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October 2001: The Prognosis for Genomics Diagnostics?

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There's a renaissance afoot in the diagnostics industry, and genomics technologies are being credited in advance as the catalyst. Barring a botched positioning job, diagnostics will be the first area of healthcare to capitalize on the human genome — long before the pharmaceuticals industry reaps any benefits from genomic data in drug development, observers say.

"People don't realize that the real goldmine is not in pharmaceuticals but in diagnostics," says Jorge Leon, vice president for genomics at Quest Diagnostics. "It's going to take 15 years to come out with drugs from the human genome project, but it will take five years to fully realize the potential of diagnostics from genomics."

Anne Bailey, VP of diagnostics for Variagenics and a 20-year veteran of diagnostics companies, says that genomics-based tests could help the industry bounce back after nearly 10 years idling under managed care.

Unfavorable insurance reimbursement policies, combined with the fact that many diagnostics lacked patent protection, served to turn most fluids and tissues tests into commodities, Bailey says. Growth of the $32 billion industry went all but flat in recent years. Thomas Weisel Partners now estimates the annual growth rate of non-molecular diagnostics at between two and 10 percent.

But because insurers and analysts alike expect greater value from emerging genomics-based tests, much higher margins are predicted. "Anything that we can use to help understand [patients'] responsiveness as well as a drug's toxicity is going to be very high value-added, and industry will withstand much higher- priced tests," notes Bailey.

DNA Diagnostics Dollars

Surabhi Garg, a drug discovery technology analyst with Frost and Sullivan, says gene-based diagnostics are, hands down, the fastest-growing segment of the diagnostics market. "The tools of molecular biology will be used to identify genes of medical interest, or mutations, or insertions or deletions in genes, and they will be quick," says Garg, who estimates that the DNA-based diagnostics market could surpass $3.5 billion by 2005.

Weisel's bankers offer similar estimates: In a white paper on the diagnostics technology and services industry, they predict that the $1 billion molecular diagnostics market is growing at a rate between 30 and 50 percent. By 2006, they say, molecular diagnostics will be a $3.7 billion market.

"Advances in genomics, proteomics, and life science technology have resulted in a proliferation of tests and techniques that can bolster traditional medicine's ability to diagnose, prognose, and predict disease. … Diagnostics is at a great precipice and poised for tremendous change analogous to PCR's impact on scientific research," Thomas Weisel reports. After all, they note, if there are 30,000 genes, and five percent of those have some diagnostics significance, there's potential for 1,500 commercially viable assays.

Who Benefits?

Just who will pocket the profits of the burgeoning business remains to be seen. Several dozen companies are gearing up to make offerings in a number of technology and disease categories with a variety of business strategies. But few are anywhere near being in the position to seek FDA approval for their products (although so-called home-brew policies permit the sale of non-FDA-regulated diagnostic tests to clinical reference labs). And they will have to either partner or compete with at least another dozen established diagnostics companies and clinical labs that are sure to move into genomics testing.

Of those emerging as genomic diagnostics providers, companies such as Orchid and Qiagen sell chemistries and assays. Small technology platform providers, such as those profiled on the next six pages, are introducing chips and instruments for tests based on sequencing, genotyping, and SNP detection. And powerhouses such as Applera and Motorola have made entrées with Celera Diagnostics and Clinical Microsensors.

Meanwhile, diagnostic giants such as Abbott, Bayer, and Roche seem to be quietly observing the market, waiting for the moment to launch their own genomics programs. And it's the testing labs, such as Quest and LabCorp, that get analysts' vote for most likely to succeed.

The Brass Ring

Quest's Jorge Leon says that though gene-based testing has been around for 15 years, the diagnostics industry had, until recently, been "very passive" about genomics. His own position was only created a year ago, at the same time that Quest established a Center for Applied Genomic Technologies where it has begun a program to systematically evaluate new diagnostic technologies in gene expression, proteomics, gene sequencing, and SNP detection.

"The critical component is to find the right technology. There are many for gene expression and genotyping. We literally look at all of them," says Leon, listing Sequenom, Promega, Orchid, and Roche among other technology providers that Quest is testing for SNP detection.

"There are a lot of technology companies floundering," says Visible Genetics CEO Richard Daly. "There's 40 miles of bad road between having something in the lab and … having something with real clinical utility." Daly is awaiting FDA approval for a desktop sequencing instrument and diagnostic tests for HIV (see p. 72).

Unlike Visible and other companies that aim to propagate instruments and technologies, Orchid sees a bigger opportunity in selling its chemistries. Says Donald Marvin, Orchid's COO and CFO, who has also worked for Abbott Labs and Bayer, "The key to getting your technology accepted is having it run on as many instrument systems as possible."

In fact, Marvin argues that while Orchid is building a "budding diagnostics presence" by providing assays to run on existing platforms, genomics technologies companies that are touting new detection platforms are overlooking the dynamics of the marketplace.

"A lot of companies in this space are running toward molecular diagnostics as a brass ring. They might be a little naive in that they don't understand what it takes to effectively penetrate this market. It's very different from selling a box to a pharma."

Of any, he says Celera and Applied Biosystems are best suited to transition to diagnostics with the new Celera Diagnostics division. Even then, to be successful, it would need to acquire infrastructure and distribution channels to compete with the likes of Abbott, Bayer, Beckman Coulter, and Roche, he says.

Of course, others with similar years of experience in the business would beg to differ. Jerry Williamson, a VP and molecular diagnostics business head at Pyrosequencing, says the important questions are, 'How strong is the technology you have?' and 'How appropriate is it for the end user?' "We want to get our detection technology out there and to follow that up with applications as opposed to looking just at the chemistry."

"A lot of the diagnostic industry has moved from one platform to another. And you have to ask yourself how long can you sell that chemistry to folks," adds Variagenics' Bailey. "Is that a business model that's going to survive?"

"[Molecular diagnostics] is growing. We're right at the tip of it. Can you survive until it explodes?" Bailey says. It's the same challenge she would pose to any company trying to make a business out of genomics diagnostics, including the six profiled on the following pages.

SIDEBAR: Electricity is the Key

It's been 10 years and $200 million since bioengineer Michael Heller invented Nanogen's semiconductor microchip technology, the NanoChip (pictured). Now it's up to new CEO Randy White and a sales force of 13 to make it all worthwhile by blanketing the clinical research market with the GameBoyish cartridges and companion workstations.

The NanoChip houses a disposable array that hosts 100 electronically wired test sites, each of which can be used to conduct an independent controlled DNA hybridization experiment. "You could run 100 different tests, or 100 different patients, or 10 patients for the same test," White says.

In the past year, White says Nanogen has sold 30 systems for home-brew diagnostics use. He counts some 4,000 clinical labs in his target market

Currently, the reader/loader workstation goes for $160,000, but is available to labs on a lease or reagent rental basis by which the cost of the instruments are amortized onto the cost of each chip. Blank chips are $500 each. "That can do 100 tests, so the cost is $5 per test plus the cost of the oligos you would load onto it," White points out.

Once Nanogen starts marketing content-loaded analyte specific reagent chips — the company plans to introduce tests for five different human disease states in the first quarter 2002, White says — customers might buy the reader alone for $90,000.

— AB

SIDEBAR: Invading the Clinic

Tiny pink pellets, dried "like chocolate at the bottom of an ice cream cone" into each well in a 384-well microtiter plate, are what hold the secret to Third Wave's clinical diagnostics, or "turn-key genotyping," strategy.

Shake the so-called Invader Assay, turn it upside down, and the "dried down" oligos and enzymes won't budge. Third Wave's Invader probes and Cleavase enzymes stick like glue. But drop in your genomic DNA sample, add buffers, incubate it, and run the plate through any fluorescence detection system and you've got a diagnostic reading.

Competitors, says VP John Comerford, are gambling that clinical labs will invest in the specific instruments needed to read their tests. Third Wave, instead, is delivering a DNA detection tool that requires no PCR prep and that can be read on most existing platforms.

The company, which expects to make its first FDA submission of the dried-down format in early 2002, currently sells four analyte specific reagent (ASR) products — all in the homeostasis area — in liquid format to CLIA regulated labs. Depending on the interest the labs show, Third Wave will select ASRs to turn into diagnostics and submit for FDA approval.

By first quarter next year, Comerford predicts the company will have 10 tests available, and 20 by 2003. Small numbers, until Comerford translates them to revenues: "Projections this year have us at about $32 million. Last year we had $11 million, and the year before that we were at $2.5 million. We're at the front end of a revenue ramp."

— AB

SIDEBAR: Semiconductor Scaling

CombiMatrix's diagnostics debut came in July when it announced an alliance with Roche. The diagnostics giant hinted at having big plans for CombiMatrix's semiconductor-based microarray technology. "Our platform has been partnered with the 600-pound gorilla of the research marketplace," says Don Montgomery, the electrochemist and CTO who invented the CombiMatrix technology five years ago. "It's a solid segue into the research and home-brew diagnostic marketplace."

But Montgomery isn't starry-eyed about the technology's immediate prospects. "A lot of regulatory issues have to be addressed before a clinically approved DNA chip diagnostic is out there. It's going to take a good five years for folks to get through the regulatory barriers."

Once the CombiMatrix platform does get past the regulators, however, the company plans to compete on price. Montgomery believes low cost will be the key to commercializing genomic diagnostics, and his chip will scale with the semiconductor world. Because CombiMatrix makes oligos directly on its chips — electrodes are used to synthesize oligos in situ — "We get to take advantage of a unique economic aspect of the semiconductor device," Montgomery says. That is, the cost to manufacture a device with one probe per square centimeter is the same as one with 100 million per square centimeter.

In addition, the costs to analyze CombiMatrix arrays, which can be read using a standard CCD imager, are far less than tests read with a $100,000 scanning confocal laser microscope.

Ultimately, Montgomery predicts that a reader will be built right into the CombiMatrix chip, allowing a physician to read a test by simply looking at the chip. "Because you can use electronics on our devices, there's the opportunity to use them as reading devices."

— AB

SIDEBAR: Pharmaco Pyrotechnics

The "sequencing-by-synthesis" instrument that Pyrosequencing touts for high-thoughput genotyping — the PSQ 96 (pictured) — is the same one it will now push into the clinical research market for home-brew diagnostics use. "The platform is user-friendly, the instrument doesn't take up a lot of space, the technology is robust, and it's relatively cost effective," explains Jerry Williamson, VP and head of the molecular diagnostics business unit, who joined the company at the time the unit was formed earlier this year.

Williamson calls the Swedish firm a full-service platform company. For the diagnostics market it intends to deliver the instrument as well as the reagents — "the razor and the razor blades to fit it."

At present, Pyrosequencing's platform, which Williamson says sells for around $95,000 depending how it's configured, is being employed for clinical research by Children's Hospital of Philadelphia, which is looking into genetic mutations associated with hearing loss, by a LaSalle University researcher to detect short-read bacterial sequences, and by the University of Geneva to develop a Down Syndrome diagnostic test.

"The exact phase we're in right now is getting guidance from [clinical labs] on which assays we'll develop," Williamson says. Though he can't predict when, Williamson says that once the company is ready to approach the FDA, the whole platform — PSQ and assays together — would be regulated.

— AB

SIDEBAR: First to FDA

According to CEO Richard Daly, Visible Genetics was "first to break into genomics diagnostics." True or not, one thing competitors of this eight-year-old Toronto company might be thankful for is the work it has done initiating regulators.

Daly says that Visible's tabletop sequencing instrument and reagents, for which he expects US FDA clearance within the next few months, will be the first genomics diagnostics submission to be approved by the agency. "There's been a lot of back and forth. FDA has to get up to speed on the technology. There were some highly unusual things — we installed a couple of our systems at the FDA and they used them and the software."

Visible Genetics' OpenGene workstation (pictured) includes a long-read DNA sequencing instrument that runs cassettes in three sizes depending on speed and read-length demands. Eight samples of 300 to 700 bases can be processed in 30 to 180 minutes.

The platform bears a price tag of $50,000, but the company is giving it away free to labs that look like potential big customers for its $225-a-piece TruGene diagnostic kits. The first of those, an HIV-1 genotyping test, has already received regulatory approval in Argentina, Canada, and France.

Daly says more than 300 instruments have been installed around the world — sales for the first six months of 2001 were $7.5 million. Having struck deals with labs comprising 70 percent of the US market already, he says, "We have the footprint we're looking for. From here it's about developing more tests

— AB

SIDEBAR: DNA Analysis Anywhere

"Our whole mission is to have DNA analysis when and where you need it," says Cepheid COO Kurt Petersen. Ultimately, a doctor or technician will be able to deposit blood or a raw tumor into a cartridge, insert it into Cepheid's SmartCycler (pictured), and get an answer within 30 minutes.

The instrument relies on microfluidics and microelectronics to extract, purify, and amplify DNA automatically before carrying out sequence detection. The prep work, says Petersen, is the key.

"To do DNA analysis there's all this sexy detection and hybridization. [But the] secret part of all this technology, which is routinely brushed off by a lot of people, is the sample prep part," he says. "We're making it simple to use, totally automated, and very small in a desktop-type instrument. We're revolutionizing DNA analysis."

Cepheid, based in Sunnyvale, Calif., will count on partners such as the University of Pittsburgh School of Medicine to develop chemistries that it will adapt to make tests to run on the instrument. For instance, Cepheid is collaborating with Environmental Technologies Group to create a biological agent detection system for the military.

Petersen says more than 400 SmartCyclers are currently in use by various pharmaceutical, academic, and government labs including at the FBI, the Centers for Disease Control, the US Army, the USDA, and the NIH. Eventually, he foresees the instruments residing outside operating and delivery rooms, in doctors' offices, and on emergency wards.

— AB

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