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Originally Published November/December 2000

Molecular diagnostics: The challenge for the future

To attain profitability, companies whose business plans call for a foray into the realm of molecular diagnostics should be prepared for a long stay.

Biotechnology ventures focused on human disease have defined their business plans around a sequence of opportunities beginning with research products and moving progressively into the realms of diagnostics, vaccines, and therapeutics. Underlying such business plans has been the assumption that once it has become possible to identify the genes or biological processes responsible for a disease, then it would also become possible to detect that disease and ultimately to offer a cure—or even to prevent it from occurring.

The research products industry has produced many of biotech's most consistent financial performers. For such biotech ventures, climbing the hierarchy from research to diagnostics to therapeutics or vaccines has been considered the primary route toward increasing value and rewards for investors. In reality, however, the situation is far more complex.

In fact, for many companies seeking to exploit developments in biotechnology, achieving a return on investment has proved an elusive goal. Burrill & Co. (San Francisco), a private merchant bank specializing in biotechnology, estimates that biotech sales are up 43% this year.¹ However, according to Ernst & Young (New York City), in the same period the U.S. biotechnology industry has lost $5.1 billion on revenues of $18.6 billion.² Meanwhile, the T. Rowe Price Group (Baltimore), which manages a diverse mutual fund portfolio, estimates that only 23 of the hundreds of companies in this sector are currently profitable.³

A Context for Development

Life sciences research companies that are now attempting to follow their business plans into the realm of diagnostics can find the field of IVDs somewhat bewildering. In addition to the obvious differences between the two fields—an unregulated environment versus a heavily regulated one, basic scientific research versus commercial product development—the IVD industry has a unique history that still exerts significant influence over the shape of its companies and their products. Over the past two decades, the IVD industry has seen periods of both explosive growth and agonizing rebirth. Understanding the ebb and flow of these periods can help companies to grasp the context in which business planning for molecular diagnostics must exist.

In 1980, a typical clinical laboratory was able to offer assays for a growing list of analytes in chemistry, hematology, and cytology, as well as for identification of infectious organisms. Immunoassays were understood to mean the use of radioactive isotopes, except in the case of gel-based methods and some early nephelometric analyzers. And if anyone had thought to use the term molecular diagnostics, it would have been considered synonymous with karyotyping, the microscopic visualization of whole chromosomes.

Regulators of that time were focused on the challenges of standardization—trying to achieve consistency among the results provided when the same assays were performed over time or in different laboratories. Physicians viewed IVDs as tools for confirming or resolving differential diagnoses or monitoring patient progress. With the exception of blood gases, glucose, electrolytes, blood counts, and type and cross matches it was rare that an IVD test result would be available in real time—or that it would be used if it were. Hospital laboratories were considered profit centers, charging whatever the market would bear and often offsetting losses in other hospital departments.

Change at Mid-Decade. In the mid-1980s, several events fundamentally changed the nature of clinical diagnostics and began the transformations that would continue into the following decade. On the technological side, instrumentation capabilities expanded rapidly to provide stable solid-state analog electronics, digital microprocessors, practical ion-specific electrodes, and precise automated pipetting. At the same time, nonradioactive immunoassay technologies emerged as a major product segment.

The principal driver, however, was a change in the U.S. government's philosophy regarding reimbursement for healthcare expenses. Instead of relying on complex, cost-based formulas, the federal government established a fixed reimbursement rate for each patient with a particular disease or diagnosis-related group. It no longer mattered how the healthcare provider spent its money or whether certain costs could be justified; the government would pay only the going rate, and no more.

In response to these technological developments and policy shifts, the world of diagnostics began to change very rapidly. Hospital laboratories became cost centers, and struggled to control expenses. Industry responded by producing increasingly larger, faster, and more-complex instrumentation designed especially to reduce testing costs. Purchasing patterns changed, and IVD companies lived or died based on their ability to respond to the new market. Meanwhile, nonradioactive homogeneous immunoassay systems exploded onto the market and revolutionized endocrinology and therapeutic drug monitoring. Electrode and dry chemistry-based systems enabled the creation of STAT labs, and point-of-care testing was born.

Although the primary functions of IVDs continued to be diagnostic confirmation and monitoring, the end of the 1980s also saw the first signs of a new approach toward the use of such tools. Introduction of the statin family of drugs made it possible to treat hypercholesterolemia, thereby reducing the incidence of heart attacks in affected individuals. To identify those who were at risk, the diagnostics industry teamed up with drug companies, government agencies, and professional societies to provide cholesterol screening that was unprecedented in its low cost, accuracy, reliability, and availability. This testing was good for patients, good for the drug companies, and good for the government, which recognized that it was less expensive to prevent heart attacks than to treat them. With the success of such cholesterol screening programs, the concept of using IVD testing to anticipate and prevent disease became a reality.

Early Nucleic Acid Testing. The first FDA clearance for a clinical diagnostic based on nucleic acid probe technology was granted to Gen-Probe Inc. (San Diego) in 1985. As the 1980s came to a close, other nucleic acid–based tests were introduced to the market. Most of these early assays focused on the field of infectious diseases, which remains the largest segment of the market. Life Technologies Inc. (LTI; Rockville, MD) pioneered the concept of using a molecular test to determine a patient's risk of developing a disease. The company's ViraPap assay, approved by FDA in 1988, detected infection by the human papilloma virus (HPV) as an indicator of risk for the development of cervical cancer.

The 1990s saw accelerated development of molecular diagnostic technologies to meet the growing challenges of HIV and other sexually transmitted diseases, tuberculosis, and the newly identified hepatitis C virus (HCV). Viral load testing became a standard of care for viral diseases such as HIV and HCV. Molecular technologies also enhanced abilities for the HLA typing required for organ transplantation.

In 1996, Myriad Genetics (Salt Lake City) announced the availability of commercial reference lab testing for mutations in the BRCA1 and BRCA2 genes that have been associated with increased risk of familial breast and ovarian cancers. Myriad Genetics performed pioneering work to identify these genes and determine their risk profiles in affected families, and was subsequently awarded patents protecting its discoveries. The company ultimately prevailed in preventing other laboratories, notably OncorMed Inc. (Gaithersburg, MD), from offering this testing. BRCA testing was hailed as a diagnostic milestone because it could provide peace of mind to women who did not carry the gene mutations, or enable monitoring and preventive strategies to be adopted by those who did.

The availability of BRCA testing helped to solidify a shift in the role of IVDs from merely confirming a disease diagnosis to that of determining a patient's susceptibility to a particular disease. This new role goes well beyond the scope of total cholesterol testing pioneered during the 1980s, but in some respects it is an uncomfortable fit for the IVD industry.

There are several key differences between the cholesterol testing of the 1980s and the BRCA testing of the 1990s. Cholesterol testing was easy and inexpensive to perform, and was available from many laboratories. The tests themselves were cleared by FDA, and performance of the tests was validated by independent proficiency testing programs. The clinical data supporting cholesterol testing were developed over decades through many studies involving multiple researchers. Those deemed at risk of developing cardiovascular disease might have to modify their diet, increase exercise, or take medications with minimal probability of adverse reactions.

By contrast, Myriad alone offers BRCA testing, which is very expensive. Because the tests are home-brew assays offered within the parameters of the Clinical Laboratory Improvement Amendments of 1988 (CLIA), there is no test to be approved or cleared by FDA, and no independent proficiency testing programs have been used to validate test performance.⁴ The clinical data supporting BRCA testing were developed mostly by Myriad. And, perhaps most significantly, those with positive BRCA mutations might undergo prophylactic mastectomy or even removal of their ovaries.

A Turning Point at the Millennium. The issues raised by the contrasts between cholesterol and BRCA testing were forcefully thrust before the general public in a Washington Post article in July 1999.⁵ The article recounted the story of a woman with a family history of breast cancer who received a positive BRCA1 result. After consulting with her doctor, the woman underwent surgery to remove her ovaries. Months later she received a letter from the laboratory indicating that her test results had been in error and refunding the $350 cost of the test as a token of the lab's concern.

The article went on to discuss the risks of predictive testing, especially when there is no possibility of performing confirmatory tests, when the test has not undergone review or received approval from FDA or other independent organizations, or when the impact of test results on the patient can be severe.

A little more than a year later, these issues have become even more powerful than they were in their initial recounting. How IVD manufacturers and testing laboratories resolve them will determine the future of molecular diagnostics testing. Today, molecular diagnostics is at a turning point. Pioneering companies offering testing kits and services will face major changes. These will be especially significant for companies that are developing analytical systems focused on the detection of genetic mutations.

Forces Driving Change

Early on, the architects of the Human Genome Project recognized that as the sequencing of the human genome progressed, societal and ethical issues would come to the forefront. In 1994, the National Institutes of Health–Department of Energy Joint Committee to Evaluate Ethical, Legal, and Social Implications of Human Genome Research formed a task force on genetic testing for the specific purpose of considering such issues. For the most part, the task force's deliberations centered on the issues of privacy, informed consent, and the potential for discrimination in employment or health and life insurance coverage.

However, one task force member, Neil A. Holtzman, MD, of Johns Hopkins University (Baltimore), also emphasized the potential harm of predictive genetic testing, especially when it is performed outside the regulatory control of FDA. Holtzman's ideas influenced the final task force report, which was issued in September 1997.⁶ In an October 1999 article in Science, Holtzman summarized his views in an editorial openly critical of commercial labs that perform predictive genetic testing.⁷

One outcome of the task force's recommendations was formation of the Secretary's Advisory Committee on Genetic Testing (SACGT), which held its first meeting in July 1999. To date, many of the recommendations of the SACGT relating to personnel qualifications, proficiency testing, and patient privacy might be viewed as evolutionary, following the course for improvement that was set for IVDs during the 1980s. However, the committee's recommendation that FDA approval should be required for new home-brew genetic tests offered by CLIA-regulated labs must be viewed as revolutionary.⁸

Traditionally, the pathology community has fiercely resisted FDA intrusion into its realm, which pathologists regard as the practice of medicine. For its part, FDA has not yet responded to the SACGT invitation to expand the scope of its product-approval activities, but such a response should be expected. Already, the Centers for Disease Control and Prevention has signaled its intent to incorporate into the existing CLIA regulation a number of policy changes developed in response to SACGT recommendations. Among these is a controversial requirement that diagnostics laboratories be held responsible for ensuring that informed consent has been obtained prior to performing a genetic test.

Meanwhile, considerable energies are also being focused on issues relating to gene patenting, which can create testing monopolies for the holders of patents that describe genes with diagnostic utility.⁹ The American College of Medical Genetics (Bethesda, MD) and the American Society of Clinical Pathologists (Chicago), supported by other medical societies, have published statements claiming that patient care is harmed when patents prevent multiple independent diagnostics laboratories from freely offering genetic testing. On the other hand, the Biotechnology Industry Organization (Washington, DC) has vigorously defended the current patent system because it provides incentives for diagnostic innovations that ultimately benefit the public. This issue has also reached the U.S. Congress; the House Judiciary Subcommittee on Courts and Intellectual Property, which is considering new guidelines for gene-based patents, heard testimony last July. Similar proceedings are expected in the Senate.

A critical element for companies wishing to obtain FDA approval for new IVDs is the ability to conduct clinical trials. Such trials are typically conducted using samples collected as part of a patient's hospital stay, but from which all patient identification has been removed. In the past, informed consent has not generally been required for testing such anonymous residual samples. In December 1999, however, FDA issued a guidance that would require patient identification of samples used in clinical trials for FDA product submissions, thereby enabling the agency to audit data by tracing them back to the patient's medical record.¹⁰ This change would require patients to give informed consent and would vastly increase the complexity and cost of conducting a clinical trial.

Finally, there is the inevitable debate over the extent to which the human genetic code will yield useful new diagnostic tests, and how long it might take to do so. Francis Collins, director of the Human Genome Research Institute at the National Institutes of Health (Bethesda, MD), believes that predictive tests will be available for 25 unnamed common disorders by 2010 and that comprehensive genomics-based healthcare—including newborn testing for disease predisposition and gene therapy—will be a reality by 2040. Others question the extent to which such tests will truly be useful, emphasizing instead the multigenic nature of most diseases and the complex relationship that exists between humans and their environment.

The Bottom Line

For those of us in business, the bottom line must always be a financial one. Seeking to satisfy this corporate need for a return on investment, business plans for new molecular diagnostics companies typically project that they will achieve profitability well within 10 years. Considering the obstacles to business growth outlined above, it is instructive to see how new companies struggling to be successful in molecular diagnostics have fared.

Useful models are surprisingly difficult to find. A large proportion of molecular diagnostics products are offered as small product lines from such large companies as Abbott, Bayer, Becton Dickinson, or Roche. Others are offered by subsidiaries of larger corporations, as in the case of Gen-Probe. For these businesses, it is difficult to determine the contribution toward profitability that is made by the relatively small molecular diagnostics product lines. Other molecular diagnostics businesses are privately held and data are not available.

Two companies that are focused exclusively on molecular diagnostics offer an opportunity to look at best-in-class examples of the companies currently in the field: Digene Corp. (Silver Spring, MD), and Vysis Inc. (Downers Grove, IL). Both of these companies can trace their origins back more than 10 years, have built a foundation based on innovative science, have introduced leading-edge products that are highly regarded by their customers, and have successfully negotiated FDA regulatory hurdles.

Digene traces its roots back to 1985 when its namesake was founded. The current company, however, is based mostly on the diagnostics testing business acquired from Life Technologies in 1990. This business included the FDA-approved radioactive-labeled ViraPap HPV assay and technology that has become the nonradioactive Hybrid Capture methodology platform. LTI investment in the Digene business can be traced back at least to the mid-1980s.

Digene now offers FDA-cleared assays for cytomegalovirus, chlamydia, and gonorrhea. The company has recently introduced the FDA-approved Hybrid Capture II HPV DNA test, which for the first time allows for specific detection of only the HPV subtypes with moderate to high oncogenic potential. This new test has been adopted as part of reflex testing protocols by leading testing centers in the United States and other countries, and is reimbursed by major providers.

Digene has an alliance with 3M Pharmaceuticals focused on HPV therapeutics. The company also has a distribution agreement with Abbott; an agreement to share in the market for research applications of their technology through Tropix; and new assays for herpes virus, hepatitis B, and HIV on the horizon. Digene went public in 1996 and had a successful follow-up private placement in December 1999.

Vysis was incorporated in 1991 as a division of Amoco Technology, originally called Imagenetics. As in the case of Digene, initial investments in Vysis probably date back to the mid-1980s. Vysis has developed a broad line of products for fluorescence in situ hybridization. These products are designed for applications in both the research products and diagnostics markets. Of particular note is the FDA-cleared AneuVysion assay for trisomy of chromosomes 13, 18, and 21 and aneusomies of X and Y. Vysis has also recently developed the FDA-cleared PathVysion HER-2 DNA kit, which allows for the determination of HER-2 copy number to assist in the selection of appropriate therapy for patients whose cancers overexpress this marker.

With support provided by an Advanced Technology Program grant from the National Institute of Standards and Technology, Vysis has developed a systems platform called the Genosensor, which is able to provide simultaneous measurement of changes in copy number for 50 gene targets amplified in cancers. Vysis recently reported that it is planning to submit a 510(k) premarket notification to FDA for clearance of a new diagnostic for bladder cancer.

Interestingly, Digene's stock was introduced and traded at around $10 per share from its initial public offering in 1996 through early 1998 when Vysis entered the market at about the same price. Thereafter, both stocks showed lackluster performance until early in 2000, when Digene rose rapidly into the $40s, thus catching up to the NASDAQ index. Vysis also rose briefly to around $20, but again was trading at around $10 at press time.

Figure 1. Operating performance for Digene Corp. (Gaithersburg, MD) for 1992–1999. Cumulative losses for the period total $43 million.

Operating data for Digene and Vysis are shown in Figures 1 and 2. Note that net income is expressed as a loss. Both of these technology and market leaders have an outstanding record of growing revenues, in each case to about $22 million per year. However, after more than 10 years of operating history they are still showing significant net losses.

Figure 2. Operating performance for Vysis Inc. (Downers Grove, IL) for 1992–1999. Cumulative losses for the period total $128 million.

Digene's estimated cumulative net loss over the eight years reported is $43 million; Vysis's is almost $128 million. Neither estimate includes investments made by their corporate parents. Digene's net loss has been decreasing over the last three years and Vysis has promised its shareholders that it will reach breakeven by the end of 2000 and show a profit in 2001.

Conclusion

Compared with the performance of other companies in this sector, the financial performance of Digene and Vysis is neither especially good nor especially bad. Rather, it reflects the challenges facing companies that plan to pursue strategies in molecular diagnostics. The performance of these leaders demonstrates that molecular diagnostics is a high-risk business that requires patience and deep sources of funding.

Investors may lose patience with waiting over a decade to see their company reach profitability. New business models—such as the genetic risk profiling pioneered by Myriad Genetics—may be adversely affected by changes in regulatory policies. Other regulatory changes may make the complexity and cost of clinical studies to support FDA applications prohibitive for all but the largest companies. And changes in the regulations pertaining to the patenting of genetic sequences may be on the horizon. Any or all of these factors will likely influence the future development of companies that are seeking to move into the realm of molecular diagnostics.

Even so, the potential of this new field remains tremendous. The data generated by the Human Genome Project is still mostly unexplored, offering a target for commercial exploration and exploitation that is virtually unrivaled in healthcare. It is both an exciting and challenging time to be involved in molecular diagnostics.

Richard S. Schifreen, PhD, is business unit leader for molecular diagnostics at Promega Corp. (Madison, WI). This article originated in a presentation to the annual meeting of the Wisconsin Biotechnology Association (September 2000).

References

1. Annual Biotechnology Industry Report Shows Industry Riding High at Beginning of Biotech Century, [on-line] (San Francisco: Burrill & Co. 2000 [cited October 19, 2000],

2. L Bergquist, "Biotech Firms Sprout in UW's Fertile Shadow," in Milwaukee Journal Sentinel [on-line] (Milwaukee, 2000 [cited October 19, 2000]).

3. K Jenner, "The Outlook for Health Care Investing," (T Rowe Price Group, Summer 2000).

4. Clinical Laboratory Improvement Amendments of 1988 (CLIA).

5. R Weiss, "Genetic Testing's Human Toll; In Unregulated Field, Errors Can Upend Lives and Mean Unneeded Surgery," in Washington Post [on-line] (Washington, DC, July 21, 1999 [cited October 19, 2000]).

6. National Institutes of Health-Department of Energy Joint Committee to Evaluate Ethical, Legal, and Social Implications of Human Genome Research, Promoting Safe and Effective Genetic Testing in the United States, Final Report of the Task Force on Genetic Testing [on-line] (Bethesda, MD:1997 [cited October 19, 2000]).

7. NA Holtzman, "Are Genetic Tests Adequately Regulated?" Science 286 (1999): 409.

8. Federal Register, 65 FR:25928–25934, May 4, 2000.

9. "Technology Roundtable: Intellectual Properties in the Molecular Age," Molecular Diagnostics Supplement to IVD Technology 6, no. 3 (2000): 20–28.

10. "Regulating In Vitro Diagnostic (IVD) Device Studies," Guidance for FDA Staff, (Rockville, MD: Office of Device Evaluation, Center for Devices and Radiological Health, FDA, December 17, 1999).