NEW YORK (GenomeWeb) – The funding environment for firms developing omics tools and MDx technologies, while brimming with challenges, is experiencing greater buoyancy as executives find ways to work around investors' concerns about reimbursement and regulations.
Interviews with CEOs raising funds and investors placing bets on omics and MDx technologies revealed a blend of uncertainty and optimism about the potential for money to flow into the omics and MDx space.
Investors have plenty of reasons to be cautious in investing in MDx firms, in particular, according to industry participants — including company risk associated with being reimbursed for tests, uncertainty around regulations, and challenges in achieving profitability despite relatively rapid test adoption.
While respecting that air of caution, sources interviewed for this article were generally optimistic about the future health of investment for this space.
"We have seen interest from a wide spectrum of investors," said David Rubin, managing director of Merck Global Health Innovation Fund. "In addition to VCs, we have worked with investors from international private equity firms, very large family offices and corporations. … Certainly, venture capital is an option. Not only have a number of life science VCs made multiple omics and MDx investments, but there are dedicated funds that have now raised capital."
Executives in omics and MDx companies raising funds from investors and innovation funds also see reasons for optimism.
"Investors are increasing their interest in the genomic space as a whole," said Jason Mellad, head of business development at epigenetics sequencing firm Cambridge Epigenetix, which closed a $21 million Series B financing round in March led by GV, formerly Google Ventures, and including Sequoia Capital, New Science Ventures, Syncona Partners, and the University of Cambridge.
Overall, investors see the real potential of molecular products and technologies to achieve breakthrough results in multiple applications, including companion diagnostics and the variety of fields in which gene editing can be applied.
Game-changing potential ranks high in attracting investors to omics and MDx technologies, said Kush Parmar, managing partner at 5AM Ventures, a venture capital firm focused on building next-generation life science companies. "The field of medicine has really moved away from the concept of looking for incremental benefits. The healthcare system really is not giving much value to that kind of innovation, and I would say genetic approaches to medicine are at the opposite end of the spectrum from incremental," he told GenomeWeb.
Gene editing and gene therapy technologies have the potential to move the bar forward for life science companies and their patients, Parmar said. "These technologies really are getting at the core roots and causes of disease and changing them entirely for the patient. It's the exact opposite of incremental improvement, and that's why in a nutshell you see investors and big pharma companies and healthcare systems companies so excited about these technologies."
A review of deals in the omics and MDx space in the first half of 2016 reveals that investors have shown a keen interest in gene editing, both for research and therapeutic applications. In February, for example, Editas Medicine announced that it had closed its initial public offering, raising $97.8 million in net proceeds, including an over-allotment option.
In May, CRISPR-based antiviral therapy firm Agenovir raised $10.6 million in Series A financing; gene editing firm Homology Medicines raised $43.5 million in Series A funding; and CRISPR platform firm Caribou Biosciences completed a $30 million Series B financing round.
"We are greatly benefiting from the buzz and excitement around CRISPR and genome engineering in general," Rachel Haurwitz, president and CEO of Caribou Biosciences, told GenomeWeb. "It's difficult for me to compare us with other companies outside of the gene engineering space, but it does appear that there is more interested money in the various genome engineering applications than in other genomics or even more diagnostic facing opportunities and applications right now."
Companies producing companion diagnostics also are seeing increased investor interest. "Molecular diagnostics really is giving over to companion diagnostics in my view," Mellad said. "In the near future, we'll see an increase in interest in companion diagnostic development, and in working with a pharma partner to get the diagnostic test approved and to facilitate not only clinical trials, but also the use in the clinic of the drug itself."
Parmar agreed that it's an exciting time of synergy between diagnostics and therapeutics, and he expects that we will see more rapid development of diagnostic tools. "The timeline to develop therapies is a very different thing from the time to introduce a new tool. We will see a really rapid progression on tools that help therapeutics be developed much more efficiently," he said, adding that he is also seeing rapid development of algorithms and informatics to process sequencing data.
In general, next-generation sequencing technologies are receiving greater investor attention. "They have come a long way both on the informatics and sequencing technologies side," Parmar said. "Liquid biopsy through cell-free DNA, for example, is attracting a lot of investment right now."
Echoing Parmar's awareness of the attraction of informatics, Kevin Hrusovsky, CEO of Quanterix, a company that has developed single-molecule arrays for multiplexed diagnostic testing, said that one way to attract investment may be to emphasize the digital nature of the enterprise.
"We're a company digitizing medicine," he said. "There are a lot of investors that have had success in the digital era. They understand that we might end up offering this very unique opportunity to invest in something that is a combination of medicine and digital technology, so that is a different way to look at this and it invites new investors that don't typically invest in life sciences. That has been very important in our positioning, and it is partly how we were able to get such high valuations and get a raise done so productively."
Cambridge Epigenetix is also benefiting, in a similar way to Quanterix, from attracting non-traditional life science investors. "We were really fortunate because Sequoia and GV had invested in the life sciences, but they were not traditional life science investors," Mellad said. "We had a very open mind when it came to looking for backers, because we knew that they could bring things to the table that more traditional life science investor firms could not necessarily bring themselves — their knowledge of big data, that they are based on the West Coast, and that they have big insights into strong technical companies with rapid growth profiles and have gained traction quickly in the market. We wanted to have that expertise on hand for us."
Healthcare savings as an investment incentive
In recent years, Homology Medicines President and CEO Arthur Tzianabos has seen investment coming in heavy on the therapeutics side with a genomics focus.
"What I have seen as someone who is talking to a lot of investors is the understanding of the need for better diagnostics, better predictive tools, better approaches really in terms of getting early diagnosis, because I think there has finally been a reconciliation with the fact that you have to make an investment in terms of disease progression in order to save the healthcare system money," Tzianabos said.
"I think everyone in the healthcare system — and this includes healthcare payors and government policy makers — recognizes that we need to diagnose diseases early in order to realize pharmacoeconomic benefits and ultimately save the healthcare system more money by developing all kinds of treatments and therapies. That's my overall sense of how things have been moving from an investment and a company formation point of view," he said.
Saving the healthcare system dollars also is a theme benefiting molecular diagnostics firm OpGen, according to CEO Evan Jones.
OpGen, which provides molecular diagnostics and bioinformatics tools aimed at identifying antibiotic-resistant infections, has a large outcomes project with an integrated HMO through which it is mining 3.5 million health records representing eight years of data to assess the costs and outcomes for drug-resistant infections, Jones said. "As a result, we expect to be in a position to say that if you take our tests you can drive down costs, and you can afford to spend, say, $1 million per year implementing OpGen solutions that include high-resolution genetic analysis and informatics and that help guide decision making about how to treat patients."
"Infectious disease is coming into vogue and there's tremendous interest in the companies that are taking these technologies and applying them to transform how infectious diseases are managed in the hospital," Jones added. "Although I can't speak for them, I believe that this is behind Merck GHI's interest to invest in OpGen. They are among the largest suppliers of antibiotics in the world, and they are interested in technologies that can help with decision making about how you can get the right antibiotic to the right patient."
While multiple sources said demonstrating healthcare system cost reduction is a key driver for the success of omics and MDx technologies, they also identified additional needs that would speed investment and technology adoption.
"To make omics and MDx more attractive, three things need to occur," said Rubin at Merck GHI. "First, systems for achieving reimbursement for new tests need to be improved. Second, uncertainty around the regulation of lab-developed tests needs to be resolved. Third, investors need to focus on what it takes to achieve market success, no matter how powerful or attractive the technologies. There have been some very profitable exits, such as the sale of BioFire to BioMérieux and the investments in Foundation [Medicine] and Geneweave by Roche, but more of these are needed to create a true trend."
Working with reimbursement risk
Venture capital investments in healthcare were projected to reach $9.4 billion in 2015, the highest level since 2000, according to "Trends in Healthcare Investments and Exits 2016," a report published by Silicon Valley Bank.
With that said, the number of venture capital-backed company exits within the broad diagnostic and life science tools (DX/tools) space were reduced in 2015 over the previous year, according to the report. The total Series A investment deal value for the Dx/tools segment was $331 million in 2012, $257 million in 2013, $354 million in 2014, and $165 million in 2015, the report said. In 2015, the median upfront deal value jumped 43 percent over the previous year, as Dx/tools companies formed in the last few years have learned to become more capital efficient and figure out a way to exit, and this led to a significant decline in time to exit. Dx/tools continue to face challenges due to commercial reimbursement issues, regulatory uncertainty and difficulty protecting intellectual property, the report said.
Perhaps reflecting greater optimism among investors, M&A activity in the omics life science tools/mdx space was up 23 percent in first half of 2016.
"In general, we've had a couple of years of depressed M&A activity, so it's not a huge surprise, especially considering cheap debt, that you would start to see some additional activity in M&A," William Quirk, a senior research analyst at Piper Jaffray, told GenomeWeb.
Investment risk associated with reimbursement continues to be among the most important restraints affecting the flow of money into the omics and MDx segment, according to investors and company executives.
"The molecular area has its own challenges and the greatest challenge is reimbursement — getting the federal government to pay for high-value molecular testing — and they have been a bit mercurial about it," OpGen's Jones said.
Peter Maag, president and CEO of CareDx, a Brisbane, California-based publicly traded molecular diagnostics firm, said he believes that as a result of the challenging regulatory and reimbursement environment, money is being diverted into other areas of biotech. "Four or five years ago, the FDA regulatory environment was the center piece. Right now, it is the Centers for Medicare & Medicaid Services," he said.
"I hope that with the recent PAMA rule announcement, we will overcome some of these hurdles because we will have more of a market approach to pricing diagnostics," said Maag, referring to the Protecting Access to Medicare Act of 2014. While this is very positive news, he said, some investors will probably wait to see how the omics and MDx ecosystem is impacted. "Since the first-year prices will be established under PAMA beginning Jan. 1, 2018, we still have a long way to go," he added.
So prevalent has been the issue of reimbursement uncertainty that companies are searching hard for solutions to shore up investor confidence. "There have been some notable disappointments, compounded by challenges with timelines and reimbursement that have made it harder to raise venture capital for MDx deals," Rubin said. "Our strategy has been to focus on the downstream issues when evaluating opportunities and make sure that if a company is successful it is paid accordingly. Putting those issues first, not last, when considering a prospective investment is a critical filter for us."
For Quanterix, its response to this challenge is to offer its technology to assist companies with drug development testing. "We have developed technology to help companies interested in developing drugs understand that the drugs are having the desired effect in terms of efficacy and safety in humans," said Hrusovsky, who formerly was CEO of Caliper Life Sciences, a life science tools firm that was acquired by PerkinElmer nearly five years ago for $600 million. "Drug companies are buying our technology very rapidly and there's no reimbursement or regulatory requirement for them to buy our technology and use it. That has allowed us significant growth while we are waiting on the things that are less certain, which is reimbursement and regulatory. The key to our strategy is getting those two words out of the description of our company, so that investors can be much more comfortable that they are not taking on too much risk."
Developing and applying a technology platform also can make a company more attractive to investors, according to company executives. "Caribou is a little bit unique in that we are not just a therapeutic company, but we're truly a platform company positioned to access the opportunity to use technology not just in therapeutics, but also in agriculture, industrial biotech, and basic research," Haurwitz said.
Mellad of Cambridge Epigenetix also sees the value in owning technology that can be applied in multiple areas. "Because we're producing a platform, we have the option of going into a variety of applications. If we were to go into molecular diagnostics, we would encounter similar challenges related to reimbursement and regulations. … I would say that being successful in this sector is less about avoiding the traditional challenges of reimbursement and regulations, among others, and more about looking at different business models where pharma is increasingly recognizing the power of having a companion diagnostic with their drug from day one."
Deciding to go public
Executives in this space mulling over whether to go public or remain private sometimes factor in the potential of viable acquisition opportunities.
"OpGen chose the route of going with a small public offering that we did last spring as opposed to staying entirely private," said Jones. That strategy was partly based on a view that many venture capital firms have de-emphasized investment in the molecular arena. The firm's offering required support of inside investors, and then Merck joined as a strategic investor.
"That has developed very nicely, as they are a terrific partner," Jones said. "This spring we did a financing deal that brought in another very large public company investor. There are pros and cons to becoming a small public company. On balance, though, this is a good strategy to building a business. The challenging funding markets end up creating an even greater advantage for those able to get funded and create new opportunities for M&A, and I think we are going to see some of that playing out."
Across the board, VCs want to see the opportunity de-risked, they want to see a demonstrable benefit that has been added, that key opinion leaders in the field have worked with you and utilized your platform to some success, and that the market you're envisioning is something on which you can make a return," Mellad said. "What they are looking for is something that really is going to move the bar forward, and if you have that you'll receive funding."