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Research on the business of cancer testing in The Americas, Asia & Europe

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Zeitgeist

January 2014

For most of the 15,000 pathologists who run America’s 8,100 cancer testing labs, and for most of the firms that sell to them, 2013 has been the worst year ever. For many, 2014 will be worse than 2013.

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After many years of reimbursement increases, anatomic pathologists are having their reimbursement rates reduced by 30% here, 50% there, and worse in other places. The pathologists’ most pressing concern is how they will survive last year’s drastic cuts to CPT code 88305, as well as the recently announced reductions in IHC reimbursement (RIP 88342).  The other fear that keeps them up at night is that advances in molecular oncology will make anatomic pathologists redundant.  While we don’t expect anatomic pathologists to become obsolete any time soon, we do expect between 2,000 and 2,500 of the country’s 8,100 AP labs to be driven out of business by declining reimbursement and slow-footed marketing by 2017.  The prognosis for any practice of less than five pathologists is grim. Most of their staff will either be prematurely retired or working for a bigger lab (that they probably won’t like) within four years.

The molecular pathology labs have some of the same worries and a few different worries. The wild west days of code stacking are over, so everyone is getting paid a lot less in 2013 than they were in 2012, and expecting to get paid less still in 2014.  Everybody with a good idea in molecular pathology looks at the gauntlet of the FDA and says why bother? Then they open or acquire a CLIA-certified lab and start selling results instead of kits. The FDA keeps making noise about the need for FDA oversight of these lab-developed tests (LDTs), prompting low-grade anxiety among the molecular oncology labs that offer expensive proprietary panels. Then there’s the more immediate anxiety stoked by the arrival of clinical NGS – next-generation sequencing.  Whole-genome sequencing for less than $6,000 is here today; within two or three years prices will fall below the $2,500-3,000 threshold of today’s most expensive conventional panels.  The assault on reimbursement, the specter of FDA regulation, and the tsunami of clinical NGS – these are the big three topics that keep those running molecular oncology labs from getting too complacent.

The effects of all these reimbursement cuts obviously trickle down to the manufacturers that supply the labs.  Sales of the instruments that labs need to produce 88305 invoices – tissue processors, H&E stainers, cover slippers, microtomes, and embedding stations – are down between 10% and 20% compared with 2012. Many capital equipment decisions have been put on hold in anticipation of the new 88342 rates that were announced November 27, 2013, which will drive many small labs to sell out or close.  This has been a very difficult year to be a sales rep for Thermo, Sakura, and their smaller core histology competitors, who are the most dependent on the market for 88305 equipment. Growth slowed this year but did not cease entirely for Ventana, Dako, and Leica, as their somewhat healthier 88342 (IHC) businesses somewhat offset the sluggishness of primary staining and sectioning markets.

Things aren’t any better in cervical cancer screening markets. Pap testing volumes continue to decline, and BD forces down the prices Hologic might otherwise be getting. While HPV volumes are still growing, margins are getting worse as Roche and Hologic/Gen-Probe eat away at Qiagen’s franchise. Aside from the anomaly of HPV, most molecular oncology testing is still done with homebrews.  While reimbursement cuts are hurting margins, the growth rates of these market segments are still a happy story for Roche Molecular, Abbott Molecular, Hologic, and Qiagen; these four own more than 85% of the molecular oncology test kit business.

The business of turning NGS testing into a widespread clinical practice is booming. Illumina’s stock is near an all-time high and Thermo paid dearly to buy Life Technologies, which transaction is expected to close in the second quarter of 2014. Roche, having walked away from their $175m purchase of 454 Life Sciences, and their very expensive failed attempt to take over Illumina, just committed another $70m to Pacific BioSciences for their third try in NGS markets.  Arrogant incumbents snicker, but your correspondent has been studying Roche Diagnostics since 1986, and can’t remember many cases where they messed up a market entry three times in three tries. Roche has decided they want an NGS business; if they can’t develop it internally, they’ll buy it again.

You can’t throw a rock at the AMP or USCAP meetings without hitting a sign claiming expertise in companion diagnostics development. Everybody wants a piece of the promised land of companion diagnostics, but this is like the market for NFL quarterbacks or Hollywood starlets: all the money is being made by just five or six players, in this case mostly Myriad, Dako, and Roche. Abbott and Qiagen haven’t made quite as much as these three yet, but their newish CDx products and pipelines have a bright future. The great majority of companion diagnostic tests  – all the ER, PR, and c-KIT, plus most of the HER-2 and EGFR – are still run on the IHC systems of Roche-Ventana, Dako, and Leica.  The companion diagnostic stains are just about the only thing Ventana, Dako, and Leica management have to smile about these days.

Chad McEvoy