By Melissa Davis, Senior Editor
Feel free to take Bio-Reference (NASDAQ:BRLI) at its word yet again. That's fine; hold onto that stock, regardless of its vulnerabilities. At least try to arrive at an informed decision, however, by comparing the sunny outlook presented by management with all of the brewing storms that its bright forecast manages to conveniently ignore.
As the following evidence clearly demonstrates, Bio-Reference has placed a rather staggering bet on the genetics division responsible for controversial panels like InheriGen - a test inexplicably designed to identify dozens of ultra-rare disorders that TheStreetSweeper has laboriously catalogued, in rather stunning detail, for the entire world to now see - despite a swelling list of dangers that keep raising the odds against the controversial laboratory.
Bio-Reference did not respond to questions for this story.
Bright Outlook: "We are now set on February as a planned release date for our disruptive new pan-ethnic carrier screening test, Inherigen, which will be the flagship product upon which we will be basing our national entry into this market … Another lab might see this as a billing opportunity. We don't. We won't. Our way to grow must be to provide more for less and thereby gain market share. (That) market is considerable, especially when one looks at the pan-ethnic carrier screens, because in something like that, you're not just limited to maternal-fetal medicine or to high-risk OB/GYNs - but virtually any OB/GYN." - Bio-Reference CEO Marc Grodman, December 2011
Dark Cloud: "The utility of (genetic) testing depends on the predictive ability of the test, the likelihood of actionable test results and the options available for the reduction of risks … Empirical studies so far have shown that the predictive ability for most complex diseases is still moderate at best, which is for a large part explained by the relatively limited number of low-risk variants that have been discovered so far. But even if all genetic variants were discovered in the future, still the predictive ability would be restricted by the fact that complex diseases are only partially heritable … Even though the benefits of testing may be higher when more diseases are tested for, the likelihood of having at least some benefit may still be quantitatively low." - Investigative Genetics, January 2010
Bright Outlook: "InheriGen tests for over 160 disorders inherited in an autosomal recessive manner (some X-linked) that are mostly severe, childhood-onset diseases. It includes mutations chosen based on current ACMG (American College of Medical Genetics) and ACOG (American Congress of Obstetricians and Gynecologists) recommendations, as well as hundreds of mutations selected through careful review of scientific literature and evaluation of clinical utility … InheriGen helps determine carrier risk for disorders that can be managed through lifestyle changes during pregnancy, medical intervention in utero or at birth, or through other therapeutic approaches. For some disorders, treatment may significantly reduce or eliminate the effects of the condition." - Bio-Reference press release, February 2012 (identical description currently published on the corporate website)
Dark Cloud: "Preconception and prenatal genetic screening and testing are recommended for a limited number of severe child-onset diseases … In fact, genetic screening for any clinical purpose should be tied to the availability of intervention, including prenatal diagnosis, counseling, reproductive decision making, lifestyle changes and enhanced phenotype screening … The obstetrician/gynecologist who orders genetic tests should be aware of when it is appropriate to test, which particular test to order and 'what information the test can provide, the limitations of the test, how to interpret positive and negative results in light of the patient's medical or family history and the medical management options available.'" - American Congress of Obstetricians and Gynecologists, formal guidelines designed to address "ethical issues" related to genetic testing, June 2008
Bright Outlook: "We have introduced new programs, such as … Inherigen, which will propel us through a changing reimbursement environment. We have designed marketing programs and comprehensive support solutions that, we believe, have protected our franchises and enabled us to maintain our growth." - Bio-Reference CEO Marc Grodman, February 2013
Dark Cloud: "Although ECS (expanded carrier screening) panels may include conditions that are routinely assessed in carrier testing, these ECS panels include many conditions that are not routinely evaluated and for which there are no existing professional guidelines … If there is no family history of or ethnic predilection for a disease, carrier screening is not recommended if the carrier rate is <1% in the general population. (Indeed), population screening should only be performed if the disease prevalence is high and the morbidity of the disease is high … BCBSNC (Blue Cross/Blue Shield of North Carolina) may request medical records for determination of medical necessity. When medical records are requested, letters of support and/or explanation are often useful, but are not sufficient documentation unless all specific information needed to make a medical necessity determination is included." - Blue Cross/Blue Shield of North Carolina, latest medical policy on prenatal genetic testing, December 2013 (scheduled for an upcoming review in August of 2014)
Bright Outlook: "Our interest in GeneDx was a little bit different. Instead of saying, 'I know you have a rare disorder. Let me go test for it,' my interest was, 'What if you have a disorder that has a lot of different mutations and you want to be able to go in and say which one is there?' You can't just go in and test, in sequence, one gene. You need methodologies and platforms that can look at a lot of genes at one time. … People will say, 'Wait a minute. Why would you do tests for mutations when there are no drugs available for all the mutations? How do you know what to do with this?' Well, number one, it better be cost effective … It's what we do for a number of conditions, as well as in autism spectrum disorders, as well as in mitochondrial disorders, as well as in seizures, new ones in neurology, new ones in prenatal genetic testing. All of these are outstanding new tests that we're able to do with a sales force of over 30 people nationwide who are selling this to specialists in those areas … It's a major source of growth for us." - Bio-Reference CEO Marc Grodman, June 2013
Dark Cloud: "The proper selection of appropriate disease-causing targets for general population-based carrier screening (i.e., absence of family history of the disorder) should be developed using clear criteria rather than simply including as many disorders as possible … The basis for the selection of disorders on expanded carrier screening panels should be disclosed. (Moreover), patient and provider materials must include specific citations that support inclusion of the mutations for which screening is being performed … The information provided about disorders with mild phenotypes, variable expression, low penetrance and/or characterized by an adult onset should be complete and transparent, allowing patients to opt out of receiving these test results. (In addition), an appropriately tailored informational pamphlet or Web site, containing a brief description of each disorder included in a test panel, should be available to patients undergoing or considering an expanded prenatal/preconception carrier screening panel … Laboratories have a duty to participate in and facilitate this information transfer." - American College of Medical Genetics and Genomics, position statement on prenatal/preconception expanded carrier screening, April 2013
Bright Outlook: "Our performance in the third quarter was quite similar to the results we reported in the immediately preceding second quarter - growth in all elements of our business, but especially strong in our genetics area through GeneDx … The genetic franchise that has been constructed over the past decade by GeneDx not only differentiates us further as an enterprise and is responsible for the fastest-growing part of our business, but also has contributed significantly to our prospects of future success and innovation." -CEO Marc Grodman, August 2013
Dark Cloud: "There appear to be two main factors which have caused increased concern on the part of the FDA: the use of LDTs (laboratory-developed tests) in the exponentially growing field of molecular diagnostics, which includes tests that are used to assess high-risk conditions and supply information for critical decision-making; and the increasing number of LDTs being manufactured by corporations with publically traded assets and far-reaching markets … Concerns about FDA direct regulation of LDTs are myriad. The FDA is not known for its fast action, and thus submitting any test to it for approval is guaranteed to delay use of the test for an unforeseeable amount of time. Submitting tests to the FDA for approval is also an expensive proposition … From a laboratory perspective, (recent) draft guidance feels like the proverbial warning shot across the bow. It is a signal that the FDA will be regulating LDTs and that it's time for laboratorians to pay attention." - Medical Laboratory Observer, October 2012
Update: "Although the FDA has repeatedly expressed its intent to issue guidance on LDT regulation, significant industry pushback and a politically divided government in Washington, D.C., has likely thwarted the agency's action in this regard. After a long period of silence, however, the FDA is once again talking about LDT regulation." - GenomeWeb, June 2013
Bright Outlook: "Regional Cancer Care Associates LLC (RCCA), one of the nation's largest oncology physician groups, announced today it has partnered with GenPath Oncology, a business unit of Bio-Reference Laboratories, to bring advanced diagnostics to the practice's more than 230,000 cancer patients … The first step in this multi-year partnership is the development of a physician-owned immunophenotyping service for hematological malignancies. In addition, GenPath will also be providing a significant amount of esoteric diagnostic testing to RCCA's network of 92 oncology physicians in 27 locations. (GenPath) was selected from among the largest cancer laboratories in the nation due to its scientific expertise and longstanding relationships with many of RCCA's physicians." - RCCA, joint press release, June 2013
Bright Outlook: "The OIG said that the arrangement 'appears to permit (a lab) to do indirectly what it cannot do directly - that is, to pay compensation to the referring physician in the form of the fee discount in exchange for laboratory testing service referrals. The OIG said, 'There appears to be no reason for (a lab) to pay the per-order fees other than to secure referrals,' and that such a fee structure 'could potentially influence' physician referrals 'in a material way.'" - Bloomberg article on the reversal of a favorable OIG opinion that had previously cleared the way for labs to cover processing fees for physicians who directed business their way, April 2014
Bright Outlook: "We seized upon the opportunity to introduce our Inherited Cancers program to the market as soon as possible and believe that our strong capabilities as a leading genetics laboratory with a significant franchise in oncology and women's health is a distinct advantage. As we have done in the past, we took on the expense of accelerating our time to enter the market, despite the cost of doing so, because the market was available … There were also substantial start-up costs related to the GeneDx inherited cancer program, which includes tests for the BRCA genes; these expenses include substantial legal expenses associated with the roll-out and ongoing defense of this program. The program was announced in late August, and the company has received highly favorable provider response and indications of acceptance. Nonetheless, the program did not have time to meaningfully contribute to Q4FY13 revenues, although the company anticipates this will be a strong program throughout FY2014." - Bio-Reference CEO Marc Grodman, November 2013
Dark Cloud: "We rely on participating practitioners to refer their Horizon BCBSNJ (Blue Cross/Blue Shield of New Jersey) patients or forward their testing samples to participating clinical laboratories … LabCorp can perform BRCA-related genetic testing. (Starting this summer), LabCorp will be the only participating clinical laboratory to provide this important testing for your Horizon BCBSNJ patients." - Horizon Blue Cross/Blue Shield of New Jersey (the very state where BRLI last year forged a valuable partnership with a huge alliance of oncologists), May 2014
Bright Outlook: "We remain now - more than ever - a growth company, grounded in innovation. (Indeed), our leadership and innovation in genetics has never been more apparent … We believe the opportunities to grow our business have never been greater, (AND) we further believe that the greatest single opportunity in laboratory medicine is in the area of genetic testing. We introduced our Inherited Cancers program at the end of August, and the greatest challenge we are currently facing is just simply handling the high demand for our products … We believe our opportunities in this area over the next 12 or 18 months are outstanding." - Bio-Reference CEO Marc Grodman, December 2013
Dark Cloud: "Genetic tests for cancer are only a covered benefit for a beneficiary with a personal history of an illness, injury or sign/symptoms thereof (i.e. clinically affected). A person with a personal history of a relevant cancer is a clinically affected person … Genetic testing is considered a non-covered screening test for patients unaffected by a relevant illness, injury, or signs/symptoms thereof. Predictive or pre-symptomatic genetic tests and services, in the absence of past or present illness in the beneficiary, are not covered under national Medicare rules. For example, Medicare does not cover genetic tests based on family history alone. A covered genetic test must be used to manage a patient. Medicare does not cover a genetic test for a clinically affected individual … when the treatment and surveillance of the beneficiary will not be affected, or in any other circumstance that does not directly affect the diagnosis or treatment of the beneficiary." - UnitedHealthcare, coverage policy for members enrolled in its Medicare Advantage plans, April 2011
Bright Outlook: "Year over year, we saw an increase in volume at GeneDx of more than 70% … We will continue to invest in GeneDx -- and expect to nearly double the number of GeneDx employees from September 2013 to the end of FY 14 -- in order to meet the demand for our services … We know the bar we need to meet going forward. (SO) we've stepped up all efforts to feed the growth at GeneDx … It has been substantial. It's not a small business any more. Quite frankly, it's quite the opposite. And we continue to go in and do that because we need to be able to go and see the growth … These opportunities don't come along very often. when you have those opportunities, you just need to lay the tracks to feed the growth. And that's where we are now with genetics. So that's not going to stop." - Bio-Reference CEO Marc Grodman, March 2014
Dark Cloud: "A review last year of clinical guidelines issued by 30 of the largest physician specialty societies found that 17 of them explicitly integrated costs. (Moreover), in recent years, as part of a campaign called Choosing Wisely, many medical societies have submitted lists of the top five procedures, tests or productions to be questioned because they are considered wasteful … Traditionally, guidelines have heavily influenced the practice of medicine, and the latest ones are expected to make doctors more conscious of the economic consequences of their decisions, even though there is no obligation to follow them. Medical society guidelines are also used by insurance companies to help determine reimbursement policies." - The New York Times, April 2014
Bright Outlook: "I can't talk about GeneDx without at least mentioning somewhat the opportunity of inherited cancer. We've been doing single genes for years with a great reputation. We've been doing next-gen sequencing - meaning panels - for six years, before anyone else. The opportunity in inherited cancer is significant. (But) I have to tell you, these changes - and everyone talks about it and gets all concerned about it - don't happen overnight … We introduced our inherited cancer program, on a very small scale, in the fall. (Since then), we've increased our capacity at GeneDx substantially … This has been an incredibly highly competitive area, and there are a lot of laboratories that do the work … But the very fact, I believe, that we have the experience, the sales relationships and the reputation in the name of GeneDX (help) create a very special opportunity for what we're going to be able to achieve." - Bio-Reference CEO Marc Grodman, May 2014
Dark Cloud: "On Sept. 1, 2014, UnitedHealthcare will launch the Laboratory Benefit Management Program. Beacon Laboratory Benefit Solutions, Inc. (BeaconLBS®), a subsidiary of LabCorp®, will administer this new program to help improve quality of care and manage appropriate utilization for outpatient laboratory services … All outpatient laboratory services for these members will be subject to new requirements including advance notification and medical policies. As part of the program, ordering and rendering providers will use BeaconLBS Physician Decision Support for laboratory services. BeaconLBS' Physician Decision Support technology makes it easier to choose the right tests and laboratories for members using evidence-based guidelines and industry best practices … It also helps identify in-network laboratories that have the expertise to perform Decision Support Tests. These tests require advance notification through Physician Decision Support, (which) will indicate if the service meets UnitedHealthcare Medical Policy … If prior authorization was not requested (and/or) if notification was not received, the claim will be denied as laboratory liability." - UnitedHealthcare, notification to laboratories and physicians, May 2014
Bright Outlook: "Reimbursements have come down for all of us. We announced it in the fall of last year; other laboratories announced it as well. These are changes that we've dealt with, and it's been hard on the entire industry. The question is: How do you respond to it? Do you know how we respond to it? With growth. With growth … We respond to that by going in and doubling down on the areas where we do better than anywhere else, and by being able to grow the business … In the last year, we've increased our capacity at GeneDx, in terms of people, by probably about 40%. In the first quarter, we announced that our testing increased quarter-over-quarter by 70% … You can't go in and be successful in offering one test. You can't do it. It's too hard. You'd need to go in and do more. And we've set a standard in genetics, which all of us - who put our career on this - believe is differentiating … This is a great opportunity for us in every which way." - Bio-Reference CEO Marc Grodman, May 2014
Dark Cloud: "What do we not like? BRLI. CEO seemed v. bearish - more so because recent legislation favors LH/DGX (LabCorp and Quest). Volumes seem ok but they are still having issues getting paid so we expect their DSOs (days sales outstanding) to still be relatively inflated this quarter. These guys seem to be getting closer to selling given what they view to be an unfavorable reimbursement environment." - William Blair analyst Amanda Murphy, research note issued after meeting with CEO Marc Grodman, May 2014
Take a look at InheriGen, the flagship panel sold by the company's booming genetics division, for a rather obvious clue. A $3,600 screening tool packed with tests for all sorts of wildly obscure inherited disorders - far exceeding the handful recommended for the sound practice of medicine - InheriGen literally costs so much that it can easily double, if not triple, the normal cost for comprehensive prenatal care. Even GenPap, the notoriously elaborate -- and expensive -- panel aggressively marketed by the company's gigantic women's health division - looks somewhat modest in comparison, despite all of the controversy surrounding that glorified Pap smear.
"The reason why Bio-Reference can get away with this," explained one of several former sales representative who volunteered similar stories, "is because the company trains you to routinely say, 'There is no risk to the doctor or the patient. If the insurance company doesn't pay, we'll reduce the bill.'
"Some reps would receive up to 15 calls a day from patients upset about getting stuck with a $2,000 bill for GenPap, when they just wanted a regular Pap smear. We dealt with complaints like that every day. It was our job to take those calls and reduce the bill to $195 (a price resembling those charged for more traditional Pap smears.) If a patient sounded really angry - and we felt worried that they might report us - we could zero out the entire balance …
"Then Bio-Reference would just write it off. They wrote off a lot of business when I was there."
That sort of business strikes many doctors -- including a prominent member of the National Physicians Alliance -- as a pointless, if not dangerous, waste of precious resources in the first place. Even before former NPA president Dr. Cheryl Bettigole learned that Bio-Reference commands thousands of dollars for its popular Inherigen and GenPap tests, she felt compelled to sound a loud alarm in The New England Journal of Medicine about expensive screening tools that look almost cheap in comparison. So Dr. Bettigole likely meant business when she responded to that jarring discovery with plans to approach NPA policymakers about taking a public stand against the even pricier screening panels that Bio-Reference has successfully pitched to so many oblivious physicians as phenomenal deals.
"It's demonically brilliant," Dr. Bettigole bluntly declared upon hearing the crafty sales pitch relayed to TheStreetSweeper by former Bio-Reference insiders once forced to use that deceptive marketing strategy themselves. "I would like to send information about these tests to our policy committee. This is exactly the kind of issue that the NPA looks at …"
"We have an OB/GYN (obstetrician/gynecologist) on our committee," Dr. Bettigole further volunteered. "ACOG, the American Congress of Obstetrics and Gynecology, is wonderfully productive," too.
Talk about a possible disaster.
As a lab that depends heavily (if not entirely) on brisk sales of big-ticket screening panels to fuel its outsized growth, Bio-Reference can hardly afford for an influential medical society to publicly denounce the flagship panels marketed by the very specialty divisions responsible for so much of its remarkable success. With health insurers already intensifying their scrutiny of its lucrative specialty tests, a trend vividly illustrated by the recent surge in its days sales outstanding (DSOs) and its bad-debt expense, Bio-Reference better hope that it can avoid pesky interference from powerful - and increasingly cost-conscious - medical societies that often play a vital role in shaping coverage decisions.
For now, at least, Bio-Reference continues to display unwavering confidence in its future prospects. Don't forget what happened the last time that Bio-Reference chose to casually ignore - and then boldly downplay - legitimate threats that struck TheStreetSweeper as rather obvious, though. After riding an overheated rally all the way to a record-breaking high, with its stock literally reaching its peak one day earlier, Bio-Reference issued a rare profit warning that largely blamed the same issues previously dismissed by management for a massive shortfall that brutally punished its highflying shares.
Sinking even lower in the six months that have since followed, Bio-Reference never recovered that devastating hit.
Disclosure: The owners of TheStreetSweeper established a short position in Bio-Reference Laboratories ahead of this article and stand to profit on any future declines in the stock price. As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking any financial positions in the companies that they cover. To contact Melissa Davis, the senior editor of the website and the author of this story, please send an email to firstname.lastname@example.org.