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Genetic, Genomic Testing to Play Key Role in Quest Diagnostics' Growth Efforts

NEW YORK (GenomeWeb News) – Quest Diagnostics held its first-ever Investor Day last Friday in New York providing a highly detailed view of its refocused strategy aimed at gaining share in the diagnostic testing market and its plans to revive flagging revenues.

A key part of these plans is driving growth in its esoteric testing business, which includes its genetic and genomic tests. These tests are primarily sold to physician specialists and include the firm's cardiovascular risk tests from Berkeley Heart Lab and its ColoVantage test for colorectal cancer — the first blood-based methylation test offered in the US.

After recent struggles to grow revenues, Quest announced a reorganization plan last month. That reorganization included a shakeup in upper management and the planned elimination of 400 to 600 management positions — all part of a three-year, $500 million cost-reduction initiative announced last year by Quest aimed at improving operational efficiency. The launch of those efforts was followed earlier this year by Steve Rusckowski succeeding Surya Mohapatra as president and CEO of the firm.

Rusckowski, who joined Quest in April from Philips Healthcare, where he had served as CEO, told investors and analysts at the meeting Friday that the US diagnostic testing market has been growing at around 4 percent, but Quest hasn't matched that pace. For example, for the past two quarters the firm posted a revenue decline of 3 percent for the third quarter and flat year-over-year revenues for the second quarter.

But with the reorganization taking shape, Rusckowski believes the firm can match the industry's low single-digit growth through 2015 and perhaps even surpass that rate afterward. He said Quest expects slower growth in the near-term, but accelerating revenues over the next few years, helping to offset continued reimbursement pressure. Part of that growth will come from initiatives associated with the reorganization, such as a more efficient sales organization, as well as the likely benefits of more insured Americans under the Affordable Care Act. But some of that growth will be the result of more sophisticated test offerings, company officials believe.

While Rusckowski noted Quest's recent flat revenues overall, he said that the firm's esoteric and anatomic pathology testing businesses, which account for around one-third of Quest's revenues, were growing at a faster clip. Company officials declined to provide specific sales numbers or revenue growth for esoteric testing, but a Quest spokesperson said in an email to GenomeWeb Daily News that that part of the business is "an important area of focus going forward."

Quest has beefed up its genomic and genetic testing capabilities over the past few years through a series of acquisitions, including those of Athena Diagnostics, Focus Diagnostics, and Celera, which also owned Berkeley HeartLab. These acquisitions brought molecular and genetic testing technologies targeting a vast array of disease areas including a variety of cancers, metabolic and cardiovascular diseases, and infectious diseases — and among the molecular technologies Quest now employs in its esoteric testing business are mass spectrometry, sequencing, microarrays, and PCR.

The newer technologies also provide Quest an opportunity to combine sales efforts for the routine testing that it provides to primary care physicians with the esoteric tests it often provides to specialists. In cancer diagnostics particularly it can offer a growing roster of molecular tests that target the spectrum of testing from predisposition to screening to diagnosis to monitoring.

In addition, the variety of technologies and capabilities possessed by Quest provide opportunities in an area that has not been well publicized by the firm: companion diagnostics. Quest has such CDx agreements in place with "more than a dozen pharmaceutical, medical device, and biotechnology companies related to one or more stages of personalized diagnostics development," the company spokesperson told GWDN.

"The pace of interest in these arrangements has picked up in recent years and we are in discussions with several other companies," she said, noting, however, that the FDA generally defines a companion diagnostic as a test developed through all stages of clinical trials, which is not the case for all of Quest's current or potential CDx alliances.

Considering Celera's Future

A major part of Quest's reorganization involves refocusing the business on what the firm calls Diagnostic Information Services, and Rusckowski noted that among the key initiatives for that part of the business were completion of the integration of Berkely HeartLab and leveraging content from Celera's discovery capabilities.

Earlier this year, the US Food and Drug Administration turned down Celera's application for pre-market approval of its KIF6 Genotyping Assay, saying it was not approvable "without major amendment." Quest will continue to offer the KIF6 test, which is used in conjunction with clinical evaluation and patient assessment to evaluate a patient's risk for coronary heart disease, as an LDT, Jay Wohlgemuth, SVP of science and innovation for Quest, said. But the firm hasn't yet decided whether it will re-file a PMA or seek any other type of FDA regulatory approval of the test as an IVD product.

While the KIF6 test and other LDTs developed by BHL are an important part of Quest's esoteric testing plans going forward, other Celera assets are being put up for strategic review. Specifically, Celera's IVD product business and biomarker research arm were highlighted as assets for which the firm would explore strategic options. Kathy Ordonez, formerly CEO of Celera, heads up the Diagnostic Solutions business of Quest, which includes those Celera assets being reviewed.

Though acquisitions, such as those of Celera/BHL and Focus, have helped Quest grow its esoteric testing business, Wolgemuth said that the firm doesn't need to acquire a company to provide additional content at this time. The firm has been actively involved in licensing in biomarkers, such as Septin9, which was licensed from Epigenomics and is incorporated into the ColoVantage test, as well as other markers for colon cancer from Australian firm Clinical Genomics and acute myelogenous leukemia from Trovagene, among others.

However, that doesn't mean Quest won't be involved in the M&A market. CFO Bob Hagemann told attendees of the Investor Day that Quest would consider smaller, fold-in deals, but not larger acquisitions. He said that any such purchases must be aligned with the refocused business, must improve Quest's market presence, and must be accretive within two years.

Between the streamlined management, reorganized sales staff, refocused efforts surrounding its Diagnostic Information Services, and savings programs targeting specific parts of the company, Quest believes that it will not only achieve its previously stated goal of $500 million in savings in 2014, but it believes it will exit 2014 with run-rate savings of $600 million.

"We need to restore growth. We need to restore operations," said Rusckowski.

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