Will Mayo v. Prometheus Fire Up Pharma?: Kevin DeGeeter
Source: George S. Mack of The Life Sciences Report (5/10/12)
Newly discovered biomarkers could provide physicians with information that will aid in the diagnosis and treatment of disease. The big question for investors is whether, in light of the recent Supreme Court ruling Mayo Collaborative Services Inc. v. Prometheus Laboratories, companies will be able to profit from that innovation. In this exclusive interview with The Life Sciences Report, Kevin DeGeeter, senior analyst with Ladenburg Thalmann & Co. Inc., shares the names of a select group of companies with good prospects, focusing on those targeting "sweet spots" in personalized medicine.
The Life Sciences Report: You are focused on personalized medicine. On March 20, the U.S. Supreme Court ruling in Mayo Collaborative Services Inc. v. Prometheus Laboratories was handed down. At issue was whether using a diagnostic test to adjust a drug dosing regimen could be patented. The decision was unanimous in favor of Mayo Foundation for Medical Education and Research (nonprofit) on the grounds that a company cannot patent laws of nature. This is a sweeping decision, and there is no appeal. What is the immediate effect of this?
Kevin DeGeeter: The immediate effect is to create more confusion in the diagnostics group than a material change in the commercial landscape would. Obviously, Mayo will now be able to go out and sell its specific test. The test that Prometheus (owned by Nestle S.A. [NESN.VX]) was selling isn't really material in the commercial sense of the market. The question is: What does this mean for intellectual property that's been issued to other companies in this space, and how does this impact potential competition?
I'd be cautious about extrapolating too much from the Mayo v. Prometheus decision. The rubber will hit the road when future cases end up in the U.S. Circuit Court of Appeals, which handles more day-to-day, mundane intellectual property disputes. How does that group of judges interpret this specific decision from the Supreme Court? On that issue, it's important not to take too broad a view of what the court was saying.
TLSR: Will this case be predictive of ACLU v. Myriad Genetics?
KD: It's not at all predictive of ACLU v. Myriad. The specific issues in Mayo v. Prometheus pertain to what is known as a method patent-machine versus transformation. U.S. patent law has long held that something existing in nature cannot be patented. Of course, underlying everything in the life sciences are basic observations about nature. What the court said in Mayo v. Prometheus is that Prometheus had not done anything novel and had not met the standard of achieving a transformative act. In ACLU v. Myriad, the central issue is whether a diagnostic company can seek and be granted patent protection pertaining to the isolation of a specific gene or gene variant in the body. It refers to a composition of matter patent, which really wasn't impacted one way or the other in Mayo v. Prometheus.
TLSR: How might the Mayo ruling affect drug development with biomarker assays? A developer patents a drug based on its composition of matter and methods, and the drug goes through clinical trials with a biomarker assay included in the package submitted to the U.S. Food and Drug Administration (FDA). What is the effect?
KD: At the margin, it is incrementally positive if you're a drug company. If there is a biomarker for a subpopulation of patients, the FDA strongly encourages drug companies to identify the population that will benefit most. In an environment where pricing is difficult, if you are able to identify a narrower patient population that may get a greater magnitude of benefit, that would ultimately help a drug company in the form of smaller clinical trials and a stronger position with insurance companies. From the drug maker's perspective, a diagnostic test that is low cost and widely available improves patient access and is more appealing to insurance companies, which are looking at the total cost of providing both the screening test and the drug. Every dollar that goes into the pocket of a diagnostic company and its companion diagnostic is in essence a dollar that comes out of the pocket of a pharmaceutical company.
TLSR: Do you think that Mayo v. Prometheus is going to have a chilling effect on development of diagnostics, but will actually be helpful in drug development where biomarkers are used?
KD: Yes. Overall, my view is that Mayo v. Prometheus is likely to be negative with regard to new companion diagnostics being brought to market. From a drug company's perspective, anything that lowers the bar for diagnostic intellectual property protection is going to be welcomed because it may increase access to diagnostic testing to a wider audience, which ultimately means more people could use the drug associated with the companion diagnostic.
TLSR: Kevin, is there a sweet spot right now in personalized medicine?
KD: The sweet spot is in oncology and for single-marker tests, which tell you something about one specific mutation or gene variant. That is where, on a day-to-day basis, clinicians use personalized medicine in the most tangible way for their patients. From a regulatory perspective, this is where the FDA has been clear about how the world of diagnostics and the world of drugs can come together.
TLSR: Is a genomic marker more bulletproof than a molecular marker from a patent standpoint?
KD: It's not necessarily more or less bulletproof.
TLSR: Which companies are you talking to investors about currently?
KD: There are several that play into your question about where the sweet spot is in personalized medicine. NeoGenomics Laboratories (NGNM:OTCBB) provides oncology testing services and works directly with the pathologist, who then reads the tests from a given specimen and hands that information off to the oncologist providing day-to-day care to a patient. The company has benefitted from the increasing complexity of cancer testing, specifically with pathologists and oncologists working in smaller communities where capital budgets may not be available for the latest equipment and the full range of testing that a patient facing a diagnosis of cancer may need.
Last quarter we saw really nice 72% year-over-year growth, which is coming from test volume growth. NeoGenomics is a really interesting smaller-cap name that plays directly off the themes we've been talking about today. Many of the tests it provides, although very complex, are not proprietary to the company, which means NeoGenomics does not have the direct intellectual property issues overhanging other companies in the diagnostic space at the moment.
TLSR: Serving pathologists who don't have access to a large teaching hospital or major medical center is an interesting business model. You recently wrote that the "tech-only" segment is roughly 70% of NeoGenomics' business. What about the remaining 30%? Are there pathologists working at the company? Does it perform as a traditional reference lab?
KD: The other 30% of NeoGenomics' business, as you correctly describe it, provides both analysis and staff pathologists who can say "that's cancer" or "that's not cancer," then relay the information back to the community oncologist. To be clear, most companies in this space, and most of the larger companies, such as Quest Diagnostics Inc. (DGX:NYSE) or Laboratory Corp. of America Holdings (LH:NYSE), provide both the analysis and the interpretation.
The differentiating point in the NeoGenomics model is its focus on the "tech-only" segment. Part of the reason its business is growing so quickly is because while pathologists know how to read slides and interpret results, there's such a rapid change in the underlying technology that there's a pressing need for a company like NeoGenomics to help bridge the gap.
TLSR: Your next company?
KD: The next company is in the cardiovascular diagnostic area. BG Medicine (BGMD:NASDAQ) has two diagnostics that it is bringing to market. One is CardioSCORE, a seven-biomarker test that predicts a patient's risk of having a heart attack. Obviously, the test appeals to an extremely large market because heart attack is of major concern, both medically and psychologically, for most Americans as they get older. The test has been filed with the FDA for a 510(k) clearance. The company should hear back on the decision later this year. We think CardioSCORE could be a very substantial test for the company.
The second product tests for galectin-3, a biomarker for heart failure. Patients with high levels of galectin-3 have more fibrosis in the heart. BG has been able to show that a patient with more fibrosis in the heart has a higher risk of heart failure and of having a negative outcome. One of the reasons we like the galectin-3 test-a really interesting second prong to the BG story-is that there is a specific molecule in the rinds of certain fruits and vegetables that will lower galectin-3 levels. This is an actionable piece of information that doctors can talk to patients about. Physicians can recommend dietary supplements or foods that contain a lot of the active agent to bring galectin-3 levels down over time and improve a patient's prognosis.
TLSR: I spoke to the company eight years ago when it was called Beyond Genomics. Its focus back then was on oncology, and it saw itself as a systems biology company. What transformed it?
KD: The Beyond Genomics business model ran its course, probably about six years ago. It was one of the earliest companies to look at how basic insights from mapping the human genome could be translated into clinically useful therapeutics. There are a couple of things that are valuable and interesting in the company's lineage. First off, unlike nearly all diagnostic companies, BG started off with a more therapeutic focus. In practice that meant running large clinical studies and thinking about clinical data as being the central piece of how to develop value. Most of the early genomics companies found that to create value they needed to be able to find a relatively small number of projects to work through to commercial completion. In the case of BG Medicine, the two lead programs ended up being in cardiovascular health.
TLSR: What is the next company you wanted to speak about?
KD: I want to talk about Sequenom Inc. (SQNM:NASDAQ). The company's MaterniT21 test is a new, noninvasive test to screen for Down syndrome and other potential birth defects. The test is based on a sequencing platform from Illumina Inc. (ILMN:NASDAQ), so it taps into and combines cutting-edge genetic sequencing technology with the clinical ability to bring better products to the market. The product has shown very strong performance, with 99%+ sensitivity and accuracy in detecting Down syndrome. It was launched in October and has so far, admittedly early, exceeded our expectations in terms of commercial adoption. It's a large market, more than 4 million (NYSE:M) pregnancies a year in the U.S.
I think it's interesting in the context of the conversation we're having that this is a case where intellectual property is important. Specifically, Sequenom has licensed some of the earlier patents on processes for extracting and interpreting fetal DNA from maternal blood. At least three private companies have announced plans to launch-or have launched-similar products. Each company has filed a lawsuit against Sequenom, claiming that Sequenom's broad patents are either not applicable or not valid. The question is working its way through the court system. The first of the suits was filed in December 2011, so we don't have much feedback yet in terms of the ultimate legal outcomes. In the next six to 12 months, I think we'll begin to see some more clarity.
From the investor's standpoint, there is a tremendous amount of interest in this product. The test is technologically complicated and is first to market, before potential competitors. If the court ultimately deems that other competitors can't enter the market or can't enter the market without licensing Sequenom's intellectual property, that's additional upside in our view.
TLSR: Do you have another company you wanted to speak about?
KD: Yes, a last one that's germane to the topic. Genetic Technologies Ltd. (GENE:NASDAQ; ASX:GTG) launched a pretty interesting test for predicting a woman's nonhereditary risk of breast cancer. You're familiar with Myriad Genetics Inc. (MYGN:NASDAQ), which provides the BRACAnalysis test for BRCA1 and BRCA2 gene mutations to determine if a woman is at high risk for eventually developing breast or ovarian cancer. The BREVAGen test from Genetic Technologies also tells a woman something about her genetic risk of eventually developing breast cancer, but it looks at markers that are not hereditary.
TLSR: Somatic mutations?
KD: Precisely. The BREVAGen test was launched last June, and the company's sales force effort has only begun to ramp up in the last three to four months. The other reason I think it's interesting in light of our discussion is that part of the company, admittedly a legacy business model, was involved in gathering intellectual property around what was known as noncoding DNA (ncDNA) and then licensing that intellectual property to third parties, diagnostic companies and testing labs. In the last couple of years, it has used a carrot-and-stick approach in dealing with companies that want to license. For those that the company thinks are infringing, it has been systematically filing lawsuits and then seeking licenses as a means of settlement. The company has been able to recoup pretty significant economic inflows from that strategy. This is an example of a different model used to capture some of the value of discoveries made through observations in genomics, but it's been a very constructive element for the company.
We think that the intellectual property it's been licensing really isn't affected by the Mayo v. Prometheus decision specifically, because it involves very important connections between underlying biology and discoveries that were not at all obvious. This is an important distinction when interpreting Mayo v. Prometheus. The court was saying a company can't use something that was obvious to anyone in this field. In the case of a lot of the intellectual property on ncDNA, when those patents were filed there was very little understood about the basic biology, and the patents actually helped to inform our understanding.
TLSR: It was called "junk DNA" actually.
KD: Exactly. We had an entire vernacular that described why it wasn't relevant. Now many of those same segments of DNA are central to and backbone components of what we look for in certain genetic tests. That's an important distinction. I look at a company like Genetic Technologies, and I don't want to lump it in with players that may be in a more challenged position due to the outcome of the Prometheus case.
TLSR: Kevin, thank you.
KD: Thank you.
Kevin DeGeeter is a director at Ladenburg Thalmann & Co. Inc. He is responsible for equity research coverage of personalized medicine and medical device companies with market capitalizations between $50M and $5 billion. His coverage focuses on molecular diagnostics and medical equipment used to treat oncology, cardiovascular disease and infectious disease, as well as related research markets. Prior to joining Ladenburg Thalmann he was an analyst at Oppenheimer & Co., with responsibility for small-cap molecular diagnostic and biotechnology stocks. He has 10 years of buyside and sellside research experience, including positions with J. P. Morgan, PaineWebber, Natexis Bleichroeder and Manning & Napier Advisors. DeGeeter received a bachelor's degree in economics from Colgate University.
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1) George S. Mack of The Life Sciences Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: NeoGenomics Laboratories and Genetic Technologies Ltd. Streetwise Reports does not accept stock in exchange for services.
3) Kevin DeGeeter: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None.
4) Ladenburg Thalmann & Co. Inc. acted in an advisory capacity on a private securities transaction for Genetic Technologies, Ltd. (NASDAQ:GENE) in the last 12 months. Ladenburg Thalmann and Co. received compensation related to investment banking services from Genetic Technologies, Ltd. in the last 12 months. Ladenburg Thalmann & Co. Inc. expects to receive or intends to seek compensation for investment banking services during the next three months for all companies mentioned. Directors of Sequenom Inc. have an affiliation with members of the boards of directors of companies in which the chairman of Ladenburg Thalmann Financial Services Inc., the parent company of Ladenburg Thalmann & Co. Inc., has a beneficial interest. Genomic Health Inc. (NASDAQ:GHDX) and Teva Pharmaceuticals Industries (NYSE:TEVA) have joint distribution interests. The chairman of Ladenburg Thalmann Financial Services Inc. is also chairman of Teva. The chairman of the board and controlling shareholder of Ladenburg Thalmann Financial Services Inc., the parent company of Ladenburg Thalmann & Co. Inc., is the chairman of the board, CEO and director and controlling shareholder of Opko Health Inc. Members of the board of directors of OPK have a noninvestment banking securities-related relationship with Ladenburg Thalmann & Co. Inc. Ladenburg Thalmann & Co. Inc. makes a market in shares of NGNM, BGMD, SQNM, GENE and MYGN.
5) Beyond Genomics is not covered by Ladenburg Thalmann & Co. Inc. and is not a recommendation to buy, hold or sell the security.
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