A Closer Look At The Exact Sciences-Genomic Health Deal

by Jondavid Klipp | Sep 15, 2019 | Exact Sciences, Genomic Health

A Closer Look At The Exact Sciences-Genomic Health Deal

Last month, Laboratory Economics took an abbreviated look at Exact Sciences’ blockbuster deal to acquire Genomic Health. Below we provide a more in-depth review of some of the interesting aspects of the agreement.

The Bidding Process
In October 2017, Genomic Health commenced, with the assistance of Goldman Sachs, a search for a potential buyer. Goldman contacted a total of 27 entities, including Exact Sciences. Sixteen of the parties contacted, including Exact Sciences, entered into confidentiality

agreements and received management presentations by Genomic Health. Two parties offered preliminary bids, with one indicating a price range of $32 to $35 per share and the other at a range of $38.50 to $39.50 per share. These bids valued Genomic Health at approximately $1.2 billion.

Exact Sciences was not one of the bidders. Laboratory Economics speculates that the unnamed bidders might have included LabCorp, Quest Diagnostics, Myriad Genetics or Roche. In any case, following completion of due diligence, no final offers were made and the process ended without a
deal in February 2018.

Meanwhile, a little over a year later, Exact’s CEO Kevin Conroy had a change of heart and contacted Kim Popovits, Chairman and CEO of Genomic Health. At a dinner meeting with Popovits on J

une 13, Conroy proposed to acquire Genomic Health for $64 per share.

Conroy’s initial offer was rejected, but after a few weeks of haggling, Exact agreed to pay $72 per share, or approximately $2.78 billion, comprised of $1.06 billion of cash and $1.72 billion of Exact Sciences’ stock. The agreement was finalized late in the evening on July 28 and publicly

announced the next day.

Extraordinary Valuation
The deal is expected to be completed by the end of 2019. The purchase price works out to be $2.54 billion, after accounting for $244 million of cash and securities that Genomic Health has on its balance sheet. At $2.54 billion, Exact Sciences is paying 5.6x for Gen

omic Health management’s forecast revenue of $452 million in 2019, 34x its forecast EBITDA of $74 million, and 65x its forecast free cash flow of $39 million.

Golden Parachutes
Completion of the sale to Exact Sciences will trigger executive severance plan payments (i.e., golden parachutes) for Genomic Health’s top executives. For example, Popovits will receive a severance package of cash and vested options and restricted stock worth $13.4 million. Genomic Health’s Frederic Pla, PhD, Chief Operating Officer, will receive a package worth $5.7 million, and CFO Brad Cole will get $5.3 million.

Minimal Cost Synergies
Exact’s Conroy has described the combination of the two companies
as a “1+1=3” situation. But financial projections contained in Exact Sciences SEC filing for the transaction project pretax operating synergies of only $8 million in 2020, $17 million in 2021, and $25 million annually thereafter.

These projected cost savings represent only 2% of the operating expenses at the combined companies and are comprised mainly of the elimination of public company costs at Genomic Health, including job cuts at the C-suite executive level.

The combined company is projected to become free cash flow positive in 2021.

Longer Term R&D Benefits
The addition of Genomic Health and its flagship OncoTypeDx test will help Exact Sciences diversify its business, now entirely dependent on its Cologuard colorectal cancer screening test.

Longer term, Katherine Tynan, PhD, President of Tynan Consulting LLC (San Francisco, CA), believes that Genomic Health’s very sophisticated R&D team and access to specialty oncologist channels may accelerate Exact Sciences’ development and commercial launch of new cancer tests. For example, over the past 20 years, Genomic Health has completed 125 clinical studies, covering multiple indications and been published in 156 peer-reviewed journal articles.

At the recent Baird Global Healthcare Conference, Exact’s CFO Jeffrey Elliot noted that Genomic Health employs 100 sales reps that market directly to oncologists in the United States. “They’ll enhance our ability to collect patient samples more rapidly….Patient samples are the biggest rate limiter to developing new diagnostic tests. You need samples to design your test and verify that it works,” explained Elliot.

New tests under development at Exact Sciences include a blood-based test panel of six DNA biomarkers designed to detect liver cancer for those at highest risk—people with hepatitis B or cirrhosis. Exact hopes to launch an LDT version of the test next year.

The Potential for a Liquid Biopsy for Colorectal Cancer
There are at least 13 companies that have developed or are developing liquid biopsy tests based on the detection of biomarkers in the blood (e.g., CellMax Life, Epigenomics AG, Freenome Inc., GRAIL Inc., et al.).

For example, Epigenomics AG received FDA approval for its liquid biopsy screening test for colorectal cancer, Epi proColon (Septin 9), in April 2016, and began offering the test commercially in May 2016. However, Tynan notes that the company has had a number of challenges, including PAMA,
on the way to payment and market access (CPT 81327: Medicare rate of $192). “They haven’t established intimacy with physicians and payers as the test is a distributed IVD, and the big commercial labs are difficult channels to raise awareness for new tests entering the market,” notes Tynan.

The real question is whether blood-based DNA analysis is a viable tool to enhance detection of advanced adenomas (precancerous lesions), according to Tynan. “Currently the literature suggests that benign colon lesions display extensive genetic heterogeneity, that they are not prone to release DNA into the circulation and are unlikely to be reliably detected with liquid biopsies, at least with the current technologies,” she adds.

Given these performance and evidentiary challenges, Tynan believes that FIT, colonoscopy, Cologuard and to a much lesser extent Epi proColon are likely to remain the only options for colorectal cancer screening for the foreseeable future.

PAMA Rate Adjustments Looming In 2021
As a final note, Laboratory Economics wonders if the second PAMA Medicare rate adjustment cycle motivated either Genomic Health or Exact Sciences to jump into each other’s arms. The privatepayer data collection period (January 1 through June 30, 2019) is over, so both companies have a
very good idea of where Medicare rates for their proprietary tests will be set for 2021-2023. CMS is scheduled to announce the new rates next summer.

PathGroup Buys Southeastern Pathology Associates

by Jondavid Klipp | Sep 15, 2019 | Lab Acquisition, PathGroup

PathGroup Buys Southeastern Pathology Associates

SEPA was started as an outpatient pathology laboratory in 1992 by its Medical Director Patrick Godbey, MD and Chief Medical Officer Mark Hanly, MD, who met while in training at the Medical College of Georgia. Over the next 20 years, their practice grew and they started to take on hospital contracts in central and southeast Georgia and northern Florida, and started a clinical laboratory.

SEPA sold its clinical laboratory business to LabCorp in 2013. Since then, SEPA has focused on its hospital contract business and to a lesser extent providing outreach anatomic pathology services to physician office clients. Its larger contracts include laboratory medical directorships at five hospitals
affiliated with Baptist Medical Center (Jacksonville, FL), and two hospitals affiliated with Southeast Georgia Health System (Brunswick, GA). SEPA’s main anatomic pathology lab is located in Brunswick and it has five smaller freestanding AP labs in Georgia, Florida and South Carolina.

Drs. Godbey and Hanly will continue in their current roles at SEPA and will also join a newlyformed Medical Executive Committee at PathGroup.

Pritzker Private Capital (Chicago, IL) took a majority stake in PathGroup in the summer of 2016. The size and pace of PathGroup’s acquisitions now seems to be accelerating, observes Laboratory Economics

Study: Cologuard Less Effective And More Costly Than Alternatives

by Jondavid Klipp | Sep 15, 2019 | Cologuard, Exact Sciences

Study: Cologuard Less Effective And More Costly Than Alternatives

Exact Sciences’ Cologuard test is less effective at saving lives and more costly than other CMSreimbursed colorectal cancer screening tests, according to a study published September 4 in PLOS One, a peer-reviewed scientific journal published by the Public Library of Science.

The study was requested by CMS and conducted by investigators at the Cancer Intervention and Surveillance Modeling Network. Lead authors were Steffie Naber, PhD, from the Department of Health Care Innovation & Evaluation at University Medical Center Utrecht in the Netherlands, and Amy Knudsen, PhD, from the Institute for Technology Assessment at Massachusetts General Hospital. No conflicts of interest were reported.

The researchers used three different models to simulate a cohort of previously unscreened 65-yearold Americans who are screened with Cologuard every three years, or one of six other CMS-reimbursed screening strategies.

Life Years Gained
Compared to no screening, triennial Cologuard testing resulted in an average of 82 life years gained (LYG) per every 1,000 simulated individuals. This was more than for sigmoidoscopy (80 LYG) at a five-year interval, but less than every other simulated strategy. The most effective strategy by far was a 10-yearly colonoscopy (104 LYG).

The reduction in lifetime risk of death from colorectal cancer was lowest for Cologuard (66%reduced risk) and highest for 10-yearly colonoscopy (84%).

Cost Effectiveness
The study found that at its 2017 reimbursement rate of $512, Cologuard was the most expensive strategy. Two of the models showed that reimbursement for triennial Cologuard testing would need to be drastically lower, in the range of $6–18 per test, for it to be cost-effective. In the third
simulation model, there was no level of reimbursement at which Cologuard would be cost effective (unless priced below zero).

The most cost-effective strategies were 10-yearly colonoscopy and an annual fecal occult blood test (either guaiac-based or FIT).

What can CMS do?
The Medicare Part B program spent $170 million on Cologuard testing in 2018 and analysts’ projections suggest Part B spending on the test will rise by 78% to about $300 million this year. But there isn’t a clear-cut way for CMS to change its reimbursement rate for Cologuard under PAMA regulations. However, private insurance companies are likely to jump on the study’s findings as rationale to cut their rates. Over the long term, this should lead to significantly lower Medicare rates for Cologuard.

Cancer Genetics Inc. Sells Businesses To Raise Cash & Lower Debt

by Jondavid Klipp | Aug 15, 2019 | Cancer Genetics, siParadigm

Cancer Genetics Inc. Sells Businesses To Raise Cash & Lower Debt

Cancer Genetics Inc. (Rutherford, NJ) has sold its clinical lab business to siParadigm LLC (Pine Brook, NJ) for an initial payment of approximately $1 million, plus an earn-out based on test volume over the next 12 months. Cancer Genetics’ clinical lab business specializes in cancer testing, and reported revenue of $7.4 million in 2018, down from $10.8 million in 2017.

siParadigm operates a cancer testing lab in northern New Jersey. The company was founded by its President Sherif A. Nasr, MD in 2003. Prior to founding siParadigm, Nasr was an Associate Medical Director at Quest Diagnostics.

In a separate transaction, Cancer Genetics sold its biopharma services business to Interpace Diagnostics (Parsippany, NJ) for approximately $23.5 million, including assumed debt. The biopharma business, which reported revenue of $14.8 million in 2018, performs molecular tests at labs in
Rutherford, NJ and Research Triangle Park, NC for cancer drug development clients.

Following these transactions, Cancer Genetics will focus on its remaining discovery services business, which performs preclinical studies and provides testing services to guide new drug development for biotech and pharmaceutical companies. The company’s discovery business generated
revenue of $5.2 million in 2018, up from $3.7 million in 2017.

Cancer Genetics aims to lower debt, raise cash and trim losses through the sale of the two businesses. Since its inception in April 1999 through March 31, 2019, Cancer Genetics has accumulated losses of $162 million. Most recently, the company reported a net loss of $4.7 million on revenue of $6.8 million for the three months ended March 31, 2019.

Cancer Genetics went public through an IPO in June 2013 and shortly thereafter its stock hit an all-time high of $21 per share giving it a market value of $100+ million. Most recently, its shares were trading at $0.12 for a market capitalization of $7 million.

AMCA Data Breach Victim List Continues To Grow—What A Mess!

by Jondavid Klipp | Aug 15, 2019 | AMCA, Cybercrime

AMCA Data Breach Victim List Continues To Grow—What A Mess!

The list of laboratories affected by the data breach at American Medical Collection Agency (AMCA), which filed for bankruptcy on June 17, continues to grow. So far, at least 24 labs and more than 25 million patients are estimated to have been affected by the incident.

AMCA had been the nation’s largest debt collector for past-due lab test bills. Hackers gained access to AMCA’s online payment system between Aug. 1, 2018 and March 30, 2019. The target was patient credit card information, which is now being sold on the dark web (see LE, July 2019).

In addition to Quest Diagnostics, LabCorp and BioReference Labs, other former AMCA lab clients affected by the hack include many of Sonic Healthcare USA’s subsidiary labs including Clinical Pathology Labs, Sunrise Medical Labs, CBLPath and American Esoteric Labs. In addition, Sonic acquired Aurora Diagnostics in January and many of its subsidiary labs had been AMCA clients as well. Other labs affected by the breach include CompuNet Clinical Labs, Inform Diagnostics, Natera and Penobscot Community Health Center in Maine.

The AMCA data breach is a huge headache for both the legal and information technology departments at affected labs. For example, Quest Diagnostics says that approximately 31 class action lawsuits related to the AMCA data hack have been filed against it. In addition, Attorneys General
offices from numerous states and the District of Columbia and certain U.S. senators are investigating the situation and requesting information from affected labs.

And finally, there is also the question of what happens to the legitimate past-due balances owed by more than 25 million patients to the affected labs? Assuming an average past-due balance of $20 per patient and a collection rate of 10% suggest there might be a total of $50 million worth of
writeoffs incurred by former AMCA lab clients.