Funeral of 88342

Washington, December 9, 2013

Flags flew at half-staff over the shuttered offices of Ventana, Dako, Leica, BioCare, BioGenex, and Cell Marque today, as well as every lab in the country doing IHCs on a small scale.

Meanwhile, the champagne and crocodile tears flowed at Quest, LabCorp, Clarient, and Sonic.

And on Sunday sales professionals and pathologists from all over the country gathered at Washington’s First Church of the Perpetual Reimbursement to pay their last respects to one of the best beloved CPT codes of all time, the dear-departed 88342.

The eulogy excerpted below was delivered by 88342’s best friend and co-conspirator, 88361. Histotechs, Pathologists, Salesmen –

Lend me your ears. I come to bury 88342, not to praise him. The evil that codes do lives after them, the good is oft-interred with their denial letters.

88342 was a generous and big-hearted code. Those 30-something million slides put $2.5 billion into the coffers of American labs this year. And those labs shared the wealth with their suppliers by peeling off more than $700m of that sum for Ventana, Dako, Leica, and other needy manufacturers. The IHC system producers then tithed to Cell Marque, Epitomics, and a few other antibody producers. 88342 put a lot of your kids through college. So we who mourn today have an obligation to keep his spirit and memory alive.

And 88342 was such a smooth operator – did you notice how he created an annual market for HER-2 slides that is several times larger than the combined total of all breast, ovarian, and GI cases? Yep, you read that right. It took a lot of cajones on the part of labs and a lot of complacency on the part of insurers to make this happen, but without the leadership of my buddy 88342, utilization rates in the US would be downright rational (perish the thought!).

How could we expect our customers’ bean counters to stay asleep at the wheel forever? On the day before Thanksgiving, 88342 was brutally gunned down by government-affiliated assassins. And now we who remain on this earth have been sentenced to the dubious mercy of these two new enforcers – G0401 and G0402 – who promise to be far more tight-fisted than the old boss was. Now labs will only be getting $88.04 for the first antibody, then just $68.08 for all subsequent antibodies. They’ll gripe, but the fact is Quest and Labcorp have been accepting insurance contracts for less than either of those figures for years. Still, this will give all labs an excuse to squeeze their suppliers for another 20% or so on every slide.

You guys from Quest, LabCorp, and Clarient – yeah you guys smirking in the back there – you’re paying less than ten bucks a slide for your highest-volume IHCs, so cry me a river, will ya? As for you other 4,000 labs running small volumes – if you think you’re paying $30-40/slide, you’re really paying $40-50/slide, because the IHC companies are very good at obscuring the total cost of all the consumables and service. Sorry, but at least half of you are going to be priced out of the IHC business within three years.

While this won’t be pleasant for the big labs, they can make up for lower IHC margins with other items on their menus. But they probably won’t have to. Because what the CMS forgot to do was add a third enforcer, G0403, who would be the tough guy who only pays I-tunes kind of prices for every slide after the fourth or fifth.  Think Roche and Danaher and Agilent are just going to say to their IHC subsidiaries… “So sad, we understand, we’ll accept 20-25% lower revenues next year.” Not a chance. So we fully expect the rocket scientists at Ventana,  Leica, and Dako to come up with great reasons why your current 3-5 slide panel should be a 5-8 slide panel going forward.

Looks like we can expect to see fewer labs, running bigger panels on more cases, on bigger instruments, placed by fewer salesmen, serviced by smaller tech support teams. A couple of thousand instruments will now be spending their declining years on second-hand (and fully-depreciated) service in Asia and Latin America.

88342 – We hardly knew Ye’  – Rest in Peace. You will be sorely missed by everybody in the anatomic pathology community.

The Restaurateur Who Thought Like a Pathologist

So there was this pathologist, see, and he decided that he couldn’t stay in business anymore, what with the 88305 and 88342 cuts and all, so he decided to open a posh restaurant. He was loyal to his people, so he gave his histotechs jobs in the kitchen, and he gave his sales staff jobs as waiters. But old habits die hard, so when the first customers came in there was an unusual back-and-forth…

Suave banker, obviously on first date with a lovely lass: May I see the wine list, please?

Former lab sales manager/now head waiter: Certainly, sir (opens the wine list and hands it to Romeo)

SBoFD: Hmmm, I think we’ll try this Bordeaux.

Lovely Lass: Which way to the ladies room please?

FSMnHW: Just past the bar, then to the left, ma’am                  (LL excuses herself)

SBoFD: (now alone with waiter) Excuse me, but what’s with the three price columns on the wine list? I’ve never seen this before. The first column says “co-payment with insurance,” this second column here

– Ack! I could buy a used car for some of these prices!  says “full payment without insurance” and the third column says “Wink, wink – the sum we actually expect to collect from you if you don’t have insurance.” The prices in that column range from 17% to 43% of the second column prices, depending on the wine.  I’m totally confused. And what kind of insurance are you asking about, anyway?

FSMnHW: Restaurant insurance, sir

SBoFD: Restaurant insurance?

FSMnHW:Yes sir, restaurant insurance. If you have a current policy with Aetna or New York Life, we  bill them for 60% of the price in the uninsured column. If you have a policy with some lame-ass carrier  we don’t do much business with, we probably bill them at 85% of the price in the uninsured column, but your co-payment stays the same.  If you don’t have insurance, then we let your date think you’re paying for the $500 bottle, and it’ll say $500 on your check, but all you have to give us is $150 and you can walk out the door without being chased down the street. And there’s a page at our website that explains how you write off the $350 balance anyway (as a customer service).

SBoFD: Cool, and you’ll still bring a bottle to the table with one of those five-hundred-dollar-labels?

FSMnHW Yes, of course, sir (clears throat loudly as LL returns to the table)

LL: So did you decide on the Bordeaux?

SBoFD: Waiter, I’ve got an Aetna Platinum card here – take down the number will ya? I think we’d like a tour of the rare bottles in the cellar….

In the US last year, Medicare accepted 92% of the claims filed for histology staining, flow cytometry, molecular oncology, and tumor markers, but reimbursed between 17% and 42% of the values of the invoices presented. The financial mechanisms for paying for cancer diagnostics in the US have degenerated into a silly game of cat and mouse. Is this any way to run a seventeen billion-dollar a year industry?

In what other realm of our lives would we tolerate this economic model?

Business intelligence on the world’s top ten cancer markets     

Michael Farmer • 415-­‐994-­‐8852 • Michael@mcevoyandfarmer-­‐

News Flash

San Diego, San Francisco, and Dallas, January 12, 2014

Riots broke out this morning and security was ramped up in the parking lots of Ambry Genetics, Pathway Genomics, Invitae, and Caris Life Sciences, as Maserati dealers, yacht designers, and real estate agents descended on the four targeted sequencing laboratories, each among next most likely to cash out during the upcoming feeding frenzy.

After reading about Roche’s billion-dollar check to Foundation, the shrewdest purveyors of ultra-luxury goods rented tents and dispatched their top salesmen to the four parking lots, each hoping to be first out of the gate. The west coast Net-Jets rep, Cassandra Nostradamus, captured the mood succinctly: “Do you think Sanofi and Lily and Merck and Astra-Zeneca are going to sit back and do nothing? Not a chance – they’ll all want what Roche and Novartis have – we’ll look back on this deal in a year and say Roche was smart and bought first when it was cheap.”

An opposing view was offered by Tiresias B. Criswell, the Head of Life Sciences Sales for Tesla Motors – “Yeah, right” sayeth Tiresias “maybe that’s what we’ll be saying in the midst of the sheep-rush a year from now. But then in five years we’ll be saying that targeted oncology sequencing is like Hollywood – a great place to be a paid employee, but a crummy place to have to mind the cash register.”

The sounds of Julia Lee’s 1949 Jazz classic “Snatch and Grab It” were heard wafting through the air as your correspondent was elbowed out of the way by a Monolo Blahnik fitter on steroids.

Who’s Who in the cancer testing business: The drug companies

In the fog of daily competition it is sometimes easy to forget that the drug companies pull the strings (or yank the chains) of the entire diagnostic testing industry.  More that $25b will be spent on cancer drugs in the US in Cancer testing market research in top 10 Global markets2013. There are 25 cancer drugs with sales of more than $100m/year in the US, and seven with US sales of more than a billion dollars annually. Only seven of these drugs have companion diagnostic tests associated with them. We expect that nearly every cancer drug approved in the future will have a companion test.

The top two are significantly bigger than the others. Roche will bring in $9b worth of oncology revenue in the US in 2013. The top three cancer drugs all belong to Roche, and they also have the most impressive pipeline by far, with 18 drugs in phase 3 and 49 drugs in phases 1 and 2.  Novartis is their nearest competitor, with $3b in US oncology sales, one billion-dollar drug, nine drugs in phase 3, and 22 drugs in phase 1 or phase 2.

After Roche and Novartis, the most valuable oncology pipelines belong to:

Phase 3                  Phase 1 and 2

• Pfizer                                                                                         9                                  8

• Millennium                                                                               7                                  15

• Celgene                                                                                     4                                  10

• Lilly                                                                                           3                                  31

• Astra Zeneca                                                                           1                                  20

• Sanofi Aventis                                                                         3                                  19

• Janssen                                                                                     3                                  10

• Bristol Myers Squibb                                                              2                                  8

Another 26 drug developers had a total of 28 oncology drugs in phase 3 and 83 drugs in phase 1 or phase 2 by the fourth quarter of 2013.

Adding all this up, it appears that in December 2013 there were 87 oncology drugs in phase 3 and 266 drugs in phase 1 or phase 2. Nearly every one of these drugs has a companion diagnostic associated with it, so there appear to be 350-400 active companion oncology diagnostic projects in the works.

In the eyes of the drug companies there are only three types of diagnostic companies: those who have already successfully gotten FDA approval for a companion test, those who have not, and Myriad Genetics. Myriad took in $30m in research revenue for companion diagnostic projects last year. The bulk of the other plum assignments went to Roche.

Who’s Who in the cancer testing business: The manufacturers who supply the labs

Just 10 companies took in in $1.7b of the $3.5b that was spent by labs with their suppliers in the US in 2013.

Roche Tissue Diagnostics, still known to most as Ventana, has a lot in common with Dako, the histology company Agilent paid $2.2b for in May 2012. These are the #1 and #2 producers of immunohistochemistry (IHC) systems. They both have smaller portfolios in primary staining and ISH/IHC companion diagnostics. They both will be damaged severely by the upcoming 2014 reductions in IHC reimbursement, expected to be in the range of 20-30%. They both can be expected to make more acquisitions in 2014 or thereafter.

Sakura and Thermo’s pathology business unit are similar in that they are both entirely focused on making equipment for 88305 billing, and so they were hit hardest when 88305 rates were cut in half at the beginning of 2013. They are both focused on making tissue processors, primary stainers, and embedding stations.Market research on cancer testing in the top ten global markets

Thermo has a strong consumables franchise and a strong sectioning business, neither of which Sakura has. Sakura however sells a lot more tissue processors and H&E stainers than Thermo does. Neither of these two has an IHC business. After Thermo digests Life Technologies in the second quarter of 2014, the combined Thermo-Life cancer testing business will be worth about $205m, which will make Thermo the #4 cancer diagnostic product manufacturer.  Thermo will likely continue to make acquisitions in the pathology industry. Sakura, a closely-held Japanese family business, is unlikely to be involved in any M&A activity.

Leica competes with all four of the companies above.  About half their revenues come from their core histology (88305) products – tissue processors, H&E stainers, cover slippers, cryotomes, microtomes, and embedding stations – which compete with Sakura and Thermo. Their Bond IHC business is just under half of their histology business, and a fast-rising #3 behind Ventana and Dako in IHC markets. They have Danaher’s money behind them and the confidence of Danaher management. Since the last edition of this report Leica bought Aperio and Kreatech; more acquisitions can be expected in 2014 and beyond.

Hologic and Qiagen share the dreary cervical cancer screening markets. In 2007 Hologic bought Cytyc’s Pap testing monopoly and Qiagen bought Digene’s HPV monopoly. The Pap testing market in the US is shrinking, and while HPV volume is growing, HPV margins are falling fast. So both Hologic and Qiagen have been investing their cervical cancer screening cash in new businesses.  Hologic bought the HPV businesses of Third Wave and then Gen-Probe.  Qiagen has invested its Digene cash in developing a broad expertise in companion diagnostics.

Abbott Molecular had enjoyed two near monopolies, their UroVysion bladder cancer screening racket and their newer ALK companion diagnostic business for Pfizer’s Xalcori lung cancer drug, until Kreatech started nibbling away at both in 2013. They also have a HER-2FISH test that competes with the Ventana and Dako molecular assays as well as the Ventana, Dako, and Leica IHC platforms.Cancer testing market research in top 10 Global markets

The other two spots on the top ten are the two companies that make most of the instrumentation and consumables used for clinical oncology NGS testing. Illumina has the slight edge with 55-60% of the market at this writing (December 2013). The Life Technology Ion Torrent division has had great momentum with their PGM systems, which cost a lot less to buy and operate. But their founding scientist, the brain that launched the NGS industry, left in June 2013 and is starting a new competitive venture.  This development, and the chaos that always prevails after big mergers, combine to suggest a better future for Illumina than the Rothberg-less Ion Torrent division of ThermoFisher.

Though not quite in the in the top ten at present, honorable mention goes to Roche Molecular, which will do $1.1b worldwide in 2013, but will still fall short of $100m in molecular oncology in the US in 2013. Within a year or two they will probably have all the FDA approvals they need to compete with Qiagen across the board in HPV, KRAS, BRAF, and EGFR markets.  By 2016, nearly all of the homebrew activity will have given way to the kits of Roche and Qiagen and most likely a few others by then. Roche Molecular will break into the top ten in 2014 or 2015, and rise quickly through the ranks thereafter.

Who’s Who in the cancer testing business: The labs

Just 11 lab groups took in $4b of the $17b that was spent on cancer diagnostic services in the US in 2013.

The Big Two, Quest and LabCorp, are the only lab groups with a nationwide footprint and anatomic pathology capabilities in every major urban market. These two bring in half the revenues in the cancer testing business. LabCorp Labcorp_logopassed Quest in cancer testing revenues for the first time in 2012, to become the biggest cancer testing lab in the country. The Big Two are under siege these days and finding growth very hard to come by. LabCorp’s overall revenues were up 2.2% in the first half of 2013; Quest’s sales were down 4.9% during the half-year. Quest and LabCorp have been making several acquisitions each year, and will probably keep doing so.

Four of the top ten labs could be described as completely focused on cancer testing, and also making money. Myriad is still the most decadently profitable lab on the planet, but that will be a hard distinction to maintain in 2014 and beyond, now that their BRCA patent has been nixed by the US Supreme Court. Genoptix has been modestly profitable for four or five years. Genomic Health and Clarient have just been emerging into profitability over the last year or two.

Sonic and Miraca are in some ways similar. These are the #3 and #4 medical testing companies in the world. Miraca bought the less exciting anatomic pathology business of Caris Diagnostics in 2011, while Caris kept the molecular business. Sonic has made eight acquisitions in the US so far, the biggest being CBLPath in 2010. Miraca and Sonic both think in many ways like Quest or LabCorp. We expect that more acquisitions will be in their futures.

BioReference is the #3 US lab chain, with a big footprint in the northeast, though scarce elsewhere. BioReference is somewhat similar to Sonic and Miraca in their mix of routine and esoteric business, their Quest/LabCorp envy, and their eye peeled for acquisitions. Their two esoteric cancer testing units, GenPath and GeneDx, operate quite independently.

Aurora and Bostwick have less desirable traits in common – both are in jeopardy of being history by the end of 2014. Aurora has been rolling up labs – 17 lab groups in some of the most obscure parts of the country – Quest_diagnosticssince 2006. But this year’s 88305 cuts hit them very hard, and they are finding it difficult to service their $300m+ in debt.  Dr. Bostwick got severely overextended in both UroVysion and real estate over the last few years. When reimbursement for the former was cut and interest on the latter came due, he lost control of his lab to a private equity group. Next year’s reductions in 88342 may prove to be the coup de grace for these two.

Promising NGS specialty labs are springing up all over. The big story so far has been the extraordinary growth of Foundation Medicine. Then in the second half of 2013 PathGroup, Harvard/Partners, ARUP, Invitae, and Paradigm/U Michigan also rolled out interesting new NGS panels. Also in the second half of the year Myriad’s BRCA monopoly was challenged by Ambry, Gene by Gene, GeneDx, and Quest – and also hypothetically by Counsyl Diagnostics.  For the newcomers in the NGS and BRCA businesses, the future looks great.


January 2014                                                                                                                         

For most of the 15,000 pathologists who run America’s 8,100 cancer testing labs, and for most of the firms that sell to them, 2013 has been the worst year ever. For many, 2014 will be worse than 2013.Cancer testing market research company

After many years of reimbursement increases, anatomic pathologists are having their reimbursement rates reduced by 30% here, 50% there, and worse in other places. The pathologists’ most pressing concern is how they will survive last year’s drastic cuts to CPT code 88305, as well as the recently announced reductions in IHC reimbursement (RIP 88342).  The other fear that keeps them up at night is that advances in molecular oncology will make anatomic pathologists redundant.  While we don’t expect anatomic pathologists to become obsolete any time soon, we do expect between 2,000 and 2,500 of the country’s 8,100 AP labs to be driven out of business by declining reimbursement and slow-footed marketing by 2017.  The prognosis for any practice of less than five pathologists is grim. Most of their staff will either be prematurely retired or working for a bigger lab (that they probably won’t like) within four years.

The molecular pathology labs have some of the same worries and a few different worries. The wild west days of code stacking are over, so everyone is getting paid a lot less in 2013 than they were in 2012, and expecting to get paid less still in 2014.  Everybody with a good idea in molecular pathology looks at the gauntlet of the FDA and says why bother? Then they open or acquire a CLIA-certified lab and start selling results instead of kits. The FDA keeps making noise about the need for FDA oversight of these lab-developed tests (LDTs), prompting low-grade anxiety among the molecular oncology labs that offer expensive proprietary panels. Then there’s the more immediate anxiety stoked by the arrival of clinical NGS – next-generation sequencing.  Whole-genome sequencing for less than $6,000 is here today; within two or three years prices will fall below the $2,500-3,000 threshold of today’s most expensive conventional panels.  The assault on reimbursement, the specter of FDA regulation, and the tsunami of clinical NGS – these are the big three topics that keep those running molecular oncology labs from getting too complacent.

The effects of all these reimbursement cuts obviously trickle down to the manufacturers that supply the labs.  Sales of the instruments that labs need to produce 88305 invoices – tissue processors, H&E stainers, cover slippers, microtomes, and embedding stations – are down between 10% and 20% compared with 2012. Many capital equipment decisions have been put on hold in anticipation of the new 88342 rates that were announced November 27, 2013, which will drive many small labs to sell out or close.  This has been a very difficult year to be a sales rep for Thermo, Sakura, and their smaller core histology competitors, who are the most dependent on the market for 88305 equipment. Growth slowed this year but did not cease entirely for Ventana, Dako, and Leica, as their somewhat healthier 88342 (IHC) businesses somewhat offset the sluggishness of primary staining and sectioning markets.

Things aren’t any better in cervical cancer screening markets. Pap testing volumes continue to decline, and BD forces down the prices Hologic might otherwise be getting. While HPV volumes are still growing, margins are getting worse as Roche and Hologic/Gen-Probe eat away at Qiagen’s franchise. Aside from the anomaly of HPV, most molecular oncology testing is still done with homebrews.  While reimbursement cuts are hurting margins, the growth rates of these market segments are still a happy story for Roche Molecular, Abbott Molecular, Hologic, and Qiagen; these four own more than 85% of the molecular oncology test kit business.

The business of turning NGS testing into a widespread clinical practice is booming. Illumina’s stock is near an all-time high and Thermo paid dearly to buy Life Technologies, which transaction is expected to close in the second quarter of 2014. Roche, having walked away from their $175m purchase of 454 Life Sciences, and their very expensive failed attempt to take over Illumina, just committed another $70m to Pacific BioSciences for their third try in NGS markets.  Arrogant incumbents snicker, but your correspondent has been studying Roche Diagnostics since 1986, and can’t remember many cases where they messed up a market entry three times in three tries. Roche has decided they want an NGS business; if they can’t develop it internally, they’ll buy it again.

You can’t throw a rock at the AMP or USCAP meetings without hitting a sign claiming expertise in companion diagnostics development. Everybody wants a piece of the promised land of companion diagnostics, but this is like the market for NFL quarterbacks or Hollywood starlets: all the money is being made by just five or six players, in this case mostly Myriad, Dako, and Roche. Abbott and Qiagen haven’t made quite as much as these three yet, but their newish CDx products and pipelines have a bright future. The great majority of companion diagnostic tests  – all the ER, PR, and c-KIT, plus most of the HER-2 and EGFR – are still run on the IHC systems of Roche-Ventana, Dako, and Leica.  The companion diagnostic stains are just about the only thing Ventana, Dako, and Leica management have to smile about these days.