Despite reimbursement and market pressures facing clinical laboratories and the in vitro diagnostics (IVD) market, investors remain bullish on the industry, noting that next-generation sequencing (NGS), cancer testing, and companion diagnostics are spurring growth in the IVD market even as labs struggle with the effect of Medicare reimbursement cuts under the Protecting Access to Medicare Act (PAMA).
While many smaller regional laboratories are experiencing stagnant revenue growth due to PAMA, large national labs are largely offsetting the cuts through acquisitions, partnerships, and new revenue sources. Publicly traded companies in the specialty lab business that perform esoteric testing, in some cases, are benefiting from the changes to the clinical laboratory fee schedule.
For example, CareDx, which specializes in diagnostic testing for transplant patients, has seen its stock price increase by 23% so far this year on positive earnings reports, primarily driven by an increase in payment for its AlloMap test and the launch in late 2017 of its AlloSure test for kidney transplants. Under PAMA, Medicare reimbursement for AlloMap increased from $2,840.70 to $3,240.
“It’s a tale of two cities,” said William Quirk, a senior research analyst with Piper Jaffray. “Labs that largely perform routine testing will experience multiyear cuts while the smaller specialty labs might stay flat or actually see an increase.”
Amanda Murphy, an analyst with William Blair, added that while PAMA is reducing Medicare payments to many laboratories, it does provide some certainty in payment for the next several years. “From an investor perspective, it’s a good thing because it gives us visibility into payment,” she said. “It’s easier to plan when you know what the reimbursement will be.”
Market Maneuvers for National Labs
The two biggest national laboratories, Quest and LabCorp, are countering the cuts through mergers and acquisitions, lab management agreements with hospitals, and revenue diversification. In the past year alone, Quest has acquired several laboratories, including Cleveland HeartLab, Shiel Medical Laboratory, California Laboratory Services, and Hartford HealthCare outreach labs. Quest most recently acquired MedXM, a provider of home-based health risk assessments. LabCorp, meanwhile, is branching into new areas through acquisition of Covance, a clinical trial and drug development company; Chiltern, a contract-research organization; and ChromaDex, a food testing lab.
“LabCorp’s top line in the past couple of quarters has grown by eight percent, and half of that is mergers and acquisitions,” Murphy said. “We are definitely seeing more consolidation, as well as partnership deals and lab management deals.”
For the first quarter of 2018, LabCorp reported revenue of $2.8 billion, up 18% over the same period last year. The increase was due largely to growth from acquisitions, with only 3.2% due to organic growth. For the year, LabCorp is projecting overall revenue growth of 10%–12% over 2017’s revenues of $10.31 billion.
Quest, meanwhile, reported revenue of $1.88 billion, up 3.7% from the same period last year. Key growth drivers for the quarter were prescription drug monitoring, QuantiFERON Gold for tuberculosis testing, and noninvasive prenatal screening. For 2018, Quest is projecting revenues of between $7.70 billion and $7.77 billion, an increase of 4%–5% over 2017.
“The profit growth for Quest and LabCorp is pretty attractive relative to the overall market, and they generate a fair amount of cash, so as long as they’re deploying it well in terms of mergers and acquisitions, we expect them to grow at or above the present market growth,” said Ross Muken, an analyst with Evercore ISI.
IVD Manufacturers Bet on Regulatory Approvals
The IVD market is also growing despite market-related challenges. While the North American IVD market is by far the largest segment in the world, with a revenue base of $19 billion, the Latin American market is among the fastest growing, according to the “Global Outlook on the In Vitro Diagnostics Industry,” a white paper published by IQVIA (formerly Quintiles IMS Holdings).
Molecular diagnostics, companion diagnostics, and NGS, though a relatively small part of the overall diagnostic market, represent the biggest growth areas. Experts are predicting even more of an increase in NGS companion diagnostics for patients with advanced cancer following a recent decision by the Centers for Medicare and Medicaid Services (CMS) to finalize a coverage decision allowing NGS cancer panels that are approved or cleared by the Food and Drug Administration (FDA) to automatically receive full Medicare coverage.
The decision was made in conjunction with FDA approval of the FoundationOne CDx companion diagnostic test for solid tumors. That test approval helped drive Foundation Medicine’s fourth-quarter revenues of $48.9 million, a 70% increase over the same period the previous year.
Puneet Souda, a senior analyst with Leerink Partners, notes the CMS decision and FDA approval is a positive for companies developing companion diagnostics for oncology indications. “This actually creates more value for the tests,” he said. “It creates a differentiation from laboratory-developed tests [LDTs]. It doesn’t mean LDTs can’t compete with [FDA approved tests], it just creates a higher bar. It definitely is a positive for the sector.”
Liquid biopsies also are poised for a breakthrough, say experts. In 2016, Roche received approval for EGFR Mutation Test v2, a blood-based companion diagnostic for the cancer drug Tarceva. And earlier this year, Guardant received an expedited access pathway designation from FDA for its Guardant360 assay, which is designed to speed review. If approved, the test could be the first FDA-approved comprehensive liquid biopsy.
For now, liquid biopsies are primarily being used as a secondary approach when a traditional biopsy is not an option, noted Blair’s Murphy, but some test developers believe that they could ultimately become a primary diagnostic tool for some diseases.
Other up and coming areas in diagnostics include infectious disease testing, rapid tests for antimicrobial sensitivity, noninvasive prenatal screening, latent tuberculosis blood testing using interferon gamma release assay, and pharmacogenomic testing.
IQVIA projects the IVD market will expand at about 4% per year through 2021 to reach $69 billion. IVD market growth in Latin America and Asia will more than offset reimbursement cuts in the United States.
Among segments experiencing solid growth are immunochemistry, point-of-care testing, and molecular diagnostics, which represent about 30%, 10%, and 8% of global sales, respectively. Areas experiencing slower growth include hematology and coagulation, as well as traditional diabetes testing, which is being affected by sensor-based technology.
The top four IVD companies in the world—Roche Diagnostics, Abbott Laboratories, Danaher, and Siemens Healthineers—are using research and development, mergers and acquisitions activity, and partnerships to expand and strengthen their product offerings while looking to global expansion initiatives to cater to both developed and emerging regions. Strategic deals in the past few years among the top four and other IVD firms include: Abbott’s acquisition of Alere, Canon’s acquisition of Toshiba Medical, Danaher’s acquisition of Cepheid, and Siemens’ acquisition of Conworx.
A key area of merger and acquisition interest has been in the molecular diagnostics segment as companies have sought to strengthen their development pipelines as well as existing product portfolios, noted IQVIA. “This trend will likely continue because of the increasing demand for molecular, although as more established molecular companies are consolidated, buyers may shift their focus to early-stage companies with novel technologies.”
Leerink’s Souda believes the diagnostics market is positioned well given the number of growth areas. “Differentiated tests are attractively positioned,” he said. “Genomics and companion diagnostics, especially in oncology, are very attractive areas and have growth rates in the teens.”
“The IVD market will continue to expand due to the rising burden of disease, a global aging population, a greater awareness of healthcare, and an improving infrastructure across the emerging regions,” according to IQVIA. “In order for IVD competitors to achieve healthy organic expansion, they need to strengthen their position in high-growth markets while leveraging their position in the more mature regions and segments within the industry.”
Ultimately, despite reimbursement pressures, regulatory hurdles, and healthcare budget constraints, diagnostics remains an attractive market for investors, analysts said. “We feel positive about the sector,” Souda commented. “There are a number of things happening that make us optimistic about the future.”
Kimberly Scott is a freelance writer who lives in Lewes, Delaware.+Email: [email protected]