[Ip-health] Tom Abate on genetic testing

[James Love]

This is why it is important to define the access campaign and various WTO
initatives broader than medicines.  Jamie

http://www.sfgate.com/cgi-bin/article.cgi?f=/chronicle/archive/2002/02/10/BU
231362.DTL

The economics of genetic testing

      The race to develop new ways to detect disease is as much about cost
as it is about technology

      Tom Abate, Chronicle Staff Writer    Sunday, February 10, 2002

--------------------------------------------------------------------------

      While the mapping of the human genome hasn't led to instant cures --
or instant riches -- some biotech firms are banking on genetic testing to
provide them more immediate payoffs from the wealth of newly discovered
genes.

      Alameda's Celera Diagnostics is one of several companies developing
chemical tests that hospitals, physicians and laboratories could use to
detect the earliest genetic clues to disease.

      "People are realizing that diagnostics breakthroughs are going to come
long before drug discoveries," said David Lewis, financial analyst with
Thomas Weisel Partners in San Francisco.

      This realization is revitalizing a niche that used to be about as
exciting as a blood test. Diagnostic testing was worth about $20 billion in
2000. Most of the revenue flowed from low-cost, low-margin tests like blood
chemistry profiles and cholesterol screenings. But new, high-margin genetic
tests of the sort being developed by Celera Diagnostics are sweetening the
revenue mix.

      Genetic testing isn't entirely new. For years, California hospitals
have tested newborns for metabolic disorders that can be treated with
special diets.

      But the mapping of the genome has emboldened biotech firms to attempt
large- scale efforts to ramp up the business of early disease detection.

      Biotech startups are vying to create diagnostic procedures to spot
cancers and other diseases in the bud. To physicians and patients, these
startups tout better treatments through early intervention, while to Wall
Street they whisper that new tests -- based on patented gene discoveries --
will command premium prices.

      "The earlier we can detect disease, the better it will be for the
patient and the cheaper for the system -- it's a no-brainer," Lewis said.
"That's the mantra."


      STARTUPS INTO THE FRAY
      Celera Diagnostics is one of the startups born of this mantra. As a
jointly owned spin-off of Foster City's Applied Biosystems and Maryland's
Celera Genomics, the 130-person firm has more technical depth than the
average year- old company.

      From Celera Genomics, the company that mapped the human genome, the
new diagnostics unit inherits a wealth of gene data. From Applied
Biosystems, which makes DNA test instruments, it gains access to hardware
and distribution clout.

      "I like to call us the startup with a head start," said Celera
Diagnostics President Kathleen Ordonez.

      Head start or not, the Alameda firm is in a race with other startups
aimed at the same opportunities. For instance:

      -- South San Francisco's DiaDexus is a joint venture of Palo Alto's
Incyte Genomics and Philadelphia's SmithKline Beecham. Incyte, a gene
discovery company, and SmithKline, a global drug giant, have given DiaDexus
access to patented gene discoveries to form the basis for new tests. The
startup, which has a staff of 90, is in a quiet period while it tries to
float an initial public offering and is not granting interviews.

      -- Millennium Predictive Medicine is a subsidiary of Millennium
Pharmaceuticals, the Massachusetts firm that vied with Incyte and Celera in
the hunt for genes. Millennium, which has transformed itself into a drug
development company, was one of the first players to create a gene-based
diagnostics unit.

      -- Myriad Genetics Laboratories is a subsidiary of Myriad Genetics, a
public firm in Utah that is developing medicines and tests from gene and
protein discoveries. In the test arena, Myriad is best known for its $2,600
test that indicates an inherited predisposition to breast and ovarian
cancer.

      Other young firms have jumped into the diagnostics fray, some hoping
to create a broad array of tests, while others have carved out disease
niches. For instance, Cytyc Corp. of Massachusetts has achieved that most
desirable of all biotech breakthroughs -- profitability -- by popularizing a
test for cervical cancer that is more sensitive than the Pap smear.

      In addition to competing with one another, the new diagnostic players
will butt heads with larger, established firms that also develop tests.
These include Bayer Diagnostics, which has a small presence in Berkeley;
BioRad, a public company based in Hercules; and Roche Molecular Systems,
which employs about 1,600 people in various East Bay locations.


      ROAD TO A TEST
      Although each of these diagnostic players has its own story, Celera
Diagnostics is indicative of how the new companies hope to use up-to-date
biotech tools to devise tests for disease.

      On a tour of the startup's Alameda offices, Ordonez and research chief
John Sninsky explained the development process. It all begins with blood or
urine samples, thousands of them, all provided by research laboratories
where patients have agreed to become donors in the discovery process.

      Celera Diagnostics will use a battery of sophisticated laboratory
experiments to compare the genetic sequences extracted from diseased samples
to the sequences extracted from healthy volunteers.

      The research phase of the development process is aimed at finding some
anomaly in a gene, protein or other genetic marker that indicates the
presence of disease.

      Only after lab experiments have confirmed that a genetic marker
correlates with the disease can Celera Diagnostics begin to create an
easy-to-use chemical test kit that ordinary technicians could use to
identify the genetic marker.

      "That chemical becomes our product," Sninsky said.

      Test chemicals, called reagents, are generally designed to work in
tandem with instruments that amplify selected stretches of DNA. In a routine
test, a pinch of reagent would be added to DNA extracted from the patient's
blood or urine.

      The mixed DNA and reagent would be cycled through the amplification
device. If the chemical finds the genetic marker, the instrument amplifies
that snippet of DNA -- sending back a positive test result. If the marker
isn't present, the chemical remains inert and the test comes out negative.

      Diagnostic tests must be fast, easy to perform, accurate in spotting
positives and reliable in excluding negatives. From a business view,
diagnostic companies want to invent tests that are unique and patentable, so
the company can exclude cheaper copycats. From a patient or physician
perspective, tests should be linked to treatments or behavior changes that
could affect the outcome of the disease.

      "There isn't a large market for tests that tell you something you
can't do anything about," said Alan Garber, a Stanford physician and
economist who advises Medicare about when the government should -- and
shouldn't -- pay for new tests and medical technology.


      WEIGHING COSTS
      Payment considerations -- rather than technology barriers -- will
probably become the chief determinant in the success or failure of new
diagnostics companies. And the issue of payment is connected to the way new
tests are regulated.

      Diagnostic tests are overseen by the U.S. Food and Drug
Administration, but the rules governing the introduction of tests are
relaxed compared with the rules governing new medicines.

      Before selling an experimental drug, companies must do clinical trials
and receive FDA permission to sell the drug.

      But diagnostics companies can bypass the clinical trial and approval
steps by introducing what are called "homebrew" tests, said Lewis, the
financial analyst.

      There are regulations on homebrew tests, however. They can be
conducted only by research laboratories that have been certified by federal
regulators to have the technical expertise to interpret what are, in
essence, experimental procedures.

      Lewis said many companies ultimately seek FDA approval for tests
because only then can they sell the sort of easy-to-use chemistry kits that
broaden their market -- and include specific claims about the reliability of
the test. In the meantime, the homebrew option lets companies earn revenue
while they develop more simplified tests that need FDA approval.

      Homebrews also allow patients and physicians quicker access to new
tests. For example, AIDS patients are now often tested to see whether they
are infected with drug-resistant strains of HIV so physicians can change
their mix of medicines. ViroLogic in South San Francisco offers a homebrew.
Toronto's Visible Genetics has an FDA-approved competing test.

      But while the homebrew option puts tests into circulation faster, it
compounds the dilemma facing insurers, government agencies, physicians and
patients, who must decide what tests are worth paying for and who should
bear the cost. Whether homebrew or approved by the FDA, new tests don't come
cheap. AIDS resistance tests run from $250 to $900, for instance.

      "Although many of the new diagnostic tests are beneficial, some add
cost without benefit," said Wade Aubry, a physician at the University of
California at San Francisco who has advised governmental and private
insurers on whether to pay for new medical technologies.

      Questions of cost-effectiveness and payment aren't lost on startups
that hope to create lucrative gene-based tests. "When you have these early
tests, there is always the question of how they get paid for," said Ordonez,
who ran Roche's local test division before she began Celera Diagnostics.

      So while new tests hold out some promise of better outcomes for
patients, as well as profits for inventors, there are likely to be many
practical hurdles along the path.

      "Somewhere between the hype and the skepticism there will have to be
proof, " said Stanford's Garber.



--------------------------------------------------------------------------
      Key players in diagnostics industry / 2 companies process tests
developed by smaller firms, startups
      Two of the biggest players in the $20 billion diagnostics industry are
companies that distribute and process tests.

      Quest Diagnostics of Teterboro, N.J., and Laboratory Corporation of
America of Burlington, N.C., each has more than a thousand locations
nationwide where they perform tests ordered by physicians and hospitals.

      David Lewis, financial analyst for Thomas Weisel Partners in San
Francisco, said Quest and Lab Corp. serve as the supermarkets of the
diagnostics industry -- collecting fees for processing the tests developed
by small companies -- saving the startups the need to create national lab
networks.

      "These stocks have had phenomenal runs because people see them as the
safe way to play diagnostics," Lewis said. In January 2000, shares of Lab
Corp. stood at $16.25. The stock closed at $87.50 on Friday. Quest hit a low
of $14. 84 in January 2000, but finished the week at $71.32.

      Lewis said the investment thesis driving these stocks has been that
both companies, already profitable on their traditional test business,
should benefit as new, higher margin tests are introduced. Lewis said older
tests typically run $28 to $32, while new tests average $120.

      Beyond Quest and Lab Corp., the diagnostics niche is populated mainly
by small public or private companies developing specialized tests. Among
other players cited by Lewis:

      -- Exact Sciences is a Massachusetts firm that is developing a test to
screen stool samples for early evidence of colorectal cancer. Exact's stock
got a boost recently when the New England Journal of Medicine published an
article suggesting promising early evidence that the test might be an
effective screening technique.

      -- Adeza Biomedical Corp. is a venture-backed firm in Sunnyvale that
has an FDA-approved test that helps determine whether a pregnant woman,
experiencing early labor pains, is ready to give birth. Many hospitals use
the $250 procedure to help decide whether to administer labor-inducing drugs
or send the patient home.

      -- R2 Technology of Los Altos has won FDA approval of a software
system that spots early breast cancers that might be overlooked in a visual
inspection of a mammogram. The company is in registration to sell an IPO. .

      Coming tomorrow in BioScope

      Gene patents encourage research into new tests, but do they also
restrict patient access?

      E-mail Tom Abate at tabate@sfchronicle.com.