Market commentary: Medical technology - Gold rush times in diagnostics
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Bellevue Asset Management /
Market commentary: Medical technology - Gold rush times in diagnostics
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Gene testing is a booming business. The market potential is huge and experts are
constantly upping their forecasts. BB Adamant Medtech (Lux) Fund managers met
with top executives from more than 30 companies while attending conferences in
New York and Boston. Few companies are truly well positioned in the battle for
market share and the entire playing field could shift early next year.
Although the limited long-term clinical data and non-reimbursement by insurers
have been standing in the way of (even stronger) market growth, strategic market
players are staking out their positions and investing billions in the process.
Notwithstanding all the euphoria, investors should be cautious. Few companies
are truly well positioned in the battle for market share and the entire playing
field could shift early next year. The world's largest annual healthcare-focused
investor conference, organized by JP Morgan in San Francisco, will take place in
January. Market leader Illumina has presented new gene sequencing machines at
several of these conferences in the past. But the really big surprise might come
from Roche Diagnostics one month later at the important AGBT (Advances in Genome
Biology and Technology), a science and technology conference held in Orlando,
Florida. Roche is the sole gold sponsor, Roche's exclusive clinical technology
partner Pacific Biosciences (PacBio) is silver sponsor and Kapa Biosystems, a
company recently taken over by Roche, is bronze sponsor. Any company that has
made such elaborate preparations for a conference probably has something
important to say. In the same vein, we note that Roche Diagnostics made the
final milestone payment of USD 20 mn to its development partner PacBio, which is
developing a sequencer for clinical diagnostic purposes exclusively for Roche.
Any surprising news could also have an impact on Qiagen's share price, likewise
a silver sponsor at the AGBT, where it will present its recently launched
GeneReader NGS system. Selectivity is called for. Some stocks have corrected to
much lower levels and now offer good entry points.
Several approaches for diagnostic tests
The huge market potential of DNA sequencing and liquid biopsy tests is
undisputed. Isaac Ro, for instance, a Goldman Sachs analyst who has earned a
reputation for conservative estimates, expects market potential to reach USD 14
bn over the next 10 years. Other analysts' forecasts go as high as USD 20 bn.
There are particularly promising opportunities for diagnostic tests in areas
where the current testing methods are inadequate and sample collection
procedures pose high risks to patients. This is the case, for example, with
early detection of fetal trisomy 21. Standardized test kits for sequence-based
non-invasive prenatal testing (NIPT) are likely to come to the market and
completely supplant the invasive procedure of amniocentesis, even in the normal
risk segment. Significant potential is also seen in tests that detect DNA
fragments of dead tumor cells in the bloodstream. Such tests are used to control
drug delivery in personalized cancer therapies and lead to significantly better
treatment outcomes.
From an investor's standpoint, the question is whether there can be another
winner besides Illumina. This US player has captured a more than 80% share of
the research market. Moreover, Illumina is the leader in terms of quality and
costs, a fact that puts the company firmly in the pole position in the race to
develop sequence-based clinical diagnostic applications. Just how important cost
leadership is can be demonstrated by looking at NIPT tests, a field where market
share is already being gained through pricing tactics. Oncology testing will
entail significantly more costly test procedures. Besides the liquid biopsy
blood test, healthy and cancerous tissue of patients will have to be sequenced,
and this is 10 to 100 times more often than routine sequencing tests. With a
research budget of almost USD 400 mn focused exclusively on sequencing, Illumina
will also have no problems keeping pace with the sector heavyweights in the
diagnostic business.
Roche Diagnostics is world market leader
Illumina's biggest rival is Roche Diagnostics (Roche Dx). The world leader in
the diagnostics market is trying to interrupt Illumina's long string of
successes. Roche Diagnostics has recognized the market potential and, in the
wake of its failed bid to take over Illumina, has been investing most of its
annual research budget of some USD 1.1 bn to build up a sequencing-based
diagnostics arm.
About USD 2 bn has already been spent on acquisitions, equity interests, and
marketing rights, resulting in a portfolio that spans the entire value chain.
Particularly noteworthy portfolio assets are Genia's sequencing technology, the
exclusive distribution rights to PacBio's sequencing technology products in the
field of human in vitro diagnostics, and the majority stake in Foundation
Medicine, a leading lab services provider focused on targeted cancer therapies.
Roche Group is the global leader in cancer drugs and therefore ideally networked
with medical practitioners and patients. This is an advantage on the
distribution front and also facilitates the execution of clinical trials.
Sequence-based cancer tests will be fully reimbursed only if and when data from
long-term clinical trials demonstrate that the tests enable better treatment
decisions and improve treatment outcomes. But time is getting short and Roche
Diagnostics has had problems in the past adhering to its own R&D schedules.
Roche Diagnostics must quickly come up with an integrated sequence-based
diagnostics product for oncology treatment. Otherwise Illumina will establish
itself here as the gold standard, as it has already done in the research market.
Qiagen could become a takeover candidate
Qiagen qualifies as the third major player in the diagnostics business. Its
full-range solution bearing the name GeneReader NGS system was presented atat a
conference in November. It is said to be highly automated and user-friendly. No
details were given regarding the company's strategy for seeking regulatory
approval and, despite the integrated workflow, this system is not a solution for
the broad mass market. Then there is the technology risk, the lack of critical
mass in gene sequencing and the research budget constraints associated with
Qiagen. On the other hand, Qiagen is viewed as a takeover target, which is not
surprising considering that Siemens and Abbott Diagnostics appear to have missed
the boat for gene sequencing and could use an influx of productive assets in
their traditional molecular diagnostics business.
What other players are there in the diagnostics market?
Thermo Fisher Scientific has a portfolio of ion sequencers that is well-suited
for clinical diagnostics thanks to their rapid testing times and small sample
input requirements, and the company has the necessary critical mass to
successfully grow this business. LabCorp, Quest Diagnostics and other high-
volume lab services providers offer attractive risk/return profiles. They cover
their fixed operating costs with routine diagnostic tests and generate their
profits with complex molecular tests. Given the expected boom in sequence-based
diagnostics tests, these companies are likely to report a proportionately faster
rate of profit growth going forward. At the same time investors can avoid
technology-related risks: These companies simply select the best solution with
the cheapest price tag.
The future of diagnostics has just begun
Adaptive Biotechnologies, a privately held company, wants to monitor how the
immune system responds to attacks by cancerous cells. Its goal is to transform
cancer from a terminal condition into a treatable chronic disease.
Efforts are under way to introduce other diagnostic procedures besides personal
genomics in the healthy population and continuously measure individual
behavioral "fingerprints" as well as environmental factors. The private company
Human Longevity, founded by genomics pioneer Craig Venter, is extending the
field of gene sequencing technology to include the microorganisms living in and
on the body and metabolic mapping. In combination with imaging procedures such
as full body MRI scans, portable monitoring devices and health checkups,
important supplemental data can be collected to learn more about the causes and
agents of disease.
The use of big data applications, i.e. applications involving huge datasets, is
increasing. This is something that has also attracted interest from Alphabet,
the parent company of Google, which has been investing in genetics research for
years. The growing use of gene mapping, the collection of vital data via
wearable devices such as fitness bracelets or the iWatch and other developments
are working in Alphabet's favor. The company's aim is to draw the right
conclusions about the cause of disease by sifting through a sea of data.
BB Adamant Medtech (Lux)
The Fund invests in medical technology companies around the world. Experienced
sector specialists focus on mid- and large-cap companies with established
product portfolios. ISIN B-EUR: LU0415391431
More information:
Bellevue Asset Management AG, Seestrasse 16, 8700 Kusnacht, Switzerland, Tel.
+41 44 267 67 00 Tanja Chicherio, tch(at)bellevue.ch
b-public AG, Pfingstweidstrasse 6, 8005 Zurich, Switzerland, Tel.
+41 79 423 22 28 Thomas Egger, teg(at)b-public.ch
Bellevue Asset Management
Bellevue Asset Management is an independent and highly specialized asset
management boutique focused on managing equity funds for selective sector and
regional strategies, in particular for African equities, Swiss/European
entrepreneurial equities, healthcare equities and multi asset strategies.
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Datum: 21.12.2015 - 14:28 Uhr
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News-ID 441037
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