Why Are Companion Diagnostics So Important?

Patients, doctors, and investors have been excited about new frontiers in oncology, but can these drugs be useful without companion diagnostics?

Jun 30, 2014 at 1:00PM

Over the last year, biotech investors have been consumed by excitement surrounding a new class of cancer drugs that uses the body's own defenses to battle tumors. Unlike the poisonous chemotherapies of the past, these cancer smart bombs, known as immunotherapies, prompt the immune system to attack only cancer cells based on their unique molecular signatures. For these therapies to work we'll need an in-depth understanding of the chemistry of a cancer cell and how it can differ between patients that seem to have the same disease. Once we do, these biomarkers will be used to develop personalized treatment plans for every cancer patient.

As the 2014 ASCO conference has come and gone, it has become only more clear that while patients may appear to share disease symptoms, their treatment options will be greatly dictated by the chemistry of their disease. The much-discussed PD-1 and PDL-1 inhibitors provide a great example. Some tumors express the PDL-1 marker, which cloaks the tumor from immune attack. PD-1 and PDL-1 inhibitors remove the cloak to promote an immune response, but should theoretically work best in patients with higher PDL-1 expression.

At ASCO, Bristol-Myers Squibb (NYSE:BMY) presented data from a Phase 1b trial testing its PD-1 inhibitor, nivolumab, as a monotherapy in patients with non-small cell lung cancer, or NSCLC. Those data, displayed in the table below, show how critical PDL-1 expression is for efficacy.

 # of PatientsOverall Response Rate
PDL-1 pos 10 50%
PDL-1 neg 7 0%
PDL-1 unavailable 3 33%
Total 20 30%

The trial is undoubtedly small and was designed primarily to measure safety, but these results are suggestive enough that Bristol-Myers and other immuno-oncology players have begun more robust late stage trials that focus on PDL-1 positive patients.

Why invest in companion diagnostics?
It's natural to ask if there's an investment opportunity wrapped up in the growing demand for companion diagnostics as immuno-oncology evolves. While the science may seem complex, many of the diagnostic techniques with potential for the clinic are already being employed in basic research labs throughout academia. So while the federal sequester and NIH budget questions have limited growth for life science tools providers in the academic sector, the clinical sector remains a growing and lucrative market.

That's been the case for Qiagen (NASDAQ:QGEN), the maker of basic laboratory kits and supplies ubiquitous in biology labs across the country. In 2013, as the NIH was tightening its belt, Qiagen saw revenue from academic customers drop 2% YoY, while revenue in its molecular diagnostics segment grew 7% and now represents 50% of Qiagen's sales.

Qiagen's diagnostic offerings center around its QIAsymphony family of automated sample preparation and analysis equipment. Diagnostic kits-such as the recently FDA approved therascreen KRAS RGQ PCR kit paired with Amgen's Vectibix-serve as a recurring revenue stream compatible with the QIAsymphony device, effectively anchoring Qiagen's role in diagnostic medicine. With three companion diagnostics approved in the US and a handful more in Europe and Asia Qiagen is actively expanding its menu of tests, making QIAsymphony a more and more relevant device with each new approval. The company's bottom line has been crippled by restructuring and other administrative expenses, but its solid 22% free cash flow growth tells a different story, and suggests that the transition to a diagnostic-focused business is paying off.

Recognition of the growth opportunities in cancer diagnostics also fueled Agilent Technologies' (NYSE:A) 2012 acquisition of Dako, the maker of diagnostic equipment, antibodies, and kits, with a particular focus in oncology. Diagnostics only contributed 7% of Agilent's revenue in the most recent quarter, but at 7% growth it represents the second fastest growing segment of the company's nine end markets. Its pipeline continues to show promise, supplementing partnerships with Bristol-Myers, Pfizer, AstraZeneca, Amgen, and Eli Lilly with a newly announce collaboration with Merck. That will have Agilent's diagnostic paired with what many consider to be the leading PD-1 inhibitor in a market where molecular diagnostics will be in high demand. When Agilent spins off its slower growing electronics segment in November, a streamlined focus on life sciences and diagnostics could help it harness that growth potential.

Illumina will also be worth a look for those intrigued by the prospects of companion diagnostics. Best known for breaking the $1,000 per genome sequence barrier, Illumina also makes smaller bench-top sequencing devices for research and clinical settings with its MiSeqDx next generation sequencing device. In November, the FDA approved Illumina's cystic fibrosis test as the first clinically available next generation sequencing diagnostic tool. Now at the forefront of genetics technology and with an approved platform under its belt, Illumina is sure to be a major player in both diagnostics and research-focused sequencing.

Bottom line
While developments in oncology are unlocking brilliant new approaches to treating cancer, new therapies will actually be applicable to fewer patients. Targeted therapies will enable clinicians to pinpoint tumors and spare healthy tissue, but will require new diagnostic tools to inform personalized treatment options. Companion diagnostics that are marketed along side new drugs present a growing industry that will continue to expand with immuno-oncology.

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Seth Robey owns shares of Amgen. The Motley Fool recommends Illumina and Qiagen. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

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KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

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That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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