cytyc-like, it can validate its test clinically and secure its market position before a competing methodology comes along that threatens to displace it. On the other hand, if established, its HPV test would enjoy the same advantages as any entrenched clinical practice: the same inertia that slows adoption would then work to its advantage.

Digene's Pedigree

Evan Jones learned entrepreneurship from stepfather Edwin C. (Jack) Whitehead, who built the clinical chemistry company, Technicon Corp., into a $400 million operation before Revlon acquired it in 1980 (and subsequently sold it to Cooper Companies Inc., which then passed it on to Bayer AG ). One of Whitehead's business teachings was to lead, and not follow. With Digene, Jones is heeding that counsel: to succeed, the company must define a new rationale for cervical cancer screening and develop the methodologies to deliver such tests.

In the early 1980s, Jones worked for Perkin Elmer Corp. (now Applera Corp. ), where he developed the plan for several of its businesses, including PCR. Jones subsequently joined the VC firm CW Group, where he crafted seed deals. CW had first-hand experience in molecular diagnostics through its investment in Chugai Pharmaceutical Co. Ltd. 's Gen-Probe Inc. Jones personally had been involved in a mixture of device and therapeutics deals.

Jones watched those companies get packaged by the VCs, and the writing off of a number of portfolio companies that were either aspiring research products companies or potential diagnostics companies. This was 1987, 1988—a cold winter for biotech investing. "The VCs took a very jaded, hardened approach," he recalls. "In terms of running Digene, it taught us to be very selective in what we wanted to do. Our company had to make a clinical difference and had to have the staying power to weather the ups and downs."

Jack Whitehead had helped finance an acquisition vehicle for Jones and Fleischman: Greenwich, CT-based Armonk Partners, which they used to buy Digene in 1990. Backed with approximately $6 million in venture money in the late '80s, Digene was essentially defunct by 1990. But it gave the duo a shell within which to erect their vision of a molecular diagnostics business. It had some good intellectual property in HPV and a rudimentary in situhybridization-based test for the virus. But more importantly, Jones points out, Digene had IP that would help in developing a diagnostics platform, and a team of 30 people. (A testament to its long-term perspective, sixteen of Digene's current employees have been with the company for more than 10 years.)

In December 1990, Jones and Fleischman also acquired for Digene the diagnostics business of Life Technologies Inc. (LTI, now part of Invitrogen Corp. ). LTI had the only FDA-approved HPV diagnostic product, an ongoing business of a couple of million dollars, and the IP that would be the foundation of Digene's position in HPV. (Over the years, Digene has added to its portfolio by in-licensing additional IP around HPV subtypes—patents from Institut Pasteur [See Deal], Georgetown University , and Kanebo Ltd. Today, the company owes a total of 4-5% of top-line HPV test revenues to its licensors.)

Of course, neither Jones nor Fleischman could have realized the absolute link between HPV and cervical cancer in 1990. "We recognized the role of HPV in the development of cervical cancer," says Fleischman, "and the lack of an effective diagnostic test, which is why we initially put together several pieces of companies that had spent a lot of money and developed some very interesting science, but had been completely unable to commercialize their efforts."

Still, some results in life can only be attributed to serendipity, he admits. "We believed the relationship between HPV and cervical cancer was stronger than any known relationship between a virus and a cancer, but we neither knew nor expected that the causal relationship was over 99 percent. We felt that over 70 percent would be enough to generate clinically important information" and establish a role for HPV status as a diagnostic that could compete with a Pap smear on cost and sensitivity.

More broadly, their goal in 1990 was to build a pre-eminent company with US manufacturing capabilities around women's health. "A decade ago," explains Fleischman, "women were perceived as underserved in the marketplace, but were, and are, also vital to health-care decision making in families. We felt we could capitalize on the interest of women in their own well-being." Importantly, they believed that they understood better than many others involved in fledging molecular diagnostics companies the significant challenges in moving from a core technology to clinically meaningful and cost-effective applications, and successfully and reproducibly manufacturing product. And because they were self-funding the company, Jones and Fleischman could take their time building clinical evidence of utility without feeling pressure from a VC-filled board of directors to deliver.

"A number of companies underestimated these challenges," Fleischman suggests, with hindsight. Small companies, without a doubt. But even large companies underestimated the regulatory challenge, he believes—especially those companies that expected to put out an entire menu of products on an automated machine quickly. "You have to lock in on the technology before you execute clinical trials, before you have applied to FDA. That means you have to get beyond your technology up front, which is very challenging for a number of organizations." Large companies didn't understand the long product development and commercialization cycles, he contends. They weren't willing to commit: they'd spend, but then shut a program down.

Today, Fleischman sees the major players—Roche , Abbott Diagnostics , and Bayer—making more reasoned commitments. "The larger players now realize both the opportunity and the challenge, and no longer have a belief that they can broadly apply a technology internally across a range of tests immediately."

But in 1990, molecular diagnostics was completely out of favor. "People were saying that immunoassay would solve the technical problems in clinical diagnostics," recalls Evan Jones. He and Fleischman, however, said "Great, but there must be things that a nucleic acid test can do to improve health care." "We were rigorous in our criteria," Jones says. "An actionable test had to provide information you couldn't get from an immunoaasay or other diagnostic methodology."

While Digene wasn't betting solely on HPV—it had developed viral load management tests and products for the research market—management saw this product as the way to establish Digene's credibility as a developer and manufacturer of specialty diagnostics. "We tried to have enough diversity in our plan to get out some winners, including a group of more obvious products with lower commercial hurdles," says Jones. "But in our view HPV was the home-run product."

Putting the Technology House in Order

Even by 1995, when in vitroevidence of the molecular pathogenesis of HPV-related cervical cancer began appearing in the scientific literature, no validated clinical test existed that could be used in large-scale trials to measure the clinical impact of screening large numbers of women for HPV. Between 1990 and 1995, however, Digene had refined HC technology, bringing together a series of 10- to 50-fold improvements in detection, which allowed its HPV test to attain levels of sensitivities not previously achieved. Those developments put Digene in position to design such trials.

During this period, the company had to weather one of biotech's periodic financing droughts. In 1992 and 1993, Jones virtually bankrolled Digene himself, putting up nearly $1 million to cover the company's $150,000 monthly burn. "We certainly couldn't have gone public then," he says, "and if we'd been venture capital backed, the VCs probably would have pulled the plug."

In 1993, Digene and International Murex Technologies Corp. (subsequently acquired by Abbott Diagnostics' parent, Abbott Laboratories Inc. [See Deal]) entered into a development and license agreement for Digene's DNA probes targeting infectious diseases, including HBV and HPV [See Deal], expanding the agreement a year later to include Digene's STD tests and a $3 million equity investment by Murex in the company [See Deal]. Digene was in essence funded during that time by Murex and, along with Jones, other wealthy private investors.

Initially, Digene was going to focus on in situhybridization (ISH) products for detecting HPV and infectious diseases, according to Jones. But that strategy soon changed. "What we learned was that if you want to make a mass market test to be used in the millions, a visually based diagnostic was both extremely difficult to manufacture and put significant burdens on the lab. We decided instead to focus on solution-based diagnostic tests that can be manufactured in scale using automated equipment and performed by labs in high volume. That was fundamental decision we made, and I'm absolutely convinced it was the right decision."

That's not to say ISH doesn't have its place commercially, which Jones acknowledges. A handful of commercial fluorescent in situhybridization (FISH) tests, notably the assay from Vysis Inc. , a division of BP PLC , for determining which patients should receive Genentech Inc. 's breast cancer drug trastuzumab (Herceptin), have made it to the market. (See "Vysis Preps for Prime Time," IN VIVO, June 2001 [A#2001800130.) But he points out that the Vysis assay is a patient management test, and that most FISH assays will have at most $15-25 million in sales—not enough to attract the attention of large multinationals. "We want to make mass market tests that can be initially diagnostic. It costs too much in time and dollars to make a diagnostic work if you don't think you can expand it to the secondary market. We could one day be selling 50 million HPV tests. At $10-15 revenue per test, it looks like a pharmaceutical.

"We took that family of products [from pre-1990 Digene and LTI] and migrated it to the chemiluminescent format," Jones explains. The transformation was driven by two factors: the regulatory environment, which tightened up dramatically in the early 1990s; and the need to verify product performance and improve it, if necessary. "Sometimes, you can't do that without a large-scale clinical trial," he observes, adding that to get to the performance it has now—near 100% sensitivity for disease—Digene had to add another group of four HPV probes, which it incorporated into the second-generation test, HC2, approved by FDA in 1999. Slow progress.

By staying focused on clinical need, HCevolved into a simple, easy-to-use, automatable, one-step sample prep that combines RNA probes that bind to HPV subtypes in a specimen and antibodies that amplify the signal. HC provides an exquisitely clean system with virtually no background and with moderate equipment costs—a lab can install a complete system for around $20,000. It's in effect an immunoassay for sequence-specific genes, Jones explains. HC is also flexible: change the probe set and you can detect a different analyte, using the same process and reagents.

HCand branched DNA (bDNA) are essentially the only signal amplification technologies used in clinical diagnostics. (bDNA, a process invented by Chiron and sold to Bayer as part of its acquisition of Chiron Diagnostics [See Deal], uses branched probes that build up a large structure, often referred to as a "Christmas tree" or "antenna" approach, which is then lit up with labeled oligonucleotides.)

"We propose that Hybrid Captureis an ideal platform for women's health and related cancers," offers Jones. BDNA requires overnight processing (vs. 4-6 hours for HC), and bDNA reagents are more expensive. And competing target amplification technologies, such as PCR and Gen-Probe's TMA, require a closed decontamination system and more internal controls—investments by customers that Jones notes is not necessary with Digene's HC.

Target amplification technologies such as PCR do have advantages, however, especially when using short probes. But "PCR has not been a successful competitor to us in HPV because amplifying a broad spectrum of virus types requires a consensus primer," says Jones, and such primers aren't easy to identify, given the frequency of viral mutations. Moreover, Digene wants very long probes—in the case of HPV, 8000 base pairs (the full length of the viral genome)—in order to maximize signal amplification. According to Jones: "We calculate that we can get about a 3000-fold amplification of one HPV molecule by coming in with the hybrid probe and decorating it with antibodies that have attached to them enzyme molecules that trigger a reaction with the chemiluminescent substrate." The Digene HC2HPV test uses a mixture of HPV probes, 13 of which are specific for high-risk HPV subtypes. "We can break it apart and test for individual HPV subtypes," Jones says, "or add other HPV probes. But that's not the issue: the issue is how to get your test established as the standard of care."

That meant finding a measurable indication to show that HCHPV technology provides information not available from a Pap smear. "Pap has no predictive value," Jones suggests. "It's merely a snapshot." If a woman is positive for cervical cancer by Pap, a physician has the information to treat her. But if a Pap is negative, the reliability of that negative result is very low.

But as Digene's own strategy attests, having a scientific rationale for a new test and proving its clinical value are two very different things. Moreover, for all its awareness of the need for good clinical data, Digene itself took longer to get approval for its second-generation HC2HPV test than management had anticipated. (It finally cleared FDA two years ago, but only after including probes for four additional high-risk subtypes.) "From registration in '99 we have made demonstrable progress," states Jones. "Our experience shows how much money you can spend before making a profit, before you have that approval and your data."

The Road to Clinical Validation

Cervical cancer is one of the few cancers that are 100% curable if treated early. In the second half of the 1990s, data have emerged from academic clinical researchers showing a better than 99% link between HPV infection and the development of cervical cancer. While 5% of women may have the persistent infection that causes disease, upwards of 40% of women, especially younger women, may have HPV in their system transiently before the immune system clears it, which can take 3-5 years.

The first indication for Digene's HCHPV was as a reflex (adjunctive) test for borderline Pap smears. Some 2-3 million tests in the US are classified as ASCUS (atypical squamous cells of undetermined significance). Current practice is to either refer ASCUS patients to immediate colposcopy (visual examination of the cervix) and biopsy, or follow up with repeat Pap every 4-6 months. But clinical data published in February 2001 from ALTS (ASCUS/LSIL Triage Study), a National Cancer Institute -sponsored trial of 3,488 women with a diagnosis of ASCUS, has caught the attention of labs and Ob/Gyns and convinced Digene that HC2 HPV plus a repeat Pap smear, one of the three arms of the ALTS study, should be the standard of care for triage of ASCUS patients. "The trial took five years," Evan Jones points out. "We had to make the test and work closely with NCI during the trial. That was the foundational work we had to do."

Moreover, Digene is even more convinced that the next wave of ALTS data, now making their way through peer review, including data on cost-effectiveness and patient follow-up to correlate triage with disease progression, will end any debate about the value of Digene's test versus Pap alone, and further entrench its position, Jones says. "We knew five years ago the performance difference between Pap and HCHPV [plus Pap]" as a triage test for referral to colposcopy. "What was required to drive it home and close that market was massive-scale clinical science and investment."

But while clinical validation with ASCUS patients is an essential initial hurdle for Digene's HPV test, and Digene's projected 50% annual growth rate over the next several years (from a $19 million base in the fiscal year ended June 30, 2001) is largely predicated on sales of HC2HPV as a reflex test, a much larger opportunity in HPV would come from establishing HC2 HPV as a primary screen. In the US and much of Europe, that means displacing Pap as the initial test, which means challenging an entrenched cytology infrastructure. Elsewhere, in developing countries where no cytology infrastructure exists to conduct Pap, it represents an opportunity to introduce cervical screening—a much larger market analysts peg at around 25 million tests sold, or upwards of $200 million.

Over all, Digene has looked at data from 30,000 women and six clinical trials that are testing HC2HPV as a primary screen (see Exhibit 1). Based on the data, Digene firmly believes that payers will eventually force the market to buy the Digene HC2 HPV test as an up-front screen. "We're setting our sights now on HPV as a stand-alone screening test," Jones says. The first step towards that is the so-called SuperPap test Digene expects to file with FDA in September 2001 using both HC2 HPV and Pap up front. "Digene should have considerable momentum by 2007 selling HC2 HPV as a primary screen," he avers.

Because HC2HPV is 1-2% less specific than Pap, the SuperPap combination loses a little on specificity. But the loss is more than offset by gains in negative predictive value—a combination test showing that a "no virus" result is 99.8% predictive, which given the slow progression of HPV infection into cervical cancer should mean less frequent re-tests. "The very high negative predictive value means physicians can separate out the better than 90% of women who are normal with high confidence, and focus resources on the rest," states Jones. For example, results from a trial at the Imperial Cancer Research Fund that looked at HC2 HPV versus Pap as a primary screen, announced on September 5 at the 19th International Papillomavirus Conference in Florianapolis, Brazil, showed a gain of 26% sensitivity for HPV, at a cost of only 3% specificity (namely, that only 3% more women went on to the reflex test).

But while Digene management may be believers, few in the industry expect HC2HPV to become a primary screen—certainly not any time soon in the US. That's because the up-front information in a Digene HPV test won't be sufficient to determine who among the vast majority of women that harbor HPV will get cervical cancer. (Pap shares that problem, but it got there first: Digene won't be able to dislodge it without being able to show a clear, added clinical triage benefit.) Notes Steve Anderson, PhD, CSO, molecular diagnostics at Laboratory Corp. of America : "It's too early to figure out the algorithm for a primary screen; for example, in follow-up, who would have a repeat Pap and who would have a colposcopy."

But Anderson also agrees that HC2HPV has its advantages and is relatively straightforward. "It's a complex assay, but user friendly, and labs with molecular experience find it easy to perform." On the other hand, he also says Pap won't go away easily, "even with its limits. The pattern is to bring in molecular diagnostics as an adjunct. Then, as cancer is better understood and new markers are found, molecular will move up to be a more primary tool."

That's okay with Jones, who points out that Digene faced similar skepticism about borderline HPV testing before the initial ALTS data were published earlier this year. And he readily acknowledges the tremendous inertia around use of Pap in the US clinical system. Thus, in the near term, Digene will first look to introduce HC2HPV as a primary screen in developing countries, which have no cytology infrastructure.

Arguing for the use of HC2HPV in developing countries as a primary screen sooner rather than later may make more sense than going head-on against Pap. But Dan Hogan, Quest Diagnostics Inc. 's director, sales and marketing, anatomic pathology and applied genomics, points out that substituting HC for Pap, especially for women under 30, would result in more false positives because HPV is usually a transient virus.

Direct detection of HPV therefore isn't the ultimate marker for cervical cancer. "It would be better to be able to look for persistent infection, first," he says, using a marker for the viral lesion or a protein that appears in response to viral integration into the cell, which can be measured by mRNAs. Or, adds Digene SVP and CSO, Attila Lorincz, PhD, a pattern of markers that are even more predictive of cervical cancer, as well as of the risk for other cancers and infectious and inflammatory diseases.

Such markers have not yet been identified and turned into validated assays, however, a process that will take years. Given that fact, Dan Hogan believes that with improvements, HC2HPV could become a primary screen, supplanting Pap, if not for 5-10 years.

Gaining Traction

Digene's business currently has a 50% underlying growth rate, albeit from a small base. "We've had real moves in market share this year, but there's more to come," opines Evan Jones, after definitive data are available, including the second wave of ALTS data expected next year. "As more data come out, our position will be stronger," he says. "We have the data, we know we have a home run. Now we have to put everything we have behind it."

Clearing the home-run fence means driving the data beyond the ASCUS population into the existing global screening market and, importantly, the market for unscreened women—10-15 million existing tests, plus a portion of the 1.5 billion unscreened women. "It's a marketing job," Jones notes, "more so than a scientific effort."

In the US, there's no better marketing partner than Cytyc, and the two are co-promoting the combination of cytology and HC2HPV directly from the same test vial for reflex testing of borderline cytology results [See Deal]. (See "Cytyc and Digene Strike a Deal," IN VIVO, Feb. 2001 [A#2001800043.) Cytyc's sales force is promoting the product combination of HC2 HPV and ThinPrep to 30,000 US Ob/Gyns; the deal is contributing strongly to Digene's current top-line growth.

"We aren't in a position to approach physicians ourselves yet, at least on a one-on-one, detailing basis," explains Rob Lilley, Digene SVP, global marketing and sales, who joined the company in 1996 as VP, European sales. On the other hand, Digene has accessed the lab market with a direct sales force. "With 150 US lab customers, we have adequate distribution, and we have developed co-marketing programs with many of the larger ones." Majors including American Medical Laboratories Inc. , LabCorp., Quest, and Unilab Corp. feature HPV reflex testing.

"A critical issue for us is physician demand creation," Lilley says, "and Cytyc has a unique detailing force. "They spent a lot of money going out and talking to physicians before seeing the return, including using television to reach consumers, but now they're reaping the rewards. And we are beginning to benefit from this unique effort." And Lilley thinks Digene, historically a conservative company when it comes to public outreach, has to become equally bold now. "Joining up with Cytyc," he says, "is a move in that direction."

Digene and Cytyc have each created and tried to move a similar story predicated on the limitations of traditional Pap. And because of the current lack of competition (including, for the moment, with each other), it's not yet time to stop investing in the broader market for fear that others will benefit, Lilley suggests. Each derives the direct benefit of its investment in demand creation, and each can drive that demand creation through physician education. "We have an equivalent view on how to dominate a niche," notes Cytyc's EVP and COO, Dan Levangie. In fact, the thought leaders are the same for each. They even share the same faculty members on their speakers' bureaus.

Combining HC2HPV and ThinPrep is a win-win in ASCUS. Even in primary screening, Digene is no threat to Cytyc as long as it limits its marketing of HPV for that use to the developing world, a market of scant interest to Cytyc because of the lack of cytology infrastructure. But Digene's SuperPap filing signals the beginning of a more competitive phase. Why, then, would Cytyc agree to work with Digene?

To begin with, notes Levangie, the use of HPV testing as triage is still in its infancy. "It's a little early in the game to know what will happen longer term" with regard to the rate of adoption of HPV, he points out. "We tried to do our best to develop a business plan that will evolve, one that gives base sales to Digene and incremental sales to Cytyc." Perhaps more to the point, the two-and-a-half-year co-promotion gives Cytyc time both to gauge the success of HPV in the triage market and to assess the competitive threat posed by Digene. If Digene is successful, Cytyc might well want to acquire the company. Under that scenario, it makes sense for Cytyc to see Digene become well established even beyond Digene's ability to add to Cytyc's sales. Additionally, should Cytyc want to expand its product offerings in cervical screening, it might find Digene's international capabilities enticing.

Outside the US, Digene has launched a combination strategy of direct-to-screen campaigns, in countries with no cytology infrastructure, and reflex testing. As part of that effort, it controls a direct network in Brazil through a joint venture, Digene do Brasil Ltda.But in Europe, the Middle East, and Africa, mindful of what Evan Jones calls "the Tower of Babel effect" of having many countries with different languages and individualized national screening programs, Digene has turned to large companies—first Abbott, and now Roche. "The decision is not etched in stone," Jones says, "but we get more value for our investment this way."

Its relationship with Abbott is longstanding, going back to that company's acquisition of Murex in 1998. But it appears to be winding down now.

Abbott was hit with a consent decree in 1999, half a year after expanding an agreement to exclusively distribute Digene's products—tests for HPV, HBV, CMV, and chlamydia/gonhorrea (CT/NG)—in Europe, the Middle East and Africa. As a result of the decree, Jones notes, Abbott spent the next year-and-a-half highly internally focused, under extensive financial constraints. "They were working hard to build our European business, but we had expectations of what needed to be done, which took money, and Abbott's ability to invest was constrained."

When Abbott didn't hit the minimum sales threshold, Roche Molecular Systems Inc. , a division of Roche, came forward with a "significant offer," according to Jones, including a $5 million investment in Digene that may convert to equity in FY 2003, a prepayment of nearly $8 million in deferred revenue, representing advanced payment of a guaranteed level of minimum sales, and other significant but undisclosed considerations [See Deal]. "The change wasn't so much because of unhappiness with Abbott as it was a result of our drive and passion to succeed," states Jones. "Roche stepped up to the plate with a different level of commitment in an extraordinarily quick way." An alternative theory is that Abbott never had a declared strategy to go for HPV; rather, it was an artifact of the Murex deal.

Digene knows it can learn from large companies—specifically its new distribution partner. Like everyone else, Digene has seen how Roche worked to get acceptance for its molecular viral load tests, which mirrors Digene's stepwise move in HPV from a focus on labs toward payers, physicians, and patients. HIV viral load testing parallels HPV in several ways: raising awareness among physicians of the importance of final status, working with payers' organizations for reimbursement, and educating women about their right and need to know if they harbor a cancer-causing virus.

It's in the Vial

Like Abbott, Roche is also a valuable partner because of its presence in STD testing, which fits with Digene's HC-based tests for CT/NG and an HC-based test for herpes simplex virus now in development. But Digene's presence in STD testing has grown more slowly than expected. For example, chlamydia testing is not yet a profitable business because of delays in the development of Rapid Capture(RC), the company's semi-automated HC platform. Now, however, the RC system development is complete, says Jones. "We can move forward with the program."

Importantly, to advance STDs, as well as cervical cancer screening and, more generally, women's health testing using HC, Digene is developing a proprietary universal collection medium (UCM). It is designed to test for various types of nucleic acids and proteins from an outpatient specimen and view cellular morphology. If adopted, UCM would enable Digene to incorporate new genomics markers, including those for expressed RNA.

UCM could be a valuable adjunct to HCtechnology in several ways. For example, Digene knows it cannot successfully position HC2 HPV as a front-line screen without Pap as a back-up, which means being able to perform both tests from the same sample. "If your system doesn't allow for that, you're constrained," Jones suggests. That means having a flexible medium for sample collection such as ThinPrep or UCM that allows combination testing.

"The patient specimen is a key driver because it defines the list of potential tests that can be done," explains Attila Lorincz. "Tremendous benefits can accrue to having ownership of that vial." When Digene management looked at the marketplace for cervical cytology, HPV testing, and STD testing, it quickly realized that the market was filled with a diversity of media, most of which didn't preserve morphology and thereby the ability to visualize whole cells for abnormalities.

"As simple as it might seem, a universal medium is highly desired in the diagnostics industry," Lorincz suggests. The different media that are out there are not compatible with all the different potential uses because of the differences in the amount of salts and other chemicals they contain. Only Cytyc, with ThinPrep, and TriPath Imaging Inc. 's AutoCyte Prepmedium have that capability, he says.

Unlike the large-volume vials used in ThinPrepand AutoCyte Prep, which increase the complexity of storage and transportation, UCM is a small-volume sample container containing 1ml of proprietary medium that can directly replace Digene's predecessor medium, STM, which does not preserve morphology. UCM has a greater than nine-month shelf life for stored DNA and preserves RNA and morphology for over six weeks at room temperature, says Lorincz, allowing expression analysis directly from the vial and immediate correlation with cytology. Digene is currently positioning UCM both for use with HPV as a primary screen in low-resource countries that do not have a cytology infrastructure—where women don't visit an Ob/Gyn regularly and self-sampling could thereby significantly increase the number of women screened—and for research applications.

Digene can run HC2on UCM directly without processing by removing a 50-microliter aliquot. The company also claims that UCM allows access to all molecules in the cell—carbohydrates, protein, DNA, and RNA. With UCM, a physician—or patient/consumer, for that matter, via self-sampling and transport to a lab or physician's office—can collect a specimen for an HPV primary test, run an aliquot of that sample on Digene's automated RC system, then reflex to cytology if the result is positive. Digene is currently validating UCM for morphology and DNA detection.

Because Digene is currently positioning UCM for use in countries where women don't regularly visit an Ob/Gyn, and in countries with ineffective screening programs, it is unlikely to compete with Cytyc's marketing efforts for ThinPrep, which are directly to physicians in the US and those European countries with good cytology infrastructure. Its successful development therefore shouldn't further drive a wedge between these partners, at least for some time.

Digene's Balancing Act

Adding UCM to the HCplatform would enable Digene to better leverage its capabilities in the development of tools for the research market—which would both generate cash flow and, Evan Jones points out, continue building innovation within the company that would keep it at the cutting edge of the diagnostics business. But expanding indications for HC2 HPV, automating its system, and building a panel of women's health tests around HPV, including having a technology for performing multiple tests (including cytology) from a single vial, comprise Digene's short list of areas for investment.

"We have a longer list," Jones says, including developing HCas a genomics research platform, which makes sense for the company to pursue. However, that would mean "defocusing," he contends: "We therefore won't pursue them as large-scale investment initiatives now."

That represents a change in management's thinking from early 2001. With the release of the ALTS data pending, Digene filed for a follow-on public offering in February, expecting to raise over $75 million, which would have given it the resources to expand its technology development in the genomics research arena, and also its internal marker discovery program. But soon after, in March, both the Nasdaq and the Dow Jones averages cracked over a four-day stretch. For Digene, that meant no new retail buyers, and any prospective institutional investors, Jones points out, were waiting for the road show. In the five weeks between registration and withdrawal of the offering [See Deal], the company's shares lost about 60% of their value.

To some extent, the Roche partnership has mitigated the damage from Digene's inability to tap the public capital markets. "Our core [HPV] business is not markedly constrained, because our balance sheet improved with the Roche deal," Jones notes. "And we have the cash flow to take the company to profitability."

Digene's lack of additional funding, however, did constrain its ability to significantly expand early-stage programs. "A stronger balance sheet would allow us to make more of those investments," he acknowledges. For now, Digene is focusing on growing its business at near 50% via HPV. "We're content to stick to our core focus," he says. "The product is critical, the platform is secondary to the execution play."

But had the 2001 financing gone through, Digene was prepared with a strategy for investment in genomics to exploit its expertise in HCand extend into the research market, suggests Donna Marie Seyfried, Digene VP, business development.

Like Evan Jones, Seyfried is a veteran of Perkin Elmer, where she first directed the PCR business, and oversaw the PCR instrument business for PE after Roche bought it from Cetus [See Deal]. The investment to which Seyfried refers would have been the basis for Digene's next-generation research platform, and moved the company upstream into the gray area of transitional diagnostics—the kind of clinical research that requires ASRs (analyte specific reagents) and flexible research platforms to identify and validate new targets and markers. And the company had intended that vehicle—be it a spin-out or other strategy for freeing up the genomics effort—to maintain strong ties to Digene to "cross-pollinate" its diagnostics business, she explains. The huge discovery and validation need created by genomics, on the one hand, and the need for clinical relevance of targets, on the other, would position Digene in that center area.

Moreover, Digene has some experience in leveraging the research area—both in applying HCto genomics and in microarray development. For example, it initiated a co-development agreement in late 1998 to market HC to the research market for gene expression analysis (known at Digene as EAS and marketed by Applied Biosystems Group (ABI), a business unit of Applera, as XpressScreen), which included product supply, licenses, marketing and distribution, and Digene's development of oligonucleotide probes for ABI on a custom basis. But ABI currently is focused on leveraging the value of real-time PCR. As a result, the collaboration is now nonexclusive and "not very active" today, says Evan Jones, although ABI did extend it from three to five years and, Seyfried contends, XpressScreen, albeit it in a small market, enjoys an excellent reputation.

But even before the Nasdaq dive that thwarted its plans for a FOPO, external circumstances had affected how Digene leveraged the value of HC.

"In 1998, we weren't equipped to distribute a gene expression product for research," Seyfried explains. Applera division Tropix Inc. was its exclusive distributor. Then pharma companies changed their view, and many decided to bring their high-throughput screening programs in-house via licensing deals for technology access. "Tropix's business model focused on product and service," she relates, "but the market wanted technology." Digene suffered from that market shift.

Despite its reluctance to expand non-core programs until its financial position strengthens, Digene is planning to soon release an oligonucleotide-based universal detection kit that will be compatible with all conventional glass-slide based (spotted) microarrays. (The kit won't be optimized for Affymetrix Inc. 's GeneChipplatform, but could run on its other scanners.) It also has an opportunistic pharmacogenomics service business based on assay development and early-stage clinical sample testing. "It's a specialty CRO focused on molecular analyses," says Seyfried, adding that in addition to HPV vaccine developers, some pharma companies have come to Digene for analysis of gene-based markers for infectious diseases and cancers, including but not limited to HPV.

How do these admittedly scaled-back efforts stack up at a time when so many other companies are making substantial investments in genomics research platforms, microarray technology, and new target discovery? Digene does "feel the time pressure" to rapidly expand its portfolio, Seyfried admits.

Evan Jones acknowledges that managing resources is an issue Digene wrestles with every day. But he also thinks that as Digene gets bigger and becomes more successful with HPV, the company's ability to pull in new tests through license or acquisition will improve.

"The barriers to entry are the ability to invest in regulatory and marketing," he asserts. "Our perspective is that adequate content will be available for us to acquire, partner, or otherwise access either because we have a unique position carved out in the women's health arena or because we have the financial muscle to play the game. That's how we'll fill our pipeline in the future, as well as through internally driven investment."

The open question is whether HPV will give Digene that clout, a question that in turn depends on the company's ability to convert its test to a primary screen and/or tap the vast market of unscreened women. In either case, Digene appears to have begun a long walk on what appears to be a still much longer road.