September 1, 2006 (Vol. 26, No. 15)
Platforms with Expanding Content Ramping Up
Diagnostic product revenues with genomics-based technologies are ramping up. The growth area in the IVD market for the next five years will be molecular tests for oncology and infectious diseases. Also, since industry and doctors have rediscovered the need for targeting therapeutics with a more comprehensive diagnostic work-up, new products and services that provide rapid and accurate DNA or genetic-based tests will grow well in excess of the core diagnostic market.
Markets for infectious disease testing have been growing rapidly for several years as new agents pose a greater threat to public health. HIV, hepatitis, and STDs, such as herpes and chlamydia, have required ever more sensitive, rapid, cost-effective testing. Recently, new agents such as avian influenza, West Nile virus, and drug-resistant bacteria, such as C. difficile and Staph, require screening of the blood supply or more exact tests.
As more targeted but expensive cancer therapies come on the market, gene-specific diagnostics will be needed to provide a more personalized treatment course. Cancer therapeutics are expected to reach 10.5% of the total market by 2009.
In the March 2006 issue of “Start-Up” by Windover Information, a review of “The New Diagnostic Companies” was presented. The article gives a good review of the diagnostics business model covering markets such as cancer and cardiovascular, the synergy with therapeutics, and regulatory issues.
The larger players in the molecular testing area are Roche, Becton Dickinson, Abbott Laboratories, and bioMerieux. Roche was one of the first big pharma companies to capitalize on the link between molecular diagnostics and therapeutics. Up until recently the DNA testing field was dominated by Roche due to its strong patent position in PCR. However, smaller, high-growth public companies in this sector, many of which were funded more than 10 years ago, have achieved significant revenues well in excess of $100 million with market caps up to a $1-billion range.
Growth in product revenues are expected to continue at greater than a 25% annual pace, as the need for testing grows and new products kick in. We review five companies, two that are leaders in a specific testing market and three that are emerging because of technology or products.
Digene (www.digene.com), with shares currently at about $45, develops, manufactures, and markets gene-based tests for diagnosis of women’s cancer and infectious disease, primarily human papilloma virus (HPV). Digene’s nucleic acid-based technology has the capability to perform tests on other infectious agents, such as STDs, and viruses such as CMV and HBV.
Digene has a licensing agreement with Luminex (www.luminexcorp.com) that has an assay technology utilizing microspheres (xMAP) to perform multiple tests simultaneously.
Digene had a blowout fourth quarter in 2005 as worldwide revenues grew 43% year-over-year to $39.4 million. Worldwide HPV testing revenue grew 38% for the current year ending June 30 to $134 million. Net income was $15.4 million for $0.69 per diluted share.
Wade King of Montgomery and Co. recently raised his revenue estimates to $45 million for the next quarter and $192 million for 2007 with an EPS of $0.84 .
Gen-Probe (www.gen-probe.com) and its marketing partner Chiron (recently acquired by Novartis) develops, manufactures, and markets nucleic acid testing products for diagnosing human diseases and screening donated blood and tissue. Valued at about $51 per share, GenProbe’s portfolio of diagnostic products includes simultaneous detection of Chlamydia and Gonorrhoeae, Strep, TB, pneumonia, and simultaneous detection of HIV-1 and HCV for screening the blood supply where they have 80% of the U.S. market.
GenProbe recently settled patent infringement litigation with Bayer Healthcare (www.bayerhealthcare.com) for HIV/HCV resulting in an upfront payment of $31.7 million and potential future royalty payments.
Tycho Peterson of JPMorgan estimates revenues of $346 million in 2006 and $407 million for 2007 with EPS of $1.08 and $1.47 respectively.
Celera Genomics (www.celera.com) has a current share price of about $13 and core technologies in proteomics, bioinformatics, and genomics, applied to drug discovery and diagnostics. Recently the drug discovery business was divested to focus on genetic tests.
As a pure-play diagnostic company, it has a collaboration with Abbott Diagnostics with a potential for 11 genetic tests for cardiovascular disease and cancer. The partnership with Abbott and the m2000 System was launched in Europe in 2005 for infectious disease monitoring with tests for hepatitis and STD. Recently the HCV genotype test was approved in Europe for the Abbott system. The partnership generated revenues of $62 million in 2006, with revenues projected for the Abbott alliance at $80 million in June 2007, assuming U.S. approval.
The company has great expectations for two tests outside the Abbott alliance: HCV with associated cirrhosis risk and a genetic test for individuals with high risk for coronary heart disease. These new tests will be introduced initially as reference lab tests. A premarket approval for a cystic fibrosis screening test has also been submitted to the FDA and development is under way for a genetic test for Alzheimer’s disease and stroke.
Eric Schmidt, Ph.D., of Cowen and Co. projects total revenues of $44 million in 2007 with a loss of $30 million due primarily to high R&D expenses of the same amount. Profitability is forecasted in 2009 with revenues of $102 million.
Cepheid (www.cepheid.com) develops, manufactures, and markets a fully integrated, easy-to-use, PCR-based DNA testing platform focused on clinical diagnostics, biothreat, and industrial tests, primarily in the infectious disease area. It is currently valued at $7.25 per share. A first-generation system called the SmartCycler has been on the market since 2000 with over 2000 units placed. A second-generation system called the GeneExpert has demonstrated its capability with its Anthrax test. Recently Cepheid received FDA 510k clearance to market its Xpert test for Group B Strep on its GeneExpert platform.
Cepheid has a license agreement with Applera for real-time PCR (RT-PCR) for potential entry into the HIV and HCV testing markets. It also has a license from Roche (www.roche.com) for a broad range of PCR patents. Cepheid recently acquired the French microRNA company Actigenics (www.actigenics.com) to expand its range of biomarkers.
Quinton Lai, Ph.D., of RW Baird estimates revenues of $131 million in 2007 with growth coming from new product offerings in the clinical market for GBS and methicillin-resistant Staph. aureus. Other clinical viral diagnostic tests expected soon are cytomegalovirus, enterovirus, varicella-zoster, and herpes (HSV-1 and 2). A growing installed base of system placements will fuel growth in cartridge and reagent revenues.
Based on its market cap of around $480 million, the price/sales ratio for 2007 would be about 3.7. In the recent quarter ending June 30, product sales decreased 7% from prior year because of lower sales to the USPS for the completion of its Biohazard Detection System. Net loss was $7 million. However, clinical product sales increased 135% to $4 million in second quarter.
Genomic Health (www.genomichealth.com) was one of the few biotech IPO’s of fourth quarter 2005 and is currently trading slightly above the IPO price at $12.25. It is focused on oncology diagnostics with genetic-based tests utilizing a panel of 21 genes that are used in early-stage breast cancer to predict the likelihood of cancer recurrence, patient survival, and chemotherapy benefit.
U.S. patent 7,056,674 was issued in July covering the utility of two genes utilized in Oncotype diagnostics for breast cancer prognosis testing. Genomic Health is working on additional diagnostics tests for breast cancer that can assess response and recurrence to chemotherapy. The technology used in the Oncotype Dx (RT-PCR and related algorithims) is a platform that can be leveraged into tests for other cancers, such as colon, prostate, lung , and renal.
As new targeted therapies for cancer are developed, there is an increasing need for selecting patients and disease response. Genomic Health is currently working with Bristol-Myers Squibb(www.bristolmyers.com) and Imclone(www.imclone.com) to develop a genomic test for predicting the response to Erbitux in colorectal carcinoma.
The OncoType DX test is a service targeted to the estimated 125,000 early-stage breast cancer patients that are early-stage node negative (N-), estrogen receptor positive (ER+) and represents an estimated $350-million market at a cost of $3,460 per test. Product revenue in second quarter 2006 was $7.8 million, up sharply from the same quarter of 2005 revenues of $1.1 million. Medicare-related revenues in the second quarter were $4.8 million. Net losses in this quarter were $4.2 million.
JPMorgan analyst Tycho Peterson is projecting 2006 revenues of $21.9 million and a diluted net loss per share of $1.61. For 2007, Peterson projects revenues of $53.5 million.
Several other players hope to capitalize on genetic testing. Myriad Genetics(www.myriad.com) already has predictive medicine products for breast and ovarian cancer, as well as colon cancer, with growing revenues in excess of $100 million with $26.9 million in the current quarter.
Decode genetics (www.decode.com is developing a type 2 diabetes test that can gauge individual risk and identify patients who may benefit from targeted therapy. Ibis, a new division of Isis Pharmaceuticals (www.isispharm.com), has developed genotyping technology for identification of bacterial and viral organisms from a single sample.
Other platform companies with molecular testing capabilities are Affymetrix(www.affymetrix.com) and Luminex. And watch GE Healthcare as they are increasing their footprint in diagnostics.