Diagnostics Market Disruption: Clinical and Financial Forces Driving Change

Diagnostics Market Disruption: Clinical and Financial Forces Driving ChangeRobert Boorstein, MD, PhDClasGroup Company

Presentation to the Health Industry Dealers AssociationNovember 12, 2015

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Drivers of Change in the Laboratory MarketUnremitting pressures for cost reductionsUnremitting pressures on reimbursements.Technological advances in laboratory testing and methodsImprovement in information management-the ability to move information Improvements in transportation and delivery systems-the ability to move specimensEmphasis on UtilityEmphasis on Value

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How is change manifest? Five trends to watchLaboratory ConsolidationsCentral Laboratory vs Point of CareGrowth of New Delivery ModelsGrowth of New TechnologiesCompetition across market sectors.

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Trend 1: Laboratory Consolidations

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What drives Laboratory ConsolidationsReduction in Labor Costs.Aging of laboratory work forceReduction in Capital CostsImprove productivity of capital investmens.Reduce Average Cost Per TestImproved QualityStandardization

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Why are trends in consolidation important?Fewer entities buying products, reagents, equipment, etc.Fewer entities making decisions about what reagents to buyA shift in market power from the seller to the buyerGreater distance of purchasing decision from the end user. Local management may have little influence on purchasing decisionsMay be more difficult to bring new products to market.Longer time interval from first contact to purchasing decision

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What are implications of these forces?Incumbent favored over new entrant.Larger organizations favored over smaller

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In what areas are we seeing most consolidation?Hospital consolidations into large networksSutter Health (California), 25 hospital network will have one microbiology lab, one molecular diagnostic lab.Consolidations of networks with Central lab consolidationsMount Sinai NY and ContinuumNew York PresbyterianNorth Shore LIJCommercial lab hospital partnershipsUMass QuestRegional labs can dominate state marketsArizona, New Mexico, Oklahoma, Rhode Island, Maine

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Market Diagnostics InternationalUS MDx Laboratory UniverseThirteen percent (13%) of all US clinical laboratories* currently perform molecular diagnostic tests. Most are either hospital or independent laboratories. This is unchanged from a year ago.9Type of LaboratoryMDxI Lab Universe*Percent of Total LabsMDxI Molecular Lab UniversePercent of Molecular LabsHospital Labs5,04329%1,63170%Independent Labs1,747(1,292 labs and 455 service centers)10%37816%Physician Office Labs/Clinics8,846**50%1476%Other Labs (ESRD; Blood Banks; Public Health, Home Health; Nursing, etc.)2,027**11%1718%Total17,633100%2,327100%

*Defined by MDxI as laboratories performing any test that is classified under CLIA regulations as moderately or highly complex.** Includes POL/clinic labs that participate in CAP proficiency surveys plus approximately 1,000 other labs that report proficiency results through the American Proficiency Institute (API).

What areas are seeing most consolidation?As hospitals consolidate, local hospital laboratories are reduced in size to become Rapid Response LaboratoriesProvide necessary chemistry, hematology and basic blood banking services.Standardization of these services across network

Laboratory areas that are either less time sensitive or require greater sophistication are targets for consolidation Anatomic Pathology (including histology, cytology)MicrobiologyAdvanced Blood BankEsoteric Testing/Molecular Diagnostics

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Market Diagnostics InternationalMolecular LaboratoriesBy Testing MenuGenetics onlyID and GeneticsID only

Gen Labs43419%ID Labs2,23996%Both34615%Gen only884%ID only1,89381%Total = 2,227Total = 2,327+8%-29%+6%The number of laboratories performing molecular diagnostic tests increased by 4.5% with nearly all of the increase in dedicated infectious disease molecular laboratories. Roughly two-thirds of new laboratories began with a very limited menu of just one or two molecular assaysLaboratories new to ID are either running just one or two tests on Meridians illumipro, Cepheids GeneXpert or are using BDs MicroProbe Processor.Although the number of labs performing genetic tests is relatively unchanged, many have added ID tests to their offerings.

US MDx Laboratory Universe by Testing Menu

What are implications of these consolidations to vendors of laboratory equipment?Purchasing decisions made by network as a wholeFewer opportunities for competitive takeoversNeed broad range of products to compete for full range of business in a networkWhile there are still over 5000 hospital laboratories, there may be only 500 decision making entities over purchase decisions.Hospital networks may be consolidating laboratory activities in some areas, and distributing them in others.

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Market Diagnostics InternationalMolecular LaboratoriesBy Testing MenuHighly Complex, no LDTHighly Complex, with LDTModerately ComplexTotal = 2,227Total = 2,327-9%-6%+25%As in past years, the most significant trend in molecular laboratories is the adoption of moderately complex tests by laboratories that had not performed molecular diagnostics in the past. The number of labs performing LDTs is decreasing.The growth in moderately complex laboratories is the result of the adoption of infectious disease assays by Meridian and Cepheid.The trend to moderately complex tests is exemplified by the continued adoption of syndromic panel tests across molecular ID labs.US MDx Laboratory Universe by CLIA Complexity

Trend 2: Central Laboratory vs Point of Care

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An apparent paradoxConsolidation of laboratories is favored to increase productivity, reduce costs, and provide standardization.

BUT AT THE SAME TIME.

An increasing amount of testing is done in point of care settings

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Point of care testing is rapidly growing sectorProjected growth of over 10% per year.Estimates that up to 1/3 of all testing will be in point of care settings within five years.

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Advantages of Point of Care TestingAbility to use laboratory diagnostics for decision making at the time of patient contact with provider.Admit vs DischargeTreat vs not treat.Isolation vs general population.

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Disadvantages of Point of Care TestingMay be harder for organisations to control costs.Reimbursement picture is variable.Harder to maintain quality and to remain regulatorily compliant.Data management is a challengeIncreasing bundling of point of care tests with cloud based data solutions.

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Opportunities and risks in expansion of Point of Care TestingPoint of care tests may command premium pricing.End users (doctors, nurses) may retain more influence over purchasing decisions.

BUT..

Reimbursement decisions can drive or inhibit adoption of point of care testing.Insurers and regulators are wary of overuse and potential for fraud and abuse.

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Trend 3: New Delivery ModelsGrowth of Laboratories with National Reach selling unique branded Products.

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National Laboratories selling unique branded products.Driven by same forces driving consolidationReduction of unit labor and materials costs.Enabled by changes in transport and IT.Use of commercial couriers to move samples within one day across nation.Use of internet to deliver results in real time.Academic Medical Centers no longer have natural monopolies on expert services.

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Traditional National Companies vs Modern National CompaniesTraditionalModernQuest, Labcorp, Arup, MayoGrowth by Acquisition, ExpansionLarge Menu of testsMany test offerings are commoditiesMyriad, Genomic Health, NateraGrowth around unique innovative productSmall menu of testsTest offerings may be unique

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Change in Historic Lifecycle of Innovative Laboratory testsOld modelTest developed in University lab, Migrates to Traditional National Laboratory, Manufacturer develops kits, test migrates to regional and local laboratories.

New modelEarly development of test in commercial laboratory developed for just that test, supported by venture capital, test branded and sold nationally.

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What are the implications of the new model?Many of the most innovative, and commercially successful, diagnostic products of the last 15 years are provided by one or by several national companies with branded products. Innovative modern laboratory companies compete (successfully) with both traditional national companies and the regional lab model.

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Examples of Diagnostic Sectors Dominated by new National companies.Breast cancer predispositionMyriad Genetics.Breast cancer treatmentGenomic Health (OncotypeDX)Non-invasive Prenatal TestingNatera, Ariosa, Sequenom, VerinataGenetic Carrier ScreeningCounsylAdvanced cancer diagnostics (NGS)Foundation Medicine, Caris

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The model of distribution of kits, reagents and instruments is in competition with the sole source model

Distributing kits as RUO faces significant regulatory scrutiny. Companies cannot make any claims about their utility or aggregate data, and each user may perform the test in a different manner Bringing tests to market through the PMA 510K process can be a very time consuming and expensive. The sole source LDT model has largely skirted the FDA.Companies which have gone for FDA approval as a marketing tool have not had more successRevenue is split between the company selling the product, the laboratory performing the test, and professional personnel involved in validating and signing out the test. The sole source model keeps all three components of revenue.

What is the impact of these tests for regional laboratories?Regional laboratories may not fully comprehend the market impact of branded tests, since they do not generally perform these tests, and in many cases do not collect samples for the tests or report results from the tests. If a laboratory doesnt do a test, or a competitor, it tends to not be familiar with the test.Pathologists have limited involvement in ordering, interpreting, or data management.These tests may wind up on pathology or ACO budgets.Since high value tests may now be performed by outside laboratories, pressure to maintain highly sophisticated labs is reduce.

Trend 4: New Technological Innovations

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New Technological InnovationsPoint of care devicesWearables, Ingestibles, Non invasive technologiesNext Generation SequencingTheranos

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Point of care opportunitiesTraditional point of care devicesHbA1CINR (Coumadin monitoring)Blood gases and electrolytes.Rapid Flu testingSerologyMolecular (Roche, Alere, Quidel)Genetics by the bedsideOxford Nanopore

New Technological InnovationsPoint of care devicesWearables, Ingestibles, Non invasive technologiesNext Generation SequencingTheranos

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Wearables, Ingestibles, and Non invasive technologiesPotentially huge and disruptive market.Dependent on robust mobile data gathering, i.e., iPhone.Raises huge issues related to Regulation: Who regulates?Reimbursement: Do you need new models?

New Technological InnovationsPoint of care devicesWearables, Ingestibles, Non invasive technologiesNext Generation SequencingTheranos

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Next Generation Sequencing: Is this a disruptive technology?Has had a major impact in Non Invasive Prenatal Testing (NIPT)Revolutionized Genetics.Utility, and market size, in cancer diagnostics still to be determined.

Next Generation Sequencing: Is this a disruptive technology?Market dominated by Illumina.Thermo-Fisher (ion torrent) has some niche presence.New entrants (Qiagen, Biorad).Limited number of labs actually performing NGS. (341 total labs)

New Technological InnovationsPoint of care devicesWearables, Ingestibles, Non invasive technologiesNext Generation SequencingTheranos

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Has Theranos Revolutionized the Industry?Central lab instrumentationPoint of care instrumentationUse of microtainersPrice transparency and low pricingPatient empowermentSelf pay provision of servicesOrder entry/Results reporting/EMR interfaces

Trend 5: Market competition across sectors

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Asymmetric competition in diagnostic Medicine.Competition is not just between different vendors of competitive products.Competition is between different models of service delivery.

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Examples of assymetric competitionPoint of care vs central lab in management of diabetes (glucose, HbA1C)Point of care vs central lab for diagnosis of flu.Reemergence of Doctors office laboratories.FIT testing (distributed) vs Cologuard (National) for colon cancer screening.H. pylori stool testing vs H. pylori breath testing.

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ConclusionsMarkets drive innovation, not technology per se. Advances in transport and IT have nationalized the market for high value testing.Different market approaches are in competition with each other as much as different products compete with a sector.Reimbursement policies and regulatory oversight strongly influence success or failure competing approaches. The changes and pressures in the todays health care environment present huge opportunities for innovative products, companies and approaches.

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