Vijay Aggarwal is an expert in navigating investment strategy while the industry faces changes in reimbursement and product development practices. In this exclusive 2-part radio interview, Dr. Aggarwal takes the temperature of the sector, and outlines important trends to watch in 2013.
In Part II of our interview with Vijay Aggarwal, Managing Partner of the Channel Group, we explore trends in the space, reimbursement issues, and the state of equity financing. Dr. Aggarwal also discusses changing investment strategy with regards to evaluating risk factors, a more sophisticated level of proof, and an evolving emphasis on the achieving and maintaining revenue during early financing rounds.
Listen to Part I of this exclusive interview here.
Matt Margolis: So Vijay, let’s talk reimbursement, what trends and changes have you seen in the last few years?
Vijay Aggarwal: The general trend line in overall unit cost in diagnostics unfortunately has been a negative trend line for decades. And that trend line continues: the unit reimbursements continue to come down, via a variety of mechanisms; I would say that this 2012-2013 has been frankly some of the most unsettling and uncertain period of time in reimbursement.
We’ve seen a dramatic cut in one of the main pathology codes which is troubling many people. 2013 represents a year where insurance companies will be doing a significant upgrade or change to the way the molecular diagnostic tests are coded and paid for. There’s significant uncertainty right now as to how those new codes will be applied, how those new codes will be paid and whether the impact on reimbursement will be negative or positive. My own view is that the trend line of negative reimbursement will continue, maybe with a different flavor as a result of the recoding of molecular diagnostics. But I think we all need to be prepared for the unit price coming down, which I think puts pressure on the diagnostics industry to maintain an innovative posture to really be self critical in developing diagnostic tests that have a meaningful impact on medical management, as opposed to just providing interesting nice to know information. And I think that the industry has responded in some ways to do that, but I think that necessity is going to continue to increase over the coming years.
My own view on this is that the recoding will be done with less than some of the Draconian changes that some people are predicting. There are some people that say that the reimbursement from molecular diagnostics may drop by 20 or 25 percent this year. I suspect that’s not going to be the case, but even if it is I think the types of tests that we’re developing, the clinical utility of some of the ones that are out there, is going to continue to drive utilization. And frankly, if the market forces are such that some tests end up not making it, well that’s the American form of capitalism and there’s nothing wrong with that.
MM: I want to talk a little bit about the diversity of [revenues streams in] the space. In your opinion, does the majority of revenue still come from research lab use as opposed to commercial use?
VA: Well, I guess it depends on how you categorize revenue, or what type of business you’re looking at. Certainly many companies that are providing instrument platforms and specialized reagents for molecular diagnostics still find the vast majority of their revenues coming from research and development activities as opposed to ongoing commercial use. For every lab that commercially uses molecular diagnostic reagents, there’s eight or ten that are using it in development mode either academic or industry research.
From the service perspective, however, people who are using these reagents to provide a diagnostic testing service, I think the majority of those revenues are still from a commercial world. There are significant number of companies now who have been in business for many years, have a very bright future of going forward, have used these technologies to great success, and I think will continue to be commercially successful. So I think that picture of reagent utilization in the research lab versus commercial will continue for a fair number of years because I think that’s actually where a lot of the innovation and future growth in this industry will come from. But I also think that you’re going to see a growing number of companies that are commercially viable and really start to transform the commercial landscape by using molecular diagnostic technologies.
I think that some of the tests that we currently perform at relatively high volumes, some of the esoteric tests and some of the tests that are used to diagnose and monitor infectious disease, some of the other tests in cardiovascular and obesity and other areas, I think will slowly and surely be transformed from conventional laboratory technology to more specific, more sensitive molecular diagnostic assays going forward. So I think the commercial applications of molecular diagnostics, for the right companies, will continue to grow with time.
MM: Lastly I want to talk a little bit about the funding gaps for early stage and emerging growth company, and especially in diagnostics. Do you see more or less venture capital flowing towards this sector as compared to before the recession?
VA: I guess what’s happened since the recession in diagnostics is not dissimilar to what’s happened in other sectors of healthcare investment, like pharmaceuticals and specialty pharmaceutical development. I think there is increasing amount of venture interest in the diagnostic space, however the barrier of entry, or the level of proof required, becomes higher and higher. So the analogy I make is if you have a pharmaceutical company that’s looking to partner with a large pharma company or get a next round of funding, everyone wants to have phase 2 data or even phase 3 data before they make an investment.
So the burden of proof and the level of validation in pharmaceutical industry has increased over the years since the recession. And the same is true for the diagnostics industry. And in the case of the diagnostics industry, I think there’s money to be invested in the space, but investors are looking for further development of the company than they may have invested in previously.
In past years there [existed a] fair number of investors that would invest in early stage diagnostic companies. Now what we’re seeing is most investors are looking for a company that has pursued a regulatory path — it may not be necessarily an FDA approved test, but at least it has the regulatory framework for the company going forward. And, occasionally, are looking for companies that have actually gone to market with a lead product as opposed to investing [in] companies at pre-revenue. So the money is there, the investments are being made. But the burden of proof and the level of development is a little bit higher than it had been prior to the recession.
And I’m not sure frankly if it’s just driven by the recession — I think there’s a rotation if you will of levels of interest in the venture community. [The community] used to be totally focused on pharmaceutical development; a couple of years ago there was a growing emphasis on investing in diagnostic companies. I think that that interest has waned a little bit in favor of some other sectors. So the investors who are still remaining in the diagnostic field are really looking for a better burden of proof a little bit further development than they had been in the past.
But as an optimist in the field I think there are still places to go for funding. Certainly the venture capital route is one that many companies still have been successful in pursuing, there are also a growing number of investment channels from strategic investors, instrument manufacturers and even pharmaceutical companies that have investment arms where people have been successful in attracting funding and sometimes at an earlier stage than the venture capital route.
MM: That was Vijay Aggarwal, Managing Partner of the Channel Group discussing trends, challenges and opportunities in the diagnostics field. With OneMedRadio this is Matt Margolis signing off.