Molecular Diagnostics Help Target Therapies

New platforms with expanding content

Rod Raynovich 9/1/06

Dx 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. And because industry and doctors have rediscovered the need for targeting therapeutics with a more comprehensive diagnostic work-up, new products and services that provide more rapid accurate DNA or genetic based tests (buzzword-”biomarkers”) 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 STD’s such as Herpes and Chlamydia have required ever more sensitive, rapid, cost effective testing;
and 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 accurate 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 (Wood Mackenzie).
In the March 2006 issue of “Start-Up” by Windover Information, Inc., 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 and BioMerieux. Up until recently the DNA testing field was dominated by Roche due to its strong patent position in PCR. Roche is one of the first big pharma companies to capitalize on the link between molecular diagnostics and therapeutics. However, smaller, high growth public companies in this sector, many of which were funded more than ten years ago, have achieved significant revenues well in excess of $100 M with market caps up to $1 B range. Growth in product revenues are expected to continue at a 25% + annual pace as the need for testing grows and new products kick in. We review five companies in the sector, two that are leaders in a specific testing market and three that are emerging because of technology or products.

Niche Leaders:

Digene (DIGE-Price $45)

Digene is the leader in the development, manufacture and marketing of gene based tests for diagnosis of women’s cancer and infectious disease primarily Human Papilloma Virus (HPV). The FDA approved test for HPV the primary cause of cervical cancer that affects 500,000 women Worldwide. Advances in HPV testing and the recent approval of Merck’s HPV vaccine called GARDISIL was recently approved by the FDA for girls and women 11-26 years old and MRK also received positive opinion from the CHMP in Europe for immunization of children and adolescents 9-15 years old. GARDISIL should make HPV screening along with a PAP test more important for prevention of cervical cancer.
Digene’s nucleic acid based technology also has the capability to perform other infectious agents such as STD’s and viruses such as CMV and HBV.

In July DIGE announced that the Company won a patent arbitration against Beckman related to the sale of intellectual property assets to Ventana Medical Systems (VMSI).

Digene has a licensing agreement with Luminex (LMNX) that has an assay technology utilizing microspheres (xMAP) to perform multiple tests simultaneously. This could be used in Digene’s next generation system.
Digene had a blowout FY’06 fourth quarter as WW revenues grew 43% year –over- year to $39.4 M. WW HPV testing revenue grew 38% for the current fiscal year ending June 30 to $134 M. Net income was $15.4 M for $0.69 per diluted share. Wade King of Montgomery and Co. recently raised his revenue estimates to $45 M for the next quarter and $192 M for FY ’07 with an EPS of $0.84 .

GenProbe (GPRO Price $51)

GenProbe and its marketing partner Chiron is one of the leading players in the development, manufacture and marketing of nucleic acid testing products for diagnosing human diseases and screening donated blood and tissue. Chiron was recently acquired by Novartis. The portfolio of diagnostic products include sexually transmitted disease-STD’s (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 has recently settled patent infringement litigation with Bayer Healthcare for HIV/HCV resulting in an up-front payment of $31.7 M to GPRO and potential of future royalty payments.
Tycho Peterson of JPMorgan estimates revenues of $346 M in 2006 and $407 M for 2007 with EPS of $1.08 and $1.47 respectively.

Emerging

Celera (CRA Price $13)

Applera Corp/Celera Genomics Group has core technologies in proteomics, bioinformatics and genomics and applies them to drug discovery and diagnostics.
Recently the drug discovery business has been 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 launched in Europe in 2005 for Infectious Disease monitoring with tests for Hepatitis and sexually transmitted disease. Recently the HCV genotype test was approved in Europe for the Abbott system. The partnership generated revenues of $62M in fiscal 2006 with revenues projected for the ABT alliance of $80 M in fiscal June 2007 assuming U.S. approval. The company has great expectations for two tests outside the Abbott alliance: HCV with associated cirrhosis risk and coronary heart disease, a genetic test for high risk individuals. These new test will be introduced initially as reference lab tests. A PMA for a Cystic Fibrosis screening test has also been submitted to the FDA and development is underway for genetic test for Alzheimer disease and stroke. Eric Schmidt Ph.D. of Cowen and Co. projects total revenues of $44 M in fiscal 2007 with a loss of $30 M due primarily to high R&D expenses of $30 M. Profitability is forecasted in 2009 with revenues of $102 M.

Cepheid (CPHD) Price $7.25

Cepheid develops, manufactures and markets a fully integrated, easy-to-use, PCR based DNA testing platform that is focused on clinical diagnostics, biothreat and industrial tests primarily in the infectious disease area. A first generation system called the SmartCycler has been on the market since 200 with over 2000 units placed. A second generation system called the GeneExpert has demonstrated its capability with its Anthrax test. Recently the Company received FDA 510k clearance to market its Xpert test for Group B Strep (GBS) 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. CPHD also has a license from Roche for a broad range of PCR patents.

CPHD recently acquired the French microRNA player Actigenics in a play to expand its range of biomarkers.

Quinton Lai Ph.D. of RW Baird estimates revenues of $131M in 2007 with core products for biothreat and industrial markets with tests for Anthrax and E.coli and growth coming from new product offerings in the clinical market with tests for GBS and methicillin resistant Staph. aureus (MRSA). Other clinical viral diagnostic tests expected soon are cytomegalovirus (CMV), enterovirus (EV),varicella-zoster (VZV) and herpes ( HSV-1 and 2) . A growing installed base of system placements will fuel growth in cartridge and reagent revenues. Based on a CPHD market cap of around $480M 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 as a result of lower sales to the USPS for the completion of its Biohazard Detection System (BDS). Net loss was $7M or (0.13) EPS.
However clinical product sales increased 135% to $4M in Q2.

Genomic Health (GHDX Price $12.25)

Genomic Health was one of the few biotech IPO’s of Q4 in 2005 and is currently trading slightly above the IPO price. The Company 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. The OncoType DX test is a service that is 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 $3460/test. Product revenue in Q2 2006 was $7.8 M up sharply from Q2 of 2005 revenues of $1.1M. Medicare related revenues in Q2 were $4.8 M. Net losses in Q2 were $4.2 M.

JPMorgan analyst Tycho Peterson is projecting 2006 Revenues of $21.9 M and a diluted net loss per share of ($1.61) For 2007 Mr. Peterson projects revenues of $53.5 million.

A U.S. patent 7,056,674 was issued in July covering the utility of two of the genes utilized in Oncotype DX for breast cancer prognosis testing. Genomic Health is working on additional DX 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 , renal and prostate. 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 and Imclone to develop a genomic test for predicting the response to Erbitux in colorectal carcinoma.

Several other players hope to capitalize on genetic testing. Myriad Genetics (MYGN) 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 M in the current quarter. Decode genetics (DCGN), an Icelandic genetics/drug discovery Company is developing a Type 2 diabetes test that can gauge individual risk and identify patients who may benefit from targeted therapy. A new division of Isis Pharmaceuticals (ISIS) called Ibis has developed genotyping technology for identification of bacterial and viral organisms from a single sample. Other platform companies with molecular testing capabilities are Affymetrix and Luminex. And watch G-E Healthcare as they are increasing their footprint in diagnostics.

Molecular Diagnostics technology has dominated testing advances for infectious diseases such as HIV and HCV. Breakthroughs in cancer testing are emerging that could improve the predictive value, target therapies and increase survival rates.