A View from the Clinical LabStephanie Murgstephanie@g2reports.com

Managing DirectorWashington G-2 Reports

• What’s Now

– Lab industry background

– Molecular diagnostics (MDx) market overview

• What’s Next

– MDx market trends

– Shifting regulatory environment

– Sequencing in the clinical lab

• Growing 6.7% annually last 10 years

• Strong growth in esoteric, AP, cytology

• Aging demographics, higher utilization, personalized medicine

• Offset by recession, reduced admissions, increasing DSO, cutbacks in workplace drug testing

• G-2 estimates that the U.S. clinical laboratory testing market will grow by 8% in 2010 to reach $63.1 billion

• Continued 6%-7% annual growth of health care expenditures and with lab share remaining at 2.3% pushes lab industry revenue to an estimated $98.4 billion by 2017

Lab Industry Represents 2.3% of Total National Health Care Expenditures

Medicare Part B Lab Spending Up 11% in 2009

• 2009 lab spend = $8.049 billion

• Lab-related carrier services up 10.5% yoy to $4.712 billion

• Lab-related services, up 12.3% yoyto $3.337 billion

• CMS projects that Part B spending on lab services will reach $18.38 billion in 2019, an average annual increase of about 8.6 percent

Lab Industry Market Share by Revenue

• Hospital lab market accounts for approx. 60% of lab test revenue

• Independent labs represent 35%

• Hospital and independent labs have higher percentage of high complexity/higher reimbursed tests than POLs

Major Testing Segments

• Routine testing accounts for bulk of market, slowest growing

• Esoteric and Anatomic Pathology each account for ~18% of market, fastest growing segments

Test Mix: LabCorp

LabCorp Esoteric:CETCMBPDianonEsoterixMonogram BiosciencesNGIOTSUS LabsViromedGenzyme Genetics (pending)

Test Mix: Quest Diagnostics

• What’s Now

– Lab industry background

– Molecular diagnostics (MDx) market overview

• What’s Next

– MDx market trends

– Shifting regulatory environment

– Sequencing in the clinical lab

A Brief History of MDx

• Evolution driven by scientific innovation– PCR and sequencing– Efficiency-focused innovations

• High-throughput sequencing• Improved amplification methods

– Now: Workflow and multiplexing• Driven by efficiency, labor concerns, science

MDx Innovation: A Virtuous Circle

ResearchIdentifies molecular marker (mutation, etc.) and clinical implications

Test DevelopmentWith demand comes need to improve test effectiveness and efficiency

Molecular Diagnostics / Methods• Cytogenetics• FISH and FISH derivatives• PCR and PCR derivatives• Direct Sequence Analysis• Southern Blot Analysis• Variable Number Tandem Repeats• Mutation Scanning• Gene Expression Profiling• Proteomics• Loss of Heterozygosity• Methylation Assays

Molecular Diagnostics / Applications• Clinical diagnosis• Neonatal screening

– PKU, congenital hypothyroidism• Prenatal diagnosis

– Trisomy 21• Carrier testing

– Tay-Sachs disease, thalassemia• HLA typing

– Transplant medicine, autoimmune diseases associated with specific HLA types

Beyond Early Detection

Early Detection Prognosis TherapeuticResponse

Beyond Early Detection…and the bounds of pathology?

Early Detection Prognosis TherapeuticResponse

Imag

ing

Imaging

Source: Quest Diagnostics

Source: Clarient

Lifecycle of a Molecular Test

Reference Laboratory

Research Laboratory

Central Hospital Laboratory

Decentralized Testing

Cost

Complexity

Molecular Diagnostic Testing Market

• Washington G-2 Reports estimates that the market for molecular diagnostic testing will grow by approximately 12% per year (to $6.2 billion in 2010), compared to 5% growth for most other areas of laboratory testing

• Molecular tests are becoming the standard of care…– FDA clearance, professional association guidelines,

reimbursement

• …But are still offered by only a fraction of clinical laboratories

MDx: Market Drivers• Aging population• Hospitals working to streamline care and reduce

testing costs• Growing number and breadth of available tests• Improved reporting of complex results• New technologies that allow the necessary

quality control and data capture from tests• Advances in instrumentation• Rise of the MDx-savvy: scientist, clinician,

vendor, media, patient

Source: CDC National Ambulatory Medical Care Survey, LabCorp

0-18 18-44 45-54 55-64 65-74 75+

Patient age (years)

Relative Number of Lab Tests per Year

MDx: Market Drivers (cont’d)

• Cost-benefit analyses• Molecular pathology fellowships• Community hospitals forming anatomic

pathology divisions

MDx: Market Challenges• Reimbursement issues• Lack of standardization across platforms• Limited quality control • High expectations for accuracy (once-in-a-

lifetime genetic tests) • Inability to fully interpret test data• Clinical utility• Increasing cost-management pressures

– Lead to greater scrutiny of tests– Show me the data!

Molecular Diagnostics / Challenges• Personnel and Expertise

– Shortage of laboratory personnel estimated to reach 100,000 by 2012 (U.S. Bureau of Labor Statistics)

– Steady decline in number of entrants into medical genetics training programs in the U.S.

• Need for technologies that make MDx easier to automate and less expensive

• Smaller markets• More complex targets

Global MDx Testing By Segment

Infectious Disease

Blood Screening

Genetic Testing

Cancer

Other

G-2 Molecular Diagnostics Survey• Key test menu decision criteria:

– Send-out data– Potential clinical impact– Cost data (e.g., cost per reportable result in-

house vs. sendout)– Medicare/insurance reimbursement rate– Time and resources required to develop test– FDA status of test– Whether competitor offers test– Prospective payer mix for test– Turnaround time for test

Decision Points Stop/Go Comments

Initial considerations

Clinical application

Volume

Assay format

Financials

Equipment

Cost per patient result

Reimbursement

Resources

Expertise

Staffing

Space

Molecular Diagnostics Decision Matrix

Source: Jane Rachel / Saint Luke’s Health System

Make or Buy?: CT/NGDecision Points Stop/Go Comments

Initial considerations

Clinical application GO Slight inc sensitivity

Volume GO High

Assay format GO Various amp methods

Financials

Equipment GO PCR in house

Cost per patient result GO

Reimbursement GO

Resources

Expertise GO

Staffing GO

Space GO

Make or Buy?: CMV quantitativeDecision Points Stop/Go Comments

Initial considerations

Clinical application GO Transplants, HIV

Volume STOP Low

Assay format GO

Financials

Equipment GO PCR in house

Cost per patient result STOP

Reimbursement GO

Resources

Expertise GO

Staffing GO

Space GO

Make or Buy?: CMV quantitative (a year later)

Decision Points Stop/Go Comments

Initial considerations

Clinical application GO Transplants, HIV

Volume GO Moderate

Assay format GO

Financials

Equipment GO PCR in house

Cost per patient result STOP

Reimbursement GO

Resources

Expertise GO

Staffing GO

Space GO

Why MDx? And Why Not?• Clinical impact

– Effect on patient management

– Sensitivity, specificity, and speed (better results)

• Practice guideline changes and regulatory decisions

• Potential savings– Decreased TAT– Decreased hosp. time

• Demand– Increasingly consumer-

driven• Ease of use

– Lab in a box systems– Less invasive sample

procurement

• Expensive• Difficult to demonstrate

potential savings• Reimbursement

– Lack of designated CPT codes

– Royalty and licensure fees• Staffing/Training• Standardization

– Quality control standards• Market Education

– Clinical utility– Applications– Availability

• Increased regulatory oversight imminent

Attitudes toward expanding esoteric testing menus continue to evolve

Financial Analysis

• MDx paradigm shift: more than just another test• One sample, potential for many tests

– Versatile: sample type, size• Examples of cost savings

– Decrease hospital stay– Establish duration of therapy – Discontinue ineffective therapy– Ability to identify high-risk patients

• What’s Now

– Lab industry background

– Molecular diagnostics (MDx) market overview

• What’s Next

– MDx market trends

– Shifting regulatory environment

– Sequencing in the clinical lab

Seizing opportunities presented by healthcare reform

• Under new law, insurers must offer preventive services to consumers as part of the insurance policy at no additional out-of-pocket charge– New: smaller employers, individual health plans– Medicare: starting next year, all enrollees will be

entitled to free annual checkup, screenings– Services rated A or B by U.S. Preventive Services

Task Force (http://www.ahrq.gov/clinic/prevenix.htm)

Reform Provisions to Watch

• Requires HHS to convene a public meeting on how to determine payment levels for new lab tests under Medicare, including a discussion of payment reform for such tests

• HHS will submit a report to Congress on the meeting and include recommendations for legislative or regulatory action

• Impose a 2.9% fee on the first sale for use of Class II and III medical devices starting in 2013 based on prior year’s sales but exempt firms with revenues less than $5M

Complex Molecular Diagnostics Test Demonstration

• Mandates a two-year, $100M demo project for tests that analyze gene protein expression, topographic genotyping, or cancer chemotherapy sensitivity assays or that are billed using a HCPCS code that is other than a “not otherwise classified” code

• Also applies to assays for which there is no alternative tests with equivalent performance characteristics

• HHS is to determine appropriate payment rates for the specified tests

• HHS must report to Congress within two years after completion of the demo on the impact on access, quality, health outcomes and expenditures

Therapeutic Research Grants forLife Science Companies

• Choice between an income tax credit or cash grant up to 50% of a firm’s costs paid or incurred in 2009 and 2010

• Research must relate to a “qualifying therapeutic discovery project” (QTDP)

• Applies only to small or mid-sized companies having no more than 250 employees

• Acceptable projects must be designed to achieve any of the following three objectives:

Therapeutic Grant Program1. Treat or prevent diseases or conditions by

conducting pre-clinical activities, clinical trials, and clinical studies or carrying out research protocols, so as to gain approval of a product by the FDA or PHS

2. Develop a product, process, or technology to further the delivery or administration of therapeutics

3. Diagnose diseases or conditions related to diseases/conditions by developing molecular diagnostics to guide therapeutic decisions

Health Care Reform Impact on Laboratory Industry

• Greater testing volume with up to 32 million newly insured over the next 10 years

• More preventive and wellness testing via 2011 requirement that Medicare waive cost-sharing for preventive tests and give beneficiaries access to a comprehensive risk assessment

• New downward pressure on reimbursement rates as Medicare implements new payment provisions in 2011 and Independent Payment Advisory Board has authority to begin adjusting payment rates beginning in 2015

Increased focus on filling the data/measurement void

• What is the evidence?• How can the information be clinically applied?• Addressing managed care data needs

– Implications for coverage policies, coding utilization management/claims systems

– Encourage dynamic approach to MDx• Addressing provider data needs

– Physician education, test interpretation• Connecting tests to outcomes• Push for cost/benefit analysis• Standards for storage and presentation of

dense MDx data

Increased focus on filling the data/measurement void

Increased focus on filling the data/measurement void

“How do we create a system in which there’s continued learning and interaction based on the patient’s biology, the patient’s preferences, and the knowledge base that surrounds the test itself?”

-Gregory J. Downing, Ph.D.Director, HHS Initiative on Personalized Health Care

Molecular Diagnostic Tests, Clinical Practice, and EHRs

• Clinicians not prepared to integrate genetic information into routine clinical practice– Collection, documentation, and interpretation

of family history for risk assessment– Recommendation of risk-specific interventions– Knowing when to offer genetic tests

JAMA . 2008; 299 (11): 1320-1334.

Genomic/Genetic Data Can Inform…

• Determination of disease risk• Appropriate dosing to avoid

adverse events• Selection of effective treatment

• Broad access• Appropriate privacy and security

measures• Data storage/transmission

capabilities to connect patient, lab, clinician, researcher

…But Will Require:

American Health Information Community Personalized Health Care Workgroup

• Developing core dataset, including:– Demographic information

• Name, unique identifier, race/ethnicity, occupation– Personal health information

• History of specific disorders, relevant non-genetic lab test and pathology data, other clinical data (e.g., radiology), environmental exposure data, prior treatment for specific disorders

– Family history information• Disorders of family members, ages of condition onset

and/or death of various family members, environment exposure, relevant social data, pedigree in structure form

AHIC PHC Workgroup: What Data?

– Personal genetic/genomic data• Prior genetic/genomic laboratory test

results, prior genetic status for specific disease, full genome scan

– Family genetic/genomic information• Genetic/genomic data of family members,

pedigree in structured form where appropriate, history of cosanguinity, consent/access allowance information

Molecular Diagnostics and EHRsWhat’s Ahead

• Clinical decision support (CDS) as central part of care delivery

• Software tools that integrate multiple variables (e.g., test results, medical/medication history, patient preferences, family history)

• Genetic test reporting standards• Integrating lab assays with informatics tools

Personal Genomics Gets Serious*

• More consumer-directed services and marketing• Price of DNA sequencing falling fast (~$3,000)• Interpretation challenges• How will FDA regulate sequencing tech?

Genomics for Fun and ProfitDietrich Stephan (CSO, Navigenics): “Every human disease has a genetic component. By identifying that component and by delivering actionable information we could alter the history of the disease...”

deCODEme: “is not a clinical service to be used as the basis for making medical decisions.”

23andMe: “What we do not and will not do is provide medical advice to our customers.”

Personal Genomics / Challenges• Regulatory oversight at all levels

– State licensing issues (CA, NY)• Quality assurance in testing• Validity of medical correlations with genomic

data– Janssens, A.C. et al. American Journal of Human

Genetics 82, 593–599 (2008)– Predictive value? Clinical utility?

• Willingness of medical professionals and insurers to accept such tests

Personal Genomics / ChallengesGAO report (July 22, 2010)

One "undercover consumer" participating in a recent Government Accountability Office (GAO) investigation was told by four companies providing direct-to-consumer genetic tests that he had only an average or below-average risk for developing atrialfibrillation…

…even though he has lived for 13 years with a pacemaker to treat the condition.

Personal Genomics / Here to Stay• Science will improve as:

– Efforts like the Personal Genome Project amass huge samples

– Costs continue to drop– Knowledge of gene function and variation

grows– New sequencing technologies come on-line

• Allowing detection of rare variants and large structural information (copy-number variants)

– Early adopters explore how new information can best be used to manage health

Faster! Better! Cheaper! More!

• MDx in a post-PCR world• Broader commercialization of extant assays

– Will decrease costs• Faster turnaround time• High sensitivity at small concentrations• Broader menus on single platform• Move to develop technologies that can be easily

adapted to low-complexity settings• Point-of-care MDx?

• What’s Now

– Lab industry background

– Molecular diagnostics (MDx) market overview

• What’s Next

– MDx market trends

– Shifting regulatory environment

– Sequencing in the clinical lab

FDA Moving to Regulate Laboratory-Developed Tests

• Re-assessment of bifurcated regulatory strategy– LDTs and traditional commercially distributed IVDs

• Today, logical basis of bifurcation has faded• LDTs have evolved to be more like commercial IVDs

– Unlevel playing field• Stifle high-quality innovation?• Introduce unreasonable risk?

– Uncontrolled design/manufacture– Unsupported claims– Unreported malfunctions, failures

FDA Considerations• Assuring that LDTs are safe and

effective…• …while facilitating innovation• Avoiding duplication with CLIA• Utilizing CLIA or deemed inspectors• Avoiding disruption of testing

FDA CMS (CLIA)

Registration/Listing

Registration of establishment

Publicly available listing of marketed tests

Registration and certification of Lab

Lists of tests maintained by CMS (not currently publicly accessible)

Analytical validationPremarket review of analytical data for Class II and Class III tests

Sampling after marketing during periodic laboratory inspections

Clinical validation

Premarket review of clinical claims for Class II and Class III tests; Postmarket surveillance of clinical claims for Class I tests

Not required

Quality SystemGMPs, QS Regulations

Assessed by inspection

Laboratory Quality system

Assessed by inspection

Design ControlsRequired for Class II and Class III tests and all other devices with software

Not required.

Software not addressed by CLIA.

Adverse Event Reporting Yes No

Postmarket surveillance Yes No

Recalls Yes No

Risk-based ClassificationHow would an undetected false result affect a patient?

Serious injury or death, difficult to detect false result, high public health risk• Incorrect and harmful clinical management, invasive procedure, failure to follow up

– Companion diagnostics, cancer diagnosis, tests that direct or very strongly influence patient management of serious diease, tests for serious/fatal communicable diseases

Non-serious injury, relatively easy to detect false result, adjunctive test• Delayed test results, uncertain clinical management, continued testing, psychosocial

issues– Tests where phenotype is already known, tests where multiple findings used to

direct clinical management, tests to monitor already-detected disease

Little potential for injury, easy to detect false result, highly adjunctive test• Unlikely to directly affect clinical management, knowledge only without change in

management, evaluation without directed management– Tests that identify one among many defining characteristics of a tissue or cell,

tests that have little clinical impact, certain instruments and equipment

• What’s Now

– Lab industry background

– Molecular diagnostics (MDx) market overview

• What’s Next

– MDx market trends

– Shifting regulatory environment

– Sequencing in the clinical lab

“Direct DNA sequencing will be a routine procedure in specialized clinical laboratories within 10 years. The pace of discovery for disease-causing genes is accelerating, and a number of autosomal genes, such as major ones associated with familial breast cancer, cumulatively affect large numbers of individuals in the general population.”

Jeffrey A. Kant, M.D., Ph.D.Clinical ChemistryVol. 41, No. 10, 1995

The Personal Genome in Clinical Practice

• Rapidly changing views– “This will be a court of last resort to try and identify

causes of disease.” –Richard Lifton, 2009– “As sequencing capacity increases globally and the

data quality improves, we will move beyond the current goal of one genome per person to sequencing multiple genomes per person from sources including sperm and egg cells, blastocysts, stem cells, pre-tumor cells and cancer cells.” –J. Craig Venter, 2010

The Personal Genome in Clinical Practice

• What’s Now

– Lab industry background

– Molecular diagnostics (MDx) market overview

• What’s Next

– Top five MDx market trends

– Shifting regulatory environment

– Sequencing in the clinical lab