NEW YORK (GenomeWeb) – NeoGenomics aspires to become "America's premier cancer testing laboratory."
While searching for a company that could move NeoGenomics closer to achieving this goal, GE Healthcare Life Sciences' unit Clarient rose to the top of the list, CEO Douglas VanOort told investors and analysts during a call last week. After a year of negotiations with GE Healthcare, the Fort Myers, Florida-headquartered cancer reference lab last week announced it was buying Clarient in a cash and stock deal worth approximately $275 million.
The two companies are somewhat alike — NeoGenomics and Clarient are in vitro diagnostics shops, they're both focused on cancer genetics, and they have similar sized sales teams. Until the deal closes (slated for the fourth quarter of 2015), NeoGenomics and Clarient are essentially competitors serving the same clients. They both have CLIA labs in Orange County, California, that are a 15-minute drive from one another.
Last year, NeoGenomics reported $87 million in 2014 revenues, while Clarient's revenues were $127 million. "In NeoGenomics' hands, Clarient makes a lot more sense," Peter Keeling, CEO of the personalized medicine-focused consulting firm Diaceutics, told GenomeWeb. "We see this as two suitors valuing the same asset with very different eyes."
GE Healthcare Life Sciences is GE's $3.7 billion molecular medicine franchise that focuses on drug discovery and development, as well as on molecular tools for diagnostics and therapy selection. In buying Clarient in 2010, GE Healthcare had a vision to develop a comprehensive diagnostics shop and become a prominent player in the precision medicine space. But industry observers GenomeWeb spoke to on the record and on background said subsequent changes in the lab testing space hindered GE's plan from coming together as planned.
"This [deal] is about finding the right focus for Clarient as part of a pure-play business to position it for future growth, drawing on the combined capabilities of NeoGenomics and GE," a spokesperson for GE Healthcare told GenomeWeb, emphasizing that GE is still well positioned to influence the precision cancer testing space.
Clarient's purchase price includes $110 million in preferred stock and 15 million shares of NeoGenomics' common stock. As a result, GE Healthcare will own 32 percent of NeoGenomics once the deal closes and Kieran Murphy, CEO of GE Healthcare Life Sciences, will have a seat on NeoGenomics' board. During the call with investors and analysts, Murphy noted that GE will collaborate with NeoGenomics in the area of bioinformatics and even help it achieve its goal of eventually entering the pharmaceutical market.
By putting Clarient "in good hands," GE's Life Sciences division will focus on advancing core business areas, such as bioprocessing, cell therapy, and diagnostic pharmaceuticals for disease imaging. "Our portfolio of imaging diagnostic pharmaceuticals for cancer, cardiovascular disease, and neurological conditions means we are heavily involved in precision diagnostics as a whole," the GE Healthcare spokesperson added.
The acquisition, however, comes during a challenging reimbursement period for the lab industry. "The acquisition is about a lot of things," Steven Jones, director of NeoGenomics' investor relations, told GenomeWeb. "But getting more scale to be able to better compete in our industry is one of the primary aims of this."
Clarient under GE Healthcare
Five years ago, GE Healthcare bought Clarient for $580 million with its own ambitions of advancing personalized medicine by offering pathologists, physicians, and pharmaceutical firms a comprehensive menu of tests for cancer and other disease. At the time, Clarient was an attractive acquisition target having aggressively grown its business and reporting $91.6 million in 2009 revenues. GE Healthcare executives had hoped to build a $1 billion diagnostics business by combining GE's expertise in PET-CT, ultrasound, computed tomography and imaging, and Clarient's efforts in molecular diagnostics and companion diagnostics.
GE Healthcare was pursing a number of initiatives toward this goal. Most recently, inspired by interactions with GlaxoSmithKline, Clarient said it would set up a global lab network so pharma could have access to standardized tests and patients could have access to personalized drugs or enter clinical trials for investigational therapies. The first assay that Clarient had planned to set up within this lab network was a 70-gene cancer mutation panel. The GE Healthcare spokesperson said Clarient has relationships with labs in Russia, Brazil, and China, but hasn't initiated any testing within this project, which was announced last year.
Plans like these are difficult to bring to fruition, because it requires buy-in from multiple industry stakeholders, and the drug industry on the whole has been slow to invest in making the systemic changes needed to advance the personalized medicine field. Although many industry experts have long foreseen that the pace of genetic discoveries would make the one drug/one test model for developing precision treatments untenable, it wasn't until recently that pharma companies agreed to advance so-called universal companion tests, which like Clarient's 70-gene mutation panel would enable analysis of multiple predictive markers at once.
"Pharma and GE never really got the right partnership model in place to support this vision" of developing a global lab network, Keeling said. He suggested that drug companies are only now waking up to the value that companion and complementary diagnostics have in more clearly defining the market for their therapies.
Caught in this transition, "Clarient was left as a standalone lab business," Keeling said, which made it vulnerable to reimbursement pressures.
GE Healthcare also felt them. "Since GE bought Clarient, a number of things changed and the cancer diagnostics market evolved significantly," the spokesperson said. "Reimbursement changes were compounded by a considerable consolidation across the cancer diagnostics industry and among hospitals using pathology services."
Amid these pressures, there were some casualties within Clarient's product portfolio. Mammostrat, a breast cancer recurrence diagnostic that Clarient launched in 2010, was in the same market as well-established tests like Genomic Health's Oncotype DX and Agendia's MammaPrint. Clarient had to discontinue offering Mammostrat and another lung cancer test called Pulmotype, as they "ceased to be competitive" in a crowded market, the GE Healthcare spokesperson said.
Clarient also decided a few years ago to stop developing a pharmacogenetic test based on the TLE3 gene. Although prior studies had suggested TLE3 may predict which cancer patients respond to taxane-based chemotherapies, a study published in the British Journal of Cancer concluded earlier this year found that TLE3 wasn't predictive of which breast cancer patients would benefit from taxane therapies.
Clarient still boasts a broad cancer testing menu, which might get more shine under NeoGenomics. The company, for example, is selling Dako's PD-L1 companion diagnostics for recently approved cancer immunotherapies. Since NeoGenomics and Clarient serve very similar clientele, the companies' sales teams will be able to cross-sell each other's tests and provide a broader diagnostic menu in cancer genetics.
NeoGenomics also hopes to benefit from Clarient's $20 million business providing diagnostics services for drug trials, which is growing at a rate of 20 percent annually. "Clarient is formally represented on the advisory boards of companies like Merck, CMS, Roche/Genentech, and Ventana, and in the course of these conversations we hear a lot about increasing demand for companion diagnostic tests alongside new drug launches," GE Healthcare's Murphy said during the call.
He noted that as a long-term investor in NeoGenomics, GE Healthcare will work with the firm on precision oncology initiatives. Specifically, the companies will collaborate in the area of bioinformatics, which in the near term might inform NeoGenomics' development of a liquid biopsy prostate cancer test. According to Jones, NeoGenomics will publish the first validation study and commercialize this test next year.
NeoGenomics is also in the process of finalizing a strategic partnership with the Diaceutics division Labceutics, which helps pharma companies create lab networks for performing the tests that are important for the delivery of their drugs, and then works with labs to ensure they are performing the tests efficiently and up to quality standards. "We perceive that future personalized medicine testing will demand even greater complexity and panels of tests," Keeling said. "Adding Clarient's skills to those of Neogenomics will enable it to offer physicians a more comprehensive and flexible testing service."
Managing reimbursement pressures
The reimbursement landscape hasn't been pretty for the lab testing industry. Precision cancer drugs that have come on the market can cost more than $100,000 per year. One-time companion tests that accompany these drugs, depending on the technology, can be under a hundred dollars. "In our particular niche of the industry, we've seen pretty substantial reductions in average revenue per test, in excess of 30 percent on a cumulative basis," Jones said.
The Clarient purchase will allow NeoGenomics to buffer itself against reimbursement pressures, while still growing its business. "In order to continue to be competitive in the laboratory space, you need to have scale," Jones said. "When you have scale you can make much more efficient gains in productivity. In a declining reimbursement environment you need to have your average cost per test come down as quickly as you can."
By combining its business with Clarient's, NeoGenomics is projecting between $240 million and $250 million in revenues in 2016 — and in three to five years, it expects between $20 million and $30 million in annual synergies. But because there is so much reimbursement uncertainty, NeoGenomics said it is being conservative in projecting the impact that Clarient will have on its business.
Around 42 percent of NeoGenomics' revenues are from fluorescence in situ hybridization and 17 percent is from flow cytometry. According to CMS' 2016 proposed pricing, CPT codes for the technical component of multiplex FISH tests are slated for a 90 percent increase, while certain flow cytometry tests are expected to be cut by around 60 percent.
Meanwhile, a big portion of Clarient's business is immunohistochemistry and digital pathology tests, which have also taken a hit in Medicare reimbursement, but NeoGenomics expects some increases for IHC, too. Factoring in Clarient's testing menu and private payors' pricing, NeoGenomics expects its average revenue per test to remain largely the same.
NeoGenomics executives also don't expect much negative fallout from the "Protecting Access to Medicare Act of 2014," which seeks to establish a market-based payment system for diagnostics under the Clinical Laboratory Fee Schedule by 2017. The lab industry has argued that CMS's preliminary plan to implement PAMA would exclude a substantial portion of the lab test market. However, 75 percent of NeoGenomics' tests are reimbursed under the Physician-Fee Schedule, which wouldn't be affected by the new law. Jones estimated that PAMA may impact around 5 percent of NeoGenomics' total revenue.
Ultimately, all of NeoGenonomics' strategic initiatives are with an eye toward becoming a one-stop shop in cancer genetics, which the firm estimates to be between a $4 billion and $6 billion market. Other players in the cancer genetics space include Mayo Clinic, ARUP, LabCorp's Integrated Oncology division, and Myriad Genetics. With the Clarient purchase, "we'll be approaching 5 percent of the market," Jones said. But with the combined company's offerings in terms of molecular, IHC, and FISH tests, Jones believes NeoGenomics will be able to offer the broadest cancer genetics testing menu in the US.