What investors look for in a genomics venture

Aug. 1, 2010

There is a limited pool of investment dollars and a savvy and experienced group of venture capitalists in the molecular-diagnostic space. Investors today are like the proverbial kid in the candy store, with a plethora of enticing choices. There is also a perception that, in this economy, ownership stakes should be available at fire-sale prices, and companies are being offered funding rounds at extremely low valuations, making it difficult to move forward. So how can companies differentiate themselves to get a fair share of the investor-dollar pool at reasonable value?

Great science does not always translate to a viable commercial product. Investors need to be convinced that the test or tests being developed will be reimbursed at a level that will support the company’s business plan. They are extremely interested in the thought processes and strategic thinking that demonstrate an awareness of all the challenges inherent to a successful commercial launch. Most often, external expertise will be required to aid in identifying and thinking through key issues, so the first challenge is to choose an advisory team that has great familiarity with the molecular-diagnostic arena. Investors will want to vet the team, and feel comfortable in their proven ability to develop and successfully execute a launch plan.

Although many new molecular-diagnostics-company management teams have significant experience in the pharma or device markets, they often lack the requisite molecular-diagnostic reimbursement and regulatory background unique to this environment. It is important that advisor(s) — perhaps a laboratory scientist or two — have specific experience with successfully launching new tests, insight into the rapidly changing reimbursement and regulatory landscape sufficient to evaluate future impacts on the business model, access to benchmarking and pricing data, and, ideally, competencies that can provide ongoing support to move the company toward commercialization.
Investors recognize a test’s success hinges on its ability to
eliminate other modalities with equal or superior results.

Market considerations
One of the first items an investor will consider is where the test fits in the molecular-diagnostic market. Investors weigh a broad set of factors to get to an understanding of market potential and acceptance. An advisor needs to be ready to answer the following:

  • Is there an unmet need that the new test will fulfill? Will it be the sole option, or are there substitutes available?
  • Are there other tests already in place that the new test improves upon?
  • How will the new test compare to the current standard of care? For example, tissue-of-unknown-origin testing vs. IHC (immunohistochemistry)?
  • Will the clinical claims be substantiated at launch?
  • How credible are the company’s outside collaborators? Their role in confirming analytical and clinical validity and utility is crucial, and they must be able to assist in having data published in peer-reviewed journals in a timely manner relative to launch.
  • Does the test provide information that is actionable as it relates to patient management? Actionable information is imperative for both physician adoption and successful reimbursement.
  • What is the test’s potential market size, and how does it compare to other successful molecular-diagnostic launches (such as OncotypeDX, which serves a specialized market for breast-cancer patients who meet specific criteria)?
  • What does the potential payor mix look like in terms of Medicare, private third-party, Medicaid, and self-pay populations? Payor mix can greatly impact revenues, and investors will be interested in genomics ventures that can demonstrate a favorable payor mix.
  • Will the test be developed and offered solely through a single source CLIA-regulated laboratory as a laboratory-developed test, or will test kits be created or licensed, requiring FDA clearance that could potentially delay time to commercial launch?

Once essential market considerations are addressed, the next critical questions that need to be evaluated for investor buy-in pertain to pricing and financial strategy:

  • What are the fully loaded cost of goods, including sales and marketing and the costs of billing and collecting?
  • If there are other tests against which the new one will be competing, how will the projected price point compare? If the price point is projected to be substantially higher, can additional diagnostic value be demonstrated?
  • Can the methods used in the test be captured by existing CPT codes; and, if so, do they add up to a price that can sustain the business? If there are currently no existing codes that fully capture the new technology, are there resources available and timelines identified for successfully navigating a strategy based on an unlisted code or not-otherwise-classified, or NOC, code? When an existing CPT code is not available, the process becomes much more drawn out. Will the company be able to successfully manage a large number of appeals? Will financial-assistance programs be required for some patients?
  • When an existing CPT code is available, what are other companies billing and actually collecting for the CPT code? Companies would do well to choose an advisor with access to this type of real-time data.
  • How does the company plan to handle billing and claims management, and is there a plan in place to address growth over time? Will the competencies be developed in house, or will this work be outsourced? If an outsource model is chosen, can portions of the billing process be supported internally as the company grows? Choosing a partner and/or system that can accommodate growth and changing priorities right from the start can be a significant factor in financial success.
  • Can the company easily access the data needed to manage its business, and are the systems and partners scalable?

Although payors deny making coverage determinations based on economics, healthcare reform may cause that to change. Investors will want to understand the impact that new tests will have on the economic landscape.

  • Will there be dollars saved because of a faster diagnosis?
  • Will the test help in drug selection or elimination for individual patients?
  • Is there potential savings based on prognostic value? Can lengthy and expensive physician follow-ups be reduced or eliminated because the test is validated to predict whose disease will or will not progress?

Investors recognize a test’s success hinges on its ability to eliminate other modalities with equal or superior results. The stronger a molecular-diagnostic company’s grasp on all the contributing success factors, the more comfortable the investor is. This means the company also needs to demonstrate an ability to stay on top of the latest activity that may impact the ability to launch a test or bill in the manner anticipated, as well as an ability to act on any changes that may occur.

Finally, investors will expect members of the management staff to demonstrate their understanding of the regulatory environment, specifically as it relates to changes that could impact the timing and success of market launch. There are a number of initiatives underway that could help eliminate the barriers that exist in allowing new molecular-diagnostic tests to be easily identified by payors — at least, in the short term. These initiatives include:

  • the switch to ICD-10 diagnosis coding scheduled for 2013, which will provide far more detail on a patient’s status that could help to identify why and how a new test is used;
  • initiatives by the American Medical Association and others that would potentially identify each individual test with its own code and price, and
  • bills submitted to Congress by both U.S. Rep. Patrick J. Kennedy (D-RI) and U.S. Sen. Orrin G. Hatch (R-UT) that would change the regulatory pathway for Advanced Personal Diagnostics and recent court rulings against gene patenting. The FDA is also considering changing the way in which it provides oversight to companion diagnostics, laboratory-developed tests, or LDTs, direct-to-consumer testing, in-vitro diagnostic multivariate assays, or IVDMIAs, and others. The timing of these initiatives could potentially delay the ability to release tests in a CLIA-regulated laboratory.

In short, in order to successfully compete for the finite funds available to help bring molecular-diagnostic tests and concepts to fruition, it is necessary not only to have a great idea but also the ability to create and execute a plan that will make goals a reality. Your future career might depend on it.

Rina Wolf is vice president of Commercialization Strategies, Consulting and Industry Affairs at XIFIN headquarters in San Diego, CA. Reach her at [email protected].