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Celera Will Add to Quest's MDx Capabilities; But Reimbursement Questions Cloud Revenue Contribution


By Turna Ray

Quest's decision
to purchase Celera fits with its overall strategy to expand its molecular diagnostics offerings, but while the smaller firm will add to Quest's biomarker discovery capabilities and cardiovascular disease testing pipeline, private payors are still not reimbursing for a large share of Celera's products, which may impact how quickly Quest can see a return on its investment.

In announcing its intent to acquire Celera last week, Quest said it intends to pay $671 million for the company, which will expand its biomarker discovery capabilities, bring a number of molecular tests for cardiovascular diseases, infectious diseases, and neurological disorders, and add to its existing in vitro diagnostics pipeline in the areas of organ transplantation, HIV drug resistance, fragile X syndrome, and cystic fibrosis.

Berkeley Heart Lab, which Celera acquired for $195 million in 2007, also comes under the Quest umbrella, and Celera and BHL will operate as independent units under the parent company. Celera CEO Kathy Ordoñez said that BHL will benefit from Quest's patient service centers and its distribution capabilities.

The acquisition will not change Celera's existing drug development partnerships with Merck and Ipsen. Quest officials noted that they hope to improve Celera's ability to attract drug companies developing personalized treatments, since Quest and Celera together will "have better leverage" to conduct clinical trials and discover biomarkers.

Quest CEO Surya Mohapatra said during a call with analysts to discuss the acquisition that Celera's executive team will work with Quest to help build its product pipeline. "It's all about differentiation," Mohapatra said. "And what we're doing is transforming the company from a simple lab company to a powerhouse of diagnostics."

Quest values the transaction at approximately $344 million net of cash and short-term investments, which may be further reduced based on Celera's available tax credits, capitalized R&D, and net operating loss, which at the end of last year totaled $117 million. As such, Quest executives said that Celera will not materially contribute to revenues until 2013.

The transaction is expected to close by the end of April.

The Celera acquisition marks the second M&A deal for Quest this year. In February, the company acquired Athena Diagnostics from Thermo Fisher Scientific for $740 million. That acquisition allowed Quest to add neurology tests to its pipeline.

Going forward, Quest officials said they will focus on reducing Athena and Celera's bad debt, "but you cannot rule out additional acquisitions," Mohapatra said.

Gaining 'Physician Reach'

According to Ordoñez, being acquired by one of the largest laboratories in the country improves Celera's ability to market its products, a capability that it lacked as a standalone company.

"Celera's ability to discover and validate biomarkers has exceeded our ability to commercialize them," Ordoñez said during the call with analysts. She added that Celera was attracted to Quest's "medical leadership, market access, and scale."

Celera currently employs 43 sales reps who reach out to doctors in major US cities. "The issue for us is physician reach," Ordoñez said, adding that with its current marketing capabilities Celera has only penetrated 3 percent of the secondary prevention market for cardiovascular disease. By becoming a Quest subsidiary, Celera will have access to a much larger sales force and market its tests through Quest's service centers.

Celera's 2010 revenues were approximately $128 million. Of this amount, BHL contributed $78 million, Celera's products business netted $40 million, and $10 million came from royalties and milestone payments.

Celera officials estimated that around 50 percent of BHL's revenues come from Medicare reimbursements, while 10 percent is covered by contracts with private payors — UnitedHealthcare, Aetna, one branch of Blue Cross Blue Shield, and a number of smaller payors.

"Most of the rest of it is out of network," a Quest official said. "Over time we expect that more of Celera's revenues will come in network. That will be making many of their services available to a broader patient population."

Getting Coded

The American Medical Association's efforts to phase out procedural code stacking and institute a new coding system for molecular diagnostics also adds uncertainty to the future reimbursement prospects for Celera's products.

The AMA is currently seeking comments on its proposed two-tier coding system to better describe advanced molecular technologies and bring more granularity to the types of procedures for which insurers are paying (PGx Reporter 03/16/11). Although most diagnostics players have not commented on the potential impact AMA's proposed coding system may have on their businesses, according to at least one industry observer, the current proposal has "logistical and structural problems" that many test makers may find restrictive.

Quest officials noted that before deciding to purchase Celera, they had factored in any anticipated reimbursement changes.

"The changes that are being contemplated … are really designed to increase the visibility into what's being billed for," Quest CFO Robert Hagemann said of the AMA's coding efforts. "Reimbursement for the new codes has not yet been established, and frankly those that are billing for more mutations than are necessary or clinically appropriate to achieve an accurate diagnosis are the ones most likely to see reimbursement reductions. We have considered this for Celera and did not see this as a significant risk to their existing tests."

For the time being, only two of Celera's tests performed by BHL — an APOE test and a CYP2C19 test to gauge Plavix response — are listed in the proposed coding list published by the AMA. According to the draft document put forth by the AMA describing its proposed coding system, Celera's Plavix response test would fall in Tier 1, and the APOE test would be reimbursed by Tier 2 codes. According to Ordoñez, these two tests represent the "highest value on a per-test basis" in Celera's pipeline.

However, since the majority of reimbursed tests performed by BHL are not listed in the proposed guidelines, it is uncertain which tier of codes these tests would fall in, or whether Celera will even be able to secure a unique code for them.

Ordoñez said that whatever new coding system results, Celera will attempt to gain a code for its KIF6 test to gauge risk of coronary artery disease and statin benefit; its 9p21 genotyping test to predict the risk of early-onset myocardial infarction; and its LPA genotyping test to predict risk of coronary heart disease and response to aspirin.

AMA intends to put its proposed CPT codes into effect in 2012, at which point "stacking" codes for such tests will no longer be permitted. Quest and Celera both expressed confidence that they would be able to secure a code under the new system for the rest of the tests that currently use stacked codes.

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