Leveraging Assay Platforms to Create Category-Killer Diagnostic Tests

The availability of novel assay platforms represents a tipping point for diagnostics' adoption in the markets for translational medicine, esoteric testing, and high-complexity labs. Platform companies may be accustomed to defining their business strategies in terms of maximizing instrument placements but this may not be the optimal path to commercial success for a novel diagnostic test. They need to develop "category-killer" tests--those that combine platform and diagnostic content to offer a compelling clinical value proposition.

The ability to leverage an analytical platform can matter as much as content in the emerging field of molecular diagnostics.

S. Roopom Banerjee and Frank S. David, MD, PhD

The availability of novel analytical assay platforms represents a tipping point for diagnostics' adoption into the markets for translational medicine, esoteric testing, and high-complexity labs.

Platform players need to develop "category-killer" tests—those that combine platform and diagnostic content to offer a compelling clinical value proposition.

A test's clinical context—for example, acute versus chronic care or inpatient versus outpatient testing—will determine the parameters for an ideal marriage of platform and content that create a category-killer test.

Although platform companies may be accustomed to defining their business strategies in terms of maximizing instrument placements, this may not be the optimal path to commercial success for a novel diagnostic test.

Earlier this decade, clinical diagnostics was viewed by the broad investment community as a maturing, slow-growth, low-margin, and relatively uninteresting market. However, the emergence of novel molecular diagnostics in the last few years has catapulted the sector into the spotlight with public and private investors as well as larger strategic entities. (See Exhibit 1.) Successes this decade of Genomic Health Inc., the Digene Corp. division of Qiagen NV, Alere Inc.'s Biosite Inc., Myriad Genetics Inc., Cepheid, and the Cytyc Corp. division of Hologic Inc. laid the groundwork for a significant expansion in venture capital investments in emerging growth diagnostics. (See Exhibit 2.) Early-stage private companies benefiting from the surge in venture capital include BG Medicine Inc. and CardioDx Inc. in congestive heart failure (CHF) and AMI, Pathwork Diagnostics Inc. (tissue of origin), Prodesse Inc. (recently acquired by Gen-Probe Inc.) [See Deal] (flu), Tethys Bioscience Inc. (diabetes, metabolic disorders), and CareDx Inc. (acute graft rejection). Heightened investor interest is driven by the emergence of new tests that exploit our better understanding of human disease, physiology, and clinical workflow to meaningfully impact clinical practice, drug selection, and drug development. And often, it's the combination of an analytical platform and a novel biomarker that creates a category-killer diagnostic test.

Analytical platform companies have played a critical role in the development and deployment of novel tests. In their early years, pioneers Applied Biosystems (ABI, now part of Life Technologies Corp. [See Deal]) and Affymetrix Inc. deployed their technologies—quantitative PCR (qPCR) and microarray-based gene expression analysis, respectively—in research and academic markets. In the last five years, however, both companies expanded their menu of molecular diagnostic tests either organically or via partnership. ABI monetized its qPCR platform by capturing royalties on Taqman real-time PCR chemistries. qPCR, widely considered the gold standard for molecular diagnostics, is the basis of Digene's HPV genotyping test and Cepheid's GeneXpert MRSA test. In contrast, Affymetrix has penetrated the diagnostics market by selectively partnering with biomarker companies and content providers such as Roche, Epigenomics AG and Pathwork Diagnostics. Newer analytical platform companies such as Illumina Inc., Luminex Corp., Fluidigm Corp., and NanoString Technologies Inc. have similarly established themselves in the research arena, and then grown by developing or acquiring novel content for clinical diagnostics. The availability of these novel analytical platforms for diagnostic applications represents a tipping point for technology adoption into the markets for translational medicine, esoteric testing, and high-complexity labs.

Even highly disruptive, game-changing analytical platforms need to enter diagnostics to unlock the platform's full commercial potential. But simply acquiring content for content's sake is not sufficient. Affymetrix spent several years and more than $100 million working with Roche to develop the AmpliChip, aimed at testing for CYP450 diagnostic markers of drug metabolism and using them to guide drug choice decisions. The venture failed commercially due to intrinsic problems with this particular platform/content combination. From a content standpoint, the test was easy to develop, but it is of questionable clinical utility due to the lack of strong linkage with definitive management decisions, leading to a significant overestimation of the market opportunity. Furthermore, as a platform, AmpliChip was problematic to incorporate into clinical labs due to its intensive requirement for technician time and labor, complex and involved sample prep, long turnaround time, and need for a large-footprint machine in often-cramped clinical lab spaces. AmpliChip illustrates how a poor marriage of platform and content can lead to failure in the diagnostics realm, even for a highly innovative platform.

To succeed long term, platform players need to develop "category-killer" tests—those that combine platform and content to offer a compelling clinical value proposition. In addition, these companies need to build a compelling business strategy to achieve broad market adoption, attract investor interest, and ensure sustainable corporate growth.

Pitfalls in Picking Content

A category-killer test is, quite simply, one that fundamentally changes clinical practice. From a content standpoint, these tests target established markets with significant unmet medical need, and are typically based on validated markers with clear linkage to targets and diseases. Clinically relevant content is only part of the story, however. The critical element for a platform company is the unique platform/content combination that, through its combined attributes, drives a new standard of care by informing disruptive decision-making power.

Emerging diagnostics players often fall under the spell of clinically relevant content, particularly when it comes to apparently large market opportunities, without evaluating how the combination of the content with their platform will drive a fundamental change in clinical practice. The allure of a large end market is undeniable—PSA, creatinine, cholesterol, and troponin, for example, are certainly tested in very high volumes. But succeeding in these large markets in which the standard of care is entrenched and the perceived unmet need is sometimes low requires a compelling value proposition to physicians, patients, and payors. This value proposition must be derived from some fundamental attribute of the test contributed by the platform.

An analytical platform is typically differentiated along one or more attributes such as sample preparation and work flow complexity, analysis time, footprint, ease of interpretation, test cost, and capital equipment cost. A test's clinical context—for example, acute versus chronic care, or inpatient versus outpatient testing—will determine which attributes are most critical, and will therefore determine the parameters for an ideal marriage of platform and content that in turn create a category-killer test.

Category-killer tests can take many forms. All diagnostic measurements detect the presence or absence, or the change or rate of change, of a specific biomarker or analyte at specific points in time. A diagnostic test, sometimes called a point test, provides a static measure of physiological conditions at a point in time, and can be used as screening or confirmation, and alone or in conjunction with other modalities. A predictive or prognostic test provides a measure of future risk to the patient and enables physicians to choose the best preventative or disease-modifying therapies; these include tests like screens for KRAS mutations in colon cancer, to determine suitability for the cancer drugs cetuximab ( Erbitux) and panitumumab ( Vectibix), as well as Genomic Health's Onco type Dx breast cancer assay. Finally, a monitoring test is repeated at regular frequencies and provides a measure of disease progression, likelihood of future outbreak, or response to treatment, illustrated by emerging tests for lupus that predict flare-ups and enable better therapeutic management with immunosuppressants. There are potential opportunities for category-killers tests in all these areas, and each requires detailed diligence on the level of unmet medical need, the level of validation of the analytes and biomarkers, and the ability of a unique content-platform combination to drive a new care paradigm.

In some lucky cases, the perfect marriage of platform and content happens to coincide with a large market opportunity. From a strategic standpoint, Sequenom Inc.'s program to enter the large and established prenatal diagnostics market, and the persistent efforts of start-ups and also established players like Genzyme Corp.'s Genzyme Genetics in this technologically challenging field, demonstrate that success in this sort of setting requires a compelling clinical value proposition—in this case, the ability of the platform-content combination to transform an invasive diagnostic paradigm (amniocentesis) into a noninvasive one through the extraction of fetal cells or fetal DNA from maternal blood. (See "Noninvasive Prenatal Diagnostics: How Much Closer to Reality?" IN VIVO , November 2009 (Also see "Noninvasive Prenatal Diagnostics: How Much Closer to Reality? " - In Vivo, 1 Nov, 2009.).) Similarly, Nanosphere Inc. and Singulex Inc. are developing cardiac troponin (cTnI) assays on high-speed and ultra-high-sensitivity detection platforms. cTnI is a widely accepted marker for cardiac injury in acute care settings, and the market is well served by large companies including Abbott Laboratories Inc., Roche, and Siemens AG. The current players' tests can only diagnose an acute myocardial infarction in 12-24 hours after a suspected event, however, compared with minutes to hours on Nanosphere's and Singulex's platforms. As Singulex CEO Philippe Goix explains, "The pairing of this disruptive detection technology with this well-proven marker provides new insights for the characterization of patients presenting a cardiac risk," and could significantly change the early decision-making paradigm for acute cardiac injury, providing transformative value to all stakeholders.

Nanosphere's and Singulex's troponin tests suggest that one route to success for a new category-killing diagnostic is to provide a superior test using established markers in the prevailing clinical decision paradigm and site of decision-making. In other cases, the unique aspects of the platform can enable a shift in the decision-making paradigm to new care settings with distinct clinical value propositions. T2 Biosystems Inc. is developing a nanotechnology-based, label-free, multiplexed diagnostics platform that can quickly yield results from clinical samples without any additional sample preparation. Those elements of speed and ease of use are common characteristics of innovative point-of-care (POC) molecular and immunologic diagnostics. (See "Can Nanotech Be a Game-Changer for Molecular Diagnostics?" START-UP , November 2008 (Also see "Can Nanotech Be a Game-Changer for In Vitro Diagnostics? " - Medtech Insight, 1 Nov, 2008.).) Indeed, Biosite took that very approach. It developed a suite of unique POC tests for its proprietary platform, leading to its $1.6 billion acquisition by Inverness, which jumped in to outbid Beckman Coulter Inc. for the firm, in 2007. [See Deal] [See Deal] Although the principal value driver for Biosite, its BMP test, leveraged a unique biomarker that took many years to validate clinically, Biosite presumably could not have garnered the exit value it did without both an ability to deliver that test on a suitable platform to the hospital core lab and the prospect of leveraging its test content in a POC environment. (See "Wake-up Calls in IVD," IN VIVO , April 2007 (Also see "Wake-up Calls in IVD" - In Vivo, 1 Apr, 2007.).)

A platform's ability to deliver enhanced performance characteristics independent of test content suggests that a potential category-killer test on one platform may be less compelling—even ordinary—on another, depending on the clinical setting. The application of Cepheid's high-speed assay platform to MRSA testing, for example, has a major impact on patient screening for community and hospital-acquired inflection management. (See "Eyeing the Market for Infectious Disease Diagnostics," START-UP , June 2008 (Also see "Eyeing the Hospital Market for Infectious Disease Diagnostics" - Scrip, 1 Jun, 2008.).) By contrast, Cepheid's platform has less clinical relevance in areas such as oncology, where moderate multiplexing is more important than rapid turnaround time in driving clinical outcomes.

Building the Business Case

Once a category-killing test applicable to a particular platform is identified, the challenge becomes building the case for surmounting the key commercial challenges. In practice, category-killers have several common attributes: well-validated development and regulatory pathways; high-value, established reimbursement and economic justification; a concentrated base of purchasers and/or key influencers; attractive gross margins with superior cost profile; and strong IP and/or other barriers to followers. For platform companies, when the content is non-proprietary, the prinicipal IP protection is typically embedded in the platform. The other aspects of the business case, however, are a function of the combination of platform and content. And while platform companies may be accustomed to defining their business strategies in terms of maximizing instrument placements, this may not be the optimal path to commercial success for a novel diagnostic test.

The laboratory model established by the Clinical Laboratory Improvement Amendments (CLIA) of 1988 for high-complexity tests provides companies with the opportunity to succeed in diagnostics without burdensome capital equipment placements. For example, instead of pursuing a distributed testing model, whereby the companies benefit from a consumables stream, Genomic Health opted to establish a CLIA-certified service lab for its Onco type Dx. The company executed successfully on its strategy in several dimensions: it achieved first-mover advantage with no competitors for several years, garnered strong support from patient advocacy organizations, built consumer brand recognition and broad support among influential oncologists, and managed over 90% reimbursement coverage in the US.

For platform companies, the lesson is that a viable business case for category-killing assay on a novel platform need not require placement of capital equipment, at least in the early stages. In fact, those firms seeking to build the business case for their entrance into clinical diagnostics should look more toward content-focused companies for illustrations of success, as these players have historically been more acutely focused on building the case for category-killing tests. For example, in developing its Tissue of Origin test aimed at tumors with unknown primary sites, Pathwork Diagnostics identified and communicated a clear clinical value proposition that was based, according to CEO Deborah Neff, PhD, on inadequacies in immunohistochemistry, simultaneous with a high cost for making the wrong decision. "The economic cost-benefit equation is squarely in our favor," she says. The Pathmark test received FDA 510(k) clearance in early 2009 and is experiencing solid adoption in its first year of commercial launch.

Another example of a strong business case complementing a category-killer test is XDx's AlloMap, a blood-based test that measures the risk of cardiac graft rejection after heart transplants. AlloMap empowers physicians to manage immunosuppressant therapies and is positioned as an alternative to serial post-transplant endocardial biopsies, which are invasive, painful, of moderate sensitivity, and cost over $4,000 per procedure. It provides practical, technical and cost benefits (at $3,000 per test) compared with endocardial biopsy. XDx's business case is strengthened by the concentrated customer base (the top six transplant centers are 70% of the market) with well-identified influencers and thought leaders, as well as a favorable reimbursement regimen. Physicians ordering AlloMap use established CPT codes, and XDx has secured Medicare coverage in order to broaden the addressable patient base.

It's important that platform companies look to the model of successful content providers, to make sure they can make the case that the introduction of their technologies will favorably impact clinical practice and/or cost. Take the case of Xceed Molecular, a gene expression company. It pursued a dual strategy of launching a 3-D microarray platform as well as proprietary assays for breast cancer, lupus flare, and immune monitoring, but missed the mark on several fronts. First, it underestimated the dependence, or "stickiness," of its markets to an entrenched platform: it could not displace qPCR-based analytical methods. Xceed also lacked the bandwidth and resources to pursue a platform and content strategy simultaneously, with the result that, despite having a unique platform, it failed to define a business case and reimbursement strategy that would underpin the diagnostic assays—the platform/content combination did not give the company enough leverage to change the diagnostic paradigm.

Although platform companies often succeed by leveraging the value of established biomarkers, they can also seek to develop novel, proprietary biomarkers. While this strategy can add to the complexity of commercial success by requiring fundamental shifts in physicians' decision-making, there is also a role for novel content to augment, rather than supplant, existing diagnostics. For example, BG Medicine's proprietary test for the cardiac inflammatory marker Galectin-3, currently in pivotal clinical trials, is intended to provide prognostic information in CHF in concert with BNP. Similarly, SourceMDx Inc. has developed a qPCR-based panel that complements PSA by predicting the likelihood of progression to prostate cancer. These tests have the potential to become category-killers by providing complementary information that meaningfully impacts patient care. While platform-based companies have yet to adopt this approach, it can reduce the often-challenging risks of technology commoditization.

A Long-Term Portfolio Approach

Although companies like Life Technologies, Illumina, and Affymetrix have shown that platform development on its own can be a successful business model, it is equally apparent that investor interest is driven more by sales of high-margin tests than by sales or placement of capital equipment. Plus, platform companies are uniquely positioned to develop category-killer platform/content tests.

The rationale is compelling: such combinations can drive volume, channel access, and mindshare of clinical lab customers to a particular platform or service provider. And while some platform companies—Cepheid and Digene, for example—have succeeded with single category-killer tests, the more common sustainable approach is to take the razor/razorblade commercial model and mix in low-volume, high-value tests along with the high-volume commodity tests that are often non-exclusive to the platform.

In some cases, it is even possible to launch a business solely with non-exclusive tests, and later introduce exclusive category-killing content. Luminex launched its multiplexed xMAP platform in the early 2000s with an open source strategy, partnering with over 50 content providers and nearly 10 major instrument distributors. The strategy yielded over 4,000 instrument placements, albeit many with subpar utilization. With the acquisition of Tm Bioscience Corp. (now Luminex Molecular Diagnostics) in 2006, however, Luminex has begun to capitalize on its existing placements and the stickiness of the commodity assays to expand into proprietary tests. [See Deal] "Tm Bioscience's discovery engine lets us now control our own destiny," explains CEO Patrick Balthrop, Sr., augmented by a pipeline of assays for infectious disease, immunology, and oncology to fuel growth. For platform companies entering the diagnostics arena, a strategic combination of exclusive and non-exclusive tests can help to create a more robust clinical menu, a more sustainable diagnostics business, and a more attractive investment thesis.

There are now enough examples from molecular diagnostics to show that analytical assay platform companies may maximize their chances of success by strategically marrying their technologies with content, to create category-killing tests. Although there are multiple means to achieve the ends, platform companies that successfully acquire, develop and commercialize high-value clinical tests have the opportunity to excel as they make the transition into full-fledged molecular diagnostics players.

S. Roopom Banerjee is Director, Investment Banking, and Frank S. David, MD, PhD, is Manager, Strategic Advisors, at Leerink Swann, a health care-focused investment banking firm that provides capital markets, mergers and acquisition, corporate finance, equity research, asset management and strategic advisory services.