I have been receiving a lot of questions about the recent deal Illumina (ILMN) struck with three pharma companies (AstraZeneca, J&J and Sanofi) and potential implications for Foundation Medicine (FMI). Foundation Medicine’s products rely on sequencers from Illumina, which now appears to become involved in the development of competing products. Thus, does the deal change Foundation Medicine’s risk/reward profile?
In my opinion not really since anybody who is following the cancer diagnostics field realizes that competition is inevitable, given the commercial opportunity ($10B globally) and the advances in next-gen sequencing (NGS). The new Illumina consortium is just one of many potential competitors that are emerging and it is only reasonable to assume others will follow. In any case, most competitors are 2-3 years behind and matching Foundation Medicine’s performance (accuracy, number of mutations covered etc.) will not be trivial.
The only thing that should make Foundation Medicine investors worry is if Illumina stops selling its sequencers to Foundation Medicine, which seems highly unlikely. In fact, Illumina will probably sell its sequencers to multiple players in the field of cancer diagnostics (Dx).
Being first to market matters
In a field which so technologically complex, where market awareness is essential, Foundation Medicine’s established presence in the market (since 2012) is an important differentiator. Providing a reliable test that can be used to inform treatment selection is not trivial as it requires a multi-disciplinary effort (genomics, pathology, algorithms, etc.). Multiple companies are developing NGS-based products for tumor profiling, not all will meet the market standards, which are set by foundation medicine.
Foundation Medicine is the only company with a proven commercially-viable panel of tumor biomarkers with a quarterly run rate of ~6000 tests 2 years after launch. This first-mover advantage should allow it to retain a significant market share in a highly competitive environment.
The company has successfully dealt with the logistic and technical hurdles associated with such a complex test, with multiple published validation studies that were conducted with research groups. Therefore, Foundation Medicine has set a high bar for any competitor with respect to quality of the test, number of genes, cost, user interface and logistics. LabCorp’s IntelliGEN test, for example, was launched 9 months ago and covers only 50 genes (vs. 343 genes covered by FoundationOne). Below are the lists as they appear in the technical specs, the difference is graphically evident.
IntelliGEN (LabCorp) – Gene list
FoundationOne (Foundation Medicine) – Gene list
Foundation Medicine has a growing customer base that is already familiar with its tests and acknowledges their value. The primary stakeholders in the cancer Dx market are the treating physician and the pathologist, who choose which tests to order from which vendor. A new entrant will have to earn physicians’ trust, which will probably require rigorous clinical validations or comparability tests. In cases like Illumina’s recently announced consortium, the resulting testsmay be focused on genes that are of interest to the pharma companies. If those genes are covered by FoundationOne, many physicians might prefer it even if the other tests are approved as companion diagnostics. (Providing FMI demonstrates its test is non-inferior to the other tests first.)
Validation from the pharma industry
In summary, I view Illumina’s announcement more as a validation of Foundation Medicine’s approach than a competitive threat. It implies that pharma companies acknowledge the value of comprehensive genomic profiling and realize that NGS-based tests will become the mainstay in cancer Dx. The move towards NGS-based products is also exemplified by companies like Agios (AGIO) and Clovis (CLVS) which are already committed to NGS and intend to use Foundation Medicine’s tests as companion diagnostics. I expect more small biotechs to choose FMI’s tests as companion Dx, as many companies focus on rare mutations and they do not have the bandwidth to develop dedicated biomarker tests for patient selection. These include Loxo Oncology (LOXO), Ignyta (RXDX) ,Mirati (MRTX) and even Exelixis (EXEL).
As I discussed in my post-ASCO write-up, personalized medicine is becoming a reality in oncology and many drugs will require patient selection on a molecular level. As a result, NGS-based tumor profiling will become the gold standard, especially in tumors with known treatment options for certain subsets (NSCLC, AML, melanoma, ovarian cancer). The clear value proposition coupled with the relatively low cost per test (~$3500) should support market growth even without broad automatic reimbursement. In light of these market dynamics, Foundation Medicine has a high likelihood of getting acquired by a large diagnostics company such as Abbott, LabCorp or Roche.
We are adding a new position in Sage Therapeutics (SAGE). I will try to elaborate about this choice in the near future.