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Scoring $270M Acquisition Price from Myriad, Crescendo Bucks Gloomy Proteomic Dx Trends

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With Myriad Genetics' announcement this week that it will acquire Crescendo Bioscience for $270 million in cash, clinical proteomics has scored what is perhaps its most significant endorsement to date.

The field has notched a number of advances in recent years, including product launches, US Food and Drug Administration clearances, and the increasing adoption of mass spec as a clinical tool. In terms of actual profits, however, proteomic diagnostics have, generally speaking, underwhelmed.

Crescendo – whose lead product, Vectra DA, is a proteomic test for assessing rheumatoid arthritis – has yet to turn a profit itself, but its rapid growth and, perhaps more important, $270 million acquisition price, mark it as a success story in a space where, thus far, success has been hard to come by.

The company emerged out of research done by Co-founder Michael Centola — first at the National Institutes of Health and then at the Oklahoma Medical Research Foundation — into the genomic and proteomic underpinnings of RA and other autoimmune diseases. Launched in 2002, Crescendo began seriously working on what ultimately became Vectra DA in the spring of 2007 upon closing on $5 million in Series A funding from investors led by Mohr Davidow Ventures, said President and CEO William Hagstrom.

Formal development of Vectra DA began in the summer of 2008, Hagstrom said, with the beta launch of the test taking place in the summer of 2010. The test monitors RA patients by measuring 12 proteins covering a variety of pathways and mechanisms underlying the disorder and using these measurements to generate for patients a disease activity score of between one and 100.

According to Myriad, the firm expects Crescendo to contribute roughly $10 million in revenue in fiscal year 2014 against an operating loss of around $6 million, with this loss narrowing in 2015 and turning to a profit in 2016 and beyond.

On Myriad's Q2 2014 earnings call this week, President and CEO Peter Meldrum said that Vectra DA is currently on a revenue run rate of $10 million per quarter "and growing rapidly." Crescendo performed more than 27,000 tests during the December 2013 quarter, compared to 22,000 in the September quarter and 16,000 in the June quarter.

The test is covered by Medicare, which currently pays for up to two tests per patient per year at a rate of $575 per test. Medicare covers roughly 40 percent of the RA population, Hagstrom said, adding that the company also receives "some form of payment from approximately 80 percent of private insurance companies."

Around 25 percent of the roughly 3,500 rheumatologists in the US order Vectra DA on a regular basis, he said.

Discussing the acquisition this week with ProteoMonitor, Hagstrom cited the company's choice of disease target as perhaps the most significant key to Crescendo's success..

"Picking the right market or disease with the right characteristics [for a proteomic test] is paramount," he said, noting that a variety of factors made RA an appealing space to pursue.

RA, Hagstrom said, "is a chronic, lifelong condition, where the same patient and physician are paired together over an extended period of time."

He noted, as well, that the rheumatologist market is fairly concentrated, consisting of roughly 3,500 physicians in the US, making it a relatively easy space to target. At the same time, with 1.5 million RA sufferers in the US, the patient pool was large enough that a successful test could generate significant sales.

Additionally, Hagstrom said, despite a great deal of innovation in RA therapies, prior to Crescendo, little progress had been made on the diagnostic side of the disease. Conventional tests of RA activity are "subjective, qualitative, and quite antiquated,", relying on data such as patient-reported pain levels and joint functionality, he said.

And while there are nine FDA-approved biologic therapies for RA, the field's diagnostic limitations mean they are being used in a relatively unguided fashion, Hagstrom said.

"So you had this interesting set of dynamics by way of relative market attractiveness in a disease state that was sufficient in size, and so if you could devise the right product strategies to fit into that mix, then we really believed we'd have something," he said.

To determine these product strategies, Crescendo conducted market research with parties including 30 key opinion leaders in the field, a similar number of community doctors, and 150-plus rheumatologists "to really dial in what were the characteristics that would be appropriate to develop a winning test," he said.

In his emphasis on choice of disease target, Hagstrom echoes comments from other proteomics diagnostics developers regarding keys to success in the space. For instance, in a 2013 interview with ProteoMonitor, Peter Levine, former CEO of defunct diagnostics developer Correlogic, cited that company's decision to pursue as its first indication ovarian cancer – a relatively rare condition – as an important contributor to the firm's failure.

Speaking on the same question, Integrated Diagnostics CEO Al Luderer told ProteoMonitor that the struggles of many early proteomic diagnostic firms demonstrated the importance of pursuing indications "that have enough available market to justify commercial development."

In the same interview, Luderer noted as well that many proteomic diagnostic firms have been hindered by a lack of sales forces capable of "'missionary selling,' where physician education, coupled with the ability to close sales, are critical skills."

Hagstrom also raised this point, observing that a "well-trained and highly skilled field sales organization" had been crucial to driving physician adoption of Vectra DA.

"We hired highly experienced individuals who had been in the autoimmune field or rheumatology … and we trained them well," he said. Crescendo currently employs a total of 33 sales people.

In this, the firm diverged from a number of early proteomics outfits including Vermillion, Correlogic, and the Yale University team behind the failed ovarian cancer test OvaSure, which inked licensing deals with large reference labs like Quest Diagnostics and Laboratory Corporation of America, with the expectation that those companies' sales staffs could effectively drive adoption of their tests.

Slow sales, though, have left some in the industry questioning this approach. In particular, Vermillion has moved in the last year towards an internally driven sales strategy similar to Crescendo's. In May, CEO Thomas McLain announced that Vermillion was taking over from Quest as leader of commercialization efforts for its OVA1 ovarian cancer diagnostic.

Explaining the change, McLain said that the sales force of a large clinical reference lab like Quest was not necessarily best suited to driving commercialization of a single specialty diagnostic like OVA1.

"As a high-value diagnostic, retaining current users and expanding into new accounts requires a specialty sales skill set," he said. "Coverage is also a significant factor in driving increased use of [OVA1]. That is not core to a high-volume reference laboratory business model."

Also key to Vectra DA's success, Hagstrom said, has been the extensive data Crescendo has collected on the test's performance.

The company performed development and initial validation of the test over a series of studies examining more than 1,900 samples from more than 1,700 patients, and since then it has performed more than 20 additional studies generating data on the test's performances for purposes ranging from initial diagnosis to monitoring therapy to separating out effects from comorbities like fibromyalgia, he said.

He estimated that it would take roughly four to five years and up to $100 million for a competitor to replicate the company's clinical program.

Launching development of Vectra DA in summer 2008, Crescendo benefitted by observing the challenges that proteomic diagnostics firms before it had encountered, Hagstrom said. "We were great students of what had worked and what had not worked, such that our path was relatively straightforward and one that worked through a series of challenges in a pretty efficient fashion."

Myriad first expressed interest in Crescendo in 2011 when it made a $25 million debt investment in the company that also gave it a three-year option to purchase the firm. That $25 million will be deducted from the $270 million purchase price.

On the earnings call this week, Myriad's Meldrum outlined several anticipated benefits to Myriad of the acquisition, among them the opportunity to expand Crescendo's technology to other autoimmune diseases; the opportunity to move further into protein diagnostics by adding Crescendo, which will operate for the time being as a wholly owned subsidiary of Myriad to its existing Myriad RBM subsidiary; and the ability to accelerate Crescendo's growth by leveraging its own sales and customer service infrastructure.