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Want to Make Money in SNP-Based Diagnostics? Better Buckle Up

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At A Glance

Name: Jorge Leon

Age: 48

Title: President, Leomics Consulting

Background: Before founding Leomics in August last year, Leon was vice president of applied genomics for Quest Diagnostics.

Education: Leon holds a PhD in cellular and molecular biology from New York University.

Most industry watchers agree companies that sell SNP-based diagnostics have ahead of them a potentially lucrative, if very challenging, future. Though today there are around 30 SNP tests that can effectively uncover links to certain diseases, a handful of these — for example cystic fibrosis, hemochromatosis, and blood coagulation — command the lion’s share of a $100 million market. The industry has a lot of elbow room.

The SNP-based diagnostics industry also has its share of hurdles. The biggest one is cost: Currently, SNP tests for diagnostics sell for somewhere between $200 and $250 apiece. That’s too expensive for most payors, and as technologies improve and as markers are validated, vendors will fall under tremendous pressure to slash that price to $50 or less. The question is, how?

One thing’s certain: For companies that do invent a platform that can make it to the mainstream, the potential for great profits abounds. Consider that payors each year shell out roughly $100 million for the small number of existing SNP-based tests. Now consider that market as it doubles every year until eventually one million tests are performed at hospitals and primary-care physicians’ offices each year.

Jorge Leon, president of Leomics Consulting and former vice president for applied genomics for Quest Diagnostics, considers this and other SNP issues with SNPtech Reporter:

What are some of your opinions of the SNP-genotyping research and diagnostics market?

I think that if you look at the research markets, everybody is doing SNP genotyping. And there’s no doubt there’s a market there. It’s not a huge market, it’s not going to grow tremendously — there are about 25 companies actively selling technologies for that.

The companies that have very high throughput technologies will differentiate themselves from the others. I think it has a nice market if you want to enter it — but as a company that has many other services. But I don’t predict that any single company can sell more than $50 million worth of SNP-testing instruments.

But in diagnostics, I see that the future is great, though the it is a more complicated sell. The problem with diagnostics today is there are only very few SNP tests available: cystic fibrosis, Factor V and Factor II mutations, and hemochromatosis. They’re growing very nicely — over 100 percent per year — and I think it has a great future, and that there will be more diagnostics tests very soon.

However, as this technology becomes more popular and joins the mainstream clinical-testing market, there is a need to reduce the price of these tests. Currently, SNP tests for diagnostics sell somewhere between $200 and $250. How much do these [test-selling] companies get back? Probably about $100 to $150. You don’t get back the full price you sell it for. The reason being is that there is a very mixed group of payors out there: Medicare, HMOs, hospitals, and the like. And not everyone pays the full price.

So when you analyze the direct cost of these tests — and I’m using examples like cystic fibrosis, hemochromatosis, Factor V mutations — the overall market for these tests alone [is] over $100 million, and is growing at about 100 percent a year.

The overall cost of a SNP test today is around $20 to $30. These costs have to be divided into three components: sample preparation, amplification, and detection. Sample prep costs somewhere between $3 and $5, amplification costs between $15 and $20 — because you have to pay royalties to Roche for your PCR, which is a big component [of] the overall price — and the detection costs between $2 and $6.

That sounds expensive.

This is a very expensive test. I mean, we’re talking about direct costs of $25 — that’s five times more than what a regular mainstream clinical test costs today in the reference-service lab industry. So as these tests become more popular and join the mainstream, their costs have to come down. And companies that have a business of selling SNP tests have to reduce their price.

So I think in the future — in the very near future — as these tests become more popular, diagnostic-service companies will have to offer these services for $50, and they will not be able to pay more than $5 per test. … So those costs have to come down from $25 to $5 for this technology to really join mainstream clinical testing in hospitals.

What can tool vendors do to cut these costs?

I think for SNP companies today … they have to, number one, bypass PCR, or the prices of PCR have to come down significantly. If you do this you can take a huge chunk out of your costs; if you are able to maintain the quality and the same sensitivity to detect SNPs without PCR you’re removing $10 to $15 from the costs right there. …

If you do this and develop a homogenous method that can actually detect a SNP with a very high level of sensitivity and bring the cost down to $5 to $10, we’re talking business here. We’re talking mainstream SNP analysis.

To my knowledge there aren’t very many companies doing that. If you look at the Orchids, the Sequenoms, the Luminexes, the Illuminas, they are basically detection platforms. You still have to do sample preps, you still have to do amplification.

There [is a handful of] companies that are pioneering this ‘no-PCR’ method with some success. [One] is Third Wave, which has a pretty acceptable technology, though I think its cost is still too high. Another company, Genetics Diagnostics, in Toronto, has a very exciting method. I think they are one or two years away from commercialization. Naxcor, in Palo Alto, Calif., currently sells its own tests that bypass PCR that have a very high level of sensitivity. To my knowledge, these two last companies … are in the $5 to $10 range.

Do you believe these companies will likely make it, as you say, to mainstream payors like Oxford or Aetna or Kaiser Permanente?

Absolutely. This is really how these companies will make it. I mean, for a diagnostic company today to make it selling a technology platform you have to have at least $50 million in revenue, right? Less than that is not attractive to anyone to invest in. And think about this: To make $50 million in tests at $5 a test you have to sell 10 million tests. Today in clinical diagnostics we do around 450,000 SNP tests per year. And pretty soon I think this will become a million. The million is a very, very stiff number. But we’ll get there.

So how do you really create value for these firms?

I think you have to have a technology that will be very unique to bring these tests to routine clinical testing. You also have to have proprietary markers; this is the other very important strategy to make a company viable. You have to have a proprietary position for a particular SNP or a particular algorithm. And then you have more value.

To my knowledge none of the existing SNP companies have adopted that strategy. Sequenom, Orchid and Illumina, and all those have been trying to discover new markers and license those, but not put those into platforms to sell them as a whole package.

In this case, I’d say without a doubt that Sequenom has the most comprehensive strategy to find markers. But Illumina and Orchid and Luminex and Third Wave are also trying to get hold of new markers for collaborations.

How much time do they have, considering most of these firms you mentioned have left three or fewer years of cash?

There is very limited growth opportunity in the SNP-research arena. However, there is growth in the clinical-trials arena when those become important. People will be doing SNPs for the next 10 years. There are so many technologies out there, and one day all of this is going to stop, right? In diagnostics, there is a much higher potential because we are only now discovering all the SNPs that have clinical value. And of the three or four we have today we’re already selling $100 million.

I would predict that SNP testing and SNP diagnostics will have a value of $2 billion to $3 billion or more in 10 years.

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