Specialty Lab versus Kit?

…What high-value diagnostics companies should consider when selecting a commercial model

dx-blog

By Jeni Takasumi, Consultant

As precision medicine becomes the new normal in advanced cancer treatment and beyond, a flood of companies have stepped up to the challenge of helping clinicians manage diagnosis and treatment decisions. The demand for novel diagnostics continues to rise as clinicians and payers strive for higher response rates and more cost-effective solutions. Furthermore, biopharma companies are actively seeking partners to co-develop companion tests for their drugs. Today, more than 40% of drugs in clinical trials are under investigation with a biomarker (more than 70% for oncology drugs)1 – a trend that continues to grow.

In addition to finding the right markers and signals, refining and validating technical aspects, and convincing clinicians and payers that a test has clinical utility, diagnostic developers have to determine which commercial model will best suit their needs. Everything from regulatory pathways to logistics, distribution, sales and marketing hinge on this decision: specialty lab, kit, or both?

Although each company’s decision depends on a slew of technical, financial, commercial, and strategic factors, we will compare the specialty lab and kit models against a few aspects of commercial attractiveness for a high-value diagnostic company. Examples in this post focus on specialized diagnostic assays in oncology, but findings can be applied across therapeutic areas.

Specialty Lab versus Kit: Comparison of Key Attributes
Leading companies like Genomic Health, Foundation Medicine, and Roche Diagnostics have demonstrated the viability of both a centralized (specialty lab) and a decentralized (kit) model, but there are key differences relating to time to market, pace of adoption, key capabilities, sales and marketing strategy, and more. Here, we compare the two models on core aspects of regulatory, reimbursement, revenue, and expenses.

Regulatory
Regulatory requirements are one of the biggest differences between the specialty lab and kit models. While FDA approval is required for in vitro diagnostic (IVD) kits, specialty labs can provide services with only CLIA (Clinical Laboratory Improvement Amendments) certification. However, companion diagnostics (CDx) for drugs is a notable exception that requires FDA approval for the first test, even when run as a specialty lab test. With the one caveat aside, a specialty lab test is generally favored from a regularly time-to-market perspective, as the FDA review time period can be avoided.

Reimbursement 
Reimbursement is always top of mind for new technologies since the inflection point of diagnostic sales often correlates with major coverage decisions. Establishing a CPT code is a major barrier for novel test developers, which can take years and limits adoption of both types of tests. Regardless of commercial model, coverage decisions depend on how compelling clinical data is and how much a company invests in on-boarding health plans; however, there are some differences that give the specialty lab model a slight edge.

The major difference between the two models is which stakeholder is billing for the service. Individual laboratories submit claims for tests run using a kit, whereas a specialty lab bills for tests run at its centralized location. This becomes advantageous for the latter in negotiating with Medicare Administrative Contractors (MACs) because coverage decisions for tests requested from providers across the nation depend on the decision in a single jurisdiction. Kit manufacturers, on the other hand, must garner coverage decisions from all MACs in which their test is run.

Revenue
Since there are so many variables, we can’t claim to directly compare the revenue potential of each model. However, these two options have differences in pricing power, capacity, and addressable market that developers should consider.

A specialty lab company has full control over test price. It can set a high list price and discount it heavily early on to gain adoption. However, a kit developer’s price should be low enough for a laboratory customer to recoup the cost of running the test based on reimbursement, effectively limiting the developer’s pricing power and forcing revenue sharing with the laboratories running the test.

Each commercial model also has limitations for its addressable market. A specialty lab is limited by the lab’s capacity and typically cannot extend its market internationally due to logistical and sometimes regulatory limitations. On the other hand, a kit’s addressable market is limited to the installed base of underlying platforms needed to run the test. This may not be a concern for a PCR test company, but is a major consideration for an NGS test developer.

Expenses
Finally, to the topic of high-level expenses, upfront and recurring. A specialty lab most likely has higher upfront capital expenditures (CapEx) and infrastructural investment, as laboratory equipment must be purchased and sample collection and transportation logistics established. The specialty lab must also scale with increasing sample volumes, which may gain some economies of scale, but perhaps not at the same rate as a kit manufacturer. The lens of investment requirements generally favors the kit model, but such a company may have additional early expenses associated with funding reagent rental models and/or placing instruments in order to drive laboratory adoption.

Salesforce strategy is the last consideration for this post, which does not necessarily favor one option over the other. Upon launch, high-value test developers typically market to both clinicians and laboratories, but in the long-run, resources are dedicated to the primary customer – laboratories for a kit and clinicians for a specialty test.

Summary of Considerations

labkit_graphic

Note: LDT = laboratory developed test; MACs = Medicare Administrative Contractors; CPT = Current Procedural Terminology; CapEx = capital expenditure.

If only it were that simple…
Looking at these four characteristics, one might conclude that companies prioritizing speed should choose the specialty lab model and those with smaller pockets or a more conservative backing should choose the kit model. Yet, we all know the decision is not that straightforward.

Developers also need to think about inherent characteristics of their test:

How complex is the protocol? Can it easily be replicated by other labs?

What platform(s) and equipment does the test require? Is the installed base sufficient for our goals?

How long will it take to receive and run a sample? Is that fast enough for the physician to make a decision?

…and how easy it is to understand and validate:

What level of evidence do I need for my test to gain traction? Does the test need to be FDA approved before partners will help generate evidence?

How much do I need to educate and market to each of my key stakeholders: clinicians, laboratories, payers, and patients? How does that impact which customer type is the best for launch? For longer-term commercialization?

…as well as their financial goals and limitations, and what their strategic imperatives are.

Many companies have chosen the specialty lab route, including Genomic Health, Guardant Health, Foundation Medicine, and others. Novel test developers choose this route for reasons described earlier, as well as others, including greater control of product messaging and enhanced market insights from a direct channel with physician customers. Foundation Medicine, in particular, has maintained its specialty lab model as it sought and received FDA approval for companion diagnostic designation of FoundationOne CDx.

On the flip side, it’s no surprise that Roche, ThermoFisher, and Agilent selected the decentralized model – these companies sell kits compatible only with their equipment in order to enhance the value of the underlying diagnostic platforms. Others who prefer the kits have chosen to focus on assay development rather than scaling a diagnostic service. Asuragen, for instance, takes a platform-agnostic approach to development and develops companion diagnostics in collaboration with partners.

Finally, we can’t forget the third option: a dual model. Providing both a specialty lab service and selling kits to laboratories, generally provides the largest commercial reach. After more than ten years as a specialty lab, Genomic Health announced it would develop an IVD with Biocartis to facilitate international expansion. The dual model is becoming more of a trend, as similar news was announced last month by Adaptive Biotechnologies at the JP Morgan Healthcare Conference.

The Bottom Line
The specialty lab model can provide a faster time to market and greater product control, while the kit model has lower capital requirements and can enable a broader commercial reach. However, each company must carefully evaluate this important decision based on inherent test characteristics, the external environment, and internal strategic and financial imperatives.

References
(1) Tufts Center for the Study of Drug Development, “Personalized Medicine Gains Traction but Still Faces Multiple Challenges,” Impact Report, May/June 2015, Volume 17, Number 3. As cited by the Personalized Medicine Coalition.

About the Author

Jeni Takasumi is a Consultant at Health Advances in the San Francisco office. She works across therapeutic areas and sectors, emphasizing oncology therapeutics and diagnostics, ophthalmology, and digital health/real world evidence (RWE) strategy.

Health Advances Capabilities in High-Value Diagnostics

Health Advances has been successfully advising companies on development and commercialization of high-value diagnostics for the past decade. Our experienced multi-disciplinary team includes PhD researchers, clinical pathologists, and diagnostics industry leaders working to provide innovative strategies for high-value diagnostics.

For more information on our capabilities, please visit https://healthadvances.com/high-value-diagnostics/.

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